The Progressive Corporation 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 1O-Q

(Mark One)


þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2005


o		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 incorporation or organization)		(I.R.S. Employer 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 þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes þ No o

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: 197,210,344 outstanding at July 31, 2005

TABLE OF CONTENTS


PART I — FINANCIAL INFORMATION
	Item 1. Financial Statements.
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II — OTHER INFORMATION
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
	Item 6. Exhibits
SIGNATURES
EXHIBIT INDEX
EX-12 Computation of Ratio of Earnings
EX-31(A) 302 Certification - CEO
EX-31(B) 302 Certification - CFO
EX-32(A) 906 Certification - CEO
EX-32(B) 906 Certification - CFO

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,	2005			2004			Change			2005		2004		Change
(millions — except per share amounts)
Revenues:
Net premiums earned	$	3,453.8		$	3,234.0			7		$	6,803.8	$	6,327.5		8
Investment income		129.8			124.7			4			250.2		239.6		4
Net realized gains (losses) on securities		(3.8	)		(3.4	)		12			6.4		56.1		(89	)
Service revenues		10.3			11.9			(13	)		21.5		24.5		(12	)
Other income		—			.2		NM				—		—		—

Total revenues		3,590.1			3,367.4			7			7,081.9		6,647.7		7

Expenses:
Losses and loss adjustment expenses		2,264.6			2,090.7			8			4,433.2		4,052.8		9
Policy acquisition costs		366.2			348.3			5			722.3		682.3		6
Other underwriting expenses		342.2			324.2			6			665.6		600.4		11
Investment expenses		3.1			2.9			7			5.9		6.2		(5	)
Service expenses		6.6			6.6			—			12.0		12.1		(1	)
Interest expense		20.7			19.7			5			41.5		40.2		3

Total expenses		3,003.4			2,792.4			8			5,880.5		5,394.0		9


Income before income taxes		586.7			575.0			2			1,201.4		1,253.7		(4	)
Provision for income taxes		192.4			188.7			2			394.4		407.4		(3	)

Net income	$	394.3		$	386.3			2		$	807.0	$	846.3		(5	)


COMPUTATION OF EARNINGS PER SHARE
Basic:
Average shares outstanding		197.1			216.3			(9	)		198.1		216.4		(8	)

Per share	$	2.00		$	1.79			12		$	4.07	$	3.91		4

Diluted:
Average shares outstanding		197.1			216.3			(9	)		198.1		216.4		(8	)
Net effect of dilutive stock-based compensation		2.9			3.5			(17	)		2.9		3.5		(17	)

Total equivalent shares		200.0			219.8			(9	)		201.0		219.9		(9	)

Per share	$	1.97		$	1.76			12		$	4.02	$	3.85		4


Dividends per share	$	.030		$	.025			20		$	.060	$	.050		20

NM = Not Meaningful

See notes to consolidated financial statements.

The Progressive Corporation and Subsidiaries
Consolidated Balance Sheets
(unaudited)


	June 30,						December 31,
	2005			2004			2004
(millions)
Assets
Investments — Available-for-sale, at market:
Fixed maturities (amortized cost: $8,566.6, $9,651.3 and $8,972.6)	$	8,638.0		$	9,679.4		$	9,084.3
Equity securities:
Preferred stocks (cost: $1,146.7, $846.6 and $749.4)		1,153.5			846.7			768.9
Common equities (cost: $1,402.2, $1,601.8 and $1,314.0)		1,936.5			2,026.8			1,851.9
Short-term investments (amortized cost: $2,266.0, $1,114.8 and $1,376.6)		2,266.7			1,114.8			1,376.9


Total investments		13,994.7			13,667.7			13,082.0
Cash		19.8			22.0			20.0
Accrued investment income		105.8			101.6			103.5
Premiums receivable, net of allowance for doubtful accounts of $85.1, $63.8 and $83.8		2,522.4			2,322.6			2,287.2
Reinsurance recoverables, including $57.3, $41.0 and $44.5 on paid losses		395.3			286.0			381.6
Prepaid reinsurance premiums		120.5			129.3			119.8
Deferred acquisition costs		468.7			449.8			432.2
Property and equipment, net of accumulated depreciation of $606.1, $513.1 and $562.1		704.3			647.9			666.5
Other assets		127.7			89.8			91.5


Total assets	$	18,459.2		$	17,716.7		$	17,184.3


Liabilities and Shareholders’ Equity
Unearned premiums	$	4,503.8		$	4,220.7		$	4,108.0
Loss and loss adjustment expense reserves		5,490.5			4,925.0			5,285.6
Accounts payable, accrued expenses and other liabilities		1,495.0			1,507.4			1,325.0
Income taxes		94.8			52.4			26.0
Debt		1,284.6			1,290.0			1,284.3


Total liabilities		12,868.7			11,995.5			12,028.9


Shareholders’ equity:
Common Shares, $1.00 par value (authorized 600.0; issued 213.1, 230.1 and 213.2, including treasury shares of 15.4, 12.8 and 12.8)		197.7			217.3			200.4
Paid-in capital		818.8			777.3			743.3
Unamortized restricted stock		(75.7	)		(58.4	)		(46.0	)
Accumulated other comprehensive income (loss):
Net unrealized gains on securities		398.6			294.6			435.1
Net unrealized gains on forecasted transactions		9.2			10.2			9.7
Foreign currency translation adjustment		—			(3.9	)		—
Retained earnings		4,241.9			4,484.1			3,812.9


Total shareholders’ equity		5,590.5			5,721.2			5,155.4


Total liabilities and shareholders’ equity	$	18,459.2		$	17,716.7		$	17,184.3

See notes to consolidated financial statements.

The Progressive Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)


Six Months Ended June 30,	2005			2004
(millions)
Cash Flows From Operating Activities

Net income	$	807.0		$	846.3
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		45.1			46.6
Amortization of fixed maturities		86.0			84.2
Amortization of restricted stock		15.6			11.6
Net realized (gains) losses on securities		(6.4	)		(56.1	)
Changes in:
Unearned premiums		395.8			326.0
Loss and loss adjustment expense reserves		204.9			348.7
Accounts payable, accrued expenses and other liabilities		87.4			173.1
Prepaid reinsurance premiums		(.7	)		(14.6	)
Reinsurance recoverables		(13.7	)		(14.7	)
Premiums receivable		(235.2	)		(243.0	)
Deferred acquisition costs		(36.5	)		(37.5	)
Income taxes		88.5			200.6
Tax benefit from exercise/vesting of stock-based compensation		23.8			29.0
Other, net		(38.8	)		6.8

Net cash provided by operating activities		1,422.8			1,707.0
Cash Flows From Investing Activities

