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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, 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
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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: 71,354,898 outstanding at June 30, 1996
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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, 1996 1995 % Change 1996 1995 % Change
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(millions - except per share amounts)
NET PREMIUMS WRITTEN $875.1 $754.4 16 $1,685.3 $1,441.3 17
====================== ======================
REVENUES
Premiums earned $784.5 $677.4 16 $1,516.5 $1,301.7 17
Investment income 53.4 50.0 7 106.2 94.8 12
Net realized gains (losses) on security sales (0.2) 22.1 -- 4.7 37.5 (87)
Service revenues 10.4 10.0 4 19.8 19.3 3
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Total revenues 848.1 759.5 12 1,647.2 1,453.3 13
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EXPENSES
Losses and loss adjustment expenses 538.6 494.6 9 1,064.1 931.5 14
Policy acquisition costs 119.4 114.0 5 239.5 220.6 9
Other underwriting expenses 51.3 40.9 25 92.2 84.9 9
Investment expenses 1.4 2.5 (44) 3.2 4.6 (30)
Service expenses 12.3 8.8 40 21.6 17.2 26
Interest expense 15.0 14.2 6 29.3 28.5 3
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Total expenses 738.0 675.0 9 1,449.9 1,287.3 13
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NET INCOME
Income before income taxes 110.1 84.5 30 197.3 166.0 19
Provision for income taxes 31.7 23.7 34 55.5 44.5 25
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Net income $ 78.4 $ 60.8 29 $ 141.8 $ 121.5 17
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PER SHARE
Primary $ 1.01 $ .79 28 $ 1.83 $ 1.59 15
Fully diluted 1.01 .79 28 1.83 1.59 15
WEIGHTED NUMBER AVERAGE EQUIVALENT SHARES
Primary 73.6 74.0 (1) 74.1 74.0 --
Fully diluted 73.7 74.0 -- 74.1 74.0 --
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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1996 1995 1995
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(millions)
ASSETS
Investments:
Held-to-maturity:
Fixed maturities, at amortized cost (market: $318.8) $ -- $309.7 $ --
Available-for-sale:
Fixed maturities, at market (amortized cost:
$3,098.5, $2,347.9 and $2,729.5) 3,091.2 2,349.8 2,772.9
Equity securities, at market
Preferred stocks (cost: $298.2, $315.2 and $379.4) 298.2 314.8 382.3
Common stocks (cost: $335.8, $213.1 and $277.6) 381.9 230.1 310.0
Short-term investments, at amortized cost (market $297.7, $280.7,
and $302.8) 297.7 280.7 302.8
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Total investments 4,069.0 3,485.1 3,768.0
Cash 11.2 13.2 16.2
Accrued investment income 50.1 39.1 39.8
Premiums receivable, net of allowance for doubtful accounts of
$20.4, $16.4, and $19.2 794.1 622.8 649.9
Reinsurance recoverables 315.8 374.3 338.1
Prepaid reinsurance premiums 91.5 81.6 70.5
Deferred acquisition costs 193.9 183.7 181.9
Income taxes 77.8 88.8 58.3
Property and equipment, net of accumulated depreciation of
$138.5, $119.3 and $128.7 166.9 152.7 159.2
Other assets 23.4 37.9 70.6
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Total assets $5,793.7 $5,079.2 $5,352.5
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LIABILITIES AND SHAREHOLDERS' EQUITY
Unearned premiums $1,399.4 $1,174.7 $1,209.6
Loss and loss adjustment expense reserves 1,693.3 1,546.2 1,610.5
Policy cancellation reserve 39.8 40.5 40.8
Accounts payable and accrued expenses 426.1 324.0 339.9
Funded debt 775.6 675.7 675.9
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Total liabilities 4,334.2 3,761.1 3,876.7
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Shareholders' equity:
9 3/8% Serial Preferred Shares, Series A (issued and outstanding:
0, 3.5 and 3.4) -- 85.8 83.6
Common Shares, $1.00 par value
(treasury shares of 11.7, 11.2 and 11.0) 71.3 71.9 72.1
Paid-in capital 376.3 370.4 374.8
Net unrealized appreciation on investment securities 25.2 12.0 51.1
Retained earnings 986.7 778.0 894.2
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Total shareholders' equity 1,459.5 1,318.1 1,475.8
