UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 1O-Q
(Mark One)
[ü] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ____________________to ____________________
THE PROGRESSIVE CORPORATION
(440) 461-5000
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 [ ü ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ü ] 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: 217,660,740 outstanding at April 30, 2003
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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
The Progressive Corporation and SubsidiariesConsolidated Statements of Income(unaudited)
See notes to consolidated financial statements.
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The Progressive Corporation and SubsidiariesConsolidated Balance Sheets(unaudited)
1 On April 18, 2003, shareholders approved a proposal to amend the Company’s Amended Articles of Incorporation to increase the number of authorized Common Shares from 300 million to 600 million.
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The Progressive Corporation and SubsidiariesConsolidated Statements of Cash Flows(unaudited)
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The Progressive Corporation and SubsidiariesNotes 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 and accompanying notes included in its Annual Report on Form 10-K for the year ended December 31, 2002.
The consolidated financial statements reflect all normal recurring adjustments which were, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. The results of operations for the period ended March 31, 2003, are not necessarily indicative of the results expected for the full year.
Note 2 Stock Options — During the first quarter 2003, the Company adopted the fair value method of accounting for employee stock options pursuant to Statement of Financial Accounting Standards (SFAS) 123, “Accounting for Stock-Based Compensation.” Prior to January 1, 2003, the Company followed the provisions of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” to account for its stock option activity in the financial statements. All options currently outstanding have an exercise price equal to the market price at the date of grant and, therefore, under APB 25, no compensation expense was recorded in 2002 and prior years.
The change to the fair value method of accounting is being applied prospectively to all awards granted, modified, or settled after January 1, 2003; no stock options have been granted after January 1, 2003. As a result, there is no compensation cost included in net income for the first quarter 2003; however, compensation cost would have been recognized if the fair value method had been used for all awards for years since the original effective date of SFAS 123 (January 1, 1995).
As previously announced, beginning in 2003, the Company plans to grant restricted stock in lieu of stock options as the primary equity-based incentives for executives and other key employees. See Item 5-Other Information in Part II of this Form 10-Q for details regarding the restricted stock awards granted by the Company.
The following table is presented in accordance with SFAS 148, “Accounting for Stock-Based Compensation — Transition and Disclosure,” and shows the effects on net income and earnings per share had the fair value method been applied to all outstanding and unvested stock option awards for the periods presented. The Company uses the Black-Scholes pricing model to calculate the fair value of the options awarded as of the date of grant.
Periods ended March 31,(millions, except per share amounts)
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Note 3 Supplemental Cash Flow Information — The Company paid income taxes of $56.0 million and $64.0 million during the three months ended March 31, 2003 and 2002, respectively. Total interest paid was $27.7 million and $16.5 million during the three months ended March 31, 2003 and 2002, respectively.
Note 4 Debt — Debt at March 31 consisted of:
Note 5 Comprehensive Income — Total comprehensive income was $262.9 million and $133.3 million for the quarters ended March 31, 2003 and 2002, respectively.
Note 6 Dividends — On March 31, 2003, the Company paid a quarterly dividend of $.025 per Common Share to shareholders of record as of the close of business on March 14, 2003. The dividend was declared by the Board of Directors on January 31, 2003.
On April 18, 2003, the Board of Directors declared a quarterly dividend of $.025 per Common Share. The dividend is payable June 30, 2003, to shareholders of record as of the close of business on June 13, 2003.
Note 7 Segment Information — The Company’s Personal Lines business units write insurance for private passenger automobiles and recreation vehicles. The Commercial Auto Business unit writes insurance for automobiles and trucks owned by small businesses for primary liability, physical damage and other auto-related insurance coverages. The Company’s other businesses principally include writing lenders’ collateral protection and directors’ and officers’ liability insurance and providing insurance-related services, primarily processing business for Commercial Auto Insurance Procedures (CAIP), which are state supervised plans serving the involuntary market. All revenues are generated from external customers.
1Personal automobile insurance accounted for 94% of the total Personal Lines segment net premiums earned in the first quarters of 2003 and 2002.
2Revenues represent recurring investment income and net realized gains/losses on security sales; pretax profit is net of investment expenses.
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Note 8 Litigation —The Company is named as defendant in various lawsuits generally relating to its insurance operations. All legal actions relating to individual claims made under insurance policies are considered by the Company in establishing its loss and loss adjustment expense reserves.
