PROGRESSIVE CORP/OH/ (Form: 10-Q, Received: 08/10/2009 10:13:36)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 1O-Q

(Mark One)

x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2009

¨	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 x 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 x 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):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

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: 678,600,888 outstanding at July 31, 2009

PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements.

The Progressive Corporation and Subsidiaries

Consolidated Statements of Income

(unaudited)


	Three Months								Six Months
Periods Ended June 30,	2009			2008			% Change		2009			2008			% Change
(millions - except per share amounts)

Revenues
Net premiums earned	$	3,441.4		$	3,411.2		1		$	6,848.0		$	6,801.2		1
Investment income		122.1			165.8		(26	)		253.6			325.1		(22	)
Net realized gains (losses) on securities:
Other-than-temporary impairment (OTI) losses:
Total OTI losses		(53.8	)		—					(53.8	)		—
Less: portion of OTI losses recognized in other comprehensive income		23.8			—					23.8			—

Net impairment losses recognized in earnings		(30.0	)		—					(30.0	)		—
Net realized gains (losses) on securities		45.9			(44.6	)				(27.5	)		(12.4	)

Total net realized gains (losses) on securities		15.9			(44.6	)	NM			(57.5	)		(12.4	)	364
Service revenues		4.1			4.2		(2	)		7.6			8.6		(12	)

Total revenues		3,583.5			3,536.6		1			7,051.7			7,122.5		(1	)


Expenses
Losses and loss adjustment expenses		2,462.6			2,471.3		—			4,799.6			4,955.3		(3	)
Policy acquisition costs		334.1			340.7		(2	)		670.3			680.2		(1	)
Other underwriting expenses		390.9			379.5		3			768.3			763.8		1
Investment expenses		2.6			2.9		(10	)		5.2			4.4		18
Service expenses		4.7			5.4		(13	)		9.3			10.5		(11	)
Interest expense		34.7			34.3		1			68.4			68.6		—

Total expenses		3,229.6			3,234.1		—			6,321.1			6,482.8		(2	)


Net Income
Income before income taxes		353.9			302.5		17			730.6			639.7		14
Provision for income taxes		103.8			87.0		19			248.0			184.8		34

Net income	$	250.1		$	215.5		16		$	482.6		$	454.9		6


Computation of Earnings Per Share
Basic:
Average shares outstanding		669.2			667.4		—			668.9			669.5		—

Per share	$	.37		$	.32		16		$	.72		$	.68		6

Diluted:
Average shares outstanding		669.2			667.4		—			668.9			669.5		—
Net effect of dilutive stock-based compensation		5.4			6.3		(14	)		4.4			6.0		(27	)

Total equivalent shares		674.6			673.7		—			673.3			675.5		—

Per share	$	.37		$	.32		16		$	.72		$	.67		6


Dividends declared per share ¹	$	—		$	—				$	—		$	—

NM = Not Meaningful

¹	Progressive maintains an annual dividend program. See Note 9 - Dividends for further discussion.

See notes to consolidated financial statements.

The Progressive Corporation and Subsidiaries

Consolidated Balance Sheets

(unaudited)


	June 30,					December 31, 2008
(millions)	2009			2008		December 31, 2008

Assets
Investments - Available-for-sale, at fair value:
Fixed maturities (amortized cost: $11,453.9, $9,406.2, and $10,295.3)	$	10,935.3		$	9,212.9	$	9,946.7
Equity securities:
Nonredeemable preferred stocks (cost: $810.4, $2,741.8, and $1,131.3)		1,130.1			2,210.5		1,150.0
Common equities (cost: $292.4, $1,310.8, and $553.6)		408.7			2,039.4		727.8
Short-term investments (amortized cost: $1,137.2, $513.2, and $1,153.6)		1,137.2			513.2		1,153.6

