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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, 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
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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: 71,442,510 outstanding at October 31, 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 Nine Months
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Periods Ended September 30, 1996 1995 % Change 1996 1995 % Change
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(millions - except per share amounts)
NET PREMIUMS WRITTEN $878.1 $733.8 20 $2,563.4 $2,175.1 18
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REVENUES
Premiums earned $827.5 $709.3 17 $2,344.0 $2,011.0 17
Investment income 57.0 51.4 11 163.2 146.2 12
Net realized gains (losses) on security sales (3.4) 5.3 -- 1.2 42.8 (97)
Service revenues 12.8 9.7 32 32.6 29.0 12
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Total revenues 893.9 775.7 15 2,541.0 2,229.0 14
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EXPENSES
Losses and loss adjustment expenses 572.7 503.9 14 1,636.7 1,435.4 14
Policy acquisition costs 120.0 119.2 1 359.5 339.8 6
Other underwriting expenses 61.6 43.9 40 153.9 128.7 20
Investment expenses 1.4 1.7 (18) 4.6 6.3 (27)
Service expenses 9.2 5.2 77 30.8 22.4 38
Interest expense 16.1 14.3 13 45.4 42.8 6
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Total expenses 781.0 688.2 13 2,230.9 1,975.4 13
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NET INCOME
Income before income taxes 112.9 87.5 29 310.1 253.6 22
Provision for income taxes 32.6 25.0 30 88.1 69.5 27
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Net income $ 80.3 $ 62.5 28 $ 222.0 $ 184.1 21
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PER SHARE
Primary $ 1.08 $ .81 33 $ 2.91 $2.40 21
Fully diluted 1.08 .81 33 2.89 2.39 21
WEIGHTED NUMBER AVERAGE EQUIVALENT SHARES
Primary 74.0 74.3 -- 74.1 74.1 --
Fully diluted 74.2 74.4 -- 74.5 74.4 --
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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1996 1995 1995
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(millions)
ASSETS
Investments:
Held-to-maturity:
Fixed maturities, at amortized cost
(market: $310.7) $ -- $ 301.1 $ --
Available-for-sale:
Fixed maturities, at market (amortized cost:
$3,348.5, $2,615.0 and $2,729.5) 3,350.0 2,624.2 2,772.9
Equity securities, at market
Preferred stocks (cost: $279.9, $335.4 and $379.4) 282.6 339.1 382.3
Common stocks (cost: $438.3, $227.7 and $277.6) 491.7 253.7 310.0
Short-term investments, at amortized cost (market: $124.7, $191.1
and $302.8) 124.7 191.1 302.8
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Total investments 4,249.0 3,709.2 3,768.0
Cash 9.3 18.0 16.2
Accrued investment income 41.9 47.8 39.8
Premiums receivable, net of allowance for doubtful accounts of
$22.4, $18.0 and $19.2 801.2 635.7 649.9
Reinsurance recoverables 319.3 361.4 338.1
Prepaid reinsurance premiums 90.9 75.7 70.5
Deferred acquisition costs 196.9 183.7 181.9
Income taxes 71.8 64.7 58.3
Property and equipment, net of accumulated depreciation of
$122.3, $124.0 and $128.7 165.6 155.1 159.2
Other assets 41.3 24.4 70.6
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Total assets $5,987.2 $5,275.7 $5,352.5
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LIABILITIES AND SHAREHOLDERS' EQUITY
Unearned premiums $1,449.4 $1,193.3 $1,209.6
Loss and loss adjustment expense reserves 1,764.1 1,604.9 1,610.5
Policy cancellation reserve 42.9 37.9 40.8
Accounts payable and accrued expenses 405.4 371.3 339.9
Funded debt 775.6 675.7 675.9
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Total liabilities 4,437.4 3,883.1 3,876.7
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Shareholders' equity:
9 3/8% Serial Preferred Shares, Series A (shares issued and
outstanding: 0, 3.5 and 3.4) -- 85.0 83.6
Common Shares, $1.00 par value
(net of treasury shares of 11.7, 11.0 and 11.0) 71.4 72.1 72.1
Paid-in capital 378.2 374.4 374.8
Net unrealized appreciation on investment securities 37.3 25.3 51.1
Retained earnings 1,062.9 835.8 894.2
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Total shareholders' equity 1,549.8 1,392.6 1,475.8
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Total liabilities and shareholders' equity $5,987.2 $5,275.7 $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)
Nine Months Ended September 30, 1996 1995
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(millions)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 222.0 $ 184.1
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 17.9 15.1
Net realized gains on security sales (1.2) (42.8)
Changes in:
Unearned premiums 239.8 156.6
Loss and loss adjustment expense reserves 153.6 170.5
Accounts payable and accrued expenses 65.5 32.0
Policy cancellation reserve 2.1 (9.4)
Prepaid reinsurance (20.4) 7.5
Reinsurance recoverables 18.8 18.3
