PGR-2014.03.31-10Q


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 1O-Q
 
 
(Mark One)
ý
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2014
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  ý    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  ý    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
 
ý
  
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  ý
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: 592,006,103 outstanding at April 30, 2014
 

1


PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
The Progressive Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(unaudited)
Three months ended March 31,
2014

 
2013

 
% Change
(millions—except per share amounts)
 
 
 
 
 
Revenues
 
 
 
 
 
Net premiums earned
$
4,402.3

 
$
4,179.3

 
5
Investment income
103.3

 
100.5

 
3
Net realized gains (losses) on securities:
 
 
 
 
 
Other-than-temporary impairment (OTTI) losses:
 
 
 
 
 
Total OTTI losses
0

 
(.2
)
 
(100)
Non-credit losses, net of credit losses recognized on previously recorded non-credit OTTI losses
0

 
0

 
NM
Net impairment losses recognized in earnings
0

 
(.2
)
 
(100)
Net realized gains (losses) on securities
119.4

 
80.8

 
48
Total net realized gains (losses) on securities
119.4

 
80.6

 
48
Fees and other revenues
72.8

 
68.4

 
6
Service revenues
9.8

 
8.4

 
17
Total revenues
4,707.6

 
4,437.2

 
6
Expenses
 
 
 
 

Losses and loss adjustment expenses
3,205.9

 
2,985.5

 
7
Policy acquisition costs
369.0

 
358.9

 
3
Other underwriting expenses
610.4

 
585.6

 
4
Investment expenses
4.1

 
4.9

 
(16)
Service expenses
9.7

 
8.6

 
13
Interest expense
26.7

 
30.6

 
(13)
Total expenses
4,225.8

 
3,974.1

 
6
Net Income
 
 
 
 

Income before income taxes
481.8

 
463.1

 
4
Provision for income taxes
160.5

 
154.5

 
4
Net income
$
321.3

 
$
308.6

 
4
Other Comprehensive Income (Loss), Net of Tax
 
 
 
 

Net unrealized gains (losses) on securities:
 
 
 
 

Net non-credit related OTTI losses, adjusted for valuation changes
$
0

 
$
.2

 
(100)
Other net unrealized gains (losses) on securities
(.1
)
 
99.0

 
(100)
Total net unrealized gains (losses) on securities
(.1
)
 
99.2

 
(100)
Net unrealized gains on forecasted transactions
(.3
)
 
(.3
)
 
0
Foreign currency translation adjustment
0

 
(.2
)
 
(100)
Other comprehensive income (loss)
(.4
)
 
98.7

 
(100)
Comprehensive income
$
320.9

 
$
407.3

 
(21)
Computation of Net Income Per Share
 
 
 
 

Average shares outstanding - Basic
593.9

 
600.6

 
(1)
Net effect of dilutive stock-based compensation
3.8

 
3.8

 
0
Total equivalent shares - Diluted
597.7

 
604.4

 
(1)
Basic: Net income per share
$
.54

 
$
.51

 
5
Diluted: Net income per share
$
.54

 
$
.51

 
5
Dividends declared per share1
$
0

 
$
0

 
 
NM = Not Meaningful
1Progressive maintains an annual dividend program. See Note 8 - Dividends for further discussion.
See notes to consolidated financial statements.

2


The Progressive Corporation and Subsidiaries
Consolidated Balance Sheets
(unaudited)
 
March 31,
 
December 31,
2013
(millions)
2014
 
2013
 
Assets
 
 
 
 
 
Investments - Available-for-sale, at fair value:
 
 
 
 
 
         Fixed maturities (amortized cost: $12,335.8, $11,686.0, and $13,415.3)
$
12,506.2

 
$
12,046.3

 
$
13,540.4

Equity securities:
 
 
 
 
 
             Nonredeemable preferred stocks (cost: $460.7, $412.5, and $445.7)
737.9

 
820.6

 
711.2

             Common equities (cost: $1,252.7, $1,388.5, and $1,451.1)
2,278.7

 
2,111.1

 
2,530.5

         Short-term investments (amortized cost: $1,872.9, $2,321.7, and $1,272.6)
1,872.9

 
2,321.7

 
1,272.6

Total investments
17,395.7

 
17,299.7

 
18,054.7

Cash
96.7

 
110.2

 
75.1

Accrued investment income
82.3

 
87.3

 
89.8

Premiums receivable, net of allowance for doubtful accounts of $131.9, $128.1, and $142.4
3,515.9

 
3,372.3

 
3,310.7

Reinsurance recoverables, including $34.5, $32.4, and $44.3 on paid losses and loss adjustment expenses
1,111.5

 
947.5

 
1,090.2

Prepaid reinsurance premiums
81.8

 
72.8

 
74.9

Deferred acquisition costs
466.9

 
452.3

 
447.6

Property and equipment, net of accumulated depreciation of $687.1, $642.3, and $680.4
950.0