Total investments		13,611.3			13,976.0		12,978.1
Cash		160.7			9.9		2.9
Accrued investment income		113.7			123.1		125.7
Premiums receivable, net of allowance for doubtful accounts of $103.5, $99.0, and $113.7		2,545.0			2,515.5		2,408.6
Reinsurance recoverables, including $40.9, $42.5, and $44.0 on paid losses		288.7			308.6		288.5
Prepaid reinsurance premiums		62.6			63.1		62.4
Deferred acquisition costs		436.3			446.2		414.0
Income taxes		727.6			291.2		821.6
Property and equipment, net of accumulated depreciation of $591.4, $636.0, and $653.6		989.9			1,002.7		997.1
Other assets		151.8			178.1		151.6

Total assets	$	19,087.6		$	18,914.4	$	18,250.5

Liabilities and Shareholders’ Equity
Unearned premiums	$	4,379.6		$	4,403.6	$	4,175.9
Loss and loss adjustment expense reserves		6,198.9			6,000.6		6,177.4
Accounts payable, accrued expenses, and other liabilities		1,407.7			1,530.0		1,506.4
Debt ¹		2,176.4			2,174.7		2,175.5

Total liabilities		14,162.6			14,108.9		14,035.2

Common Shares, $1.00 par value (authorized 900.0; issued 797.8, 797.9, and 797.9, including treasury shares of 117.8, 122.5, and 121.4)		680.0			675.4		676.5
Paid-in capital		914.2			863.6		892.9
Accumulated other comprehensive income (loss):
Net unrealized gains (losses) on securities		(30.9	)		15.4		(76.8	)
Portion of OTI losses recognized in other comprehensive income		(15.5	)		—		—

Total net unrealized gains (losses) on securities		(46.4	)		15.4		(76.8	)
Net unrealized gains on forecasted transactions		23.9			26.3		24.9
Retained earnings		3,353.3			3,224.8		2,697.8

Total shareholders’ equity		4,925.0			4,805.5		4,215.3

Total liabilities and shareholders’ equity	$	19,087.6		$	18,914.4	$	18,250.5

¹	Consists of long-term debt. See Note 4 - Debt .

See notes to consolidated financial statements.

The Progressive Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

(unaudited)


Six months ended June 30,	2009						2008
(millions)

Retained Earnings
Balance, Beginning of year	$	2,697.8					$	2,927.7
Cumulative effect of change in accounting principle ¹		189.6						—

Balance, Beginning of year, as adjusted		2,887.4						2,927.7
Net income		482.6		$	482.6			454.9		$	454.9

Treasury shares purchased		(16.9	)					(155.6	)
Other, net ²		.2						(2.2	)

Balance, End of period	$	3,353.3					$	3,224.8


Accumulated Other Comprehensive Income (Loss), Net of Tax
Balance, Beginning of year	$	(51.9	)				$	492.8
Cumulative effect of change in accounting principle ¹		(189.6	)					—

Balance, Beginning of year, as adjusted		(241.5	)					492.8
Changes in:
Net unrealized gains (losses) on securities					235.5						(449.6	)
Portion of OTI losses recognized in other comprehensive income (loss)					(15.5	)					—

Total net unrealized gains (losses) on securities					220.0						(449.6	)
Net unrealized gains on forecasted transactions					(1.0	)					(1.5	)

Other comprehensive income (loss)		219.0			219.0			(451.1	)		(451.1	)

Balance, End of period	$	(22.5	)				$	41.7

Comprehensive Income				$	701.6					$	3.8


Common Shares, $1.00 Par Value
Balance, Beginning of year	$	676.5					$	680.2
Stock options exercised		1.2						2.3
Treasury shares purchased		(1.3	)					(9.8	)
Restricted stock issued, net of forfeitures		3.6						2.7

Balance, End of period	$	680.0					$	675.4


Paid-In Capital
Balance, Beginning of year	$	892.9					$	834.8
Stock options exercised		6.2						16.5
Tax benefits from exercise/vesting of stock-based compensation		.2						8.0
Treasury shares purchased		(1.8	)					(12.1	)
Restricted stock issued, net of forfeitures		(3.6	)					(2.7	)
Amortization of stock-based compensation		19.0						15.7
Other ²		1.3						3.4

Balance, End of period	$	914.2					$	863.6

Total Shareholders’ Equity	$	4,925.0					$	4,805.5

¹	Pursuant to FASB Staff Position (FSP) FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments.” See Note 11 - New Accounting Standards for further discussion.

