UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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 September 30, 2004
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
| 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
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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). 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: 200,204,259 outstanding at October 31, 2004
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
The Progressive Corporation and Subsidiaries
Consolidated Statements of Income
(unaudited)
| Three Months |
Nine Months |
|||||||||||||||||||||||
| % | % | |||||||||||||||||||||||
| Periods Ended September 30, |
2004 |
2003 |
Change |
2004 |
2003 |
Change |
||||||||||||||||||
| (millions – except per share amounts) | ||||||||||||||||||||||||
Revenues: |
||||||||||||||||||||||||
Net premiums earned |
$ | 3,277.7 | $ | 2,927.8 | 12 | $ | 9,605.2 | $ | 8,301.0 | 16 | ||||||||||||||
Investment income |
124.8 | 115.5 | 8 | 364.4 | 344.0 | 6 | ||||||||||||||||||
Net realized gains (losses) on securities |
23.9 | (4.3 | ) | NM | 80.0 | 15.7 | 410 | |||||||||||||||||
Service revenues |
12.1 | 10.8 | 12 | 36.6 | 30.1 | 22 | ||||||||||||||||||
Other income |
— | 30.8 | NM | — | 30.8 | NM | ||||||||||||||||||
Total revenues |
3,438.5 | 3,080.6 | 12 | 10,086.2 | 8,721.6 | 16 | ||||||||||||||||||
Expenses: |
||||||||||||||||||||||||
Losses and loss adjustment expenses |
2,171.7 | 1,983.1 | 10 | 6,224.5 | 5,636.9 | 10 | ||||||||||||||||||
Policy acquisition costs |
353.5 | 321.3 | 10 | 1,035.8 | 915.6 | 13 | ||||||||||||||||||
Other underwriting expenses |
303.7 | 267.7 | 13 | 904.1 | 736.4 | 23 | ||||||||||||||||||
Investment expenses |
4.2 | 2.7 | 56 | 10.4 | 8.3 | 25 | ||||||||||||||||||
Service expenses |
5.9 | 6.7 | (12 | ) | 18.0 | 19.4 | (7 | ) | ||||||||||||||||
Interest expense |
20.1 | 24.0 | (16 | ) | 60.3 | 71.8 | (16 | ) | ||||||||||||||||
Total expenses |
2,859.1 | 2,605.5 | 10 | 8,253.1 | 7,388.4 | 12 | ||||||||||||||||||
Income before income taxes |
579.4 | 475.1 | 22 | 1,833.1 | 1,333.2 | 37 | ||||||||||||||||||
Provision for income taxes |
190.5 | 155.3 | 23 | 597.9 | 435.6 | 37 | ||||||||||||||||||
Net income |
$ | 388.9 | $ | 319.8 | 22 | $ | 1,235.2 | $ | 897.6 | 38 | ||||||||||||||
COMPUTATION OF EARNINGS PER SHARE |
||||||||||||||||||||||||
Basic: |
||||||||||||||||||||||||
Average shares outstanding |
216.0 | 216.9 | — | 216.2 | 217.5 | (1 | ) | |||||||||||||||||
Per share |
$ | 1.80 | $ | 1.47 | 22 | $ | 5.71 | $ | 4.13 | 38 | ||||||||||||||
Diluted: |
||||||||||||||||||||||||
Average shares outstanding |
216.0 | 216.9 | — | 216.2 | 217.5 | (1 | ) | |||||||||||||||||
Net effect of dilutive stock-based
compensation |
3.1 | 3.6 | (14 | ) | 3.4 | 3.7 | (8 | ) | ||||||||||||||||
Total equivalent shares |
219.1 | 220.5 | (1 | ) | 219.6 | 221.2 | (1 | ) | ||||||||||||||||
Per share |
$ | 1.77 | $ | 1.45 | 22 | $ | 5.62 | $ | 4.06 | 39 | ||||||||||||||
Dividends per Share |
$ | .030 | $ | .025 | 20 | $ | .080 | $ | .075 | 7 | ||||||||||||||
NM = Not Meaningful
See notes to consolidated financial statements.
