-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RWqGM1XGo1GhC1I7Pt2ZlCpEHmW5tRg00UqLGzvYSC6mAeNk26EYCCL0Ab33UgWb T8dKSpmcngKVoqM6OHdf+g== 0000950152-99-004215.txt : 19990512 0000950152-99-004215.hdr.sgml : 19990512 ACCESSION NUMBER: 0000950152-99-004215 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990511 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROGRESSIVE CORP/OH/ CENTRAL INDEX KEY: 0000080661 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 340963169 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09518 FILM NUMBER: 99616623 BUSINESS ADDRESS: STREET 1: 6300 WILSON MILLS RD CITY: MAYFIELD VILLAGE STATE: OH ZIP: 44143 BUSINESS PHONE: 4404615000 MAIL ADDRESS: STREET 1: 6300 WILSON MILLS RD CITY: MAYFIELD VILLAGE STATE: OH ZIP: 44143 10-Q 1 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 March 31, 1999 --------------------------------------------- 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: 72,899,802 outstanding at April 30, 1999 2 PART I - FINANCIAL INFORMATION ------------------------------ ITEM 1. Financial Statements. The Progressive Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Three months ended March 31, 1999 1998 % Change ---------------------------- --------------------------------------------------- (millions - except per share amounts) NET PREMIUMS WRITTEN $1,553.7 $1,345.3 15 ===================================== REVENUES Premiums earned $1,322.1 $1,145.7 15 Investment income 74.7 72.0 4 Net realized gains on security sales 2.0 26.7 (93) Service revenues 11.2 10.5 7 ------------------------------------- Total revenues 1,410.0 1,254.9 12 ------------------------------------- EXPENSES Losses and loss adjustment expenses 913.9 784.2 17 Policy acquisition costs 175.0 155.9 12 Other underwriting expenses 141.7 110.9 28 Investment expenses 2.1 2.5 (16) Service expenses 10.0 9.4 6 Interest expense 16.8 16.1 4 ------------------------------------- Total expenses 1,259.5 1,079.0 17 ------------------------------------- NET INCOME Income before income taxes 150.5 175.9 (14) Provision for income taxes 45.2 55.8 (19) ------------------------------------- Net income $105.3 $120.1 (12) ===================================== COMPUTATION OF EARNINGS PER SHARE Basic: Average shares outstanding 72.7 72.4 -- ===================================== Per share $1.45 $1.66 (13) ===================================== Diluted: Average shares outstanding 72.7 72.4 -- Net effect of dilutive stock options 2.0 3.5 (43) ------------------------------------- Total equivalent shares 74.7 75.9 (2) ===================================== Per share $1.41 $1.58 (11) =====================================
See notes to consolidated financial statements. 2 3 The Progressive Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS (unaudited)
March 31, December 31, --------------------------- ------------------ 1999 1998 1998 ---------------------------- ------------------ (millions) ASSETS Investments: Available-for-sale: Fixed maturities, at market (amortized cost: $4,646.7, $3,832.7 and $4,171.6) $4,665.4 $3,885.7 $4,219.0 Equity securities, at market Preferred stocks (cost: $361.5, $420.3 and $374.3) 365.1 434.6 376.5 Common stocks (cost: $647.5, $520.7 and $512.2) 814.1 708.5 636.9 Short-term investments, at amortized cost (market: $356.7, $468.1 and $441.9) 356.7 468.1 441.9 ---------------------------- ------------------ Total investments 6,201.3 5,496.9 5,674.3 Cash 25.3 13.4 18.6 Accrued investment income 49.7 37.5 53.1 Premiums receivable, net of allowance for doubtful accounts of $32.5, $31.1 and $34.0 1,618.0 1,310.3 1,456.2 Reinsurance recoverables 281.8 326.6 281.0 Prepaid reinsurance premiums 78.8 78.9 77.7 Deferred acquisition costs 332.9 278.1 299.1 Income taxes 154.1 62.5 192.9 Property and equipment, net of accumulated depreciation of $206.5, $170.1 and $194.1 404.8 286.3 376.2 Other assets 29.2 40.2 34.0 ---------------------------- ------------------ Total assets $9,175.9 $7,930.7 $8,463.1 ============================ ================== LIABILITIES AND SHAREHOLDERS' EQUITY Unearned premiums 2,562.4 2,178.7 2,329.7 Loss and loss adjustment expense reserves 2,192.0 2,148.1 2,188.6 Policy cancellation reserve 21.1 28.7 29.1 Accounts payable and accrued expenses 644.1 496.7 582.0 Debt 1,070.5 776.1 776.6 ---------------------------- ------------------ Total liabilities 6,490.1 5,628.3 5,906.0 ---------------------------- ------------------ Shareholders' equity: Common Shares, $1.00 par value (treasury shares of 10.3, 10.7 and 10.6) 72.8 72.4 72.5 Paid-in capital 465.5 420.9 448.3 Accumulated comprehensive income: Net unrealized appreciation on investment securities 122.8 165.6 113.3 Other comprehensive income (9.0) (6.3) (9.6) Retained earnings 2,033.7 1,649.8 1,932.6 ---------------------------- ------------------ Total shareholders' equity 2,685.8 2,302.4 2,557.1 ---------------------------- ------------------ Total liabilities and shareholders' equity $9,175.9 $7,930.7 $8,463.1 ============================ ==================
