Document


 
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 June 30, 2016
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: 581,915,711 outstanding at June 30, 2016
 

1


PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
The Progressive Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(unaudited)
 
Three Months
 
Six Months
Periods Ended June 30,
2016

 
2015

 
%
Change
 
2016

 
2015

 
%
Change
(millions—except per share amounts)
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
 
 
 
Net premiums earned
$
5,561.8

 
$
4,995.8

 
11
 
$
10,879.2

 
$
9,662.1

 
13
Investment income
114.6

 
113.3

 
1
 
233.4

 
218.4

 
7
Net realized gains (losses) on securities:
 
 
 
 
 
 
 
 
 
 
 
Net impairment losses recognized in earnings
(0.2
)
 
(1.7
)
 
(88)
 
(0.2
)
 
(9.6
)
 
(98)
Net realized gains (losses) on securities
32.5

 
77.7

 
(58)
 
49.9

 
118.6

 
(58)
Total net realized gains (losses) on securities
32.3

 
76.0

 
(58)
 
49.7

 
109.0

 
(54)
Fees and other revenues
82.5

 
74.9

 
10
 
161.4

 
148.6

 
9
Service revenues
26.5

 
23.3

 
14
 
51.5

 
40.5

 
27
Gains on extinguishment of debt
1.6

 
0

 
NM
 
1.6

 
0

 
NM
Total revenues
5,819.3

 
5,283.3

 
10
 
11,376.8

 
10,178.6

 
12
Expenses
 
 
 
 

 
 
 
 
 
 
Losses and loss adjustment expenses
4,243.0

 
3,617.2

 
17
 
8,156.4

 
6,985.8

 
17
Policy acquisition costs
458.9

 
417.3

 
10
 
899.2

 
796.7

 
13
Other underwriting expenses
766.8

 
662.4

 
16
 
1,522.6

 
1,312.8

 
16
Investment expenses
5.3

 
5.7

 
(7)
 
10.1

 
11.0

 
(8)
Service expenses
23.7

 
20.5

 
16
 
45.3

 
36.4

 
24
Interest expense
34.3

 
34.9

 
(2)
 
68.5

 
67.4

 
2
Total expenses
5,532.0

 
4,758.0

 
16
 
10,702.1

 
9,210.1

 
16
Net Income
 
 
 
 

 
 
 
 
 
 
Income before income taxes
287.3

 
525.3

 
(45)
 
674.7

 
968.5

 
(30)
Provision for income taxes
92.4

 
156.8

 
(41)
 
221.1

 
304.4

 
(27)
Net income
194.9

 
368.5

 
(47)
 
453.6

 
664.1

 
(32)
Net income attributable to noncontrolling interest (NCI), net of tax
4.0

 
5.2

 
(23)
 
4.5

 
5.2

 
(13)
Net income attributable to Progressive
$
190.9

 
$
363.3

 
(47)
 
$
449.1

 
$
658.9

 
(32)
Other Comprehensive Income (Loss), Net of Tax
 
 
 
 

 
 
 
 
 
 
Changes in:
 
 
 
 
 
 
 
 
 
 
 
Total net unrealized gains (losses) on securities
$
91.6

 
$
(149.8
)
 
(161)
 
$
161.1

 
$
(114.4
)
 
(241)
Net unrealized losses on forecasted transactions
(0.3
)
 
(0.3
)
 
0
 
(0.6
)
 
(9.0
)
 
(93)
Foreign currency translation adjustment
(0.1
)
 
0

 
NM
 
0.4

 
(0.5
)
 
(180)
Other comprehensive income (loss)
91.2

 
(150.1
)
 
(161)
 
160.9

 
(123.9
)
 
(230)
Other comprehensive (income) loss attributable to NCI
(1.4
)
 
2.8

 
(150)
 
(3.5
)
 
2.8

 
(225)
Comprehensive income attributable to Progressive
$
280.7

 
$
216.0

 
30
 
$
606.5

 
$
537.8

 
13
Computation of Per Share Earnings Attributable to Progressive
 
 
 
 

 
 
 
 
 
 
Average shares outstanding - Basic
582.4

 
585.7

 
(1)
 
582.8

 
586.6

 
(1)
Net effect of dilutive stock-based compensation
2.7

 
3.8

 
(29)
 
2.5

 
3.7

 
(32)
Total equivalent shares - Diluted
585.1

 
589.5

 
(1)
 
585.3

 
590.3

 
(1)
Basic: Earnings per share
$
0.33

 
$
0.62

 
(47)
 
$
0.77

 
$
1.12

 
(31)
Diluted: Earnings per share
$
0.33

 
$
0.62

 
(47)
 