2
The Progressive Corporation and Subsidiaries
| September 30, |
December 31, | |||||||||||
| 2004 |
2003 |
2003 |
||||||||||
| (millions) | (audited) | |||||||||||
Assets |
||||||||||||
Investments: |
||||||||||||
Available-for-sale: |
||||||||||||
Fixed maturities, at market (amortized cost: $9,534.0, $8,920.1 and $8,899.0) |
$ | 9,681.1 | $ | 9,210.0 | $ | 9,133.4 | ||||||
Equity securities, at market |
||||||||||||
Preferred stocks (cost: $723.4, $763.5 and $751.3) |
747.2 | 793.1 | 778.8 | |||||||||
Common equities (cost: $1,312.1, $1,590.4 and $1,590.6) |
1,686.7 | 1,767.3 | 1,972.1 | |||||||||
Short-term investments, at amortized cost (market: $2,204.2, $633.5 and $648.0) |
2,204.2 | 633.5 | 648.0 | |||||||||
Total investments |
14,319.2 | 12,403.9 | 12,532.3 | |||||||||
Cash |
34.5 | 21.9 | 12.1 | |||||||||
Accrued investment income |
100.6 | 98.5 | 97.4 | |||||||||
Premiums receivable, net of allowance for doubtful accounts of
$70.6, $61.7 and $66.8 |
2,397.6 | 2,152.2 | 2,079.6 | |||||||||
Reinsurance recoverables, including $43.6, $41.7 and $41.4 on paid losses |
295.3 | 254.2 | 271.3 | |||||||||
Prepaid reinsurance premiums |
125.9 | 115.1 | 114.7 | |||||||||
Deferred acquisition costs |
460.5 | 432.0 | 412.3 | |||||||||
Income taxes |
— | 33.9 | 81.6 | |||||||||
Property and equipment, net of accumulated depreciation of
$537.6, $455.5 and $476.4 |
674.6 | 548.0 | 584.7 | |||||||||
Other assets |
87.5 | 100.9 | 95.5 | |||||||||
Total assets |
$ | 18,495.7 | $ | 16,160.6 | $ | 16,281.5 | ||||||
Liabilities and Shareholders’ Equity |
||||||||||||
Unearned premiums |
$ | 4,326.5 | $ | 4,028.7 | $ | 3,894.7 | ||||||
Loss and loss adjustment expense reserves |
5,156.0 | 4,384.2 | 4,576.3 | |||||||||
Accounts payable, accrued expenses and other liabilities |
1,548.6 | 1,667.6 | 1,290.1 | |||||||||
Income taxes |
43.4 | — | — | |||||||||
Debt |
1,290.2 | 1,489.6 | 1,489.8 | |||||||||
Total liabilities |
12,364.7 | 11,570.1 | 11,250.9 | |||||||||
Shareholders’ equity: |
||||||||||||
Common Shares, $1.00 par value (authorized 600.0, issued 230.1,
including treasury shares of 13.1, 14.0 and 13.7) |
217.0 | 216.1 | 216.4 | |||||||||
Paid-in capital |
789.5 | 679.1 | 688.3 | |||||||||
Unamortized restricted stock |
(52.5 | ) | (30.0 | ) | (28.9 | ) | ||||||
Accumulated other comprehensive income (loss): |
||||||||||||
Net unrealized appreciation on investment securities |
354.6 | 322.6 | 418.2 | |||||||||
Net unrealized gains on forecasted transactions |
10.0 | 11.0 | 10.7 | |||||||||
Foreign currency translation adjustment |
(3.9 | ) | (3.9 | ) | (3.9 | ) | ||||||
Retained earnings |
4,816.3 | 3,395.6 | 3,729.8 | |||||||||
Total shareholders’ equity |
6,131.0 | 4,590.5 | 5,030.6 | |||||||||
Total liabilities and shareholders’ equity |
$ | 18,495.7 | $ | 16,160.6 | $ | 16,281.5 | ||||||
See notes to consolidated financial statements.