See notes to consolidated financial statements. 3 4 The Progressive Corporation and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three months ended March 31, 1999 1998 --------------------------- ------------ ------------ (millions) CASH FLOWS FROM OPERATING ACTIVITIES Net income $105.3 $120.1 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 15.0 12.9 Net realized gains on security sales (2.0) (26.7) Changes in: Unearned premiums 232.7 198.6 Loss and loss adjustment expense reserves 3.4 1.5 Accounts payable and accrued expenses 46.2 37.5 Policy cancellation reserve (8.0) (6.0) Prepaid reinsurance premiums (1.1) .9 Reinsurance recoverables (.8) (9.1) Premiums receivable (161.8) (149.5) Deferred acquisition costs (33.8) (18.5) Income taxes 33.7 30.6 Other, net 18.9 1.3 ------------ ------------ Net cash provided by operating activities 247.7 193.6 CASH FLOWS FROM INVESTING ACTIVITIES Purchases: Available-for-sale: fixed maturities (1,969.6) (1,586.1) equity securities (194.5) (258.0) Sales: Available-for-sale: fixed maturities 1,417.6 1,469.7 equity securities 67.6 161.5 Maturities, paydowns, calls and other: Available-for-sale: fixed maturities 71.9 119.9 equity securities 2.4 11.1 Net (purchases) sales of short-term investments 85.2 (58.7) (Receivable) payable on securities 15.9 (27.2) Purchase of property and equipment (43.3) (38.9) ------------- ------------- Net cash used in investing activities (546.8) (206.7) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from exercise of stock options 6.4 2.8 Tax benefit from exercise of stock options 10.7 5.2 Proceeds from debt 293.7 -- Dividends paid to shareholders (4.7) (4.3) Acquisition of treasury shares (.3) (.5) ------------- ------------- Net cash provided by financing activities 305.8 3.2 ------------- ------------- Increase (decrease) in cash 6.7 (9.9) Cash, January 1 18.6 23.3 ------------- ------------- Cash, March 31 $25.3 $13.4 ============= =============
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 included in its Annual Report on Form 10-K for the year ended December 31, 1998. The consolidated financial statements reflect all normal recurring adjustments which were, in the opinion of management, necessary to present a fair statement of the results for the interim periods. The results of operations for the period ended March 31, 1999, are not necessarily indicative of the results expected for the full year. NOTE 2 Supplemental Cash Flow Information -- The Company paid income taxes of $0 and $18.2 million for the periods ended March 31, 1999 and 1998, respectively. Total interest paid was $6.6 million for both periods. NOTE 3 Debt -- On March 1, 1999, the Company issued $300 million of 6 5/8% Senior Notes due March 1, 2029. Debt at March 31 consisted of:
1999 1998 -------------------------------- ----------------------------- Market Market Cost Value Cost Value ----------- ----------- -------- -------- 6 5/8% Senior Notes $ 293.7 $ 288.8 $ - $ - 7.30% Notes 99.7 104.3 99.7 106.0 6.60% Notes 199.1 202.3 199.0 200.7 7% Notes 148.5 154.5 148.4 154.2 8 3/4% Notes 30.0 30.2 29.7 30.9 10% Notes 149.8 160.1 149.7 164.3 10 1/8% Subordinated Notes 149.7 160.4 149.6 164.0 ---------- ---------- -------- -------- $ 1,070.5 $ 1,100.6 $ 776.1 $ 820.1 ========== ========== ======== ========
NOTE 4 Comprehensive Income -- Total comprehensive income was $115.4 million and $163.4 million at March 31, 1999 and 1998, respectively. NOTE 5 Dividends -- On March 31, 1999, the Company paid a quarterly dividend of $.065 per Common Share to shareholders of record as of the close of business on March 12, 1999. The dividend was declared by the Board of Directors on February 19, 1999. On April 23, 1999, the Board of Directors declared a quarterly dividend of $.065 per Common Share, payable June 30, 1999, to shareholders of record as of the close of business on June 11, 1999. 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. For the three months ended March 31, (millions)
1999 1998 ------------------------------- ------------------------------- Pretax Pretax Revenues Profit (Loss) Revenues Profit (Loss) ----------- ------------- ------------ ------------- Personal Lines $ 1,227.8 $ 82.2 1,056.4 84.6 Other 105.5 10.5 99.8 11.2 Investments(1) 76.7 74.6 98.7 96.2 Interest Expense - (16.8) - (16.1) ---------- --------- ---------- -------- $ 1,410.0 $ 150.5 $ 1,254.9 $ 175.9 ========== ========= ========== ========
