1
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 June 30, 1999
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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)
(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: 72,947,994 outstanding at July 31, 1999
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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
---------------------------------- ---------------------------------
Periods Ended June 30, 1999 1998 % Change 1999 1998 % Change
---------------------------------------------------------------------------------------- ---------------------------------
(millions - except per share amounts)
NET PREMIUMS WRITTEN $ 1,608.4 $ 1,349.1 19 $ 3,162.1 $ 2,694.4 17
===================== =====================
REVENUES
Premiums earned $ 1,404.6 $ 1,227.7 14 $ 2,726.7 $ 2,373.4 15
Investment income 86.0 76.5 12 160.7 148.5 8
Net realized gains on security sales 16.7 21.4 (22) 18.7 48.1 (61)
Service revenues 12.2 9.5 28 23.4 20.0 17
Other income(1) 5.2 -- -- 5.2 -- --
--------------------- ---------------------
Total revenues 1,524.7 1,335.1 14 2,934.7 2,590.0 13
--------------------- ---------------------
EXPENSES
Losses and loss adjustment expenses 1,004.7 849.6 18 1,918.6 1,633.8 17
Policy acquisition costs 186.4 161.7 15 361.4 317.6 14
Other underwriting expenses 140.3 122.6 14 282.0 233.5 21
Investment expenses 2.5 1.9 32 4.6 4.4 5
Service expenses 10.0 5.6 79 20.0 15.0 33
Interest expense 20.1 15.2 32 36.9 31.3 18
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Total expenses 1,364.0 1,156.6 18 2,623.5 2,235.6 17
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NET INCOME
Income before income taxes 160.7 178.5 (10) 311.2 354.4 (12)
Provision for income taxes 48.6 55.5 (12) 93.8 111.3 (16)
--------------------- ---------------------
Net income $ 112.1 $ 123.0 (9) $ 217.4 $ 243.1 (11)
===================== =====================
COMPUTATION OF EARNINGS PER SHARE
Basic:
Average shares outstanding 72.9 72.5 1 72.8 72.4 1
===================== =====================
Per share $ 1.54 $ 1.70 (9) $ 2.99 $ 3.36 (11)
===================== =====================
Diluted:
Average shares outstanding 72.9 72.5 1 72.8 72.4 1
Net effect of dilutive stock options 1.9 3.7 (49) 1.9 3.6 (47)
===================== =====================
Total equivalent shares 74.8 76.2 (2) 74.7 76.0 (2)
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Per share $ 1.50 $ 1.61 (7) $ 2.91 $ 3.20 (9)
===================== =====================
(1)See Note 7 - Related Party Transaction for discussion.
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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1999 1998 1998
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(millions)
ASSETS
Investments:
Available-for-sale:
Fixed maturities, at market (amortized cost:
$4,816.9, $3,889.7 and $4,171.6) $ 4,763.2 $ 3,943.9 $ 4,219.0
Equity securities, at market
Preferred stocks (cost: $393.1, $414.6 and $374.3) 389.6 427.8 376.5
Common stocks (cost: $882.9, $639.3 and $512.2) 1,074.2 801.5 636.9
Short-term investments, at amortized cost
(market: $153.1, $502.2 and $441.9) 153.1 502.2 441.9
---------------------- ----------
Total investments 6,380.1 5,675.4 5,674.3
Cash 20.8 21.2 18.6
Accrued investment income 54.7 49.9 53.1
Premiums receivable, net of allowance for doubtful accounts of
$34.7, $31.5 and $34.0 1,766.5 1,389.9 1,456.2
Reinsurance recoverables 270.4 300.2 281.0
Prepaid reinsurance premiums 81.4 80.6 77.7
Deferred acquisition costs 355.4 296.4 299.1
Income taxes 203.6 132.4 192.9
Property and equipment, net of accumulated depreciation of
$216.8, $183.1 and $194.1 420.1 315.9 376.2
Other assets 57.3 23.8 34.0
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Total assets $ 9,610.3 $ 8,285.7 $ 8,463.1
====================== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Unearned premiums $ 2,768.8 $ 2,301.8 $ 2,329.7
Loss and loss adjustment expense reserves 2,242.0 2,170.4 2,188.6
Policy cancellation reserve 20.1 30.4 29.1
Accounts payable and accrued expenses 775.5 595.9 582.0
Debt 1,040.6 776.2 776.6
---------------------- ----------
Total liabilities 6,847.0 5,874.7 5,906.0
---------------------- ----------
Shareholders' equity:
Common Shares, $1.00 par value
(treasury shares of 10.2, 10.6 and 10.6) 72.9 72.5 72.5
Paid-in capital 471.2 427.3 448.3
Accumulated comprehensive income:
Net unrealized appreciation on investment securities 87.2 149.2 113.3
Other comprehensive income (9.0) (6.3) (9.6)
Retained earnings 2,141.0 1,768.3 1,932.6
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Total shareholders' equity 2,763.3 2,411.0 2,557.1
---------------------- ----------
Total liabilities and shareholders' equity $ 9,610.3 $ 8,285.7 $ 8,463.1
====================== ==========
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, 1999 1998
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(millions)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 217.4 $ 243.1
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 30.5 27.2
Net realized gains on security sales (18.7) (48.1)
Gain on sale of property and equipment (5.2) --
Changes in:
Unearned premiums 439.1 321.7
Loss and loss adjustment expense reserves 53.4 23.8
Accounts payable and accrued expenses 128.5 77.3
Policy cancellation reserve (9.0) (4.3)
Prepaid reinsurance premiums (3.7) (.8)
Reinsurance recoverables 10.6 17.3
Premiums receivable (310.3) (229.1)
Deferred acquisition costs (56.3) (36.8)
Income taxes 3.9 (30.2)
Other, net .2 15.4
----------------------
Net cash provided by operating activities 480.4 376.5
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases:
Available-for-sale: fixed maturities (4,199.5) (2,560.0)
equity securities (591.0) (498.4)
Sales:
Available-for-sale: fixed maturities 3,354.8 2,290.9
equity securities 231.2 302.7
Maturities, paydowns, calls and other:
Available-for-sale: fixed maturities 169.5 207.3
equity securities 2.4 17.4
Net (purchases) sales of short-term investments 296.9 (92.8)
Payable on securities 53.1 32.2
Purchases of property and equipment (78.8) (83.2)
Sale of property and equipment 12.1 --
Purchase of subsidiary, net of cash acquired (5.7) --
----------------------
Net cash used in investing activities (755.0) (383.9)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options 8.7 4.5
Tax benefits from exercise of stock options 14.1 10.0
Proceeds from debt 293.7 --
Payments on debt (30.0) --
Dividends paid to shareholders (9.4) (8.7)
Acquisition of treasury shares (.3) (.5)
----------------------
Net cash provided by financing activities 276.8 5.3
----------------------
Increase (decrease) in cash 2.2 (2.1)
Cash, January 1 18.6 23.3
----------------------
Cash, June 30 $ 20.8 $ 21.2
======================
See notes to consolidated financial statements.
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The Progressive Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 Basis of Presentation -- These financial statements and the
notes thereto should be read in conjunction with the Company's audited financial
statements included in its Annual Report on Form 10-K for the year ended
December 31, 1998.
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 June 30, 1999, are not necessarily indicative of the results expected for
the full year.
NOTE 2 Supplemental Cash Flow Information -- The Company paid income
taxes of $75.9 million and $128.2 million for the six months ended June 30, 1999
and 1998, respectively. Total interest paid was $31.9 million for both the six
months ended June 30, 1999 and 1998.
NOTE 3 Debt -- On March 1, 1999, the Company issued $300 million of
6 5/8% Senior Notes due March 1, 2029. Debt at June 30 consisted of:
1999 1998
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Market Market
Cost Value Cost Value
-------- -------- ------ ------
6 5/8% Senior Notes $ 293.7 $ 272.4 $ -- $ --
7.30% Notes 99.7 100.8 99.7 106.6
6.60% Notes 199.1 198.5 199.0 204.4
7% Notes 148.5 146.3 148.4 157.6
8 3/4% Notes -- -- 29.8 30.8
10% Notes 149.8 158.2 149.7 163.5
10 1/8% Subordinated Notes 149.8 158.5 149.6 163.8
-------- -------- ------ ------
$1,040.6 $1,034.7 $776.2 $826.7
======== ======== ====== ======
NOTE 4 Comprehensive Income -- Total comprehensive income was $76.5
million and $106.6 million for the quarters ended June 30, 1999 and 1998,
respectively, and $191.9 million and $270.0 million for the six months ended
June 30, 1999 and 1998, respectively.
NOTE 5 Dividends -- On June 30, 1999, the Company paid a quarterly
dividend of $.065 per Common Share to shareholders of record as of the close of
business on June 11, 1999. The dividend was declared by the Board of Directors
on April 23, 1999.
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NOTE 6 Segment Information -- The Company's Personal Lines business
units write insurance for private passenger automobiles and recreation vehicles.
The other lines of business include writing insurance for small fleets of
commercial vehicles, lenders' collateral protection and directors' and officers'
liability, and providing related services. All revenues are generated from
external customers.
Periods ended June 30,
(millions)
Three Months Six Months
--------------------------------------------- ---------------------------------------------
1999 1998 1999 1998
--------------------- -------------------- --------------------- --------------------
Pretax Pretax Pretax Pretax
Profit Profit Profit Profit
Revenues (Loss) Revenues (Loss) Revenues (Loss) Revenues (Loss)
---------- ------- -------- ------- -------- ------ -------- ------
Personal Lines $1,315.2 $ 64.5 $1,137.5 $ 84.6 $2,543.0 $146.7 $2,193.9 $169.2
Other 106.8 16.1 99.7 13.1 212.3 26.6 199.5 24.3
Investments(1) 102.7 100.2 97.9 96.0 179.4 174.8 196.6 192.2
Interest Expense -- (20.1) -- (15.2) -- (36.9) -- (31.3)
-------- ------ -------- ------ -------- ------ -------- ------
$1,524.7 $ 160.7 $1,335.1 $178.5 $2,934.7 $311.2 $2,590.0 $354.4
======== ======= ======== ====== ======== ====== ======== ======
(1)Revenues represent recurring investment income and net realized gains on
security sales; pretax profit is net of investment expenses.
NOTE 7 Related Party Transaction -- On April 23, 1999, the Company sold
its corporate aircraft to a company independently owned by Peter B. Lewis, the
Company's Chairman of the Board, President and Chief Executive Officer -
Insurance Operations. The airplane had a net book value of $6.9 million and was
sold to Mr. Lewis for $12.1 million, the fair market value of the airplane as
determined by an independent appraiser.
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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 1999, operating income, which excludes net realized gains
on security sales and nonrecurring items, was $98.5 million, or $1.32 per share,
compared to $109.1 million, or $1.43 per share, last year. Nonrecurring items
include a $5.2 million, or $.05 per share, gain from the sale of the corporate
aircraft and a $1.2 million, or $.01 per share, reserve for the wind-down of
the Company's Canadian operations; the amount of Canadian net premiums written
are less than 1% of the Company's consolidated net premiums written. The
combined ratio was 94.8, compared to 92.4 for the second quarter 1998. For the
six months ended June 30, 1999, operating income was $202.5 million, or $2.71
per share, compared to $211.8 million, or $2.79 per share, in 1998. The
year-to-date combined ratio was 94.0, compared to 92.1 last year.