3
The Progressive Corporation and Subsidiaries
| Nine Months Ended September 30, |
2004 |
2003 |
||||||
| (millions) | ||||||||
Cash Flows From Operating Activities |
||||||||
Net income |
$ | 1,235.2 | $ | 897.6 | ||||
Adjustments to reconcile net income to net cash provided
by operating activities: |
||||||||
Depreciation |
72.4 | 64.1 | ||||||
Net amortization of fixed maturities |
129.9 | 71.1 | ||||||
Amortization of restricted stock |
16.9 | 6.4 | ||||||
Net realized (gains) losses on securities |
(80.0 | ) | (15.7 | ) | ||||
Changes in: |
||||||||
Unearned premiums |
431.8 | 724.4 | ||||||
Loss and loss adjustment expense reserves |
579.7 | 571.2 | ||||||
Accounts payable, accrued expenses and other liabilities |
220.5 | 274.7 | ||||||
Prepaid reinsurance premiums |
(11.2 | ) | (18.4 | ) | ||||
Reinsurance recoverables |
(24.0 | ) | (38.5 | ) | ||||
Premiums receivable |
(318.0 | ) | (409.4 | ) | ||||
Deferred acquisition costs |
(48.2 | ) | (68.5 | ) | ||||
Income taxes |
159.3 | 99.0 | ||||||
Tax benefit from exercise/vesting of stock-based
compensation |
36.6 | 34.6 | ||||||
Other, net |
10.2 | (77.9 | ) | |||||
Net cash provided by operating activities |
2,411.1 | 2,114.7 | ||||||
Cash Flows From Investing Activities |
||||||||
Purchases: |
||||||||
Available-for-sale: fixed maturities |
(5,194.8 | ) | (8,146.9 | ) | ||||
equity securities |
(590.2 | ) | (642.6 | ) | ||||
Sales: |
||||||||
Available-for-sale: fixed maturities |
4,028.9 | 6,064.2 | ||||||
equity securities |
825.2 | 247.6 | ||||||
Maturities, paydowns, calls and other: |
||||||||
Available-for-sale: fixed maturities |
474.2 | 570.2 | ||||||
equity securities |
78.2 | 44.7 | ||||||
Net purchases of short-term investments |
(1,556.2 | ) | (65.7 | ) | ||||
Net unsettled security transactions |
26.2 | 202.8 | ||||||
Purchases of property and equipment |
(167.6 | ) | (109.1 | ) | ||||
Net cash used in investing activities |
(2,076.1 | ) | (1,834.8 | ) | ||||
Cash Flows From Financing Activities |
||||||||
Proceeds from exercise of stock options |
44.1 | 39.7 | ||||||
Payment of debt |
(200.0 | ) | — | |||||
Dividends paid to shareholders |
(17.3 | ) | (16.3 | ) | ||||
Acquisition of treasury shares |
(139.4 | ) | (298.3 | ) | ||||
Net cash used in financing activities |
(312.6 | ) | (274.9 | ) | ||||
Increase in cash |
22.4 | 5.0 | ||||||
Cash, January 1 |
12.1 | 16.9 | ||||||
Cash, September 30 |
$ | 34.5 | $ | 21.9 | ||||
See notes to consolidated financial statements.
4
The Progressive Corporation and Subsidiaries
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, 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 September 30, 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 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 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 of the Company’s Common Shares 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 the Company’s Form 10-Q for the quarterly period ended March 31, 2004, for details regarding the annual restricted stock awards granted by the Company.
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 used a modified Black-Scholes pricing model to calculate the fair value of the options awarded as of the date of grant.
5
| Nine months ended September 30, |
||||||||
| (millions, except per share amounts) | 2004 |
2003 |
||||||
Net income, as reported |
$ | 1,235.2 | $ | 897.6 | ||||
Deduct: Total stock-based employee
compensation expense determined
under the fair value based
method for all awards, net of related
tax effects |
(4.5 | ) | (9.7 | ) | ||||
Net income, pro forma |
$ | 1,230.7 | $ | 887.9 | ||||
Earnings per share
|
||||||||
Basic – as reported |
$ | 5.71 | $ | 4.13 | ||||
Basic – pro forma |
$ | 5.69 | $ | 4.08 | ||||
Diluted – as reported |
$ | 5.62 | $ | 4.06 | ||||
Diluted – pro forma |
$ | 5.62 | $ | 4.03 | ||||
Note 3 Supplemental Cash Flow Information — The Company paid income taxes of $463.0 million and $304.0 million during the nine months ended September 30, 2004 and 2003, respectively. Total interest paid was $70.3 million and $77.6 million during the nine months ended September 30, 2004 and 2003, respectively.