Purchases:
Fixed maturities		(3,049.1	)		(3,430.5	)
Equity securities		(694.8	)		(464.4	)
Sales:
Fixed maturities		3,191.7			2,283.2
Equity securities		86.7			317.0
Maturities, paydowns, calls and other:
Fixed maturities		258.1			357.8
Equity securities		48.3			50.0
Net (purchases) sales of short-term investments		(889.4	)		(466.8	)
Net unsettled security transactions		79.1			32.0
Purchases of property and equipment		(82.9	)		(115.0	)

Net cash used in investing activities		(1,052.3	)		(1,436.7	)
Cash Flows From Financing Activities

Proceeds from exercise of stock options		28.1			36.4
Payment of debt		—			(200.0	)
Dividends paid to shareholders		(11.9	)		(10.8	)
Acquisition of treasury shares		(386.9	)		(86.0	)

Net cash used in financing activities		(370.7	)		(260.4	)

Increase (decrease) in cash		(.2	)		9.9
Cash, January 1		20.0			12.1

Cash, June 30	$	19.8		$	22.0

See notes to consolidated financial statements.

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, 2004.

The consolidated financial statements reflect all normal recurring adjustments which, in the opinion of management, were necessary for a fair statement of the results for the interim periods presented. The results of operations for the period ended June 30, 2005, are not necessarily indicative of the results expected for the full year.

Note 2 Stock-Based Compensation —The Company follows the provisions of Statement of Financial Accounting Standards (SFAS) 123, “Accounting for Stock-Based Compensation,” to account for its stock compensation activity in the financial statements. 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.

The change to the fair value based method of accounting under SFAS 123 was applied prospectively to all non-qualified stock option awards granted, modified, or settled after January 1, 2003. No stock options were granted after December 31, 2002. As a result, there is no compensation cost for stock options included in net income for 2003 and forward; however, compensation expense would have been recognized if the fair value based method had been used for all awards since the original effective date of SFAS 123 (January 1, 1995). Prior to 2003, the Company granted all options currently outstanding at an exercise price equal to the market price of the Company’s Common Shares at the date of grant and, therefore, under APB 25, no compensation expense was recorded.

The following table shows the effects on net income and earnings per share had the fair value based method been applied to all outstanding and unvested stock option awards for the periods presented. The Company used the modified Black-Scholes pricing model to calculate the fair value of the options awarded as of the date of grant.


(millions, except per share amounts)	Six months ended
	June 30,
	2005			2004
Net income, as reported	$	807.0		$	846.3
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all stock option awards, net of related tax effects		(1.2	)		(2.9	)

Net income, pro forma	$	805.8		$	843.4


Earnings per share
Basic – as reported	$	4.07		$	3.91
Basic – pro forma	$	4.07		$	3.90

Diluted – as reported	$	4.02		$	3.85
Diluted – pro forma	$	4.01		$	3.85

In 2003, the Company began issuing restricted stock awards. Compensation expense for restricted stock awards is recognized over the respective vesting periods. The current year expense is not representative of the effect on net income for future years since each subsequent year will reflect expense for additional awards.

Note 3 Supplemental Cash Flow Information — The Company paid income taxes of $286.0 million and $239.0 million during the six months ended June 30, 2005 and 2004, respectively. Total interest paid was $42.5 million and $49.2 million for the six months ended June 30, 2005 and 2004, respectively. Non-cash activity includes the liability for deferred restricted stock compensation and the changes in net unrealized gains (losses) on securities.

Note 4 Debt — Debt at June 30 consisted of:


(millions)	2005				2004
			Market				Market
	Cost		Value		Cost		Value
7.30% Notes due 2006	$	100.0	$	102.9	$	99.9	$	107.7
6.375% Senior Notes due 2012		347.8		386.0		347.6		376.7
7% Notes due 2013		148.9		173.4		148.8		167.4
6 5/8% Senior Notes due 2029		294.2		349.8		294.1		302.2
6.25% Senior Notes due 2032		393.7		444.6		393.6		390.4
Other debt		—		—		6.0		6.0

	$	1,284.6	$	1,456.7	$	1,290.0	$	1,350.4

Note 5 Comprehensive Income — Total comprehensive income was $492.1 million and $212.1 million for the quarters ended June 30, 2005 and 2004, respectively, and $770.0 million and $722.2 million for the six months ended June 30, 2005 and 2004, respectively.

Note 6 Dividends — On June 30, 2005, the Company paid a quarterly dividend of $.03 per Common Share to shareholders of record as of the close of business on June 10, 2005. The Board of Directors declared the dividend on April 15, 2005.

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 primary liability and physical damage insurance for automobiles and trucks owned by small businesses. The Company’s other-indemnity businesses primarily include writing professional liability insurance for community banks and managing the Company’s run-off businesses. The Company’s other-service businesses include providing insurance-related services, primarily processing business for Commercial Auto Insurance Procedures/Plans (CAIP), which are state-supervised plans serving the involuntary market. All revenues are generated from external customers.

Following are the operating results for the periods ended June 30:


(millions)	Three Months										Six Months
	2005					2004					2005					2004
			Pretax					Pretax					Pretax					Pretax
			Profit					Profit					Profit					Profit
	Revenues		(Loss)			Revenues		(Loss)			Revenues		(Loss)			Revenues		(Loss)
Personal Lines — Agency	$	2,015.9	$	271.0		$	1,945.9	$	273.2		$	3,991.3	$	550.8		$	3,817.3	$	567.7
Personal Lines — Direct		1,019.1		135.6			909.6		128.6			1,991.7		267.8			1,775.5		267.3

Total Personal Lines¹		3,035.0		406.6			2,855.5		401.8			5,983.0		818.6			5,592.8		835.0
Commercial Auto		412.0		71.2			370.4		71.0			807.2		155.7			717.2		158.8
Other-indemnity		6.8		3.0			8.1		(2.0	)		13.6		8.4			17.5		(1.8	)

Total underwriting operations		3,453.8		480.8			3,234.0		470.8			6,803.8		982.7			6,327.5		992.0
Other-service		10.3		3.7			11.9		5.3			21.5		9.5			24.5		12.4
Investments²		126.0		122.9			121.3		118.4			256.6		250.7			295.7		289.5
Interest expense		—		(20.7	)		—		(19.7	)		—		(41.5	)		—		(40.2	)
Other income (expense)³		—		—			.2		.2			—		—			—		—

	$	3,590.1	$	586.7		$	3,367.4	$	575.0		$	7,081.9	$	1,201.4		$	6,647.7	$	1,253.7


¹		Personal automobile insurance accounted for 92% of the total Personal Lines segment net premiums earned in the second quarter and first six months of 2005, compared to 93% in the second quarter and first six months of 2004.