Net premiums written increased 19% over the second quarter 1998 and 17% over the
first six months of 1998, primarily reflecting an increase in unit sales driven
by the Company's competitive rates and its effort to increase brand awareness
through its advertising campaign. Premiums earned, which are a function of the
amount of premiums written in the current and prior periods, increased 14% for
the quarter and 15% for the first six months of 1999.
The Personal Lines business units write insurance for private passenger
automobiles and recreation vehicles and generate 93% of the Company's net
premiums written. The Personal Lines business is generated either by an agent or
written directly by the Company. The Agent channel includes business written by
our network of 30,000 Independent Insurance Agents and through Strategic
Alliance business relationships (other insurance companies, financial
institutions, employers and national brokerage agencies). Total net premiums
written through Independent Agents and Strategic Alliance agency relationships
increased 13% to $1,275.6 million for the second quarter 1999, compared to
$1,128.5 million for the same period last year, and increased 10% to $2,521.3
million for the six months ended June 30, 1999, compared to $2,283.4 million for
the same period last year. Direct business includes business written through
1 800 AUTO PRO(R), the Internet and the Strategic Alliances business unit on
behalf of affinity groups. Net premiums written on a Direct basis increased 82%
to $221.1 million for the second quarter 1999, compared to $121.4 million for
the same period last year, and increased 94% to $426.6 million for the six
months ended June 30, 1999, compared to $220.1 million for the same period last
year.
The Company continues to execute its strategy to achieve a 4% underwriting
profit over the entire retention period of a policyholder, which has
implications on both the Company's growth and profitability. The Company also
continues to pursue multichannel distribution, allowing our customers to
purchase our products from Independent Agents, via the Internet or by calling us
directly at 1 800 AUTO PRO(R). The cost of acquiring business through each
channel differs. In periods of rapid growth the Company's earnings may be lower
as a result of higher up-front costs, particularly on its Direct business, and
higher loss costs traditionally associated with new business. Conversely, in
periods of slower growth, the Company would expect higher earnings due to a
higher percentage of renewal business, which historically has been more
profitable. As Direct becomes a greater percent of the Company's overall
business (or more precisely, as the ratio of new direct business to renewal
direct business remains high and the ratio of direct business to total business
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increases), the impact on earnings (reduced earnings in a period of growth,
increased earnings in a period of reduced growth) will continue. The magnitude
of the impact is a function of the pace of the change. For both agent and direct
business, the lifetime profitability of the business is dependent on renewal
persistency outcomes. The Company expects continued growth in its Personal Lines
business over the next several quarters, with the Direct business continuing to
become a larger percentage of the Company's overall business.
The Company is developing plans to reduce the volume of nonstandard auto
premiums written by the Midland Financial Group, which was acquired in 1997.
The amount of Midland's net premiums written are less than 1% of the Company's
consolidated net premiums written.
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, were 72% of premiums earned for the
quarter, compared to 69% the same period last year. Year-to-date claim costs
were 70%, compared to 69% last year. The increase in claim costs was primarily
driven by increases in loss cost trends and the effects of the Company taking
rate decreases over the last year.
Policy acquisition costs and other underwriting expenses were 23% of premiums
earned for the second quarter 1999 and 1998, and 24% for the first six months of
1999, compared to 23% in 1998. Other underwriting expenses include additional
advertising expenses.
Recurring investment income (interest and dividends) increased 12% for the
quarter and 8% for the first six months, reflecting an increase in the average
investment portfolio partially offset by a decrease in the pretax yields. The
weighted average annualized fully taxable equivalent book yield of the portfolio
was 6.4% and 6.3% for the quarter and first six months ended June 30, 1999,
respectively, compared to 6.6% and 6.5% for the second quarter and first six
months of 1998. The Company had net realized gains on security sales of $16.7
million and $18.7 million for the second quarter and first six months of 1999,
respectively, compared to $21.4 million and $48.1 million in 1998. On June 30,
1999, the Company's portfolio had $134.1 million in total unrealized gains,
compared to $174.3 million at December 31, 1998; the decrease was driven by
rising interest rates and the overall decline in the equity market. During the
six months ended June 30, 1999, the yield on the 5-year Treasuries rose 111
basis points over which time the total return was (2.41)%. During the same
period, the Company's fixed-income portfolio had a total return of .92%.
