10-QPeriod: Q3 FY2008

PROGRESSIVE CORP/OH/ Quarterly Report for Q3 Ended Sep 30, 2008

Filed November 10, 2008For Securities:PGR

Summary

Progressive Corporation (PGR) filed its third-quarter 2008 10-Q report on November 10, 2008, detailing its market risk exposure and controls. The report highlights that the company's investment portfolio experienced valuation losses in the fixed-income segment that exceeded the Value-at-Risk (VaR) model's 99% confidence level during the quarter. This underperformance was attributed to significant market disruption in the financial services sector and an unexpected increase in correlation between financial sector preferred stocks and their common equities. The company also acknowledged the broader economic risks, including a potential recession and the financial instability of counterparties, as outlined in their updated risk factors. Despite these challenges, Progressive reaffirmed the effectiveness of its disclosure controls and procedures and reported no material changes to its internal control over financial reporting during the quarter.

Financial Highlights

30 data points
Beta

Revenue

$2.21B

Net Income

-$684.20M

-31.0% Net Margin

EPS (Diluted)

$-1.03

Total Assets

$18.64B

Cash & Equivalents

$6.60M

Free Cash Flow

$474.60M

Financial Statements
Beta
Revenue$2.21B
Interest Expense$34.20M
Net Income-$684.20M
EPS (Basic)$-1.03
EPS (Diluted)$-1.03
Shares Outstanding (Basic)666.30M
Shares Outstanding (Diluted)672.80M

Key Highlights

  • 1Investment portfolio losses in fixed-income segment exceeded VaR model's 99% confidence level due to market disruption.
  • 2Increased correlation between financial sector preferred stocks and common equities contributed to larger-than-expected losses.
  • 3Risk factors updated to include heightened concerns about recession, financial institution failures, and market illiquidity.
  • 4Disclosure controls and procedures were reviewed and found to be effective; no material changes to internal control over financial reporting were reported.
  • 5Share repurchases continued, with a total of 85 shares repurchased in August 2008 for $19.40 per share, under a plan authorized in June 2007 to repurchase up to 100 million shares.
  • 6Limited share repurchases in the third quarter of 2008, primarily used to offset dilution from equity-based compensation.
  • 7Company continues to manage market risk through VaR analysis, though recent events highlighted limitations of historical volatility modeling in extreme market conditions.

Frequently Asked Questions

The company reported that valuation losses in its fixed-income portfolio during the quarter ended September 30, 2008, exceeded the VaR model's expected loss at the 99% confidence level. This occurred because the VaR model, based on historical volatility, did not adequately capture the significant market disruption in the financial services sector during that period. An unexpected increase in correlation between financial sector preferred stocks and their common equities also contributed to the larger-than-anticipated loss.

Progressive's risk factors have been amplified by recent financial market turmoil. Key risks include the possibility of a recession in the U.S. or global economies affecting the value of its securities, the failure of financial institutions that could disrupt markets or lead to counterparty defaults, and inactive markets for certain securities hindering the ability to sell them at reasonable prices. Significant investment portfolio losses and reductions in capital levels could also lead to credit rating downgrades, increasing the cost of future capital raises.

The report states that Progressive's disclosure controls and procedures, designed to ensure timely and accurate reporting, were reviewed by the CEO and CFO and found to be effective as of the end of the period. There were no changes in the company's internal control over financial reporting during the most recent fiscal quarter that materially affected or are reasonably likely to materially affect its internal control over financial reporting.

Progressive's financial policies include repurchasing shares to neutralize dilution from equity-based compensation and return underleveraged capital to investors. In the third quarter of 2008, the company repurchased a very small number of shares (85 in August) at an average price of $19.40, as part of its publicly announced plans. These repurchases were primarily used to offset dilution from equity-based compensation, consistent with their stated policy.