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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 1O-Q

(Mark One)

[ü]     Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2003

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

(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: 217,254,968 outstanding at July 31, 2003

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

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

NM = Not Meaningful

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, 2002.

The consolidated financial statements reflect all normal recurring adjustments which were, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. The results of operations for the period ended June 30, 2003, are not necessarily indicative of the results expected for the full year.

Note 2 Stock-Based Compensation Plans — During the first quarter 2003, the Company adopted the fair value method of accounting for employee stock options pursuant to Statement of Financial Accounting Standards (SFAS) 123, “Accounting for Stock-Based Compensation.” 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 in the financial statements. All options currently outstanding have an exercise price equal to the market price at the date of grant and, therefore, under APB 25, no compensation expense was recorded in 2002 and prior years.

The change to the fair value method of accounting is being applied prospectively to all awards granted, modified, or settled after January 1, 2003; no stock options have been granted after January 1, 2003. As a result, there is no compensation cost included in net income for 2003; however, compensation cost would have been recognized if the fair value method had been used for all awards for years since the original effective date of SFAS 123 (January 1, 1995).

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 uses a modified Black-Scholes pricing model to calculate the fair value of the options awarded as of the date of grant.

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As previously announced, beginning in 2003, the Company began granting restricted stock in lieu of stock options as the primary equity-based incentives for executives and other key employees. During the second quarter 2003, the Company granted time-based restricted stock awards to certain management employees and non-employee directors, as well as performance-based restricted stock awards to certain senior managers, covering a total of 556,811 Common Shares, net of minimal forfeitures arising from terminations or retirements during the quarter, for a total aggregate dollar value of approximately $36.2 million as of June 30, 2003. The employee time-based restricted stock awards vest in equal installments on January 1 of 2006, 2007 and 2008, the performance-based awards will vest upon the attainment of pre-established profitability and growth objectives, and the directors’ awards are scheduled to vest on March 21, 2004. The Company will recognize compensation expense for all awards over the applicable vesting period based on the market value at the date of grant; forfeitures will be recognized as they occur. During the second quarter 2003, the Company recognized compensation expense of $3.1 million for these awards.

Note 3 Supplemental Cash Flow Information — The Company paid income taxes of $154.0 million and $97.0 million during the six months ended June 30, 2003 and 2002, respectively. Total interest paid was $49.9 million and $25.5 million during the six months ended June 30, 2003 and 2002, respectively.

Note 4 Debt — Debt at June 30 consisted of:

Note 5 Comprehensive Income — Total comprehensive income was $487.2 million and $148.2 million for the quarters ended June 30, 2003 and 2002, respectively, and $750.1 million and $281.5 million for the six months ended June 30, 2003 and 2002, respectively.

Note 6 Dividends — On June 30, 2003, the Company paid a quarterly dividend of $.025 per Common Share to shareholders of record as of the close of business on June 13, 2003. The Board of Directors declared the dividend on April 18, 2003.

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 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 principally 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. All revenues are generated from external customers.

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Periods ended June 30,
(millions)

¹Personal automobile insurance accounted for 93% of the total Personal Lines segment net premiums earned in all periods presented.

²Revenues 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 generally relating to its insurance operations. All legal actions relating to individual claims made under insurance policies are considered by the Company in establishing its loss and loss adjustment expense reserves.

The Company has also been named as defendant in a number of putative class action and individual lawsuits, such as 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, use of preferred provider rates for payment of personal injury protection or medical payment claims, use of automated database vendors to assist in evaluating certain first party bodily injury 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, including worker classification issues. Other insurance companies face many of these same issues. Court approved settlements were reached in the alternative commission and betterment class action cases, and such settlements were concluded during the first quarter 2003 in accordance with the terms of the settlement agreements.

The Company plans to contest the outstanding suits vigorously, but will pursue settlement negotiations in those cases for which the Company deems it appropriate to do so. In accordance with the requirements of generally accepted accounting principles (GAAP), the Company is only permitted to establish loss reserves for lawsuits when it is probable that a loss has been incurred and the Company can reasonably estimate its potential exposure. Accordingly, the Company has not established reserves for those lawsuits where the Company is currently unable to estimate the potential exposure.

