PGR-2014.06.30-10Q


 
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 June 30, 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: 591,471,615 outstanding at June 30, 2014
 

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,
2014

 
2013

 
%
Change
 
2014

 
2013

 
%
Change
(millions—except per share amounts)
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
 
 
 
Net premiums earned
$
4,513.5

 
$
4,277.0

 
6
 
$
8,915.8

 
$
8,456.3

 
5
Investment income
99.2

 
102.2

 
(3)
 
202.5

 
202.7

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

 
(1.5
)
 
(100)
 
0

 
(1.7
)
 
(100)
Non-credit losses, net of credit losses recognized on previously recorded non-credit OTTI losses
0

 
(.1
)
 
(100)
 
0

 
(.1
)
 
(100)
Net impairment losses recognized in earnings
0

 
(1.6
)
 
(100)
 
0

 
(1.8
)
 
(100)
Net realized gains (losses) on securities
40.4

 
134.5

 
(70)
 
159.8

 
215.3

 
(26)
Total net realized gains (losses) on securities
40.4

 
132.9

 
(70)
 
159.8

 
213.5

 
(25)
Fees and other revenues
74.4

 
70.9

 
5
 
147.2

 
139.3

 
6
Service revenues
14.0

 
10.6

 
32
 
23.8

 
19.0

 
25
Total revenues
4,741.5

 
4,593.6

 
3
 
9,449.1

 
9,030.8

 
5
Expenses
 
 
 
 

 
 
 
 
 
 
Losses and loss adjustment expenses
3,269.1

 
3,117.0

 
5
 
6,475.0

 
6,102.5

 
6
Policy acquisition costs
374.8

 
364.0

 
3
 
743.8

 
722.9

 
3
Other underwriting expenses
611.7

 
581.1

 
5
 
1,222.1

 
1,166.7

 
5
Investment expenses
6.0

 
4.4

 
36
 
10.1

 
9.3

 
9
Service expenses
12.9

 
10.4

 
24
 
22.6

 
19.0

 
19
Interest expense
29.6

 
30.4

 
(3)
 
56.3

 
61.0

 
(8)
Total expenses
4,304.1

 
4,107.3

 
5
 
8,529.9

 
8,081.4

 
6
Net Income
 
 
 
 

 
 
 
 
 
 
Income before income taxes
437.4

 
486.3

 
(10)
 
919.2

 
949.4

 
(3)
Provision for income taxes
144.0

 
161.7

 
(11)
 
304.5

 
316.2

 
(4)
Net income
$
293.4

 
$
324.6

 
(10)
 
$
614.7

 
$
633.2

 
(3)
Other Comprehensive Income (Loss), Net of Tax
 
 
 
 

 
 
 
 
 
 
Net unrealized gains (losses) on securities:
 
 
 
 

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

 
$
.1

 
(100)
 
$
0

 
$
.3

 
(100)
Other net unrealized gains (losses) on securities
88.4

 
(154.4
)
 
(157)
 
88.3

 
(55.4
)
 
(259)
Total net unrealized gains (losses) on securities
88.4

 
(154.3
)
 
(157)
 
88.3

 
(55.1
)
 
(260)
Net unrealized gains on forecasted transactions
(1.3
)
 
(.4
)
 
225
 
(1.6
)
 
(.7
)
 
129
Foreign currency translation adjustment
.5

 
(.8
)
 
(163)
 
.5

 
(1.0
)
 
(150)
Other comprehensive income (loss)
87.6

 
(155.5
)
 
(156)
 
87.2

 
(56.8
)
 
(254)
Comprehensive income
$
381.0

 
$
169.1

 
125
 
$
701.9

 
$
576.4

 
22
Computation of Net Income Per Share
 
 
 
 

 
 
 
 
 
 
Average shares outstanding - Basic
591.2

 
599.5

 
(1)
 
592.6

 
600.1

 
(1)
Net effect of dilutive stock-based compensation
4.3

 
4.1

 
5
 
4.0

 
3.9

 
3
Total equivalent shares - Diluted
595.5

 
603.6

 
(1)
 
596.6

 
604.0

 
(1)
Basic: Net income per share
$
.50

 
$
.54

 
(8)
 
$
1.04

 
$
1.06

 
(2)
Diluted: Net income per share
$
.49

 
$
.54

 
(8)
 
$
1.03

 
$
1.05

 
(2)
Dividends declared per share1
$
0

 
$
0

 
 
