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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, 1998
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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)
(440) 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: 72,504,500 outstanding at April 30, 1998
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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, 1998 1997 %Change
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(millions - except per share amounts)
NET PREMIUMS WRITTEN........................... $1,345.3 $1,051.6 28
====================
REVENUES
Premiums earned................................ $1,145.7 $894.3 28
Investment income.............................. 72.0 64.1 12
Net realized gains (losses) on security sales.. 26.7 (3.3) --
Service revenues............................... 10.5 11.4 (8)
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Total revenues.............................. 1,254.9 966.5 30
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EXPENSES
Losses and loss adjustment expenses............ 784.2 635.2 23
Policy acquisition costs....................... 155.9 128.6 21
Other underwriting expenses.................... 110.9 65.8 69
Investment expenses............................ 2.5 1.5 67
Service expenses............................... 9.4 11.2 (16)
Interest expense............................... 16.1 16.1 --
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Total expenses.............................. 1,079.0 858.4 26
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NET INCOME
Income before income taxes..................... 175.9 108.1 63
Provision for income taxes..................... 55.8 31.6 77
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Net income..................................... $120.1 $76.5 57
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COMPUTATION OF EARNINGS PER SHARE
Basic:
Average shares outstanding..................... 72.4 71.7 1
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Per share.................................... $1.66 $1.07 55
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Diluted:
Average shares outstanding..................... 72.4 71.7 1
Net effect of dilutive stock options........... 3.5 3.1 13
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Total equivalent shares...................... 75.9 74.8 1
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Per share................................. $1.58 $1.02 55
====================
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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1998 1997 1997
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(millions)
ASSETS
Investments:
Available-for-sale:
Fixed maturities, at market (amortized cost:
$3,832.7, $3,590.5 and $3,836.8).......... $3,885.7 $3,589.2 $3,891.4
Equity securities, at market
Preferred stocks (cost: $420.3, $356.4
and $333.9)............................. 434.6 359.0 348.8
Common stocks (cost: $520.7, $499.9 and
$501.9)................................. 708.5 581.4 620.8
Short-term investments, at amortized cost
(market: $468.1, $148.2 and $409.4)....... 468.1 148.2 409.4
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Total investments....................... 5,496.9 4,677.8 5,270.4
Cash.......................................... 13.4 28.3 23.3
Accrued investment income..................... 37.5 43.8 44.3
Premiums receivable, net of allowance for
doubtful accounts of $31.1, $22.9 and $32.4. 1,310.3 962.7 1,160.8
Reinsurance recoverables...................... 326.6 347.3 317.5
Prepaid reinsurance premiums.................. 78.9 90.2 79.8
Deferred acquisition costs.................... 278.1 230.3 259.6
Income taxes.................................. 62.5 71.6 116.5
Property and equipment, net of accumulated
depreciation of $170.1, $132.6 and $158.3... 286.3 185.7 260.4
Other assets.................................. 40.2 37.6 27.0
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Total assets.......................... $7,930.7 $6,675.3 $7,559.6
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LIABILITIES AND SHAREHOLDERS' EQUITY
Unearned premiums............................. $2,178.7 $1,671.3 $1,980.1
Loss and loss adjustment expense reserves..... 2,148.1 1,969.5 2,146.6
Policy cancellation reserve................... 28.7 47.8 34.7
Accounts payable and accrued expenses......... 496.7 469.8 486.4
Debt.......................................... 776.1 775.8 775.9
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Total liabilities....................... 5,628.3 4,934.2 5,423.7
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Shareholders' equity:
Common Shares, $1.00 par value
(treasury shares of 10.7, 11.3 and 10.8).. 72.4 71.8 72.3
Paid-in capital............................. 420.9 393.1 412.8
Accumulated comprehensive income:
Net unrealized appreciation on investment
securities.............................. 165.6 53.7 122.3
Other comprehensive income................ 6.3 6.0 6.3
Retained earnings........................... 1,637.2 1,216.5 1,522.2
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Total shareholders' equity.............. 2,302.4 1,741.1 2,135.9
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Total liabilities and shareholders'
equity.............................. $7,930.7 $6,675.3 $7,559.6
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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, 1998 1997
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(millions)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................ $120.1 $76.5
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................... 12.9 6.6
Net realized (gains) losses on security sales... (26.7) 3.3
