10-Q 1 e10-q.txt THE PROGRESSIVE CORPORATION FORM 10-Q 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, 2000 ------------------------------------------------- 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 ---------------------------------------------------------- THE PROGRESSIVE CORPORATION -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Ohio 34-0963169 -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6300 Wilson Mills Road, Mayfield Village, Ohio 44143 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (440) 461-5000 -------------------------------------------------------------------------------- (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: 73,274,664 outstanding at July 31, 2000 2 PART I - FINANCIAL INFORMATION ------------------------------ ITEM 1. Financial Statements. The Progressive Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Three Months Six Months ------------------------------------ ----------------------------------------- Periods Ended June 30, 2000 1999 % Change 2000 1999 % Change -------------------------------------------------------------------------------------- ----------------------------------------- (millions - except per share amounts) NET PREMIUMS WRITTEN $ 1,674.0 $ 1,608.4 4 $ 3,313.7 $ 3,162.1 5 ======================== ======================== REVENUES Premiums earned $ 1,579.9 $ 1,404.6 12 $ 3,100.9 $ 2,726.7 14 Investment income 94.1 86.0 9 184.8 160.7 15 Net realized gains (losses) on security sales (26.2) 16.7 NM (41.6) 18.7 NM Service revenues 5.0 12.2 (59) 10.2 23.4 (56) Other income -- 5.2 NM -- 5.2 NM ------------------------ ------------------------ Total revenues 1,652.8 1,524.7 8 3,254.3 2,934.7 11 ------------------------ ------------------------ EXPENSES Losses and loss adjustment expenses 1,332.1 1,004.7 33 2,653.8 1,918.6 38 Policy acquisition costs 197.2 186.4 6 388.7 361.4 8 Other underwriting expenses 129.4 140.3 (8) 272.4 282.0 (3) Investment expenses 2.2 2.5 (12) 3.9 4.6 (15) Service expenses 5.3 10.0 (47) 10.8 20.0 (46) Interest expense 20.0 20.1 -- 39.9 36.9 8 ------------------------ ------------------------ Total expenses 1,686.2 1,364.0 24 3,369.5 2,623.5 28 ------------------------ ------------------------ NET INCOME (LOSS) Income (loss) before income taxes (33.4) 160.7 NM (115.2) 311.2 NM Provision (benefit) for income taxes (19.3) 48.6 NM (54.5) 93.8 NM ------------------------ ------------------------ Net income (loss) ($14.1) $ 112.1 NM ($60.7) $ 217.4 NM ======================== ======================== COMPUTATION OF EARNINGS PER SHARE Basic: Average shares outstanding 73.1 72.9 -- 73.1 72.8 -- ======================== ======================== Per share ($.19) $ 1.54 NM ($.83) $ 2.99 NM ======================== ======================== Diluted: Average shares outstanding 73.1 72.9 -- 73.1 72.8 -- Net effect of dilutive stock options 1.2 1.9 (37) 1.0 1.9 (47) ======================== ======================== Total equivalent shares 74.3 74.8 (1) 74.1 74.7 (1) ======================== ======================== Per share(1) ($.19) $ 1.50 NM ($.83) $ 2.91 NM ======================== ========================
NM = Not Meaningful (1)Since the Company reported a net loss for the three months and six months ended June 30, 2000, the calculated diluted earnings per share was antidilutive; therefore, basic earnings per share is disclosed. See notes to consolidated financial statements. 2 3 The Progressive Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS (unaudited)
June 30, December 31, ------------------------------ ----------------- 2000 1999 1999 ------------------------------------------------------------------------------------------------------------------------------------ (millions) ASSETS Investments: Available-for-sale: Fixed maturities, at market (amortized cost: $4,609.3, $4,816.9 and $4,650.9) $4,518.6 $4,763.2 $4,532.7 Equity securities, at market Preferred stocks (cost: $618.1, $393.1 and $425.4) 619.1 389.6 422.4 Common stocks (cost: $1,051.2, $882.9 and $1,127.8) 1,206.8 1,074.2 1,243.6 Short-term investments, at amortized cost (market: $711.9, $153.1 and $229.0) 711.9 153.1 229.0 ------------------------------ ----------------- Total investments 7,056.4 6,380.1 6,427.7 