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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 1O-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 September 30, 1995
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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: 72,063,790 outstanding at October 31, 1995
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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 Nine Months
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Periods Ended September 30, 1995 1994 % Change 1995 1994 % Change
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(millions - except per share amounts)
NET PREMIUMS WRITTEN $733.8 $633.6 16 $2,175.1 $1,814.4 20
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REVENUES
Premiums earned $709.3 $572.3 24 $2,011.0 $1,587.6 27
Investment income 51.4 40.4 27 146.2 115.2 27
Net realized gains on security sales 5.3 11.4 (54) 42.8 17.7 142
Service revenues 9.7 10.0 (3) 29.0 30.0 (3)
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Total revenues 775.7 634.1 22 2,229.0 1,750.5 27
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EXPENSES
Losses and loss adjustment expenses 503.9 384.1 31 1,435.4 1,047.5 37
Policy acquisition costs 119.2 99.8 19 339.8 284.5 19
Other underwriting expenses 43.9 38.1 15 128.7 111.7 15
Investment expenses 1.7 2.0 (15) 6.3 6.4 (2)
Service expenses 5.2 6.5 (20) 22.4 24.1 (7)
Interest expense 14.3 13.8 4 42.8 41.1 4
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Total expenses 688.2 544.3 26 1,975.4 1,515.3 30
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NET INCOME
Income before income taxes 87.5 89.8 (3) 253.6 235.2 8
Provision for income taxes 25.0 25.0 -- 69.5 61.8 12
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Net income $ 62.5 $ 64.8 4 $184.1 $173.4 6
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PER SHARE
Primary $ .81 $ .85 (5) $2.40 $2.25 7
Fully diluted .81 .85 (5) 2.39 2.25 6
WEIGHTED NUMBER AVERAGE EQUIVALENT SHARES
Primary 74.3 73.9 1 74.1 74.1 --
Fully diluted 74.4 73.9 1 74.4 74.2 --
See notes to consolidated financial statements.
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The Progressive Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30, December 31,
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1995 1994 1994
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(millions)
ASSETS
Investments:
Held-to-maturity:
Fixed maturities, at amortized cost
(market: $310.7, $349.0, and $343.8) $ 301.1 $ 339.4 $ 337.6
Available-for-sale:
Fixed maturities, at market (amortized cost:
$2,615.0, $2,025.4, and $2,129.7) 2,624.2 2,017.1 2,087.0
Equity securities, at market (cost: $563.1, $456.5, and
$481.0) 592.8 458.6 476.3
Short-term investments, at amortized cost (market: $191.1,
$382.6, and $279.2) 191.1 382.5 279.1
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Total investments 3,709.2 3,197.6 3,180.0
Cash 18.0 11.9 13.4
Accrued investment income 47.8 39.6 43.4
Premiums receivable, net of allowance for doubtful accounts of
$18.0, $14.6, and $15.6 635.7 509.5 542.4
Reinsurance recoverables 361.4 387.1 379.7
Prepaid reinsurance premiums 75.7 91.0 83.2
Deferred acquisition costs 183.7 160.4 161.6
Income taxes 64.7 99.2 103.2
Property and equipment, net of accumulated depreciation of
$124.0, $114.0, and $116.7 155.1 139.4 143.3
Other assets 24.4 26.2 24.9
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Total assets $5,275.7 $4,661.9 $4,675.1
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LIABILITIES AND SHAREHOLDERS' EQUITY
Unearned premiums $1,193.3 $1,005.2 $1,036.7
Loss and loss adjustment expense reserves 1,604.9 1,475.2 1,434.4
Policy cancellation reserve 37.9 50.8 47.3
Accounts payable and accrued expenses 371.3 365.7 329.2
Funded debt 675.7 675.6 675.6
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Total liabilities 3,883.1 3,572.5 3,523.2
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Shareholders' equity:
9 3/8% Serial Preferred Shares, Series A (shares issued and
outstanding: 3.5, 3.6, and 3.5) 85.0 87.0 85.8
Common Shares, $1.00 par value
(net of treasury shares of 11.0, 11.0, and 11.2) 72.1 71.3 71.2
Paid-in capital 374.4 355.5 357.1
Net unrealized appreciation (depreciation) on investment
securities 25.3 (4.0) (30.7)
Retained earnings 835.8 579.6 668.5
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Total shareholders' equity 1,392.6 1,089.4 1,151.9
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Total liabilities and shareholders' equity $5,275.7 $4,661.9 $4,675.1
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See notes to consolidated financial statements.
