10-Q

 

 

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 September 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   (I.R.S. Employer
incorporation or organization)   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 issuer’s classes of common stock, as of the latest practicable date.

Common Shares, $1.00 par value: 620,628,395 outstanding at September 30, 2011

 

 

 


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

The Progressive Corporation and Subsidiaries

Consolidated Statements of Income

(unaudited)

 

      Three Months     Nine Months  

Periods Ended September 30,

   2011     2010     % Change     2011     2010     % Change  
(millions—except per share amounts)                                     

Revenues

            

Net premiums earned

   $ 3,740.7     $ 3,599.9       4     $ 11,125.9     $ 10,691.2       4  

Investment income

     117.4       131.5       (11     361.5       391.9       (8

Net realized gains (losses) on securities:

            

Other-than-temporary impairment (OTTI) losses:

            

Total OTTI losses

     (1.4     (1.9     (26     (5.9     (19.1     (69

Non-credit losses, net of credit losses recognized on previously recorded non-credit OTTI losses

     0       (.2     NM        .9       5.3       (83
  

 

 

   

 

 

     

 

 

   

 

 

   

Net impairment losses recognized in earnings

     (1.4     (2.1     (33     (5.0     (13.8     (64

Net realized gains (losses) on securities

     (51.2     29.0       NM        78.1       32.0       144  
  

 

 

   

 

 

     

 

 

   

 

 

   

Total net realized gains (losses) on securities

     (52.6     26.9       NM        73.1       18.2       302  

Service revenues

     5.6       4.8       17       16.8       14.0       20  

Net gain (loss) on extinguishment of debt

     (.1     6.4       NM        (.1     6.4       NM   
  

 

 

   

 

 

     

 

 

   

 

 

   

Total revenues

     3,811.0       3,769.5       1       11,577.2       11,121.7       4  
  

 

 

   

 

 

     

 

 

   

 

 

   

Expenses

            

Losses and loss adjustment expenses

     2,749.3       2,543.4       8       7,918.3       7,510.0       5  

Policy acquisition costs

     350.2       342.4       2       1,045.2       1,014.3       3  

Other underwriting expenses

     460.5       459.1       0       1,381.2       1,331.8       4  

Investment expenses

     4.0       .3       1233       10.6       8.5       25  

Service expenses

     5.1       5.2       (2     13.9       15.9       (13

Interest expense

     33.4       31.9       5       96.4       102.2       (6
  

 

 

   

 

 

     

 

 

   

 

 

   

Total expenses

     3,602.5       3,382.3       7       10,465.6       9,982.7       5  
  

 

 

   

 

 

     

 

 

   

 

 

   

Net Income

            

Income before income taxes

     208.5       387.2       (46     1,111.6       1,139.0       (2

Provision for income taxes

     57.8       125.6       (54     352.8       369.9       (5
  

 

 

   

 

 

     

 

 

   

 

 

   

Net income

   $ 150.7     $ 261.6       (42   $ 758.8     $ 769.1       (1
  

 

 

   

 

 

     

 

 

   

 

 

   

Computation of Earnings Per Share

            

Basic:

            

Average shares outstanding

     626.9       655.8       (4     640.5       659.2       (3
  

 

 

   

 

 

     

 

 

   

 

 

   

Per share

   $ .24     $ .40       (40   $ 1.18     $ 1.17       2  
  

 

 

   

 

 

     

 

 

   

 

 

   

Diluted:

            

Average shares outstanding

     626.9       655.8       (4     640.5       659.2       (3

Net effect of dilutive stock-based compensation

     4.5       5.4       (17     4.3       5.2       (17
  

 

 

   

 

 

     

 

 

   

 

 

   

Total equivalent shares

     631.4       661.2       (5     644.8       664.4       (3
  

 

 

   

 

 

     

 

 

   

 

 

   

Per share

   $ .24     $ .40       (40   $ 1.18     $ 1.16       2  
  

 

 

   

 

 

     

 

 

   

 

 

   

Dividends declared per share

   $ 0     $ 0       $ 0     $ 0    
  

 

 

   

 

 

     

 

 

   

 

 

   

 

NM = Not Meaningful

1        Progressive 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)

 

      September 30,     December 31,  

(millions)

   2011     2010     2010  

Assets

      

Investments—Available-for-sale, at fair value:

      

Fixed maturities (amortized cost: $11,531.9, $11,727.3, and $11,630.8)

   $ 11,815.6     $ 12,085.8     $ 11,850.0  

Equity securities:

      

Nonredeemable preferred stocks (cost: $493.6, $610.6, and $601.3)

     873.0       1,189.4       1,157.6  

Common equities (cost: $1,391.5, $1,014.7, and $1,021.7)

     1,599.5       1,285.3       1,425.0  

Short-term investments (amortized cost: $1,699.7, $1,815.5, and $1,090.8)

     1,699.7       1,815.5       1,090.8  
  

 

 

   

 

 

   

 

 

 

Total investments

     15,987.8       16,376.0       15,523.4  

Cash

     170.3       155.0       158.9  

Accrued investment income

     98.3       107.3       109.3  

Premiums receivable, net of allowance for doubtful accounts of $117.0, $109.5, and $114.9