The Company has also been named as defendant in a number of putative class action lawsuits, such as those alleging damages as a result of the Company’s total loss evaluation methodology, use of after-market parts, use of consumer reports, such as credit reports, in underwriting and related notice requirements under the federal Fair Credit Reporting Act, charging betterment in first party physical damage claims, the use of preferred provider rates for payment of Florida personal injury protection claims, the use of automated database vendors to assist in evaluating certain first party bodily injury claims, offering alternative commission programs or the alleged diminution of value to vehicles which are involved in accidents, and cases challenging other aspects of the Company’s claims and marketing practices and business operations, including worker classification issues. Other insurance companies face many of these same issues. Under generally accepted accounting principles (GAAP), the Company is not permitted to establish a reserve for any of these cases unless the loss is both probable and estimable. Court approved settlements have been reached in the alternative commission and betterment cases and such settlements have been concluded in accordance with the terms of the settlement agreements.
The Company plans to contest the outstanding suits vigorously, but will pursue settlement negotiations in those cases for which it deems it appropriate to do so. In accordance with GAAP, the Company accrues for lawsuits when it is probable that a loss has been incurred and the Company can reasonably estimate its potential exposure. The Company has not established reserves for those lawsuits where the Company is currently unable to estimate the potential exposure.
The Company believes that any disposition of the lawsuits for which reserves have been established in amounts in excess of the current reserves will not materially affect the Company’s annual cash flows or results of operations or financial condition. However, in those cases for which the Company’s estimated exposure is based upon management’s belief that the case will be resolved through a court approved claims-made settlement, if instead, the case results in a judgment against the Company or the actual claims filed pursuant to a court approved settlement are significantly greater than estimated, the final payout could have a material impact on the Company’s financial condition, cash flows and results of operations.
For a further discussion on the Company’s pending litigation, see Item 3-Legal Proceedings in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.
Note 9 Reclassifications — Certain amounts in the financial statements for prior periods were classified to conform to the 2003 presentation.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
RESULTS OF OPERATIONS
Companywide net premiums written, which represent the premiums generated from policies written during the period less any reinsurance, increased 32% over the first quarter 2002. Premiums earned, which are a function of the premiums written in the current and prior periods and are recognized into income over the policy term using a mid-month convention, increased 32% over the first quarter 2002. The Company’s growth was widespread across the country, with most states experiencing over 20% growth driven by new policies and rate increases as well as changes in the mix of business; policies in force for the combined Personal Lines and Commercial Auto businesses increased 24% over the prior year. During the first quarter 2003, the Company implemented 24 auto rate revisions in various states. The Company will continue to be opportunistic in seeking market share, as the Company balances the opportunity to grow profitably with its ability to maintain service quality.
For the first quarter 2003, the Company generated net income of $291.5 million, compared to $176.2 million for the same period last year. Following is a reconciliation of the Company’s net income to operating income:
The Company defines operating income, which is a non-GAAP disclosure, as net income less the after-tax effect of net realized gains and losses on securities and nonrecurring items. By excluding items which are not of a recurring nature, the Company believes that operating income provides a useful measure of the Company’s operating results and more accurately reflects the trends in the Company’s financial performance. However, since operating income is not a term defined by GAAP, the Company’s operating income results may not be comparable to similarly titled measures reported by other companies. The increase in operating income is primarily a result of improved underwriting results as discussed below. The GAAP combined ratio (CR) was 86.7 for the first quarter 2003 and 90.5 for the first quarter 2002.
The Company’s Personal Lines business units write insurance for private passenger automobiles and recreation vehicles and represent 88% of the Company’s total year-to-date 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 agencies and through strategic alliance business relationships (other insurance companies, financial institutions, employers and national brokerage agencies). Direct business includes business written through 1-800-PROGRESSIVE, the Internet (progressive.com) and on behalf of affinity groups.
The Company’s Commercial Auto Business unit writes primary liability, physical damage and other auto-related insurance for automobiles and trucks owned by small businesses. The Commercial Auto Business represents 11% of the Company’s total year-to-date net premiums written. Although the Commercial Auto Business differs from Personal Lines auto, both businesses require the same fundamental skills, including disciplined underwriting and pricing, as well as excellent claim service. The Company’s Commercial Auto Business is primarily distributed through the independent agent channel.