(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 1999 presentation. NOTE 8 Related Party Transaction -- On April 23, 1999, subsequent to the balance sheet date, the Company sold, in a cash transaction, its corporate aircraft to ACME Acquisition Corporation, a company owned by Peter B. Lewis, the Company's Chairman of the Board, President and Chief Executive Officer - Insurance Operations. The airplane had a net book value of $6.9 million and was sold to Mr. Lewis for $12.1 million, the fair market value of the airplane as determined by an independent appraiser. 6 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. RESULTS OF OPERATIONS For the first quarter 1999, operating income, which excludes net realized gains and losses on security sales, was $104.0 million, or $1.39 per share, compared to $102.8 million, or $1.35 per share, last year. The combined ratio was 93.1, compared to 91.7 for the first quarter 1998. Net premiums written increased 15% over the first quarter 1998, primarily reflecting an increase in unit sales driven by the Company's competitive rates and its effort to increase brand awareness through its advertising campaign. Ninety-three percent of the Company's net premiums written were generated by the Personal Lines business units, which write insurance for private passenger automobiles and recreation vehicles. The Personal Lines business is generated either by an agent or written directly by the Company. The Agent channel includes business written by our network of 30,000 Independent Insurance Agents and through Strategic Alliance business relationships (other insurance companies, financial institutions, employers and national brokerage agencies). For the first quarter 1999, total net premiums written through Independent Agents and Strategic Alliance agency relationships increased 8% to $1,245.7 million, compared to $1,154.9 million last year. Direct business includes business written through 1 800 AUTO PRO(R), over the Internet and by the Strategic Alliances business unit on behalf of affinity groups. For the first quarter 1999, net premiums written on a Direct basis increased 108% to $205.5 million, compared to $98.7 million last year. Premiums earned, which are a function of the amount of premiums written in the current and prior periods, increased 15% for the quarter. Claim costs, which represent actual and estimated future payments to or for our policyholders, as well as loss estimates for future assignments and assessments under state-mandated assigned risk programs, were 69% of premiums earned for the quarter, compared to 68% for the same period last year. Policy acquisition costs and other underwriting expenses as a percentage of premiums earned were 24% and 23% in the first quarter 1999 and 1998, respectively. Other underwriting expenses include additional advertising expenses. Recurring investment income (interest and dividends) increased 4% for the quarter, reflecting an increase in the average investment portfolio, partially offset by a decrease in the pretax yields. The weighted average annualized fully taxable equivalent book yield of the portfolio was 6.2% and 6.4% for the quarters ended March 31, 1999 and 1998, respectively. The Company had net realized gains on security sales of $2.0 million for the quarter, compared to $26.7 million in the first quarter of 1998. At March 31, 1999, the Company's portfolio had $188.9 million in total unrealized gains, compared to $174.3 million at December 31, 1998. 7 8 The Company continues to invest in fixed maturity, equity and short-term securities. The majority of the portfolio was in short-term and intermediate-term, investment-grade fixed-maturity securities ($4,743.1 million, or 76.5%, at March 31, 1999, and $4,131.1 million, or 75.1%, at March 31, 1998). Long-term investment-grade fixed-maturity securities represented $157.0 million, or 2.5%, and $102.4 million, or 1.9%, of the total investment portfolio at March 31, 1999 and 1998, respectively. Non-investment-grade fixed-maturity securities were $122.0 million, or 2.0%, in 1999, and $120.3 million, or 2.2%, in 1998, and offer the Company high returns and added diversification without a significant adverse effect on the stability and quality of the investment portfolio as a whole. The duration of the fixed-income portfolio was 3.0 years at March 31, 1999 and 1998. Derivative instruments are primarily used to manage the risks and enhance the returns of the available-for-sale portfolio and may also be used for trading purposes. Derivative instruments classified as held or issued for other than trading had a net market value of $(.3) million at March 31, 1999, compared to $2.4 million at March 31, 1998. Trading positions had a net market value of $(4.1) million as of March 31, 1999, compared to $.8 million as of