     3,086.0       2,858.6       2,738.4  

Reinsurance recoverables, including $36.5, $34.4, and $37.4 on paid losses and loss adjustment expenses

     798.1       685.2       741.5  

Prepaid reinsurance premiums

     81.8       97.8       88.1  

Deferred acquisition costs

     458.1       450.5       417.2  

Income taxes

     298.5       164.6       189.0  

Property and equipment, net of accumulated depreciation of $561.7, $560.1, and $564.3

     910.9       932.0       932.6  

Other assets

     254.5       197.6       251.9  
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 22,144.3     $ 22,024.6     $ 21,150.3  
  

 

 

   

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

      

Unearned premiums

   $ 4,830.1     $ 4,711.0     $ 4,353.8  

Loss and loss adjustment expense reserves

     7,256.8       6,953.4       7,071.0  

Accounts payable, accrued expenses, and other liabilities

     1,797.2       1,689.2       1,718.4  

Debt

     2,443.9       1,957.8       1,958.2  
  

 

 

   

 

 

   

 

 

 

Total liabilities

     16,328.0       15,311.4       15,101.4  
  

 

 

   

 

 

   

 

 

 

Common Shares, $1.00 par value (authorized 900.0; issued 797.7, 797.7, and 797.7, including treasury shares of 177.1, 134.3, and 135.3)

     620.6       663.4       662.4  

Paid-in capital

     986.7       977.0       1,007.1  

Retained earnings

     3,632.4       4,273.6       3,595.7  

Accumulated other comprehensive income (loss), net of tax:

      

Net non-credit related OTTI losses, adjusted for valuation changes

     (6.3     (3.1     (1.8

Other net unrealized gains (losses) on securities

     572.2       785.8       769.1  
  

 

 

   

 

 

   

 

 

 

Total net unrealized gains (losses) on securities

     565.9       782.7       767.3  

Net unrealized gains on forecasted transactions

     8.7       15.4       14.7  

Foreign currency translation adjustment

     2.0       1.1       1.7  
  

 

 

   

 

 

   

 

 

 

Total accumulated other comprehensive income (loss)

     576.6       799.2       783.7  
  

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

     5,816.3       6,713.2       6,048.9  
  

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 22,144.3     $ 22,024.6     $ 21,150.3  
  

 

 

   

 

 

   

 

 

 

 

1        Consists

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)

 

Nine months ended September 30,

   2011     2010  
(millions)             

Cash Flows From Operating Activities

    

Net income

   $ 758.8     $ 769.1  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation

     65.3       62.4  

Amortization of fixed-income securities

     174.7       172.9  

Amortization of stock-based compensation

     36.4       35.2  

Net realized (gains) losses on securities

     (73.1     (18.2

Net (gain) loss on disposition of property and equipment

     7.8       (1.2

Net (gain) loss on extinguishment of debt

     .1       (6.4

Changes in:

    

Premiums receivable

     (347.6     (403.8

Reinsurance recoverables

     (56.6     (120.4

Prepaid reinsurance premiums

     6.3       (28.5

Deferred acquisition costs

     (40.9     (48.3

Income taxes

     .9       64.2  

Unearned premiums

     476.3       538.1  

Loss and loss adjustment expense reserves

     185.8       300.4  

Accounts payable, accrued expenses, and other liabilities

     278.9       362.3  

Other, net

     22.2       .1  
  

 

 

   

 

 

 

Net cash provided by operating activities

     1,495.3       1,677.9  
  

 

 

   

 

 

 

Cash Flows From Investing Activities

    

Purchases:

    

Fixed maturities

     (5,208.0     (3,515.7

Equity securities

     (424.0     (453.7

Sales:

    

Fixed maturities

     4,057.2       2,448.1  

Equity securities

     264.8       153.6  

Maturities, paydowns, calls, and other:

    

Fixed maturities

     1,107.4       912.9  

Net purchases of short-term investments - other

     (608.8     (736.9

Net unsettled security transactions

     (14.2     47.2  

Purchases of property and equipment

     (53.3     (39.5

Sales of property and equipment

     1.9       7.6  
  

 

 

   

 

 

 

Net cash used in investing activities

     (877.0     (1,176.4
  

 

 

   

 

 

 

Cash Flows From Financing Activities

    

Proceeds from exercise of stock options

     6.8       14.4  

Tax benefit from exercise/vesting of stock-based compensation

     2.7       6.0  

Proceeds from debt issuance

     491.9       0  

Reacquisition of debt

     (12.7     (214.3

Dividends paid to shareholders

     (263.6     (108.2

Acquisition of treasury shares

     (832.1     (205.5
  

 

 

   

 

 

 

Net cash used in financing activities

     (607.0     (507.6
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     .1       .4  
  

 

 

   

 

 

 

Increase (decrease) in cash

     11.4       (5.7

Cash, January 1

     158.9       160.7  
  

 

 

   

 

 

 

Cash, September 30

   $ 170.3     $ 155.0  
  

 

 

   

 

 

 

1        Progressive 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 September 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)
    Fair
Value
     % of
Total
Fair
Value
 

September 30, 2011

  