 
935.9

 
960.9

Net deferred income taxes
0

 
49.0

 
0

Other assets
614.6

 
216.5

 
304.3

Total assets
$
24,315.4

 
$
23,543.5

 
$
24,408.2

Liabilities and Shareholders’ Equity
 
 
 
 
 
Unearned premiums
$
5,460.1

 
$
5,207.3

 
$
5,174.5

Loss and loss adjustment expense reserves
8,592.6

 
7,948.4

 
8,479.7

Net deferred income taxes
51.1

 
0

 
28.4

Dividends payable
0

 
0

 
890.2

Accounts payable, accrued expenses, and other liabilities
1,911.7

 
1,934.5

 
1,785.0

Debt1
1,861.3

 
2,063.5

 
1,860.9

Total liabilities
17,876.8

 
17,153.7

 
18,218.7

Common Shares, $1.00 par value (authorized 900.0; issued 797.6, including treasury shares of 204.5, 194.4, and 201.8)
593.1


603.2


595.8

Paid-in capital
1,159.0


1,096.9


1,142.0

Retained earnings
3,735.2


3,720.0


3,500.0

Accumulated other comprehensive income, net of tax:





Net non-credit related OTTI losses, adjusted for valuation changes
0


(.1
)

0

Other net unrealized gains (losses) on securities
946.9


962.0


947.0

Total net unrealized gains (losses) on securities
946.9

 
961.9

 
947.0

Net unrealized gains on forecasted transactions
3.8

 
5.8

 
4.1

Foreign currency translation adjustment
.6

 
2.0

 
.6

Total accumulated other comprehensive income
951.3

 
969.7

 
951.7

Total shareholders’ equity
6,438.6

 
6,389.8

 
6,189.5

Total liabilities and shareholders’ equity
$
24,315.4

 
$
23,543.5

 
$
24,408.2

 
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)
Three months ended March 31,
2014

 
2013

(millions)
 
 
 
Cash Flows From Operating Activities
 
 
 
Net income
$
321.3

 
$
308.6

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
22.8

 
23.7

Amortization of fixed-income securities
19.0

 
40.0

Amortization of equity-based compensation
15.2

 
17.8

Net realized (gains) losses on securities
(119.4
)
 
(80.6
)
Net (gains) losses on disposition of property and equipment
2.1

 
1.0

Changes in:
 
 
 
Premiums receivable
(205.2
)
 
(188.6
)
Reinsurance recoverables
(21.3
)
 
(46.5
)
Prepaid reinsurance premiums
(6.9
)
 
(6.5
)
Deferred acquisition costs
(19.3
)
 
(17.8
)
Income taxes
149.6

 
129.8

Unearned premiums
285.6

 
276.7

Loss and loss adjustment expense reserves
112.9

 
110.0

Accounts payable, accrued expenses, and other liabilities
77.0

 
135.1

Other, net
27.2

 
19.4

Net cash provided by operating activities
660.6

 
722.1

Cash Flows From Investing Activities
 
 
 
Purchases:
 
 
 
Fixed maturities
(1,731.6
)
 
(1,950.8
)
Equity securities
(86.6
)
 
(74.1
)
Sales:
 
 
 
Fixed maturities
2,107.1

 
1,257.3

Equity securities
362.5

 
72.5

Maturities, paydowns, calls, and other:
 
 
 
Fixed maturities
697.0

 
368.6

Equity securities
14.3

 
16.0

Net sales (purchases) of short-term investments
(600.4
)
 
(331.6
)
Net unsettled security transactions
(411.3
)
 
98.4

Purchases of property and equipment
(16.2
)
 
(27.7
)
Sales of property and equipment
2.2

 
.8

Net cash provided by (used in) investing activities
337.0

 
(570.6
)
Cash Flows From Financing Activities
 
 
 
Tax benefit from vesting of equity-based compensation
10.7

 
6.6

Dividends paid to shareholders1
(892.6
)
 
(175.6
)
Acquisition of treasury shares
(94.7
)
 
(51.3
)
Net cash used in financing activities
(976.6
)
 
(220.3
)
Effect of exchange rate changes on cash
.6

 
(.1)

Increase (decrease) in cash
21.6

 
(68.9
)
Cash, January 1
75.1

 
179.1

Cash, March 31
$
96.7

 
$
110.2


1Progressive maintains an annual dividend program. See Note 8 - 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, a mutual insurance company affiliate, and a limited partnership investment affiliate. All of the subsidiaries and affiliates 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 March 31, 2014, 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, 2013.
During the first quarter 2014, a decision was made to sell property originally purchased for a future Service Center site. At March 31, 2014, included in other assets in the consolidated balance sheets is $8.7 million of "held for sale" property, which represents the fair value of the property less the estimated costs to sell.
Note 2 Investments — The following tables present the composition of our investment portfolio by major security type, consistent with our classification of 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