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Total liabilities and shareholders' equity $5,793.7 $5,079.2 $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)
Six Months Ended June 30, 1996 1995
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(millions)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 141.8 $ 121.5
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 12.8 10.0
Net realized gains on security sales (4.7) (37.5)
Changes in:
Unearned premiums 189.8 138.0
Loss and loss adjustment expense reserves 82.8 111.8
Accounts payable and accrued expenses 55.6 0.6
Policy cancellation reserve (1.0) (6.8)
Prepaid reinsurance (21.0) 1.6
Reinsurance recoverables 22.3 5.4
Premiums receivable (144.2) (80.4)
Deferred acquisition costs (12.0) (22.1)
Income taxes (5.5) (8.8)
Other, net (3.9) 12.6
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Net cash provided by operating activities 312.8 245.9
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases:
Held-to-maturity: fixed maturities -- (0.2)
Available-for-sale: fixed maturities (2,233.4) (1,530.4)
equity securities (280.0) (526.3)
Sales:
Available-for-sale: fixed maturities 1,649.6 1,080.7
equity securities 287.2 477.9
Maturities, paydowns, calls and other:
Held-to-maturity: fixed maturities -- 26.7
Available-for-sale: fixed maturities 202.2 254.1
equity securities 25.6 10.4
Net (purchases) sales of short-term investments 5.1 (1.6)
(Receivable) payable on securities 76.8 (18.1)
Purchases of property and equipment (18.1) (21.0)
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Net cash used in investing activities (285.0) (247.8)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options 4.1 7.2
Tax benefits from exercise of stock options 2.9 6.8
Proceeds from funded debt 99.6 --
Payments on funded debt (0.2) (0.2)
Redemption of Preferred Shares (80.8) --
Dividends paid to shareholders (11.1) (12.1)
Acquisition of treasury shares (47.3) --
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Net cash provided by (used in) financing activities (32.8) 1.7
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Decrease in cash (5.0) (0.2)
Cash, January 1 16.2 13.4
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Cash, June 30 $ 11.2 $ 13.2
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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
$52.4 million and $40.5 million for the six months ended June 30, 1996 and 1995,
respectively. Total interest paid was $28.3 million for each of the six months
ended June 30, 1996 and 1995.
NOTE 2 On May 31, 1996, the Company redeemed all of its remaining outstanding
9 3/8% Serial Preferred Shares, Series A (Cumulative, Liquidation Preference
$25.00 per share) ("Preferred Shares") at a total cost of $82.1 million,
including accrued but unpaid dividends through the redemption date. The
redemption was funded through the sale on May 28, 1996, of $100 million of the
Company's 7.30% Notes due 2006 at par in an underwritten public offering. The
remaining proceeds of the offering were added to the investment portfolios of
the Company's subsidiaries and will be available for general corporate purposes,
which may include supporting premium growth.
NOTE 3 Funded debt at June 30 consisted of:
1996 1995
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Market Market
Cost Value Cost Value
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7.3% Notes $ 99.6 $ 99.6 $ -- $ --
6.6% Notes 198.8 192.9 198.6 196.3
7.0% Notes 148.3 141.0 148.3 142.6
8 3/4% Notes 29.4 31.6 29.1 32.3
10% Notes 149.5 167.6 149.4 173.1
10 1/8% Subordinated Notes 149.4 168.0 149.3 173.0
Other funded debt 0.6 0.6 1.0 1.0
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$ 775.6 $ 801.3 $ 675.7 $ 718.3
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NOTE 4 On June 30, 1996, the Company paid a quarterly dividend of $.055 per
Common Share to shareholders of record as of the close of business on June 14,
1996. The dividend was declared by the Board of Directors on April 26, 1996.
On July 26, 1996, the Board of Directors declared a quarterly dividend of $.06
per Common Share, payable September 30, 1996, to shareholders of record as of
the close of business on September 13, 1996.
NOTE 5 Certain amounts in the consolidated financial statements for prior
periods were reclassified to conform with the 1996 presentation.