$
0.77

 
$
1.12

 
(31)
Dividends declared per share1
$
0

 
$
0

 
 
 
$
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)
 
June 30,
 
December 31,
2015
(millions)
2016

 
2015

 
Assets
 
 
 
 
 
Investments - Available-for-sale, at fair value:
 
 
 
 
 
Fixed maturities (amortized cost: $13,409.6, $15,520.6, and $15,347.9)
$
13,589.5

 
$
15,589.0

 
$
15,332.2

Equity securities:
 
 
 
 
 
        Nonredeemable preferred stocks (cost: $745.5, $632.4, and $674.2)
858.5

 
772.3

 
782.6

        Common equities (cost: $1,558.6, $1,351.7, and $1,494.3)
2,765.4

 
2,546.8

 
2,650.5

Short-term investments (amortized cost: $5,166.4, $1,669.3, and $2,172.0)
5,166.4

 
1,669.3

 
2,172.0

Total investments
22,379.8

 
20,577.4

 
20,937.3

Cash
134.7

 
263.8

 
224.4

Accrued investment income
93.9

 
100.4

 
102.2

Premiums receivable, net of allowance for doubtful accounts of $159.1, $140.6, and $164.8
4,522.2

 
3,867.3

 
3,987.7

Reinsurance recoverables, including $73.8, $46.2, and $46.1 on paid losses and loss adjustment expenses
1,669.7

 
1,402.3

 
1,488.8

Prepaid reinsurance premiums
178.0

 
233.0

 
199.3

Deferred acquisition costs
645.2

 
568.2

 
564.1

Property and equipment, net of accumulated depreciation of $824.0, $770.3, and $778.3
1,083.7

 
1,018.9

 
1,037.2

Goodwill
449.4

 
472.9

 
447.6

Intangible assets, net of accumulated amortization of $78.5, $16.3, and $47.4
463.8

 
526.0

 
494.9

Other assets
337.8

 
274.0

 
335.8

Total assets
$
31,958.2

 
$
29,304.2

 
$
29,819.3

Liabilities
 
 
 
 
 
Unearned premiums
$
7,470.1

 
$
6,641.9

 
$
6,621.8

Loss and loss adjustment expense reserves
10,674.8

 
9,701.2

 
10,039.0

Net deferred income taxes
140.7

 
176.0

 
109.3

Dividends payable
0

 
0

 
519.2

Accounts payable, accrued expenses, and other liabilities
2,706.2

 
2,252.9

 
2,067.8

Debt1
2,664.1

 
2,739.0

 
2,707.9

Total liabilities
23,655.9

 
21,511.0

 
22,065.0

Redeemable noncontrolling interest (NCI)2
466.8

 
433.4

 
464.9

Shareholders' Equity
 
 
 
 
 
Common shares, $1.00 par value (authorized 900.0; issued 797.5, 797.6, and 797.6 including treasury shares of 215.6, 211.7, and 214.0)
581.9


585.9


583.6

Paid-in capital
1,264.6


1,177.0


1,218.8

Retained earnings
5,031.2


4,694.9


4,686.6

Accumulated other comprehensive income, net of tax:





Net unrealized gains (losses) on securities
970.1

 
907.5

 
809.0

Net unrealized losses on forecasted transactions
(8.8
)
 
(7.5
)
 
(8.2
)
Foreign currency translation adjustment
(1.1
)
 
(0.8
)
 
(1.5
)
Accumulated other comprehensive (income) loss attributable to noncontrolling interest
(2.4
)
 
2.8

 
1.1

Total accumulated other comprehensive income
957.8

 
902.0

 
800.4

Total shareholders’ equity
7,835.5

 
7,359.8

 
7,289.4

Total liabilities, redeemable NCI, and shareholders’ equity
$
31,958.2

 
$
29,304.2

 
$
29,819.3

1Consists of both short-term and long-term debt. See Note 4 - Debt for further discussion.
2See Note 11 – Redeemable Noncontrolling Interest for further discussion.
See notes to consolidated financial statements.

