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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 March 31, 2008
or
     
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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer  þ   Accelerated filer  o   Non-accelerated filer  o   Smaller reporting company  o
    (Do not check if a smaller reporting company)
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o  No  þ
     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 677,510,990 outstanding at March 31, 2008
 
 

 

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 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits.
SIGNATURES
EXHIBIT INDEX
EX-3.1
EX-3.2
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-99

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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
The Progressive Corporation and Subsidiaries
Consolidated Statements of Income
(unaudited)
                         
Three Months Ended March 31,   2008     2007     % Change  
 
(millions — except per share amounts)                        
Revenues
                       
Net premiums earned
  $ 3,390.0     $ 3,493.8       (3 )
Investment income
    159.3       163.5       (3 )
Net realized gains on securities
    32.2       23.3       38  
Service revenues
    4.4       6.2       (29 )
           
Total revenues
    3,585.9       3,686.8       (3 )
           
Expenses
                       
Losses and loss adjustment expenses
    2,484.0       2,400.5       3  
Policy acquisition costs
    339.5       355.2       (4 )
Other underwriting expenses
    384.3       371.5       3  
Investment expenses
    1.5       2.8       (46 )
Service expenses
    5.1       5.2       (2 )
Interest expense
    34.3       18.9       81  
           
Total expenses
    3,248.7       3,154.1       3  
           
Net Income
                       
Income before income taxes
    337.2       532.7       (37 )
Provision for income taxes
    97.8       169.2       (42 )
           
Net income
  $ 239.4     $ 363.5       (34 )
           
           
 
                       
Computation of Earnings Per Share
                       
Basic:
                       
Average shares outstanding
    671.5       737.8       (9 )
           
           
Per share
  $ .36     $ .49       (28 )
           
           
Diluted:
                       
Average shares outstanding
    671.5       737.8       (9 )
Net effect of dilutive stock-based compensation
    5.8       7.5       (23 )
           
Total equivalent shares
    677.3       745.3       (9 )
           
           
Per share
  $ .35     $ .49       (28 )
           
           
See notes to consolidated financial statements.

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The Progressive Corporation and Subsidiaries
Consolidated Balance Sheets
(unaudited)
                         
    March 31,     December 31,  
  2008     2007     2007  
       
(millions)            
Assets
                       
Investments — Available-for-sale, at fair value:
                       
Fixed maturities (amortized cost: $8,182.4, $10,244.6 and $9,135.6)
  $ 8,120.7     $ 10,266.2     $ 9,184.9  
Equity securities:
                       
Preferred stocks (cost: $2,635.7, $1,821.1 and $2,578.1)
    2,121.5       1,846.1       2,270.3  
Common equities (cost: $1,330.3, $1,479.2 and $1,361.0)
    2,104.2       2,390.9       2,327.5  
Short-term investments (amortized cost: $1,533.3, $594.3 and $382.4)
    1,533.3       594.3       382.4  
           
Total investments
    13,879.7       15,097.5       14,165.1  
Cash
    8.5       9.9       5.8  
Accrued investment income
    125.8       151.9       142.1  
Premiums receivable, net of allowance for doubtful accounts of $105.2, $111.8 and $118.1
    2,503.2       2,633.3       2,395.1  
Reinsurance recoverables, including $42.8, $53.5 and $47.6 on paid losses
    322.2       393.6       335.1  
Prepaid reinsurance premiums
    66.9       88.7       69.8  
Deferred acquisition costs
    434.1       453.3       426.3  
Income taxes
    190.6       —       106.0  
Property and equipment, net of accumulated depreciation of $621.2, $561.7 and $605.7
    1,000.6       979.7       1,000.4  
Other assets
    185.2       203.8       197.4  
           
Total assets
  $ 18,716.8     $ 20,011.7     $ 18,843.1  
           
Liabilities and Shareholders’ Equity
                       
Unearned premiums
  $ 4,307.9     $ 4,487.1     $ 4,210.4  
Loss and loss adjustment expense reserves
    5,952.1       5,720.4       5,942.7  
Accounts payable, accrued expenses and other liabilities
    1,532.9       1,544.6       1,580.6  
Income taxes
    —       143.3       —  
Debt 1
    2,174.3       1,185.7       2,173.9  
           