NOTE 6 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
June 30, 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 second quarter 1996, operating income, which excludes net realized gains
(losses) on security sales and one-time items, was $78.5 million, or $1.05 per
share, compared to $46.4 million, or $.60 per share, last year. The increase was
due primarily to favorable underwriting results as discussed below. During the
quarter, the Company redeemed all of its outstanding Preferred Shares at a
liquidation price of $25.00 per share, which exceeded its carrying value of
$24.11 per share, resulting in a one-time $.04 per share impact. The combined
ratio was 90.4, compared to 95.9 for the second quarter 1995. For the six months
ended June 30, 1996, operating income was $138.7 million, or $1.83 per share,
compared to $97.1 million, or $1.26 per share, in 1995. The year-to-date
combined ratio was 92.0, compared to 95.0 last year.
Net premiums written increased 16% over the second quarter 1995 and 17%
year-to-date, 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 16% for the quarter and 17% for the first six months. Service
revenue increased 4% to $10.4 million for the quarter and 3% to $19.8 million
for the first six months.
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, and costs to settle these claims,
decreased as a percentage of premiums earned to 69% for the quarter, compared to
73% in 1995. The lower loss ratio was primarily attributable to declining
severity not anticipated by our pricing. In addition, 1995 results included $7.9
million of losses from storms that hit Texas and Louisiana. Year-to-date claim
costs were 70%, compared to 72% last year.
Policy acquisition costs and other underwriting expenses were 22% of premiums
earned for the second quarter, compared to 23% in 1995, and 22% for the first
six months, compared to 23% last year. Service expenses increased 40% for the
quarter and 26% for the first six months, primarily due to the costs associated
with acquiring a majority interest in a company which provides vehicle
inspection services.
Recurring investment income (interest and dividends) increased 7% for the
quarter and 12% for the first six months, reflecting an increase in the average
investment portfolio, partially offset by an increase in the common stock
portfolio, and a decrease in the pretax yields. The Company had net realized
gains (losses) on security sales of $(.2) million and $4.7 million for the
quarter and first six months, respectively, compared to $22.1 million and $37.5
million in 1995. On June 30, 1996, the Company's portfolio had $38.8 million in
total unrealized gains, compared to $78.7 million at December 31, 1995,
primarily reflecting an increase in interest rate levels as evidenced by the
3-year treasury note yield increasing from 5.2% to 6.3% during the first six
months.
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 ($3,304.5 million,
or 81.2%, at June 30, 1996, and $2,764.2 million, or 79.4%, at June 30, 1995).
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Long-term investment-grade fixed-income securities represented $69.8 million, or
1.7%, and $101.4 million, or 2.9%, of the total investment portfolio at June 30,
1996 and 1995, respectively. The duration of the fixed-income portfolio was 2.8
years at June 30, 1996, compared to 1.8 years at June 30, 1995.
Equity investments are comprised of preferred stocks ($298.2 million or 7.3% in
1996 and $314.8 million or 9.0% in 1995) and common stocks ($381.9 million or
9.4% in 1996 and $230.1 million or 6.6% 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 returns and further
diversify the portfolio through foreign equity investments. As of June 30, 1996
and 1995, the non-investment-grade fixed-income portfolio of the Company was
$14.6 million, or .4%, and $74.6 million, or 2.1%, respectively, of the total
investment portfolio.
The Company's financial instruments with off-balance-sheet risk had net
unrealized gains (losses) of $1.5 million, compared to $(.2) million as of
June 30, 1996 and 1995, respectively.
The weighted average annualized fully taxable equivalent book yield of the
portfolio was 6.6% and 6.9% for the six months ended June 30, 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 six months ended June 30, 1996, operations generated a positive cash flow of
$312.8 million. During the first six months, the Company repurchased 993,560
Common Shares at an average cost of $41.55 per share. During the second quarter,
the Company repurchased 941,600 Common Shares at an average cost of $41.36 per
share.
On May 28, 1996, the Company sold $100 million of its 7.30% Notes due 2006 at
par in an underwritten public offering. The net proceeds of $99.6 million (after
underwriting discount and expenses) were used primarily to fund the Preferred
Share redemption (see below). The remaining proceeds were added to the
investment portfolios of the Company's subsidiaries and will be available for
general corporate purposes, which may include supporting premium growth.