²		Revenues represent recurring investment income and net realized gains (losses) on securities; pretax profit is net of investment expenses.

³		Represents the additional interest received during the second quarter on an income tax refund the Company received in February 2004.

The Company’s management uses underwriting margin and combined ratio as primary measures of underwriting profitability. The underwriting margin is the pretax profit (loss) [calculated as net premiums earned less losses and loss adjustment expenses, policy acquisition costs and other underwriting expenses] expressed as a percent of net premiums earned (i.e., revenues). The combined ratio is the complement of the underwriting margin. Following are the underwriting margins and combined ratios for the Company’s underwriting operations for the periods ended June 30:


	Three Months										Six Months
	2005					2004					2005					2004
	Under-					Under-					Under-					Under-
	writing			Combined		writing			Combined		writing			Combined		writing			Combined
	Margin			Ratio		Margin			Ratio		Margin			Ratio		Margin			Ratio
Personal Lines — Agency		13.4	%		86.6		14.0	%		86.0		13.8	%		86.2		14.9	%		85.1
Personal Lines — Direct		13.3			86.7		14.1			85.9		13.4			86.6		15.0			85.0
Total Personal Lines		13.4			86.6		14.1			85.9		13.7			86.3		14.9			85.1
Commercial Auto		17.3			82.7		19.2			80.8		19.3			80.7		22.1			77.9
Other-indemnity¹	NM			NM		NM			NM		NM			NM		NM			NM
Total underwriting operations		13.9			86.1		14.6			85.4		14.4			85.6		15.7			84.3


¹		Underwriting profit expressed as a percentage is not meaningful (NM) for the Company’s other-indemnity businesses due to the insignificant amount of premiums earned by such businesses.

Note 8 Litigation — The Company is named as defendant in various lawsuits arising out of its insurance operations. All legal actions relating to claims made under insurance policies are considered by the Company in establishing its loss and loss adjustment expense reserves.

In addition, the Company is named as defendant in a number of class action or individual lawsuits, the outcomes of which are uncertain at this time. These cases include those alleging damages as a result of the Company’s total loss evaluation methodology or handling, 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 adjusting of personal injury protection and medical payment claims, the use of preferred provider rates for payment of personal injury protection claims, the use of automated database vendors or products to assist in evaluating certain bodily injury claims, policy implementation and renewal procedures and cases challenging other aspects of the Company’s claims and marketing practices and business operations.

The Company plans to contest the outstanding suits vigorously, but may pursue settlement negotiations in appropriate cases. In accordance with accounting principles generally accepted in the United States of America (GAAP), the Company has established accruals for lawsuits as to which the Company has determined that it is probable that a loss has been incurred and the Company can reasonably estimate its potential exposure. Pursuant to GAAP, the Company has not established reserves for those lawsuits where the loss is not deemed probable and/or the Company is currently unable to estimate the potential exposure. If any one or more of these lawsuits results in a judgment against or settlement by the Company in an amount that is significantly in excess of the reserve established for such lawsuit (if any), the resulting liability could have a material effect 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, 2004.

Note 9 New Accounting Standards — On April 15, 2005, the Securities and Exchange Commission issued an amendment to Rule 4-01(a) of Regulation S-X, which became effective April 21, 2005, regarding the compliance date for SFAS 123 (revised 2004), “Share-Based Payment.” Pursuant to the amendment, companies are not required to prepare financial statements in accordance with SFAS 123R until the first quarter of the first fiscal year beginning after June 15, 2005, although earlier compliance is permitted. The Company plans to adopt SFAS 123R on January 1, 2006, and, as a result, estimates that net income will be reduced by approximately $.9 million in 2006. The Company will not incur any additional expense relating to currently outstanding stock options in years subsequent to 2006, since the final vesting date of stock options previously granted will be January 1, 2007. The Company does not currently intend to issue additional stock options.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

OVERVIEW

For the second quarter 2005, The Progressive Corporation and subsidiaries (the “Company”) generated strong profitability in each business segment and experienced modest growth. On a companywide basis, net premiums written increased 7% and the Company generated a combined ratio of 86.1 for the quarter. For the second quarter 2005, net income was $394.3 million, or $1.97 per share.

At June 30, 2005, the Company had 9.8 million policies in force on a companywide basis, 11% more than at the same time last year. Policy life expectancy, which is one measure of retention, increased in each of the Company’s auto tiers, as compared to the prior quarter, and was higher in most of the tiers as compared to the same time last year. The Company continued to experience a decrease in its premium per application on both new and renewal business, consistent with market pricing refinements in several states. The Company will continue to evaluate prudent tradeoffs of profit for growth and seek growth where it deems appropriate. The Company continues to take actions it believes will enhance its competitiveness and allow the Company to be ready for future growth if and when market conditions change.

The favorable underwriting margins benefited from 2.5 points of favorable reserve development in the second quarter 2005 and 3.0 points year-to-date. This favorable development reflects both actuarial adjustments, as well as other favorable development (e.g., claims settling for less than reserved). The Company is continuing to benefit from low accident frequency, consistent with the Company’s recent experience. In addition, the Company’s claims file quality and customer service remain strong and continue to meet or exceed the Company’s expectations.

The Company made no substantial changes in the allocation of its investment portfolio during the quarter. The Company’s investment portfolio produced a fully taxable equivalent total return of 2.3% for the second quarter 2005 and 1.9% year-to-date, with positive total returns in both fixed-income securities and common stocks for both periods. The Company continued to keep its credit quality high and exposure to interest rate risk low. At June 30, 2005, the fixed-income portfolio duration was 2.4 years with a weighted average credit quality of AA.

FINANCIAL CONDITION

Capital Resources and Liquidity

The Company has substantial capital resources and believes it has sufficient borrowing capacity and other capital resources to support current and anticipated growth and satisfy scheduled debt and interest payments. The Company’s existing debt covenants do not include any rating or credit triggers.

Progressive’s insurance operations create liquidity by collecting and investing premiums from new and renewal business in advance of paying claims. For the six months ended June 30, 2005, operations generated a positive cash flow of $1,422.8 million. Operating cash flows decreased 17% from the first six months last year, primarily reflecting a one-time IRS refund in the first quarter 2004 and timing differences associated with the payment of accrued expenses. During the second quarter 2005, the Company repurchased 2.34 million Common Shares at a total cost of $220.5 million (average cost of $94.22 per share), bringing total year-to-date repurchases to 4.24 million shares, or $386.9 million (average cost of $91.19 per share).