The Company has established reserves for those lawsuits for which it is probable that a loss has occurred and the Company can reasonably estimate its potential exposure. The Company believes that any disposition of these lawsuits in amounts in excess of the current reserves will not materially affect the Company’s annual cash flows, 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 one or more judgments 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, 2002.

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Note 9 New Accounting Standards — The accounting standards recently issued by the Financial Accounting Standards Board are currently not applicable to the Company and, therefore, would have no impact on the Company’s financial condition, cash flows or results of operations.

Note 10 Subsequent Event — In July 2003, the Company received notice from the Internal Revenue Service that the Joint Committee of Taxation of Congress had completed its review of a Federal income tax settlement agreed to by the Internal Revenue Service, primarily attributable to the amount of loss reserves deductible for tax purposes. As a result, the Company will receive an income tax refund of approximately $58 million, which is currently reflected as a deferred tax asset as a component of the Company’s “Income Taxes” item on the balance sheet. In addition, the Company currently estimates that it will receive $30.4 million of interest, which will be reflected as income in July’s results.

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

RESULTS OF OPERATIONS

Companywide net premiums written, which represent the premiums generated from policies written during the period less any reinsurance, increased 27% and 29% during the second quarter and first six months of 2003, respectively, over the same 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 30% and 31% during the second quarter and first six months of 2003, respectively, over the same periods last year. The Company has seen some modest cooling of the pace of growth in the second quarter, although the growth rates in many markets remain stable. Growth continues to be driven by new policies, increased retention and rate increases as well as changes in the mix of business. New applications continue to increase, albeit at a declining rate; however, the Company continues to see retention lengthening. Policies in force for the combined Personal Lines and Commercial Auto businesses increased 23% over June 30, 2002. During the second quarter 2003, the Company implemented 21 auto rate revisions in various states, bringing the total to 45 for the year. The Company will continue to be opportunistic in seeking market share, as the Company balances the opportunity to grow profitably with its ability to maintain service quality.

For the second quarter and first six months of 2003, the Company generated net income of $286.3 million and $577.8 million, respectively, compared to $160.4 million and $336.6 million for the same periods last year. Net income per share was $1.29 and $2.61 for the second quarter and year-to-date 2003, respectively, compared to $.71 and $1.50 for the same periods last year. Included in net income are net realized gains on securities of $23.1 million, or $.07 per share, for the second quarter 2003 and $20.0 million, or $.06 per share, for the first six months of 2003. Second quarter and year-to-date 2002 results included net realized losses on securities of $3.0 million, or $.01 per share, and $17.8 million, or $.05 per share, respectively. The GAAP combined ratio (CR) was 88.8 for the second quarter 2003, compared to 93.4 for the second quarter 2002. The year-to-date CR was 87.8, compared to 92.0 last year.

The Company’s Personal Lines business units write insurance for private passenger automobiles and recreation vehicles and represent 88% of the Company’s total year-to-date net premiums written. The Personal Lines business is generated either by an agent or written directly by the Company. The Agent channel includes business written by the Company’s 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, online at progressive.com and on behalf of affinity groups.

The Company’s Commercial Auto Business unit writes primary liability, physical damage and other auto-related insurance for automobiles and trucks operated by small businesses. The Commercial Auto Business represents 12% of the Company’s total year-to-date net premiums written. Although the Commercial Auto Business differs from Personal Lines auto, both businesses require the same fundamental skills, including 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’s other businesses, which represent less than 1% of year-to-date net premiums written, primarily include writing lenders’ collateral protection and directors’ and officers’ liability insurance and providing insurance-related services, principally processing business for Commercial Auto Insurance Procedures (CAIP), which are state-supervised plans serving the involuntary market. During April 2003, the Company decided to cease writing lenders’ collateral protection and related business no later than September 30, 2003. During 2002, the Company lost some key accounts for these products and this business has been unable to meet its profitability target. Management believes that exiting this line of business will not materially affect the Company’s financial condition, results of operations or cash flows. The remaining products in the Company’s other businesses are continuing to grow profitably.

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Underwriting results for the Company’s Personal Lines, including its channel components, the Commercial Auto business and other businesses were as follows:

(dollars in millions)