            

Fixed maturities:

  

            

U.S. government obligations

   $ 2,921.7      $ 129.1      $ (.1   $      $ 3,050.7        19.1 

State and local government obligations

     1,930.6        56.4        (1.1            1,985.9        12.4  

Corporate debt securities

     2,680.2        86.4        (10.4     5.2         2,761.4        17.3  

Residential mortgage-backed securities

     471.3        9.4        (36.5            444.2        2.8  

Commercial mortgage-backed securities

     1,826.2        43.2        (9.7            1,859.7        11.6  

Other asset-backed securities

     1,265.5        14.8        (1.3     .7         1,279.7        8.0  

Redeemable preferred stocks

     436.4        20.1        (22.5            434.0        2.7  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total fixed maturities

     11,531.9        359.4        (81.6     5.9         11,815.6        73.9  

Equity securities:

  

            

Nonredeemable preferred stocks

     493.6        387.4        (2.6     (5.4     873.0        5.5  

Common equities

     1,391.5        288.4        (80.4            1,599.5        10.0  

Short-term investments:

  

            

Other short-term investments

     1,699.7        0        0              1,699.7        10.6  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total portfolio2,3

   $ 15,116.7      $ 1,035.2      $ (164.6   $ .5       $ 15,987.8        100.0 
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

($ in millions)

   Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Net
Realized
Gains
(Losses)
    Fair
Value
     % of
Total
Fair
Value
 

September 30, 2010

  

            

Fixed maturities:

  

            

U.S. government obligations

   $ 3,411.7      $ 110.0      $ 0     $      $ 3,521.7        21.5 

State and local government obligations

     1,865.1        67.8        (.6            1,932.3        11.8  

Corporate debt securities

     2,392.6        109.3        (1.2     5.1         2,505.8        15.3  

Residential mortgage-backed securities

     576.8        14.4        (24.5            566.7        3.4  

Commercial mortgage-backed securities

     1,801.0        72.3        (5.7            1,867.6        11.4  

Other asset-backed securities

     1,077.2        16.5        (1.7     (.2 )       1,091.8        6.7  

Redeemable preferred stocks

     602.9        26.0        (29.0            599.9        3.7  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total fixed maturities

     11,727.3        416.3        (62.7     4.9         12,085.8        73.8  

Equity securities:

  

            

Nonredeemable preferred stocks

     610.6        580.0        0       (1.2     1,189.4        7.3  

Common equities

     1,014.7        279.6        (9.0            1,285.3        7.8  

Short-term investments:

  

            

Other short-term investments

     1,815.5        0        0              1,815.5        11.1  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total portfolio2,3

   $ 15,168.1      $ 1,275.9      $ (71.7   $ 3.7       $ 16,376.0        100.0 
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

5


($ in millions)

   Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Net
Realized
Gains
(Losses)
    Fair
Value
     % of
Total
Fair
Value
 

December 31, 2010

  

            

Fixed maturities:

  

            

U.S. government obligations

   $ 3,203.2      $ 56.3      $ (16.9   $      $ 3,242.6        20.9 

State and local government obligations

     1,955.5        43.0        (9.4            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            563.6        3.6  

Commercial mortgage-backed securities

     1,772.1        66.9        (6.9            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            502.5        3.3  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total fixed maturities

     11,630.8        304.1        (87.1     2.2         11,850.0        76.3  

Equity securities:

  

            

Nonredeemable preferred stocks

     601.3        560.2        0       (3.9     1,157.6        7.5  

Common equities

     1,021.7        406.5        (3.2            1,425.0        9.2  

Short-term investments:

  

            

Other short-term investments

     1,090.8        0        0              1,090.8        7.0  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total portfolio2,3

   $ 14,344.6      $ 1,270.8      $ (90.3   $ (1.7   $ 15,523.4        100.0 
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

1

Represents net holding period gains (losses) on certain hybrid securities (discussed below).

2

At September 30, 2011, we had $60.5 million of net unsettled security transactions included in other assets, compared to $46.3 million at December 31, 2010; at September 30, 2010, we had $54.9 million of net unsettled security transactions included in other liabilities.

3

The total fair value of the portfolio at September 30, 2011 and 2010, and December 31, 2010 included $1.7 billion, $1.6 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:

 

     September 30,      December 31,  

(millions)

   2011      2010      2010  

Fixed maturities:

        

Corporate debt securities

   $ 234.8      $ 133.9      $ 176.4  

Other asset-backed securities

     16.4        14.8        14.9  
  

 

 

    

 

 

    

 

 

 

Total fixed maturities

     251.2        148.7        191.3  

Equity securities:

        

Nonredeemable preferred stocks

     15.1        55.5        52.8  
  

 

 

    

 

 

    

 

 

 

Total hybrid securities

   $ 266.3      $ 204.2      $ 244.1  
  

 

 

    

 

 

    

 

 

 

 

6


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. The one hybrid security held in the asset-backed portfolio 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.

