UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1O-Q
(Mark One)
| þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2011
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
(Exact name of registrant as specified in its charter)
| Ohio | 34-0963169 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| 6300 Wilson Mills Road, Mayfield Village, Ohio | 44143 | |
| (Address of principal executive offices) | (Zip Code) |
(440) 461-5000
(Registrant’s telephone number, including area code)
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 þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | þ | Accelerated filer | ¨ | |||
| Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Common Shares, $1.00 par value: 642,703,902 outstanding at June 30, 2011
PART I - FINANCIAL INFORMATION
| Item 1. | Financial Statements. |
The Progressive Corporation and Subsidiaries
Consolidated Statements of Income
(unaudited)
| Three Months | Six Months | |||||||||||||||||||||||
| Periods Ended June 30, |
2011 | 2010 | % Change |
2011 | 2010 | % Change |
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| (millions - except per share amounts) | ||||||||||||||||||||||||
| Revenues |
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| Net premiums earned |
$ | 3,719.9 | $ | 3,590.2 | 4 | $ | 7,385.2 | $ | 7,091.3 | 4 | ||||||||||||||
| Investment income |
120.8 | 130.6 | (8 | ) | 244.1 | 260.4 | (6 | ) | ||||||||||||||||
| Net realized gains (losses) on securities: |
||||||||||||||||||||||||
| Other-than-temporary impairment (OTTI) losses: |
||||||||||||||||||||||||
| Total OTTI losses |
(3.1 | ) | (7.9 | ) | (61 | ) | (4.5 | ) | (17.2 | ) | (74 | ) | ||||||||||||
| Non-credit losses, net of credit losses recognized on previously recorded non-credit OTTI losses |
.9 | (.7 | ) | NM | .9 | 5.5 | (84 | ) | ||||||||||||||||
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| Net impairment losses recognized in earnings |
(2.2 | ) | (8.6 | ) | (74 | ) | (3.6 | ) | (11.7 | ) | (69 | ) | ||||||||||||
| Net realized gains (losses) on securities |
28.2 | (30.9 | ) | NM | 129.3 | 3.0 | 4210 | |||||||||||||||||
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| Total net realized gains (losses) on securities |
26.0 | (39.5 | ) | NM | 125.7 | (8.7 | ) | NM | ||||||||||||||||
| Service revenues |
6.0 | 5.0 | 20 | 11.2 | 9.2 | 22 | ||||||||||||||||||
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| Total revenues |
3,872.7 | 3,686.3 | 5 | 7,766.2 | 7,352.2 | 6 | ||||||||||||||||||
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| Expenses |
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| Losses and loss adjustment expenses |
2,660.9 | 2,543.2 | 5 | 5,169.0 | 4,966.6 | 4 | ||||||||||||||||||
| Policy acquisition costs |
348.3 | 338.8 | 3 | 695.0 | 671.9 | 3 | ||||||||||||||||||
| Other underwriting expenses |
466.0 | 446.2 | 4 | 920.7 | 872.7 | 6 | ||||||||||||||||||
| Investment expenses |
3.5 | 4.6 | (24 | ) | 6.6 | 8.2 | (20 | ) | ||||||||||||||||
| Service expenses |
4.8 | 5.5 | (13 | ) | 8.8 | 10.7 | (18 | ) | ||||||||||||||||
| Interest expense |
31.5 | 35.1 | (10 | ) | 63.0 | 70.3 | (10 | ) | ||||||||||||||||
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| Total expenses |
3,515.0 | 3,373.4 | 4 | 6,863.1 | 6,600.4 | 4 | ||||||||||||||||||
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| Net Income |
||||||||||||||||||||||||
| Income before income taxes |
357.7 | 312.9 | 14 | 903.1 | 751.8 | 20 | ||||||||||||||||||
| Provision for income taxes |
112.5 | 101.0 | 11 | 295.0 | 244.3 | 21 | ||||||||||||||||||
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| Net income |
$ | 245.2 | $ | 211.9 | 16 | $ | 608.1 | $ | 507.5 | 20 | ||||||||||||||
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| Computation of Earnings Per Share |
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| Basic: |
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| Average shares outstanding |
643.6 | 660.4 | (3) | 647.6 | 660.9 | (2 | ) | |||||||||||||||||
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| Per share |
$ | .38 | $ | .32 | 19 | $ | .94 | $ | .77 | 22 | ||||||||||||||
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| Diluted: |
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| Average shares outstanding |
643.6 | 660.4 | (3) | 647.6 | 660.9 | (2 | ) | |||||||||||||||||
| Net effect of dilutive stock-based compensation |
4.3 | 5.3 | (19) | 4.1 | 5.2 | (21 | ) | |||||||||||||||||
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| Total equivalent shares |
647.9 | 665.7 | (3) | 651.7 | 666.1 | (2 | ) | |||||||||||||||||
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| Per share |
$ | .38 | $ | .32 | 19 | $ | .93 | $ | .76 | 22 | ||||||||||||||
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| Dividends declared per share1 |
$ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||||
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NM = Not Meaningful
1Progressive maintains an annual dividend program. See Note 9 - Dividends for further discussion.
See notes to consolidated financial statements.
2
The Progressive Corporation and Subsidiaries
Consolidated Balance Sheets
(unaudited)
| June 30, | December 31, | |||||||||||
| (millions) |
2011 | 2010 | 2010 | |||||||||
| Assets |
||||||||||||
| Investments—Available-for-sale, at fair value: |
||||||||||||
| Fixed maturities (amortized cost: $11,499.5, $11,699.5, and $11,630.8) |
$ | 11,788.5 | $ | 11,885.3 | $ | 11,850.0 | ||||||
| Equity securities: |
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| Nonredeemable preferred stocks (cost: $495.5, $627.3, and $601.3) |
1,029.7 | 1,145.8 | 1,157.6 | |||||||||
| Common equities (cost: $1,379.8, $1,005.1, and $1,021.7) |
1,867.9 | 1,150.0 | 1,425.0 | |||||||||
| Short-term investments (amortized cost: $1,343.5, $1,648.9, and $1,090.8) |
1,343.5 | 1,648.9 | 1,090.8 | |||||||||
| Total investments |
16,029.6 | 15,830.0 | 15,523.4 | |||||||||
| Cash |
149.7 | 153.8 | 158.9 | |||||||||
| Accrued investment income |
104.3 | 108.9 | 109.3 | |||||||||
| Premiums receivable, net of allowance for doubtful accounts of $109.5, $105.8, and $114.9 |
2,982.6 | 2,766.2 | 2,738.4 | |||||||||
| Reinsurance recoverables, including $34.3, $35.7, and $37.4 on paid losses and loss adjustment expenses |
775.7 | 675.8 | 741.5 | |||||||||
| Prepaid reinsurance premiums |
86.7 | 74.4 | 88.1 | |||||||||
| Deferred acquisition costs |
451.6 | 443.1 | 417.2 | |||||||||
| Income taxes |
111.4 | 318.2 | 189.0 | |||||||||
| Property and equipment, net of accumulated depreciation of $596.4, $618.8, and $564.3 |
917.1 | 947.7 | 932.6 | |||||||||
| Other assets |
198.9 | 178.5 | 251.9 | |||||||||
| Total assets |
$ | 21,807.6 | $ | 21,496.6 | $ | 21,150.3 | ||||||
| Liabilities and Shareholders’ Equity |
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| Unearned premiums |
$ | 4,704.3 | $ | 4,572.1 | $ | 4,353.8 | ||||||
| Loss and loss adjustment expense reserves |
7,142.6 | 6,885.6 | 7,071.0 | |||||||||
| Accounts payable, accrued expenses, and other liabilities |
1,652.1 | 1,556.2 | 1,718.4 | |||||||||
|
Debt1 |
1,959.1 | 2,178.1 | 1,958.2 | |||||||||
| Total liabilities |
15,458.1 | 15,192.0 | 15,101.4 | |||||||||
| Common Shares, $1.00 par value (authorized 900.0; issued 797.7, 797.7, and 797.7, including treasury shares of 155.0, 130.1, and 135.3) |
642.7 | 667.6 | 662.4 | |||||||||
| Paid-in capital |
1,007.7 | 964.5 | 1,007.1 | |||||||||
| Retained earnings |
3,835.6 | 4,097.9 | 3,595.7 | |||||||||
| Accumulated other comprehensive income (loss), net of tax: |
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| Net non-credit related OTTI losses, adjusted for valuation changes |
(4.9 | ) | (6.0 | ) | (1.8 | ) | ||||||
| Other net unrealized gains (losses) on securities |
853.1 | 560.0 | 769.1 | |||||||||
| Total net unrealized gains (losses) on securities |
848.2 | 554.0 | 767.3 | |||||||||
| Net unrealized gains on forecasted transactions |
13.1 | 20.0 | 14.7 | |||||||||
| Foreign currency translation adjustment |
2.2 | .6 | 1.7 | |||||||||
| Total accumulated other comprehensive income (loss) |
863.5 | 574.6 | 783.7 | |||||||||
| Total shareholders’ equity |
6,349.5 | 6,304.6 | 6,048.9 | |||||||||
| Total liabilities and shareholders’ equity |
$ | 21,807.6 | $ | 21,496.6 | $ | 21,150.3 | ||||||
1Consists of both short- and long-term debt. See Note 4—Debt.
See notes to consolidated financial statements.