Note 4 Debt — Debt at September 30 consisted of:
| 2004 |
2003 |
|||||||||||||||
| Market | Market | |||||||||||||||
| (millions) | Cost |
Value |
Cost |
Value |
||||||||||||
6.60% Notes due 2004 |
$ | — | $ | — | $ | 199.9 | $ | 202.7 | ||||||||
7.30% Notes due 2006 |
99.9 | 106.9 | 99.9 | 112.0 | ||||||||||||
6.375% Senior Notes due 2012 |
347.7 | 387.3 | 347.4 | 391.1 | ||||||||||||
7% Notes due 2013 |
148.9 | 171.8 | 148.8 | 173.9 | ||||||||||||
6 5/8% Senior Notes due 2029 |
294.1 | 320.6 | 294.0 | 319.5 | ||||||||||||
6.25% Senior Notes due 2032 |
393.6 | 411.4 | 393.6 | 432.5 | ||||||||||||
Other debt |
6.0 | 6.0 | 6.0 | 6.0 | ||||||||||||
| $ | 1,290.2 | $ | 1,404.0 | $ | 1,489.6 | $ | 1,637.7 | |||||||||
Note 5 Comprehensive Income — Total comprehensive income was $448.7 million and $307.9 million for the quarters ended September 30, 2004 and 2003, respectively, and $1,170.9 million and $1,058.0 million for the nine months ended September 30, 2004 and 2003, respectively.
Note 6 Dividends — On September 30, 2004, the Company paid a quarterly dividend of $.03 per Common Share to shareholders of record as of the close of business on September 10, 2004. The Board of Directors declared the dividend on August 20, 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 principally 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” also manage the run-off from discontinued product lines. All revenues are generated from external customers.
6
Periods ended September 30,
| Three Months |
Nine Months |
|||||||||||||||||||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||||||||||||||||||
| Pretax | Pretax | Pretax | Pretax | |||||||||||||||||||||||||||||
| Profit | Profit | Profit | Profit | |||||||||||||||||||||||||||||
| (millions) | Revenues |
(Loss) |
Revenues |
(Loss) |
Revenues |
(Loss) |
Revenues |
(Loss) |
||||||||||||||||||||||||
Personal Lines — Agency |
$ | 1,959.2 | $ | 246.5 | $ | 1,790.6 | $ | 204.4 | $ | 5,776.5 | $ | 814.2 | $ | 5,096.2 | $ | 593.2 | ||||||||||||||||
Personal Lines — Direct |
926.1 | 131.0 | 800.6 | 99.1 | 2,701.6 | 398.3 | 2,263.4 | 271.1 | ||||||||||||||||||||||||
Total Personal Lines1 |
2,885.3 | 377.5 | 2,591.2 | 303.5 | 8,478.1 | 1,212.5 | 7,359.6 | 864.3 | ||||||||||||||||||||||||
Commercial Auto Business |
384.0 | 70.3 | 319.9 | 49.7 | 1,101.2 | 229.1 | 888.2 | 144.6 | ||||||||||||||||||||||||
Other businesses2 |
20.5 | 7.2 | 58.3 | 37.4 | 62.5 | 17.8 | 114.1 | 44.7 | ||||||||||||||||||||||||
Investments3 |
148.7 | 144.5 | 111.2 | 108.5 | 444.4 | 434.0 | 359.7 | 351.4 | ||||||||||||||||||||||||
Interest expense |
— | (20.1 | ) | — | (24.0 | ) | — | (60.3 | ) | — | (71.8 | ) | ||||||||||||||||||||
| $ | 3,438.5 | $ | 579.4 | $ | 3,080.6 | $ | 475.1 | $ | 10,086.2 | $ | 1,833.1 | $ | 8,721.6 | $ | 1,333.2 | |||||||||||||||||
1Personal automobile insurance accounted for 92% of the total Personal Lines segment net premiums earned in the third quarter of 2004 and 93% for all other periods presented.
2Includes the other indemnity businesses as well as the Company’s service business operations. For 2003, other businesses included $30.8 million of estimated interest income related to the 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 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 to assist in evaluating certain first party bodily injury claims, 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. 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 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.
Note 10 Subsequent Event — On October 22, 2004, the Company repurchased 16.9 million of its Common Shares, $1.00 par value, as part of a modified “Dutch auction” tender offer, at a purchase price of $88 per share, for a total cost of $1.5 billion.
7
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 and the first half of 2004. The Company had an underwriting profit margin of 13.7% and net income of $388.9 million in the third quarter 2004. Growth continued to slow as the Company’s net premiums written grew 9% in the third quarter 2004, as compared to the same period last year. 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 continue to change and most of the Company’s competitors now have rates that appear to be adequate. As a result, consumers generally are not being dislocated by rate or underwriting shocks, thereby reducing the number of new applications the Company is receiving. The Company, along with the rest of the industry, continued to benefit from the low level of automobile accident frequency during the quarter.