 
$
0

 
$
0

 
 

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,
2013
(millions)
2014

 
2013

 
Assets
 
 
 
 
 
Investments - Available-for-sale, at fair value:
 
 
 
 
 
        Fixed maturities (amortized cost: $12,265.4, $12,824.1, and $13,415.3)
$
12,498.6

 
$
12,949.4

 
$
13,540.4

Equity securities:
 
 
 
 
 
             Nonredeemable preferred stocks (cost: $497.1, $416.8, and $445.7)
760.2

 
754.4

 
711.2

             Common equities (cost: $1,265.2, $1,438.2, and $1,451.1)
2,381.7

 
2,224.5

 
2,530.5

        Short-term investments (amortized cost: $3,118.7, $1,558.1, and $1,272.6)
3,118.7

 
1,558.1

 
1,272.6

Total investments
18,759.2

 
17,486.4

 
18,054.7

Cash
126.1

 
96.9

 
75.1

Accrued investment income
82.9

 
90.4

 
89.8

Premiums receivable, net of allowance for doubtful accounts of $133.4, $125.6, and $142.4
3,566.3

 
3,401.9

 
3,310.7

Reinsurance recoverables, including $36.2, $35.1, and $44.3 on paid losses and loss adjustment expenses
1,135.0

 
962.2

 
1,090.2

Prepaid reinsurance premiums
89.8

 
79.6

 
74.9

Deferred acquisition costs
479.0

 
468.1

 
447.6

Property and equipment, net of accumulated depreciation of $706.3, $666.0, and $680.4
952.5

 
950.6

 
960.9

Net deferred income taxes
0

 
67.9

 
0

Other assets
261.9

 
237.8

 
304.3

Total assets
$
25,452.7

 
$
23,841.8

 
$
24,408.2

Liabilities and Shareholders’ Equity
 
 
 
 
 
Unearned premiums
$
5,582.6

 
$
5,323.5

 
$
5,174.5

Loss and loss adjustment expense reserves
8,639.9

 
8,086.2

 
8,479.7

Net deferred income taxes
98.8

 
0

 
28.4

Dividends payable
0

 
0

 
890.2

Accounts payable, accrued expenses, and other liabilities
2,134.2

 
1,844.3

 
1,785.0

Debt1
2,208.0

 
2,063.9

 
1,860.9

Total liabilities
18,663.5

 
17,317.9

 
18,218.7

Common Shares, $1.00 par value (authorized 900.0; issued 797.6, including treasury shares of 206.1, 197.2, and 201.8)
591.5


600.4


595.8

Paid-in capital
1,169.3


1,109.3


1,142.0

Retained earnings
3,989.5


4,000.0


3,500.0

Accumulated other comprehensive income, net of tax:





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


0


0

Other net unrealized gains (losses) on securities
1,035.3


807.6


947.0

Total net unrealized gains (losses) on securities
1,035.3

 
807.6

 
947.0

Net unrealized gains on forecasted transactions
2.5

 
5.4

 
4.1

Foreign currency translation adjustment
1.1

 
1.2

 
.6

Total accumulated other comprehensive income
1,038.9

 
814.2

 
951.7

Total shareholders’ equity
6,789.2

 
6,523.9

 
6,189.5

Total liabilities and shareholders’ equity
$
25,452.7

 
$
23,841.8

 
$
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)
Six months ended June 30,
2014

 
2013

(millions)
 
 
 
Cash Flows From Operating Activities
 
 
 
Net income
$
614.7

 
$
633.2

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
46.7

 
49.0

Amortization of fixed-income securities
38.1

 
76.8

Amortization of equity-based compensation
29.8

 
35.1

Net realized (gains) losses on securities
(159.8
)
 
(213.5
)
Net (gains) losses on disposition of property and equipment
3.3

 
2.0

Changes in:
 
 
 
Premiums receivable
(255.4
)
 
(218.4
)
Reinsurance recoverables
(44.8
)
 
(61.2
)
Prepaid reinsurance premiums
(14.9
)
 
(13.3
)
Deferred acquisition costs
(31.4
)
 
(33.6
)
Income taxes
53.6

 
43.0

Unearned premiums
407.7

 
393.5

Loss and loss adjustment expense reserves
160.1

 
248.0

Accounts payable, accrued expenses, and other liabilities
164.0

 
168.6

Other, net
29.5

 
28.0

Net cash provided by operating activities
1,041.2

 
1,137.2

Cash Flows From Investing Activities
 
 
 
