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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to _____________________
Commission File Number 1-9518
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THE PROGRESSIVE CORPORATION
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(Exact name of registrant as specified in its charter)
Ohio 34-0963169
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6300 Wilson Mills Road, Mayfield Village, Ohio 44143
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(Address of principal executive offices) (Zip Code)
(216) 461-5000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Shares $1 par value: 71,292,438 outstanding at July 31, 1994
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PART I - FINANCIAL INFORMATION
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ITEM 1. Financial Statements.
The Progressive Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Six Months
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Periods Ended June 30, 1994 1993 % Change 1994 1993 % Change
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(millions - except per share amounts)
NET PREMIUMS WRITTEN $622.6 $458.7 36 $1,180.8 $880.5 34
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REVENUES
Premiums earned $536.6 $411.3 30 $1,015.3 $783.5 30
Investment income 38.0 32.9 16 74.8 67.3 11
Net realized gains on security sales 8.9 38.2 (77) 6.3 56.1 (89)
Service revenues 10.5 12.0 (13) 20.0 22.6 (12)
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Total revenues 594.0 494.4 20 1,116.4 929.5 20
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EXPENSES
Losses and loss adjustment expenses 354.4 251.4 41 663.4 485.1 37
Policy acquisition costs 97.6 77.0 27 184.7 147.2 25
Other underwriting expenses 34.7 31.5 10 73.6 68.9 7
Investment expenses 2.3 2.4 (4) 4.4 4.4 --
Service expenses 9.5 10.2 (7) 17.6 20.2 (13)
Interest expense 13.8 9.5 45 27.3 19.3 41
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Total expenses 512.3 382.0 34 971.0 745.1 30
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NET INCOME
Income before Federal income taxes 81.7 112.4 (27) 145.4 184.4 (21)
Provision for Federal income taxes 21.2 32.7 (35) 36.8 53.1 (31)
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Net income $ 60.5 $ 79.7 (24) $ 108.6 131.3 (17)
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PER SHARE
Primary $ .79 $ 1.11 (29) $ 1.40 $ 1.82 (23)
Fully diluted .79 1.11 (29) 1.40 1.82 (23)
WEIGHTED NUMBER EQUIVALENT SHARES
Primary 73.8 69.4 6 74.2 69.5 7
Fully diluted 73.9 69.5 6 74.2 69.5 7
<FN>
See notes to consolidated financial statements.
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The Progressive Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(unaudited)
June 30, December 31,
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1994 1993 1993
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(millions)
ASSETS
Investments:
Held to maturity:
Fixed maturities, at amortized cost
(market: $355.9, $253.9 and $327.4) $ 345.9 $ 232.9 $ 309.1
Available for sale:
Fixed maturities, at market (amortized cost:
$1,955.5, $1,540.5 and $1,761.9) 1,944.3 1,582.5 1,792.6
Equity securities, at market (cost: $504.7, $276.4 and $433.2) 510.5 321.3 453.9
Short-term investments, at amortized cost (market $310.5,
$430.1 and $231.3) 310.3 429.6 230.8
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Total investments 3,111.0 2,566.3 2,786.4
Cash 11.7 21.3 8.7
Accrued investment income 39.0 26.6 33.7
Premiums receivable, net of allowance for doubtful accounts of
$14.6, $9.0 and $8.7 476.7 345.0 380.6
Reinsurance recoverables 393.7 380.3 380.9
Prepaid reinsurance premiums 95.7 86.7 84.6
Deferred acquisition costs 152.6 120.7 124.6
Federal income taxes 94.4 65.5 78.5
Property and equipment, net of accumulated depreciation of
$110.4, $102.2 and $107.1 125.6 76.8 106.7
Other assets 28.1 24.5 26.6
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Total assets $4,528.5 $3,713.7 $4,011.3
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LIABILITIES AND SHAREHOLDERS' EQUITY
Unearned premiums $ 948.6 $ 720.5 $ 772.0
Loss and loss adjustment expense reserves 1,433.5 1,318.4 1,348.6
Policy cancellation reserve 57.4 44.3 60.1
Accounts payable and accrued expenses 382.6 333.4 355.6
Funded debt 675.5 568.5 477.1
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Total liabilities 3,497.6 2,985.1 3,013.4
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Shareholders' equity:
9 3/8% Serial Preferred Shares, Series A (issued and outstanding
3.6, 4.0 and 3.6) 87.0 96.4 87.9
Common Shares, $1.00 par value
(treasury shares of 11.0, 10.0 and 10.1) 71.3 67.1 72.1
Paid-in capital 355.3 180.9 357.6
Net unrealized appreciation (depreciation) on investment securities (3.5) 57.4 33.5
Retained earnings 520.8 326.8 446.8
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Total shareholders' equity 1,030.9 728.6 997.9
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Total liabilities and shareholders' equity $4,528.5 $3,713.7 $4,011.3
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<FN>
See notes to consolidated financial statements.