²	Primarily reflects activity associated with our deferred compensation and incentive plans.

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.

The Progressive Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(unaudited)


Six months ended June 30,	2009			2008
(millions)

Cash Flows From Operating Activities
Net income	$	482.6		$	454.9
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		43.2			48.0
Amortization of fixed-income securities		118.3			126.2
Amortization of stock-based compensation		19.3			16.0
Net realized (gains) losses on securities		57.5			12.4
Net loss on disposition of property and equipment		1.5			1.0
Changes in:
Premiums receivable		(136.4	)		(120.4	)
Reinsurance recoverables		(.2	)		26.5
Prepaid reinsurance premiums		(.2	)		6.7
Deferred acquisition costs		(22.3	)		(19.9	)
Income taxes		(24.6	)		56.9
Unearned premiums		203.7			193.2
Loss and loss adjustment expense reserves		21.5			57.9
Accounts payable, accrued expenses, and other liabilities		146.4			41.7
Other, net		17.8			38.6

Net cash provided by operating activities		928.1			939.7

Cash Flows From Investing Activities
Purchases:
Fixed maturities		(6,119.8	)		(2,663.5	)
Equity securities		(25.8	)		(546.6	)
Short-term investments - auction rate securities		—			(479.5	)
Sales:
Fixed maturities		4,850.5			2,188.7
Equity securities		456.3			278.6
Short-term investments - auction rate securities		—			479.5
Maturities, paydowns, calls, and other:
Fixed maturities		361.1			227.9
Equity securities		—			34.9
Net sales (purchases) of short-term investments - other		16.3			(130.5	)
Net unsettled security transactions		(259.0	)		(24.8	)
Purchases of property and equipment		(38.3	)		(51.3	)
Sales of property and equipment		.8			—

Net cash used in investing activities		(757.9	)		(686.6	)

Cash Flows From Financing Activities
Proceeds from exercise of stock options		7.4			18.8
Tax benefit from exercise/vesting of stock-based compensation		.2			8.0
Dividends paid to shareholders ¹		—			(98.3	)
Acquisition of treasury shares		(20.0	)		(177.5	)

Net cash used in financing activities		(12.4	)		(249.0	)

Increase in cash		157.8			4.1
Cash, January 1		2.9			5.8

Cash, June 30	$	160.7		$	9.9

¹	Progressive maintains an annual dividend program. See Note 9 - Dividends for further discussion.

See notes to consolidated financial statements.

The Progressive Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

Note 1 Basis of Presentation — These 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, 2008.

The consolidated financial statements reflect all normal recurring adjustments which, 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, 2009, are not necessarily indicative of the results expected for the full year.

Subsequent events have been evaluated through August 10, 2009, the date the financial statements were issued via filing this Quarterly Report on Form 10-Q with the Securities and Exchange Commission.

Note 2 Investments — During the second quarter 2009, we adopted the new accounting guidance relating to the recognition and presentation of other-than-temporary impairments (see Note 11- New Accounting Standards for further information).

The following table presents the composition of our investment portfolio by major security type consistent with our internal 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, 2009
Fixed maturities:
U.S. government obligations	$	5,362.6	$	9.3	$	(144.6	)	$	—		$	5,227.3	38.4	%
State and local government obligations		2,383.7		56.1		(36.8	)		—			2,403.0	17.7
Corporate debt securities		803.4		19.1		(25.8	)		—			796.7	5.8
Residential mortgage-backed securities		561.7		.7		(121.8	)		—			440.6	3.2
Commercial mortgage-backed securities		1,491.7		5.9		(111.6	)		—			1,386.0	10.2
Other asset-backed securities		200.5		3.3		(3.0	)		—			200.8	1.5
Redeemable preferred stocks		648.2		9.0		(179.3	)		—			477.9	3.5
Other debt obligations		2.1		.9		—			—			3.0	—