Purchases:
 
 
 
Fixed maturities
(3,332.1
)
 
(4,262.6
)
Equity securities
(176.7
)
 
(208.2
)
Sales:
 
 
 
Fixed maturities
3,329.3

 
1,872.2

Equity securities
446.4

 
242.1

Maturities, paydowns, calls, and other:
 
 
 
Fixed maturities
1,117.8

 
862.1

Equity securities
14.2

 
0

Net sales (purchases) of short-term investments
(1,846.0
)
 
430.6

Net unsettled security transactions
174.5

 
207.9

Purchases of property and equipment
(44.7
)
 
(69.5
)
Sales of property and equipment
3.1

 
1.6

Net cash used in investing activities
(314.2
)
 
(923.8
)
Cash Flows From Financing Activities
 
 
 
Tax benefit from vesting of equity-based compensation
10.7

 
7.4

Proceeds from debt issuance
344.7

 
0

Dividends paid to shareholders1
(892.6
)
 
(175.6
)
Acquisition of treasury shares
(140.0
)
 
(126.7
)
Net cash used in financing activities
(677.2
)
 
(294.9
)
Effect of exchange rate changes on cash
1.2

 
(.7)

Increase (decrease) in cash
51.0

 
(82.2
)
Cash, January 1
75.1

 
179.1

Cash, June 30
$
126.1

 
$
96.9


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 June 30, 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 half of 2014, decisions were made to sell two properties originally purchased for future Service Center sites. At June 30, 2014, included in other assets in the consolidated balance sheets is $13.4 million of "held for sale" property, which represents the fair value of these properties 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

June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
$
3,249.0

 
$
43.5

 
$
(3.1
)
 
$
0

 
$
3,289.4

 
17.5
%
State and local government obligations
2,287.2

 
46.5

 
(2.6
)
 
.1

 
2,331.2

 
12.4

Foreign government obligations
0

 
0

 
0

 
0

 
0

 
0

Corporate debt securities
2,215.4

 
47.9

 
(2.8
)
 
2.3

 
2,262.8

 
12.1

Residential mortgage-backed securities
1,312.0

 
32.7

 
(9.3
)
 
0

 
1,335.4

 
7.1

Commercial mortgage-backed securities
1,974.4

 
47.8

 
(2.9
)
 
0

 
2,019.3

 
10.8

Other asset-backed securities
965.4

 
7.1

 
(.1
)
 
.6

 
973.0

 
5.2

Redeemable preferred stocks
262.0

 
31.5

 
(6.0
)
 
0

 
287.5

 
1.5

Total fixed maturities
12,265.4

 
257.0

 
(26.8
)
 
3.0

 
12,498.6

 
66.6

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks
497.1

 
247.5

 
(1.4
)
 
17.0

 
760.2

 
4.1

Common equities
1,265.2

 
1,118.9

 
(2.4
)
 
0

 
2,381.7

 
12.7

Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
Other short-term investments
3,118.7

 
0

 
0

 
0

 
3,118.7

 
16.6

Total portfolio2,3
$
17,146.4

 
$
1,623.4

 
$
(30.6
)
 
$
20.0

 
$
18,759.2

 
100.0
%

5



($ in millions)
Cost

 
Gross
Unrealized Gains

 
Gross
Unrealized
Losses

 
Net
Realized
Gains
(Losses)1

 
Fair
Value

 
% of
Total
Fair
Value

June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
$
3,362.8

 
$
63.0

 
$
(15.0
)
 
$
0

 
$
3,410.8

 
19.5
%
State and local government obligations
2,010.6

 
27.7

 
(18.4
)
 
0

 
2,019.9

 
11.6

Foreign government obligations
16.4

 
0

 
0

 
0

 
16.4

 
.1

Corporate debt securities
3,048.8

 
57.0

 
(33.0
)
 
(.8
)
 
3,072.0

 
17.6

Residential mortgage-backed securities
870.9

 
30.5

 
(14.7
)
 
0

 
886.7

 
5.1

Commercial mortgage-backed securities
2,213.9

 
48.9

 
(41.0
)
 
0

 
2,221.8

 
12.7

Other asset-backed securities
941.7

 
7.6

 
(2.2
)
 
.6

 
947.7

 
5.4

Redeemable preferred stocks
359.0

 
27.8

 
(12.7
)
 