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-maturity securities ($4,302.1 million,
or 67.5%, at June 30, 1999, and $4,120.8 million, or 72.6%, at June 30, 1998).
Long-term investment-grade fixed-maturity securities represented $409.2 million,
or 6.4%, and $138.8 million, or 2.5%, of the total investment portfolio at June
30, 1999 and 1998, respectively. Non-investment-grade fixed-maturity securities
were $205.0 million, or 3.2%, in 1999, and $186.5 million, or 3.3%, in 1998, and
offer the Company higher returns and added diversification without a significant
adverse effect on the stability and quality of the investment portfolio as a
whole.
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A portion of the investment portfolio is invested in marketable equity
securities. Common stocks represented $1,074.2 million, or 16.8%, in 1999,
compared to $801.5 million, or 14.1%, in 1998. The majority of the common stock
portfolio is invested in domestic equities traded on nationally recognized
securities exchanges. The Company also invests in foreign equities (1.3% in
1999, compared to 2.5% in 1998), partnership investments (1.3% in 1999, compared
to 1.4% in 1998) and equity investments in closed-end unit investment trusts
(2.8% in 1999, compared to .4% in 1998). Preferred stocks represented $389.6
million, or 6.1% of the portfolio in 1999, compared to $427.8 million, or 7.5%,
in 1998.
Derivative instruments are primarily used to manage the risks and enhance the
returns of the available-for-sale portfolio and may be used for trading
purposes. Derivative instruments classified as held or issued for other than
trading had a net market value of $(2.9) million at June 30, 1999, compared to
$(1.6) million at June 30, 1998. Trading positions had a net market value of $0
million at June 30, 1999, compared to $(.2) million at June 30, 1998. As of June
30, 1999, the Company had open investment funding commitments of $39.3 million.
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, 1999, operations generated a positive cash flow of
$480.4 million.
In April 1999, the Company purchased a 53.3% interest in Frontier Adjusters of
America, Inc. for $6.8 million. Frontier licenses and franchises independent
claims adjusters throughout the United States and Canada, with 650 advertised
locations. Frontier also owns and operates independent insurance adjusting
businesses in 2 states.
On March 1, 1999, the Company issued $300 million of 6 5/8% Senior Notes due
March 1, 2029, under a shelf registration statement filed with the Securities
and Exchange Commission in 1998. The Company may redeem all or part of the Notes
at any time, subject to a "make whole" provision. There are no sinking fund
requirements. The Notes were priced at 98.768% to yield 6.721% to maturity.
Interest is payable semiannually on March 1 and September 1, beginning
September 1, 1999. Net proceeds to the Company of $293.7 million (after discount
and underwriting fees) are intended to be used, together with other available
funds, to retire certain of the Company's current outstanding debt upon its
maturity, including $30 million of 8 3/4% Notes, which were due and paid on June
1, 1999, and $150 million each of 10% Notes and 10 1/8% Subordinated Notes, both
of which are due December 15, 2000.
The Company is currently constructing a corporate office complex in Mayfield
Village, Ohio at an estimated cost of $69.7 million, of which $42.2 million has
been paid through June 30, 1999, including $4.4 million paid in the second
quarter 1999. The first of three buildings was completed in May 1999, with the
other two buildings to be completed by the end of 1999. The Company completed
the construction of its regional call center in Tampa, Florida in February 1999.
The final cost of the project was $45.5 million, of which $1.4 million was paid
in the second quarter 1999.
The Company has substantial capital resources and believes it has sufficient
borrowing capacity and other capital resources to support current and
anticipated growth.