Commitments and Contingencies

In June 2005, the Company completed the conversion of a building purchased in Austin, Texas into a call center at an estimated total cost of $40 million. The Company is currently constructing a data center in Colorado Springs, Colorado at an estimated total cost of $67 million. Construction on this data

center is expected to be completed in 2006 and the facility will become operational in 2007. The Company is also interested in the acquisition of additional land for future development to support corporate operations near its current corporate headquarters with the intent to begin construction in 2006. All such projects, including the additional service centers discussed below, are, or will be, funded through operating cash flows.

The Company currently has in operation a total of 22 centers that provide concierge-level claims service, including 2 facilities that opened in the second quarter 2005. The Company has announced a significant expansion of this service and is currently looking for additional sites. The Company expects to more than double the number of sites in the next two years, with a total of approximately 50 additional facilities opened over the next several years, including four sites expected to be opened in the fourth quarter 2005.

Off-Balance-Sheet Arrangements

Except for open investment funding commitments, operating leases and service agreements discussed in the notes to the financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, the Company does not have any off-balance-sheet leverage.

Contractual Obligations

During the second quarter 2005, the Company’s contractual obligations did not change materially from those discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

RESULTS OF OPERATIONS

Underwriting Operations

Growth


	Growth over prior year
	Quarter			Year-to-date
Net premiums written		7	%		8	%
Net premiums earned		7	%		8	%
Policies in force (at June 30)	NA				11	%

NA = Not Applicable

Companywide net premiums written represent the premiums generated from policies written during the period less any premiums ceded to reinsurers. Net premiums earned, which are a function of the premiums written in the current and prior periods, are earned into income using a daily earnings convention.

The Company analyzes its growth by reviewing rate levels, new policies and customers, and the retention characteristics of its books of business. During the second quarter 2005, the Company filed 49 auto rate revisions in various states, bringing the total to 91 for the year. The overall effect of these revisions was a slight decrease in rates for the year. The Company will continue to assess market conditions on a state-by-state basis, will consider rate reductions in states where it will be able to maintain an attractive combination of profit and growth while still maintaining service quality, and will seek selective rate increases where it is necessary to maintain rate adequacy. New business applications increased slightly in both the Company’s Personal Lines and Commercial Auto businesses for the second quarter 2005 and year-to-date.

Customer retention is another factor that affects growth. 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. The Company has seen overall increases in PLE for its auto business in both the Agency and Direct channels for the current quarter, as compared to the prior quarter, although several tiers in the Direct channel were lower than the same period in 2004.

Overall, the Company views these retention trends as favorable. Another way to analyze retention is through customer relationship life expectancy (i.e., focusing on the customer rather than the policy in force). The Company is beginning to develop customer relationship life expectancy estimates for both new and renewal business at a detailed segment level under varying market conditions. With an increasing percentage of the Company’s premium coming from renewal business, increasing retention remains an area where the Company is continuing to focus its efforts.

Profitability

Profitability for the Company’s underwriting operations is defined by pretax underwriting profit, which is calculated as net premiums earned less losses and loss adjustment expenses, policy acquisition costs and other underwriting expenses. The Company also uses underwriting profit margin, which is underwriting profit expressed as a percent of net premiums earned, to analyze the Company’s results. For the three and six month periods ended June 30, the Company’s underwriting profitability measures were as follows:


	Three Months											Six Months
(millions)	2005					2004						2005					2004
	Underwriting					Underwriting						Underwriting					Underwriting
	Profit (Loss)					Profit (Loss)						Profit (Loss)					Profit (Loss)
	$		Margin			$			Margin			$		Margin			$			Margin
Personal Lines - Agency	$	271.0		13.4	%	$	273.2			14.0	%	$	550.8		13.8	%	$	567.7			14.9	%
Personal Lines - Direct		135.6		13.3			128.6			14.1			267.8		13.4			267.3			15.0

Total Personal Lines		406.6		13.4			401.8			14.1			818.6		13.7			835.0			14.9
Commercial Auto		71.2		17.3			71.0			19.2			155.7		19.3			158.8			22.1
Other-indemnity		3.0	NM				(2.0	)	NM				8.4	NM				(1.8	)	NM

Total underwriting operations	$	480.8		13.9	%	$	470.8			14.6	%	$	982.7		14.4	%	$	992.0			15.7	%


NM=Not Meaningful

Further underwriting results for the Company’s Personal Lines businesses, including its channel components, the Commercial Auto business and other-indemnity businesses, were as follows (details discussed below):

(dollars in millions)


	THREE MONTHS ENDED								SIX MONTHS ENDED
	JUNE 30,								JUNE 30,
	2005		2004			Change			2005		2004			Change
NET PREMIUMS WRITTEN
Personal Lines – Agency	$	2,066.3	$	2,007.5			3	%	$	4,148.1	$	3,964.6			5	%
Personal Lines – Direct		1,038.0		928.3			12	%		2,119.0		1,866.2			14	%

Total Personal Lines		3,104.3		2,935.8			6	%		6,267.1		5,830.8			7	%
Commercial Auto		484.0		419.7			15	%		920.3		795.9			16	%
Other – indemnity		5.8		6.1			(5	)%		11.5		12.2			(6	)%

Total underwriting operations	$	3,594.1	$	3,361.6			7	%	$	7,198.9	$	6,638.9			8	%


NET PREMIUMS EARNED
Personal Lines – Agency	$	2,015.9	$	1,945.9			4	%	$	3,991.3	$	3,817.3			5	%
Personal Lines – Direct		1,019.1		909.6			12	%		1,991.7		1,775.5			12	%

Total Personal Lines		3,035.0		2,855.5			6	%		5,983.0		5,592.8			7	%
Commercial Auto		412.0		370.4			11	%		807.2		717.2			13	%
Other – indemnity		6.8		8.1			(16	)%		13.6		17.5			(22	)%

Total underwriting operations	$	3,453.8	$	3,234.0			7	%	$	6,803.8	$	6,327.5			8	%


PERSONAL LINES – AGENCY
Loss and loss adjustment expense ratio		65.9		65.4		(.5) pts.				65.5		65.0		(.5) pts.
Underwriting expense ratio		20.7		20.6		(.1) pts.				20.7		20.1		(.6) pts.

Combined ratio		86.6		86.0		(.6) pts.				86.2		85.1		(1.1) pts.


PERSONAL LINES – DIRECT
Loss and loss adjustment expense ratio		66.4		64.5		(1.9) pts.				66.6		64.1		(2.5) pts.
Underwriting expense ratio		20.3		21.4		1.1 pts.				20.0		20.9		.9 pts.

Combined ratio		86.7		85.9		(.8) pts.				86.6		85.0		(1.6) pts.


PERSONAL LINES – TOTAL
Loss and loss adjustment expense ratio		66.1		65.0		(1.1) pts.				65.8		64.7		(1.1) pts.
Underwriting expense ratio		20.5		20.9		.4 pts.				20.5		20.4		(.1) pts.