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The Company’s other businesses primarily include writing lenders’ collateral protection and directors’ and officers’ liability insurance and providing insurance-related services, primarily processing business for Commercial Auto Insurance Procedures (CAIP), which are state-supervised plans serving the involuntary market. During April 2003, the Company decided to cease writing lenders’ collateral protection and related business no later than September 30, 2003. During 2002, the Company lost some key accounts for these products and this business has been unable to meet its profitability target. Management believes that exiting this line of business will not materially affect the Company’s financial condition, results of operations or cash flows.
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Underwriting results for the Company’s Personal Lines, including its channel components, the Commercial Auto Business and other businesses were as follows:
NM = Not Meaningful
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The Agent channel net premiums written increased 31%, and net premiums earned increased 29%, with a 24% increase in auto policies in force. The increase in premiums written resulted from both an increase in new applications and strong renewals. The Agent channel also continued to benefit from rate adequacy. In addition, competitors continue to raise rates in an effort to enhance underwriting performance.
The Company’s Direct channel net premiums written increased 36% from the first quarter last year. The Direct channel net premiums earned grew 37% over the first quarter last year. Continued growth in the Direct business is dependent on (among other factors) customer retention, as well as the success of the Company’s advertising and other marketing efforts, realizing that price sensitivity is always a factor. The Company is advertising on a national basis and supplements that coverage by local market media campaigns in over 80 designated marketing areas. Direct auto policies in force have increased 27% since March 2002.
The Company continues to manage growth on a state-by-state basis. For example, during the first quarter 2003, the Company imposed its first constraint on the growth rate in Texas. The Company has taken steps to control growth in Texas in an effort to attain continued improvement in claims handling quality. The Company’s review of acceptable growth rates is a dynamic and formal process and is based on forecasts of future market opportunities and the Company’s service capabilities. The Company is close to its projected maximum growth rate in one other large state, and an increase in frequency trend above estimates could strain claims handling capacity and cause the Company to limit growth in other states as well.
An important element affecting growth and profitability is customer retention. One measure of improvement in customer retention is policy life expectancy (PLE), which is the estimate of the average length of time that a policy will remain in force before cancellation or non-renewal. Continuing the favorable trend the Company experienced through most of 2002, the Company saw a lengthening of PLE during the first quarter 2003 of 3-6%. The increase in retention contributed to improved profitability in both the Agent and Direct channels, but the effect is considerably greater in the Direct channel, which has higher policy acquisition costs. Since multiple factors affect retention, such as market conditions, competitors achieving rate adequacy and the Company’s mix of business, the Company is unable to predict future retention levels.
The Company’s Commercial Auto business net premiums written increased 36% for the first quarter 2003, compared to the same period last year. The Company has seen the rate of growth slow since the first quarter 2002, but the Company is still benefiting from competitors raising rates and restricting the business they write. Should these market conditions continue throughout 2003, the Company would likely still be able to increase rates while achieving a significant increase in unit growth. The Company continues to focus on writing insurance for small business autos and trucks, with the majority of its customers insuring three or fewer vehicles. Approximately 55% of the Company’s year-to-date Commercial Auto net premiums written were generated in the light and local commercial auto markets, which includes autos, vans and pick-up trucks used by contractors, artisans, landscapers and a variety of other small businesses. The remainder of the business was written in the specialty commercial auto market, which includes dump trucks, logging trucks and other short-haul commercial vehicles. The Company does not write in, and has no intention of re-entering, the long-haul trucking market. There are many similarities between the Company’s commercial and personal auto business; however, since the commercial auto policies have higher limits than personal auto, the Company continues to monitor this segment closely. Commercial Auto net premiums earned increased 53% for the first quarter 2003, compared to the same period last year. Policies in force have increased 32% over March 31, 2002.
Claims costs, the Company’s most significant expense, represent payments made, and estimated future payments to be made, to or on behalf of its policyholders, including adjusting expenses needed to settle claims. These costs include a loss estimate for future assignments, based on current business, under state-mandated automobile insurance programs. Claims costs are influenced by loss severity and frequency and inflation, among other factors. Accordingly, anticipated changes in these factors are taken into account when the Company establishes premium rates and loss reserves.
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During the quarter, the Company continued to report favorable loss ratios, primarily reflecting low loss frequency. Although the true causation is not known, the Company believes that the low frequency is related to an increase in renewal business and, consistent with other retail trends, reflects a change in consumer behavior as a result of the war in Iraq and related television coverage. In addition, the Company experienced generally favorable weather conditions and minimal catastrophic losses during the first quarter 2003. The Company does not believe that this decreasing frequency trend is sustainable and continues to believe frequency will increase to more historic levels. In April, the Company experienced an early hailstorm in Texas and similar weather-related events in Missouri and Mississippi. Therefore, the Company continues to focus on identifying and promptly responding to loss trends.