3


The Progressive Corporation and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
(unaudited)
 
Six months ended June 30,
 
 
 
(millions — except per share amounts)
2016

 
2015

Common Shares, $1.00 Par Value
 
 
 
Balance, Beginning of period
$
583.6

 
$
587.8

Treasury shares purchased
(3.6
)
 
(4.0
)
Net restricted equity awards issued/vested/(forfeited)
1.9

 
2.1

Balance, End of period
$
581.9

 
$
585.9

Paid-In Capital
 
 
 
Balance, Beginning of period
$
1,218.8

 
$
1,184.3

Tax benefit from vesting of equity-based compensation
6.7

 
8.7

Treasury shares purchased
(7.7
)
 
(8.2
)
Net restricted equity awards (issued)/(vested)/forfeited
(1.9
)
 
(2.1
)
Amortization of equity-based compensation
42.1

 
26.5

Reinvested dividends on restricted stock units
0.5

 
(0.1
)
Adjustment to carrying amount of redeemable noncontrolling interest
6.1

 
(32.1
)
Balance, End of period
$
1,264.6

 
$
1,177.0

Retained Earnings
 
 
 
Balance, Beginning of period
$
4,686.6

 
$
4,133.4

Net income attributable to Progressive
449.1

 
658.9

Treasury shares purchased
(100.8
)
 
(95.9
)
Cash dividends declared on common shares
0.2

 
0

Reinvested dividends on restricted stock units
(0.5
)
 
0.1

Other, net
(3.4
)
 
(1.6
)
Balance, End of period
$
5,031.2

 
$
4,694.9

Accumulated Other Comprehensive Income, Net of Tax
 
 
 
Balance, Beginning of period
$
800.4

 
$
1,023.1

Attributable to noncontrolling interest
(3.5
)
 
2.8

Other comprehensive income
160.9

 
(123.9
)
Balance, End of period
$
957.8

 
$
902.0

Total Shareholders’ Equity
$
7,835.5

 
$
7,359.8

There are 20.0 million Serial Preferred Shares authorized; no such shares are issued or outstanding.
There are 5.0 million Voting Preference Shares authorized; no such shares have been issued.
See notes to consolidated financial statements.










4


The Progressive Corporation and Subsidiaries
Consolidated Statements of Cash Flows        
(unaudited) (millions)
Six months ended June 30,
2016

 
2015

Cash Flows From Operating Activities
 
 
 
Net income
$
453.6

 
$
664.1

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
58.1

 
49.7

         Amortization of intangible assets
31.1

 
15.7

Amortization of fixed-income securities
42.1

 
43.5

Amortization of equity-based compensation
42.1

 
26.5

Net realized (gains) losses on securities
(49.7
)
 
(109.0
)
Net (gains) losses on disposition of property and equipment
1.2

 
0.7

(Gains) losses on extinguishment of debt
(1.6
)
 
0

Net loss on exchange transaction
4.5

 
0

Changes in:
 
 
 
Premiums receivable
(531.5
)
 
(300.5
)
Reinsurance recoverables
(173.1
)
 
(116.1
)
Prepaid reinsurance premiums
41.3

 
(1.2
)
Deferred acquisition costs
(97.8
)
 
(46.4
)
Income taxes
(69.3
)
 
(82.9
)
Unearned premiums
832.6

 
652.0

Loss and loss adjustment expense reserves
630.0

 
537.7

Accounts payable, accrued expenses, and other liabilities
376.6

 
66.9

Other, net
(35.4
)
 
29.3

Net cash provided by operating activities
1,554.8

 
1,430.0

Cash Flows From Investing Activities
 
 
 
Purchases:
 
 
 
Fixed maturities
(4,489.6
)
 
(5,316.7
)
Equity securities
(290.5
)
 
(257.2
)
Sales:
 
 
 
Fixed maturities
3,361.7

 
2,780.0

Equity securities
182.9

 
200.4

Maturities, paydowns, calls, and other:
 
 
 
Fixed maturities
3,032.8

 
1,595.1

Equity securities
0

 
12.0

Net sales (purchases) of short-term investments
(2,959.1
)
 
523.4

Net unsettled security transactions
270.0

 
128.4

Purchases of property and equipment
(109.1
)
 
(53.6
)
Net cash acquired in exchange transaction
8.5

 
0

Acquisition of ARX Holding Corp., net of cash acquired
0

 
(752.7
)
Acquisition of additional shares of ARX Holding Corp.
0

 
(12.6
)
Sales of property and equipment
3.3

 
7.1

Net cash used in investing activities
(989.1
)
 
(1,146.4
)
Cash Flows From Financing Activities
 
 
 
Tax benefit from vesting of equity-based compensation
6.7

 
8.7

Net proceeds from debt issuance
0

 
382.0

Payments of debt
(13.0
)
 
(6.8
)
Reacquisition of debt
(18.2
)
 
0

Dividends paid to shareholders
(519.0
)
 
(403.6
)
Acquisition of treasury shares
(112.1
)
 
(108.1
)
Net cash used in financing activities
(655.6
)
 
(127.8
)
Effect of exchange rate changes on cash
0.2

 
(0.4
)
Increase (decrease) in cash
(89.7
)
 
155.4

Cash, January 1
224.4

 
108.4

Cash, June 30
$
134.7

 
$
263.8

See notes to consolidated financial statements.