Combined ratio		86.6		85.9		(.7) pts.				86.3		85.1		(1.2) pts.


COMMERCIAL AUTO
Loss and loss adjustment expense ratio		62.3		61.3		(1.0) pts.				60.5		58.8		(1.7) pts.
Underwriting expense ratio		20.4		19.5		(.9) pts.				20.2		19.1		(1.1) pts.

Combined ratio		82.7		80.8		(1.9) pts.				80.7		77.9		(2.8) pts.


TOTAL UNDERWRITING OPERATIONS
Loss and loss adjustment expense ratio		65.6		64.6		(1.0) pts.				65.2		64.0		(1.2) pts.
Underwriting expense ratio		20.5		20.8		.3 pts.				20.4		20.3		(.1) pts.

Combined ratio		86.1		85.4		(.7) pts.				85.6		84.3		(1.3) pts.


COMPANYWIDE ACCIDENT YEAR
Loss and loss adjustment expense ratio		68.1		65.7		(2.4) pts.				68.2		64.2		(4.0) pts.


ACTUARIAL ADJUSTMENTS¹
Favorable/(Unfavorable)
Prior accident years	$	32.6	$	14.3					$	69.0	$	25.7
Current accident year		13.9		(8.5	)					11.0		(8.4	)

Calendar year actuarial adjustment	$	46.5	$	5.8			702%		$	80.0	$	17.3			362%


PRIOR ACCIDENT YEARS DEVELOPMENT
Favorable/(Unfavorable)
Actuarial adjustment	$	32.6	$	14.3					$	69.0	$	25.7
All other development		55.0		22.8						133.5		(11.5	)

Total development	$	87.6	$	37.1			136%		$	202.5	$	14.2			1326%


POLICIES IN FORCE	June		June
(in thousands)	2005		2004		Change
Agency – Auto		4,492		4,187		7	%
Direct – Auto		2,271		1,996		14	%
Other Personal Lines²		2,612		2,252		16	%

Total Personal Lines		9,375		8,435		11	%

Commercial Auto		455		404		13	%



¹		Represents the net changes made by the Company’s actuarial staff to both current and prior accident year reserves based on regularly scheduled reviews. See the Company’s Report on Loss Reserving Practices, filed in the Company’s Current Report on Form 8-K on June 28, 2005, for further discussion.

²		Includes insurance for motorcycles, recreation vehicles, mobile homes, watercraft, snowmobiles and similar items.

Loss and Loss Adjustment Expense Reserves

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, as well as expenses needed to adjust or settle claims. These costs include an estimate for costs related to assignments, based on current and prior writings, under state-mandated automobile insurance programs. Claims costs are influenced by changes in loss severity and frequency, among other factors. Accordingly, anticipated changes in these factors are taken into account when the Company establishes premium rates and loss reserves.

During the second quarter and first six months of 2005, the Company continued to report favorable loss ratios. Auto accident frequency remained low. In general, the Company continues to experience the same frequency trends as the rest of the industry in nearly every coverage. The Company will continue to analyze these trends to distinguish changes in its experience from external factors versus those resulting from shifts in the mix of the Company’s business.

The Company experienced an increase in severity during the second quarter 2005, compared to the same period last year. The Company’s increase in severity for the most recent quarter was greater than that reported for the industry in the first quarter 2005. The year-over-year increase in bodily injury severity for the second quarter 2005 was greater than that experienced by the Company in the first quarter of 2005, but less than that experienced in the second half of 2004. Personal injury protection severity increased in the second quarter 2005, but at a lower rate than the last several quarters. Property damage severity was also higher than the second quarter last year. The Company is seeing severity trends in most coverages no longer being offset entirely by lower frequency. The Company plans to continue to be diligent in its efforts to recognize trend when setting rates and establishing loss reserves.

The Company monitors physical damage trend in evaluating its claims handling performance and capacity. During the second quarter 2005, the Company maintained adequacy in its claims quality, as indicated by the Company’s internal audit of claims files. The result of achieving more consistency in claims quality and process allowed the Company to deploy more effectively claims personnel to needed areas.

During the second quarter and first six months of 2005, the Company experienced 2.5 points and 3.0 points, respectively, of favorable loss reserve development, compared to 1.1 points and .2 points for the same periods last year. Total development consists both of actuarial adjustments based on regularly scheduled actuarial reviews and “all other development” (e.g., claims settling for more or less than reserved, emergence of unreported claims at rates different than reserved and changes in reserve estimates by claims representatives). The continued recognition of lower severity for prior accident years than had been previously estimated contributed to the favorable prior year reserve development in 2005. For 2004, the total favorable development was partially offset by unfavorable development in the Company’s personal auto product due to a greater number of late reported claims than anticipated. The Company continues to increase the analysis intensity of its loss reserves to increase accuracy and further understand its business. A detailed discussion of the Company’s loss reserving practices can be found in its Report on Loss Reserving Practices, which was filed in a Form 8-K on June 28, 2005.

Underwriting Expenses

Other underwriting expenses and policy acquisition costs expressed as a percent of premiums earned were slightly lower for the second quarter 2005, as compared to the same period last year, primarily due to the accrual for proposed settlements in several class actions lawsuits in 2004. On a year-to-date basis, the expense ratio was .1 points higher than last year, reflecting an increase in advertising spending associated with the rollout of Drive^®Insurance from Progressive, the new Agency brand, partially offset by the litigation accruals discussed above. In addition, the “other underwriting expenses,” as shown on the income statement, reflect increases in salaries and other infrastructure costs consistent with premium growth.

Personal Lines

The Company’s Personal Lines business units write insurance for private passenger automobiles and recreation vehicles, and represent 87% of the Company’s total year-to-date net premiums written. Personal Lines net premiums written and earned both grew 6% for the second quarter and 7% for the first six months of 2005, compared to the same periods last year. The Personal Lines business is comprised of the Agency business and the Direct business.

The Agency Business


	Growth over prior year
	Quarter			Year-to-date
Net premiums written		3	%		5	%
Net premiums earned		4	%		5	%
Auto policies in force (at June 30)	NA				7	%


NA=Not Applicable

The Agency business includes business written by more than 30,000 independent insurance agencies that represent the Company, as well as brokerages in New York and California. The Agency auto business saw a decrease in new applications in the second quarter and first six months of 2005 (about 3% and 1%, respectively), as compared to the same periods last year. Premiums per application were lower on both new and renewal business. The conversion rate (the percentage of quotes resulting in a sale) was down slightly on a minor increase in the number of quotes. The Company has seen retention lengthen modestly month over month in all of the Agency auto tiers throughout 2005.

