10-QPeriod: Q2 FY2008

PROGRESSIVE CORP/OH/ Quarterly Report for Q2 Ended Jun 30, 2008

Filed August 7, 2008For Securities:PGR

Summary

Progressive Corporation (PGR) reported its second quarter and year-to-date results for the period ending June 30, 2008. The company experienced a notable decline in net income, down 24% for the quarter and 30% year-to-date, primarily attributed to increased catastrophe losses and higher realized losses on securities. Total revenues also saw a decrease of 4% for the quarter and 3% year-to-date. Despite revenue pressures from prior rate decreases, Progressive maintained a focus on customer retention, with policy life expectancy showing significant improvement. However, new business acquisition remains a challenge, particularly in the Agency segment. The company's investment portfolio saw a decrease in net unrealized gains, largely due to market disruptions in the financial sector. Management expressed confidence in sufficient capital resources and liquidity to support ongoing operations.

Financial Highlights

30 data points
Beta

Revenue

$3.54B

Net Income

$215.50M

6.1% Net Margin

EPS (Diluted)

$0.32

Total Assets

$18.91B

Cash & Equivalents

$9.90M

Free Cash Flow

$888.40M

Financial Statements
Beta
Revenue$3.54B
Interest Expense$34.30M
Net Income$215.50M
EPS (Basic)$0.32
EPS (Diluted)$0.32
Shares Outstanding (Basic)667.40M
Shares Outstanding (Diluted)673.70M

Key Highlights

  • 1Net income declined significantly: -24% for Q2 2008 and -30% for the first six months of 2008 compared to the prior year periods.
  • 2Total revenues decreased by 4% for Q2 2008 and 3% for the first six months of 2008.
  • 3Underwriting profitability margin for total underwriting operations was 6.4% in Q2 2008, down from 7.7% in Q2 2007.
  • 4Customer retention efforts showed positive results with policy life expectancy increasing by 11% for Agency and 13% for Direct auto businesses year-over-year.
  • 5Net premiums earned declined by 3% for both Q2 and the first six months of 2008, impacted by prior year rate reductions.
  • 6The investment portfolio's pretax net unrealized gains decreased significantly, reflecting market volatility, particularly in financial sector securities.
  • 7The company repurchased 3.3 million common shares in Q2 2008 for $61.4 million as part of its share repurchase program.

Frequently Asked Questions

The primary drivers of the decrease in net income were higher catastrophe losses incurred in the second quarter of 2008 compared to the prior year, and increased realized losses on securities. The impact of prior rate decreases, which began in mid-2006 and continued until late 2007, also contributed to lower earned premiums.

Progressive is implementing several initiatives to spur new business growth, including expanding its usage-based insurance product, introducing a 'Name Your Price' program allowing customers to select their desired coverage price, and entering new markets like Massachusetts with its personal auto product.

The investment portfolio's net unrealized gains decreased substantially due to market disruptions, particularly in the financial sector and preferred stocks. While the company has recognized other-than-temporary impairment losses on certain securities, it continues to monitor its portfolio diligently. The duration of the fixed-income portfolio was 3.0 years, and the company uses Value-at-Risk (VaR) to manage exposure to short-term volatility.

Progressive has an annual variable dividend policy based on a target percentage of after-tax underwriting income multiplied by a 'Gainshare factor.' For 2008, the dividend was targeted at 20% of after-tax underwriting profit, with a Gainshare factor of 0.70 as of June 30, 2008. However, the policy states that if after-tax comprehensive income is less than after-tax underwriting income, no dividend will be paid. Based on results as of June 30, 2008, no dividend would be payable under this policy for the year.