UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 1O-Q
(Mark One)
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 [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: 73,844,095 outstanding at April 30, 2001
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
The Progressive Corporation and SubsidiariesConsolidated Statements of Income(unaudited)
NM = Not Meaningful
1Since the Company reported a net loss for the three months ended March 31, 2000, the calculated diluted earnings per share was antidilutive; therefore, basic earnings per share is disclosed.
See notes to consolidated financial statements.
2
The Progressive Corporation and SubsidiariesConsolidated Balance Sheets(unaudited)
3
The Progressive Corporation and SubsidiariesConsolidated Statements of Cash Flows(unaudited)
4
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, 2000.
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, 2001, are not necessarily indicative of the results expected for the full year.
Note 2 Supplemental Cash Flow Information — The Company paid income taxes of $2.3 million and $0 for the three months ended March 31, 2001 and 2000, respectively. Total interest paid was $16.5 million for both the three months ended March 31, 2001 and 2000.
Note 3 Debt — Debt at March 31 consisted of:
Note 4 Comprehensive Income/Loss — Total comprehensive income (loss) was $60.5 million and $(14.7) million for the quarters ended March 31, 2001 and 2000, respectively.
Note 5 Dividends — On March 31, 2001, the Company paid a quarterly dividend of $.07 per Common Share to shareholders of record as of the close of business on March 9, 2001. The dividend was declared by the Board of Directors on February 2, 2001.
On April 20, 2001, the Board of Directors declared a quarterly dividend of $.07 per Common Share. The dividend is payable June 30, 2001, to shareholders of record as of the close of business on June 8, 2001.
5
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 March 31,(millions)
1Revenues represent recurring investment income and net realized gains/losses on security sales; pretax profit is net of investment expenses.
Note 7 Reclassifications — Certain amounts in the financial statements for prior periods were reclassified to conform with the 2001 presentation.
6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
RESULTS OF OPERATIONS
On a companywide basis, for the first quarter 2001, operating income, which excludes net realized gains and losses on security sales, was $88.3 million, or $1.18 per share, compared to an operating loss of $36.6 million, or $.50 per share, for the same period last year. The combined ratio was 97.3 for the first quarter 2001, compared to 108.9 for the first quarter 2000.
The Company’s Personal Lines business units write insurance for private passenger automobiles and recreation vehicles and represent 90% 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-AUTO-PRO®, the Internet and the Strategic Alliances business unit on behalf of affinity groups.
In addition to its Personal Lines business, the Company’s 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.
7
Underwriting results for the Company’s Personal Lines, including its channel components, and the other lines of business for the three months ended March 31, were (dollars in millions):
1First quarter 2001 net premiums written include $37.7 million associated with the commutation of a reinsurance agreement that was part of a terminated Strategic Alliance relationship; these premiums will be earned throughout 2001. Excluding the additional premiums, NPW grew 31% for Personal Lines — Direct, decreased 1% for Total Personal Lines and grew 2% Companywide.
8
During the first quarter, the Company continued to shift business to six-month terms. In March 2001, 95% of the new auto policies were written for six-month terms, compared to 80% in December 2000 and 37% in March 2000. The Company achieved its objective of converting both Agent and Direct new policies to shorter terms allowing the Company to implement and realize the benefits of rate adjustments more quickly.
The Agent channel net premiums written decreased 10% from the first quarter last year. The shift to shorter policy terms, along with the rate increases the Company has taken in almost every state during the last 18 months, contributed to the decrease. In addition, Agent auto policies in force decreased 8%. During the first quarter, the Company’s Direct channel net premiums written increased 31%, excluding $37.7 million associated with the commutation of a reinsurance agreement that was part of a terminated Strategic Alliance relationship. The Direct business policies in force increased 34%. The quote volume in the Direct business set record levels in the first quarter 2001, with the biggest driver being the number of quotes started online. During the quarter, the Company expanded its advertising campaign into 109 media markets, compared to 81 in the first quarter last year; the Company plans to expand its advertising to more markets as the year progresses.