The Agency expense ratio increased .1 points and .6 points for the second quarter and first six months of 2005, respectively, as compared to the same periods last year, primarily due to a substantial increase in advertising costs as the Company continues to roll out its Drive Insurance from Progressive brand. Drive commercials are now airing nationally. The Company is hopeful that greater brand identity, coupled with its product offerings, systems and claims and customer service, will support growth in the Agency channel.

The Direct Business


	Growth over prior year
	Quarter			Year-to-date
Net premiums written		12	%		14	%
Net premiums earned		12	%		12	%
Auto policies in force (at June 30)	NA				14	%


NA=Not Applicable

The Direct business includes business written directly by the Company over the telephone and on the Internet. The Direct business experienced a strong increase in new applications in the second quarter

and first six months of 2005 (about 13%). Premiums per application were lower on both new and renewal business. The conversion rate on the Direct business is down from last year; however, the number of quotes has risen. The effectiveness of the Progressive Direct ^SM advertising campaign seems to have resulted in an increase in total quotes. The use of the Internet, either for complete or partial quoting, continues to grow and is the most significant source of the new business activity in the Direct channel. Direct auto has also seen a modest month over month lengthening in retention throughout 2005 in all but one of the Direct auto tiers.

The Direct expense ratio decreased 1.1 points and .9 points for the second quarter and first six months of 2005, respectively, as compared to the same periods last year, primarily reflecting a greater percentage of renewal business. Advertising costs in the Direct business did not increase at the same rate as earned premiums for both the second quarter and first six months of 2005, thus having a favorable effect on the expense ratio. The Progressive Direct marketing efforts continue to emphasize the ease of doing business with Progressive and credible price comparisons provided to consumers. The Company advertises its Direct brand on a national basis and supplements that coverage by local market media campaigns in over 100 designated market areas.

Commercial Auto


	Growth over prior year
	Quarter			Year-to-date
Net premiums written		15	%		16	%
Net premiums earned		11	%		13	%
Auto policies in force (at June 30)	NA				13	%


NA=Not Applicable

The Company’s Commercial Auto business unit writes primary liability and physical damage insurance for automobiles and trucks owned by small businesses, with the majority of its customers insuring three or fewer vehicles. The Commercial Auto business represents 13% of the Company’s total year-to-date net premiums written. Although Commercial Auto differs from Personal Lines auto in its customer base and products written, both businesses require the same fundamental skills, including disciplined underwriting and pricing, as well as excellent claims service. The Company’s Commercial Auto business is primarily distributed through the independent agency channel.

The Company experienced solid growth in Commercial Auto during the quarter. The Commercial Auto business expanded into one new state during the year, bringing the total number of markets to 46, and plans on entering one more during 2005. Approximately 49% of the Company’s year-to-date Commercial Auto net premiums written were generated in the light and local commercial auto markets, which include autos, vans and pick-up trucks used by artisans, such as contractors, landscapers and plumbers, 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. There are many similarities between the Company’s Commercial Auto and Personal Lines auto businesses; however, since the Commercial Auto policies have higher limits (up to $1 million) than Personal Lines auto, the Company analyzes the limit differences in this product more closely.

New applications increased about 5% in the Commercial Auto business over both the second quarter and first six months of 2004. Commercial Auto is increasing its offering of twelve-month term policies, primarily in the specialty commercial auto market, which has a favorable effect on the premiums per application. Six-month term restrictions will remain in selected markets. Retention has lengthened slightly throughout 2005 in all Commercial Auto tiers. The expense ratio in this business increased .9 points and 1.1 points from the second quarter and first six months, respectively, last year, partially due

to the branding of Commercial Auto under Drive Insurance from Progressive, as well as greater involuntary market assessments in the first quarter 2005, as compared to the prior year.

Other Businesses

Indemnity

The Company’s other-indemnity businesses, which represent less than .2% of year-to-date net premiums written, primarily include writing professional liability insurance for community banks and the Company’s run-off businesses. These businesses generated an underwriting profit (loss) of $3.0 million and $8.4 million for the second quarter and first six months of 2005, respectively, compared to $(2.0) million and $(1.8) million, respectively, for the same periods last year. The increase in underwriting profit is primarily due to favorable reserve development in 2005, compared to unfavorable reserve development last year.

Service

The other-service businesses primarily provide policy issuance and claims adjusting services for the state Commercial Auto Insurance Procedures/Plans (CAIP) businesses, which are state-supervised plans serving the involuntary market. These service businesses generated an operating profit of $3.7 million and $9.5 million for the second quarter and first six months of 2005, respectively, compared to $5.3 million and $12.4 million for the same periods last year, reflecting declining CAIP business.

Investments

Portfolio Allocation

The composition of the investment portfolio at June 30 was:


					Gross					% of
			Gross		Unrealized			Market		Total			Duration
(millions)	Cost		Unrealized Gains		Losses			Value		Portfolio			(Years)		Rating¹

2005
Fixed maturities	$	8,566.6	$	120.5	$	(49.1	)	$	8,638.0		61.7	%		3.0	AA+
Preferred stocks		1,146.7		19.1		(12.3	)		1,153.5		8.3			2.2		A-
Short-term investments²		2,266.0		.7		—			2,266.7		16.2			<1	AA+

Total fixed income		11,979.3		140.3		(61.4	)		12,058.2		86.2			2.4	AA
Common equities		1,402.2		542.8		(8.5	)		1,936.5		13.8		NM		NM

Total portfolio³	$	13,381.5	$	683.1	$	(69.9	)	$	13,994.7		100.0	%		2.4	AA

2004
Fixed maturities	$	9,651.3	$	124.0	$	(95.9	)	$	9,679.4		70.8	%		3.3	AA+
Preferred stocks		846.6		15.5		(15.4	)		846.7		6.2			3.0	BBB+
Short-term investments²		1,114.8		—		—			1,114.8		8.2			<1	AA-

Total fixed income		11,612.7		139.5		(111.3	)		11,640.9		85.2			3.0	AA
Common equities		1,601.8		430.8		(5.8	)		2,026.8		14.8		NM		NM

Total portfolio³	$	13,214.5	$	570.3	$	(117.1	)	$	13,667.7		100.0	%		3.0	AA


NM = Not Meaningful

¹		Credit quality ratings are assigned by nationally recognized securities rating organizations. To calculate the weighted average credit quality ratings, the Company weights individual securities based on market value and assigns a numeric score to each credit rating based on a scale from 0-5.

²		Short-term investments include Eurodollar deposits, commercial paper, auction rate securities and other investments, which are expected to be liquidated within one year.