Gross Unrealized Losses As of September 30, 2011, we had $84.2 million of gross unrealized losses in our fixed-income portfolio (i.e., fixed-maturity securities and nonredeemable preferred stocks) and $80.4 million in our common equities. We currently do not intend to sell the fixed-income 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
     Gross
    Less than 12 Months
    12 Months or Greater  

(millions)

   Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

September 30, 2011

               

Fixed maturities:

               

U.S. government obligations

   $ 125.3      $ (.1   $ 125.3      $ (.1   $ 0      $ 0  

State and local government obligations

     154.3        (1.1     126.0        (.7     28.3        (.4

Corporate debt securities

     466.3        (10.4     327.2        (7.7     139.1        (2.7

Residential mortgage-backed securities

     320.7        (36.5     79.6        (4.1     241.1        (32.4

Commercial mortgage-backed securities

     429.9        (9.7     342.8        (7.0     87.1        (2.7

Other asset-backed securities

     169.0        (1.3     165.3        (.9     3.7        (.4

Redeemable preferred stocks

     233.8        (22.5     85.0        (.9     148.8        (21.6
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total fixed maturities

     1,899.3        (81.6     1,251.2        (21.4     648.1        (60.2

Equity securities:

               

Nonredeemable preferred stocks

     20.5        (2.6     20.5        (2.6     0        0  

Common equities

     420.2        (80.4     407.3        (76.6     12.9        (3.8
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total equity securities

     440.7        (83.0     427.8        (79.2     12.9        (3.8
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total portfolio

   $ 2,340.0      $ (164.6   $ 1,679.0      $ (100.6   $ 661.0      $ (64.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

7


      Total      Gross     Less than 12 Months     12 Months or Greater  
     Fair      Unrealized     Fair      Unrealized     Fair      Unrealized  

(millions)

   Value      Losses     Value      Losses     Value      Losses  

September 30, 2010

               

Fixed maturities:

               

U.S. government obligations

   $ 0      $ 0     $ 0      $ 0     $ 0      $ 0  

State and local government obligations

     101.4        (.6     89.0        (.2     12.4        (.4

Corporate debt securities

     96.7        (1.2     48.0        (.2     48.7        (1.0

Residential mortgage-backed securities

     283.3        (24.5     46.0        (.7     237.3        (23.8

Commercial mortgage-backed securities

     189.4        (5.7     114.7        (.6     74.7        (5.1

Other asset-backed securities

     111.3        (1.7     105.7        (.4     5.6        (1.3

Redeemable preferred stocks

     374.1        (29.0     0        0       374.1        (29.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total fixed maturities

     1,156.2        (62.7     403.4        (2.1     752.8        (60.6

Equity securities:

               

Nonredeemable preferred stocks

     0        0       0        0       0        0  

Common equities

     125.8        (9.0     121.1        (8.5     4.7        (.5
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total equity securities

     125.8        (9.0     121.1        (8.5     4.7        (.5
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total portfolio

   $ 1,282.0      $ (71.7   $ 524.5      $ (10.6   $ 757.5      $ (61.1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

      Total      Gross     Less than 12 Months     12 Months or Greater  
     Fair      Unrealized     Fair      Unrealized     Fair      Unrealized  

(millions)

   Value      Losses     Value      Losses     Value      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:

               

Nonredeemable preferred stocks

     0        0       0        0       0        0  

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
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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 September 30, 2011  
     Mortgage-Backed      Corporate         

(millions)

   Residential     Commercial      Debt      Total  

Beginning balance at July 1, 2011

   $ 36.2     $ .9      $ 6.5      $ 43.6  

Credit losses for which an OTTI was previously recognized

     0       0        0        0  

Credit losses for which an OTTI was not previously recognized

     0       0        0        0  

Change in recoveries of future cash flows expected to be collected1,2

     (1.6     .4        0        (1.2

Reductions for previously recognized credit impairments written-down to fair value

     0       0        0        0  
  

 

 

   

 

 

    

 

 

    

 

 

 

Ending balance at September 30, 2011

   $ 34.6     $ 1.3      $ 6.5      $ 42.4  
  

 

 

   

 

 

    

 

 

    

 

 

 

 

      Nine Months Ended September 30, 2011  
     Mortgage-Backed     Corporate         

(millions)

   Residential     Commercial     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

     1.3       .3       0        1.6  

Reductions for previously recognized credit impairments written-down to fair value

     (1.1     (.4     0        (1.5
  

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance at September 30, 2011

   $ 34.6     $ 1.3     $ 6.5      $ 42.4  
  

 

 

   

 

 

   

 

 

    

 

 

 

 

      Three Months Ended September 30, 2010  
     Mortgage-Backed     Corporate         

(millions)

   Residential     Commercial     Debt      Total  

Beginning balance at July 1, 2010

   $ 44.2     $ 1.5     $ 6.5      $ 52.2  

Credit losses for which an OTTI was previously recognized

     0       .2       0        .2  

Credit losses for which an OTTI was not previously recognized

     0       .2       0        .2  

Change in recoveries of future cash flows expected to be collected

     (.6     0       0        (.6

Reductions for previously recognized credit impairments written-down to fair value

     (7.7     (.6     0        (8.3
  

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance at September 30, 2010

   $ 35.9     $ 1.3     $ 6.5      $ 43.7  
  

 

 

   

 

 

   

 

 

    

 

 

 

 

      Nine Months Ended September 30, 2010  
     Mortgage-Backed     Corporate         

(millions)

   Residential     Commercial     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       .9       0        3.3  

Change in recoveries of future cash flows expected to be collected

     (1.7     0       0        (1.7

Reductions for previously recognized credit impairments written-down to fair value

     (8.9     (.8     0        (9.7
  

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance at September 30, 2010

   $ 35.9     $ 1.3     $ 6.5      $ 43.7  
  

 

 

   

 

 

   

 

 

    

 

 

 

 

 

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

Includes $1.9 million received on a residential mortgage-backed security in excess of the cash flows expected at the time of the write-down.