March 31, 1998. As of March 31, 1999, the Company had open investment funding commitments of $46.9 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 three months ended March 31, 1999, operations generated a positive cash flow of $247.7 million. On March 1, 1999, the Company issued $300 million of 6 5/8% Senior Notes due March 1, 2029, under a shelf registration statement filed with the Securities and Exchange Commission in 1998. The Company may redeem all or part of the Notes at any time, subject to a "make whole" provision. There are no sinking fund requirements. The Notes were priced at 98.768% to yield 6.721% to maturity. Interest is payable semiannually on March 1 and September 1, beginning September 1, 1999. Net proceeds to the Company of $293.7 million (after discount and underwriting fees) are intended to be used, together with other available funds, to retire certain of the Company's current outstanding debt upon its maturity, including $30 million of 8 3/4% Notes, which are due June 1, 1999, and $150 million each of 10% Notes and 10 1/8% Subordinated Notes, both of which are due December 15, 2000. The Company has substantial capital resources and is unaware of any trends, events or circumstances that are reasonably likely to affect its capital resources in a material way. The Company 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 $70.1 million, of which $37.8 million has been paid through March 31, 1999, including $9.1 million paid in the first quarter 1999. The first of three buildings is expected to be completed in May 1999, with the other two buildings to be completed by the end of 1999. The Company completed the construction of its regional call center in Tampa, Florida in February 1999. The total estimated cost of the project is $45.1 million, of which $44.1 million has been paid through March 31, 1999, including $2.8 million paid in the first quarter 1999. 8 9 YEAR 2000 COMPLIANCE The year 2000 problem exists because many computer programs only use the last two digits to refer to a year and could recognize "00" as 1900 instead of 2000. If not corrected, many computer and other microchip supported applications could fail or create erroneous results. The extent of the potential impact is still unknown but could affect the global economy. In response to this issue, the Company has evaluated its applications and operating software (including its claims reporting, financial reporting, policy issuance, policy maintenance and other internal production systems), hardware and software products, and third-party data exchanges and business relationships and is in the process of evaluating its end user computing activities and facilities implications (including public utility services). The Company has established a dedicated, tenured project team responsible for overseeing progress on the Company's compliance program and periodically reporting to management. The Company began converting its applications software to be year 2000 compliant in July 1995 and, as a result, has been able to avoid redeploying significant resources or deferring other important projects to specifically address the year 2000 issues. During the first quarter 1998, the Company retained independent consultants to determine its state of readiness. Although some additional areas of focus were identified, the consultants noted that the Company was adequately addressing its critical internal systems and issues. As of March 31, 1999, the Company has completed approximately 99% of its efforts to bring its applications software in compliance. Testing of critical applications is being accomplished through the use of a special systems environment known as a "Time Warp Lab," which mimics the Company's production environment. As a final test of year 2000 readiness, after conversion and year 2000 certification, critical applications are run in the Time Warp Lab while systems clocks turn over from 1999 to 2000 and beyond. The total cost to modify these existing production systems, which includes both internal and external costs of programming, coding and testing, is estimated to be $8.5 million, of which $7.8 million had been expensed through March 31, 1999. The Company also replaced some of its systems during 1998. In addition to being year 2000 compliant, these new systems added increased functionality to the Company. The total cost of these systems, which include both internal and external costs, is estimated to be $5.3 million, and the majority of the projects were completed in 1998, with remaining parallel testing scheduled during the first half of 1999. As of March 31, 1999, $5.1 million had been paid for these systems. All costs are being funded through operating cash flows. In addition, the Company has identified