Total liabilities
    13,967.2       13,081.1       13,907.6  
           
Common Shares, $1.00 par value (authorized 900.0; issued 797.9, 798.5 and 798.1, including treasury shares of 120.4, 62.3 and 117.9)
    677.5       736.2       680.2  
Paid-in capital
    846.3       850.3       834.8  
Accumulated other comprehensive income:
                       
Net unrealized gains on securities
    135.7       622.3       465.0  
Net unrealized gains on forecasted transactions
    27.1       7.2       27.8  
Retained earnings
    3,063.0       4,714.6       2,927.7  
           
Total shareholders’ equity
    4,749.6       6,930.6       4,935.5  
           
Total liabilities and shareholders’ equity
  $ 18,716.8     $ 20,011.7     $ 18,843.1  
           
 
                     
 
1      Consists of long-term debt. See Note 4 — Debt.
See notes to consolidated financial statements.

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The Progressive Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
                 
Three Months Ended March 31,   2008   2007
(millions)                
 
               
Cash Flows From Operating Activities
               
Net income
  $ 239.4     $ 363.5  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
    23.8       26.2  
Amortization of fixed maturities
    69.9       66.0  
Amortization of stock-based compensation
    6.5       6.2  
Net realized gains on securities
    (32.2 )     (23.3 )
Net (gain) loss on disposition of property and equipment
    .5       (.1 )
Changes in:
               
Premiums receivable
    (108.1 )     (135.1 )
Reinsurance recoverables
    12.9       40.2  
Prepaid reinsurance premiums
    2.9       .8  
Deferred acquisition costs
    (7.8 )     (12.3 )
Income taxes
    92.7       146.4  
Unearned premiums
    97.5       152.1  
Loss and loss adjustment expense reserves
    9.4       (4.6 )
Accounts payable, accrued expenses and other liabilities
    25.4       30.9  
Other, net
    28.6       (20.9 )
     
Net cash provided by operating activities
    461.4       636.0  
Cash Flows From Investing Activities
               
Purchases:
               
Fixed maturities
    (473.0 )     (1,607.2 )
Equity securities
    (244.8 )     (422.7 )
Short-term investments — auction rate securities
    (414.7 )     (935.0 )
Sales:
               
Fixed maturities
    1,376.1       1,158.2  
Equity securities
    101.5       360.4  
Short-term investments — auction rate securities
    240.6       945.3  
Maturities, paydowns, calls and other:
               
Fixed maturities
    120.4       112.8  
Equity securities
    34.9       —  
Net purchases of short-term investments — other
    (976.7 )     (23.6 )
Net unsettled security transactions
    2.4       124.6  
Purchases of property and equipment
    (24.2 )     (33.6 )
Sale of property and equipment
    —       1.2  
     
Net cash used in investing activities
    (257.5 )     (319.6 )
Cash Flows From Financing Activities
               
Proceeds from exercise of stock options
    9.1       6.5  
Tax benefit from exercise/vesting of stock-based compensation
    4.1       4.5  
Dividends paid to shareholders 1
    (98.3 )     —  
Acquisition of treasury shares
    (116.1 )     (323.1 )
     
Net cash used in financing activities
    (201.2 )     (312.1 )
     
Increase in cash
    2.7       4.3  
Cash, January 1
    5.8       5.6  
     
Cash, March 31
  $ 8.5     $ 9.9  
     
 
1   Progressive maintains an annual dividend program. See Note 8 — Dividends for further discussion.
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 Progressive’s audited financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2007.
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 March 31, 2008, are not necessarily indicative of the results expected for the full year.
Note 2 Investments — The composition of the investment portfolio at March 31 was:
                                         
            Gross   Gross           % of
            Unrealized   Unrealized   Fair   Total
($ in millions)   Cost   Gains   Losses   Value   Fair Value
     
2008
                                       
Fixed maturities 1
  $ 8,182.4     $ 118.2     $ (179.9 )   $ 8,120.7       58.5 %
Equity securities:
                                       
Preferred stocks 2
    2,635.7       3.5       (506.9 )     2,121.5       15.3  
Common equities
    1,330.3       793.8       (19.9 )     2,104.2       15.2  
Short-term investments:
                                       
