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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 March 31, 1996
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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 [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Shares, $1.00 par value: 72,243,975 outstanding at March 31, 1996
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PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements.
The Progressive Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three months ended March 31, 1996 1995 % Change
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(millions - except per share amounts)
NET PREMIUMS WRITTEN $810.2 $ 686.9 18
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REVENUES
Premiums earned $732.0 $ 624.3 17
Investment income 52.7 44.8 18
Net realized gains on security sales 4.9 15.4 (68)
Service revenues 9.4 9.3 1
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Total revenues 799.0 693.8 15
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EXPENSES
Losses and loss adjustment expenses 525.4 436.9 20
Policy acquisition costs 120.1 106.6 13
Other underwriting expenses 41.0 44.0 (7)
Investment expenses 1.8 2.1 (14)
Service expenses 9.3 8.4 11
Interest expense 14.3 14.3 --
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Total expenses 711.9 612.3 16
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NET INCOME
Income before income taxes 87.1 81.5 7
Provision for income taxes 23.8 20.8 14
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Net income $ 63.3 $ 60.7 4
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PER SHARE
Primary $ .82 $ .79 4
Fully diluted .82 .79 4
WEIGHTED NUMBER AVERAGE EQUIVALENT SHARES
Primary 74.6 74.0 1
Fully diluted 74.6 74.1 1
See notes to consolidated financial statements.
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The Progressive Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31, December 31,
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1996 1995 1995
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(millions)
ASSETS
Investments:
Held-to-maturity:
Fixed maturities, at amortized cost (market: $329.0) $ -- $ 321.0 $ --
Available-for-sale:
Fixed maturities, at market (amortized cost:
$3,112.1, $2,219.0 and $2,729.5) 3,120.4 2,201.8 2,772.9
Equity securities, at market
Preferred stocks (cost: $327.9, $286.0 and $379.4) 329.9 282.5 382.3
Common stocks (cost: $337.8, $148.4 and $277.6) 368.6 156.9 310.0
Short-term investments, at amortized cost
(market: $248.5, $298.5 and $302.8) 248.5 298.5 302.8
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Total investments 4,067.4 3,260.7 3,768.0
Cash 13.9 15.2 16.2
Accrued investment income 41.3 36.5 39.8
Premiums receivable, net of allowance
for doubtful accounts of $19.0, $16.4 and $19.2 721.9 574.4 649.9
Reinsurance recoverables 333.7 387.7 338.1
Prepaid reinsurance premiums 78.5 77.0 70.5
Deferred acquisition costs 186.2 170.9 181.9
Income taxes 54.1 88.4 58.3
Property and equipment, net of accumulated
depreciation of $133.6, $121.4 and $128.7 165.1 149.2 159.2
Other assets 24.6 90.9 70.6
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Total assets $5,686.7 $4,850.9 $5,352.5
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LIABILITIES AND SHAREHOLDERS' EQUITY
Unearned premiums $1,295.8 $1,093.1 $1,209.6
Loss and loss adjustment expense reserves 1,653.8 1,486.0 1,610.5
Policy cancellation reserve 37.5 43.3 40.8
Accounts payable and accrued expenses 517.1 310.9 339.9
Funded debt 675.9 675.7 675.9
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Total liabilities 4,180.1 3,609.0 3,876.7
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Shareholders' equity:
9 3/8% Serial Preferred Shares, Series A (issued
and outstanding, 3.2, 3.5 and 3.4) 78.4 85.8 83.6
Common Shares, $1.00 par value (treasury shares of
10.9, 11.2 and 11.0) 72.2 71.8 72.1
Paid-in capital 380.0 368.9 374.8
Net unrealized appreciation (depreciation) on
investment securities 26.6 (7.9) 51.1
Retained earnings 949.4 723.3 894.2
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Total shareholders' equity 1,506.6 1,241.9 1,475.8
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Total liabilities and shareholders' equity $5,686.7 $4,850.9 $5,352.5
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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)
Three months ended March 31, 1996 1995
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(millions)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $63.3 $ 60.7
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 5.2 4.8
Net realized gains on security sales (4.9) (15.4)
Changes in:
Unearned premiums 86.2 56.4
Loss and loss adjustment expense reserves 43.3 51.6
Accounts payable and accrued expenses 29.7 (12.5)
Policy cancellation reserve (3.3) (4.0)
Prepaid reinsurance premiums (8.0) 6.2
Reinsurance recoverables 4.4 (8.0)
Premiums receivable (72.0) (32.0)
Deferred acquisition costs (4.3) (9.3)
Income taxes 17.3 2.4
Other, net 2.2 8.8
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Net cash provided by operating activities 159.1 109.7
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases:
Available-for-sale: fixed maturities (1,663.8) (752.9)
equity securities (178.8) (249.8)
Sales:
Available-for-sale: fixed maturities 1,174.5 510.8
equity securities 161.2 288.1
Maturities, paydowns, calls and other:
Held-to-maturity: fixed maturities -- 16.0
Available-for-sale: fixed maturities 98.8 164.4
equity securities 17.9 9.1
Net (purchases) sales of short-term investments 54.3 (19.4)
(Receivable) payable on securities 193.7 (68.9)
Purchase of property and equipment (11.1) (11.6)
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Net cash used in investing activities (153.3) (114.2)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options 3.3 6.3
Tax benefit from exercise of stock options 2.4 6.1
Payments on funded debt (.1) (.1)
Dividends paid to shareholders (5.9) (6.0)
Acquisition of treasury shares (7.8) --
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Net cash provided by (used in) financing activities (8.1) 6.3
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Increase (decrease) in cash (2.3) 1.8
Cash, January 1 16.2 13.4
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Cash, March 31 $13.9 $ 15.2
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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 income
taxes of $0 and $6.5 million for the periods ended March 31, 1996 and 1995,
respectively. Total interest paid was $6.6 million for both periods which ended
March 31, 1996 and 1995, respectively.