March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
$
3,197.8

 
$
39.0

 
$
(6.8
)
 
$
0

 
$
3,230.0

 
18.5
%
State and local government obligations
2,131.0

 
33.1

 
(9.2
)
 
0

 
2,154.9

 
12.4

Foreign government obligations
17.9

 
0

 
0

 
0

 
17.9

 
.1

Corporate debt securities
2,461.6

 
45.4

 
(7.2
)
 
1.8

 
2,501.6

 
14.4

Residential mortgage-backed securities
1,286.7

 
32.6

 
(11.9
)
 
0

 
1,307.4

 
7.5

Commercial mortgage-backed securities
2,037.7

 
41.5

 
(17.6
)
 
0

 
2,061.6

 
11.9

Other asset-backed securities
936.2

 
6.6

 
(.6
)
 
.3

 
942.5

 
5.4

Redeemable preferred stocks
266.9

 
29.6

 
(6.2
)
 
0

 
290.3

 
1.7

Total fixed maturities
12,335.8

 
227.8

 
(59.5
)
 
2.1

 
12,506.2

 
71.9

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks
460.7

 
263.7

 
(1.2
)
 
14.7

 
737.9

 
4.2

Common equities
1,252.7

 
1,028.8

 
(2.8
)
 
0

 
2,278.7

 
13.1

Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
Other short-term investments
1,872.9

 
0

 
0

 
0

 
1,872.9

 
10.8

Total portfolio2,3
$
15,922.1

 
$
1,520.3

 
$
(63.5
)
 
$
16.8

 
$
17,395.7

 
100.0
%

5



($ in millions)
Cost

 
Gross
Unrealized Gains

 
Gross
Unrealized
Losses

 
Net
Realized
Gains
(Losses)1

 
Fair
Value

 
% of
Total
Fair
Value

March 31, 2013
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
$
3,015.6

 
$
83.6

 
$
0

 
$
0

 
$
3,099.2

 
17.9
%
State and local government obligations
1,771.6

 
42.8

 
(.5
)
 
0

 
1,813.9

 
10.5

Foreign government obligations
0

 
0

 
0

 
0

 
0

 
0

Corporate debt securities
2,910.8

 
100.3

 
(.9
)
 
4.1

 
3,014.3

 
17.4

Residential mortgage-backed securities
595.7

 
33.1

 
(7.5
)
 
0

 
621.3

 
3.6

Commercial mortgage-backed securities
2,107.2

 
76.2

 
(3.2
)
 
0

 
2,180.2

 
12.6

Other asset-backed securities
929.2

 
11.0

 
0

 
.6

 
940.8

 
5.4

Redeemable preferred stocks
355.9

 
32.5

 
(11.8
)
 
0

 
376.6

 
2.2

Total fixed maturities
11,686.0

 
379.5

 
(23.9
)
 
4.7

 
12,046.3

 
69.6

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks
412.5

 
401.7

 
0

 
6.4

 
820.6

 
4.8

Common equities
1,388.5

 
729.6

 
(7.0
)
 
0

 
2,111.1

 
12.2

Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
Other short-term investments
2,321.7

 
0

 
0

 
0

 
2,321.7

 
13.4

Total portfolio2,3
$
15,808.7

 
$
1,510.8

 
$
(30.9
)
 
$
11.1

 
$
17,299.7

 
100.0
%
 
($ in millions)
Cost

 
Gross
Unrealized Gains

 
Gross
Unrealized
Losses

 
Net
Realized
Gains
(Losses)1

 
Fair
Value

 
% of
Total
Fair
Value

December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
$
3,630.4

 
$
48.4

 
$
(16.6
)
 
$
0

 
$
3,662.2

 
20.3
%
State and local government obligations
2,247.3

 
27.1

 
(18.4
)
 
0

 
2,256.0

 
12.5

Foreign government obligations
15.6

 
0

 
0

 
0

 
15.6

 
.1

Corporate debt securities
2,885.0

 
60.4

 
(20.4
)
 
1.6

 
2,926.6

 
16.2

Residential mortgage-backed securities
1,110.1

 
31.9

 
(14.1
)
 
0

 
1,127.9

 
6.2

Commercial mortgage-backed securities
2,154.4

 
43.9

 
(37.8
)
 
0

 
2,160.5

 
12.0

Other asset-backed securities
1,073.0

 
6.6

 
(2.1
)
 
.2

 
1,077.7

 
6.0

Redeemable preferred stocks
299.5

 
24.1

 
(9.7
)
 
0

 
313.9

 
1.7

Total fixed maturities
13,415.3

 
242.4

 
(119.1
)
 
1.8

 
13,540.4

 
75.0

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks
445.7

 
258.7

 
(4.5
)
 
11.3

 
711.2

 
3.9

Common equities
1,451.1

 
1,081.8

 
(2.4
)
 
0

 
2,530.5

 
14.0

Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
Other short-term investments
1,272.6

 
0

 
0

 
0

 
1,272.6

 
7.1

Total portfolio2,3
$
16,584.7

 
$
1,582.9

 
$
(126.0
)
 
$
13.1

 
$
18,054.7

 
100.0
%
 
1Represents net holding period gains (losses) on certain hybrid securities (discussed below).
2Our portfolio reflects the effect of unsettled security transactions and collateral on open derivative positions; at March 31, 2014, $350.0 million was included in "other assets" and at March 31, 2013 and December 31, 2013, $7.5 million and $61.3 million, respectively, were included in "other liabilities."
3The total fair value of the portfolio at March 31, 2014 and 2013, and December 31, 2013 included $0.8 billion, $1.2 billion, and $1.8 billion, respectively, of securities held in a consolidated, non-insurance subsidiary of the holding company, net of any unsettled security transactions.


6


Our other short-term investments include commercial paper, reverse repurchase transactions, and other investments that are expected to mature within one year. We had $140.0 million, $620.4 million, and $200.0 million of open reverse repurchase commitments at March 31, 2014 and 2013, and December 31, 2013, respectively. At these dates, we had no repurchase transactions where we lent collateral. To the extent our repurchase transactions were with the same counterparty and subject to an enforceable master netting arrangement, we could elect to offset these transactions. Consistent with past practice, we report these transactions on a gross basis on our balance sheets.

Included in our fixed-maturity and equity securities are hybrid securities, which are reported at fair value:
 
 
March 31,
 
December 31,
2013

(millions)
2014

 
2013

 
Fixed maturities:
 
 
 
 
 
Corporate debt securities
$
145.7

 
$
175.7

 
$
164.2

Other asset-backed securities
13.9

 
16.6

 
14.8

Total fixed maturities
159.6

 
192.3

 
179.0

Equity securities:
 
 
 
 
 
Nonredeemable preferred stocks
63.8

 
55.4

 
60.3

Total hybrid securities
$
223.4

 
$
247.7

 
$
239.3

Certain corporate debt securities are accounted for as hybrid securities since they were acquired at a substantial premium and contain a change-in-control put option (derivative) that permits the investor, at its sole option if and when a change in control is triggered, to put the security back to the issuer at a 1% premium to par. Due to this change-in-control put option and the substantial market premium paid to acquire these securities, there is the potential that the election to put, upon the change in control, could result in an acceleration of the remaining premium paid on these securities, which would result in a loss of $10.0 million as of March 31, 2014, if all of the bonds experienced a simultaneous change in control and we elected to exercise all of our put options. The put feature limits the potential loss in value that could be experienced in the event a corporate action occurs that results in a change in control that materially diminishes the credit quality of the issuer. We are under no obligation to exercise the put option we hold if a change in control occurs.
The other asset-backed security in the table above represents one hybrid security that was acquired at a deep discount to par due to a failing auction, and contains a put option 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.
Fixed Maturities The composition of fixed maturities by maturity at March 31, 2014, was:
 
(millions)
Cost

 
Fair Value

Less than one year
$
1,838.3

 
$
1,874.4

One to five years
7,538.0

 
7,658.9

Five to ten years
2,849.0

 
2,855.8

Ten years or greater
58.6

 
65.2

Total1
$
12,283.9

 
$
12,454.3

 
1Excludes $51.9 million related to our open interest rate swap positions.
Asset-backed securities are classified in the maturity distribution table based upon their projected cash flows. All other securities which do not have a single maturity date are reported based upon expected average maturity. Contractual maturities may differ from expected maturities because the issuers of the securities may have the right to call or prepay obligations.

7



Gross Unrealized Losses As of March 31, 2014, we had $60.7 million of gross unrealized losses in our fixed-income securities (i.e., fixed-maturity securities, nonredeemable preferred stocks, and short-term investments) and $2.8 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. A review of our fixed-income securities indicated that the issuers were current with respect to their interest obligations and that there was no evidence of any deterioration of the current cash flow projections that would indicate we would not receive the remaining principal at maturity. For common equities, 87% of our common stock portfolio was indexed to the Russell 1000; as such, this portfolio may contain securities in a loss position for an extended period of time, subject to possible write-downs, as described below. We may retain these securities as long as the portfolio and index correlation remain similar. The remaining 13% of our common stocks are part of a managed equity strategy selected and administered by external investment advisors. If our review of loss position securities indicates there is a fundamental, or market, impairment on these securities that is determined to be other-than-temporary, 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 No. of Sec.

Total
Fair
Value

Gross Unrealized Losses

Less than 12 Months
 
12 Months or Greater
($ in millions)
No. of Sec.

Fair
Value

Unrealized Losses

 
No. of Sec.

Fair
Value

Unrealized Losses

March 31, 2014
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
18

$
930.4

$
(6.8
)
5

$
163.1

$
(.3
)
 
13

$
767.3

$
(6.5
)
State and local government obligations
106

603.0

(9.2
)
28

76.8

(.6
)
 
78

526.2

(8.6
)
Corporate debt securities
31

594.3

(7.2
)
7

101.6

(.4
)
 
24

492.7

(6.8
)
Residential mortgage-backed securities
66

812.6

(11.9
)
24

359.7

(1.9
)
 
42

452.9

(10.0
)
Commercial mortgage-backed securities
59

783.7

(17.6
)
19

116.7

(.2
)
 
40

667.0

(17.4
)
Other asset-backed securities
8

112.7

(.6
)
4

36.8

(.1
)
 
4

75.9

(.5
)
Redeemable preferred stocks
3

93.5

(6.2
)
0

0

0

 
3

93.5

(6.2
)
Total fixed maturities
291

3,930.2

(59.5
)
87

854.7

(3.5
)
 
204

3,075.5

(56.0
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks
3

84.3

(1.2
)
0

0

0

 
3

84.3

(1.2
)
Common equities
9

34.0

(2.8
)
7

23.1

(1.6
)
 
2

10.9

(1.2
)
Total equity securities
12

118.3

(4.0
)
7

23.1

(1.6
)
 
5

95.2

(2.4
)
Total portfolio
303

$
4,048.5

$
(63.5
)
94

$
877.8

$
(5.1
)
 
209

$
3,170.7

$
(58.4
)
 

8


 
Total No. of Sec.

Total
Fair
Value

Gross Unrealized Losses

Less than 12 Months
 
12 Months or Greater
($ in millions)
No. of Sec.

Fair
Value

Unrealized Losses

 
No. of Sec.

Fair
Value

Unrealized Losses

March 31, 2013
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
1

$
40.0

$
0

1

$
40.0

$
0

 
0

$
0

$
0

State and local government obligations
29

117.4

(.5
)
20

78.7

(.4
)
 
9

38.7

(.1
)
Corporate debt securities
15

267.5

(.9
)
15

267.5

(.9
)
 
0

0

0

Residential mortgage-backed securities
26

180.5

(7.5
)
10

106.7

(2.5
)
 
16

73.8

(5.0
)
Commercial mortgage-backed securities
21

348.2

(3.2
)
17

343.2

(3.1
)
 
4

5.0

(.1
)
Other asset-backed securities
4

49.7

0

4

49.7

0

 
0

0

0

Redeemable preferred stocks
4

120.6

(11.8
)
1

25.0

0

 
3

95.6

(11.8
)
Total fixed maturities
100

1,123.9

(23.9
)
68

910.8

(6.9
)
 
32

213.1

(17.0
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks
0

0

0

0

0

0

 
0

0

0

Common equities
51

55.1

(7.0
)
38

44.3

(5.7
)
 
13

10.8

(1.3
)
Total equity securities
51

55.1

(7.0
)
38

44.3

(5.7
)
 
13

10.8

(1.3
)
Total portfolio
151

$
1,179.0

$
(30.9
)
106

$
955.1

$
(12.6
)
 
45

$
223.9

$
(18.3
)
 
Total No. of Sec.

Total
Fair
Value

Gross Unrealized Losses

Less than 12 Months
 
12 Months or Greater
($ in millions)
No. of Sec.

Fair
Value

Unrealized Losses

 
No. of Sec.

Fair
Value

Unrealized Losses

December 31, 2013
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
29

$
1,444.3

$
(16.6
)
28

$
1,434.6

$
(16.3
)
 
1

$
9.7

$
(.3
)
State and local government obligations
141

844.2

(18.4
)
119

759.3

(17.1
)
 
22

84.9

(1.3
)
Corporate debt securities
51

997.6

(20.4
)
45

831.1

(17.8
)
 
6

166.5

(2.6
)
Residential mortgage-backed securities
66

763.5

(14.1
)
45

597.6

(7.9
)
 
21

165.9

(6.2
)
Commercial mortgage-backed securities
76

1,061.9

(37.8
)
60

809.2

(19.7
)
 
16

252.7

(18.1
)
Other asset-backed securities
25

287.2

(2.1
)
22

233.3

(1.8
)
 
3

53.9

(.3
)
Redeemable preferred stocks
4

122.7

(9.7
)
0

0

0

 
4

122.7

(9.7
)
Total fixed maturities
392

5,521.4

(119.1
)
319

4,665.1

(80.6
)
 
73

856.3

(38.5
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks
7

142.3

(4.5
)
7

142.3

(4.5
)
 
0

0

0

Common equities
24

59.7

(2.4
)
20

58.5

(2.4
)
 
4

1.2

0

Total equity securities
31

202.0

(6.9
)
27

200.8

(6.9
)
 
4

1.2

0

Total portfolio
423

$
5,723.4

$
(126.0
)
346

$
4,865.9

$
(87.5
)
 
77

$
857.5

$
(38.5
)

During 2013, the number of our fixed-maturity securities with unrealized losses increased reflecting the decline in prices associated with the general rise in interest rates since March 31, 2013. During the first quarter 2014, the decline in benchmark interest rates for maturities longer than five years and for many non-treasury securities of all maturities reduced the number of fixed-maturity securities we held in our portfolio with unrealized losses at March 31, 2014 since year end. The decline in the number of common equity securities in an unrealized loss position during the last nine months of 2013 and the first quarter 2014, reflects increases in the equity market values, sales of securities, and write-downs in 2013 of a number of securities as a result of our other-than-temporary impairment review process. We had no material decreases in valuation as a result of credit rating downgrades on our fixed-maturity securities during the first quarter 2014. Unrealized losses on our nonredeemable preferred stocks related to three issuers with unrealized losses, averaging approximately 1% of our total cost of those securities. A review of these securities concluded that the unrealized losses are market-related adjustments to the values, which were determined not to be other-than-temporary, and we continue to expect to recover our initial investments on these securities. All of the fixed-maturity securities in an unrealized loss position at March 31, 2014 in the table above are current with respect to required principal and interest payments.


9


Other-Than-Temporary Impairment (OTTI) The following table shows the total non-credit portion of the OTTI recorded in accumulated other comprehensive income, reflecting the original non-credit loss at the time the credit impairment was determined:
 
 
March 31,
 
December 31,
2013

(millions)
2014

 
2013

 
Fixed maturities:
 
 
 
 
 
Residential mortgage-backed securities
$
(44.1
)
 
$
(44.2
)
 
$
(44.1
)
Commercial mortgage-backed securities
(.9
)
 
(.9
)
 
(.9
)
Total fixed maturities
$
(45.0
)
 
$
(45.1
)
 
$
(45.0
)

The following tables provide rollforwards of the amounts related to credit losses recognized in earnings for the periods ended March 31, 2014 and 2013, for which a portion of the OTTI losses were also recognized in accumulated other comprehensive income at the time the credit impairments were determined and recognized:
 
 
Three Months Ended March 31, 2014
 
Mortgage-Backed
 
 
(millions)
Residential 

 
Commercial 

 
Total

Balance at December 31, 2013
$
19.2

 
$
.4

 
$
19.6

Change in recoveries of future cash flows expected to be collected1
(.1
)
 
0

 
(.1
)
Balance at March 31, 2014
$
19.1

 
$
.4

 
$
19.5


 
Three Months Ended March 31, 2013
 
Mortgage-Backed
 
 
(millions)
Residential 

 
Commercial 

 
Total

Balance at December 31, 2012
$
27.1

 
$
.6

 
$
27.7

Change in recoveries of future cash flows expected to be collected1
.6

 
(.1
)
 
.5

Balance at March 31, 2013
$
27.7

 
$
.5

 
$
28.2


1Reflects expected recovery of prior period impairments that will be accreted into income over the remaining life of the security, net of any current quarter decreases in expected cash flows on previously recorded reductions.

Although 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), we are required to measure and report the amount of credit losses on the securities that were determined to be other-than-temporarily impaired. In that process, 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 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); historical credit ratings; and updated cash flow expectations 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.


10


Realized Gains (Losses) The components of net realized gains (losses) for the three months ended March 31, were:
(millions)
2014

 
2013

Gross realized gains on security sales
 
 
 
Fixed maturities:
 
 
 
U.S. government obligations
$
6.5

 
$
1.5

State and local government obligations
4.4

 
6.8

Corporate and other debt securities
23.1

 
24.1

Residential mortgage-backed securities
1.0

 
.4

Commercial mortgage-backed securities
6.1

 
4.0

Total fixed maturities
41.1

 
36.8

Equity securities:
 
 
 
Nonredeemable preferred stocks
25.9

 
38.5

Common equities
83.0

 
2.7

Subtotal gross realized gains on security sales
150.0

 
78.0

Gross realized losses on security sales
 
 
 
Fixed maturities:
 
 
 
U.S. government obligations
(4.7
)
 
(.3
)
State and local government obligations
(.1
)
 
0

Corporate and other debt securities
(2.2
)
 
(.4
)
Commercial mortgage-backed securities
(2.7
)
 
0

Redeemable preferred stocks
(3.2
)
 
(.1
)
Total fixed maturities
(12.9
)
 
(.8
)
Equity securities:
 
 
 
Common equities
(3.4
)
 
0

Subtotal gross realized losses on security sales
(16.3
)
 
(.8
)
Net realized gains (losses) on security sales
 
 
 
Fixed maturities:
 
 
 
U.S. government obligations
1.8

 
1.2

State and local government obligations
4.3

 
6.8

Corporate and other debt securities
20.9

 
23.7

Residential mortgage-backed securities
1.0

 
.4

Commercial mortgage-backed securities
3.4

 
4.0

Redeemable preferred stocks
(3.2
)
 
(.1
)
Total fixed maturities
28.2

 
36.0

Equity securities:
 
 
 
Nonredeemable preferred stocks
25.9

 
38.5

Common equities
79.6

 
2.7

Subtotal net realized gains (losses) on security sales
133.7

 
77.2

Other-than-temporary impairment losses
 
 
 
Fixed maturities:
 
 
 
Residential mortgage-backed securities
0

 
(.1
)
Total fixed maturities
0

 
(.1
)
Equity securities:
 
 
 
Common equities
0

 
(.1
)
Subtotal other-than-temporary impairment losses
0

 
(.2
)
Other gains (losses)
 
 
 
Hybrid securities
3.8

 
2.3

Derivative instruments
(19.3
)
 
1.3

Litigation settlements
1.2

 
0

Subtotal other gains (losses)
(14.3
)
 
3.6

Total net realized gains (losses) on securities
$
119.4

 
$
80.6

Gross realized gains and losses were predominately the result of sales transactions in our fixed-income portfolio related to movements in credit spreads and interest rates, sales from our equity-indexed portfolio during the first quarter 2014, and tax management strategies. In addition, gains and losses reflect recoveries from litigation settlements and holding period valuation changes on hybrids and derivatives. Also included are write-downs for securities determined to be other-than-temporarily impaired in our fixed-maturity and/or equity portfolios.

11


Net Investment Income  The components of net investment income for the three months ended March 31, were:
 
(millions)
2014

2013

Fixed maturities:
 
 
U.S. government obligations
$
13.0

$
11.8

State and local government obligations
12.8

11.4

Foreign government obligations
.1

0

Corporate debt securities
22.0

25.6

Residential mortgage-backed securities
9.9

4.5

Commercial mortgage-backed securities
16.7

18.7

Other asset-backed securities
4.2

3.5

Redeemable preferred stocks
4.1

5.4

Total fixed maturities
82.8

80.9

Equity securities:
 
 
Nonredeemable preferred stocks
9.9

9.2

Common equities
10.4

9.7

Short-term investments:
 
 
Other short-term investments
.2

.7

Investment income
103.3

100.5

Investment expenses
(4.1
)
(4.9
)
Net investment income
$
99.2

$
95.6


Trading Securities At March 31, 2014 and 2013, and December 31, 2013, we did not hold any trading securities and did not have any net realized gains (losses) on trading securities for the three months ended March 31, 2014 and 2013.
Derivative Instruments 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 a net derivative 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. 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.

12


The following table shows the status of our derivative instruments at March 31, 2014 and 2013, and December 31, 2013, and for the three months ended March 31, 2014 and 2013; amounts are on a pretax basis:
 
(millions)
 
 
 
 
Balance Sheet2
 
Comprehensive Income Statement
 
 
 
 
 
 
 
Assets (Liabilities)
Fair Value
 
Net Realized
Gains (Losses) on Securities
 
Notional Value1
 
 
 
 
 
 
 
Three months ended
 
March 31,
 
Dec. 31,
 
 
 
 
 
March 31,
 
Dec. 31,
 
March 31,
Derivatives designated as:
2014

 
2013

 
2013

 
Purpose
 
Classification
 
2014

 
2013

 
2013

 
2014

 
2013

Hedging instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Closed:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ineffective cash flow hedge
$
0

 
$
0

 
$
54

 
Manage interest 
rate risk
 
NA
 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

Non-hedging instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
750

 
0

 
750

 
Manage portfolio
duration
 
Investments—
fixed maturities
 
51.9

 
0

 
68.1

 
(19.3
)
 
0

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
0

 
1,263

 
0

 
Manage portfolio
duration
 
Other liabilities
 
0

 
(87.8
)
 
0

 
0

 
1.3

Closed:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
0

 
0

 
1,263

 
Manage portfolio
duration
 
NA
 
0

 
0

 
0

 
0

 
0

Total
NA

 
NA

 
NA

 
 
 
 
 
$
51.9

 
$
(87.8
)
 
$
68.1

 
$
(19.3
)
 