5


The Progressive Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
Note 1 Basis of Presentation — The accompanying consolidated financial statements include the accounts of The Progressive Corporation and ARX Holding Corp. (ARX), and their respective wholly owned insurance and non-insurance subsidiaries and affiliates, in which Progressive or ARX has a controlling financial interest.  The Progressive Corporation owned 69.2% of the outstanding capital stock of ARX at June 30, 2016 and December 31, 2015, and 69.1% at June 30, 2015. All intercompany accounts and transactions are eliminated in consolidation.
During the second quarter 2016, ARX entered into an exchange transaction with a third party pursuant to which ARX acquired 100% of the equity interest in an insurance subsidiary (and an affiliated company) that writes personal property insurance and disposed of 100% of the equity interest in an insurance subsidiary (and an affiliated company) that writes commercial property insurance. The book values of the entities that were acquired and disposed of were relatively equal at the time of the exchange.
The consolidated financial statements reflect all normal recurring adjustments that, in the opinion of management, were necessary for a fair statement of the results for the interim periods presented. The results of operations for the period ended June 30, 2016, 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 Exhibit 13 to our Annual Report on Form 10-K for the year ended December 31, 2015 ("2015 Annual Report to Shareholders").
Included in other assets on the consolidated balance sheets are properties that are considered "held for sale." The fair value of these properties, less the estimated cost to sell them, was $8.7 million at June 30, 2016 and 2015, and December 31, 2015.

6


Note 2 Investments — 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.
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. The net holding period gains (losses) represent the amounts realized on our hybrid securities only.
 
($ in millions)
Cost

 
Gross
Unrealized Gains

 
Gross
Unrealized
Losses

 
Net
Holding Period Gains
(Losses)1

 
Fair
Value

 
% of
Total
Fair
Value

June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
$
1,276.0

 
$
20.0

 
$
0

 
$
0

 
$
1,296.0

 
5.8
%
State and local government obligations
2,545.5

 
72.7

 
(0.6
)
 
0

 
2,617.6

 
11.7

Foreign government obligations
24.9

 
0.1

 
0

 
0

 
25.0

 
0.1

Corporate debt securities
3,833.9

 
80.2

 
(3.7
)
 
0.6

 
3,911.0

 
17.5

Residential mortgage-backed securities
1,672.8

 
22.7

 
(21.8
)
 
1.2

 
1,674.9

 
7.5

Agency residential pass-through obligations
46.4

 
0.5

 
0

 
0

 
46.9

 
0.2

Commercial mortgage-backed securities
2,177.3

 
38.8

 
(5.7
)
 
0

 
2,210.4

 
9.9

Other asset-backed securities
1,567.7

 
4.5

 
(1.0
)
 
0.4

 
1,571.6

 
7.0

Redeemable preferred stocks
265.1

 
17.2

 
(46.2
)
 
0

 
236.1

 
1.0

Total fixed maturities
13,409.6

 
256.7

 
(79.0
)
 
2.2

 
13,589.5

 
60.7

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks
745.5

 
130.2

 
(18.4
)
 
1.2

 
858.5

 
3.8

Common equities
1,558.6

 
1,215.1

 
(8.3
)
 
0

 
2,765.4

 
12.4

Short-term investments
5,166.4

 
0

 
0

 
0

 
5,166.4

 
23.1

Total portfolio2,3
$
20,880.1

 
$
1,602.0

 
$
(105.7
)
 
$
3.4

 
$
22,379.8

 
100.0
%


7


($ in millions)
Cost

 
Gross
Unrealized Gains

 
Gross
Unrealized
Losses

 
Net
Holding Period Gains
(Losses)1

 
Fair
Value

 
% of
Total
Fair
Value

June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
$
2,049.3

 
$
14.0

 
$
(0.1
)
 
$
0

 
$
2,063.2

 
10.0
%
State and local government obligations
3,177.2

 
32.2

 
(17.1
)
 
0

 
3,192.3

 
15.5

Foreign government obligations
18.6

 
0

 
0

 
0

 
18.6

 
0.1

Corporate debt securities
3,433.9

 
23.3

 
(22.6
)
 
0.2

 
3,434.8

 
16.7

Residential mortgage-backed securities
1,879.5

 
31.1

 
(17.6
)
 
(0.5
)
 
1,892.5

 
9.2

Agency residential pass-through obligations
116.0

 
0.1

 
(1.8
)
 
0

 
114.3

 
0.6

Commercial mortgage-backed securities
2,548.4

 
26.0

 
(14.2
)
 
(0.1
)
 
2,560.1

 
12.4

Other asset-backed securities
2,037.9

 
3.6

 
(0.7
)
 