Premiums receivable (151.3) (93.3)
Deferred acquisition costs (15.0) (22.1)
Income taxes (6.2) 8.2
Other, net 15.1 10.8
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Net cash provided by operating activities 540.7 435.5
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases:
Held-to-maturity: fixed maturities -- (.2)
Available-for-sale: fixed maturities (3,289.3) (2,175.1)
equity securities (520.2) (567.5)
Sales:
Available-for-sale: fixed maturities 2,280.6 1,366.7
equity securities 426.4 485.9
Maturities, paydowns, calls and other:
Held-to-maturity: fixed maturities -- 34.7
Available-for-sale: fixed maturities 371.1 345.8
equity securities 40.1 10.4
Net sales of short-term investments 178.1 88.0
Payable on securities 26.6 10.1
Purchases of property and equipment (25.7) (28.6)
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Net cash used in investing activities (512.3) (429.8)
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of preferred shares (80.8) --
Proceeds from exercise of stock options 5.2 9.9
Tax benefit of stock options exercised 3.8 8.3
Proceeds from funded debt 99.6 --
Payments on funded debt (.3) (.3)
Dividends paid to shareholders (15.3) (18.1)
Acquisition of treasury shares (47.5) (.9)
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Net cash used in financing activities (35.3) (1.1)
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Increase (decrease) in cash (6.9) 4.6
Cash, January 1 16.2 13.4
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Cash, September 30 $ 9.3 $ 18.0
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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 $75.4 million and $45.5 million for the nine months ended September 30, 1996
and 1995, respectively. Total interest paid was $34.9 million for each of the
nine months ended September 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 September 30 consisted of:
1996 1995
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Market Market
Cost Value Cost Value
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7.30% Notes $ 99.6 $ 99.9 $ -- $ --
6.60% Notes 198.8 193.5 198.6 197.1
7% Notes 148.3 140.2 148.3 145.1
8 3/4% Notes 29.4 31.6 29.2 32.2
10% Notes 149.5 167.0 149.4 172.4
10 1/8% Subordinated Notes 149.5 167.6 149.3 172.4
Other funded debt .5 .5 .9 .9
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$ 775.6 $ 800.3 $ 675.7 $ 720.1
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NOTE 4 On September 30, 1996, the Company paid a quarterly dividend of $.06 per
Common Share to shareholders of record as of the close of business on September
13, 1996. The dividend was declared by the Board of Directors on July 26, 1996.
On October 25, 1996, the Board of Directors declared a quarterly dividend of
$.06 per Common Share. The dividend is payable December 31, 1996, to
shareholders of record as of the close of business on December 13, 1996.
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NOTE 5 Certain amounts in the financial statements for 1995 were reclassified to
conform with the presentation used for 1996. These reclassifications had no
effect on net income.
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 period ended
September 30, 1996, are not necessarily indicative of the results expected for
the full year.
NOTE 7 SUBSEQUENT EVENT. On November 6, 1996, the Company signed a definitive
agreement to acquire Midland Financial Group, Inc. Under the agreement, the
Company will acquire all of Midland's outstanding stock, or approximately 5.5
million shares, at a price of $9.00 per share in cash. The transaction is
expected to be completed during the first quarter 1997, subject to regulatory
approval and other customary conditions. Midland Financial Group underwrites
and markets nonstandard private passenger automobile insurance through
approximately 8,500 independent agents across 20 states, primarily in the
southern and western United States. For the first half of 1996, Midland wrote
$76 million of net premiums written.
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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 1996, operating income, which excludes net realized
gains/losses on security sales, was $82.5 million, or $1.11 per share, compared
to $59.0 million, or $.76 per share, last year. The combined ratio was 91.2,
compared to 94.0 for the third quarter 1995. For the nine months ended September
30, 1996, operating income was $221.2 million, or $2.92 per share, compared to
$156.2 million, or $2.02 per share, in 1995. The year-to-date combined ratio was
91.7, compared to 94.7 last year.
Net premiums written increased 20% over the third quarter 1995 and 18%
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 17% for both the quarter and the first nine months. Service
revenues increased 32% to $12.8 million for the quarter and 12% to $32.6 million
for the first nine months, primarily driven by the newly acquired vehicle
inspection services company.