Total fixed maturities		11,453.9		104.3		(622.9	)		—			10,935.3	80.3
Equity securities:
Nonredeemable preferred stocks		810.4		334.2		(3.3	)		(11.2	)		1,130.1	8.3
Common equities		292.4		123.7		(7.4	)		—			408.7	3.0
Short-term investments:
Other short-term investments		1,137.2		—		—			—			1,137.2	8.4

Total portfolio ^2,3	$	13,693.9	$	562.2	$	(633.6	)	$	(11.2	)	$	13,611.3	100.0	%


($ in millions)	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Net Realized Gains (Losses) ¹			Fair Value		% of Total Fair Value
June 30, 2008
Fixed maturities:
U.S. government obligations ⁴	$	1,636.9	$	9.0	$	(5.6	)	$	—		$	1,640.3	11.7	%
State and local government obligations		3,178.4		23.3		(38.8	)		—			3,162.9	22.7
Foreign government obligations		30.0		.4		—			—			30.4	.2
Corporate debt securities		969.0		2.2		(28.9	)		—			942.3	6.7
Residential mortgage-backed securities		853.9		3.8		(34.9	)		—			822.8	5.9
Commercial mortgage-backed securities		1,856.2		12.5		(42.1	)		—			1,826.6	13.1
Other asset-backed securities		167.1		.8		(2.0	)		—			165.9	1.2
Redeemable preferred stocks		712.6		1.8		(95.7	)		—			618.7	4.4
Other debt obligations		2.1		.9		—			—			3.0	—

Total fixed maturities		9,406.2		54.7		(248.0	)		—			9,212.9	65.9
Equity securities:
Nonredeemable preferred stocks		2,741.8		3.4		(515.0	)		(19.7	)		2,210.5	15.8
Common equities		1,310.8		770.0		(41.4	)		—			2,039.4	14.6
Short-term investments:
Other short-term investments		513.2		—		—			—			513.2	3.7

Total portfolio ^2,3	$	13,972.0	$	828.1	$	(804.4	)	$	(19.7	)	$	13,976.0	100.0	%


($ in millions)	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Net Realized Gains (Losses) ¹			Fair Value		% of Total Fair Value
December 31, 2008
Fixed maturities:
U.S. government obligations	$	3,565.7	$	129.0	$	(1.1	)	$	—		$	3,693.6	28.5	%
State and local government obligations		3,041.4		53.1		(90.1	)		—			3,004.4	23.1
Foreign government obligations		16.2		.2		—			—			16.4	.1
Corporate debt securities		692.1		1.6		(54.4	)		—			639.3	4.9
Residential mortgage-backed securities		758.7		1.4		(137.1	)		—			623.0	4.8
Commercial mortgage-backed securities		1,692.7		1.0		(243.7	)		—			1,450.0	11.2
Other asset-backed securities		139.2		—		(10.1	)		—			129.1	1.0
Redeemable preferred stocks		387.2		8.7		(8.0	)		—			387.9	3.0
Other debt obligations		2.1		.9		—			—			3.0	—

Total fixed maturities		10,295.3		195.9		(544.5	)		—			9,946.7	76.6
Equity securities:
Nonredeemable preferred stocks		1,131.3		73.5		(17.3	)		(37.5	)		1,150.0	8.9
Common equities		553.6		203.5		(29.3	)		—			727.8	5.6
Short-term investments:
Other short-term investments		1,153.6		—		—			—			1,153.6	8.9

Total portfolio ^2,3	$	13,133.8	$	472.9	$	(591.1	)	$	(37.5	)	$	12,978.1	100.0	%

¹	Represents net holding period gains (losses) on certain hybrid securities (discussed below) and on common equity options (see the Derivative Instruments section below for further discussion).

²	June 30, 2009 total excludes $4.8 million of unsettled security transactions offset in other assets. At June 30, 2008 and December 31, 2008, we had $52.2 million and $254.2 million, respectively, of unsettled security transactions offset in other liabilities.