0.7

 
2,041.5

 
9.9

Redeemable preferred stocks
259.8

 
21.7

 
(9.8
)
 
0

 
271.7

 
1.3

Total fixed maturities
15,520.6

 
152.0

 
(83.9
)
 
0.3

 
15,589.0

 
75.7

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks
632.4

 
150.0

 
(11.3
)
 
1.2

 
772.3

 
3.8

Common equities
1,351.7

 
1,204.7

 
(9.6
)
 
0

 
2,546.8

 
12.4

Short-term investments
1,669.3

 
0

 
0

 
0

 
1,669.3

 
8.1

Total portfolio2,3
$
19,174.0

 
$
1,506.7

 
$
(104.8
)
 
$
1.5

 
$
20,577.4

 
100.0
%
 
($ in millions)
Cost

 
Gross
Unrealized Gains

 
Gross
Unrealized
Losses

 
Net
Holding Period Gains
(Losses)1

 
Fair
Value

 
% of
Total
Fair
Value

December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
$
2,425.4

 
$
4.4

 
$
(0.6
)
 
$
0

 
$
2,429.2

 
11.6
%
State and local government obligations
2,677.6

 
47.5

 
(3.7
)
 
0

 
2,721.4

 
13.0

Foreign government obligations
18.6

 
0

 
0

 
0

 
18.6

 
0.1

Corporate debt securities
3,713.2

 
11.3

 
(33.0
)
 
0.1

 
3,691.6

 
17.6

Residential mortgage-backed securities
1,726.0

 
22.1

 
(20.6
)
 
(0.8
)
 
1,726.7

 
8.3

Agency residential pass-through obligations
90.3

 
0.1

 
(1.1
)
 
0

 
89.3

 
0.4

Commercial mortgage-backed securities
2,665.7

 
16.9

 
(29.4
)
 
0

 
2,653.2

 
12.7

Other asset-backed securities
1,771.1

 
1.4

 
(5.1
)
 
0.5

 
1,767.9

 
8.4

Redeemable preferred stocks
260.0

 
17.6

 
(43.3
)
 
0

 
234.3

 
1.1

Total fixed maturities
15,347.9

 
121.3

 
(136.8
)
 
(0.2
)
 
15,332.2

 
73.2

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks
674.2

 
122.8

 
(15.7
)
 
1.3

 
782.6

 
3.7

Common equities
1,494.3

 
1,170.4

 
(14.2
)
 
0

 
2,650.5

 
12.7

Short-term investments
2,172.0

 
0

 
0

 
0

 
2,172.0

 
10.4

Total portfolio2,3
$
19,688.4

 
$
1,414.5

 
$
(166.7
)
 
$
1.1

 
$
20,937.3

 
100.0
%
1Represents net holding period gains (losses) realized on certain hybrid securities (discussed below).
2Our portfolio reflects the effect of unsettled security transactions and collateral on open derivative positions; at June 30, 2016 and 2015, $246.9 million and $159.7 million, respectively, were included in "other liabilities" and $23.1 million was in "other assets" at December 31, 2015.
3The total fair value of the portfolio at June 30, 2016 and 2015, and December 31, 2015 included $0.6 billion, $0.7 billion, and $1.3 billion, respectively, of securities held in a consolidated, non-insurance subsidiary of the holding company, net of any unsettled security transactions.


8


Short-Term Investments Our short-term investments may include commercial paper and other investments that are expected to mature within one year. We did not enter into any repurchase commitment transactions during the first six months of 2016 or 2015, and we had no open repurchase commitments at June 30, 2016, June 30, 2015, or December 31, 2015.
Also included in short-term investments are reverse repurchase commitment transactions, where we loan cash to approved counterparties and receive U.S. Treasury Notes pledged as collateral against the cash borrowed. Our exposure to credit risk is limited due to the nature of the collateral (i.e., U.S. Treasury Notes) received. We have counterparty exposure on these trades in the event of a counterparty default to the extent the collateral security's value is below the amount of cash we delivered to acquire the collateral. The short-term duration of the transactions (primarily overnight) reduces that exposure.

We had no open reverse repurchase commitments at June 30, 2016, June 30, 2015, or December 31, 2015. For the six months ended June 30, 2016, our largest outstanding balance of reverse repurchase commitments was $265.0 million, which was open for one day; the average daily balance of reverse repurchase commitments was $165.2 million.

To the extent our repurchase and reverse 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 have elected not to offset these transactions and therefore report these transactions on a gross basis on our balance sheets.