3
The Progressive Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
| Six months ended June 30, |
2011 | 2010 | ||||||
| (millions) | ||||||||
| Cash Flows From Operating Activities |
||||||||
| Net income |
$ | 608.1 | $ | 507.5 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
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| Depreciation |
42.6 | 41.9 | ||||||
| Amortization of fixed-income securities |
116.4 | 110.7 | ||||||
| Amortization of stock-based compensation |
24.5 | 23.7 | ||||||
| Net realized (gains) losses on securities |
(125.7 | ) | 8.7 | |||||
| Net loss on disposition of property and equipment |
7.3 | 1.1 | ||||||
| Changes in: |
||||||||
| Premiums receivable |
(244.2 | ) | (311.4 | ) | ||||
| Reinsurance recoverables |
(34.2 | ) | (111.0 | ) | ||||
| Prepaid reinsurance premiums |
1.4 | (5.1 | ) | |||||
| Deferred acquisition costs |
(34.4 | ) | (40.9 | ) | ||||
| Income taxes |
34.1 | 31.8 | ||||||
| Unearned premiums |
350.4 | 399.2 | ||||||
| Loss and loss adjustment expense reserves |
71.5 | 232.6 | ||||||
| Accounts payable, accrued expenses, and other liabilities |
194.4 | 297.1 | ||||||
| Other, net |
18.9 | 18.6 | ||||||
| Net cash provided by operating activities |
1,031.1 | 1,204.5 | ||||||
| Cash Flows From Investing Activities |
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| Purchases: |
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| Fixed maturities |
(4,265.9 | ) | (2,281.3 | ) | ||||
| Equity securities |
(397.5 | ) | (444.2 | ) | ||||
| Sales: |
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| Fixed maturities |
3,570.6 | 1,683.6 | ||||||
| Equity securities |
240.9 | 118.9 | ||||||
| Maturities, paydowns, calls, and other: |
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| Fixed maturities |
735.4 | 516.8 | ||||||
| Net purchases of short-term investments—other |
(252.3 | ) | (571.1 | ) | ||||
| Net unsettled security transactions |
39.2 | .1 | ||||||
| Purchases of property and equipment |
(35.6 | ) | (29.9 | ) | ||||
| Sales of property and equipment |
1.2 | .5 | ||||||
| Net cash used in investing activities |
(364.0 | ) | (1,006.6 | ) | ||||
| Cash Flows From Financing Activities |
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| Proceeds from exercise of stock options |
5.4 | 8.2 | ||||||
| Tax benefit from exercise/vesting of stock-based compensation |
2.4 | 2.7 | ||||||
| Dividends paid to shareholders1 |
(263.6 | ) | (108.2 | ) | ||||
| Acquisition of treasury shares |
(420.9 | ) | (107.3 | ) | ||||
| Net cash used in financing activities |
(676.7 | ) | (204.6 | ) | ||||
| Effect of exchange rate changes on cash |
.4 | (.2 | ) | |||||
| Increase (decrease) in cash |
(9.2 | ) | (6.9 | ) | ||||
| Cash, January 1 |
158.9 | 160.7 | ||||||
| Cash, June 30 |
$ | 149.7 | $ | 153.8 | ||||
1Progressive maintains an annual dividend program. See Note 9—Dividends for further discussion.
See notes to consolidated financial statements.
4
The Progressive Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
Note 1 Basis of Presentation — The consolidated financial statements include the accounts of The Progressive Corporation, its subsidiaries, and a mutual company affiliate. All of the subsidiaries and the mutual company affiliate are wholly owned or controlled. The consolidated financial statements reflect all normal recurring adjustments that, in the opinion of management, were necessary for a fair statement of the results for the interim periods presented. The results of operations for the period ended June 30, 2011, are not necessarily indicative of the results expected for the full year. These consolidated financial statements and the notes thereto should be read in conjunction with Progressive’s audited financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2010.
Note 2 Investments — The following tables present the composition of our investment portfolio by major security type consistent with our internal classification, which represents how we manage, monitor, and measure the portfolio:
| ($ in millions) |
Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Net Realized Gains (Losses)1 |
Fair Value | % of Total Fair Value |
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| June 30, 2011 |
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| Fixed maturities: |
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| U.S. government obligations |
$ | 2,881.1 | $ | 80.3 | $ | (.8 | ) | $ | 0 | $ | 2,960.6 | 18.5 | % | |||||||||||
| State and local government obligations |
1,812.7 | 46.0 | (1.3 | ) | 0 | 1,857.4 | 11.6 | |||||||||||||||||
| Corporate debt securities |
2,765.1 | 89.5 | (5.1 | ) | 5.9 | 2,855.4 | 17.8 | |||||||||||||||||
| Residential mortgage-backed securities |
537.0 | 12.7 | (29.8 | ) | 0 | 519.9 | 3.2 | |||||||||||||||||
| Commercial mortgage-backed securities |
1,755.6 | 60.4 | (3.6 | ) | 0 | 1,812.4 | 11.3 | |||||||||||||||||
| Other asset-backed securities |
1,312.4 | 15.0 | (.8 | ) | 1.1 | 1,327.7 | 8.3 | |||||||||||||||||
| Redeemable preferred stocks |
435.6 | 28.0 | (8.5 | ) | 0 | 455.1 | 2.8 | |||||||||||||||||
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| Total fixed maturities |
11,499.5 | 331.9 | (49.9 | ) | 7.0 | 11,788.5 | 73.5 | |||||||||||||||||
| Equity securities: |
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| Nonredeemable preferred stocks |
495.5 | 534.8 | 0 | (.6 | ) | 1,029.7 | 6.4 | |||||||||||||||||
| Common equities |
1,379.8 | 494.7 | (6.6 | ) | 0 | 1,867.9 | 11.7 | |||||||||||||||||
| Short-term investments: |
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| Other short-term investments |
1,343.5 | 0 | 0 | 0 | 1,343.5 | 8.4 | ||||||||||||||||||
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| Total portfolio2,3 |
$ | 14,718.3 | $ | 1,361.4 | $ | (56.5 | ) | $ | 6.4 | $ | 16,029.6 | 100.0 | % | |||||||||||
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| ($ in millions) |
Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Net Realized Gains (Losses)1 |
Fair Value | % of Total Fair Value |
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| June 30, 2010 |
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| Fixed maturities: |
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| U.S. government obligations |
$ | 4,061.2 | $ | 69.2 | $ | (15.7 | ) | $ | 0 | $ | 4,114.7 | 26.0 | % | |||||||||||
| State and local government obligations |
1,723.8 | 59.0 | (1.0 | ) | 0 | 1,781.8 | 11.2 | |||||||||||||||||
| Corporate debt securities |
2,039.3 | 85.7 | (10.1 | ) | 2.4 | 2,117.3 | 13.4 | |||||||||||||||||
| Residential mortgage-backed securities |
560.9 | 10.0 | (37.9 | ) | 0 | 533.0 | 3.4 | |||||||||||||||||
| Commercial mortgage-backed securities |
1,721.0 | 59.7 | (8.7 | ) | 0 | 1,772.0 | 11.2 | |||||||||||||||||
| Other asset-backed securities |
976.1 | 12.4 | (1.8 | ) | .1 | 986.8 | 6.2 | |||||||||||||||||
| Redeemable preferred stocks |
617.2 | 20.3 | (57.8 | ) | 0 | 579.7 | 3.7 | |||||||||||||||||
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| Total fixed maturities |
11,699.5 | 316.3 | (133.0 | ) | 2.5 | 11,885.3 | 75.1 | |||||||||||||||||
| Equity securities: |
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| Nonredeemable preferred stocks |
627.3 | 524.1 | 0 | (5.6 | ) | 1,145.8 | 7.2 | |||||||||||||||||
| Common equities |
1,005.1 | 170.7 | (25.8 | ) | 0 | 1,150.0 | 7.3 | |||||||||||||||||
| Short-term investments: |
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| Other short-term investments |
1,648.9 | 0 | 0 | 0 | 1,648.9 | 10.4 | ||||||||||||||||||
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| Total portfolio2,3 |
$ | 14,980.8 | $ | 1,011.1 | $ | (158.8 | ) | $ | (3.1 | ) | $ | 15,830.0 | 100.0 | % | ||||||||||
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5
| ($ in millions) |
Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Net Realized Gains (Losses)1 |
Fair Value | % of Total Fair Value |
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| December 31, 2010 |
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| Fixed maturities: |
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| U.S. government obligations |
$ | 3,203.2 | $ | 56.3 | $ | (16.9) | $ | 0 | $ | 3,242.6 | 20.9 | % | ||||||||||||
| State and local government obligations |
1,955.5 | 43.0 | (9.4) | 0 | 1,989.1 | 12.8 | ||||||||||||||||||
| Corporate debt securities |
2,579.0 | 78.1 | (13.3) | 2.3 | 2,646.1 | 17.0 | ||||||||||||||||||
| Residential mortgage-backed securities |
567.1 | 17.8 | (21.3) | 0 | 563.6 | 3.6 | ||||||||||||||||||
| Commercial mortgage-backed securities |
1,772.1 | 66.9 | (6.9) | 0 | 1,832.1 | 11.8 | ||||||||||||||||||
| Other asset-backed securities |
1,063.9 | 12.4 | (2.2) | (.1) | 1,074.0 | 6.9 | ||||||||||||||||||
| Redeemable preferred stocks |
490.0 | 29.6 | (17.1) | 0 | 502.5 | 3.3 | ||||||||||||||||||
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| Total fixed maturities |
11,630.8 | 304.1 | (87.1) | 2.2 | 11,850.0 | 76.3 | ||||||||||||||||||
| Equity securities: |
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| Nonredeemable preferred stocks |
601.3 | 560.2 | 0 | (3.9) | 1,157.6 | 7.5 | ||||||||||||||||||
| Common equities |
1,021.7 | 406.5 | (3.2) | 0 | 1,425.0 | 9.2 | ||||||||||||||||||
| Short-term investments: |
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| Other short-term investments |
1,090.8 | 0 | 0 | 0 | 1,090.8 | 7.0 | ||||||||||||||||||
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| Total portfolio2,3 |
$ | 14,344.6 | $ | 1,270.8 | $ | (90.3) | $ | (1.7) | $ | 15,523.4 | 100.0 | % | ||||||||||||
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1 Represents net holding period gains (losses) on certain hybrid securities (discussed below).