³		The Company had net unsettled security acquisitions of $111.0 million and $107.1 million at June 30, 2005 and 2004, respectively. June 30, 2005 and 2004 totals include $1.0 billion and $1.4 billion, respectively, of securities in the portfolio of a consolidated, non-insurance subsidiary of the holding company.

As of June 30, 2005, the Company’s portfolio had $613.2 million of net unrealized gains, compared to $453.2 million at June 30, 2004 and $669.4 million at December 31, 2004. During the second quarter 2005, the fixed-income portfolio’s valuation increased $115.2 million reflecting the decline in market interest rates during the period. The common stock portfolio had an increase of $35.6 million during the second quarter, reflecting movement in the market.

Fixed-Income Securities

The fixed-income portfolio, which includes fixed-maturity securities, preferred stocks and short-term investments, had a duration of 2.4 years at June 30, 2005, compared to 2.9 years at December 31, 2004, and 3.0 years at June 30, 2004. During the second quarter 2005, the Company increased its holdings of short-term investments to reduce the sensitivity of the portfolio’s value to interest rate changes. After adjustments to exclude unsettled securities transactions, the allocation of fixed-income securities at June 30, 2005, was 86.1% of the total portfolio, compared to 85.1% at June 30, 2004.

The fixed-maturity securities and short-term investments, as reported in the balance sheets, were comprised of the following:


(millions)	June 30, 2005				June 30, 2004
Investment-grade fixed maturities:
Short/intermediate term	$	10,661.4	97.8	%	$	10,550.5	97.7	%
Long term¹		58.9	.5			115.2	1.1
Non-investment-grade fixed maturities		184.4	1.7			128.6	1.2

Total	$	10,904.7	100.0	%	$	10,794.2	100.0	%


¹		Long term includes securities with maturities of 10 years or greater.

Included in the fixed-income portfolio are $2.6 billion of asset-backed securities. These asset-backed securities are comprised of residential mortgage-backed ($.6 billion), commercial mortgage-backed ($1.1 billion) and other asset-backed ($.9 billion) securities, with a total duration of 1.9 years and a weighted average credit quality of AAA-. The largest component of other asset-backed securities are automobile receivable loans ($.5 billion) and home equity loans ($.2 billion). Substantially all asset-backed securities are liquid with available market quotes and contain no residual interests (the most subordinated class in a pool of securitized assets).

Common Equities

Common equities, as reported in the balance sheets, were comprised of the following:


(millions)	June 30, 2005				June 30, 2004
Common stocks	$	1,913.8	98.8	%	$	1,988.7	98.1	%
Other risk investments		22.7	1.2			38.1	1.9

Total common equities	$	1,936.5	100.0	%	$	2,026.8	100.0	%

Common equities comprised 13.9% and 14.9% of the total portfolio, excluding the net unsettled securities transactions, at June 30, 2005 and 2004, respectively. 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 Russell 1000, the Company held approximately 70% of the common stocks comprising the index at June 30, 2005. 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 focus on changes in value of the equity portfolio relative to the change in value of the index, as noted in the following table:


	Total Return¹
	For the six months ended
	June 30,
	2005			2004
Common Stocks		.4	%		3.2	%
Russell 1000 Index		.1	%		3.3	%


¹		Includes 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 $4.9 million of open funding commitments at June 30, 2005.

Trading Securities

Trading securities are entered into for the purpose of near-term profit generation. At June 30, 2005 and 2004, the Company did not have any trading securities, with the exception of the derivatives classified as trading discussed below. The Company had no trading security gains or losses during the second quarters and first six months of 2005 and 2004.

Derivative Instruments

From time to time, the Company invests in derivative instruments, which are primarily used to manage the risks 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 June 30, 2005 or 2004. The Company recognized no gains or losses during the second quarter and first six months of 2005 or 2004 on risk management derivatives.

Derivative instruments may also be used for trading purposes or classified as trading derivatives due to characteristics of the transaction. During the second quarter 2005, the Company sold three credit default protection derivatives, on three separate issuers, which were matched with Treasury securities with an equivalent principal and maturity to replicate cash bond positions. The Company held similar investments in 2004. These positions had a notional amount of $65.0 million at June 30, 2005, and $128.5 million at June 30, 2004. For the second quarter and first six months of 2005, these positions generated a net gain of $1.9 million, compared to net losses of $3.4 million and $3.0 million for the second quarter and first six months of 2004, respectively. The amount and results of the derivative and Treasury positions are immaterial to the Company’s financial condition, cash flows and results of operations and are reported as part of the available-for-sale portfolio, with the net gains (losses) reported as a component of net realized gains (losses) on securities .

Investment Income

Recurring investment income (interest and dividends before investment and interest expenses) increased 4% for both the second quarter and first six months of 2005, compared to the same periods last year, reflecting portfolio growth and a slight increase in the portfolio’s yield.

The Company reports total return to reflect more accurately management’s philosophy of the portfolio and evaluation of the investment results. The fully taxable equivalent (FTE) total return includes recurring investment income grossed up for certain tax-preferential investments (e.g., municipal debt) and net realized gains (losses) and changes in unrealized gains (losses) on securities. The Company reported the following investment results for the periods ended June 30:


	Three Months						Six Months
	2005			2004			2005			2004
Pretax recurring investment book yield		4.0	%		3.9	%		3.9	%		3.9	%
Weighted average FTE book yield		4.7	%		4.5	%		4.6	%		4.5	%
FTE total return:
Fixed-income securities		2.4	%		(1.4	)%		2.2	%		.8	%
Common stocks		2.1	%		1.4	%		.4	%		3.2	%
Total portfolio		2.3	%		(.9	)%		1.9	%		1.2	%

Realized Gains/Losses

The components of net realized gains (losses) for the periods ended June 30 were:


(millions)	Three Months						Six Months
	2005			2004			2005			2004
Gross realized gains:
Fixed maturities	$	22.1		$	10.9		$	40.2		$	58.4
Preferred stocks		—			—			—			7.6
Common equities		.9			6.6			7.2			22.6
Short-term investments		—			.1			—			.1

		23.0			17.6			47.4			88.7

Gross realized losses:
Fixed maturities		18.5			10.3			24.2			11.4
Preferred stocks		—			—			—			—
Common equities		8.3			10.6			16.8			21.0
Short-term investments		—			.1			—			.2

		26.8			21.0			41.0			32.6

Net realized gains (losses) on securities:
Fixed maturities		3.6			.6			16.0			47.0
Preferred stocks		—			—			—			7.6
Common equities		(7.4	)		(4.0	)		(9.6	)		1.6
Short-term investments		—			—			—			(.1	)

	$	(3.8	)	$	(3.4	)	$	6.4		$	56.1

Per share	$	(.01	)	$	(.01	)	$	.02		$	.17

The gross realized gains and losses were primarily the result of market driven interest rate movements, sector allocation changes and the rebalancing of the common stock portfolio to the Russell 1000 Index, as part of ordinary investment operations. Gross realized losses also include write-downs of both fixed-income and equity securities determined to be other-than-temporarily impaired.

