UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

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

For the quarterly period ended  March 31, 2004

[  ]      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

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.           Yes [ü] No [  ]

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).           Yes [ü] No [  ]

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Shares, $1.00 par value: 217,407,029 outstanding at April 30, 2004

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Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

The Progressive Corporation and Subsidiaries
Consolidated Statements of Income
(unaudited)

NM = Not Meaningful

See notes to consolidated financial statements.

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The Progressive Corporation and Subsidiaries
Consolidated Balance Sheets
(unaudited)

See notes to consolidated financial statements.

3

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

See notes to consolidated financial statements.

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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, 2003.

The consolidated financial statements reflect all normal recurring adjustments which were, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. The results of operations for the period ended March 31, 2004, 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 method of accounting 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 or 2004; however, compensation expense would have been recognized if the fair value 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 at the date of grant and therefore, under APB 25, no compensation expense was recorded.

In 2003, the Company began issuing restricted stock awards. Compensation expense for restricted stock awards is recognized over their 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.

See Item 5-Other Information in Part II of this Form 10-Q for details regarding the restricted stock awards granted by the Company during 2004.

The following table is presented in accordance with SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” and shows the effects on net income and earnings per share had the fair value method been applied to all outstanding and unvested stock option awards for the periods presented. The Company uses the Black-Scholes pricing model to calculate the fair value of the options awarded as of the date of grant.

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Note 3 Supplemental Cash Flow Information — The Company paid income taxes of $54.0 million and $56.0 million during the three months ended March 31, 2004 and 2003, respectively. Total interest paid was $27.7 million for both the three months ended March 31, 2004 and 2003. Non-cash activity includes the liability for deferred restricted stock compensation and the changes in net unrealized appreciation on investment securities.

Note 4 Debt — Debt at March 31 consisted of:

Note 5 Comprehensive Income — Total comprehensive income was $510.1 million and $262.9 million for the quarters ended March 31, 2004 and 2003, respectively.

Note 6 Dividends — On March 31, 2004, the Company paid a quarterly dividend of $.025 per Common Share to shareholders of record as of the close of business on March 12, 2004. The Board of Directors declared the dividend on January 31, 2004.

On April 16, 2004, the Board of Directors declared a quarterly dividend of $.025 per Common Share. The dividend is payable June 30, 2004, to shareholders of record as of the close of business on June 11, 2004.

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, physical damage and other auto-related insurance for automobiles and trucks owned by small businesses. The Company’s other businesses primarily include directors’ and officers’ liability insurance and processing business for Commercial Auto Insurance Procedures (CAIP), which are state-supervised plans serving the involuntary market. The other businesses are also managing the wind-down of the Company’s lender’s collateral protection program. All revenues are generated from external customers.

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Periods ended March 31,

¹Personal automobile insurance accounted for 94% of the total Personal Lines segment net premiums earned in the first quarters of 2004 and 2003.

²For 2004, both revenues and pretax profit include $(.2) million related to the over-accrual of estimated interest on an income tax refund the Company received in February 2004.

³Revenues represent recurring investment income and net realized gains (losses) on securities; pretax profit is net of investment expenses.

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, use of after-market parts, use of consumer reports, such as credit reports, in underwriting and related notice requirements under the federal Fair Credit Reporting Act, charging betterment in first party physical damage claims, the use of preferred provider rates for payment of personal injury protection claims, the use of automated database vendors to assist in evaluating certain first party bodily injury claims, offering alternative commission programs or the alleged diminution of value to vehicles which are involved in accidents, and cases challenging other aspects of the Company’s claims and marketing practices and business operations, including worker classification issues.

The Company plans to contest the outstanding suits vigorously, but may pursue settlement negotiations in appropriate cases. In accordance with generally accepted accounting principles (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 probable and/or the Company is currently unable to estimate the potential exposure.

Based on currently available information, the Company believes that its reserves for these lawsuits are reasonable. However, 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 impact on the Company’s financial condition, cash flows and results of operations.

For a further discussion on the Company’s pending litigation, see Item 3-Legal Proceedings in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

Note 9 Reclassifications — Certain amounts in the financial statements for prior periods were classified to conform to the 2004 presentation.

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

OVERVIEW

The Progressive Corporation and subsidiaries (the “Company”) continued the success achieved in 2003 into the first quarter 2004 with a 14% increase in net premiums written, an underwriting profit of 16.8% and net income of $460.0 million. All areas of the Company continued to function well, especially product pricing and claims resolution, as highlighted in the Company’s 2003 Annual Report to Shareholders. On the other hand, market conditions are changing and most of the Company’s competitors now have rates that are consistent with their profit objectives. As a result, consumers are not being dislocated by rate or underwriting shocks, thereby negatively impacting the number of new applications the Company is receiving. Nevertheless, the Company’s current absolute growth was very acceptable. The Company also continued to benefit from the low level of automobile accident frequency.

During the first quarter 2004, the Company’s companywide policies in force grew 17%, primarily supported by strong renewals. Although the Company did not experience any significant increases in its overall retention rate, it is seeing shifts in its books of business away from the nonstandard tiers, which favorably impacted retention. Given its strong underwriting margins, the Company remains in a position where it can focus on retaining customers and introduce new product improvements faster.

Despite the favorable underwriting margins in the first quarter, the Company experienced unfavorable reserve development of .7 points. This unfavorable development related to personal auto and was driven by several items discussed later in this report (see “Loss and Loss Adjustment Expense Reserves”). Nonetheless, the Company continued to experience a decline in accident frequency in every coverage on a quarter over prior year quarter basis. In addition, the Company has continued to maintain solid claims hiring and training and, as a result, has not had to restrict growth due to claims capacity in any state, as was the case in Texas in the first quarter 2003.