$
1.3


1The amounts represent the value held at quarter and year end for open positions and the maximum amount held during the period for closed positions.
2To the extent we hold both derivative assets and liabilities with the same counterparty that are subject to an enforceable master netting arrangement, we report them on a gross basis on our balance sheets, consistent with our historical presentation.
NA= Not Applicable

CASH FLOW HEDGES
We did not repurchase any debt during the quarters ended March 31, 2014 and 2013. During the year ended December 31, 2013, we repurchased, in the open market, $54.1 million, in aggregate principal amount of our 6.70% Fixed-to-Floating Rate Junior Subordinated Debentures due 2067 (the “6.70% Debentures”). For the portion of the 6.70% Debentures we repurchased during 2013, we reclassified $0.8 million, on a pretax basis, of the unrealized gain on forecasted transactions from accumulated other comprehensive income on the balance sheet to net realized gains on securities on the comprehensive income statement.
INTEREST RATE SWAPS
During the periods ended March 31, 2014 and 2013, and December 31, 2013, we invested in interest rate swap positions primarily to manage the fixed-income portfolio duration. At both March 31, 2014 and December 31, 2013, we held three 10-year interest rate swap positions (opened in the second quarter of 2013) with a total notional value of $750 million. In each case, we are paying a fixed rate and receiving a variable rate, effectively shortening the duration of our fixed-income portfolio. As of March 31, 2014 and December 31, 2013, we recognized inception-to-date fair value gains of $51.9 million and $68.1 million, respectively, on the balance sheet, reflecting rising interest rates since the positions were opened. The decrease in the fair value gain during the first quarter 2014 reflected a decline in the benchmark interest rates.
At March 31, 2013, we held three interest rate swap positions with a total notional value of $1,263 million. These positions included one 9-year interest rate swap position (opened in 2009) and two 5-year interest rate swap positions (opened in 2011); in each case, we were paying a fixed rate and receiving a variable rate, effectively shortening the duration of our fixed-income portfolio. We recognized a fair value loss of $87.8 million on these positions as of March 31, 2013, which resulted from an overall decline in interest rates from the inception of the trades.
As of March 31, 2014 and December 31, 2013, the balance of the cash collateral that we had received from the applicable counterparties on the open positions was $43.3 million and $62.7 million, respectively. As of March 31, 2013, the balance of the cash collateral that we had delivered to the applicable counterparty on the then open positions was $93.5 million.

13



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, active exchange-traded equity securities, and certain short-term 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).
Determining the fair value of the investment portfolio is the responsibility of management. As part of the responsibility, we evaluate whether a market is distressed or inactive in determining the fair value for 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.


14


The composition of the investment portfolio by major security type and our outstanding debt was:
 
 
Fair Value
 
 
(millions)
Level 1

 
Level 2

 
Level 3

 
Total

 
Cost

March 31, 2014
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
U.S. government obligations
$
3,230.0

 
$
0

 
$
0

 
$
3,230.0

 
$
3,197.8

State and local government obligations
0

 
2,154.9

 
0

 
2,154.9

 
2,131.0

Foreign government obligations
17.9

 
0

 
0

 
17.9

 
17.9

Corporate debt securities
0

 
2,501.6

 
0

 
2,501.6

 
2,461.6

Subtotal
3,247.9

 
4,656.5

 
0

 
7,904.4

 
7,808.3

Asset-backed securities:
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
0

 
1,307.4

 
0

 
1,307.4

 
1,286.7

Commercial mortgage-backed
0

 
2,033.0

 
28.6

 
2,061.6

 
2,037.7

Other asset-backed
0

 
942.5

 
0

 
942.5

 
936.2

Subtotal asset-backed securities
0

 
4,282.9

 
28.6

 
4,311.5

 
4,260.6

Redeemable preferred stocks:
 
 
 
 
 
 
 
 
 
Financials
0

 
107.4

 
0

 
107.4

 
84.2

Utilities
0

 
65.2

 
0

 
65.2

 
64.9

Industrials
0

 
117.7

 
0

 
117.7

 
117.8

Subtotal redeemable preferred stocks
0

 
290.3

 
0

 
290.3

 
266.9

Total fixed maturities
3,247.9

 
9,229.7

 
28.6

 
12,506.2

 
12,335.8

Equity securities:
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks:
 
 
 
 
 
 
 
 
 
Financials
284.0

 
411.8

 
42.1

 
737.9

 
460.7

Utilities
0

 
0

 
0

 
0

 
0

Subtotal nonredeemable preferred stocks
284.0

 
411.8

 
42.1

 
737.9

 
460.7

Common equities:
 
 
 
 
 
 
 
 
 
Common stocks
2,278.3

 
0

 
0

 
2,278.3

 
1,252.3

Other risk investments
0