Changes in:
Unearned premiums............................. 198.6 135.2
Loss and loss adjustment expense reserves..... 1.5 27.0
Accounts payable and accrued expenses......... 37.5 16.8
Policy cancellation reserve................... (6.0) 4.5
Prepaid reinsurance premiums.................. .9 22.1
Reinsurance recoverables...................... (9.1) 32.9
Premiums receivable........................... (149.5) (112.8)
Deferred acquisition costs.................... (18.5) (23.5)
Income taxes ................................. 30.6 14.1
Other, net.................................... 1.3 15.4
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Net cash provided by operating activities... 193.6 218.1
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases:
Available-for-sale: fixed maturities ............... (1,586.1) (1,479.6)
equity securities ............... (258.0) (171.1)
Sales:
Available-for-sale: fixed maturities ............... 1,469.7 1,285.5
equity securities ............... 161.5 115.8
Maturities, paydowns, calls and other:
Available-for-sale: fixed maturities ............. 119.9 85.1
equity securities ............. 11.1 12.3
Net (purchases) sales of short-term investments .... (58.7) 12.6
(Receivable) payable on securities ................. (27.2) 14.5
Purchase of property and equipment ................. (38.9) (19.5)
Purchase of subsidiary, net of cash acquired ....... -- (48.0)
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Net cash used in investing activities..... (206.7) (192.4)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options ............ 2.8 6.6
Tax benefit from exercise of stock options ......... 5.2 5.0
Payments on debt ................................... -- (20.1)
Dividends paid to shareholders ..................... (4.3) (4.3)
Acquisition of treasury shares ..................... (.5) --
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Net cash provided by (used in) financing
activities.............................. 3.2 (12.8)
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Increase (decrease) in cash ............................ (9.9) 12.9
Cash, January 1 .................................... 23.3 15.4
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Cash, March 31 ..................................... $13.4 $28.3
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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 $18.2 million and $10.9 million for the periods ended March 31, 1998 and
1997, respectively. Total interest paid was $6.6 million for both periods.
NOTE 2 Debt at March 31 consisted of:
1998 1997
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Market Market
Cost Value Cost Value
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7.30% Notes ................. $ 99.7 $106.0 $ 99.7 $ 98.5
6.60% Notes ................. 199.0 200.7 198.8 192.0
7% Notes .................... 148.4 154.2 148.4 139.2
8 3/4% Notes ................ 29.7 30.9 29.5 31.1
10% Notes ................... 149.7 164.3 149.6 164.2
10 1/8% Subordinated Notes .. 149.6 164.0 149.5 164.8
Other debt .................. -- -- .3 .3
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$776.1 $820.1 $775.8 $790.1
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NOTE 3 As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) 130, "Reporting Comprehensive Income," which
requires transactions that are reported directly to shareholders' equity,
primarily changes in unrealized gains/losses, to be included in total
comprehensive income. The adoption of SFAS 130 had no impact on the Company's
net income or shareholders' equity. Total comprehensive income was $163.4
million and $56.9 million at March 31, 1998 and 1997, respectively.
NOTE 4 During the first quarter 1998, the Company early adopted the
accounting treatment required by Statement of Position 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use," and, as
a result, capitalized $4.3 million, or $.04 per share, of computer software
costs incurred during the period ended March 31, 1998, which amounts are not
necessarily indicative of deferrals in future periods.
NOTE 5 On March 31, 1998, the Company paid a quarterly dividend of $.06
per Common Share to shareholders of record as of the close of business on March
13, 1998. The dividend was declared by the Board of Directors on February 6,
1998.
On April 24, 1998, the Board of Directors declared a quarterly dividend of $.06
per Common Share, payable June 30, 1998, to shareholders of record as of the
close of business on June 12, 1998.
NOTE 6 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, 1998, are not necessarily indicative of the
results expected for the full year.
NOTE 7 Certain amounts in the financial statements for prior periods were
reclassified to conform with the 1998 presentation.
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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 1998, operating income, which excludes net realized gains
and losses on security sales, was $102.8 million, or $1.35 per share, compared
to $78.6 million, or $1.05 per share, last year. The combined ratio was 91.7,
compared to 92.8 for the first quarter 1997.
Net premiums written increased 28% over the first quarter 1997, primarily
reflecting an increase in unit sales driven by the Company's competitive rates.
In addition, the Company continues to write through multiple distribution
channels and expand in the standard and preferred markets. Premiums earned,
which are a function of the amount of premiums written in the current and prior
periods, increased 28% 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, decreased as a percentage of
premiums earned to 68% for the quarter, compared to 71% in 1997 reflecting
favorable loss experience in the industry.