3

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).

 

9


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 September 30, 2011, September 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 nine months ended September 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.

 

10


The following table shows the status of our derivative instruments at September 30, 2011, September 30, 2010, and December 31, 2010, and for the three and nine months ended September 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
 
    Sept. 30,      Dec.
31,
             Sept. 30,     Dec. 31,     Three months
ended Sept.
30,
    Nine months
ended Sept. 30,
 

Derivatives designated as:

  2011      2010      2010      Purpose   Classification   2011     2010     2010     2011     2010     2011     2010  

Hedging instruments

                          

Closed:

                          

Effective cash flow hedge

  $ 500       $ 0       $ 0       Forecasted
transaction
  Accumulated

other
comprehensive
income

  $ (5.1   $ 0      $ 0      $ 0      $ 0      $ 0      $ 0   

Ineffective cash flow hedge

    13         223         223       Manage
interest
rate risk
  NA     0        0        0        .3        5.8        .3        5.8   

Non-hedging instruments

                          

Assets:

                          

Corporate credit default swaps

    25         35         35       Manage
credit risk
  Investments -
fixed
maturities
    .8        .4        1.3        .5        .6        (.1     1.7   

Liabilities:

                          

Interest rate swaps

    1,513         713         713       Manage
portfolio
duration
  Other
liabilities
    (110.0     (84.1     (41.7     (72.4     (34.3     (93.8     (102.7

Closed:

                          

Interest rate swaps

    100         0         0       Manage
portfolio
duration
  NA     0        0        0        0        0        .5        0   

Corporate credit default swaps

    10         25         25       Manage
credit risk
  NA     0        0        0        .1        (.2     .5        (.2
              

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    NA         NA         NA           $ (114.3   $ (83.7   $ (40.4   $ (71.5   $ (28.1   $ (92.6   $ (95.4
              

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NA= Not Applicable

 

1 

The amounts represent the value held at quarter and year end for open positions and the maximum amount held during the quarter for closed positions.

CASH FLOW HEDGES

During the third quarter 2011, we issued $500 million of 3.75% Senior Notes due 2021 and entered into a forecasted debt issuance hedge (cash flow hedge) against a possible rise in interest rates (see Note 4 – Debt for further discussion). Upon issuance of the 3.75% Senior Notes, the hedge was closed and we recognized, as part of accumulated other comprehensive income, a pretax unrealized loss of $5.1 million.

During the third quarter 2011, we repurchased $12.7 million of our 6.70% Fixed-to-Floating Rate Junior Subordinated Debentures due 2067 at or near par in the open market (see Note 4 – Debt for further discussion). We reclassified $0.3 million (pretax) from accumulated other comprehensive income on the balance sheet to net realized gains (losses) on securities on the income statement, reflecting the portion of the unrealized gain on forecasted transactions that was related to these debt extinguishments.

During the third quarter 2010, we finalized the Tender Offer for, and purchased $222.9 million of, the 6.70% Debentures discussed above (see Note 4 – Debt for further discussion). We reclassified $5.8 million (pretax) from accumulated other comprehensive income on the balance sheet to net realized gains (losses) on securities on the income statement, reflecting the portion of the unrealized gain on forecasted transactions that was related to the 6.70% Debentures that were extinguished pursuant to the Tender Offer.

 

11


INTEREST RATE SWAPS

At September 30, 2011, September 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 and third quarters of 2011, we entered into 5-year interest rate swap positions with notional values of $400 million and $500 million, respectively, 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 September 30, 2011, as interest rates have fallen since the inception of these positions. As of September 30, 2011, September 30, 2010, and December 31, 2010, we delivered $117.8 million, $94.2 million, and $52.2 million, respectively, in cash collateral to the counterparties on our then open interest rate swap positions.

CORPORATE CREDIT DEFAULT SWAPS

At September 30, 2011, September 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 September 30, 2011, September 30, 2010, and December 31, 2010, we received $0.8 million, $0.4 million, and $0.5 million, respectively, in cash collateral from the counterparty on this position.

During the third quarter 2011, we closed the position where we sold credit protection in the form of a corporate credit default swap on one issuer in the automotive sector with a 5-year time horizon; the position was opened during the second quarter 2010. 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 September 30, 2010 and December 31, 2010, we received $0.1 million and $1.1 million, respectively, in cash collateral from the counterparty.

As of September 30, 2010, we closed 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; both positions were opened during the second quarter 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 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.