Hybrid Securities Included in our fixed-maturity and equity securities are hybrid securities, which are reported at fair value:

 
June 30,
 
December 31,
2015

(millions)
2016

 
2015

 
Fixed maturities:
 
 
 
 
 
Corporate debt securities
$
31.3

 
$
105.6

 
$
49.1

Residential mortgage-backed securities
173.3

 
117.5

 
144.3

Commercial mortgage-backed securities
0

 
17.3

 
17.3

Other asset-backed securities
10.2

 
12.5

 
11.3

Total fixed maturities
214.8

 
252.9

 
222.0

Equity securities:
 
 
 
 
 
Nonredeemable preferred stocks
45.5

 
66.6

 
50.7

Total hybrid securities
$
260.3

 
$
319.5

 
$
272.7

Certain corporate debt securities are accounted for as hybrid securities since they were acquired at a 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, would result in an acceleration of the recognition of the remaining premium paid on these securities in our results of operations. This would result in a loss of $2.3 million as of June 30, 2016, 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 residential mortgage-backed securities accounted for as hybrid securities are obligations of the issuer with payments of principal based on the performance of a reference pool of loans. This embedded derivative results in the securities incorporating the risk of default from both the issuer and the related loan pool.
During 2016, we sold the commercial mortgage-backed securities in the table above. These securities contained fixed interest rate reset features that will increase the coupons in the event the securities are not fully paid off on the anticipated repayment date. These reset features had the potential to more than double our initial purchase yield for each security.
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 at acquisition.
The hybrid securities in our nonredeemable preferred stock portfolio are perpetual preferred stocks with fixed-rate coupons that have call features, whereby the change in value of the call features is a component of the overall change in value of the preferred stocks.

9


Fixed Maturities The composition of fixed maturities by maturity at June 30, 2016, was:
 
(millions)
Cost

 
Fair Value

Less than one year
$
3,252.4

 
$
3,229.1

One to five years
7,014.2

 
7,100.7

Five to ten years
2,998.7

 
3,110.6

Ten years or greater
144.3

 
149.1

Total
$
13,409.6

 
$
13,589.5

 
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.
Gross Unrealized Losses As of June 30, 2016, we had $97.4 million of gross unrealized losses in our fixed-income securities (i.e., fixed-maturity securities, nonredeemable preferred stocks, and short-term investments) and $8.3 million in our common equities. We currently do not intend to sell the fixed-income securities and determined that it is more likely 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, 95% 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. To the extent there is issuer-specific deterioration, we may write down the securities of that issuer. The remaining 5% of our common stocks were part of a managed equity strategy selected and administered by an external investment advisor. If our review of loss position securities were to indicate there was a fundamental, or market, impairment on these securities that was 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

June 30, 2016
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
0

$
0

$
0

0

$
0

$
0

 
0

$
0

$
0

State and local government obligations
47

131.9

(0.6
)
19

38.6

(0.2
)
 
28

93.3

(0.4
)
Corporate debt securities
37

269.0

(3.7
)
23

147.1

(0.6
)
 
14

121.9

(3.1
)
Residential mortgage-backed securities
137

1,154.4

(21.8
)
29

267.6

(1.3
)
 
108

886.8

(20.5
)
Agency residential pass-through obligations
18

5.4

0

6

1.6

0

 
12

3.8

0

Commercial mortgage-backed securities
55

530.3

(5.7
)
9

70.8

(0.4
)
 
46

459.5

(5.3
)
Other asset-backed securities
53

502.1

(1.0
)
22

194.6

(0.3
)
 
31

307.5

(0.7
)
Redeemable preferred stocks
8

181.6

(46.2
)
0

0

0

 
8

181.6

(46.2
)
Total fixed maturities
355

2,774.7

(79.0
)
108

720.3

(2.8
)
 
247

2,054.4

(76.2
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks
11

294.9

(18.4
)
2

31.2

(0.7
)
 
9

263.7

(17.7
)
Common equities
113

107.0

(8.3
)
108

100.7

(8.1
)
 
5

6.3

(0.2
)
Total equity securities
124

401.9

(26.7
)
110

131.9

(8.8
)
 
14

270.0

(17.9
)
Total portfolio
479

$
3,176.6

$
(105.7
)
218

$
852.2

$
(11.6
)
 
261

$
2,324.4

$
(94.1
)
 

10


 
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

June 30, 2015
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
11

$
7.6

$
(0.1
)
11

$
7.6

$
(0.1
)
 
0

$
0

$
0

State and local government obligations
736

1,319.3

(17.1
)
720

1,277.5

(16.5
)
 
16

41.8

(0.6
)
Corporate debt securities
160

1,693.6

(22.6
)
146

1,406.4

(18.5
)
 