Auction rate municipal obligations
    174.1       —       —       174.1       1.2  
Other short-term investments
    1,359.2       —       —       1,359.2       9.8  
     
Total short-term investments
    1,533.3       —       —       1,533.3       11.0  
     
Total portfolio 2, 3
  $ 13,681.7     $ 915.5     $ (706.7 )   $ 13,879.7       100.0 %
     
2007
                                       
Fixed maturities
  $ 10,244.6     $ 79.2     $ (57.6 )   $ 10,266.2       68.0 %
Equity securities:
                                       
Preferred stocks 2
    1,821.1       36.4       (12.3 )     1,846.1       12.2  
Common equities
    1,479.2       915.0       (3.3 )     2,390.9       15.8  
Short-term investments:
                                       
Auction rate municipal obligations
    158.3       —       —       158.3       1.1  
Other short-term investments
    436.0       —       —       436.0       2.9  
     
Total short-term investments
    594.3       —       —       594.3       4.0  
     
Total portfolio 2,3
  $ 14,139.2     $ 1,030.6     $ (73.2 )   $ 15,097.5       100.0 %
     
 
1   Includes $1.1 million of gains on our open interest rate swap position, as well as $44.7 million of collateral in the form of Treasury Notes that were delivered to the counterparty on our open credit default swaps. See the Derivative Instruments section in Management’s Discussion and Analysis of Financial Condition and Results of Operations for further discussion.
 
2   At March 31, 2008 and 2007, the fair value included a $10.8 million net realized loss and a $.9 million net realized gain, respectively, on certain hybrid securities (discussed below).
 
3   Includes net unsettled security acquisitions of $79.4 million and $166.5 million at March 31, 2008 and 2007, respectively.
Our fixed-maturity securities include debt securities and redeemable preferred stocks. The preferred stock portfolio includes nonredeemable preferred stocks and certain hybrid securities. At March 31, 2008 and 2007, our preferred stock portfolio included $149.7 million and $59.4 million, respectively, of perpetual preferred stocks that have call features with fixed-rate coupons (i.e., hybrid securities), whereby the change in value of the call features is a component of the overall change in value of the preferred stocks. Our other short-term investments include Eurodollar deposits, commercial paper and other investments which are expected to mature within one year. The auction rate securities we hold are high-quality municipal obligations which we believe currently have sufficient demand in the marketplace to clear all auctions. In the event of a failed auction, each of these securities will pay an after-tax interest rate of 10% or higher. Common equities include common stock and other risk investments (i.e., private equity investments and limited partnership interests in private equity and mezzanine funds).

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Our securities are reported at fair value, with the changes in fair value of these securities (other than hybrid securities and derivative instruments) reported as a component of accumulated other comprehensive income, net of deferred income taxes. The change in fair value of the hybrid securities and derivative instruments is recorded as a component of net realized gains (losses) on securities.
During the first quarter 2008, we wrote-down $52.5 million in securities determined to have an other-than-temporary decline in fair value. The write-downs included $42.7 million in preferred stocks, $6.9 million of common equities and $2.9 million of fixed-maturity asset-backed securities. All of these write-downs were the result of fundamental issues with the underlying issuers.
Note 3 Fair Value — We adopted Statement of Financial Accounting Standards (SFAS) 157, “Fair Value Measurements,” in the first quarter 2008, as it applies to our financial assets and liabilities. SFAS 157 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on inputs used to measure fair value and expands disclosure about fair value measurements. Adopting this statement does not have an effect on our financial condition, cash flows or results of operations.
In accordance with SFAS 157, we have categorized our financial instruments, based on the degree of subjectivity inherent in the valuation technique, into a fair value hierarchy of three levels as follows:
  •   Level 1 : Inputs are unadjusted, quoted prices in active markets for identical instruments at the measurement date (e.g., U.S. Government securities and active exchange-traded equity securities).
 
  •   Level 2 : Inputs (other than quoted prices included within Level 1) that are observable for the instrument either directly or indirectly. This includes: (i) quoted prices for similar instruments in active markets, (ii) quoted prices for identical or similar instruments in markets that are not active, (iii) inputs other than quoted prices that are observable for the instruments and (iv) inputs that are derived principally from or corroborated by observable market data by correlation or other means. (Examples include certain corporate and municipal bonds and certain preferred stocks).
 