 

12


The composition of the investment portfolio by major security type was:

 

      Fair Value         

(millions)

   Level 1      Level 2      Level 3      Total      Cost  

September 30, 2011

              

Fixed maturities:

              

U.S. government obligations

   $ 3,050.7      $ 0      $ 0      $ 3,050.7      $ 2,921.7  

State and local government obligations

     0        1,985.9        0        1,985.9        1,930.6  

Corporate debt securities

     0        2,731.8        29.6        2,761.4        2,680.2  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     3,050.7        4,717.7        29.6        7,798.0        7,532.5  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Asset-backed securities:

              

Residential mortgage-backed

     0        377.1        67.1        444.2        471.3  

Commercial mortgage-backed

     0        1,837.9        21.8        1,859.7        1,826.2  

Other asset-backed

     0        1,276.1        3.6        1,279.7        1,265.5  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal asset-backed securities

     0        3,491.1        92.5        3,583.6        3,563.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Redeemable preferred stocks:

              

Financials

     24.1        118.0        0        142.1        136.7  

Utilities

     0        68.6        0        68.6        70.8  

Industrials

     0        223.3        0        223.3        228.9  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal redeemable preferred stocks

     24.1        409.9        0        434.0        436.4  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

     3,074.8        8,618.7        122.1        11,815.6        11,531.9  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities:

              

Nonredeemable preferred stocks:

              

Financials

     332.3        487.6        0        819.9        453.6  

Utilities

     0        53.1        0        53.1        40.0  

Industrials

     0        0        0        0        0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal nonredeemable preferred stocks

     332.3        540.7        0        873.0        493.6  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Common equities:

  

           

Common stocks

     1,587.7        0        0        1,587.7        1,387.4  

Other equity-like investments

     0        0        11.8        11.8        4.1  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal common equities

     1,587.7        0        11.8        1,599.5        1,391.5  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities and equity securities

   $ 4,994.8      $ 9,159.4      $ 133.9        14,288.1        13,417.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Short-term investments:

              

Other short-term investments

  

           1,699.7        1,699.7  
           

 

 

    

 

 

 

Total portfolio

            $ 15,987.8      $ 15,116.7  
           

 

 

    

 

 

 

Debt

  

         $ 2,605.8      $ 2,443.9  
           

 

 

    

 

 

 

 

13


     Fair Value         

(millions)

   Level 1      Level 2      Level 3      Total      Cost  

September 30, 2010

              

Fixed maturities:

              

U.S. government obligations

   $ 3,521.7      $ 0      $ 0      $ 3,521.7      $ 3,411.7  

State and local government obligations

     0        1,932.3        0        1,932.3        1,865.1  

Corporate debt securities

     0        2,476.2        29.6        2,505.8        2,392.6  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     3,521.7        4,408.5        29.6        7,959.8        7,669.4  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Asset-backed securities:

              

Residential mortgage-backed

     0        462.1        104.6        566.7        576.8  

Commercial mortgage-backed

     0        1,842.2        25.4        1,867.6        1,801.0  

Other asset-backed

     0        1,086.2        5.6        1,091.8        1,077.2  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal asset-backed securities

     0        3,390.5        135.6        3,526.1        3,455.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Redeemable preferred stocks:

  

           

Financials

     23.5        231.6        0        255.1        247.6  

Utilities

     0        69.9        0        69.9        69.9  

Industrials

     0        274.9        0        274.9        285.4  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal redeemable preferred stocks

     23.5        576.4        0        599.9        602.9  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

     3,545.2        8,375.4        165.2        12,085.8        11,727.3  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities:

              

Nonredeemable preferred stocks:

              

Financials

     608.9        478.2        0        1,087.1        523.6  

Utilities

     0        67.0        0        67.0        50.8  

Industrials

     0        35.3        0        35.3        36.2  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal nonredeemable preferred stocks

     608.9        580.5        0        1,189.4        610.6  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Common equities:

              

Common stocks

     1,272.8        0        0        1,272.8        1,010.0  

Other equity-like investments

     0        0        12.5        12.5        4.7  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal common equities

     1,272.8        0        12.5        1,285.3        1,014.7  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities and equity securities

   $ 5,426.9      $ 8,955.9      $ 177.7        14,560.5        13,352.6  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Short-term investments:

              

Other short-term investments

              1,815.5        1,815.5  
           

 

 

    

 

 

 

Total portfolio

            $ 16,376.0      $ 15,168.1  
           

 

 

    

 

 

 

Debt

            $ 2,091.2      $ 1,957.8  
           

 

 

    

 

 

 

 

14


     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 stocks

     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 investments

              1,090.8        1,090.8  
           

 

 

    

 

 

 

Total portfolio

            $ 15,523.4      $ 14,344.6  
           

 

 

    

 

 

 

Debt

            $ 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. We did not have any transfers between Level 1 and Level 2 during the third quarter 2011. During the first quarter, we had two nonredeemable preferred securities with a value of $71.2 million that were transferred from Level 2 into Level 1 due to the availability of exchange pricing. In the second quarter, the securities (then valued at $74.9 million) were transferred back into Level 2 due to the lack of a consistent daily exchange-quoted price. The securities will remain in Level 2 permanently until a daily exchange price is evident. We did not have any transfers between Level 1 and Level 2 for the three and nine months ended September 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 September 30, 2011, vendor-quoted prices represented 61% of our Level 1 classifications, compared to 65% at September 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-quoted prices. The balance of our Level 1 pricing comes from quotes obtained directly from trades made on an active exchange.