0

 
374.1

 
2.1

Total fixed maturities
12,824.1

 
262.5

 
(137.0
)
 
(.2
)
 
12,949.4

 
74.1

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks
416.8

 
332.1

 
(1.5
)
 
7.0

 
754.4

 
4.3

Common equities
1,438.2

 
794.5

 
(8.2
)
 
0

 
2,224.5

 
12.7

Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
Other short-term investments
1,558.1

 
0

 
0

 
0

 
1,558.1

 
8.9

Total portfolio2,3
$
16,237.2

 
$
1,389.1

 
$
(146.7
)
 
$
6.8

 
$
17,486.4

 
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 June 30, 2014, $235.8 million was included in "other liabilities," compared to $117.0 million and $61.3 million at June 30, 2013 and December 31, 2013, respectively.
3The total fair value of the portfolio at June 30, 2014 and 2013, and December 31, 2013 included $1.1 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 no open reverse repurchase commitments at June 30, 2014, compared to $416.0 million, and $200.0 million at June 30, 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:
 
 
June 30,
 
December 31,
2013

(millions)
2014

 
2013

 
Fixed maturities:
 
 
 
 
 
State and local government obligations
$
5.1

 
$
0

 
$
0

Corporate debt securities
142.0

 
188.6

 
164.2

Residential mortgage-backed securities
27.6

 
0

 
0

Other asset-backed securities
14.3

 
16.0

 
14.8

Total fixed maturities
189.0

 
204.6

 
179.0

Equity securities:
 
 
 
 
 
Nonredeemable preferred stocks
66.1

 
56.0

 
60.3

Total hybrid securities
$
255.1

 
$
260.6

 
$
239.3

The state and local government obligations in the table above were acquired at a premium and contain a contingently exercisable call feature that allows the issuer, at its discretion, to call the securities at par based on a provision that is unrelated to the economic characteristics of the issuer. This feature, if exercised, would result in the acceleration of the recognition of the remaining premium paid on these securities in our results of operations. This would result in a loss of $0.8 million as of June 30, 2014, if all of the bonds were simultaneously called by the issuer.
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 $9.5 million as of June 30, 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 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.
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.




7



Fixed Maturities The composition of fixed maturities by maturity at June 30, 2014, was:
 
(millions)
Cost

 
Fair Value

Less than one year
$
1,882.0

 
$
1,920.2

One to five years
7,400.9

 
7,530.5

Five to ten years
2,862.0

 
2,919.2

Ten years or greater
85.4

 
93.6

Total1
$
12,230.3

 
$
12,463.5

 
1Excludes $35.1 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.
Gross Unrealized Losses As of June 30, 2014, we had $28.2 million of gross unrealized losses in our fixed-income securities (i.e., fixed-maturity securities, nonredeemable preferred stocks, and short-term investments) and $2.4 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. 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

June 30, 2014
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
12

$
460.0

$
(3.1
)
1

$
14.9

$
(.1
)
 
11

$
445.1

$
(3.0
)
State and local government obligations
55

333.9

(2.6
)
22

52.2

(.1
)
 
33

281.7

(2.5
)
Corporate debt securities
15

265.1

(2.8
)
6

112.2

(.5
)
 
9

152.9

(2.3
)
Residential mortgage-backed securities
56

684.2

(9.3
)
17

263.2

(1.7
)
 
39

421.0

(7.6
)
Commercial mortgage-backed securities
23

256.7

(2.9
)
7

37.1

(.2
)
 
16

219.6

(2.7
)
Other asset-backed securities
3

47.4

(.1
)
2

28.3

0

 
1

19.1

(.1
)
Redeemable preferred stocks
3

93.6

(6.0
)
0

0

0

 
3

93.6

(6.0
)
Total fixed maturities
167

2,140.9

(26.8
)
55

507.9

(2.6
)
 
112

1,633.0

(24.2
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks
4

121.4

(1.4
)
1

33.7

(.2
)
 
3

87.7

(1.2
)
Common equities
14

50.4

(2.4
)
14

50.4

(2.4
)
 
0

0

0

Total equity securities
18

171.8

(3.8
)
15

84.1

(2.6
)
 
3

87.7

(1.2
)
Total portfolio
185

$
2,312.7

$
(30.6
)
70

$
592.0

$
(5.2
)
 
115

$
1,720.7

$
(25.4
)
 

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

June 30, 2013
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
19

$
1,035.9

$
(15.0
)
19

$
1,035.9

$
(15.0
)
 