³	June 30, 2009, June 30, 2008, and December 31, 2008 totals include $.9 billion, $1.7 billion, and $1.0 billion, respectively, of securities in the portfolio of a consolidated, non-insurance subsidiary of the holding company, net of any unsettled security transactions.

⁴	Balance at June 30, 2008 includes $49.6 million of collateral in the form of Treasury Notes delivered to a counterparty on a derivative position; the position was closed in the fourth quarter 2008. See the Derivative Instruments section below for further discussion.

Our fixed-maturity securities include debt securities and redeemable preferred stocks. At June 30, 2009, June 30, 2008, and December 31, 2008, the nonredeemable preferred stock portfolio included $17.3 million, $116.8 million, and $53.0 million, respectively, of hybrid securities (i.e., 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). Common equities include common stocks and other risk investments (i.e., private equity investments and limited partnership interests in private equity and mezzanine funds). Our other short-term investments include Eurodollar deposits, commercial paper, and other investments which are expected to mature within one year.

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 change in fair value of the hybrid securities and derivative instruments is recorded as a component of net realized gains (losses) on securities.

Other-than-Temporary Impairment (OTI) In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-than-Temporary Impairments.” The new accounting position provides guidance in determining whether impairments in debt securities are other-than-temporary and requires additional disclosures relating to OTI and unrealized losses on investments; the new standard did not change the impairment model for equity securities. Pursuant to the new standard, we analyze our debt securities to determine if we intend to sell, or if it is more likely than not that we will be required to sell, the security prior to recovery and, if so, we will write down the security to its current fair value with the entire amount of the write-down recorded to earnings. To the extent that it is more likely than not that we will hold the debt security until recovery (which could be maturity), we need to determine if any of the decline in value is due to a credit loss (i.e., where the present value of cash flows expected to be collected is lower than the amortized cost basis of the security) and, if so, we will recognize that portion of the impairment in earnings, with the balance (i.e., non-credit related impairment) recognized as part of our net unrealized gains (losses) in other comprehensive income.

In addition, the new guidance requires that, during the initial period of adoption, we record a cumulative effect of change in accounting principle to reclassify the non-credit component of a previously recognized OTI from retained earnings to other comprehensive income. Based on our review of OTI losses on securities held at March 31, 2009, we reclassified $189.6 million (or $291.8 million on a pretax basis) from retained earnings to accumulated other comprehensive income (loss).

Under the new accounting guidance, we are required to separate our OTI losses between those related to a credit loss and the portion that was a non-credit related impairment. The following table shows our OTI losses for the second quarter 2009 under this guidance:


(millions)	Total OTI		Credit Related and Other OTI (Income Statement)		Non-Credit Related (Balance Sheet)
Fixed maturities:
Residential mortgage-backed securities:
Bifurcated	$	38.3	$	14.5	$	23.8
Non-bifurcated ¹		14.2		14.2		—

Total fixed maturities		52.5		28.7		23.8
Common stocks		1.3		1.3		NA

Total	$	53.8	$	30.0	$	23.8

NA = Not Applicable

¹	Represents securities where our total OTI was credit related; no unrealized losses are recorded as a component of accumulated other comprehensive income.

The following table provides a rollforward of the amounts related to credit losses recognized in earnings for which a portion of the OTI loss was recognized in accumulated other comprehensive income:


(millions)	Corporate Debt		Residential Mortgage- Backed		Total
Beginning balance at April 1, 2009 ¹	$	6.5	$	24.2	$	30.7
Credit losses for which an OTI was previously recognized ²		—		1.4		1.4
Credit losses for which an OTI was not previously recognized ²		—		13.1		13.1

Ending balance at June 30, 2009	$	6.5	$	38.7	$	45.2

¹	Represents the credit loss taken on securities held and in an unrealized loss position as of the date the new accounting guidance was adopted.

²	Amounts reflect credit losses taken during the period on securities held and in an unrealized loss position at June 30, 2009.

At June 30, 2009, we did not intend to sell the fixed maturity securities on which a credit loss was recognized, and determined that it is more likely than not that we will not be required to sell the securities prior to the recovery (which could be maturity) of their respective cost bases.