  •   Level 3 : Inputs that are unobservable. Unobservable inputs reflect the reporting entity’s subjective evaluation about the assumptions market participants would use in pricing the financial instrument (e.g., certain structured securities and privately held investments).
The composition of the investment portfolio as of March 31, 2008, was:
                                 
    Fair Value  
(millions)   Level 1     Level 2     Level 3     Total  
Fixed maturities
  $ 320.0     $ 7,644.8     $ 155.9     $ 8,120.7  
Preferred stocks
    952.7       1,168.8       —       2,121.5  
Common equities
    2,090.5       —       13.7       2,104.2  
Short-term investments:
                               
Auction rate municipal obligations 1
    —       174.1       —       174.1  
 
                       
 
  $ 3,363.2     $ 8,987.7     $ 169.6       12,520.5  
 
                         
Short-term investments: Other 2
                            1,359.2  
 
                             
Total portfolio
                          $ 13,879.7  
 
                             
 
1   These securities are backed by municipal obligations with a maturity of 14 years or greater. Due to the short-term nature of auction rate securities (generally 7-49 days between auctions), these securities are valued at cost, which approximates fair value.
 
2   These securities are not subject to fair value measurement since they are cash equivalents (e.g., mature within one business day); therefore, we report these securities at cost, which approximates fair value.
We currently have no material financial liabilities that would require categorization.

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The following table shows a reconciliation of the December 31, 2007 balance and the March 31, 2008 balance for fair value measurements using significant unobservable (Level 3) inputs:
                                 
    Level 3 Fair Value  
    Fixed     Preferred     Common        
(millions)   Maturities     Stocks     Equities     Total  
Fair value at December 31, 2007
  $ 119.4     $ 115.6     $ 13.7     $ 248.7  
Calls/maturities/paydowns
    (1.8 )     —       —       (1.8 )
Transfers in (out) 1
    46.7       (115.6 )     —       (68.9 )
Change in valuation
    (8.4 )     —       —       (8.4 )
 
                       
Fair value at March 31, 2008
  $ 155.9     $ —     $ 13.7     $ 169.6  
 
                       
 
1   Represents movement between the fair value hierarchy levels during the first quarter 2008, reflecting changes in the inputs used to measure fair value during the period.
There were no purchases, sales or realized gains/losses associated with the Level 3 securities during the first quarter 2008.
Note 4 Debt — Debt at March 31 consisted of:
                                 
(millions)   2008     2007  
    Carrying     Fair     Carrying     Fair  
    Value     Value     Value     Value  
6.375% Senior Notes due 2012
  $ 348.6     $ 372.1     $ 348.3     $ 366.0  
7% Notes due 2013
    149.2       164.3       149.1       163.3  
6 5/8% Senior Notes due 2029
    294.5       295.3       294.4       321.1  
6.25% Senior Notes due 2032
    394.0       374.4       393.9       410.1  
6.70% Fixed-to-Floating Rate Junior Subordinated Debentures due 2067
    988.0       876.0       —       —  
 
                       
Total
  $ 2,174.3     $ 2,082.1     $ 1,185.7     $ 1,260.5  
 
                       
Note 5 Supplemental Cash Flow Information — We did not make any income tax payments in the first quarter 2008, compared to $19.0 million paid during the first quarter 2007, which represented a final estimated payment for 2006. Total interest paid was $21.1 million for both the three months ended March 31, 2008 and 2007. Non-cash activity includes changes in net unrealized gains (losses) on investment securities.
Note 6 Segment Information — Our Personal Lines segment writes insurance for private passenger automobiles and recreational vehicles. Our Commercial Auto segment writes primary liability and physical damage insurance for automobiles and trucks owned by small businesses in the specialty truck and business auto markets. Our other indemnity businesses primarily include writing professional liability insurance for community banks and managing a small amount of run-off business. Our service businesses include providing insurance-related services, primarily providing policy issuance and claims adjusting services for Commercial Auto Insurance Procedures/Plans (CAIP), which are state-supervised plans serving the involuntary market. All revenues are generated from external customers.

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Following are the operating results for the three months ended March 31:
                                 
    2008     2007