approximately 380 third parties with which data is exchanged. All critical data exchanges are being tested for compliance. Unless delayed by our business partners' testing schedules, all testing of critical data exchanges is expected to be completed by the end of the second quarter 1999. The Company continually evaluates computer hardware and software upgrades for enhancements and, therefore, many of the costs to replace these items to be year 2000 compliant are not likely to be incremental costs to the Company. The Company's remediation of its mainframe hardware and operating software is 96% complete and the remediation of its servers and client server operating software is 85% complete. The Company estimates that all mainframe and client server hardware and operating software will be year 2000 compliant by the first half of 1999. In addition, during 1998, the Company secured software which will assist in the discovery of noncompliant desktop hardware and software. It is estimated that the assessment and remediation process will be completed by the first half of 1999. 9 10 The Company is currently unable to determine the impact that year 2000 noncompliance may have on its financial condition, cash flows and results of operations. The Company believes that it is taking the necessary measures to address issues that may arise relating to the year 2000 and that its production systems will be compliant. The Company realizes, however, that noncompliance by third parties could impact its business. The possibility exists that a portion of the Company's distribution channel may not be compliant, that communication with agents could be disrupted, that underwriting data, such as motor vehicle reports, could be unobtainable, that the claim settling process could be delayed or that frequency and severity of losses may increase due to external factors. The Company is contacting its key independent insurance agents, vendors and suppliers (e.g. banks, credit bureaus, motor vehicle departments, rating agencies, etc.) to determine their status of compliance and to assess the impact of noncompliance to the Company. The Company is working closely with all critical business relationships to minimize its exposure to year 2000 issues, including on-site visits to identify their state of readiness. The Company's process teams and business groups are identifying potential year 2000 scenarios. For those scenarios deemed to be both probable and with a potentially significant business impact, the Company is developing contingency plans. The majority of the contingency plans are drafted and were reviewed by the Company's chief financial and technology officers during 1998. Contingency plans include such items as hardening facilities with back-up generators, prioritizing resources, securing alternative vendors, developing alternative processes, pre-ordering policyholder information and other measures. The contingency plans were substantially completed for all material relationships during the first quarter 1999, and are being reviewed in detail in the second quarter 1999. The Company will continue to review these plans throughout 1999. SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: EXCEPT FOR HISTORICAL INFORMATION, THE MATTERS DISCUSSED IN THIS QUARTERLY REPORT ON FORM 10-Q ARE FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED. THESE RISKS AND UNCERTAINTIES INCLUDE, WITHOUT LIMITATION, PRICING COMPETITION AND OTHER INITIATIVES BY COMPETITORS, LEGISLATIVE AND REGULATORY DEVELOPMENTS, WEATHER CONDITIONS (INCLUDING THE SEVERITY AND FREQUENCY OF STORMS, HURRICANES, SNOWFALLS, HAIL AND WINTER CONDITIONS), DRIVING PATTERNS, COURT DECISIONS AND TRENDS IN LITIGATION, INTEREST RATE LEVELS AND OTHER CONDITIONS IN THE FINANCIAL AND SECURITIES MARKETS, UNFORESEEN TECHNOLOGICAL ISSUES ASSOCIATED WITH THE YEAR 2000 COMPLIANCE EFFORTS AND THE EXTENT TO WHICH VENDORS, PUBLIC UTILITIES, GOVERNMENTAL ENTITIES AND OTHER THIRD PARTIES THAT INTERFACE WITH THE COMPANY MAY FAIL TO ACHIEVE YEAR 2000 COMPLIANCE, AND OTHER RISKS DETAILED FROM TIME TO TIME IN THE COMPANY'S SEC REPORTS. THE COMPANY ASSUMES NO OBLIGATION TO UPDATE THE INFORMATION IN THIS QUARTERLY REPORT. ITEM 3. Quantitative and Qualitative Disclosures About Market Risk. Derivative financial instruments held or issued for purposes of managing interest rate exposure on the anticipated debt issuance were closed on March 1, 1999 upon the issuance of the $300 million 6 5/8% Senior Notes. The net market value of these instruments at closing was $3.3 million. No other material changes have occurred in market risk since reported in the Annual Report on Form 10-K for the year ended December 31, 1998. 