2 At June 30, 2011, we had $7.1 million of net unsettled security transactions offset in other assets, compared to $46.3 million at December 31, 2010; at June 30, 2010, we had $7.8 million of net unsettled security transactions offset in other liabilities.
3 The total fair value of the portfolio at June 30, 2011 and 2010, and December 31, 2010 included $1.6 billion, $1.9 billion, and $2.2 billion, respectively, of securities held in a consolidated, non-insurance subsidiary of the holding company, net of any unsettled security transactions.
Our other short-term investments include Eurodollar deposits, commercial paper, reverse repurchase transactions, and other investments that are expected to mature within one year.
Included in our fixed-maturity and equity securities are hybrid securities, which are reported at fair value:
| June 30, | December 31, | |||||||||||
| (millions) |
2011 | 2010 | 2010 | |||||||||
| Fixed maturities: |
||||||||||||
| Corporate debt securities |
$ | 230.5 | $ | 117.6 | $ | 176.4 | ||||||
| Other asset-backed securities |
16.5 | 14.8 | 14.9 | |||||||||
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|||||||
| Total fixed maturities |
247.0 | 132.4 | 191.3 | |||||||||
| Equity securities: |
||||||||||||
| Nonredeemable preferred stocks |
22.9 | 55.5 | 52.8 | |||||||||
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|||||||
| Total hybrid securities |
$ | 269.9 | $ | 187.9 | $ | 244.1 | ||||||
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Certain corporate debt securities are accounted for as hybrid securities since they were acquired at a substantial premium and contain a change-of-control put feature that permits the investor, at its sole option once the change of control is triggered, to put the security back to the issuer at a 1% premium to par. Due to this change-of-control put option and the substantial market premium paid, there is a potential that the election to put, upon the occurrence of a change in control, could result in the investment not returning substantially all of the original investment. In the asset-backed portfolio, the hybrid security was acquired at a deep discount to par due to a failing auction, and contains a put option (derivative feature) that allows the investor to put that security back to the auction at par. If the auction is restored, this embedded derivative has the potential to more than double our initial investment yield. The hybrid securities in our nonredeemable preferred stock portfolio are perpetual preferred stocks that have call features with fixed-rate coupons, whereby the change in value of the call features is a component of the overall change in value of the preferred stocks.
Our securities are reported at fair value, with the changes in fair value of these securities (other than hybrid securities and derivative instruments) reported as a component of accumulated other comprehensive income, net of deferred income taxes. The changes in fair value of the hybrid securities and derivative instruments are recorded as a component of net realized gains (losses) on securities.
6
Gross Unrealized Losses As of June 30, 2011, we had $49.9 million of gross unrealized losses in our fixed-maturity securities and $6.6 million in our common equities. We currently do not intend to sell the fixed-maturity securities and determined that it is more likely than not that we will not be required to sell these securities for the period of time necessary to recover their cost bases. In addition, we may retain the common stocks to maintain correlation to the Russell 1000 Index. If our strategy was to change and these securities were determined to be other-than-temporarily impaired, we would recognize a write-down in accordance with our stated policy.
The following tables show the composition of gross unrealized losses by major security type and by the length of time that individual securities have been in a continuous unrealized loss position:
| Total Fair Value |
Gross Unrealized Losses |
Less than 12 Months | 12 Months or Greater | |||||||||||||||||||||
| (millions) |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
||||||||||||||||||||
| June 30, 2011 |
||||||||||||||||||||||||
| Fixed maturities: |
||||||||||||||||||||||||
| U.S. government obligations |
$ | 33.4 | $ | (.8 | ) | $ | 33.4 | $ | (.8 | ) | $ | 0 | $ | 0 | ||||||||||
| State and local government obligations |
163.3 | (1.3 | ) | 121.1 | (.6 | ) | 42.2 | (.7 | ) | |||||||||||||||
| Corporate debt securities |
354.7 | (5.1 | ) | 330.3 | (4.7 | ) | 24.4 | (.4 | ) | |||||||||||||||
| Residential mortgage-backed securities |
402.1 | (29.8 | ) | 185.4 | (3.0 | ) | 216.7 | (26.8 | ) | |||||||||||||||
| Commercial mortgage-backed securities |
220.9 | (3.6 | ) | 138.6 | (2.1 | ) | 82.3 | (1.5 | ) | |||||||||||||||
| Other asset-backed securities |
120.0 | (.8 | ) | 115.5 | (.3 | ) | 4.5 | (.5 | ) | |||||||||||||||
| Redeemable preferred stocks |
161.7 | (8.5 | ) | 0 | 0 | 161.7 | (8.5 | ) | ||||||||||||||||
| Total fixed maturities |
1,456.1 | (49.9 | ) | 924.3 | (11.5 | ) | 531.8 | (38.4 | ) | |||||||||||||||
| Equity securities: |
||||||||||||||||||||||||
| Common equities |
95.0 | (6.6 | ) | 94.7 | (6.5 | ) | .3 | (.1 | ) | |||||||||||||||
| Total equity securities |
95.0 | (6.6 | ) | 94.7 | (6.5 | ) | .3 | (.1 | ) | |||||||||||||||
| Total portfolio |
$ | 1,551.1 | $ | (56.5 | ) | $ | 1,019.0 | $ | (18.0 | ) | $ | 532.1 | $ | (38.5 | ) | |||||||||
| Total Fair Value |
Gross Unrealized Losses |
Less than 12 Months | 12 Months or Greater | |||||||||||||||||||||
| (millions) |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
||||||||||||||||||||
| June 30, 2010 |
||||||||||||||||||||||||
| Fixed maturities: |
||||||||||||||||||||||||
| U.S. government obligations |
$ | 639.1 | $ | (15.7 | ) | $ | 0 | $ | 0 | $ | 639.1 | $ | (15.7 | ) | ||||||||||
| State and local government obligations |
71.5 | (1.0 | ) | 54.0 | (.3 | ) | 17.5 | (.7 | ) | |||||||||||||||
| Corporate debt securities |
293.7 | (10.1 | ) | 245.7 | (8.4 | ) | 48.0 | (1.7 | ) | |||||||||||||||
| Residential mortgage-backed securities |
339.6 | (37.9 | ) | 56.5 | (1.5 | ) | 283.1 | (36.4 | ) | |||||||||||||||
| Commercial mortgage-backed securities |
204.0 | (8.7 | ) | 112.4 | (1.2 | ) | 91.6 | (7.5 | ) | |||||||||||||||
| Other asset-backed securities |
105.5 | (1.8 | ) | 99.1 | (.4 | ) | 6.4 | (1.4 | ) | |||||||||||||||
| Redeemable preferred stocks |
508.0 | (57.8 | ) | 121.4 | (1.0 | ) | 386.6 | (56.8 | ) | |||||||||||||||
| Total fixed maturities |
2,161.4 | (133.0 | ) | 689.1 | (12.8 | ) | 1,472.3 | (120.2 | ) | |||||||||||||||
| Equity securities: |
||||||||||||||||||||||||
| Common equities |
365.8 | (25.8 | ) | 361.5 | (25.1 | ) | 4.3 | (.7 | ) | |||||||||||||||
| Total equity securities |
365.8 | (25.8 | ) | 361.5 | (25.1 | ) | 4.3 | (.7 | ) | |||||||||||||||
| Total portfolio |
$ | 2,527.2 | $ | (158.8 | ) | $ | 1,050.6 | $ | (37.9 | ) | $ | 1,476.6 | $ | (120.9 | ) | |||||||||
7
| Total Fair Value |
Gross Unrealized Losses |
Less than 12 Months | 12 Months or Greater | |||||||||||||||||||||
| (millions) |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
||||||||||||||||||||
| December 31, 2010 |
||||||||||||||||||||||||
| Fixed maturities: |
||||||||||||||||||||||||
| U.S. government obligations |
$ | 495.3 | $ | (16.9 | ) | $ | 495.3 | $ | (16.9 | ) | $ | 0 | $ | 0 | ||||||||||
| State and local government obligations |
461.9 | (9.4 | ) | 454.0 | (8.7 | ) | 7.9 | (.7 | ) | |||||||||||||||
| Corporate debt securities |
589.3 | (13.3 | ) | 541.3 | (11.6 | ) | 48.0 | (1.7 | ) | |||||||||||||||
| Residential mortgage-backed securities |
314.1 | (21.3 | ) | 74.0 | (1.0 | ) | 240.1 | (20.3 | ) | |||||||||||||||
| Commercial mortgage-backed securities |
332.0 | (6.9 | ) | 269.7 | (3.1 | ) | 62.3 | (3.8 | ) | |||||||||||||||
| Other asset-backed securities |
214.8 | (2.2 | ) | 209.8 | (1.1 | ) | 5.0 | (1.1 | ) | |||||||||||||||
| Redeemable preferred stocks |
216.7 | (17.1 | ) | 0 | 0 | 216.7 | (17.1 | ) | ||||||||||||||||
| Total fixed maturities |
2,624.1 | (87.1 | ) | 2,044.1 | (42.4 | ) | 580.0 | (44.7 | ) | |||||||||||||||
| Equity securities: |
||||||||||||||||||||||||
| Common equities |
60.5 | (3.2 | ) | 57.3 | (3.1 | ) | 3.2 | (.1 | ) | |||||||||||||||
| Total equity securities |
60.5 | (3.2 | ) | 57.3 | (3.1 | ) | 3.2 | (.1 | ) | |||||||||||||||
| Total portfolio |
$ | 2,684.6 | $ | (90.3 | ) | $ | 2,101.4 | $ | (45.5 | ) | $ | 583.2 | $ | (44.8 | ) | |||||||||
OTHER-THAN-TEMPORARY IMPAIRMENT (OTTI)
The following tables provide a rollforward of the amounts related to credit losses recognized in earnings for which a portion of the OTTI loss was recognized in accumulated other comprehensive income at the time the credit impairment was determined and recognized:
| Three Months Ended June 30, 2011 | ||||||||||||||||
| (millions) |
Residential Mortgage- Backed |
Commercial Mortgage- Backed |
Corporate Debt |
Total | ||||||||||||
| Beginning balance at April 1, 2011 |
$ | 34.5 | $ | 1.0 | $ | 6.5 | $ | 42.0 | ||||||||
| Credit losses for which an OTTI was previously recognized |
1.0 | .2 | 0 | 1.2 | ||||||||||||
| Credit losses for which an OTTI was not previously recognized |
1.0 | 0 | 0 | 1.0 | ||||||||||||
| Change in recoveries of future cash flows expected to be collected1 |
(.3 | ) | (.3 | ) | 0 | (.6 | ) | |||||||||
| Reductions for previously recognized credit impairments written-down to fair value2 |
0 | 0 | 0 | 0 | ||||||||||||
| Ending balance at June 30, 2011 |
$ | 36.2 | $ | .9 | $ | 6.5 | $ | 43.6 | ||||||||
| Six Months Ended June 30, 2011 | ||||||||||||||||
| (millions) |
Residential Mortgage- Backed |
Commercial Mortgage- Backed |
Corporate Debt |
Total | ||||||||||||
| Beginning balance at January 1, 2011 |
$ | 32.3 | $ | 1.0 | $ | 6.5 | $ | 39.8 | ||||||||
| Credit losses for which an OTTI was previously recognized |
1.0 | 0 | 0 | 1.0 | ||||||||||||
| Credit losses for which an OTTI was not previously recognized |
1.1 | .4 | 0 | 1.5 | ||||||||||||
| Change in recoveries of future cash flows expected to be collected1 |
2.9 | (.1 | ) | 0 | 2.8 | |||||||||||
| Reductions for previously recognized credit impairments written-down to fair value2 |
(1.1 | ) | (.4 | ) | 0 | (1.5 | ) | |||||||||
| Ending balance at June 30, 2011 |
$ | 36.2 | $ | .9 | $ | 6.5 | $ | 43.6 | ||||||||
8
| Three Months Ended June 30, 2010 | ||||||||||||||||
| (millions) |
Residential Mortgage- Backed |
Commercial Mortgage- Backed |
Corporate Debt |
Total | ||||||||||||
| Beginning balance at April 1, 2010 |
$ | 33.2 | $ | .9 | $ | 6.5 | $ | 40.6 | ||||||||
| Credit losses for which an OTTI was previously recognized |
2.6 | .4 | 0 | 3.0 | ||||||||||||
| Credit losses for which an OTTI was not previously recognized |
1.2 | .2 | 0 | 1.4 | ||||||||||||
| Change in recoveries of future cash flows expected to be collected1 |
8.4 | 0 | 0 | 8.4 | ||||||||||||
| Reductions for previously recognized credit impairments written-down to fair value2 |
(1.2 | ) | 0 | 0 | (1.2 | ) | ||||||||||
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| Ending balance at June 30, 2010 |
$ | 44.2 | $ | 1.5 | $ | 6.5 | $ | 52.2 | ||||||||
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| Six Months Ended June 30, 2010 | ||||||||||||||||
| (millions) |
Residential Mortgage- Backed |
Commercial Mortgage- Backed |
Corporate Debt |
Total | ||||||||||||
| Beginning balance at January 1, 2010 |
$ | 41.1 | $ | .9 | $ | 6.5 | $ | 48.5 | ||||||||
| Credit losses for which an OTTI was previously recognized |
3.0 | .3 | 0 | 3.3 | ||||||||||||
| Credit losses for which an OTTI was not previously recognized |
2.4 | .5 | 0 | 2.9 | ||||||||||||
| Change in recoveries of future cash flows expected to be collected1 |
(1.1 | ) | 0 | 0 | (1.1 | ) | ||||||||||
| Reductions for previously recognized credit impairments written-down to fair value2 |
(1.2 | ) | (.2 | ) | 0 | (1.4 | ) | |||||||||
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| Ending balance at June 30, 2010 |
$ | 44.2 | $ | 1.5 | $ | 6.5 | $ | 52.2 | ||||||||
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1 Reflects expected recovery of prior period impairments that will be accreted into income over the remaining life of the security, net of any current quarter (increases) decreases in expected cash flows on previously recorded reductions.
2 Reflects reductions of prior credit impairments where the current credit impairment requires writing securities down to fair value (i.e., no remaining non-credit loss).
Since we determined that it is more likely than not that we will not be required to sell the securities prior to the recovery of their respective cost bases (which could be maturity) in order to measure the amount of credit losses on the securities that were determined to be other-than-temporarily impaired, we considered a number of factors and inputs related to the individual securities. The methodology and significant inputs used to measure the amount of credit losses in our asset-backed portfolio included: current performance indicators on the underlying assets (e.g., delinquency rates, foreclosure rates, and default rates), credit support (via current levels of subordination), and historical credit ratings. Updated cash flow expectations were also generated by our portfolio managers based upon these performance indicators. In order to determine the amount of credit loss, if any, the net present value of the cash flows expected (i.e., expected recovery value) was calculated using the current book yield for each security, and was compared to its current amortized value. In the event that the net present value was below the amortized value, a credit loss was deemed to exist, and the security was written down.
Trading Securities At June 30, 2011, June 30, 2010, and December 31, 2010, we did not hold any trading securities and did not have any net realized gains (losses) on trading securities for the three and six months ended June 30, 2011 and 2010.
Derivative Instruments We have invested in the following derivative exposures at various times: interest rate swaps, asset-backed credit default swaps, U.S. corporate debt credit default swaps, cash flow hedges, and equity options.
For all derivative positions discussed below, realized holding period gains and losses are netted with any upfront cash that may be exchanged under the contract to determine if the net position should be classified either as an asset or liability. To be reported as an asset and a component of the available-for-sale portfolio, the inception-to-date realized gain on the derivative position at period end would have to exceed any upfront cash received (net derivative asset). On the other hand, a net derivative liability would include any inception-to-date realized loss plus the amount of upfront cash received (or netted, if upfront cash was paid) and would be reported as a component of other liabilities. These net derivative assets/liabilities are not separately disclosed on the balance sheet due to their immaterial effect on our financial condition, cash flows, and results of operations.
9
The following table shows the status of our derivative instruments at June 30, 2011, June 30, 2010, and December 31, 2010, and for the three and six months ended June 30, 2011 and 2010; amounts are on a pretax basis:
| (millions) | Balance Sheet | Income Statement |
||||||||||||||||||||||||||||||||||||||||||
| Notional Value1 | Assets (Liabilities) Fair Value |
Net Realized Gains (Losses) on Securities |
||||||||||||||||||||||||||||||||||||||||||
| June 30, | Dec. 31, | June 30, | Dec. 31, | Three months ended June 30, |
Six months ended June 30, |
|||||||||||||||||||||||||||||||||||||||
| Derivatives designated as: |
2011 | 2010 | 2010 | Purpose | Classification | 2011 | 2010 | 2010 | 2011 | 2010 | 2011 | 2010 | ||||||||||||||||||||||||||||||||
| Non-hedging instruments |
||||||||||||||||||||||||||||||||||||||||||||
| Assets: |
||||||||||||||||||||||||||||||||||||||||||||
| Corporate credit default swaps |
$ | 35 | $ | 40 | $ | 35 | Manage credit risk |
Investments - fixed maturities |
$ | .9 | $ | .8 | $ | 1.3 | $ | .5 | $ | 1.2 | $ | (.2 | ) | $ | 1.4 | |||||||||||||||||||||
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| Liabilities: |
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| Interest rate swaps |
1,013 | 713 | 713 | Manage portfolio duration |
Other liabilities |
(45.8 | ) | (55.8 | ) | (41.7 | ) | (24.0 | ) | (50.5 | ) | (21.4 | ) | (68.4 | ) | |||||||||||||||||||||||||
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| Corporate credit default swaps |
0 | 10 | 0 | Manage credit risk |
Other liabilities |
0 | (.8 | ) | 0 | 0 | (.3 | ) | 0 | (.3 | ) | |||||||||||||||||||||||||||||
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| Closed: |
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| Interest rate swaps |
100 | 0 | 0 | Manage portfolio duration |
NA | 0 | 0 | 0 | 0 | 0 | .5 | 0 | ||||||||||||||||||||||||||||||||
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| Corporate credit default swaps |
0 | 10 | 0 | Manage credit risk |
NA | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||
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| Total |
NA | NA | NA | $ | (44.9 | ) | $ | (55.8 | ) | $ | (40.4 | ) | $ | (23.5 | ) | $ | (49.6 | ) | $ | (21.1 | ) | $ | (67.3 | ) | ||||||||||||||||||||
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NA= Not Applicable
1The amounts represent the value held at quarter and year end for open positions and the maximum amount held during the quarter for closed positions.