0

$
0

$
0

State and local government obligations
139

829.2

(18.4
)
132

803.1

(18.2
)
 
7

26.1

(.2
)
Corporate debt securities
73

1,254.2

(33.0
)
73

1,254.2

(33.0
)
 
0

0

0

Residential mortgage-backed securities
60

627.4

(14.7
)
44

550.0

(10.8
)
 
16

77.4

(3.9
)
Commercial mortgage-backed securities
69

1,001.0

(41.0
)
66

1,001.0

(41.0
)
 
3

0

0

Other asset-backed securities
18

260.8

(2.2
)
18

260.8

(2.2
)
 
0

0

0

Redeemable preferred stocks
5

151.3

(12.7
)
1

31.4

(.2
)
 
4

119.9

(12.5
)
Total fixed maturities
383

5,159.8

(137.0
)
353

4,936.4

(120.4
)
 
30

223.4

(16.6
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks
4

89.8

(1.5
)
4

89.8

(1.5
)
 
0

0

0

Common equities
50

74.8

(8.2
)
40

66.7

(5.9
)
 
10

8.1

(2.3
)
Total equity securities
54

164.6

(9.7
)
44

156.5

(7.4
)
 
10

8.1

(2.3
)
Total portfolio
437

$
5,324.4

$
(146.7
)
397

$
5,092.9

$
(127.8
)
 
40

$
231.5

$
(18.9
)
 
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
)

Since December 31, 2013, the number of securities in our fixed-maturity portfolio with unrealized losses decreased, reflecting a combination of an increase in prices associated with a general decline in interest rates at certain maturities as well as sales of securities for portfolio management reasons. The decline in the number of common equity securities in an unrealized loss position during the same period reflects increases in the equity market values and sales of securities. We had no material decreases in valuation as a result of credit rating downgrades on our fixed-maturity securities during the second quarter or first six months of 2014. Unrealized losses on our nonredeemable preferred stocks related to four 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 June 30, 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:
 
 
June 30,
 
December 31,
2013

(millions)
2014

 
2013

 
Fixed maturities:
 
 
 
 
 
Residential mortgage-backed securities
$
(44.1
)
 
$
(44.1
)
 
$
(44.1
)
Commercial mortgage-backed securities
(.6
)
 
(.9
)
 
(.9
)
Total fixed maturities
$
(44.7
)
 
$
(45.0
)
 
$
(45.0
)

The following tables provide rollforwards of the amounts related to credit losses recognized in earnings for the periods ended June 30, 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 June 30, 2014
 
Mortgage-Backed
 
 
(millions)
Residential 

 
Commercial 

 
Total

Balance at March 31, 2014
$
19.1

 
$
.4

 
$
19.5

Change in recoveries of future cash flows expected to be collected1
(6.1
)
 
0

 
(6.1
)
Reductions for previously recognized credit impairments written-down to fair value2
0

 
0

 
0

Balance at June 30, 2014
$
13.0

 
$
.4

 
$
13.4

 
 
 
 
 
 
 
Six Months Ended June 30, 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
(6.2
)
 
0

 
(6.2
)
Reductions for previously recognized credit impairments written-down to fair value2
0

 
0

 
0

Balance at June 30, 2014
$
13.0

 
$
.4

 
$
13.4


 
Three Months Ended June 30, 2013
 
Mortgage-Backed
 
 
(millions)
Residential 

 
Commercial 

 
Total

Balance at March 31, 2013
$
27.7

 
$
.5

 
$
28.2

Change in recoveries of future cash flows expected to be collected1
(.6
)
 
0

 
(.6
)
Reductions for previously recognized credit impairments written-down to fair value2
(.2
)
 
0

 
(.2
)
Balance at June 30, 2013
$
26.9

 
$
.5

 
$
27.4

 
 
 
 
 
 
 
Six Months Ended June 30, 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
0

 
(.1
)
 
(.1
)
Reductions for previously recognized credit impairments written-down to fair value2
(.2
)
 
0

 
(.2
)
Balance at June 30, 2013
$
26.9

 
$
.5

 
$
27.4


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.
2Reflects reductions of prior credit impairments where the current credit impairment requires writing securities down to fair value (i.e., no remaining non-credit loss).

10


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.