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The Progressive Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended September 30, 1995 1994
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(millions)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 184.1 $ 173.4
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 15.1 14.2
Net realized gains on security sales (42.8) (17.7)
Changes in:
Unearned premiums 156.6 233.2
Loss and loss adjustment expense reserves 170.5 126.6
Accounts payable and accrued expenses 32.0 38.7
Policy cancellation reserve (9.4) (9.3)
Prepaid reinsurance 7.5 (6.4)
Reinsurance recoverables 18.3 (6.2)
Premiums receivable (93.3) (128.9)
Deferred acquisition costs (22.1) (35.8)
Income taxes 8.2 (.6)
Other, net 10.8 12.1
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Net cash provided by operating activities 435.5 393.3
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases:
Held-to-maturity: fixed maturities (.2) (71.5)
Available for sale: fixed maturities (2,175.1) (1,027.9)
equity securities (567.5) (228.4)
Sales:
Available-for-sale: fixed maturities 1,366.7 507.1
equity securities 485.9 201.6
Maturities, paydowns, calls and other:
Held-to-maturity: fixed maturities 34.7 39.5
Available-for-sale: fixed maturities 345.8 245.2
equity securities 10.4 17.7
Net (purchases) sales of short-term investments 88.0 (151.7)
(Receivable) payable on securities 10.1 (28.6)
Purchases of property and equipment (28.6) (45.9)
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Net cash used in investing activities (429.8) (542.9)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options 9.9 1.7
Tax benefit of stock options exercised 8.3 --
Proceeds from funded debt -- 198.4
Payments on funded debt (.3) (.3)
Dividends paid to shareholders (18.1) (17.5)
Acquisition of treasury shares (.9) (29.5)
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Net cash provided by (used in) financing activities (1.1) 152.8
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Increase in cash 4.6 3.2
Cash, January 1 13.4 8.7
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Cash, September 30 $ 18.0 $ 11.9
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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 $45.5 million and $59.3 million for the nine months ended September
30, 1995 and 1994, respectively. Total interest paid was $34.9 million and
$33.5 million for the nine months ended September 30, 1995 and 1994,
respectively.
NOTE 2 On September 30, 1995, the Company paid a quarterly dividend of $.055
per Common Share and a regular quarterly dividend of approximately $.5859 per
share on the 9 3/8% Serial Preferred Shares, Series A, to shareholders of
record as of the close of business on September 8, 1995. Both dividends were
declared by the Board of Directors on July 28, 1995.
On October 27, 1995, the Board of Directors declared a quarterly dividend of
$.055 per Common Share and a regular quarterly dividend of approximately $.5859
per share on the 9 3/8% Serial Preferred Shares, Series A. Both dividends are
payable December 31, 1995, to shareholders of record as of the close of
business on December 8, 1995.
NOTE 3 Certain amounts in the financial statements for 1994 were reclassified
to conform with the presentation used for 1995. These reclassifications had no
effect on net income.
NOTE 4 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 periods
ended September 30, 1995 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 third quarter 1995, operating income, which excludes net realized gains
on security sales, was $59.0 million, or $.76 per share, compared to $57.4
million, or $.75 per share, last year. The combined ratio was 94.0, compared
to 91.2 for the third quarter 1994. For the nine months ended September 30,
1995, operating income was $156.2 million, or $2.02 per share, compared to
$161.9 million, or $2.10 per share, in 1994. The year-to-date combined ratio
was 94.7, compared to 90.9, last year.
Net premiums written increased 16% over the third quarter 1994 and 20%
year-to-date, primarily reflecting unit growth in the core automobile insurance
business driven by the Company's rates remaining competitive. Premiums earned,
which are a function of the amount of premiums written in the current and prior
periods, increased 24% for the quarter and 27% for the first nine months.
Service revenue decreased 3% to $9.7 million for the quarter and 3% to $29.0
million for the first nine 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 71% for the quarter, compared to 67% in 1994, and 71% for
the first nine months, compared to 66% last year. During the year, the
Company's loss costs have continued to rise at a faster pace than rates,
reflecting the Company's intent to keep rates competitive. Policy acquisition
costs and other underwriting expenses as a percentage of premiums earned
decreased to 23% for the third quarter and first nine months, compared to 24%
for the third quarter and 25% for the first nine months in 1994. Service
expenses decreased 20% for the quarter and 7% for the first nine months,
reflecting a decrease in loss adjustment expense reserves.
Recurring investment income (interest and dividends) increased 27% for
both the quarter and the first nine months, reflecting an increase in the
average size of the investment portfolio and a mix shift in the portfolio to
taxable securities. The Company had net realized gains on security sales of
$5.3 million and $42.8 million for the quarter and first nine months,
respectively, compared to $11.4 million and $17.7 million in 1994. On
September 30, 1995, the Company's portfolio had $48.5 million in total
unrealized gains, compared to $41.1 million in total unrealized losses at
December 31, 1994, primarily reflecting the general decline in interest rate
levels.