NOTE 2 Funded debt at March 31 consisted of:
1996 1995
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Market Market
Cost Value Cost Value
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6.60% Notes $198.7 $195.3 $198.6 $182.5
7% Notes 148.3 142.5 148.2 130.8
8 3/4% Notes 29.3 32.0 29.1 31.2
10% Notes 149.5 170.5 149.4 165.3
10 1/8% Subordinated Notes 149.4 171.1 149.3 165.7
Other Funded debt .7 .7 1.1 1.1
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$675.9 $712.1 $675.7 $676.6
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NOTE 3 On March 31, 1996, the Company paid 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, to shareholders of record as of the close of business on March
8, 1996. Both dividends were declared by the Board of Directors on
February 9, 1996.
On April 16, 1996, the Company called for redemption, on May 31, 1996,
all of its outstanding 9 3/8% Serial Preferred Shares, Series A. SEE
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS for further discussion.
On April 26, 1996, the Board of Directors declared a quarterly dividend
of $.055 per Common Share, payable June 30, 1996, to shareholders of
record as of the close of business on June 14, 1996.
NOTE 4 Certain amounts in the consolidated financial statements
for prior periods were reclassified to conform with the 1996 presentation.
NOTE 5 The consolidated 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 March 31, 1996, 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 first quarter 1996, operating income, which excludes net
realized gains and losses on security sales, was $60.2 million, or $.78
per share, compared to $50.7 million, or $.66 per share, last year. The
combined ratio was 93.8, compared to 94.1 for the first quarter 1995.
Net premiums written increased 18% over the first quarter 1995,
primarily reflecting an increase in unit sales. Premiums earned, which
are a function of the amount of premiums written in the current and
prior periods, increased 17% for the quarter. Service revenue increased
1% to $9.4 million for the quarter.
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 72% for the quarter, compared to
70% in 1995. Policy acquisition costs and other underwriting expenses
as a percentage of premiums earned decreased to 22% for the first
quarter, compared to 24% in 1995. Service expenses increased 11% for
the quarter, primarily reflecting an increase in loss adjustment
expense reserves.
Recurring investment income (interest and dividends) increased 18% for the
quarter, primarily reflecting an increase in the average investment
portfolio. The Company had net realized gains on security sales of $4.9
million for the quarter, compared to $15.4 million in the first quarter
of 1995. At March 31, 1996, the Company's portfolio had $41.1 million in
total unrealized gains, compared to $78.7 million at December 31, 1995,
primarily reflecting an increase in interest rates as evidenced by the
3-year treasury note yield increasing from 5.2% to 5.9% during the
quarter.
The Company continues to invest in fixed maturity, equity and short-term
securities. The majority of the portfolio was in short-term and
intermediate-term, investment-grade fixed-income securities ($3,276.4
million, or 80.6%, at March 31, 1996 and $2,617.0 million, or 80.3%, at
March 31, 1995). Long-term investment-grade fixed-income securities
represented $86.1 million, or 2.1%, and $53.7, or 1.6%, of the total
investment portfolio at March 31, 1996 and 1995, respectively. The
duration of the fixed-income portfolio was 2.8 years at March 31, 1996,
compared to 1.9 years at March 31, 1995.
Equity investments are comprised of preferred stocks ($329.9 million, or
8.1%, in 1996 and $282.5 million, or 8.7%, in 1995), and common stocks
($368.6 million, or 9.1%, in 1996 and $156.9 million, or 4.8%, in 1995).
The increase in common stocks reflects the Company's objective to
increase its position in common stock investments to 15% of the entire
portfolio and to optimize value and further diversify the portfolio
through foreign equity investments. As of March 31, 1996 and 1995, the
non-investment-grade fixed-income securities of the Company were $6.4
million, or .1%, and $150.6 million, or 4.6%, respectively, of the total
investment portfolio.
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The Company's financial instruments with off-balance-sheet risk had a net
market value of $2.6 million as of March 31, 1996, compared to a $.6 million
loss as of March 31, 1995.