14

287.2

(4.1
)
Residential mortgage-backed securities
140

1,189.2

(17.6
)
87

668.1

(5.9
)
 
53

521.1

(11.7
)
Agency residential pass-through obligations
53

104.6

(1.8
)
53

104.6

(1.8
)
 
0

0

0

Commercial mortgage-backed securities
155

1,426.9

(14.2
)
132

1,205.9

(13.5
)
 
23

221.0

(0.7
)
Other asset-backed securities
38

715.3

(0.7
)
30

566.2

(0.5
)
 
8

149.1

(0.2
)
Redeemable preferred stocks
5

123.7

(9.8
)
3

55.6

(3.1
)
 
2

68.1

(6.7
)
Total fixed maturities
1,298

6,580.2

(83.9
)
1,182

5,291.9

(59.9
)
 
116

1,288.3

(24.0
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks
14

345.9

(11.3
)
9

163.7

(1.8
)
 
5

182.2

(9.5
)
Common equities
73

129.4

(9.6
)
72

128.9

(9.5
)
 
1

0.5

(0.1
)
Total equity securities
87

475.3

(20.9
)
81

292.6

(11.3
)
 
6

182.7

(9.6
)
Total portfolio
1,385

$
7,055.5

$
(104.8
)
1,263

$
5,584.5

$
(71.2
)
 
122

$
1,471.0

$
(33.6
)
 
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, 2015
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
22

$
897.1

$
(0.6
)
22

$
897.1

$
(0.6
)
 
0

$
0

$
0

State and local government obligations
290

606.7

(3.7
)
264

500.7

(2.6
)
 
26

106.0

(1.1
)
Corporate debt securities
215

2,580.6

(33.0
)
197

2,294.6

(25.2
)
 
18

286.0

(7.8
)
Residential mortgage-backed securities
188

1,294.7

(20.6
)
115

493.4

(3.7
)
 
73

801.3

(16.9
)
Agency residential pass-through obligations
61

84.9

(1.1
)
61

84.9

(1.1
)
 
0

0

0

Commercial mortgage-backed securities
207

2,046.5

(29.4
)
171

1,694.6

(25.8
)
 
36

351.9

(3.6
)
Other asset-backed securities
101

1,548.6

(5.1
)
92

1,472.0

(4.5
)
 
9

76.6

(0.6
)
Redeemable preferred stocks
9

199.4

(43.3
)
6

119.4

(14.5
)
 
3

80.0

(28.8
)
Total fixed maturities
1,093

9,258.5

(136.8
)
928

7,556.7

(78.0
)
 
165

1,701.8

(58.8
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks
10

301.8

(15.7
)
5

124.2

(1.7
)
 
5

177.6

(14.0
)
Common equities
64

164.8

(14.2
)
60

161.4

(14.2
)
 
4

3.4

0

Total equity securities
74

466.6

(29.9
)
65

285.6

(15.9
)
 
9

181.0

(14.0
)
Total portfolio
1,167

$
9,725.1

$
(166.7
)
993

$
7,842.3

$
(93.9
)
 
174

$
1,882.8

$
(72.8
)

Since both June 30, 2015 and December 31, 2015, the number of securities in our fixed-maturity portfolio with unrealized losses decreased, primarily the result of declining interest rates. We had no material decreases in valuation as a result of credit rating downgrades on our fixed-maturity securities. All of the fixed-maturity securities in an unrealized loss position at June 30, 2016 in the table above are current with respect to required principal and interest payments. Since December 31, 2015, our nonredeemable preferred stocks with unrealized losses increased to 11 securities, averaging approximately 6% of their total cost. We reviewed these securities and concluded that the unrealized losses are market-related adjustments to the values, which we determined not to be other-than-temporary; we expect to recover our initial investments on these securities. The number of issuers with unrealized losses in our common stock portfolio also increased during the first six months of 2016. A review of the securities in a loss position did not uncover fundamental issues with the issuers that would indicate other-than-temporary impairments existed. Additionally, market expectations for recovery in the next 12 months would put the fair values at or above our current book values. Lastly, we determined, as of the balance sheet date, that it was not likely these securities would be sold prior to that recovery.