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The Progressive Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended June 30, 1994 1993
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(millions)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $108.6 $ 131.3
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 8.3 8.7
Net realized gains on security sales (6.3) (56.1)
Changes in:
Unearned premiums 176.6 105.7
Loss and loss adjustment expense reserves 84.9 44.2
Accounts payable and accrued expenses 30.6 (7.0)
Policy cancellation reserve (2.7) (7.8)
Prepaid reinsurance (11.1) (8.7)
Reinsurance recoverables (12.8) (22.5)
Premiums receivable (96.1) (33.0)
Deferred acquisition costs (28.0) (19.4)
Federal income taxes 3.9 3.4
Other, net 6.5 12.0
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Net cash provided by operating activities 262.4 150.8
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases:
Held-to-maturity: fixed maturities (55.8) (3.1)
Available-for-sale: fixed maturities (747.1) (467.3)
equity securities (145.5) (114.8)
Sales:
Available-for-sale: fixed maturities 378.4 69.0
equity securities 78.3 203.4
Maturities, paydowns, calls and other:
Held-to-maturity: fixed maturities 18.1 20.3
Available-for-sale: fixed maturities 166.1 256.4
Net purchases of short-term investments (79.5) (129.6)
(Receivable) payable on securities (3.6) 46.9
Purchase of property and equipment (27.5) (22.0)
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Net cash used in investing activities (418.1) (140.8)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options 1.5 --
Proceeds from funded debt 198.4 170.0
Payments on funded debt (.3) (170.2)
Dividends paid to shareholders (11.4) (11.4)
Acquisition of treasury shares (29.5) --
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Net cash provided by (used in) financing activities 158.7 (11.6)
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Increase (decrease) in cash 3.0 (1.6)
Cash, January 1 8.7 22.9
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Cash, June 30 $11.7 $ 21.3
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<FN>
See notes to consolidated financial statements.
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The Progressive Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 SUPPLEMENTAL CASH FLOW INFORMATION. The Company paid Federal income
taxes of $29.0 million and $48.6 million for the six months ended June 30, 1994
and 1993, respectively. Total interest paid was $28.3 million and $19.6
million for the six months ended June 30, 1994 and 1993, respectively.
NOTE 2 During the second quarter, the Company settled the dispute, arising out
of its 1985 acquisition of American Star Insurance Company, over the seller's
refusal to pay certain losses on pre-sale business written by American Star.
See the "Environmental and Product Liability Exposures" section of MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS on
page 7 for further discussion.
NOTE 3 On June 30, 1994, the Company paid a quarterly dividend of $.05 per
Common Share and a regular quarterly dividend of approximately $.59 per share
on the 9 3/8% Serial Preferred Shares, Series A, to shareholders of record as
of the close of business on June 10, 1994. Both dividends were declared by the
Board of Directors on April 22, 1994.
On August 5, 1994, the Board of Directors declared a quarterly dividend of
$.055 per Common Share and a regular quarterly dividend of approximately $.59
per share on the 9 3/8% Serial Preferred Shares, Series A. Both are payable
September 30, 1994, to shareholders of record as of the close of business on
September 9, 1994.
NOTE 4 Certain amounts in the financial statements for 1993 were reclassified
to conform with the presentation used for 1994. These reclassifications had no
effect on net income.
NOTE 5 The financial statements reflect all normal recurring adjustments which
were, in the opinion of management, necessary to present a fair statement of
the results for the interim periods. The results of operations for the period
ended June 30, 1994 are not necessarily indicative of the results expected for
the full year.
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ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
RESULTS OF OPERATIONS
For the second quarter 1994, operating income, which excludes net realized
gains on security sales, was $54.7 million, or $.71 per share, compared to
$54.5 million, or $.75 per share, last year. The combined ratio was 90.7,
compared to 87.5 for the second quarter 1993. For the six months ended June
30, 1994, operating income was $104.5 million, or $1.35 per share, compared to
$94.3 million, or $1.29 per share, in 1993. The year-to-date combined ratio
was 90.8, compared to 89.5 last year.
Net premiums written increased 36% over the second quarter 1994 and 34%
year-to-date, reflecting unit growth in the core automobile insurance business.
This growth resulted from the Company's rates becoming more competitive due to
cost control efforts. Premiums earned, which are a function of the amount of
premiums written in the current and prior periods, increased 30% for both the
quarter and first six months. Service revenue decreased 13% to $10.5 million
for the quarter and 12% to $20.0 million for the first six months, primarily
reflecting the decrease in the size of the CAIP market.
