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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 1O-Q

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: 215,997,800 outstanding at October 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 September 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 and third quarters of 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 554,786 Common Shares, net of minimal forfeitures arising from terminations or retirements during the periods, for a total aggregate dollar value of approximately $36.4 million as of September 30, 2003. The employee time-based restricted stock awards vest in equal installments on January 1 of 2006, 2007 and 2008, respectively; the performance-based awards will vest upon the attainment of pre-established profitability and growth objectives. The directors’ awards are scheduled to vest on March 21, 2004. The Company recognizes 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 third quarter and first nine months of 2003, the Company recognized compensation expense of $3.3 million and $6.4 million, respectively, for these awards.

Note 3 Supplemental Cash Flow Information — The Company paid income taxes of $304.0 million and $277.0 million during the nine months ended September 30, 2003 and 2002, respectively. Total interest paid was $77.6 million and $55.3 million during the nine months ended September 30, 2003 and 2002, respectively.

Note 4 Debt — Debt at September 30 consisted of:

Note 5 Comprehensive Income — Total comprehensive income was $307.9 million and $200.5 million for the quarters ended September 30, 2003 and 2002, respectively, and $1,058.0 million and $482.0 million for the nine months ended September 30, 2003 and 2002, respectively.

Note 6 Dividends — On September 30, 2003, the Company paid a quarterly dividend of $.025 per Common Share to shareholders of record as of the close of business on September 12, 2003. The Board of Directors declared the dividend on August 22, 2003.

On October 3, 2003, the Board of Directors declared a quarterly dividend of $.025 per Common Share payable December 31, 2003, to shareholders of record at the close of business on December 12, 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. Through September 30, 2003, the Company’s other businesses principally included writing lenders’ collateral protection and directors’ and officers’ liability insurance and providing insurance-related services, primarily processing business for Commercial Auto Insurance Procedures (CAIP),

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which are state supervised plans serving the involuntary market. All revenues are generated from external customers.

Periods ended September 30,

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

²For 2003, other businesses include $30.8 million of estimated interest income related to an income tax refund the Company will receive.

³Revenues 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, betterment and California claims employees class action cases, and those settlements were concluded during 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 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 for which the Company is currently unable to estimate the potential exposure. In the event that any one or more of these cases results in a judgment against or settlement by the Company, the resulting liability could have a material impact on the Company’s financial condition, cash flows and results of operations.

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. Based on currently available information, the Company believes that its reserves for these lawsuits are reasonable. However, if any one or more of these cases results in a judgment against or settlement by the Company for an amount that is significantly greater than the amount so reserved, the resulting liability could have a material impact on the Company’s financial condition, cash flows and results of operations.

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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.

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 Related Party Transactions — In January 2003, the Company repurchased 400,000 of its Common Shares, $1.00 par value, from an entity owned and controlled by Peter B. Lewis, the Company’s Chairman of the Board, at $52.23 per share. In addition, in September 2003, the Company purchased an additional 200,000 of its Common Shares from the same entity at $71.00 per share. The prices per share for each transaction were equal to or less than the then current market price of the Company’s stock as quoted on the New York Stock Exchange. These transactions are part of the Company’s ongoing share repurchase program.

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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 25% and 28% during the third quarter and first nine months of 2003, respectively, over the same periods last year. Net 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% and 29% during the third quarter and first nine months of 2003, respectively, over the same periods last year. The Company has experienced some modest cooling in the pace of growth over the course of 2003, with the written premium growth slowing to the lower 20% range more recently. However, the growth rates in many markets remain stable. Growth over the prior year continues to be driven by new policies, increased retention and rate increases, as well as changes in the mix of business. New auto applications continue to increase, albeit at a declining rate. The Company believes this declining rate of increase reflects competitors being more aggressive in the marketplace and achieving rate adequacy, which is likely to lead to more competition for the business and slower growth going forward. Auto retention has decreased slightly during the third quarter as compared to the second quarter, but has lengthened compared to prior years. Policies in force for the combined Personal Lines and Commercial Auto businesses increased 21% over September 30, 2002. During the third quarter 2003, the Company implemented 23 auto rate revisions in various states, bringing the total to 68 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 third quarter and first nine months of 2003, the Company generated net income of $319.8 million and $897.6 million, respectively, compared to $178.5 million and $515.1 million for the same periods last year. Net income per share was $1.45 and $4.06 for the third quarter and year-to-date 2003, respectively, compared to $.80 and $2.30 for the same periods last year. Included in net income are net realized losses on securities of $4.3 million, or $.01 per share, for the third quarter 2003 and net realized gains of $15.7 million, or $.05 per share, for the first nine months of 2003. Third quarter and year-to-date 2002 results included net realized losses on securities of $23.7 million, or $.07 per share, and $41.5 million, or $.12 per share, respectively. In addition, 2003 net income includes $30.8 million, or $.09 per share, of estimated interest income related to an income tax refund the Company will receive. See “Financial Condition” for a discussion of the refund. The GAAP combined ratio (CR) was 87.9 for the third quarter 2003, compared to 91.9 for the third 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 Agency channel includes business written by the Company’s network of 30,000 independent insurance agencies, insurance brokers in several states 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 affiliates.

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 11% of the Company’s total year-to-date net premiums written. Although the Commercial Auto business differs from Personal Lines auto in its customer base and products written, both businesses require the same fundamental skills, including disciplined underwriting and pricing, as well as excellent claims 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 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. The other businesses are also managing the wind down the

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Company’s lender’s collateral protection program, which the Company decided to cease writing as of September 30, 2003. During 2002, the Company lost some key accounts for the lender’s collateral protection 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.

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