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YEAR 2000 COMPLIANCE
The year 2000 problem exists because many computer programs only use the last
two digits to refer to a year and could recognize "00" as 1900 instead of 2000.
If not corrected, many computer and other microchip supported applications could
fail or create erroneous results. The extent of the potential impact is still
unknown but could affect the global economy. In response to this issue, the
Company has evaluated its applications and operating software (including its
claims reporting, financial reporting, policy issuance, policy maintenance and
other internal production systems), hardware and software products, and
third-party data exchanges and business relationships and continues to evaluate
its end user computing activities and facilities implications (including public
utility services). The Company has established a dedicated, tenured project team
responsible for overseeing progress on the Company's compliance program and
periodically reporting to management.
The Company began converting its applications software to be year 2000 compliant
in July 1995 and, as a result, has been able to avoid redeploying significant
resources or deferring other important projects to specifically address the year
2000 issues. During the first quarter 1998, the Company retained independent
consultants to determine its state of readiness. Although some additional areas
of focus were identified, the consultants noted that the Company was adequately
addressing its critical internal systems and issues. As of June 30, 1999, the
Company has substantially completed its efforts to bring its applications
software in compliance. Testing of critical applications is being accomplished
through the use of a special systems environment known as a "Time Warp Lab,"
which mimics the Company's production environment. As a final test of year 2000
readiness, after conversion and year 2000 certification, critical applications
are run in the Time Warp Lab while systems clocks turn over from 1999 to 2000
and beyond. The total cost to modify these existing production systems, which
includes both internal and external costs of programming, coding and testing, is
estimated to be $9.0 million, of which $8.5 million had been expensed through
June 30, 1999. The Company also replaced some of its systems during 1998. In
addition to being year 2000 compliant, these new systems added increased
functionality to the Company. The majority of the projects were completed in
1998, with remaining parallel testing completed during the first half of 1999.
As of June 30, 1999, $5.5 million, which include both internal and external
costs, had been paid for these systems. All costs are being funded through
operating cash flows. In addition, the Company has identified approximately 380
third parties with which data is exchanged. The majority of scheduled critical
data exchanges with our business partners were tested for compliance. However, a
few tests still need to be completed due to business partner schedule conflicts.
The Company continually evaluates computer hardware and software upgrades for
enhancements and, therefore, many of the costs to replace these items to be year
2000 compliant are not likely to be incremental costs to the Company. The
Company's remediation of its mainframe hardware and operating software is 98%
complete and the remediation of its servers and client server operating software
is 97% complete. The Company estimates that all mainframe and client server
hardware and operating software will be year 2000 compliant by the end of the
third quarter 1999. In addition, during 1998, the Company secured software which
will assist in the discovery of noncompliant desktop hardware and software. The
assessment and remediation process was completed in the first half of 1999, with
some minor follow-up to be done in the third quarter.
The Company is currently unable to determine the impact that year 2000
noncompliance may have on its financial condition, cash flows and results of
operations. The Company believes that it is taking the necessary measures to
address issues that may arise relating to the year 2000 and that its production
systems will be compliant. The Company realizes, however, that noncompliance by
third parties could impact its business. The possibility exists that a portion
of the Company's distribution channel may not be compliant, that communication
with agents could be disrupted, that underwriting data, such as motor vehicle
reports, could be unobtainable, that the claim settling process could be delayed
or that frequency and severity of losses may increase due to external factors.
The Company continues to contact its key independent insurance agents, vendors
and suppliers (e.g. banks, credit bureaus, motor vehicle departments, rating
agencies, etc.) to determine their status of compliance and to assess the impact
of noncompliance to the Company. The Company is working closely with all
critical business relationships to minimize its exposure to year 2000 issues,
including on-site visits to identify their state of readiness.