The Company continues to invest in fixed maturity, short-term and equity
securities. The majority of the portfolio ($3,055.6 million, or 82.4%, at
September 30, 1995 and $2,504.2 million, or 78.3%, at September 30, 1994) was
in short-term and intermediate-term, investment-grade fixed-maturity
securities. Long-term investment-grade fixed-maturity securities represented
$44.8million, or $1.2%, and $68.7 million, or 2.2%, of the total investment
portfolio at September 30, 1995 and 1994, respectively.
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As of September 30, 1995 and 1994, equity investments of the Company were
$592.8 million, or 16.0%, and $458.6 million, or 14.3%, respectively, of the
total investment portfolio. Equity investments are comprised of preferred
stocks ($339.1 million in 1995 and $379.1 million in 1994) and common stocks
($253.7 million in 1995 and $79.5 million in 1994). As of September 30, 1995
and 1994, the non-investment-grade fixed-maturity securities of the Company
were $16.0 million, or .4%, and $166.1 million, or 5.2%, respectively, of the
total investment portfolio.
The Company's financial instruments with off-balance-sheet risk had a net
market value of $(4.7) million and $4.6 million as of September 30, 1995 and
1994, respectively.
The weighted average annualized fully taxable equivalent book yield of the
portfolio was 6.9% and 6.6% for the nine months ended September 30, 1995 and
1994, 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 nine months ended September 30, 1995, operations generated a positive
cash flow of $435.5 million. During the third quarter 1995, 33,000 9 3/8%
Serial Preferred Shares, Series A, were repurchased at an average cost of
$25.83 per share.
During 1995, the Company paid $3.8 million to complete its contractual
commitments related to the construction of its corporate office complex in
Mayfield Village, Ohio. The total cost of the project was $75.5 million and
was funded through operating cash flows.
PART II - OTHER INFORMATION
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ITEM 5. Other Information.
The First Amendment to The Progressive Corporation Executive Deferred
Compensation Trust ("Trust Amendment") is filed as Exhibit 99A to this Form
10-Q in order to supplement and amend Registration Statement No. 33-57121,
which was filed by the Company with the Securities and Exchange Commission (the
"Commission") on December 29, 1994 pursuant to the Securities Act of 1933, as
amended (the "1933 Act"). Registration Statement No. 33-57121 incorporates by
reference this Form 10-Q and, upon the filing of this Form 10-Q with the
Commission, the Trust Amendment shall be incorporated into said Registration
Statement as Exhibit 4(b)(2) thereto.
The Progressive Retirement Security Program (1994 Amendment and Restatement),
as amended (formerly known as The Progressive Corporation Long-Term Savings
Plan) ("Retirement Plan") is filed as Exhibit 99B to this Form 10-Q in order to
supplement and amend Registration Statements No. 33-16509 and 33-51034, as
heretofore amended, which were filed by the Company with the Commission on
August 14, 1987 and August 20, 1992, respectively, pursuant to the 1933 Act.
Registration Statements No. 33-16509 and 33-51034 incorporate by reference this
Form 10-Q and, upon the filing of this Form 10-Q with the Commission, the
Retirement Plan shall be incorporated into each of Registration Statements No.
33-16509 and 33-51034 as Exhibit 4(a) thereto.
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The First Amendment to Trust Agreement between The Progressive Corporation and
NBD Bank, N.A., as Trustee for The Progressive Retirement Security Program,
("Retirement Trust Amendment") is filed as Exhibit 99C to this Form 10-Q in
order to supplement and amend Registration Statements No. 33-16509 and
33-51034, as heretofore amended, which were filed by the Company with the
Commission on August 14, 1987 and August 20, 1992, respectively, pursuant to
the 1933 Act. Registration Statements No. 33-16509 and 33-51034 incorporate by
reference this Form 10-Q and, upon the filing of this Form 10-Q with the
Commission, the Retirement Trust Amendment shall be incorporated into each of
Registration Statements No. 33-16509 and 33-51034 as Exhibit 4(d) thereto.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
See exhibit index on page 10.
(b) Reports on Form 8-K filed during the quarter ended
September 30, 1995: 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: November 9, 1995 BY: /s/ DAVID M. SCHNEIDER
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David M. Schneider
Secretary
Date: November 9, 1995 BY: /s/ CHARLES B. CHOKEL
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Charles B. Chokel
Chief Financial Officer
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EXHIBIT INDEX
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Exhibit No. Form 1O-Q
Under Reg. Exhibit
S-K, Item 601 No. Description of Exhibit
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11 11 Computation of Earnings Per Share
27 27 Financial Data Schedule
99 99A First Amendment to The Progressive Corporation Executive Deferred Compensation Trust
99 99B The Progressive Retirement Security Program (1994 Amendment and Restatement), as amended
(formerly known as The Progressive Corporation Long-Term Savings Plan)
99 99C First Amendment to Trust Agreement Between The Progressive Corporation and NBD Bank,
N.A., as Trustee for The Progressive Retirement Security Program
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