Policy acquisition costs and other underwriting expenses as a percentage of
premiums earned were 23% and 22% in 1998 and 1997, respectively. Other
underwriting expenses include additional advertising expenses as well as costs
to support the Company's infrastructure.
Recurring investment income (interest and dividends) increased 12% for the
quarter, reflecting an increase in the average investment portfolio. The
weighted average annualized fully taxable equivalent book yield of the portfolio
was 6.4% and 6.7% for the quarters ended March 31, 1998 and 1997, respectively.
The Company had net realized gains on security sales of $26.7 million for the
quarter, compared to net realized losses of $3.3 million in the first quarter of
1997. At March 31, 1998, the Company's portfolio had $255.1 million in total
unrealized gains, compared to $188.4 million at December 31, 1997, reflecting
increased stock prices as the Standard & Poor's 500 index rose from 970.43 to
1,101.75 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 ($4,131.1 million,
or 75.1%, at March 31, 1998, and $3,496.0 million, or 74.8%, at March 31, 1997).
Long-term investment-grade fixed-income securities represented $102.4 million,
or 1.9%, and $117.9 million, or 2.5%, of the total investment portfolio at March
31, 1998 and 1997, respectively. Non-investment-grade fixed-maturity securities
were $120.3 million, or 2.2%, in 1998, and $123.5 million, or 2.6%, in 1997, 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,
1998 and 1997.
Derivative instruments are primarily used to manage the risks and enhance the
returns of the available-for-sale portfolio and may also be used for trading
purposes. Trading positions had a net market value of $.8 million as of March
31, 1998, compared to $.1 million as of March 31, 1997.
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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, 1998, operations generated a positive cash flow
of $193.6 million.
On March 31, 1998, the Company filed a shelf registration statement with the
Securities and Exchange Commission under which it may issue from time to time,
in one or more transactions, its debt securities in an aggregate principal
amount not to exceed $300 million. The registration statement became effective
April 7, 1998. In conjunction with the shelf registration, the Company has a
$150 million anticipatory hedge, which was effective March 17, 1998.
The Company has substantial capital resources and is unaware of any trends,
events or circumstances that are reasonably likely to affect its capital
resources in a material way. The Company believes it has sufficient borrowing
capacity and other capital resources to support current and anticipated growth.
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PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders.
At the April 24, 1998 Annual Meeting of the Shareholders of the Company,
65,239,273 Common Shares were represented in person or by proxy.
At the meeting, the shareholders elected the three directors named
below, each to serve a 3-year term. The votes cast for each director
were as follows:
Director Term Expires For Withheld
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B. Charles Ames.......... 2001 64,902,491 336,782
Peter B. Lewis........... 2001 65,008,467 230,806
Donald B. Shackelford.... 2001 64,998,735 240,538
The following are the directors whose terms continued after the Annual
Meeting:
Director Term Expires
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Milton N. Allen............. 1999
Charles A. Davis............ 1999
Paul B. Sigler.............. 1999
Stephen R. Hardis........... 2000
Janet Hill.................. 2000
Norman S. Matthews.......... 2000
The shareholders approved an amendment to the Company's Amended Articles
of Incorporation to increase the number of authorized Common Shares from
200,000,000 to 300,000,000. This proposal received 64,037,496
affirmative votes and 1,065,781 negative votes. There were 122,191
abstentions and 13,805 broker non-votes with respect to this proposal.
The shareholders approved The Progressive Corporation 1998 Directors'
Stock Option Plan. This proposal received 49,830,102 affirmative votes
and 14,566,752 negative votes. There were 828,613 abstentions and 13,806
broker non-votes with respect to this proposal.
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, 1998: 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 14, 1998 BY: /s/ DAVID M. SCHNEIDER
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David M. Schneider
Secretary
Date: May 14, 1998 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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(3) 3 Amended Articles of Incorporation,
as amended, of The Progressive Corporation
(incorporated by reference to the Company's
Registration Statement on Form S-8,
File No. 333-51613, as filed with the
Securities and Exchange Commission on
May 1, 1998; see Exhibit 4(c) therein.)
(12) 12 Computation of Ratio of Earnings to
Fixed Charges
(27) 27 Financial Data Schedule for the period ended
March 31, 1998 and Restated Financial Data
Schedule for the period ended March 31, 1997.
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