Cash 8.9 20.8 14.2 Accrued investment income 48.6 54.7 54.0 Premiums receivable, net of allowance for doubtful accounts of $39.8, $34.7 and $42.9 1,898.0 1,766.5 1,760.8 Reinsurance recoverables 247.3 270.4 254.7 Prepaid reinsurance premiums 99.4 81.4 88.3 Deferred acquisition costs 361.4 355.4 343.4 Income taxes 309.3 203.6 273.7 Property and equipment, net of accumulated depreciation of $277.2, $216.8 and $243.8 479.4 420.1 447.7 Other assets 44.1 57.3 40.2 ------------------------------ ----------------- Total assets $10,552.8 $9,610.3 $9,704.7 ============================== ================= LIABILITIES AND SHAREHOLDERS' EQUITY Unearned premiums $3,005.3 $2,768.8 $2,781.4 Loss and loss adjustment expense reserves 2,773.1 2,242.0 2,416.2 Policy cancellation reserve 15.5 20.1 17.8 Accounts payable and accrued expenses 979.7 775.5 687.9 Debt 1,048.9 1,040.6 1,048.6 ------------------------------ ----------------- Total liabilities 7,822.5 6,847.0 6,951.9 ------------------------------ ----------------- Shareholders' equity: Common Shares, $1.00 par value (treasury shares of 9.9, 10.2 and 10.0) 73.2 72.9 73.1 Paid-in capital 497.6 471.2 481.6 Accumulated comprehensive income: Net unrealized appreciation (depreciation) on investment securities 42.9 87.2 (3.4) Other (9.0) (9.0) (9.0) Retained earnings 2,125.6 2,141.0 2,210.5 ------------------------------ ----------------- Total shareholders' equity 2,730.3 2,763.3 2,752.8 ------------------------------ ----------------- Total liabilities and shareholders' equity $10,552.8 $9,610.3 $9,704.7 ============================== =================
See notes to consolidated financial statements. 3 4 The Progressive Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six Months Ended June 30, 2000 1999 ---------------------------------------------------------------------------------------------------- (millions) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) ($ 60.7) $ 217.4 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 37.8 30.5 Net realized (gains) losses on security sales 41.6 (18.7) Gain on sale of property and equipment -- (5.2) Changes in: Unearned premiums 223.9 439.1 Loss and loss adjustment expense reserves 356.9 53.4 Accounts payable and accrued expenses 30.1 128.5 Policy cancellation reserve (2.3) (9.0) Prepaid reinsurance premiums (11.1) (3.7) Reinsurance recoverables 7.4 10.6 Premiums receivable (137.2) (310.3) Deferred acquisition costs (18.0) (56.3) Income taxes (60.6) 3.9 Other, net 4.2 (.3) ------------------------- Net cash provided by operating activities 412.0 479.9 CASH FLOWS FROM INVESTING ACTIVITIES Purchases: Available-for-sale: fixed maturities (1,676.1) (4,199.5) equity securities (510.7) (591.0) Sales: Available-for-sale: fixed maturities 1,469.4 3,354.8 equity securities 361.6 231.2 Maturities, paydowns, calls and other: Available-for-sale: fixed maturities 206.9 169.5 equity securities 27.1 2.4 Net (purchases) sales of short-term investments (482.9) 296.9 Payable on securities 261.7 53.1 Purchases of property and equipment (66.9) (78.8) Sale of property and equipment -- 12.1 Purchase of subsidiary, net of cash acquired -- (5.7) ------------------------- Net cash used in investing activities (409.9) (755.0) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from exercise of stock options 10.3 8.7 Tax benefit from exercise of stock options 6.8 14.1 Proceeds from debt -- 293.7 Payments on debt -- (30.0) Dividends paid to shareholders (9.5) (9.4) Acquisition of treasury shares (16.1) (.3) Other, net 1.1 .5 ------------------------- Net cash provided by (used in) financing activities (7.4) 277.3 ------------------------- Increase (decrease) in cash (5.3) 2.2 Cash, January 1 14.2 18.6 ------------------------- Cash, June 30 $ 8.9 $ 20.8 =========================
See notes to consolidated financial statements. 4 5 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 and accompanying notes included in its Annual Report on Form 10-K for the year ended December 31, 1999. 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, 2000, are not necessarily indicative of the results expected for the full year. NOTE 2 Supplemental Cash Flow Information -- The Company paid income taxes of $0 and $75.9 million for the six months ended June 30, 2000 and 1999, respectively. Total interest paid was $40.7 million and $31.9 million for the six months ended June 30, 2000 and 1999, respectively. NOTE 3 Debt -- Debt at June 30 consisted of:
2000 1999 --------------------------------- -------------------------------- Market Market Cost Value Cost Value -------------- --------------- -------------- ------------- 6 5/8% Senior Notes $ 293.8 $238.9 $ 293.7 $ 272.4 7.30% Notes 99.7 97.0 99.7 100.8 6.60% Notes 199.3 189.4 199.1 198.5 7% Notes 148.6 133.9 148.5 146.3 10% Notes 149.9 152.0 149.8 158.2 10 1/8% Subordinated Notes 149.9 152.1 149.8 158.5 Other Debt 7.7 7.7 -- -- -------------- --------------- -------------- -------------- $1,048.9 $971.0 $1,040.6 $1,034.7 ============== =============== ============== ==============
NOTE 4 Comprehensive Income/Loss -- Total comprehensive income (loss) was $.3 million and $76.5 million for the quarters ended June 30, 2000 and 1999, respectively, and $(14.4) million and $191.9 million for the six months ended June 30, 2000 and 1999, respectively. NOTE 5 Dividends -- On June 30, 2000, the Company paid a quarterly dividend of $.065 per Common Share to shareholders of record as of the close of business on June 9, 2000. The dividend was declared by the Board of Directors on April 21, 2000. 5 6 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 ---------------------------------------------- ------------------------------------------------ 2000 1999 2000 1999 --------------------- ------------------------ ------------------------ ----------------------- Pretax Pretax Pretax Pretax Profit Profit Profit Profit Revenues (Loss) Revenues (Loss) Revenues (Loss) Revenues (Loss) --------- ---------- ----------- ----------- ----------- ----------- ----------- ----------- Personal Lines $1,464.2 ($82.6) $1,310.0 $59.3 $2,878.2 ($225.6) $2,537.8 $141.5 Other 120.7 3.5 112.0 21.3 232.9 11.0 217.5 31.8 Investments(1) 67.9 65.7 102.7 100.2 143.2 139.3 179.4 174.8 Interest Expense -- (20.0) -- (20.1) -- (39.9) -- (36.9) --------- ---------- ----------- ----------- ----------- ----------- ----------- ----------- $1,652.8 ($ 33.4) $1,524.7 $160.7 $3,254.3 ($115.2) $2,934.7 $311.2 ========= ========== =========== =========== =========== =========== =========== ===========
1 Revenues represent recurring investment income and net realized gains 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 2000 presentation. 6 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. RESULTS OF OPERATIONS On a companywide basis, for the second quarter 2000, operating income, which excludes net realized gains and losses on security sales and nonrecurring items, was $4.0 million, or $.06 per share, compared to $98.5 million, or $1.32 per share, last year. Nonrecurring items in 2000 consist of $1.7 million, or $.02 per share, of severance costs primarily incurred due to the restructuring of the Company's organization at the general manager level. Nonrecurring items last year consisted of 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 combined ratio was 105.0 for the second quarter 2000, compared to 94.8 for the second quarter 1999. Second quarter results include .7 points of catastrophe losses. For the six months ended June 30, 2000, operating loss was $32.6 million, or $.45 per share, compared to operating income of $202.5 million, or $2.71 per share, in 1999. The year-to-date combined ratio was 106.9, compared to 94.0 last year. The deterioration in results was due to several factors as discussed below. The Company's Personal Lines business units write insurance for private passenger automobiles and recreation vehicles and represent 92% 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(R), 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 8 Underwriting results for the Company's Personal Lines, including its channel components, and the other lines of business for the periods ended June 30, were (dollars in millions):