Based on these ongoing trends, the Company will continue to assess market conditions on a state-by-state basis and will consider, and has taken, some rate reductions in selected states to maintain attractive combinations of profit and growth. In the short term, the Company’s strategy is to maintain rate stability, with some margin reduction by absorbing future cost trends. The Company remains focused on building sustainable competitive advantages by providing longer-term price stability for customers.

The Company made no substantial changes in the allocation of its investment portfolio during the quarter. Both the fixed-income securities and common stocks produced positive total returns for the quarter. The Company continued to keep its credit quality high and exposure to interest rate risk low. At March 31, 2004, the fixed-income portfolio duration was 3.0 years with a weighted average credit quality of AA+.

FINANCIAL CONDITION

Capital Resources and Liquidity

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, 2004, operations generated a positive cash flow of $900.5 million.

During the first quarter 2004, the Company retired all $200 million of its 6.60% Notes at their maturity using part of the proceeds from the $400 million of its 6.25% Senior Notes issued in November 2002; the remainder of the proceeds from that offering are available for general corporate purposes.

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

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Commitments and Contingencies

The Company is currently constructing call centers in Colorado Springs, Colorado and Tampa, Florida and an office building in Mayfield Village, Ohio. These three projects are expected to be completed in 2004 at an estimated total cost of $128 million. These projects are being funded through operating cash flows. In addition, during the first quarter 2004, the Company opened one additional claims service center, bringing the total number of sites offering this concierge level service to 20. The Company plans to add additional sites at the appropriate times and locations based on internal analysis of the operating performance and cost parameters of the existing sites.

Off-Balance-Sheet Arrangements

Except for the open investment funding commitment and operating leases and service agreements discussed in the notes to the financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, the Company does not have any off-balance-sheet leverage.

Contractual Obligations

During the first quarter 2004, the Company’s contractual obligations have not changed materially from those discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

RESULTS OF OPERATIONS

Underwriting Operations

Growth

Companywide net premiums written, which represent the premiums generated from policies written during the period less any reinsurance, increased 14% over the first quarter 2003. Net premiums earned, which are a function of the premiums written in the current and prior periods, increased 19% over the first quarter 2003. Insurance premiums written in 2004 and forward are being earned into income using a daily earnings convention, as compared to a mid-month convention used previously, therefore, having no impact on amounts reported in prior periods. The change to a daily earnings method will improve the precision of the Company’s premium recognition on a monthly basis.

The Company analyzes its growth by reviewing rate levels, new customers and the retention characteristics of its books of business. During the first quarter 2004, the Company implemented 26 auto rate revisions in various states. The overall impact of these revisions was a slight reduction in rates for the year. The Company will continue to assess market conditions on a state-by-state basis and 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 did not increase substantially in the first quarter 2004, and declined slightly in Agency auto, partially driven by the fact that fewer customers were in the marketplace shopping for insurance since competitors have achieved more rate adequacy.

Another important element affecting growth is customer retention. One measure of improvement in customer retention is policy life expectancy (PLE), which is the estimate of the average length of time that a policy will remain in force before cancellation or non-renewal. The Company measures PLE on a product and tier basis. The Company saw modest declines in PLE in the second half of 2003 after a period of increase in individual product tiers. The Company continues to refine its measurement and methodology, but for the first quarter of 2004, it appears as if PLE’s in the Agency channel are relatively unchanged and those in the Direct channel are lengthening modestly. Although the PLE’s are more positive than in prior quarters, this does not necessarily suggest that there are any significant changes in the Company’s customer retention by tier. On the other hand, the Company is seeing a shift in its books of business away from the nonstandard tiers toward tiers where the PLE’s have historically been longer, thus favorably impacting retention.

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Profitability

For the first quarter 2004, the Company generated net income of $460.0 million, compared to $291.5 million for the same period last year. Net income per share was $2.09 for the first quarter 2004, compared to $1.32 for the same period last year. The GAAP combined ratio (CR) was 83.2 for the first quarter 2004, compared to 86.7 for the first quarter 2003, primarily driven by lower losses and loss adjustment expenses. Included in net income are net realized gains on securities of $59.5 million, or $.18 per share, for the first quarter 2004. First quarter 2003 results included net realized losses on securities of $3.1 million, or $.01 per share. Investment income, on a pretax basis net of investment and interest expenses, was $91.1 million, compared to $88.6 million in the first quarter 2003. The lower interest expense primarily reflects the retirement of all $200 million of the Company’s 6.60% Notes during the quarter.

During the first quarter 2004, the Company reduced its tax liability $7.1 million, or $.02 per share, for tax years 1993-1998, which years were settled concurrently with the receipt of a $58 million tax refund from the IRS during the quarter. Overall, the Company’s income taxes shifted to a net liability as of March 31, 2004, as compared to the same period last year, primarily driven by an increase in the Company’s deferred tax liability associated with the unrealized gains in the investment portfolio, reflecting equity returns after the first quarter 2003 and continuing into the first quarter 2004, as well as receipt of the above-mentioned tax refund; the shift from year end was primarily due to the provision for income taxes without a corresponding estimated tax payment.

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Underwriting results for the Company’s Personal Lines, including its channel components, the Commercial Auto business and other businesses were as follows: