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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 March 31, 1997
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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: 71,926,047 outstanding at April 30, 1997
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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 ended March 31, 1997 1996 % Change
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(millions - except per share amounts)
NET PREMIUMS WRITTEN $1,051.6 $810.2 30
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REVENUES
Premiums earned $894.3 $732.0 22
Investment income 64.1 52.7 22
Net realized gains (losses) on security sales (3.3) 4.9 --
Service revenues 11.4 9.4 21
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Total revenues 966.5 799.0 21
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EXPENSES
Losses and loss adjustment expenses 635.2 525.4 21
Policy acquisition costs 128.6 120.1 7
Other underwriting expenses 65.8 41.0 60
Investment expenses 1.5 1.8 (17)
Service expenses 11.2 9.3 20
Interest expense 16.1 14.3 13
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Total expenses 858.4 711.9 21
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NET INCOME
Income before income taxes 108.1 87.1 24
Provision for income taxes 31.6 23.8 33
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Net income $76.5 $ 63.3 21
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PER SHARE
Primary $1.02 $ .82 24
Fully diluted 1.02 .82 24
WEIGHTED NUMBER AVERAGE EQUIVALENT SHARES
Primary 74.8 74.6 --
Fully diluted 74.8 74.6 --
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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1997 1996 1996
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(millions)
ASSETS
Investments:
Available-for-sale:
Fixed maturities, at market (amortized cost:
$3,590.5, $3,112.1 and $3,384.1) $3,589.2 $3,120.4 $3,409.2
Equity securities, at market
Preferred stocks (cost: $356.4, $327.9 and $333.8) 359.0 329.9 341.6
Common stocks (cost: $499.9, $337.8 and $458.9) 581.4 368.6 540.1
Short-term investments, at amortized cost
(market: $148.2, $248.5 and $159.7) 148.2 248.5 159.7
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Total investments 4,677.8 4,067.4 4,450.6
Cash 28.3 13.9 15.4
Accrued investment income 43.8 41.3 46.9
Premiums receivable, net of allowance
for doubtful accounts of $22.9, $19.0 and $23.2 962.7 721.9 820.8
Reinsurance recoverables 376.8 333.7 310.0
Prepaid reinsurance premiums 90.2 78.5 85.8
Deferred acquisition costs 230.3 186.2 200.1
Income taxes 71.6 54.1 62.1
Property and equipment, net of accumulated
depreciation of $132.6, $133.6 and $126.7 185.7 165.1 169.9
Other assets 37.6 24.6 22.3
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Total assets $6,704.8 $5,686.7 $6,183.9
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LIABILITIES AND SHAREHOLDERS' EQUITY
Unearned premiums $1,671.3 $1,295.8 $1,467.3
Loss and loss adjustment expense reserves 1,999.0 1,653.8 1,800.6
Policy cancellation reserve 47.8 37.5 43.3
Accounts payable and accrued expenses 469.8 517.1 420.1
Funded debt 775.8 675.9 775.7
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Total liabilities 4,963.7 4,180.1 4,507.0
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Shareholders' equity:
9 3/8% Serial Preferred Shares, Series A (issued
and outstanding, 0, 3.2 and 0) -- 78.4 --
Common Shares, $1.00 par value (treasury shares of
11.3, 10.9 and 11.6) 71.8 72.2 71.5
Paid-in capital 393.1 380.0 381.8
Net unrealized appreciation on investment securities 53.7 26.6 74.0
Retained earnings 1,222.5 949.4 1,149.6
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Total shareholders' equity 1,741.1 1,506.6 1,676.9
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Total liabilities and shareholders' equity $6,704.8 $5,686.7 $6,183.9
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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, 1997 1996
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(millions)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $76.5 $63.3
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 6.6 5.2
Net realized (gains) losses on security sales 3.3 (4.9)
Changes in:
Unearned premiums 135.2 86.2
Loss and loss adjustment expense reserves 56.5 43.3
Accounts payable and accrued expenses 16.8 29.7
Policy cancellation reserve 4.5 (3.3)
Prepaid reinsurance premiums 22.1 (8.0)
Reinsurance recoverables 3.4 4.4
Premiums receivable (112.8) (72.0)
Deferred acquisition costs (23.5) (4.3)
Income taxes 14.1 17.3
Other, net 15.4 2.2
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Net cash provided by operating activities 218.1 159.1
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases:
Available-for-sale: fixed maturities (1,479.6) (1,663.8)
equity securities (171.1) (178.8)
Sales:
Available-for-sale: fixed maturities 1,285.5 1,174.5
equity securities 115.8 161.2
Maturities, paydowns, calls and other:
Available-for-sale: fixed maturities 85.1 98.8
equity securities 12.3 17.9
Net sales of short-term investments 12.6 54.3
Payable on securities 14.5 193.7
Purchase of property and equipment (19.5) (11.1)
Purchase of Midland, net of cash acquired (48.0) --
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Net cash used in investing activities (192.4) (153.3)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options 6.6 3.3
Tax benefit from exercise of stock options 5.0 2.4
Payments on funded debt (20.1) (.1)
Dividends paid to shareholders (4.3) (5.9)
Acquisition of treasury shares -- (7.8)
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Net cash used in financing activities (12.8) (8.1)
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Increase (decrease) in cash 12.9 (2.3)
Cash, January 1 15.4 16.2
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Cash, March 31 $28.3 $13.9
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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 $10.9 million and $0 for the periods ended March 31, 1997 and 1996,
respectively. Total interest paid was $6.6 million for both periods.