INTEREST RATE SWAPS
At June 30, 2011, June 30, 2010, and December 31, 2010, we held interest rate swap positions, primarily to manage the fixed-income portfolio duration. During the fourth quarter 2009, we entered into a 9-year interest rate swap position pursuant to which we are paying a fixed rate and receiving a variable rate. We closed a portion of this position during the first quarter 2011. During the second quarter 2011, we entered into a 5-year interest rate swap position pursuant to which we are paying a fixed rate and receiving a variable rate. The combined open positions have generated an aggregate realized loss through June 30, 2011, as interest rates have fallen since the inception of both positions. As of June 30, 2011, June 30, 2010, and December 31, 2010, we delivered $63.4 million, $65.0 million, and $52.2 million, respectively, in cash collateral to the counterparty on our open interest rate swap positions.
CORPORATE CREDIT DEFAULT SWAPS
At June 30, 2011, June 30, 2010, and December 31, 2010, we held a position, which was opened during the third quarter 2008, on one corporate issuer within the financial services sector for which we bought credit default protection in the form of a credit default swap for a 5-year time horizon. We hold this protection to reduce our exposure to additional valuation declines on a preferred stock position of the same issuer. As of June 30, 2011, June 30, 2010, and December 31, 2010, we received $0.2 million, $0.9 million, and $0.5 million, respectively, in cash collateral from the counterparty on this position.
At June 30, 2011, June 30, 2010, and December 31, 2010, we held a position opened during the second quarter 2010, where we sold credit protection in the form of a corporate credit default swap on one issuer in the automotive sector for a 5-year time horizon. We would be required to cover the loss on a $10 million notional value if a credit event is triggered, including failure to pay or bankruptcy by the issuer. We acquired an equal par value amount of U.S. Treasury Notes with a similar maturity to cover the credit default swap’s notional exposure. As of June 30, 2011, the market price of credit protection on the issuer moved in a favorable direction and we received $1.0 million in cash collateral from the counterparty on this position; we received $1.1 million in cash collateral from the counterparty at December 31, 2010. As of June 30, 2010, we delivered $0.8 million in cash collateral to the counterparty on this position.
10
During the second quarter 2010, we opened two positions on one corporate issuer within the industrial sector for which we bought credit default protection in the form of credit default swaps for 2-year and 4-year time horizons; we closed the 2-year exposure position as of June 30, 2010. We paid $0.2 million in upfront cash when we entered the 4-year exposure position, which was offset against our then open exposure; we closed this position during the third quarter 2010. We held this protection to reduce our exposure to additional valuation declines on a corporate position of the same issuer due to potential future credit impairment.
Note 3 Fair Value — We have categorized our financial instruments, based on the degree of subjectivity inherent in the method by which they are valued, into a fair value hierarchy of three levels, as follows:
| • | Level 1: Inputs are unadjusted quoted prices in active markets for identical instruments at the measurement date (e.g., U.S. government obligations and active exchange-traded equity securities). |
| • | Level 2: Inputs (other than quoted prices included within Level 1) that are observable for the instrument either directly or indirectly (e.g., certain corporate and municipal bonds and certain preferred stocks). This includes: (i) quoted prices for similar instruments in active markets, (ii) quoted prices for identical or similar instruments in markets that are not active, (iii) inputs other than quoted prices that are observable for the instruments, and (iv) inputs that are derived principally from or corroborated by observable market data by correlation or other means. |
| • | Level 3: Inputs that are unobservable. Unobservable inputs reflect our subjective evaluation about the assumptions market participants would use in pricing the financial instrument (e.g., certain structured securities and privately held investments). |
We evaluate whether a market is distressed or inactive in determining the fair value of our portfolio. We review certain market level inputs to evaluate whether sufficient activity, volume, and new issuances exist to create an active market. Based on this evaluation, we concluded that there was sufficient activity related to the sectors and securities for which we obtained valuations.
11
The composition of the investment portfolio by major security type was:
| Fair Value | ||||||||||||||||||||
| (millions) |
Level 1 | Level 2 | Level 3 | Total | Cost | |||||||||||||||
| June 30, 2011 |
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| Fixed maturities: |
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| U.S. government obligations |
$ | 2,960.6 | $ | 0 | $ | 0 | $ | 2,960.6 | $ | 2,881.1 | ||||||||||
| State and local government obligations |
0 | 1,857.4 | 0 | 1,857.4 | 1,812.7 | |||||||||||||||
| Corporate debt securities |
0 | 2,825.6 | 29.8 | 2,855.4 | 2,765.1 | |||||||||||||||
| Subtotal |
2,960.6 | 4,683.0 | 29.8 | 7,673.4 | 7,458.9 | |||||||||||||||
| Asset-backed securities: |
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| Residential mortgage-backed |
0 | 448.4 | 71.5 | 519.9 | 537.0 | |||||||||||||||
| Commercial mortgage-backed |
0 | 1,785.9 | 26.5 | 1,812.4 | 1,755.6 | |||||||||||||||
| Other asset-backed |
0 | 1,323.2 | 4.5 | 1,327.7 | 1,312.4 | |||||||||||||||
| Subtotal asset-backed securities |
0 | 3,557.5 | 102.5 | 3,660.0 | 3,605.0 | |||||||||||||||
| Redeemable preferred stocks: |
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| Financials |
24.5 | 129.8 | 0 | 154.3 | 136.7 | |||||||||||||||
| Utilities |
0 | 71.9 | 0 | 71.9 | 70.6 | |||||||||||||||
| Industrials |
0 | 228.9 | 0 | 228.9 | 228.3 | |||||||||||||||
| Subtotal redeemable preferred stocks |
24.5 | 430.6 | 0 | 455.1 | 435.6 | |||||||||||||||
| Total fixed maturities |
2,985.1 | 8,671.1 | 132.3 | 11,788.5 | 11,499.5 | |||||||||||||||
| Equity securities: |
||||||||||||||||||||
| Nonredeemable preferred stocks: |
||||||||||||||||||||
| Financials |
430.8 | 541.9 | 0 | 972.7 | 451.8 | |||||||||||||||
| Utilities |
0 | 54.1 | 0 | 54.1 | 40.7 | |||||||||||||||
| Industrials |
0 | 2.9 | 0 | 2.9 | 3.0 | |||||||||||||||
| Subtotal nonredeemable preferred stocks |
430.8 | 598.9 | 0 | 1,029.7 | 495.5 | |||||||||||||||
| Common equities: |
||||||||||||||||||||
| Common stocks1 |
1,856.0 | 0 | 0 | 1,856.0 | 1,375.7 | |||||||||||||||
| Other equity-like investments |
0 | 0 | 11.9 | 11.9 | 4.1 | |||||||||||||||
| Subtotal common equities |
1,856.0 | 0 | 11.9 | 1,867.9 | 1,379.8 | |||||||||||||||
| Total fixed maturities and equity securities |
$ | 5,271.9 | $ | 9,270.0 | $ | 144.2 | 14,686.1 | 13,374.8 | ||||||||||||
| Short-term investments: |
||||||||||||||||||||
| Other short-term investments2 |
1,343.5 | 1,343.5 | ||||||||||||||||||
| Total portfolio |
$ | 16,029.6 | $ | 14,718.3 | ||||||||||||||||
|
Debt3 |
$ | 2,129.9 | $ | 1,959.1 | ||||||||||||||||
12
| Fair Value | ||||||||||||||||||||
| (millions) |
Level 1 | Level 2 | Level 3 | Total | Cost | |||||||||||||||
| June 30, 2010 |
||||||||||||||||||||
| Fixed maturities: |
||||||||||||||||||||
| U.S. government obligations |
$ | 4,114.7 | $ | 0 | $ | 0 | $ | 4,114.7 | $ | 4,061.2 | ||||||||||
| State and local government obligations |
0 | 1,781.8 | 0 | 1,781.8 | 1,723.8 | |||||||||||||||
| Corporate debt securities |
0 | 2,088.3 | 29.0 | 2,117.3 | 2,039.3 | |||||||||||||||
| Subtotal |
4,114.7 | 3,870.1 | 29.0 | 8,013.8 | 7,824.3 | |||||||||||||||
| Asset-backed securities: |
||||||||||||||||||||
| Residential mortgage-backed |
0 | 444.5 | 88.5 | 533.0 | 560.9 | |||||||||||||||
| Commercial mortgage-backed |
0 | 1,749.4 | 22.6 | 1,772.0 | 1,721.0 | |||||||||||||||
| Other asset-backed |
0 | 980.4 | 6.4 | 986.8 | 976.1 | |||||||||||||||
| Subtotal asset-backed securities |
0 | 3,174.3 | 117.5 | 3,291.8 | 3,258.0 | |||||||||||||||
| Redeemable preferred stocks: |
||||||||||||||||||||
| Financials |
19.8 | 218.9 | 0 | 238.7 | 252.6 | |||||||||||||||
| Utilities |
0 | 67.3 | 0 | 67.3 | 69.8 | |||||||||||||||
| Industrials |
0 | 273.7 | 0 | 273.7 | 294.8 | |||||||||||||||
| Subtotal redeemable preferred stocks |
19.8 | 559.9 | 0 | 579.7 | 617.2 | |||||||||||||||
| Total fixed maturities |
4,134.5 | 7,604.3 | 146.5 | 11,885.3 | 11,699.5 | |||||||||||||||
| Equity securities: |
||||||||||||||||||||
| Nonredeemable preferred stocks: |
||||||||||||||||||||
| Financials |
526.0 | 513.0 | 0 | 1,039.0 | 535.9 | |||||||||||||||
| Utilities |
0 | 67.0 | 0 | 67.0 | 50.8 | |||||||||||||||
| Industrials |
0 | 39.8 | 0 | 39.8 | 40.6 | |||||||||||||||
| Subtotal nonredeemable preferred stocks |
526.0 | 619.8 | 0 | 1,145.8 | 627.3 | |||||||||||||||
| Common equities: |
||||||||||||||||||||
| Common stocks1 |