Claim costs, which represent actual and estimated future payments to or for our
policyholders, as well as loss estimates for future assignments and assessments
under state-mandated assigned risk programs, increased as a percentage of
premiums earned to 66% for the quarter, compared to 61% in 1993, reflecting
normal variation in our expected loss ratio; year-to-date claim costs were 65%,
compared to 62% last year. Policy acquisition costs and other underwriting
expenses were 25% of premiums earned for the second quarter, compared to 26% in
1993, and 25% for the first six months, compared to 28% last year, reflecting a
continued commitment to reduce expenses. Service expenses decreased 7% for the
quarter and 13% for the first six months, primarily reflecting decreased
service revenues.
Recurring investment income (interest and dividends) increased 16% for the
quarter and 11% for the first six months, reflecting an increase in the average
investment portfolio, partially offset by a mix shift to tax-free securities.
The Company had net realized gains on security sales of $8.9 million and $6.3
million for the quarter and first six months, respectively, compared to $38.2
million and $56.1 million in 1993; a significant portion of the 1993 realized
gains resulted from the sale of certain equity securities held in the Company's
investment portfolio. On June 30, 1994, the Company's portfolio had $4.8
million in total unrealized gains, compared to $70.2 million at December 31,
1993, primarily reflecting the general decline in the financial markets.
The provision for Federal income taxes was $21.2 million, compared to $32.7
million for the quarter and $36.8 million, compared to $53.1 million for the
first six months, reflecting less realized gains on security sales in the
current year and a mix shift in the portfolio to tax-free securities.
The Company continues to invest in fixed maturity, short-term and equity
securities. The majority of the portfolio ($2,311.0 million, or 74.3%, at June
30, 1994 and $2,069.0 million, or 80.6%, at June 30, 1993) was in short-term
and intermediate-term, investment-grade fixed-income securities. As of June
30, 1994 and 1993, the equity portfolio of the Company was $510.5 million, or
16.4%, and $321.3 million, or 12.5%, respectively, of the total investment
portfolio. The equity portfolio consists of standard adjustable rate
preferreds ($41.6 million in 1994 and $97.4 million in 1993), perpetual
preferreds with mechanisms that may provide an opportunity to liquidate at par
($342.4 million in 1994 and $103.0 million in 1993) and common stocks ($126.5
million in 1994 and $120.9 million in 1993). The Company had forward and
future positions, offset by short forward, future or interest rate swap
positions, with a net market
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value of $3.5 million and $7.2 million as of June 30, 1994 and 1993,
respectively. The weighted average fully taxable equivalent book yield of the
portfolio was 6.5% and 7.3% at June 30, 1994 and 1993, respectively.
FINANCIAL CONDITION
Progressive's insurance operations create liquidity by collecting and investing
premiums written from new and renewal business in advance of paying claims.
For the six months ended June 30, 1994, operations generated a positive cash
flow of $262.4 million. During the first six months, 917,000 Common Shares
were repurchased, including 867,000 Common Shares during the second quarter, at
an average cost of $31.01 per share and 40,000 9 3/8% Serial Preferred Shares,
Series A, were repurchased at an average cost of $27.05 per share.
ENVIRONMENTAL AND PRODUCT LIABILITY EXPOSURES
During the second quarter, the Company settled the dispute, arising out of its
1985 acquisition of American Star Insurance Company (since renamed National
Continental Insurance Company), over the seller's refusal to pay certain losses
on pre-sale business written by American Star. Under the settlement, National
Continental received $10.1 million from the seller and agreed to be solely
responsible for the next $20 million of gross losses. The seller will
thereafter be responsible for half the losses, net of reinsurance, if it
achieves certain minimum net worth requirements. In addition to the $10.1
million, National Continental will be entitled to the proceeds of various
treaty and facultative reinsurance policies that had been purchased by American
Star. National Continental has established reserves for these exposures, which
are mainly for product liability and environmental claims, in amounts it
believes to be adequate based on information currently available to it,
including a recent study by independent actuaries for the seller. Total
reserves on this business are $26.1 million. Net reserve increases in 1994
arising from the settlement and case development, in the aggregate amount of
approximately $5 million, have been charged against Company's supplemental
reserve, on a consolidated basis, and therefore have had no effect on the
Company's results of operations. The supplemental reserve historically carried
by the Company is intended to cover provisions for adverse development such as
this, where the potential loss could not reasonably have been foreseen, in
order to provide 98% statistical confidence that reserves are adequate.
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PART II - OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
See exhibit index on page 10.
(b) Reports on Form 8-K during the quarter ended June 30, 1994: None
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SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE PROGRESSIVE CORPORATION
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(Registrant)
Date: August 12, 1994 BY:/s/ DAVID M. SCHNEIDER
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David M. Schneider
Secretary of the Registrant
Date: August 12, 1994 BY: /s/ CHARLES B. CHOKEL
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Charles B. Chokel
Chief Financial Officer of the Registrant
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EXHIBIT INDEX
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Exhibit No. Form 10-Q
Under Reg. Exhibit
S-K. Item 601 No. Description of Exhibit
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(11) 11 Computation of Earnings Per Share
(99) 99 Computation of Premiums Earned
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