Claim costs, the Company’s most significant expense, represent actual payments made and estimated future payments to be made to or on behalf of its policyholders, including expenses required to settle claims and losses. These costs include a loss estimate for future assignments and assessments, based on current business, under state-mandated involuntary automobile programs.
During the quarter, the Company’s loss ratios have improved across the country reflecting the Company’s aggressive rate actions taken over the last one and one-half years. During the quarter, 21 of the Company’s top 25 states, which represent 87% of the Personal Lines volume, made an underwriting profit. New York and Florida continue to represent significant challenges for the Company, and although the actions taken are encouraging, it is too early to declare that these states are rate adequate. In addition, average claim payments continue to be higher than last year, but the averages are not increasing at the same pace as last year. The Company is encouraged by the severity trend it is seeing despite the fact that claims severity for personal injury protection, physical damage and bodily injury are still higher than last year. The Company plans to continue to be diligent about recognizing trend when setting rates.
Recurring investment income (interest and dividends) increased 7% for the quarter, primarily reflecting an increase in the average investment portfolio. The weighted average annualized fully taxable equivalent book yield of the portfolio was 6.2% for the first quarter 2001, compared to 6.3% for the same period last year. The Company had net realized losses on security sales of $2.5 million for the first quarter 2001, compared to net realized losses of $15.4 million in the same period last year. At March 31, 2001, the Company’s portfolio had $66.8 million in net unrealized gains, compared to $107.0 million at December 31, 2000 and $43.7 million at March 31, 2000.
9
The Company continues to invest in fixed maturity, equity and short-term securities. The market value of the portfolio is as follows (dollars in millions):
The non-investment-grade fixed-maturity securities 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 3.5 years at March 31, 2001, compared to 2.8 years at March 31, 2000.
The majority of the common stock portfolio is invested in domestic equities traded on nationally recognized securities exchanges. Common stock investments also include partnership investments ($47.4 million in 2001, compared to $66.1 million in 2000), and equity investments in term trust certificates, the common shares of closed-end bond funds, which have the risk/reward characteristics of the underlying bonds ($224.4 million in 2001, compared to $232.3 million in 2000).
Derivative instruments held or issued for purposes “other than trading” are used to manage the risks and enhance the returns of the available-for-sale portfolio. At March 31, 2001, other-than-trading derivative instruments had a net market value of $.7 million (notional value of $4.9 million), compared to other-than-trading derivative instruments with net market values of $(3.4) million (notional value of $220.1 million) at March 31, 2000.
As of March 31, 2001, the Company had open investment funding commitments of $50.2 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 three months ended March 31, 2001, operations generated a positive cash flow of $344.3 million. 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 has constructed a corporate office complex in Mayfield Village, Ohio at an estimated cost of $126.4 million, of which $123.9 million has been paid through March 31, 2001,
10
including $4.8 million paid in the first quarter 2001. Four buildings and a parking garage were completed during 1999 and 2000. The final building was completed in the first quarter of 2001. The project is being funded through operating cash flows.
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; changes in economic conditions (including changes in interest rates and financial markets); pricing competition and other initiatives by competitors; ability to obtain regulatory approval for requested rate changes and the timing thereof; legislative and regulatory developments; weather conditions (including the severity and frequency of storms, hurricanes, snowfalls, hail and winter conditions); changes in driving patterns and loss trends; court decisions and trends in litigation and health care costs; and other matters described from time to time by the Company in other documents filed with the United States Securities and Exchange Commission. The Company assumes no obligation to update the information in this quarterly report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
At March 31, 2001, the duration of the financial instruments subject to interest rate risk was 3.5 years, compared to 3.5 years at December 31, 2000. At March 31, 2001, the weighted average beta of the equity portfolio was .97, compared to .95 at December 31, 2000. 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, 2000.
11
PART II — OTHER INFORMATION
12
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.
13