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
71% in 1995, and 70% for the first nine months, compared to 71% last year.
Policy acquisition costs and other underwriting expenses as a percentage of
premiums earned decreased to 22% for the third quarter and for the first nine
months, compared to 23% for the third quarter and for the first nine months in
1995. Service expenses increased 77% for the quarter and 38% for the first nine
months. Excluding current and prior year loss adjustment expense reserve changes
and acquisition costs associated with the vehicle inspection services company,
the increase in service expenses is consistent with the increase in revenues.
Recurring investment income (interest and dividends) increased 11% for the
quarter and 12% for the first nine months, reflecting an increase in the average
investment portfolio, partially offset by a decrease in the pretax yields and a
shift in the portfolio to common stocks. The Company had net realized losses on
security sales of $3.4 million for the quarter and net realized gains on
security sales of $1.2 million for the first nine months, compared to net
realized gains on security sales of $5.3 million and $42.8 million,
respectively, in 1995. On September 30, 1996, the Company's portfolio had $57.6
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
nine months.
The Company continues to invest in fixed-maturity, short-term and equity
securities. The majority of the portfolio was in short-term and
intermediate-term, investment-grade fixed-maturity securities ($3,335.9 million,
or 78.5%, at September 30, 1996, and $3,055.6 million, or 82.4%, at September
30, 1995). Long-term investment-grade fixed-maturity securities represented
$75.4 million, or $1.8%, and $44.8 million, or 1.2%, of the total investment
portfolio
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at September 30, 1996 and 1995, respectively. As of September 30, 1996 and 1995,
the non-investment-grade fixed-maturity portfolio of the Company was $63.4
million, or 1.5%, and $16.0 million, or .4%, respectively, of the total
investment portfolio. The duration of the fixed-income portfolio was 3.1 years
at September 30, 1996, compared to 1.9 years at September 30, 1995.
Equity investments are comprised of preferred stocks ($282.6 million, or 6.6%,
in 1996 and $339.1 million, or 9.2%, in 1995) and common stocks ($491.7 million,
or 11.6%, in 1996 and $253.7 million, or 6.8%, in 1995). The increase in common
stocks reflects the Company's objectives 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.
The Company's financial instruments with off-balance-sheet risk had net
unrealized losses of $1.4 million as of September 30, 1996, compared to losses
of $4.5 million as of September 30, 1995.
The weighted average annualized fully taxable equivalent book yield of the
portfolio was 6.6% and 6.9% for the nine months ended September 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 nine months ended September 30, 1996, operations generated a positive cash
flow of $540.7 million. During the first nine months, the Company repurchased
997,105 Common Shares at an average cost of $41.59 per share. During the third
quarter, the Company repurchased 3,545 Common Shares at an average cost of
$52.59 per share, pursuant to an oddlot tender offer.
RECENT DEVELOPMENTS
The Company has previously reported that it 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 has been approved by the administrative
law judge and signed by the California Commissioner of Insurance and became
final on September 16, 1996. The Company sought indemnification for this
liability from the sellers from whom Pro-West was acquired in October 1990, but
the sellers disputed the obligation. A settlement was reached, and, in
September, the Company accepted the sellers' payment in the amount of
$1,040,000 in full satisfaction of their indemnity obligation. The Company has
begun the process of locating eligible policyholders so that the rollback
refunds can be distributed.
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PART II - OTHER INFORMATION
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ITEM 5. Other Information
The Board of Directors on October 25, 1996, elected Charles A.
Davis to fill the vacancy on the Company's Board. Mr. Davis is a
limited partner with Goldman Sachs Group L.P.
On November 6, 1996, the Company signed a definitive agreement
to acquire Midland Financial Group, Inc. Under the agreement,
the Company will acquire all of Midland's outstanding stock, or
approximately 5.5 million shares, at a price of $9.00 per share
in cash. The transaction is expected to be completed during the
first quarter 1997, subject to regulatory approval and other
customary conditions. Midland Financial Group underwrites and
markets nonstandard private passenger automobile insurance
through approximately 8,500 independent agents across 20 states,
primarily in the southern and western United States. For the
first half of 1996, Midland wrote $76 million of net premiums
written.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
See exhibit index on page 11.
(b) Reports on Form 8-K filed during the quarter ended September
30, 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: November 13, 1996 BY: /s/ DAVID M. SCHNEIDER
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David M. Schneider
Secretary
Date: November 13, 1996 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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10 10 The Progressive Corporation Directors Deferral
Plan (Amendment and Restatement), as further
amended on October 25, 1996
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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