The weighted average annualized fully taxable equivalent book yield of
the portfolio was 6.7% and 6.8% for the quarters ended March 31, 1996
and 1995, 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 three months ended March 31, 1996, operations
generated a positive cash flow of $159.1 million. During the first
quarter, 51,960 Common Shares were repurchased in conjunction with
various employee benefit plans at an average cost of $44.95 per share
and 216,000 9 3/8% Serial Preferred Shares, Series A, were repurchased
in the open market at an average cost of $25.64 per share.
On April 16, 1996, the Company called for redemption, on May 31, 1996,
all of its outstanding 9 3/8% Serial Preferred Shares, Series A. The
redemption will be made at the redemption price of $25.00 per share plus
accrued but unpaid dividends through the redemption date. From and after
the redemption date, dividends will cease to accrue on the Preferred
Shares. The Company may fund the redemption through operating cash flows
or by issuing notes or other debt securities in a partial take-down
under its $200 million shelf registration, which became effective March
29, 1996.
On April 26, 1996, the Board of Directors reset, at 6 million, the
Company's authorization to repurchase Common Shares from time to time in
the open market or otherwise when opportunities exist to buy at
attractive prices or for purposes which are otherwise in the best
interest of the Company. The acquired shares may be used in connection
with employee stock benefit plans, held for other purposes or retired.
RECENT DEVELOPMENTS
During the first quarter, the Company finalized its plans to
reorganize its operating structure to bring the Company closer to its
customers and deliver better, faster service. The new structure is
organized around five processes (product, brand, buying, ownership and
claims), each led by a process leader, and is designed to enhance the
Company's distribution channels, enable quicker implementation of
product and process improvements, and continue the Company's efforts to
reduce operating expenses through streamlined work flow. As part of the
reorganization, the Company created a ten person Policy Team, which will
be the focal point for setting companywide policy, strategy and
priorities. The Policy Team consists of -- Alan Bauer (Buying), Chuck
Chokel (Chief Financial Officer), Allan Ditchfield (Chief Information
Officer), Tom Forrester (Ownership), Willy Graves (Claims), Daniel Lewis
(South Florida Community Manager), Peter Lewis (Chief Executive
Officer), Bob McMillan (Product), Glenn Renwick (Brand) and Tiona
Thompson (Chief Human Resources Officer). All Policy Team members will
report to Peter Lewis.
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PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders.
At the April 26, 1996 Annual Meeting of the Shareholders of the
Company, 69,630,628 Common Shares were represented in person or
by proxy.
At the meeting, the shareholders elected the eight directors
named below, each to serve for a term of one year. The
votes cast for each director were as follows:
For Withheld
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Milton N. Allen 69,415,955 214,673
B. Charles Ames 69,430,635 199,993
Stephen R. Hardis 69,438,985 191,643
Janet Hill 69,441,156 189,472
Peter B. Lewis 69,404,053 226,575
Norman S. Matthews 69,434,943 195,685
Donald B. Shackelford 69,412,867 217,761
Paul B. Sigler 69,434,017 196,611
ITEM 5. Other Information.
The form of Non-Qualified Stock Option Agreement (single award) and form
of Non-Qualified Stock Option Agreement (multiple awards) under The
Progressive Corporation 1989 Incentive Plan (collectively "NQSO
Agreement Forms") are filed as Exhibits 10(B) and 10(C), respectively,
to this Form 10-Q in order to supplement and amend the Company's Form
S-8 Registration Statement No. 33-33240, filed with the Securities and
Exchange Commission (the "Commission") on January 31, 1990, and Form S-8
Registration Statement No. 33-64210, filed with the Commission on June
10, 1993 (collectively, the "Registration Statements"). The Registration
Statements incorporate by reference this Form 10-Q and, upon the filing
of this Form 10-Q with the Commission, the NQSO Agreement Forms shall be
incorporated into said Registration Statements as Exhibits 4(b)(2) and
4(b)(3) thereto, respectively.
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 March 31, 1996:
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: May 1, 1996 BY: /s/ DAVID M. SCHNEIDER
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David M. Schneider
Secretary
Date: May 1, 1996 BY: /s/ CHARLES B. CHOKEL
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Charles B. Chokel
Treasurer and 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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(10) 10(A) The Progressive Corporation 1996 Process
Management Bonus Plan
(10) 10(B) Form of Non-Qualified Stock Option
Agreement under The Progressive Corporation
1989 Incentive Plan (single award)
(10) 10(C) Form of Non-Qualified Stock Option
Agreement under The Progressive Corporation
1989 Incentive Plan (multiple awards)
(11) 11 Computation of Earnings Per Share
(12) 12(A) Computation of Ratio of Earnings to Fixed
Charges
(12) 12(B) Computation of Ratio of Earnings to Combined
Fixed Charges and Preferred Share Dividend
Requirements
(27) 27 Financial Data Schedule
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