On May 31, 1996, the Company redeemed all of its remaining outstanding Preferred
Shares at a total cost of $82.1 million, including accrued but unpaid dividends
through the redemption date. The redemption was funded through the Company's
debt offering.
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RECENT DEVELOPMENTS
The Company has entered into a Settlement Stipulation with the California
Department of Insurance to settle Pro-West Insurance Company's Proposition 103
rollback obligation for the sum of $1,750,000. The Settlement Stipulation must
be approved by an administrative law judge and the Insurance Commissioner before
becoming final. The Company has sought indemnification for this liability from
the sellers from whom Pro-West was acquired in October 1990, in accordance with
the terms of the acquisition agreements, but the sellers have disputed such
obligation. In July 1996, the Company reached an agreement with the sellers to
settle the dispute. Under the settlement, the sellers have agreed to reimburse
Pro-West in the amount of at least $1,055,000, and potentially up to the full
amount of the rollback obligation plus certain expenses, depending on the timing
and circumstances of the indemnity payment.
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PART II - OTHER INFORMATION
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ITEM 2. Changes in Securities
On May 28, 1996, the Company sold $100 million of its 7.30% Notes due
2006 (the "Notes") in an underwritten public offering. The Notes rank
on a parity with all other current and future unsecured and
unsubordinated indebtedness of the Company and prior to the
subordinated indebtedness and the Common Shares of the Company, as
well as any preferred shares that may be outstanding hereafter.
If certain defaults occur with respect to the Notes, no payment may be
made by the Company on account of the principal of or interest on, or
to acquire, any of the subordinated indebtedness until the Notes have
been paid in full or such defaults have been cured or waived. Upon any
acceleration of the principal of the subordinated indebtedness, or
upon any payment by the Company or distribution of assets of the
Company upon any dissolution, winding up, liquidation or
reorganization involving the Company, whether voluntary or
involuntary, or in bankruptcy or insolvency, all amounts due or to
become due upon the Notes must be paid in full or provided for before
any payment may be made on account of the subordinated indebtedness.
As a consequence, in the event of any such bankruptcy, insolvency or
similar event, holders of the Company's subordinated indebtedness may
recover less, ratably, than the holders of the Notes and certain other
indebtedness of the Company. Further, under Ohio law, upon any
dissolution or winding up of the Company, payment of the indebtedness
evidenced by the Notes, and other obligations of the Company, must be
made or adequately provided for prior to the distribution of any
remaining assets to holders of the Company's Common Shares and any
preferred shares which may be then outstanding.
ITEM 5. Other Information
On May 31, 1996, the Registrant redeemed all of its outstanding
Preferred Shares. The redemption was made at the redemption price of
$25.00 per share, plus accrued and unpaid dividends therein to the
date of redemption.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
See exhibit index on page 12.
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(b) Reports on Form 8-K during the quarter ended June 30, 1996:
On April 3, 1996, the Registrant filed a Form 8-K to report the
voluntary resignation of Chief Operating Officer, Bruce W. Marlow. Mr.
Marlow plans to pursue opportunities outside of the auto insurance
business. Peter B. Lewis, President and Chief Executive Officer, has
assumed Mr. Marlow's responsibilities.
On April 16, 1996, the Registrant filed a Form 8-K to announce the
call for redemption, on May 31, 1996, of all of its outstanding 9 3/8%
Serial Preferred Shares, Series A (Cumulative, Liquidation Preference
$25.00 per share).
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SIGNATURES
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: July 31, 1996 BY: /s/ DAVID M. SCHNEIDER
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David M. Schneider
Secretary
Date: July 31, 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 10-Q
Under Reg. Exhibit
S-K. Item 601 No. Description of Exhibit
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(4) 4 Form of 7.30% Notes due 2006, issued in the
aggregate principal amount of $100,000,000
under the Senior Indenture dated September 15,
1993 between the Company and State Street Bank
and Trust, as amended and supplemented
(10) 10 Amending Agreement dated April 1, 1996 between
the Company and Bruce W. Marlow relating to
certain outstanding stock options previously
granted to Mr. Marlow
(11) 11 Computation of Earnings Per Share
(12) 12 Computation of Ratio of Earnings to Fixed
Charges
(27) 27 Financial Data Schedule
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