11


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: 
 
June 30,
 
December 31,
2015

(millions)
2016

 
2015

 
Fixed maturities:
 
 
 
 
 
Residential mortgage-backed securities
$
(43.3
)
 
$
(44.1
)
 
$
(43.3
)
Commercial mortgage-backed securities
(0.6
)
 
(0.6
)
 
(0.6
)
Total fixed maturities
$
(43.9
)
 
$
(44.7
)
 
$
(43.9
)

The following tables provide rollforwards of the amounts related to credit losses recognized in earnings for the periods ended June 30, 2016 and 2015, 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 June 30, 2016
 
Mortgage-Backed
 
 
(millions)
Residential 

 
Commercial 

 
Total

Balance at March 31, 2016
$
12.1

 
$
0.4

 
$
12.5

Change in recoveries of future cash flows expected to be collected1
(0.3
)
 
0

 
(0.3
)
Balance at June 30, 2016
$
11.8

 
$
0.4

 
$
12.2

 
 
 
 
 
 
 
Six months ended June 30, 2016
 
Mortgage-Backed
 
 
(millions)
Residential 

 
Commercial 

 
Total

Balance at December 31, 2015
$
12.4

 
$
0.4

 
$
12.8

Change in recoveries of future cash flows expected to be collected1
(0.6
)
 
0

 
(0.6
)
Balance at June 30, 2016
$
11.8

 
$
0.4

 
$
12.2


 
Three Months Ended June 30, 2015
 
Mortgage-Backed
 
 
(millions)
Residential 

 
Commercial 

 
Total

Balance at March 31, 2015
$
12.2

 
$
0.4

 
$
12.6

Change in recoveries of future cash flows expected to be collected1
1.8

 
0

 
1.8

Balance at June 30, 2015
$
14.0

 
$
0.4

 
$
14.4

 
 
 
 
 
 
 
Six Months Ended June 30, 2015
 
Mortgage-Backed
 
 
(millions)
Residential 

 
Commercial 

 
Total

Balance at December 31, 2014
$
12.7

 
$
0.4

 
$
13.1

Change in recoveries of future cash flows expected to be collected1
1.3

 
0

 
1.3

Balance at June 30, 2015
$
14.0

 
$
0.4

 
$
14.4

1Reflects the current period change in the expected recovery of prior impairments that will be accreted into income over the remaining life of the security.
Although we determined it is more likely 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 the amount of potential credit losses on the securities that were in an unrealized loss position. 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

12


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. We did not have any credit impairment write-downs for the six months ended June 30, 2016 or 2015.
Realized Gains (Losses) The components of net realized gains (losses) for the three and six months ended June 30, were:
 
Three Months
 
Six Months
(millions)
2016

 
2015

 
2016

 
2015

Gross realized gains on security sales
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
U.S. government obligations
$
3.4

 
$
9.5

 
$
17.7

 
$
14.4

State and local government obligations
4.5

 
0

 
15.4

 
0

Corporate and other debt securities
10.0

 
6.8

 
22.5

 
15.9

Residential mortgage-backed securities
0.8

 
0.1

 
1.7

 
0.2

Agency residential pass-through obligations
0.1

 
0

 
0.1

 
0

Commercial mortgage-backed securities
2.9

 
3.6

 
6.5

 
14.4

Redeemable preferred stocks
0

 
0.1

 
0

 
0.1

Total fixed maturities
21.7

 
20.1

 
63.9

 
45.0

Equity securities:
 
 
 
 
 
 
 
Nonredeemable preferred stocks
5.4

 
34.4

 
7.0

 
50.2

Common equities
19.4

 
12.7

 
28.9

 
30.5

Subtotal gross realized gains on security sales
46.5

 
67.2

 
99.8

 
125.7

Gross realized losses on security sales
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
U.S. government obligations
0

 
(0.1
)
 
(0.4
)
 
(0.9
)
State and local government obligations
(1.5
)
 
0

 
(1.6
)
 
0

Corporate and other debt securities
(1.3
)
 
(0.5
)
 
(1.7
)
 
(1.3
)
Agency residential pass-through obligations
(0.2
)
 
0

 
(0.2
)
 
0

Commercial mortgage-backed securities
(1.4
)
 
(0.8
)
 
(4.1
)
 
(1.0
)
Total fixed maturities
(4.4
)
 
(1.4
)
 
(8.0
)
 
(3.2
)
Equity securities:
 
 
 
 
 
 
 
Nonredeemable preferred stocks
(1.7
)
 
(1.4
)
 
(2.7
)
 
(1.4
)
Common equities
(0.1
)
 
(0.1
)
 
(5.0
)
 
(0.7
)
Subtotal gross realized losses on security sales
(6.2
)
 
(2.9
)
 
(15.7
)
 
(5.3
)
Net realized gains (losses) on security sales
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
U.S. government obligations
3.4

 
9.4

 
17.3

 
13.5

State and local government obligations
3.0

 
0

 
13.8

 
0

Corporate and other debt securities
8.7

 
6.3

 
20.8

 
14.6

Residential mortgage-backed securities
0.8

 
0.1

 
1.7

 
0.2

Agency residential pass-through obligations
(0.1
)
 
0