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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 1O-Q

     (Mark One)

For the transition period from                 to                

Commission File Number                     1-9518                    

THE PROGRESSIVE CORPORATION

(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 [ 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: 217,768,095 outstanding at September 30, 2002

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

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

¹ Presented on a post-split basis. The Company’s 3 for 1 stock split was effective April 22, 2002.

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.

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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, 2001.

The consolidated financial statements reflect all normal recurring adjustments which were, in the opinion of management, necessary to present a fair statement of the results for the interim periods. The results of operations for the period ended September 30, 2002, are not necessarily indicative of the results expected for the full year.

     Note 2 Supplemental Cash Flow Information — The Company paid income taxes of $277.0 million and $2.3 million during the nine months ended September 30, 2002 and 2001, respectively. Total interest paid was $55.3 million and $42.2 million during the nine months ended September 30, 2002 and 2001, respectively.

The Company effected a 3 for 1 stock split in the form of a dividend to shareholders on April 22, 2002. The Company reflected the issuance of the additional Common Shares by transferring $147.0 million from retained earnings to the common stock account. All per share and average equivalent share amounts were adjusted to give effect to the split. Treasury shares were not split.

     Note 3 Debt — Debt at September 30 consisted of:

     Note 4 Comprehensive Income — Total comprehensive income was $200.5 million and $153.6 million for the quarters ended September 30, 2002 and 2001, respectively, and $482.0 million and $320.5 million for the nine months ended September 30, 2002 and 2001, respectively.

     Note 5 Dividends — On September 30, 2002, the Company paid a quarterly dividend of $.025 per Common Share to shareholders of record as of the close of business on September 13, 2002. The dividend was declared by the Board of Directors on August 23, 2002.

On October 18, 2002, the Board of Directors declared a quarterly dividend of $.025 per Common Share. The dividend is payable December 31, 2002, to shareholders of record as of the close of business on December 13, 2002.

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     Note 6 Segment Information — The Company’s Personal Lines business units write insurance for private passenger automobiles and recreation vehicles. The Commercial Auto Business unit writes insurance for automobiles and trucks owned by small businesses for primary liability, physical damage and other auto-related insurance coverages. The Company’s other businesses primarily include writing lenders’ collateral protection and directors’ and officers’ liability insurance and providing insurance-related services, primarily processing business for Commercial Auto Insurance Procedures (CAIP), which are state supervised plans serving the involuntary market. During the third quarter 2002, the Company separated the Commercial Auto business from its other businesses and restated all prior periods discussed in this report. All revenues are generated from external customers.

Periods ended September 30,
(millions)

¹Personal automobile insurance accounted for 93% of the total Personal Lines segment net premiums earned for the third quarter and first nine months of both 2002 and 2001.

²Revenues represent recurring investment income and net realized gains/losses on securities; pretax profit is net of investment expenses.

     Note 7 Litigation —The Company is named as defendant in various lawsuits generally relating to 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, including an estimated reserve related to a diminution of value suit in Georgia. In February 2002, the Company reached a settlement of its diminution of value lawsuit in Georgia for $19.8 million, plus administrative costs.

The Company is also named as defendant in a number of putative class action lawsuits, such as those alleging damages as a result of the Company’s total loss evaluation methodology, use of after-market parts, use of credit in underwriting, charging betterment in first party physical damage 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. Other insurance companies face many of these same issues. Under generally accepted accounting principles (GAAP), the Company is not permitted to establish a reserve for any of these cases unless the loss is both probable and estimable.

The Company plans to contest these suits vigorously and pursue settlement negotiations in those cases for which it deems it appropriate to do so. In accordance with GAAP, the Company accrues for lawsuits when it is probable that a loss has been incurred and the Company can reasonably estimate its potential exposure. The Company has not established reserves for those lawsuits where the Company is currently unable to estimate the potential exposure. During the first nine months of 2002, the Company accrued $39.5 million to reflect its best

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estimate of the Company’s exposure relating to settlements pending in several states relating to the Company’s alternative commission programs and practice of charging betterment in first party physical damage claims. Both settlements have received preliminary court approval. Fairness hearings for consideration of final court approval of these settlements are currently scheduled for November 14, 2002, with respect to the alternative commission programs suits, and December 18, 2002, for the betterment suits; the dates of these hearings are subject to change by the courts.