NOTE 2 Debt at March 31 consisted of:
1997 1996
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Market Market
Cost Value Cost Value
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7.30% Notes $99.7 $98.5 $ -- $ --
6.60% Notes 198.8 192.0 198.7 195.3
7% Notes 148.4 139.2 148.3 142.5
8 3/4% Notes 29.5 31.1 29.3 32.0
10% Notes 149.6 164.2 149.5 170.5
10 1/8% Subordinated Notes 149.5 164.8 149.4 171.1
Other debt .3 .3 .7 .7
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$775.8 $790.1 $675.9 $712.1
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NOTE 3 On March 7, 1997, the Company acquired all of the outstanding
capital stock of Midland Financial Group, Inc., or 5,565,278 shares, at a price
of $9.00 per share. The Company accounted for the acquisition under the purchase
method of accounting and will include all activity since date of acquisition in
its results of operations. The cost of the acquisition exceeded the underlying
book value at the date of acquisition by $10.2 million and is being amortized
over three years. In addition, the Company repaid $20.0 million of Midland's
notes payable.
NOTE 4 On March 31, 1997, the Company paid a quarterly dividend of $.06 per
Common Share to shareholders of record as of the close of business on March 14,
1997. The dividend was declared by the Board of Directors on February 22, 1997.
On April 25, 1997, the Board of Directors declared a quarterly dividend of $.06
per Common Share, payable June 30, 1997, to shareholders of record as of the
close of business on June 13, 1997.
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, 1997, 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 1997, operating income, which excludes net realized gains
and losses on security sales, was $78.6 million, or $1.05 per share, compared to
$60.2 million, or $.78 per share, last year. The combined ratio was 92.8,
compared to 93.8 for the first quarter 1996.
Net premiums written increased 30% over the first quarter 1996, primarily
reflecting an increase in unit sales driven by the Company's competitive rates.
Premiums earned, which are a function of the amount of premiums written in the
current and prior periods, increased 22% for the quarter. Service revenues
increased 21% to $11.4 million for the quarter, driven by new service products
started during 1996.
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, decreased as a percentage of
premiums earned to 71% for the quarter, compared to 72% in 1996. Policy
acquisition costs and other underwriting expenses as a percentage of premiums
earned were 22% for both periods. Service expenses increased 20% for the
quarter, consistent with the increase in revenues.
Recurring investment income (interest and dividends) increased 22% for the
quarter, primarily reflecting an increase in the average investment portfolio.
The Company had net realized losses on security sales of $3.3 million for the
quarter, compared to net realized gains of $4.9 million in the first quarter of
1996. At March 31, 1997, the Company's portfolio had $82.8 million in total
unrealized gains, compared to $114.1 million at December 31, 1996, reflecting an
increase in interest rates as evidenced by the 3-year treasury note yield
increasing from 6.0% to 6.6% 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 ($3,496.0 million,
or 74.8%, at March 31, 1997, and $3,276.4 million, or 80.6%, at March 31, 1996).