The Company saw a slight upturn in severity trend during the first quarter 2003. The Company’s personal injury protection coverage severity trend was slightly more favorable than the National Association of Independent Insurers estimates as of the first quarter 2003. As compared to the same periods last year, the increase in severity trend for collision and property damage was in the 8% range, higher than the Company expected. The Company continues to monitor this increase in physical damage trend in evaluating its claims handling performance and capacity. Currently, the Company is comfortable with its claims handling quality, as indicated by the Company’s audits of claims files, and has hired approximately a net 350 claims staff during the first quarter 2003. The Company is also seeing an increase in the cost of repairing vehicles and the number of total loss vehicles, partially due to the presence of more complicated and expensive auto components (e.g. air bags, electronics). The Company plans to continue to be diligent about recognizing trend when setting rates.
During the first quarter 2003, the Company experienced $39.0 million, or 1.5 points, of unfavorable loss reserve development, compared to $3.1 million, or ..2 points, of favorable development for the same period last year. The current year unfavorable development is comprised of $5.2 million of favorable adjustments based on regularly scheduled actuarial reviews and $44.2 million of unfavorable other development. The unfavorable other development was driven largely by the companywide emergence of incurred but not reported losses (IBNR) at higher frequency than anticipated by the Company. The Company continues to increase the analysis intensity in its loss reserves to increase accuracy and further understand its business.
Policy acquisition costs and other underwriting expenses were 20.0% and 21.5% of premiums earned for the first quarter 2003 and 2002, respectively. The expense ratio decreased in both the Agent and Direct channel, as well as in the Commercial Auto business driven by premium growth outpacing salaries and other infrastructure costs. For the Direct channel, the Company also experienced an improvement in both average talk time and advertising costs per sale.
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INVESTMENTSThe composition of the investment portfolio at March 31 was:
1Short-term investments include eurodollar deposits, commercial paper and other securities maturing within one year.
The fixed maturity securities, including short-term investments, as reported in the balance sheets, were comprised of the following:
The non-investment-grade fixed-maturity securities offer the Company higher returns and added diversification but may involve greater risks often related to creditworthiness, solvency and relative liquidity of the secondary trading market.
The fixed-income portfolio, which includes fixed-maturity securities, preferred stocks, short-term investments and term trust certificates (discussed below), had a duration of 3.0 years at March 31, 2003, compared to 3.7 years at March 31, 2002. After adjustments to exclude unsettled securities transactions, the allocation of fixed-income securities at March 31, 2003, was 85.8% of the total portfolio, slightly higher than the target allocation of 85%, but within the Company’s normal range of variation.
Common equities, as reported in the balance sheets, were comprised of the following:
Term trust certificates, the common shares of closed-end bond funds, have the risk/reward characteristics of the underlying bonds and are managed as part of the fixed-income portfolio.
Common equities comprise 14.2% of the total portfolio, excluding the net unsettled securities transactions, at March 31, 2003. Common stocks are the majority of the common equity portfolio and are managed externally to track the Russell 1000 index within +/- 50 basis points. To maintain high correlation with the
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Russell 1000, the Company holds approximately 700 of the common stocks comprising the index. Individual holdings are measured based on their contribution to the correlation with the index. The Company’s common equity allocation and management strategy are intended to provide diversification for the total portfolio and focuses on changes in value of the equity portfolio relative to the change in value of the index on an annual basis as noted in the following table:
1Includes gross dividends reinvested and price appreciation/depreciation.
Other risk investments include private equity investments and limited partnership interests in private equity and mezzanine investment funds which have no off-balance-sheet exposure or contingent obligations, except for the open funding commitments discussed below.
Trading securities are entered into for the purpose of near-term profit generation. At March 31, 2003 and 2002, the Company did not have any trading securities. The Company had one trading security transaction during the first quarter 2003 which generated $0.1 million of gains, compared to $0 of gains for the first three months of 2002. Gains from trading securities are immaterial to the financial condition, cash flows and results of operations of the Company and are reported as part of the available-for-sale portfolio.
Recurring investment income (interest and dividends) increased 7% for the first quarter 2003, compared to the same period last year, reflecting an increase in the average investment portfolio, partially offset by an increase in the allocation to tax advantage securities, shortening duration and investing new cash in securities with yields meaningfully lower than our average book yield of the first quarter 2002. The pretax recurring investment book yield was 4.6% and 5.2% for the first quarters 2003 and 2002, respectively; the weighted average annualized fully taxable equivalent yield was 5.2% and 5.7%, respectively.