The Company believes that the ultimate disposition of the lawsuits for which reserves have been established in amounts in excess of the current reserves will not materially affect the Company’s annual cash flows or results of operations or financial condition. However, in those cases for which the Company’s estimated exposure is based upon management’s belief that the case will be resolved through a court approved claims-made settlement, if instead, the case results in a judgment against the Company or the actual claims filed pursuant to a court approved settlement are significantly greater than estimated, the final payout 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, 2001.

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

RESULTS OF OPERATIONS

For the third quarter 2002, the Company’s net income was $178.5 million, or $.80 per share, compared to $96.4 million, or $.43 per share, for the same period last year. The GAAP combined ratio (CR) was 91.9 for the third quarter 2002, compared to 92.8 for the third quarter 2001. For the nine months ended September 30, 2002, net income was $515.1 million, or $2.30 per share, compared to $286.7 million, or $1.27 per share, for the same period last year. The year-to-date CR was 92.0, compared to 95.5 for the same period last year.

For the third quarter 2002, operating income, which is a non-GAAP disclosure and defined by the Company as net income less the after-tax effect of net realized gains and losses on securities and nonrecurring items, was $193.9 million, or $.87 per share, compared to $150.5 million, or $.67 per share, last year. Year-to-date operating income was $542.1 million, or $2.42 per share, compared to $345.8 million, or $1.54 per share, in 2001. The increase in operating income was primarily driven by improved underwriting results as discussed below. The only nonrecurring item consisted of $2.1 million, or less than $.01 per share, of severance and other costs related to the Company’s reduction in force in New York during 2001, and is reflected in the results for the first nine months of that year. The Company believes that, by excluding items which are not of a recurring nature, operating income provides a useful measure of the Company’s operating results. However, since operating income is not a term defined by GAAP, the Company’s operating income results may not be comparable to similarly titled measures reported by other companies.

Following is a reconciliation of the Company’s net income to operating income:

Companywide net premiums written, which represent the premiums generated from policies written during the period less any reinsurance, increased 31% during the third quarter 2002 and 29% during the first nine months of 2002 over the corresponding periods last year. Premiums earned, which are a function of the premiums written in the current and prior periods and are recognized into income over the policy term using a mid-month convention, increased 26% during the third quarter of 2002 and 22% during the first nine months of 2002 over the same periods last year. The countrywide growth experienced over the past nine months has been generated from new policies and rate increases, as well as changes in the mix of business. Personal Lines policies in force increased 20% over September 30, 2001, partially resulting from further competitor rate increases, as well as underwriting restrictions, withdrawals or moratoriums by other national and regional insurers. During the third quarter 2002, the Company implemented 22 auto rate revisions in various states, bringing the total rate revisions to 72 for the year. The Company will continue to be opportunistic in seeking market share, as the Company balances its ability to grow profitably with its ability to maintain service quality. In several key states, such as Florida, Texas and California, the Company is meeting its profit targets while growing in excess of 25% for the year. On the other hand, in Kentucky, where the year-to-date combined ratio is over 100, the Company is addressing the need to increase rates and may decide to slow growth there in the short term.

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The Company’s Personal Lines business units write insurance for private passenger automobiles and recreation vehicles and represent 89% of the Company’s total year-to-date net premiums earned. The Personal Lines business is generated either by an agent or written directly by the Company. The Agent channel includes business written by our network of 30,000 Independent Insurance Agencies and through strategic alliance business relationships (other insurance companies, financial institutions, employers and national brokerage agencies). Direct business includes business written through 1-800-PROGRESSIVE, the Internet (progressive.com) and on behalf of affinity groups.

The Company’s Commercial Auto Business unit writes insurance for automobiles and trucks owned by small businesses for primary liability, physical damage and other auto-related insurance coverage. The Commercial Auto Business represents 10% of the Company’s total year-to-date net premiums earned. Although the Commercial Auto Business differs from Personal Lines auto, it requires the same fundamental skills that drive the Company’s Personal Lines auto business, which include disciplined underwriting and pricing, as well as excellent claim service. The Company’s Commercial Auto Business is primarily distributed through the independent agent channel. The Company estimates that its Commercial Auto Business currently ranks fifth in market share on a national basis based on data reported by A. M. Best Company Inc.

The Company’s other businesses primarily include writing lenders’ collateral protection and directors’ and officers’ liability insurance and providing insurance-related services, primarily processing business for Commercial Auto Insurance Procedures (CAIP), which are state supervised plans serving the involuntary market.

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Underwriting results for the Company’s Personal Lines, including its channel components, the Commercial Auto Business and other businesses for the periods ended September 30, were:

(dollars in millions)