At September 30, 2011, vendor-quoted prices comprised 94% of our Level 2 classifications, compared to 91% at September 30, 2010 and 94% at 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

 

15


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 September 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 September 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 September 30, 2011 and 2010, as well as December 31, 2010, we had two fixed-maturity securities with an aggregate value of $0.5 million that were priced internally.

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 for all levels of financial instruments 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.

 

16


The following tables provide a summary of changes in fair value associated with Level 3 assets for the three and nine months ended September 30, 2011 and 2010:

 

     Level 3 Fair Value
Three months ended September 30, 2011
 
    Fair Value     Calls/                 Net           Net     Fair value  
    at June 30,     Maturities/                 Realized     Change in     Transfers     at Sept. 30,  

(millions)

  2011     Paydowns     Purchases     Sales     (gain)/loss     Valuation     in (out)     2011  

Fixed maturities:

               

Asset-backed securities:

               

Residential mortgage-backed

  $ 71.5     $ (4.9   $ 0     $ 0     $ 0     $ .5     $ 0     $ 67.1  

Commercial mortgage-backed

    26.5       (.1     0       0       0       (4.6     0       21.8  

Other asset-backed

    4.5       (.8     0       0       0       (.1     0       3.6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total asset-backed securities

    102.5       (5.8     0       0       0       (4.2     0       92.5  

Corporate debt securities

    29.8       0       0       0       0       (.2     0       29.6  

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

    132.3       (5.8     0       0       0       (4.4     0       122.1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity securities:

               

Common equities:

               

Other equity-like investments

    11.9       0       0       0       0       (.1     0       11.8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3 securities

  $ 144.2     $ (5.8   $ 0     $ 0     $ 0     $ (4.5   $ 0     $ 133.9  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    Level 3 Fair Value  
    Nine months ended September 30, 2011  
    Fair Value     Calls/                 Net           Net     Fair value  
    at Dec. 31,     Maturities/                 Realized     Change in     Transfers     at Sept. 30,  

(millions)

  2010     Paydowns     Purchases     Sales     (gain)/loss     Valuation     in (out)     2011  

Fixed maturities:

               

Asset-backed securities:

               

Residential mortgage-backed

  $ 96.7     $ (14.7   $ 0     $ 0     $ 0     $ .5     $ (15.4   $ 67.1  

Commercial mortgage-backed

    27.5       (.2     0       0       0       (5.5            21.8  

Other asset-backed

    5.0       (1.7     0       0       0       .3              3.6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total asset-backed securities

    129.2       (16.6     0       0       0       (4.7     (15.4     92.5  

Corporate debt securities

    29.5       0       0       0       0       .1              29.6  

Other debt obligations

    0       0       0       0       0       0              0  

Redeemable preferred stocks:

               

Industrials

    0       0       0       0       0       0              0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturities

    158.7       (16.6     0       0       0       (4.6     (15.4     122.1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity securities:

               

Common equities:

               

Other equity-like investments

    11.8       0       0       0       0       0              11.8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3 securities

  $ 170.5     $ (16.6   $ 0     $ 0     $ 0     $ (4.6   $ (15.4   $ 133.9  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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.

 

17


    Level 3 Fair Value  
    Three months ended September 30, 2010  
    Fair Value     Calls/                 Net           Net     Fair value  
    at June 30,     Maturities/                 Realized     Change in     Transfers     at Sept. 30,  

(millions)

  2010     Paydowns     Purchases     Sales     (gain)/loss     Valuation     in (out)     2010  

Fixed maturities:

               

Asset-backed securities:

               

Residential mortgage-backed

  $ 88.5     $ (5.5   $ 21.3     $ 0     $ 0     $ .3     $      $ 104.6  

Commercial mortgage-backed

    22.6       0       0       0       0       2.5       .3         25.4  

Other asset-backed

    6.4       (.8     0       0       0       0              5.6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total asset-backed securities

    117.5       (6.3     21.3       0       0       2.8       .3         135.6  

Corporate debt securities

    29.0       0       0       0       0       .6              29.6  

Other debt obligations

    0       0       0       0       0       0              0  

Redeemable preferred stocks:

               

Industrials

    0       0       0       0       0       0              0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturities

    146.5       (6.3     21.3       0       0       3.4       .3         165.2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity securities:

               

Common equities:

               

Other equity-like investments

    12.7       0       0       (.3     .3       (.2            12.5  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3 securities

  $ 159.2     $ (6.3   $ 21.3     $ (.3   $ .3     $ 3.2     $ .3       $ 177.7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

1

The $0.3 million was transferred from Level 2 into Level 3 due to a lack of trade volume and liquidity.