------------------------------------- ------------------------------------- THREE MONTHS SIX MONTHS ------------------------------------- ------------------------------------- 2000 1999 Change 2000 1999 Change ---------- --------- ----------- --------- --------- ---------- NET PREMIUMS WRITTEN Personal Lines - Agency $1,192.5 $1,275.6 (7)% $2,384.4 $2,521.3 (5)% Personal Lines - Direct 333.6 221.1 51% 658.3 426.6 54% ---------- --------- --------- --------- Total Personal Lines 1,526.1 1,496.7 2% 3,042.7 2,947.9 3% Other Lines 147.9 111.7 32% 271.0 214.2 27% ---------- --------- --------- --------- Companywide $1,674.0 $1,608.4 4% $3,313.7 $3,162.1 5% ========== ========= ========= ========= NET PREMIUMS EARNED Personal Lines - Agency $1,171.5 $1,138.8 3% $2,327.9 $2,218.9 5% Personal Lines - Direct 292.7 171.2 71% 550.3 318.9 73% ---------- --------- --------- --------- Total Personal Lines 1,464.2 1,310.0 12% 2,878.2 2,537.8 13% Other Lines 115.7 94.6 22% 222.7 188.9 18% ---------- --------- --------- --------- Companywide $1,579.9 $1,404.6 12% $3,100.9 $2,726.7 14% ========== ========= ========= ========= STANDARD/PREFERRED SALES AS A % OF PERSONAL LINES NPW 52% 45% -- 52% 43% -- ========== ========= ========= ========= INTERNET SALES AS % OF DIRECT BUSINESS NPW 14% 7% -- 13% 6% -- ========== ========= ========= ========= PERSONAL LINES - AGENCY CR Loss & loss adjustment expense ratio 86.1 72.7 (13.4) pts. 87.6 71.2 (16.4) pts. Underwriting expense ratio 18.4 20.4 2.0 pts. 19.2 20.9 1.7 pts. ---------- --------- --------- --------- 104.5 93.1 (11.4) pts. 106.8 92.1 (14.7) pts. ========== ========= ========= ========= PERSONAL LINES - DIRECT CR Loss & loss adjustment expense ratio 81.4 71.0 (10.4) pts. 82.4 70.8 (11.6) pts. Underwriting expense ratio 28.8 39.9 11.1 pts. 29.8 39.7 9.9 pts. ---------- --------- --------- --------- 110.2 110.9 .7 pts. 112.2 110.5 (1.7) pts. ========== ========= ========= ========= PERSONAL LINES - TOTAL CR Loss & loss adjustment expense ratio 85.1 72.5 (12.6) pts. 86.6 71.1 (15.5) pts. Underwriting expense ratio 20.5 23.0 2.5 pts. 21.2 23.3 2.1 pts. ---------- --------- --------- --------- 105.6 95.5 (10.1) pts. 107.8 94.4 (13.4) pts. ========== ========= ========= ========= OTHER LINES - CR Loss & loss adjustment expense ratio 73.3 58.2 (15.1) pts. 71.9 60.0 (11.9) pts. Underwriting expense ratio 23.4 27.0 3.6 pts. 22.9 27.7 4.8 pts. ---------- --------- --------- --------- 96.7 85.2 (11.5) pts. 94.8 87.7 (7.1) pts. ========== ========= ========= ========= COMPANYWIDE GAAP CR Loss & loss adjustment expense ratio 84.3 71.5 (12.8) pts. 85.6 70.4 (15.2) pts. Underwriting expense ratio 20.7 23.3 2.6 pts. 21.3 23.6 2.3 pts. ---------- --------- --------- --------- 105.0 94.8 (10.2) pts. 106.9 94.0 (12.9) pts. ========== ========= ======== ======== COMPANYWIDE ACCIDENT YEAR Loss & loss adjustment expense ratio 84.0 73.8 (10.2) pts. 81.9 72.5 (9.4) pts. ========== ========= ======== ========
8 9 The Agent channel net premiums written decreased primarily as a result of the rate increases filed by the Company in almost every state during the last 12 months. The Company's Direct channel net written premiums increased, albeit at a decreased rate. The conversion rate on direct quotes has declined very little, despite the rate increases taken. Brand awareness appears to have produced a relatively stable conversion rate. In addition, the Company continues to see an increase in the number of quotes generated via the Internet. Premiums earned are a function of the premiums written in the current and prior periods. 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, increased for both the second quarter and first six months of 2000 in the Agent and Direct channel. These percentage increases were driven primarily by rate inadequacy, trend and loss reserves. It appears that many of the rate increases taken by the Company during the last 12 months were insufficient. In many states, the rate increases raised new business rate levels more than renewal rate levels, leaving renewal rates relatively inadequate, thus requiring the Company to take further rate increases in a number of states. As noted in the following table, 61% of auto policies written in June 2000 are annual policies and, therefore, the Company will have rate inadequacy on future earned premium in some states for up to an additional six to nine months. The Company has plans currently in place to ensure that a majority of its new and renewal policies have six-month terms.