The components of net realized gains/(losses) were:
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Gross realized gains as of March 31, 2003, were primarily in the fixed income and equity categories. Gains in the fixed income category were the result of sales of U.S. Treasury Notes, corporate debt, and commercial mortgage backed securities generated by favorable movements in yields. Gains in the common equity category were largely the result of the sale of one private equity investment.
Gross realized losses as of March 31, 2003, were primarily the result of three factors:
The net realized loss of $3.1 million was immaterial to the Company’s overall financial results.
As noted above, realized losses include write-downs of securities determined to have an other-than-temporary decline in market value. The Company routinely monitors its portfolio for pricing changes which might indicate potential impairments and performs detailed reviews of securities with unrealized losses based on predetermined criteria. In such cases, changes in market value are evaluated to determine the extent to which such changes are attributable to (i) fundamental factors specific to the issuer, such as financial conditions, business prospects or other factors or (ii) market-related factors, such as interest rates or equity market declines.
Fixed income and equity securities with declines attributable to issuer-specific fundamentals are reviewed to identify all available evidence, circumstances and influences to estimate the potential for and timing of recovery of the investment’s impairment. An other-than-temporary impairment loss is deemed to have occurred when the potential for and timing of recovery does not satisfy the guidance set forth in Staff Accounting Bulletin 59, “Noncurrent Marketable Equity Securities,” SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities,” and other related guidance.
For fixed income investments with unrealized losses due to market or industry-related declines where the Company has the intent and ability to hold the investment for the period of time necessary to recover a significant portion of the investment’s original principal and interest obligation, declines are not deemed to qualify as other than temporary. The Company’s policy for common stocks with market-related declines is to recognize impairment losses on individual securities with losses that are not reasonably expected to be recovered under historical market conditions when the security has been in a loss position for three consecutive quarters.
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When a security in the Company’s investment portfolio has a decline in market value that is deemed to be other than temporary, the Company reduces the book value of such security to its current market value, recognizing the decline as a realized loss in the income statement. All other unrealized gains or losses are reflected in shareholders’ equity. The write-down activity for the period ended March 31 is as follows:
The following table stratifies the gross unrealized losses in the Company’s portfolio at March 31, 2003, by length of time in a loss position and magnitude of the loss as a percentage of book value. The individual amounts represent the additional OTI the Company could have recognized in the income statement if its policy for market-related declines was different than that stated above.
(1) The $.9 million represents an unrealized loss position in our alternative portfolio, comprised primarily of private equity and mezzanine funds. Due to the nature of these funds, the Company employs a fundamental review to impairment analysis. At this time, there is no evidence of OTI as it relates to these funds.
For example, if the Company decided to write down all securities in an unrealized loss position in excess of three quarters where the securities decline in value exceeded 15%, the Company would recognize an additional $55.2 million of OTI losses in the income statement. These OTI losses would be $24.4 million if the threshold for market decline was greater than 25%.
Since total unrealized losses are already a component of the Company’s shareholders’ equity, any recognition of additional OTI losses would have no effect on the Company’s comprehensive income or book value.
From time to time, the Company invests in derivative instruments, which are primarily used to manage the risks and enhance the returns of the available-for-sale portfolio. This is accomplished by modifying the basis, duration, interest rate or foreign currency characteristics of the portfolio, hedged securities or hedged cash flows. The Company had no risk management derivatives at March 31, 2003 or 2002. The Company recognized no gains or losses during the first quarter 2003 or 2002 on risk managed derivatives.
Derivative instruments may also be used for trading purposes. The Company had no derivatives used for trading purposes at March 31, 2003, compared to one held credit default protection instrument at March 31, 2002, with a net market value of less than $.1 million. During the first quarter 2003, the Company recognized no gains/(losses) on trading derivatives, compared to $.1 million of net losses during the first quarter 2002.
As of March 31, 2003, the Company had open investment funding commitments of $21.8 million.