 

    Level 3 Fair Value  
    Nine months ended September 30, 2010  
    Fair Value     Calls/                 Net           Net     Fair value  
    at Dec. 31,     Maturities/                 Realized     Change in     Transfers     at Sept. 30,  

(millions)

  2009     Paydowns     Purchases     Sales     (gain)/loss     Valuation     in (out)     2010  

Fixed maturities:

               

Asset-backed securities:

               

Residential mortgage-backed

  $ 46.1     $ (13.0   $ 55.6     $ 0     $ 0     $ 3.8       12.1       $ 104.6  

Commercial mortgage-backed

    21.6       0       0       0       0       3.5       .3         25.4  

Other asset-backed

    7.8       (2.0     0       0       0       (.2            5.6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total asset-backed securities

    75.5       (15.0     55.6       0       0       7.1       12.4         135.6  

Corporate debt securities

    28.2       0       0       0       0       1.4              29.6  

Other debt obligations

    1.1       0       0       0       0       (1.1            0  

Redeemable preferred stocks:

               

Industrials

    53.1       0       0       0       0       0       (53.1     0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturities

    157.9       (15.0     55.6       0       0       7.4       (40.7     165.2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity securities:

               

Common equities:

               

Other equity-like investments

    12.9       (.6     0       (.3     .3       .2              12.5  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3 securities

  $ 170.8     $ (15.6   $ 55.6     $ (.3   $ .3     $ 7.6     $ (40.7   $ 177.7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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.

 

18


Note 4 Debt — Debt consisted of:

 

     September 30, 2011      September 30, 2010      December 31, 2010  
     Carrying      Fair      Carrying      Fair      Carrying      Fair  

(millions)

   Value      Value      Value      Value      Value      Value  

6.375% Senior Notes due 2012

   $ 349.9      $ 354.4      $ 349.5      $ 376.3      $ 349.6      $ 369.3  

7% Notes due 2013

     149.7        164.2        149.5        167.1        149.6        165.0  

3.75% Senior Notes due 2021

     497.0        511.8        0        0        0        0  

6 5/8% Senior Notes due 2029

     294.9        354.1        294.8        342.5        294.8        329.9  

6.25% Senior Notes due 2032

     394.3        462.6        394.2        443.7        394.2        433.3  

6.70% Fixed-to-Floating Rate Junior Subordinated Debentures due 2067

     758.1        758.7        769.8        761.6        770.0        808.2  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,443.9      $ 2,605.8      $ 1,957.8      $ 2,091.2      $ 1,958.2      $ 2,105.7  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 nine months of 2011.

On August 22, 2011, we issued $500 million of 3.75% Senior Notes due 2021 (the “3.75% Senior Notes”). We received proceeds of $497 million, after deducting underwriter’s discounts and commissions, and we incurred an additional $1.0 million of expenses related to the issuance. In addition, upon issuance of the 3.75% Senior Notes, we closed a forecasted debt issuance hedge, which was entered into to hedge against a possible rise in interest rates, and recognized a $5.1 million pretax loss as part of accumulated other comprehensive income (loss); the loss will be recognized as an adjustment to interest expense and amortized over the life of the 3.75% Senior Notes.

During the third quarter 2011, we repurchased $12.7 million in aggregate principal amount of our 6.70% Fixed-to-Floating Rate Junior Subordinated Debentures due 2067 (the “6.70% Debentures”), resulting in a net loss on these extinguishments of $0.1 million. In addition, we reclassified $0.3 million, on a pretax basis, from accumulated other comprehensive income on the balance sheet to net realized gains (losses) on securities on the income statement, reflecting the portion of the unrealized gain on forecasted transactions that was related to the portion of the debt extinguished during the quarter.

In September 2011, we entered into an agreement with The Bank of New York Mellon Trust Company, N.A., as trustee, modifying the terms of our 6.70% Debentures. Pursuant to that agreement, among other changes, we surrendered our right to temporarily defer the payment of interest on the 6.70% Debentures and terminated a related obligation to reserve up to 250 million of our unissued common shares as a source of potential funding to pay any such deferred interest. The changes were effective immediately upon execution of the agreement.

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% Debentures. The Tender Offer expired on July 8, 2010. We received valid tenders from holders of the 6.70% 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 6.70% Debentures accepted for purchase, which included an early tender payment of $50 per $1,000 principal amount of 6.70% 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 due 2032 (the “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 6.70% Debentures. Under the RCC, we agreed that we would not repay, redeem, defease, or purchase all or any part of the 6.70% 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

 

19


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 September 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 nine months ended September 30, 2011, there have been no material changes in our uncertain tax positions.

The effective tax rate for the three months ended September 30, 2011 was 28%, compared with 32% for the same period last year, reflecting $6.3 million of elective tax credits, primarily related to the 2007-2009 tax years, recognized during the third quarter 2011.

Note 6 Supplemental Cash Flow Information — Cash includes only bank demand deposits. We paid the following in the respective time periods:

 

     Nine Months Ended September 30,

(millions)

   2011      2010

Income taxes, net of refunds

   $ 348.0      $ 299.0

Interest

     86.1      94.6

Note 7 Segment Information — Our Personal Lines segment writes insurance for personal autos and recreational vehicles. Our Commercial Auto segment writes primary liability, physical damage, and other auto-related 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 program 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 September 30,     Nine Months Ended September 30,