1,137.3 | 0 | 0 | 1,137.3 | 1,000.1 | |||||||||||||||
| Other equity-like investments |
0 | 0 | 12.7 | 12.7 | 5.0 | |||||||||||||||
| Subtotal common equities |
1,137.3 | 0 | 12.7 | 1,150.0 | 1,005.1 | |||||||||||||||
| Total fixed maturities and equity securities |
$ | 5,797.8 | $ | 8,224.1 | $ | 159.2 | 14,181.1 | 13,331.9 | ||||||||||||
| Short-term investments: |
||||||||||||||||||||
| Other short-term investments2 |
1,648.9 | 1,648.9 | ||||||||||||||||||
| Total portfolio |
$ | 15,830.0 | $ | 14,980.8 | ||||||||||||||||
|
Debt3 |
$ | 2,237.4 | $ | 2,178.1 | ||||||||||||||||
13
| Fair Value | ||||||||||||||||||||
| (millions) |
Level 1 | Level 2 | Level 3 | Total | Cost | |||||||||||||||
| December 31, 2010 |
||||||||||||||||||||
| Fixed maturities: |
||||||||||||||||||||
| U.S. government obligations |
$ | 3,242.6 | $ | 0 | $ | 0 | $ | 3,242.6 | $ | 3,203.2 | ||||||||||
| State and local government obligations |
0 | 1,989.1 | 0 | 1,989.1 | 1,955.5 | |||||||||||||||
| Corporate debt securities |
0 | 2,616.6 | 29.5 | 2,646.1 | 2,579.0 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Subtotal |
3,242.6 | 4,605.7 | 29.5 | 7,877.8 | 7,737.7 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Asset-backed securities: |
||||||||||||||||||||
| Residential mortgage-backed |
0 | 466.9 | 96.7 | 563.6 | 567.1 | |||||||||||||||
| Commercial mortgage-backed |
0 | 1,804.6 | 27.5 | 1,832.1 | 1,772.1 | |||||||||||||||
| Other asset-backed |
0 | 1,069.0 | 5.0 | 1,074.0 | 1,063.9 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Subtotal asset-backed securities |
0 | 3,340.5 | 129.2 | 3,469.7 | 3,403.1 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Redeemable preferred stocks: |
||||||||||||||||||||
| Financials |
23.4 | 172.4 | 0 | 195.8 | 183.8 | |||||||||||||||
| Utilities |
0 | 71.4 | 0 | 71.4 | 70.2 | |||||||||||||||
| Industrials |
0 | 235.3 | 0 | 235.3 | 236.0 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Subtotal redeemable preferred stocks |
23.4 | 479.1 | 0 | 502.5 | 490.0 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total fixed maturities |
3,266.0 | 8,425.3 | 158.7 | 11,850.0 | 11,630.8 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Equity securities: |
||||||||||||||||||||
| Nonredeemable preferred stocks: |
||||||||||||||||||||
| Financials |
490.2 | 565.1 | 0 | 1,055.3 | 514.3 | |||||||||||||||
| Utilities |
0 | 67.9 | 0 | 67.9 | 50.8 | |||||||||||||||
| Industrials |
0 | 34.4 | 0 | 34.4 | 36.2 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Subtotal nonredeemable preferred stocks |
490.2 | 667.4 | 0 | 1,157.6 | 601.3 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Common equities: |
||||||||||||||||||||
| Common stocks1 |
1,413.2 | 0 | 0 | 1,413.2 | 1,017.6 | |||||||||||||||
| Other equity-like investments |
0 | 0 | 11.8 | 11.8 | 4.1 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Subtotal common equities |
1,413.2 | 0 | 11.8 | 1,425.0 | 1,021.7 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total fixed maturities and equity securities |
$ | 5,169.4 | $ | 9,092.7 | $ | 170.5 | 14,432.6 | 13,253.8 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Short-term investments: |
||||||||||||||||||||
| Other short-term investments2 |
1,090.8 | 1,090.8 | ||||||||||||||||||
|
|
|
|
|
|||||||||||||||||
| Total portfolio |
$ | 15,523.4 | $ | 14,344.6 | ||||||||||||||||
|
|
|
|
|
|||||||||||||||||
|
Debt3 |
$ | 2,105.7 | $ | 1,958.2 | ||||||||||||||||
|
|
|
|
|
|||||||||||||||||
1 Common stocks are managed externally to track the Russell 1000 Index. Therefore, a break-out by major sector type is not provided.
2 Due to the underlying nature of these securities, cost approximates fair value.
3 Debt is not subject to measurement at fair value in the Consolidated Balance Sheets. Therefore, it is not broken out by hierarchy level; fair values are obtained from external sources.
Our portfolio valuations classified as either Level 1 or Level 2 in the above tables are priced exclusively by external sources, including: pricing vendors, dealers/market makers, and exchange-quoted prices. During the second quarter 2011, we had two nonredeemable preferred securities with a value of $74.9 million that were transferred from Level 1 to Level 2. These securities are exchange-traded securities when they trade, but trading is inconsistent. In prior periods, when an exchange-trade price was available on the last business day of the quarter, the securities were classified as Level 1; otherwise, they were classified as Level 2. During the second quarter 2011, we decided, due to the lack of a consistent daily exchange-quoted price, to move the securities to Level 2 permanently until a daily exchange price is evident. We did not have any transfers between Level 1 and Level 2 for the periods ended June 30, 2010 and December 31, 2010.
With limited exceptions, our Level 3 securities are also priced externally; however, due to several factors (e.g., nature of the securities, level of activity, lack of similar securities trading to obtain observable market level inputs), these valuations are more subjective in nature. Certain private-equity and fixed-income investments included in the Level 3 securities are valued using external pricing supplemented by internal review and analysis.
At June 30, 2011, vendor-quoted prices represented 56% of our Level 1 classifications, compared to 71% at June 30, 2010 and 63% at December 31, 2010. The securities quoted by vendors in Level 1 represent holdings in our U.S. Treasury Notes, which are frequently traded and the quotes are considered similar to exchange trade quotes. The significant reduction in Level 1 vendor-quoted prices is due to our reduction in U.S. Treasury Notes since June 30, 2010. The balance of our Level 1 pricing comes from quotes obtained directly from trades made on an active exchange.
14
At June 30, 2011, vendor-quoted prices comprised 98% of our Level 2 classifications, compared to 94% at both June 30, 2010 and December 31, 2010. We reviewed independent documentation detailing the pricing techniques, models, and methodologies used by these pricing vendors and believe that their policies adequately consider market activity, either based on specific transactions for the issue valued or based on modeling of securities with similar credit quality, duration, yield, and structure that were recently transacted. We continue to monitor any changes or modifications to the processes employed by the pricing vendors. We reviewed each sector of the fixed-income portfolio for transaction volumes and determined that sufficient activity and liquidity existed to provide a credible source for market level valuations, despite being below historical averages, for all periods presented.
Broker/dealer-quoted prices represent the balance of our Level 2 classifications. In these instances, we typically use broker/dealers because the security we hold is not widely held or frequently traded and thus is not serviced by the pricing vendors. We reviewed independent documentation detailing the pricing techniques, models, and methodologies used by broker/dealers and determined that they used the same pricing techniques as the external vendor pricing sources discussed above. The broker/dealers maintain back office pricing desks, separate from the day-to-day traders that buy and sell the securities. This process creates uniformity in pricing when they quote externally to their various customers. The broker/dealer valuations are quoted in terms of spreads to various indices and the spreads are based off recent transactions adjusted for movements since the last trade or based off similar securities currently trading in the market. These quotes are not considered binding offers to transact. From time to time, we will obtain more than one broker/dealer quote for a security, and we will also obtain a broker/dealer quote for those securities priced by vendors as further evaluation of market price. We believe these additional steps help to ensure that we are reporting the most representative price and validate our pricing methodology.
To the extent the inputs used by external pricing sources are determined to not contain sufficient observable market information, we will reclassify the affected security valuations to Level 3. At June 30, 2011 and 2010, and December 31, 2010, securities in our fixed-maturity portfolio listed as Level 3 were comprised substantially of securities that were either (i) private placement deals, (ii) thinly held and/or traded securities, or (iii) non-investment-grade securities with little liquidity. Based on these factors, it was difficult to independently verify observable market inputs that were used to generate the external valuations we received. At June 30, 2011 and 2010, as well as December 31, 2010, one private common equity security with an aggregate value of $10.2 million was priced internally. Additionally, at June 30, 2011, we had two fixed-maturity securities with an aggregate value of $0.6 million that were priced internally, compared to one fixed-maturity security with a value of $0.3 million at June 30, 2010 and two fixed-maturity securities with an aggregate value of $0.5 million at December 31, 2010.