Other-Than-Temporary Impairment (OTI)

From time to time, 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.

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 OTI write-down activity for the periods ended June 30 is as follows:


	Three Months						Six Months
(millions)			Write-downs		Write-downs				Write-downs		Write-downs
	Total		On Securities		On Securities		Total		On Securities		On Securities
	Write-downs		Sold		Held at Period End		Write-downs		Sold		Held at Period End
2005
Fixed income	$	9.0	$	3.8	$	5.2	$	10.0	$	3.8	$	6.2
Common equities		1.2		—		1.2		1.6		—		1.6

Total portfolio	$	10.2	$	3.8	$	6.4	$	11.6	$	3.8	$	7.8

2004
Fixed income	$	—	$	—	$	—	$	—	$	—	$	—
Common equities		.9		—		.9		.9		—		.9

Total portfolio	$	.9	$	—	$	.9	$	.9	$	—	$	.9

The following table stratifies the gross unrealized losses in the Company’s portfolio at June 30, 2005, 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.


(millions)	Total Gross		Decline of Investment Value
	Unrealized
Total Portfolio	Losses		>15%		>25%		>35%		>45%
Unrealized loss for 1 quarter	$	9.7	$	.1	$	—	$	—	$	—
Unrealized loss for 2 quarters		9.8		.2		.2		.2		.2
Unrealized loss for 3 quarters		14.0		—		—		—		—
Unrealized loss for 1 year or longer		36.4		.1		.1		.1		—

	$	69.9	$	.4	$	.3	$	.3	$	.2

For example, if the Company had decided to write down all securities in an unrealized loss position for one year or longer where the securities decline in value exceeded 25%, the Company would have recognized an additional $.1 million of OTI losses in the income statement.

The Company also reviews securities in unrealized loss positions in accordance with Emerging Issues Task Force 03-1, “The Meaning of Other-Than-Temporary Impairments.” At June 30, 2005, the gross unrealized loss of $69.9 million (on securities with a market value of $4,676.0 million) included $36.4 million of unrealized losses on securities in a loss position for one year or longer (market value of $1,809.8 million). The Company determined that none of these securities met the criteria for other-than-temporary impairment write-downs.

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.

Repurchase Transactions

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 six months ended June 30, 2005, the Company’s largest single outstanding balance of repurchase commitments was $1.2 billion open on two separate business days, with an average daily balance of $.6 billion for the year. The Company had no open repurchase commitments at June 30, 2005 and 2004. The Company earned income of $1.0 million and $.6 million on repurchase commitments during the three months ended June 30, 2005 and 2004, respectively, and earned $1.5 million and $.9 million for the six months ended June 30, 2005 and 2004, respectively.

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 changes in economic conditions (including changes in interest rates and financial markets); the accuracy and adequacy of the Company’s pricing and loss reserving methodologies; pricing competition and other initiatives by competitors; the Company’s ability to obtain regulatory approval for requested rate changes and the timing thereof; the effectiveness of the Company’s advertising campaigns; legislative and regulatory developments; disputes relating to intellectual property rights; the outcome of litigation pending or that may be filed 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; the Company’s ability to maintain the uninterrupted operation of its facilities, systems (including information technology systems) and business functions; 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 one or more contingencies. Reported results, therefore, may appear to be volatile in certain accounting periods.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The duration of the financial instruments subject to interest rate risk was 2.4 years at June 30, 2005, compared to 2.9 at December 31, 2004. The weighted average beta of the equity portfolio was 1.0 at June 30, 2005 and December 31, 2004. 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, 2004.

As a supplement to the sensitivity analysis, as discussed in the Annual Report on Form 10-K for the year ended December 31, 2004, the following are estimates of the Value-at-Risk (VaR) of the Company’s fixed-income and equity portfolios:


	VaR
(millions)	June 30,			December 31,
	2005			2004
Fixed-income portfolio	$	(164.9	)	$	(180.1	)
% of portfolio		(1.4	)%		(1.6	)%

Common equity portfolio	$	(143.7	)	$	(130.2	)
% of portfolio		(7.4	)%		(7.0	)%

Total portfolio	$	(208.8	)	$	(222.1	)
% of portfolio		(1.5	)%		(1.7	)%

The model results represent the maximum expected loss in a three-month period at a 95% confidence level. The VaR of the total investment portfolio is less than the sum of the two components (fixed income and equity) due to the benefit of diversification.

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.

The Chief Executive Officer and the Chief Financial Officer reviewed and evaluated the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on 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 as of the end of the period covered by this report.

There has been no change in the Company’s internal control over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds


ISSUER PURCHASES OF EQUITY SECURITIES
					Total Number of		Maximum Number of
					Shares Purchased as		Shares That May Yet
					Part of Publicly		Be Purchased Under
2005	Total Number of		Average Price Paid		Announced Plans or		the Plans or
Calendar Month	Shares Purchased		per Share		Programs		Programs

April		907,900	$	90.55		7,624,634		7,375,366
May		756,800		94.62		8,381,434		6,618,566
June		675,100		98.71		9,056,534		5,943,466

Total		2,339,800	$	94.22

In April 2003, the Board of Directors authorized the repurchase of up to 15,000,000 Common Shares. The Company may purchase its shares from time to time, in the open market or otherwise, when opportunities exist to buy at attractive prices or for purposes which are otherwise in the best interest of the Company.

Item 6. Exhibits

See exhibit index on page 26.

EXHIBIT INDEX


					If Incorporated by
					Reference,
Exhibit No.					Documents with
Under	Form 10-Q				Which Exhibit was
Reg. S-K,	Exhibit				Previously Filed
Item 601	Number			Description of Exhibit	with SEC
(12)		12		Computation of Ratio of Earnings to Fixed Charges	Filed herewith

(31)		31	(A)	Certification of the Principal Executive Officer, Glenn M. Renwick, of The Progressive Corporation, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith

(31)		31	(B)	Certification of the Principal Financial Officer, W. Thomas Forrester, of The Progressive Corporation, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith

(32)		32	(A)	Certification of the Principal Executive Officer, Glenn M. Renwick, of The Progressive Corporation, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith

(32)		32	(B)	Certification of the Principal Financial Officer, W. Thomas Forrester, of The Progressive Corporation, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith


		THE PROGRESSIVE CORPORATION (Registrant)

Date: August 8, 2005	BY:	/s/ W. Thomas Forrester

		W. Thomas Forrester
		Vice President and Chief Financial Officer

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