10 11 PART II - OTHER INFORMATION --------------------------- ITEM 2. Changes in Securities. On March 1, 1999, the Company sold $300 million of its 6 5/8% Notes due 2029 (the "Notes") in an underwritten public offering. The Notes rank on a parity with all other current and future unsecured and unsubordinated indebtedness of the Company and prior to the subordinated indebtedness and the Common Shares of the Company, as well as any preferred shares that may be outstanding hereafter. If certain defaults occur with respect to the Notes, no payment may be made by the Company on account of the principal of or interest on, or to acquire, any of the subordinated indebtedness until the Notes have been paid in full or such defaults have been cured or waived. Upon any acceleration of the principal of the subordinated indebtedness, or upon any payment by the Company or distribution of assets of the Company upon any dissolution, winding up, liquidation or reorganization involving the Company, whether voluntary or involuntary, or in bankruptcy or insolvency, all amounts due or to become due upon the Notes must be paid in full or provided for before any payment may be made on account of the subordinated indebtedness. As a consequence, in the event of any such bankruptcy, insolvency or similar event, holders of the Company's subordinated indebtedness may recover less, ratably, than the holders of the Notes and certain other indebtedness of the Company. Further, under Ohio law, upon any dissolution or winding up of the Company, payment of the indebtedness evidenced by the Notes, and other obligations of the Company, must be made or adequately provided for prior to the distribution of any remaining assets to holders of the Company's Common Shares and any preferred shares which may be then outstanding. ITEM 4. Submission of Matters to a Vote of Security Holders. At the April 23, 1999 Annual Meeting of Shareholders of the Company, 61,821,673 Common Shares were represented in person or by proxy. At the meeting, the shareholders elected the five directors named below. The votes cast for each director were as follows:
Director Term Expires For Withheld -------- ------------ --- -------- Charles B. Chokel 2000 61,634,956 186,717 Milton N. Allen 2002 61,555,049 266,624 James E. Bennett III 2002 61,288,000 533,673 Charles A. Davis 2002 61,654,967 166,706 Paul B. Sigler 2002 61,631,025 190,648
11 12 The following are the directors whose terms continued after the Annual Meeting: Director Term Expires -------- ------------ Stephen R. Hardis 2000 Janet Hill 2000 Norman S. Matthews 2000 B. Charles Ames 2001 Peter B. Lewis 2001 Donald B. Shakelford 2001 The shareholders approved a proposal to fix the number of directors at twelve. This proposal received 61,282,642 affirmative votes and 128,232 negative votes. There were 410,799 abstentions and no broker non-votes with respect to this proposal. The shareholders approved The Progressive Corporation 1999 Executive Bonus Plan. This proposal received 60,456,770 affirmative votes and 829,175 negative votes. There were 535,728 abstentions and no broker non-votes with respect to this proposal. ITEM 6. Exhibits and Reports on Form 8-K. (a) Exhibits: See exhibit index on page 14. (b) Reports on Form 8-K during the quarter ended March 31, 1999: On January 5, 1999, the Registrant filed a Current Report on Form 8-K, dated January 1, 1999, discussing certain changes in the senior management of the Registrant. On February 18, 1999, the Registrant filed a Current Report on Form 8-K containing certain financial information concerning the Registrant and its subsidiaries at December 31, 1998 and 1997, and for each of the three years in the period ended December 31, 1998. On February 26, 1999, the Registrant filed a Current Report on Form 8-K containing additional exhibits to be filed and incorporated into the Registrant's previously filed Registration Statement on Form S-3 (File No. 333-48935). 12 13 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: May 11, 1999 BY: /s/ W. THOMAS FORRESTER ---------------- ------------------------------------- W. Thomas Forrester Treasurer and Chief Financial Officer 13 14 EXHIBIT INDEX ------------- Exhibit No. Form 1O-Q Under Reg. Exhibit S-K, Item 601 No. Description of Exhibit - ------------- --- ---------------------- (27) 27 Financial Data Schedule for the period ended March 31, 1999 14 EX-27 2 EXHIBIT 27
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 US$ 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 1 4,665,400 0 0 1,179,200 0 0 6,201,300 25,300 281,800 332,900 9,175,900 2,192,000 2,562,400 0 0 1,070,500 0 0 72,800 2,613,000 9,175,900 1,322,100 72,600 2,000 11,200 913,900 175,000 141,700 150,500 45,200 105,300 0 0 0 105,300 1.45 1.41 0 0 0 0 0 0 0
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