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The Company's process teams and business groups are identifying potential year
2000 scenarios. For those scenarios deemed to be both probable and with a
potentially significant business impact, the Company is developing contingency
plans. The majority of the contingency plans are drafted and were reviewed by
the Company's chief financial and technology officers during 1998. Contingency
plans include such items as hardening facilities with back-up generators,
prioritizing resources, securing alternative vendors, developing alternative
processes, pre-ordering policyholder information and other measures. The
contingency plans were substantially completed for all material relationships
during the first quarter 1999, and were reviewed in detail in the second quarter
1999. The Company will continue to review these plans throughout 1999.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: EXCEPT FOR HISTORICAL INFORMATION, THE MATTERS DISCUSSED IN THIS QUARTERLY
REPORT ON FORM 10-Q ARE FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO CERTAIN
RISKS AND UNCERTAINTIES THAT COULD CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE PROJECTED. THESE RISKS AND UNCERTAINTIES INCLUDE, WITHOUT LIMITATION,
PRICING COMPETITION AND OTHER INITIATIVES BY COMPETITORS, LEGISLATIVE AND
REGULATORY DEVELOPMENTS, WEATHER CONDITIONS (INCLUDING THE SEVERITY AND
FREQUENCY OF STORMS, HURRICANES, SNOWFALLS, HAIL AND WINTER CONDITIONS), DRIVING
PATTERNS, COURT DECISIONS AND TRENDS IN LITIGATION, INTEREST RATE LEVELS AND
OTHER CONDITIONS IN THE FINANCIAL AND SECURITIES MARKETS, UNFORESEEN
TECHNOLOGICAL ISSUES ASSOCIATED WITH THE YEAR 2000 COMPLIANCE EFFORTS AND THE
EXTENT TO WHICH VENDORS, PUBLIC UTILITIES, GOVERNMENTAL ENTITIES AND OTHER THIRD
PARTIES THAT INTERFACE WITH THE COMPANY MAY FAIL TO ACHIEVE YEAR 2000
COMPLIANCE, AND OTHER RISKS DETAILED FROM TIME TO TIME IN THE COMPANY'S SEC
REPORTS. THE COMPANY ASSUMES NO OBLIGATION TO UPDATE THE INFORMATION IN THIS
QUARTERLY REPORT.
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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
Investments in the Company's portfolio have varying degrees of risk. The primary
market risk exposure to the fixed-income portfolio is interest rate risk, which
is limited by managing duration to a defined range of 1.8 to 5 years. The
distribution of maturities and convexity are monitored on a regular basis. The
duration of the fixed-income portfolio was 3.2 years at June 30, 1999, compared
to 2.8 years at June 30, 1998. Based on a hypothetical 100 basis point rise in
market rates, exposure to risk in terms of a change in market value is $165
million, or 3.5% of the fixed-income portfolio, at June 30, 1999, compared to
$136 million, or 3.2% of the fixed-income portfolio, at December 31, 1998.
Derivative financial instruments held or issued for purposes of managing
interest rate exposure on the anticipated debt issuance were closed on March 1,
1999, upon the issuance of the $300 million 6 5/8% Senior Notes. The net market
value of these instruments at closing was $3.3 million.
No other material changes have occurred in market risk since reported in the
Annual Report on Form 10-K for the year ended December 31, 1998.
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PART II - OTHER INFORMATION
---------------------------
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
See exhibit index on page 15.
(b) Reports on Form 8-K during the quarter ended June 30, 1999: None
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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
(Registrant)
Date August 16, 1999 BY: /s/ David M. Schneider
---------------- -------------------------------------
David M. Schneider
Secretary
Date August 16, 1999 BY: /s/ W. Thomas Forrester
---------------- -------------------------------------
W. Thomas Forrester
Treasurer and Chief Financial Officer
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EXHIBIT INDEX
-------------
Exhibit No. Form 10-Q
Under Reg. Exhibit
S-K. Item 601 No. Description of Exhibit
------------- --------- ----------------------
(27) 27 Financial Data Schedule for the six
months ended June 30, 1999
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