During each valuation period, we create internal estimations of portfolio valuation (performance returns), based on current market-related activity (i.e., interest rate and credit spread movements and other credit-related factors) within each major sector of our portfolio. We compare our internally generated portfolio results with those generated based on quotes we received externally and research material valuation differences.
Based on the criteria described above, we believe that the current level classifications are appropriate based on the valuation techniques used and that our fair values accurately reflect current market assumptions in the aggregate.
15
The following tables provide a summary of changes in fair value associated with Level 3 assets for the three and six months ended June 30, 2011 and 2010:
| Level 3 Fair Value Three months ended June 30, 2011 |
||||||||||||||||||||||||||||||||
| (millions) |
Fair Value at Mar. 31, 2011 |
Calls/ Maturities/ Paydowns |
Purchases | Sales | Net Realized (gain)/loss |
Change in Valuation |
Net Transfers in (out) |
Fair value at June 30, 2011 |
||||||||||||||||||||||||
| Fixed maturities: |
||||||||||||||||||||||||||||||||
| Asset-backed securities: |
||||||||||||||||||||||||||||||||
| Residential mortgage-backed |
$ | 76.3 | $ | (4.8 | ) | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 71.5 | |||||||||||||||
| Commercial mortgage-backed |
27.1 | (.1 | ) | 0 | 0 | 0 | (.5 | ) | 0 | 26.5 | ||||||||||||||||||||||
| Other asset-backed |
5.1 | (.5 | ) | 0 | 0 | 0 | (.1 | ) | 0 | 4.5 | ||||||||||||||||||||||
| Total asset-backed securities |
108.5 | (5.4 | ) | 0 | 0 | 0 | (.6 | ) | 0 | 102.5 | ||||||||||||||||||||||
| Corporate debt securities |
29.6 | 0 | 0 | 0 | 0 | .2 | 0 | 29.8 | ||||||||||||||||||||||||
| Other debt obligations |
0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
| Redeemable preferred stocks: |
||||||||||||||||||||||||||||||||
| Industrials |
0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
| Total fixed maturities |
138.1 | (5.4 | ) | 0 | 0 | 0 | (.4 | ) | 0 | 132.3 | ||||||||||||||||||||||
| Equity securities: |
||||||||||||||||||||||||||||||||
| Common equities: |
||||||||||||||||||||||||||||||||
| Other equity-like investments |
11.8 | 0 | 0 | 0 | 0 | .1 | 0 | 11.9 | ||||||||||||||||||||||||
| Total Level 3 securities |
$ | 149.9 | $ | (5.4 | ) | $ | 0 | $ | 0 | $ | 0 | $ | (.3 | ) | $ | 0 | $ | 144.2 | ||||||||||||||
| Level 3 Fair Value Six months ended June 30, 2011 |
||||||||||||||||||||||||||||||||
| (millions) |
Fair Value at Dec. 31, 2010 |
Calls/ Maturities/ Paydowns |
Purchases | Sales | Net Realized (gain)/loss |
Change in Valuation |
Net Transfers in (out)1 |
Fair value at June 30, 2011 |
||||||||||||||||||||||||
| Fixed maturities: |
||||||||||||||||||||||||||||||||
| Asset-backed securities: |
||||||||||||||||||||||||||||||||
| Residential mortgage-backed |
$ | 96.7 | $ | (9.8 | ) | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | (15.4 | ) | $ | 71.5 | ||||||||||||||
| Commercial mortgage-backed |
27.5 | (.1 | ) | 0 | 0 | 0 | (.9 | ) | 0 | 26.5 | ||||||||||||||||||||||
| Other asset-backed |
5.0 | (.9 | ) | 0 | 0 | 0 | .4 | 0 | 4.5 | |||||||||||||||||||||||
| Total asset-backed securities |
129.2 | (10.8 | ) | 0 | 0 | 0 | (.5 | ) | (15.4 | ) | 102.5 | |||||||||||||||||||||
| Corporate debt securities |
29.5 | 0 | 0 | 0 | 0 | .3 | 0 | 29.8 | ||||||||||||||||||||||||
| Other debt obligations |
0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
| Redeemable preferred stocks: |
||||||||||||||||||||||||||||||||
| Industrials |
0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
| Total fixed maturities |
158.7 | (10.8 | ) | 0 | 0 | 0 | (.2 | ) | (15.4 | ) | 132.3 | |||||||||||||||||||||
| Equity securities: |
||||||||||||||||||||||||||||||||
| Common equities: |
||||||||||||||||||||||||||||||||
| Other equity-like investments |
11.8 | 0 | 0 | 0 | 0 | .1 | 0 | 11.9 | ||||||||||||||||||||||||
| Total Level 3 securities |
$ | 170.5 | $ | (10.8 | ) | $ | 0 | $ | 0 | $ | 0 | $ | (.1 | ) | $ | (15.4 | ) | $ | 144.2 | |||||||||||||
1 The $(15.4) million was transferred out of Level 3 into Level 2 due to the availability of vendor pricing on a residential mortgage-backed security.
16
| Level 3 Fair Value Three months ended June 30, 2010 |
||||||||||||||||||||||||||||||||
| (millions) |
Fair Value at Mar. 31, 2010 |
Calls/ Maturities/ Paydowns |
Purchases | Sales | Net Realized (gain)/loss |
Change in Valuation |
Net Transfers in (out) |
Fair value at June 30, 2010 |
||||||||||||||||||||||||
| Fixed maturities: |
||||||||||||||||||||||||||||||||
| Asset-backed securities: |
||||||||||||||||||||||||||||||||
| Residential mortgage-backed |
$ | 73.5 | $ | (4.5 | ) | $ | 16.3 | $ | 0 | $ | 0 | $ | 3.2 | $ | 0 | $ | 88.5 | |||||||||||||||
| Commercial mortgage-backed |
21.0 | 0 | 0 | 0 | 0 | 1.6 | 0 | 22.6 | ||||||||||||||||||||||||
| Other asset-backed |
6.2 | (.5 | ) | 0 | 0 | 0 | .7 | 0 | 6.4 | |||||||||||||||||||||||
| Total asset-backed securities |
100.7 | (5.0 | ) | 16.3 | 0 | 0 | 5.5 | 0 | 117.5 | |||||||||||||||||||||||
| Corporate debt securities |
28.9 | 0 | 0 | 0 | 0 | .1 | 0 | 29.0 | ||||||||||||||||||||||||
| Other debt obligations |
1.1 | 0 | 0 | 0 | 0 | (1.1 | ) | 0 | 0 | |||||||||||||||||||||||
| Redeemable preferred stocks: |
||||||||||||||||||||||||||||||||
| Industrials |
0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
| Total fixed maturities |
130.7 | (5.0 | ) | 16.3 | 0 | 0 | 4.5 | 0 | 146.5 | |||||||||||||||||||||||
| Equity securities: |
||||||||||||||||||||||||||||||||
| Common equities: |
||||||||||||||||||||||||||||||||
| Other equity-like investments |
13.0 | (.6 | ) | 0 | 0 | 0 | .3 | 0 | 12.7 | |||||||||||||||||||||||
| Total Level 3 securities |
$ | 143.7 | $ | (5.6 | ) | $ | 16.3 | $ | 0 | $ | 0 | $ | 4.8 | $ | 0 | $ | 159.2 | |||||||||||||||
| Level 3 Fair Value Six months ended June 30, 2010 |
||||||||||||||||||||||||||||||||
| (millions) |
Fair Value at Dec. 31, 2009 |
Calls/ Maturities/ Paydowns |
Purchases | Sales | Net Realized (gain)/loss |
Change in Valuation |
Net Transfers in (out)1 |
Fair value at June 30, 2010 |
||||||||||||||||||||||||
| Fixed maturities: |
||||||||||||||||||||||||||||||||
| Asset-backed securities: |
||||||||||||||||||||||||||||||||
| Residential mortgage-backed |
$ | 46.1 | $ | (7.5 | ) | $ | 34.3 | $ | 0 | $ | 0 | $ | 3.5 | $ | 12.1 | $ | 88.5 | |||||||||||||||
| Commercial mortgage-backed |
21.6 | 0 | 0 | 0 | 0 | 1.0 | 0 | 22.6 | ||||||||||||||||||||||||
| Other asset-backed |
7.8 | (1.2 | ) | 0 | 0 | 0 | (.2 | ) | 0 | 6.4 | ||||||||||||||||||||||
| Total asset-backed securities |
75.5 | (8.7 | ) | 34.3 | 0 | 0 | 4.3 | 12.1 | 117.5 | |||||||||||||||||||||||
| Corporate debt securities |
28.2 | 0 | 0 | 0 | 0 | .8 | 0 | 29.0 | ||||||||||||||||||||||||
| Other debt obligations |
1.1 | 0 | 0 | 0 | 0 | (1.1 | ) | 0 | 0 | |||||||||||||||||||||||
| Redeemable preferred stocks: |
||||||||||||||||||||||||||||||||
| Industrials |
53.1 | 0 | 0 | 0 | 0 | 0 | (53.1 | ) | 0 | |||||||||||||||||||||||
| Total fixed maturities |
157.9 | (8.7 | ) | 34.3 | 0 | 0 | 4.0 | (41.0 | ) | 146.5 | ||||||||||||||||||||||
| Equity securities: |
||||||||||||||||||||||||||||||||
| Common equities: |
||||||||||||||||||||||||||||||||
| Other equity-like investments |
12.9 | (.6 | ) | 0 | 0 | 0 | .4 | 0 | 12.7 | |||||||||||||||||||||||
| Total Level 3 securities |
$ | 170.8 | $ | (9.3 | ) | $ | 34.3 | $ | 0 | $ | 0 | $ | 4.4 | $ | (41.0 | ) | $ | 159.2 | ||||||||||||||
1 The $12.1 million was transferred from Level 2 into Level 3 due to a lack of trade volume and the $(53.1) million was transferred out of Level 3 into Level 2 due to the availability of vendor pricing on a redeemable preferred stock.