In order to measure the amount of credit losses on the securities that were determined to be other-than-temporarily impaired during the second quarter 2009, we considered a number of factors and inputs related to the individual securities. During the second quarter 2009, all of the securities that comprise the $28.7 million in credit losses were within the residential mortgage-backed portfolio. The methodology and significant inputs used to measure the amount of credit losses in this portfolio included: current performance indicators on the underlying assets (i.e., delinquency rates, foreclosure rates, and default rates), credit support (via current levels of subordination), and historical credit ratings. Updated cash flow expectations were also generated by our portfolio managers based upon these performance indicators. In order to determine the amount of credit losses, if any, the net present value of the cash flows expected (i.e., expected recovery value) was calculated using the current implied 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 to its net present value level.

Gross Unrealized Losses As of June 30, 2009, we had $626.2 million of gross unrealized losses in our fixed-income securities (i.e., fixed-maturity securities and nonredeemable preferred stocks) and $7.4 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 new cost basis. In addition, we may retain the common stocks to maintain correlation to the Russell 1000 Index as long as the portfolio and index correlation remain similar. If our strategy were to change and these securities were determined to be other-than-temporarily impaired, we would recognize a write-down in accordance with our stated policy.

The following tables show the composition of gross unrealized losses by major security type by the length of time that individual securities have been in a continuous unrealized loss position:


	Total Fair Value		Total Unrealized Losses			Less than 12 Months					12 Months or Greater
(millions)	Total Fair Value		Total Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses ¹
June 30, 2009
Fixed maturities:
U.S. government obligations	$	4,683.3	$	(144.6	)	$	4,683.3	$	(144.6	)	$	—	$	—
State and local government obligations		838.1		(36.8	)		58.1		(.8	)		780.0		(36.0	)
Corporate debt securities		369.5		(25.8	)		93.8		(3.1	)		275.7		(22.7	)
Residential mortgage-backed securities		404.6		(121.8	)		8.5		(.3	)		396.1		(121.5	)
Commercial mortgage-backed securities		1,034.6		(111.6	)		65.1		(3.7	)		969.5		(107.9	)
Other asset-backed securities		68.7		(3.0	)		57.0		(.1	)		11.7		(2.9	)
Redeemable preferred stocks		447.0		(179.3	)		39.8		(5.1	)		407.2		(174.2	)

Total fixed maturities		7,845.8		(622.9	)		5,005.6		(157.7	)		2,840.2		(465.2	)
Equity securities:
Nonredeemable preferred stocks		112.2		(3.3	)		—		—			112.2		(3.3	)
Common equities		61.1		(7.4	)		49.0		(5.6	)		12.1		(1.8	)

Total equity securities		173.3		(10.7	)		49.0		(5.6	)		124.3		(5.1	)

Total portfolio	$	8,019.1	$	(633.6	)	$	5,054.6	$	(163.3	)	$	2,964.5	$	(470.3	)


	Total Fair Value		Total Unrealized Losses			Less than 12 Months					12 Months or Greater
(millions)	Total Fair Value		Total Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
June 30, 2008
Fixed maturities:
U.S. government obligations	$	997.4	$	(5.6	)	$	997.4	$	(5.6	)	$	—	$	—
State and local government obligations		1,511.5		(38.8	)		1,209.2		(30.9	)		302.3		(7.9	)
Corporate debt securities		672.0		(28.9	)		438.1		(10.7	)		233.9		(18.2	)
Residential mortgage-backed securities		675.5		(34.9	)		541.3		(30.5	)		134.2		(4.4	)
Commercial mortgage-backed securities		1,275.5		(42.1	)		886.3		(23.2	)		389.2		(18.9	)
Other asset-backed securities		32.5		(2.0	)		3.9		(.1	)		28.6		(1.9	)
Redeemable preferred stocks		550.0		(95.7	)		195.7		(7.1	)		354.3		(88.6	)

Total fixed maturities		5,714.4		(248.0	)		4,271.9		(108.1	)		1,442.5		(139.9	)
Equity securities:
Nonredeemable preferred stocks		1,993.3		(515.0	)		948.4		(161.5	)		1,044.9		(353.5	)
Common equities		287.8		(41.4	)		285.3		(41.3	)		2.5		(.1	)