Long-term investment-grade fixed-income securities represented $117.9 million,
or 2.5%, and $86.1 million, or 2.1%, of the total investment portfolio at March
31, 1997 and 1996, respectively. Non-investment-grade fixed-maturity securities
were $123.5 million, or 2.6%, in 1997, and $6.4 million, or .1%, in 1996, and
offer the Company high returns and added diversification without a significant
adverse effect on the stability and quality of the investment portfolio as a
whole. The duration of the fixed-income portfolio was 3.2 years at March 31,
1997, compared to 2.8 years at March 31, 1996.
Equity investments are comprised of preferred stocks ($359.0 million, or 7.7%,
in 1997 and $329.9 million, or 8.1%, in 1996), and common stocks ($581.4
million, or 12.4%, in 1997 and $368.6 million, or 9.1%, in 1996). The increase
in common stocks reflects the Company's objective to increase its position in
common stock and similar investments to about 15% of the entire portfolio.
Financial instruments with off-balance-sheet risk are used to manage the risks
and enhance the yields of the available-for-sale portfolio. These financial
instruments had a net market value of $(.1) million as of March 31, 1997,
compared to $3.2 million as of March 31, 1996.
The weighted average annualized fully taxable equivalent book yield of the
portfolio was 6.7% for the quarters ended March 31, 1997 and 1996.
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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, 1997, operations generated a positive cash flow
of $218.1 million.
On March 7, 1997, the Company acquired Midland Financial Group, Inc. through a
purchase of all of Midland's outstanding capital stock, or 5,565,278 shares, at
a price of $9.00 per share. In addition, the Company repaid $20.0 million of
Midland's notes payable. The transactions were settled in cash generated by the
Company's operations and current investments.
PART II - OTHER INFORMATION
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ITEM 4. Submission of Matters to a Vote of Security Holders.
At the April 25, 1997 Annual Meeting of Shareholders of the
Company, 65,687,626 Common Shares were represented in person or by
proxy. At the Annual Meeting, the shareholders took the following
actions:
The shareholders approved the proposal to fix the number of directors
at ten. The proposal received 64,777,801 affirmative votes, 686,186
negatives votes and 223,639 abstentions.
The shareholders approved the proposal to amend the Company's Code of
Regulations to require advance written notice to the Company of
shareholder nominations for the election of directors. This proposal
received 54,854,493 affirmative votes, 7,800,667 negative votes and
3,032,466 abstentions.
The shareholders approved the proposal to amend the Company's Code of
Regulations to provide for classification of the Board of Directors
and adopt related provisions. The amendment adopted by shareholders
divides the Board into three classes of directors serving staggered
terms. This proposal received 43,493,550 affirmative votes,
16,056,412 negative votes, 263,767 abstentions and 5,873,897
broker non-votes.
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At the meeting, the shareholders elected the nine directors named
below, for the terms indicated. One vacancy remains on the board. The
votes cast with respect to each director were as follows:
Director Term Expires For Withheld
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B. Charles Ames 1998 65,216,269 471,357
Peter B. Lewis 1998 65,174,568 513,058
Donald B. Shackelford 1998 65,216,450 471,176
Milton N. Allen 1999 65,202,089 485,537
Charles A. Davis 1999 65,214,239 473,387
Paul B. Sigler 1999 65,164,038 523,588
Stephen R. Hardis 2000 65,218,311 469,315
Janet Hill 2000 65,215,595 472,031
Norman S. Matthews 2000 65,217,334 470,292
The shareholders approved The Progressive Corporation 1997 Executive
Bonus Plan, which provides certain executive officers of the Company
with the opportunity to earn performance-based incentive compensation.
Under this plan, participants will be entitled to receive additional
cash compensation on an annual basis if, and to the extent, that
certain pre-established performance goals are met. This proposal
received 61,288,165 affirmative votes, 1,239,745 negative votes and
3,159,716 abstentions.
ITEM 5. Other Information.
On April 30, 1997, the Company amended its shelf registration statement
(SEC File No. 333-1745) for the purpose of deregistering $100 million
of Debt Securities of the Company. The action was taken because the
Company does not anticipate the need for borrowing in the public
markets in the near term.
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, 1997: 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 15, 1997 BY: /s/ DAVID M. SCHNEIDER
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David M. Schneider
Secretary
Date: May 15, 1997 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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(3)(ii) 3 Code of Regulations of The Progressive
Corporation (as amended April 25, 1997)
(11) 11 Computation of Earnings Per Share
(27) 27 Financial Data Schedule
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