17
Note 4 Debt — Debt consisted of:
| June 30, 2011 | June 30, 2010 | December 31, 2010 | ||||||||||||||||||||||
| (millions) |
Carrying Value |
Fair Value |
Carrying Value |
Fair Value |
Carrying Value |
Fair Value |
||||||||||||||||||
| 6.375% Senior Notes due 2012 |
$ | 349.8 | $ | 360.9 | $ | 349.4 | $ | 374.1 | $ | 349.6 | $ | 369.3 | ||||||||||||
| 7% Notes due 2013 |
149.7 | 167.6 | 149.5 | 166.1 | 149.6 | 165.0 | ||||||||||||||||||
| 6 5/8% Senior Notes due 2029 |
294.9 | 349.1 | 294.8 | 331.2 | 294.8 | 329.9 | ||||||||||||||||||
| 6.25% Senior Notes due 2032 |
394.3 | 444.1 | 394.2 | 430.1 | 394.2 | 433.3 | ||||||||||||||||||
| 6.70% Fixed-to-Floating Rate Junior |
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| Subordinated Debentures due 2067 |
770.4 | 808.2 | 990.2 | 935.9 | 770.0 | 808.2 | ||||||||||||||||||
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| Total |
$ | 1,959.1 | $ | 2,129.9 | $ | 2,178.1 | $ | 2,237.4 | $ | 1,958.2 | $ | 2,105.7 | ||||||||||||
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On December 31, 2010, we entered into an amendment to the 364-Day Secured Liquidity Credit Facility Agreement (“Credit Facility Agreement”) with PNC Bank, National Association (PNC), which extended the expiration date of our outstanding credit facility agreement until December 31, 2011, unless earlier terminated pursuant to the terms of the agreement. Under this agreement, we may borrow up to $125 million, which may be increased to $150 million at our request but subject to PNC’s discretion. The purpose of the credit facility is to provide liquidity in the event of disruptions in our cash management operations, such as disruptions in the financial markets or related facilities that affect our ability to transfer or receive funds. Under this credit facility, we may borrow funds, on a revolving basis, either in the form of Eurodollar Loans or Base Rate Loans. Eurodollar Loans will bear interest at one-, two-, three-, or six-month LIBOR (as selected by us) plus 50 basis points for the selected period. Base Rate Loans will bear daily interest at the greater of (a) PNC’s prime rate for such day, (b) the federal funds effective rate for such day plus 1/2% per annum, or (c) one-month LIBOR plus 2% per annum. Any borrowings under this agreement will be secured by a lien on certain marketable securities held in our investment portfolio. We had no borrowings under this arrangement in 2010 or through the first six months of 2011.
In June 2010, we commenced an offer to purchase for cash (the “Tender Offer”) up to $350 million in aggregate principal amount of our 6.70% Fixed-to-Floating Rate Junior Subordinated Debentures due 2067 (the “Debentures”). The Tender Offer expired on July 8, 2010. We received valid tenders from holders of the Debentures in the aggregate principal amount of $222.9 million. All of the tendering holders validly tendered by the early tender date of June 23, 2010 and received consideration of $950 per $1,000 principal amount of the Debentures accepted for purchase, which included an early tender payment of $50 per $1,000 principal amount of Debentures accepted. We recognized a net gain on the debt extinguishment of $6.4 million, after deducting expenses and fees associated with the Tender Offer and related Consent Solicitation discussed below.
As a condition of the Tender Offer, we solicited consents (the “Consent Solicitation”) from the holders of our 6.25% Senior Notes to terminate the Replacement Capital Covenant (the “RCC”) relating to the 6.25% Senior Notes. The RCC was originally entered into by Progressive in June 2007 for the benefit of the holders of the 6.25% Senior Notes in connection with the issuance of the Debentures. Under the RCC, we agreed that we would not repay, redeem, defease, or purchase all or any part of the Debentures before June 15, 2047, unless Progressive was to obtain a specified portion of the funds used in the transaction through the sale of its common shares or certain other equity or equity-like securities. The RCC was terminated on June 23, 2010, the expiration date of the Consent Solicitation, at which time we had received the consent of holders of a majority of the outstanding aggregate principal amount of the 6.25% Senior Notes. Those holders who validly delivered their consent by the expiration date received a consent fee of $5.00 for each $1,000 principal amount of their 6.25% Senior Notes.
Note 5 Income Taxes — At June 30, 2011 and 2010 and December 31, 2010, we determined that we did not need a valuation allowance on our deferred tax asset. Although realization of the deferred tax asset is not assured, management believes it is more likely than not that the gross deferred tax asset will be realized based on our expectation that we will be able to fully utilize the deductions that are ultimately recognized for tax purposes. For the six months ended June 30, 2011, there have been no material changes in our uncertain tax positions.
Note 6 Supplemental Cash Flow Information — Cash includes only bank demand deposits. We paid the following in the respective time periods:
| Six Months Ended June 30, |
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| (millions) |
2011 | 2010 | ||||||
| Income taxes, net of refunds |
$ | 258.0 | $ | 209.0 | ||||
| Interest |
64.9 | 72.3 | ||||||
18
Note 7 Segment Information — Our Personal Lines segment writes insurance for personal autos and recreational vehicles. Our Commercial Auto segment writes primary liability and physical damage insurance for automobiles and trucks owned by small businesses in the business auto and truck markets. Our other indemnity businesses manage our run-off businesses, including the run-off of our professional liability insurance for community banks, which was sold in 2010. Our service businesses provide insurance-related services, including processing Commercial Auto Insurance Procedures/Plans (“CAIP”) business and serving as an agent for homeowners insurance through our programs with three unaffiliated homeowner insurance companies. All revenues are generated from external customers.
Following are the operating results for the respective periods:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||||||
| (millions) |
Revenues | Pretax Profit (Loss) |
Revenues | Pretax Profit (Loss) |
Revenues | Pretax Profit (Loss) |
Revenues | Pretax Profit (Loss) |
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| Personal Lines |
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| Agency |
$ | 1,905.9 | $ | 119.4 | $ | 1,862.9 | $ | 138.9 | $ | 3,793.7 | $ | 329.5 | $ | 3,690.8 | $ | 335.0 | ||||||||||||||||
| Direct |
1,451.0 | 91.2 | 1,352.1 | 83.5 | 2,871.0 | 196.4 | 2,651.7 | 154.2 | ||||||||||||||||||||||||
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| Total Personal Lines1 |
3,356.9 | 210.6 | 3,215.0 | 222.4 | 6,664.7 | 525.9 | 6,342.5 | 489.2 | ||||||||||||||||||||||||
| Commercial Auto |
361.6 | 34.1 | 371.3 | 38.7 | 717.3 | 75.2 | 740.5 | 83.0 | ||||||||||||||||||||||||
| Other indemnity |
1.4 | 0 | 3.9 | .9 | 3.2 | (.6 | ) | 8.3 | 7.9 | |||||||||||||||||||||||
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| Total underwriting operations |
3,719.9 | 244.7 | 3,590.2 | 262.0 | 7,385.2 | 600.5 | 7,091.3 | 580.1 | ||||||||||||||||||||||||
| Service businesses |
6.0 | 1.2 | 5.0 | (.5 | ) | 11.2 | 2.4 | 9.2 | (1.5 | ) | ||||||||||||||||||||||
| Investments2 |
146.8 | 143.3 | 91.1 | 86.5 | 369.8 | 363.2 | 251.7 | 243.5 | ||||||||||||||||||||||||
| Interest expense |
NA | (31.5 | ) | NA | (35.1 | ) | NA | (63.0 | ) | NA | (70.3 | ) | ||||||||||||||||||||
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| Consolidated total |
$ | 3,872.7 | $ | 357.7 | $ | 3,686.3 | $ | 312.9 | $ | 7,766.2 | $ | 903.1 | $ | 7,352.2 | $ | 751.8 | ||||||||||||||||
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1 Personal auto insurance accounted for 91% of the total Personal Lines segment net premiums earned in the both the second quarter and first six months of 2011, compared to 90% for the same periods last year; insurance for our special lines products (e.g., motorcycles, ATVs, RVs, mobile homes, watercraft, and snowmobiles) accounted for the balance of the Personal Lines net premiums earned.
2 Revenues represent recurring investment income and total net realized gains (losses) on securities; pretax profit is net of investment expenses.
NA = Not Applicable
Progressive’s management uses underwriting margin and combined ratio as primary measures of underwriting profitability. The underwriting margin is the pretax underwriting profit (loss) expressed as a percentage of net premiums earned (i.e., revenues from insurance operations). Combined ratio is the complement of the underwriting margin. Following are the underwriting margins and combined ratios for our underwriting operations:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||||||
| Under- writing Margin |
Combined Ratio |
Under- writing Margin |
Combined Ratio |
Under- writing Margin |
Combined Ratio |
Under- writing Margin |
Combined Ratio |
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| Personal Lines |
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| Agency |
6.3 | % | 93.7 | 7.5 | % | 92.5 | 8.7 | % | 91.3 | < | ||||||||||||||||||||||