For the first quarter 2004, the combined ratio was 83.2% on net premiums written growth of 14%. All 49 markets where we write Personal Lines business were profitable. Recurring investment income was down slightly from a year ago, with lower yields offsetting the growth in the portfolio. However, we recognized $59.5 million of realized gains on securities during the quarter, compared to losses in the first quarter last year. As a result, net income increased 58% over the first quarter last year to $460 million.

The drivers of results this year so far are much as I outlined in the 2003 Annual Report. We experienced solid and improving execution in all operations of the Company, notably product pricing and claims resolution. Market conditions, however, are considerably different from even a year ago. Most competitors' rates are consistent with their profit objectives, and consumers are not being dislocated by rate or underwriting shocks, as was more common in the prior 12-24 months. External factors, notably reduced claims frequency, have been a consistent contributor to industry results. For Progressive, this means that we expect somewhat slower percentage growth than we experienced in the last two years. Our current absolute growth, however, is very acceptable.

Our claims hiring and training has continued to be very solid. At this time last year, keeping up with claims staffing was a challenge and, in one notable situation, an inhibitor to growth. This is not the case today and our progress on claims resolution, both in the quality of current handling and our exciting strategic initiatives, is a continuing highlight for us.

Operating at our current margins, while welcome, is to a degree unanticipated and greater than that contemplated in our pricing. We will continue to consider rate reductions on a state-by-state basis if we believe the margin for volume trade-off is a good one based on local market conditions, competition and our assessment of price elasticity. I have reaffirmed that short-term rate reductions are not a primary strategy. Rather, we will provide longer-term price stability for customers and believe we will be in a position to sustain that stability longer than our competitors.

This strategy is entirely consistent with our focus on retention. To the extent our pricing, claims, marketing and technology strategies allow us the opportunity to now operate at higher growth and wider margins than our competition, this will become considerably more valuable as the overall industry margins are reduced in the future. We will remain focused on building sustainable competitive advantages.

This quarterly shareholders' report is the first step toward a continuous report to shareholders. We expect to build upon the online annual report with periodic updates. Our goal is to get the same information that is in our monthly releases and quarterly analyst conference calls to our shareholders as quickly as possible. As always, this is an evolving process and one that we hope shareholders find useful.

In closing, it would be hard to be less than happy with our results. Perhaps less obvious, however, is the tremendous attitude of Progressive people and the culture that make these results possible.

Glenn M. Renwick
President and Chief Executive Officer

continue to FIRST QUARTER 2004 FINANCIAL REVIEW