11


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)
2014

 
2013

 
2014

 
2013

Gross realized gains on security sales
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
U.S. government obligations
$
4.2

 
$
2.2

 
$
10.7

 
$
3.7

State and local government obligations
0

 
0

 
4.4

 
6.8

Corporate and other debt securities
9.8

 
12.6

 
32.9

 
36.7

Residential mortgage-backed securities
1.0

 
1.7

 
2.0

 
2.1

Commercial mortgage-backed securities
3.5

 
4.3

 
9.6

 
8.3

Redeemable preferred stocks
.4

 
0

 
.4

 
0

Total fixed maturities
18.9

 
20.8

 
60.0

 
57.6

Equity securities:
 
 
 
 
 
 
 
Nonredeemable preferred stocks
33.2

 
62.7

 
59.1

 
101.2

Common equities
9.4

 
12.3

 
92.4

 
15.0

Subtotal gross realized gains on security sales
61.5

 
95.8

 
211.5

 
173.8

Gross realized losses on security sales
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
U.S. government obligations
(.4
)
 
(1.1
)
 
(5.1
)
 
(1.4
)
State and local government obligations
(.1
)
 
0

 
(.2
)
 
0

Corporate and other debt securities
(.1
)
 
(.6
)
 
(2.3
)
 
(1.0
)
Residential mortgage-backed securities
(.2
)
 
0

 
(.2
)
 
0

Commercial mortgage-backed securities
(4.1
)
 
(.7
)
 
(6.8
)
 
(.7
)
Redeemable preferred stocks
0

 
0

 
(3.2
)
 
(.1
)
Total fixed maturities
(4.9
)
 
(2.4
)
 
(17.8
)
 
(3.2
)
Equity securities:
 
 
 
 
 
 
 
Common equities
0

 
(.3
)
 
(3.4
)
 
(.3
)
Subtotal gross realized losses on security sales
(4.9
)
 
(2.7
)
 
(21.2
)
 
(3.5
)
Net realized gains (losses) on security sales
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
U.S. government obligations
3.8

 
1.1

 
5.6

 
2.3

State and local government obligations
(.1
)
 
0

 
4.2

 
6.8

Corporate and other debt securities
9.7

 
12.0

 
30.6

 
35.7

Residential mortgage-backed securities
.8

 
1.7

 
1.8

 
2.1

Commercial mortgage-backed securities
(.6
)
 
3.6

 
2.8

 
7.6

Redeemable preferred stocks
.4

 
0

 
(2.8
)
 
(.1
)
Total fixed maturities
14.0

 
18.4

 
42.2

 
54.4

Equity securities:
 
 
 
 
 
 
 
Nonredeemable preferred stocks
33.2

 
62.7

 
59.1

 
101.2

Common equities
9.4

 
12.0

 
89.0

 
14.7

Subtotal net realized gains (losses) on security sales
56.6

 
93.1

 
190.3

 
170.3

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

 
(.3
)
 
0

 
(.4
)
Total fixed maturities
0

 
(.3
)
 
0

 
(.4
)
Equity securities:
 
 
 
 
 
 
 
Common equities
0

 
(1.3
)
 
0

 
(1.4
)
Subtotal other-than-temporary impairment losses
0

 
(1.6
)
 
0

 
(1.8
)
Other gains (losses)
 
 
 
 
 
 
 
Hybrid securities
3.7

 
(3.5
)
 
7.5

 
(1.2
)
Derivative instruments
(19.9
)
 
44.9

 
(39.2
)
 
46.2

Litigation settlements
0

 
0

 
1.2

 
0

Subtotal other gains (losses)
(16.2
)
 
41.4

 
(30.5
)
 
45.0

Total net realized gains (losses) on securities
$
40.4

 
$
132.9

 
$
159.8

 
$
213.5

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 and sales from our equity-indexed portfolio primarily during the first quarter 2014. 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.

12


Net Investment Income  The components of net investment income for the three and six months ended June 30, were:
 
 
Three Months
 
Six Months
(millions)
2014

2013

 
2014

2013

Fixed maturities:
 
 
 
 
 
U.S. government obligations
$
12.0

$
12.1

 
$
25.0

$
23.9

State and local government obligations
12.6

11.1

 
25.4

22.5

Foreign government obligations
.1

0

 
.2

0

Corporate debt securities
18.8

24.2

 
40.8

49.8

Residential mortgage-backed securities
11.3

5.7

 
21.2

10.2

Commercial mortgage-backed securities
16.0

18.1

 
32.7

36.8

Other asset-backed securities
3.7