At September 30, 2004, the Company had 9.0 million policies in force on a companywide basis, 12% more than at the same time last year. New business applications are about on pace with last year, while strong renewal business is helping to support growth and is becoming an increasing percentage of the Company’s premiums. The Company has seen its retention measures fall somewhat despite its expectation that its average retention period per customer would increase given the rate stability in the industry. The Company is continuing to refine its measurement and methodology with regards to retention. Given its continued strong underwriting margins, the Company remains in a position where it can focus on retaining customers and introduce new product improvements faster.
The Company experienced favorable reserve development of 1.9 points for the third quarter and .8 points for the first nine months of 2004. The Company continued to experience a decline in accident frequency in every coverage on a quarter over prior year quarter basis. This low frequency, coupled with no notable escalating trends in claim costs and continuous improvement in claims settlement quality, helped contribute to the Company’s favorable loss results during the quarter.
The Company will continue to assess market conditions on a state-by-state basis. The Company has taken some rate reductions in selected states and is considering more 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, generally through initiatives that reduce cost or increase segmentation, while providing longer-term price stability for customers.
The Company made no substantial changes in the allocation of its investment portfolio during the quarter, with the exception of the asset movement at quarter end in anticipation of the settlement of the Company’s tender offer (discussed below). Overall, the total portfolio had a positive return for the third quarter, driven by a positive return in the fixed-income securities, partially offset by negative total returns in the common stock portfolio. Year-to-date, both the fixed-income and common stock portfolios generated positive total returns. The Company continued to keep its credit quality high and exposure to interest rate risk low. At September 30, 2004, the fixed-income portfolio duration was 2.9 years with a weighted average credit quality of AA+.
During the third quarter 2004, the Board of Directors of the Company determined that the Company had a significant amount of capital on hand in excess of what was needed to support its insurance operations, fund its corporate obligations and prepare for various contingencies. In response, the Company conducted a modified “Dutch auction” tender offer to repurchase up to 17.1 million of its outstanding Common Shares, $1.00 par value, at prices ranging from $78 to $88 per share. See Financial Condition section for further information.
8
FINANCIAL CONDITION
Capital Resources and Liquidity
During the third quarter 2004, The Progressive Corporation received $979.6 million of dividends from its insurance subsidiaries, net of cash capital contributions made to such subsidiaries, which were approved by the Ohio Department of Insurance. These dividends were invested in the portfolio of a consolidated, non-insurance subsidiary of the Company until needed to fund the “Dutch auction” tender offer discussed below.
Progressive’s insurance operations create liquidity by collecting and investing premiums written from new and renewal business in advance of paying claims. For the nine months ended September 30, 2004, operations generated positive cash flows of $2.4 billion.
On October 22, 2004, the Company repurchased 16.9 million of its Common Shares, $1.00 par value, as part of a modified “Dutch auction” tender offer, at a purchase price of $88 per share, for a total cost of $1.5 billion. The Company believes that, after completing the tender offer, its remaining capital on hand and cash flows from operations will be sufficient to support the Company’s insurance operations, corporate obligations and risk contingencies, including catastrophic, weather-related losses.
During the second quarter 2004, the Company entered into an uncommitted line of credit with National City Bank in the principal amount of $100 million. The Company entered into the line of credit as part of a contingency plan to help the Company maintain liquidity in the unlikely event that it experiences conditions or circumstances that affect the Company’s ability to transfer or receive funds. The Company had no borrowings under this arrangement at September 30, 2004.
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 principal and interest payments. The Company’s existing debt covenants do not include any rating or credit triggers.
Commitments and Contingencies
The Company is currently constructing a call center in Tampa, Florida, which is expected to be completed during the fourth quarter of 2004. In addition, construction was completed on a call center in Colorado Springs, Colorado and an office building in Mayfield Village, Ohio in the second and third quarters of 2004, respectively. The total cost for these three projects is estimated to be $130 million. During the third quarter 2004, the Company announced plans to construct a data center in Colorado Springs, Colorado, at an estimated cost of $50 million. Construction is expected to begin on this data center in April 2005 with completion estimated for 2006. All projects are funded through operating cash flows.
During the first quarter 2004, the Company opened one additional claims service center, bringing the total number of sites offering this concierge level of service to 20; no sites were added during the second or third quarters. During the third quarter 2004, the Company achieved the performance standards necessary to satisfy the expansion criteria of its concierge claims strategy. As a result, the Company plans to open several additional claims service centers in 2005.
On October 22, 2004, the Company received interrogatories and a subpoena from the Connecticut Attorney General’s Office seeking information as part of its investigation into possible violations of antitrust laws by unnamed persons. The Company understands that the Connecticut Attor