Total equity securities		2,281.1		(556.4	)		1,233.7		(202.8	)		1,047.4		(353.6	)

Total portfolio	$	7,995.5	$	(804.4	)	$	5,505.6	$	(310.9	)	$	2,489.9	$	(493.5	)


	Total Fair Value		Total Unrealized Losses			Less than 12 Months					12 Months or Greater
(millions)	Total Fair Value		Total Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
December 31, 2008
Fixed maturities:
U.S. government obligations	$	232.5	$	(1.1	)	$	232.5	$	(1.1	)	$	—	$	—
State and local government obligations		1,100.6		(90.1	)		274.8		(17.9	)		825.8		(72.2	)
Corporate debt securities		493.1		(54.4	)		278.3		(27.4	)		214.8		(27.0	)
Residential mortgage-backed securities		592.8		(137.1	)		219.1		(41.4	)		373.7		(95.7	)
Commercial mortgage-backed securities		1,422.1		(243.7	)		842.9		(116.7	)		579.2		(127.0	)
Other asset-backed securities		128.8		(10.1	)		117.7		(7.4	)		11.1		(2.7	)
Redeemable preferred stocks		60.6		(8.0	)		60.6		(8.0	)		—		—

Total fixed maturities		4,030.5		(544.5	)		2,025.9		(219.9	)		2,004.6		(324.6	)
Equity securities:
Nonredeemable preferred stocks		437.6		(17.3	)		305.4		(13.2	)		132.2		(4.1	)
Common equities		123.2		(29.3	)		110.5		(26.5	)		12.7		(2.8	)

Total equity securities		560.8		(46.6	)		415.9		(39.7	)		144.9		(6.9	)

Total portfolio	$	4,591.3	$	(591.1	)	$	2,441.8	$	(259.6	)	$	2,149.5	$	(331.5	)

¹	Includes $291.8 million related to the cumulative effect of change in accounting principle (discussed above).

Included in gross unrealized losses at June 30, 2009, was $30.4 million related to securities for which a portion of the OTI loss was recorded in earnings as a credit loss ($6.6 million of corporate debt securities as part of the cumulative effect adjustment discussed above, and $23.8 million of residential mortgage-backed securities recorded in the second quarter 2009). The fair value and gross unrealized losses for these securities were comprised of the following:


	Total Fair Value		Total Unrealized Losses			Less than 12 Months					12 Months or Greater
(millions)	Total Fair Value		Total Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Fixed maturities:
Corporate debt securities	$	19.9	$	(6.6	)	$	19.9	$	(6.6	)	$	—	$	—
Residential mortgage-backed securities		53.4		(23.8	)		—		—			53.4		(23.8	)

Total fixed maturities	$	73.3	$	(30.4	)	$	19.9	$	(6.6	)	$	53.4	$	(23.8	)

Trading Securities At June 30, 2009, June 30, 2008, and December 31, 2008, we did not hold any trading securities and did not have any net realized gains (losses) on trading securities for the three and six months ended June 30, 2009 and 2008.

Derivative Instruments We have invested in the following derivative exposures at various times: interest rate swaps; asset-backed credit default swaps; U.S. corporate debt credit default swaps; and cash flow hedges. In addition, during 2009, we invested in equity options as an economic, forecasted forward sale.

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 component of the available-for-sale portfolio, the inception-to-date realized gain on the derivative position at period end would have to exceed any upfront cash received (net derivative asset). On the other hand, a net derivative liability would include any inception-to-date realized loss plus the amount of upfront cash received (or netted, if upfront cash was paid) and would be reported as a component of other liabilities. These net derivative assets/liabilities are not separately disclosed on the balance sheet due to their immaterial effect on our financial condition, cash flows, and results of operations.

The following table shows the status of our derivative instruments at June 30, 2009, June 30, 2008, and December 31, 2008 and for the three and six months ended June 30, 2009 and 2008:

(millions)