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During the quarter, the Company entered into repurchase commitment transactions, whereby the Company loans Treasury or U.S. Government agency securities to accredited brokerage firms in exchange for cash equal to the fair market value of the securities. These internally managed transactions are typically overnight arrangements. The cash proceeds are invested in AA or higher financial institution paper with yields that exceed the Company’s interest obligation on the borrowed cash. The Company is able to borrow the cash at low rates since the securities loaned are in short supply. The Company’s interest rate exposure does not increase or decrease since the borrowing and investing periods match. During the three months ended March 31, 2003, the Company’s largest single outstanding balance of repurchase commitments was $1.2 billion open for one business day, with an average daily balance of $619.7 million for the quarter. The Company had no open repurchase commitments at March 31, 2003 and 2002. The Company earned income of $.7 million and $.8 million on repurchase commitments during the three months ended March 31, 2003 and March 31, 2002, respectively.
FINANCIAL CONDITIONProgressive’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, 2003, operations generated a positive cash flow of $567.6 million. During the first quarter 2003, the Company repurchased 1,831,855 Common Shares at an average cost of $54.29 per share. On April 18, 2003, the Board of Directors set the authorization to purchase the Company’s Common Shares to a 15 million share level, superceding the previous authorization set in April 1996 under which 7,193,551 shares remained available for repurchase.
The Company has substantial capital resources and believes it has sufficient borrowing capacity and other capital resources to support current and anticipated growth. The Company’s existing debt covenants do not include any rating or credit triggers. Except for the open investment funding commitment and operating leases and service agreements discussed in the notes to the financial statements in the Company’s Annual Report to Shareholders for the year ended December 31, 2002, the Company does not have any off-balance-sheet leverage.
The Company is currently constructing a 322,000 square foot call center complex in Colorado Springs, Colorado at an estimated total project cost of $62 million. The project is scheduled to be completed in 2004 and will be funded through operating cash flows. In addition, as a result of the Company’s continuing review of its real estate needs, in April 2003, the Board of Directors approved expenditures for real estate acquisitions in the amount of approximately $110 million during 2003 and 2004, to support operations, including call centers, information technology and other functions. These acquisitions may involve transactions in various locations around the country and may include leases of space from third parties or new construction on land currently owned or to be purchased by the Company. Also, the Company expects to open up to 20 additional vehicle claim service repair sites in 2003, with three such sites opened in April 2003.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: Statements in this quarterly report on Form 10-Q that are not historical fact are forward-looking statements that are subject to certain risks and uncertainties that could cause actual events and results to differ materially from those discussed herein. These risks and uncertainties include, without limitation, uncertainties related to estimates, assumptions and projections generally; inflation and other changes in economic conditions (including changes in interest rates and financial markets); the effectiveness of the Company’s advertising campaigns; the accuracy and adequacy of the Company’s pricing methodologies; pricing competition and other initiatives by competitors; ability to obtain regulatory approval for requested rate changes and the timing thereof; legislative and regulatory developments; the outcome of litigation pending against the Company; weather conditions (including the severity and frequency of storms, hurricanes, snowfalls, hail and winter conditions); changes in driving patterns and loss trends; acts of war and terrorist activities; court decisions and trends in litigation and health care and auto repair costs; and other matters described from time to time by the Company in releases and publications, and in periodic reports and other documents filed with the United States Securities and Exchange Commission. In addition, investors should be aware that generally accepted accounting principles prescribe when a company may reserve for particular risks, including litigation exposures. Accordingly, results for a given reporting period could be significantly affected if and when a reserve is established for a major contingency. Reported results may therefore appear to be volatile in certain accounting periods.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
At March 31, 2003, the duration of the financial instruments subject to interest rate risk was 3.0 years, compared to 3.2 years at December 31, 2002. At March 31, 2003, the weighted average beta of the equity portfolio was .97, compared to .95 at December 31, 2002. Although components of the portfolio have changed, no material changes have occurred in the total market risk since reported in the Annual Report on Form 10-K for the year ended December 31, 2002
Item 4. Controls and Procedures.
The Company, under the direction of the Chief Executive Officer and the Chief Financial Officer, has established disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. The disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Within 90 days of the filing of this Report, the Chief Executive Officer and the Chief Financial Officer reviewed and evaluated the Company’s disclosure controls and procedures. Based on, and as of the date of, that review and evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effectively serving the stated purposes.
In addition, there have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their most recent evaluation. No significant deficiencies or material weaknesses in the internal controls were identified during the evaluation and, as a consequence, no corrective action is required to be taken.
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PART II — OTHER INFORMATION
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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.
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CERTIFICATION
I, Glenn M. Renwick, certify that:
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I, W. Thomas Forrester, certify that:
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EXHIBIT INDEX
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