% OF NEW AUTO POLICIES WRITTEN IN JUNE WHICH ARE JUNE 2000 JUNE 1999 ANNUAL Agency 58% 66% Direct 68% 81% Total 61% 69%
The second factor contributing to the increase in claims costs is the increase in severity trend that the Company is experiencing. Based on industry data from the National Association of Independent Insurers and review of other insurance company filings, it appears that the escalation in loss costs this year is impacting many other carriers as well. Although the Company's loss costs are increasing at a slower rate than earlier this year, the Company does not see these costs leveling off in the near future. The third factor facing the Company is loss reserving. During the second quarter 2000, the Company experienced $5.3 million, or .3 points, of adverse loss reserve development relating to prior accidents years, compared to $31.9 million, or 2.3 points, of favorable development in the second quarter 1999. For the six months ended June 30, 2000, the Company experienced $113.1 million, or 3.7 points, of adverse loss reserve development relating to prior accident years, compared to $58.1 million, or 2.1 points, of favorable development for the same period last year. The Company conducts extensive quarterly reviews to help ensure that the Company is meeting its objective of maintaining adequate loss reserves. Policy acquisition costs and other underwriting expenses were 20.7% and 23.3% of premiums earned for the second quarter 2000 and 1999, respectively, and 21.3% for the first six months of 2000, compared to 23.6% in 1999. The decrease in the Agent channel expenses was due to lower 9 10 gainsharing costs and lower commission expenses as a result of our mix of business shifting toward more renewals, which has lower commission expenses associated with it. For the Direct business, the decrease was driven by higher productivity in our Direct sales call centers, more efficient purchases of television media and a greater percentage of renewal business, which has lower expenses associated with it. Recurring investment income (interest and dividends) increased 9% for the quarter and 15% for the first six months, primarily reflecting an increase in the average investment portfolio. The weighted average annualized fully taxable equivalent book yield of the portfolio was 6.4% for both of the quarters ended June 30, 2000 and 1999 and 6.3% for the first six months of both 2000 and 1999. The Company had net realized losses on security sales of $26.2 million for the second quarter and $41.6 million for the first six months of 2000, compared to net realized gains of $16.7 million and $18.7 million, respectively, last year. During the second quarter 2000, the Company wrote down $9.8 million in one security that was determined to have an other than temporary decline in market value. At June 30, 2000, the Company's portfolio had $65.9 million in total unrealized gains, compared to $5.4 million in unrealized losses at December 31, 1999. 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):
----------------------------------- -------------------------------- June 30, 2000 June 30, 1999 ----------------------------------- -------------------------------- Fixed Maturities: Investment-Grade: Short/Intermediate Term $4,766.6 67.5% $4,302.1 67.5% Long Term 245.7 3.5% 409.2 6.4% Non-Investment-Grade 218.2 3.1% 205.0 3.2% Equity Securities: Common Stocks 1,206.8 17.1% 1,074.2 16.8% Preferred Stocks 619.1 8.8% 389.6 6.1% ------------------- --------------- --------------- --------------- Total Portfolio $7,056.4 100.0% $6,380.1 100.0% =================== =============== =============== ===============
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 2.9 years at June 30, 2000, compared to 3.2 years at June 30, 1999. 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 ($121.1 million in 2000, compared to $85.2 million in 1999), equity investments in term trust certificates, the common shares of closed-end bond funds, which have the risk/reward characteristics of the underlying bonds ($237.0 million in 2000, compared to $181.0 million in 1999), and foreign equities ($0 in 2000, compared to $74.9 million in 1999). 10 11 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 June 30, 2000, the Company had no open other-than-trading derivative instruments, compared to other-than-trading derivative instruments with net market values of $(2.9) million (notional value of $136.8 million) at June 30, 1999. Derivative instruments are also used for trading purposes. At June 30, 2000, the Company had a long trading position in futures with a market value of $0 million (notional value of $100 million) offset by comparably matched short futures position. In addition, the Company had short trading positions in forwards and puts with net market values of $(1.4) million (notional values of $648 million). At June 30, 1999, the Company had short trading positions in calls with a market value of $0 million (notional value of $9.5 million). As of June 30, 2000, the Company had open investment funding commitments of $30.9 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, 2000, operations generated a positive cash flow of $412.0 million. During the first six months of 2000, 272,500 Common Shares were repurchased at an average cost of $58.09 per share. In addition, in connection with the share repurchase program, the Company sold put options during the first six months and received $1.1 million in net proceeds. 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 is currently constructing a corporate office complex in Mayfield Village, Ohio at an estimated cost of $130.7 million, of which $87.4 million has been paid through June 30, 2000, including $14.4 million paid in the second quarter 2000. The first building was completed in May 1999. The next two buildings were completed in the first quarter of 2000. The parking garage and fourth building are scheduled to be completed in October 2000. The fifth building is scheduled to be 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: CERTAIN MATTERS IN THIS QUARTERLY REPORT ON FORM 10-Q MAY BE CONSIDERED 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; 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. 11 12 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk. At June 30, 2000, the duration of the financial instruments subject to interest rate risk was 2.9 years, compared to 3.0 years at December 31, 1999. At June 30, 2000, the weighted average beta of the equity portfolio was .98, compared to .89 at December 31, 1999. 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, 1999. 12 13 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, 2000: None 13 14 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 14, 2000 BY: /s/ W. Thomas Forrester ----------------- ---------------------------------------- W. Thomas Forrester Treasurer and Chief Financial Officer 14 15 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, 2000 15