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 September 30, 2009
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 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):
| Large accelerated filer | x | 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 x
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Common Shares, $1.00 par value: 674,228,419 outstanding at October 31, 2009
PART I - FINANCIAL INFORMATION
| Item 1. | Financial Statements. |
The Progressive Corporation and Subsidiaries
Consolidated Statements of Income
(unaudited)
| Three Months | Nine Months | |||||||||||||||||||||
|
Periods Ended September 30, |
2009 | 2008 |
%
Change |
2009 | 2008 |
%
Change |
||||||||||||||||
| (millions - except per share amounts) | ||||||||||||||||||||||
|
Revenues |
||||||||||||||||||||||
|
Net premiums earned |
$ | 3,445.4 | $ | 3,416.2 | 1 | $ | 10,293.4 | $ | 10,217.4 | 1 | ||||||||||||
|
Investment income |
122.6 | 163.5 | (25 | ) | 376.2 | 488.6 | (23 | ) | ||||||||||||||
|
Net realized gains (losses) on securities: |
||||||||||||||||||||||
|
Other-than-temporary impairment (OTI) losses: |
||||||||||||||||||||||
|
Total OTI losses |
(20.2 | ) | — | (74.0 | ) | — | ||||||||||||||||
|
Less: portion of OTI losses recognized in other comprehensive income |
12.4 | — | 36.2 | — | ||||||||||||||||||
|
Net impairment losses recognized in earnings |
(7.8 | ) | — | (37.8 | ) | — | ||||||||||||||||
|
Net realized gains (losses) on securities |
46.6 | (1,373.4 | ) | 19.1 | (1,385.8 | ) | ||||||||||||||||
|
Total net realized gains (losses) on securities |
38.8 | (1,373.4 | ) | NM | (18.7 | ) | (1,385.8 | ) | (99 | ) | ||||||||||||
|
Service revenues |
4.5 | 3.8 | 18 | 12.1 | 12.4 | (2 | ) | |||||||||||||||
|
Total revenues |
3,611.3 | 2,210.1 | 63 | 10,663.0 | 9,332.6 | 14 | ||||||||||||||||
|
Expenses |
||||||||||||||||||||||
|
Losses and loss adjustment expenses |
2,459.9 | 2,517.6 | (2 | ) | 7,259.5 | 7,472.9 | (3 | ) | ||||||||||||||
|
Policy acquisition costs |
333.8 | 339.3 | (2 | ) | 1,004.1 | 1,019.5 | (2 | ) | ||||||||||||||
|
Other underwriting expenses |
401.9 | 391.9 | 3 | 1,170.2 | 1,155.7 | 1 | ||||||||||||||||
|
Investment expenses |
2.9 | 2.0 | 45 | 8.1 | 6.4 | 27 | ||||||||||||||||
|
Service expenses |
5.5 | 6.0 | (8 | ) | 14.8 | 16.5 | (10 | ) | ||||||||||||||
|
Interest expense |
35.3 | 34.2 | 3 | 103.7 | 102.8 | 1 | ||||||||||||||||
|
Total expenses |
3,239.3 | 3,291.0 | (2 | ) | 9,560.4 | 9,773.8 | (2 | ) | ||||||||||||||
|
Net Income (Loss) |
||||||||||||||||||||||
|
Income (loss) before income taxes |
372.0 | (1,080.9 | ) | NM | 1,102.6 | (441.2 | ) | NM | ||||||||||||||
|
Provision (benefit) for income taxes |
102.1 | (396.7 | ) | NM | 350.1 | (211.9 | ) | NM | ||||||||||||||
|
Net income (loss) |
$ | 269.9 | $ | (684.2 | ) | NM | $ | 752.5 | $ | (229.3 | ) | NM | ||||||||||
|
Computation of Earnings Per Share |
||||||||||||||||||||||
|
Basic: |
||||||||||||||||||||||
|
Average shares outstanding |
666.7 | 666.3 | — | 668.2 | 668.4 | — | ||||||||||||||||
|
Per share |
$ | .40 | $ | (1.03 | ) | NM | $ | 1.13 | $ | (.34 | ) | NM | ||||||||||
|
Diluted: |
||||||||||||||||||||||
|
Average shares outstanding |
666.7 | 666.3 | — | 668.2 | 668.4 | — | ||||||||||||||||
|
Net effect of dilutive stock-based compensation |
6.1 | 6.5 | (6 | ) | 5.0 | 6.2 | (19 | ) | ||||||||||||||
|
Total equivalent shares |
672.8 | 672.8 | — | 673.2 | 674.6 | — | ||||||||||||||||
|
Per share 1 |
$ | .40 | $ | (1.03 | ) | NM | $ | 1.12 | $ | (.34 | ) | NM | ||||||||||
|
Dividends declared per share 2 |
$ | — | $ | — | $ | — | $ | — | ||||||||||||||
NM = Not Meaningful
| 1 |
For 2009, amounts disclosed are diluted earnings per share. In 2008, due to the net loss reported in both the third quarter and first nine months of the year, the calculated diluted earnings per share was antidilutive; therefore, basic earnings per share is disclosed. |
| 2 |
Progressive maintains an annual dividend program. See Note 9 - Dividends for further discussion. |
See notes to consolidated financial statements.
2
The Progressive Corporation and Subsidiaries
Consolidated Balance Sheets
(unaudited)
| September 30, |
December 31,
2008 |
||||||||||
|
(millions) |
2009 | 2008 | |||||||||
|
Assets |
|||||||||||
|
Investments - Available-for-sale, at fair value: |
|||||||||||
|
Fixed maturities (amortized cost: $11,915.6, $9,557.3, and $10,295.3) |
$ | 11,729.9 | $ | 9,367.4 | $ | 9,946.7 | |||||
|
Equity securities: |
|||||||||||
|
Nonredeemable preferred stocks (cost: $762.7, $1,357.0, and $1,131.3) |
1,244.8 | 1,310.9 | 1,150.0 | ||||||||
|
Common equities (cost: $290.4, $903.5, and $553.6) |
466.6 | 1,322.6 | 727.8 | ||||||||
|
Short-term investments (amortized cost: $1,227.9, $733.8, and $1,153.6) |
1,227.9 | 733.8 | 1,153.6 | ||||||||
|
Total investments |
14,669.2 | 12,734.7 | 12,978.1 | ||||||||
|
Cash |
172.5 | 6.6 | 2.9 | ||||||||
|
Accrued investment income |
103.6 | 130.3 | 125.7 | ||||||||
|
Premiums receivable, net of allowance for doubtful accounts of $109.1, $106.3, and $113.7 |
2,636.1 | 2,584.8 | 2,408.6 | ||||||||
|
Reinsurance recoverables, including $35.2, $35.0, and $44.0 on paid losses |
335.9 | 290.3 | 288.5 | ||||||||
|
Prepaid reinsurance premiums |
68.4 | 63.5 | 62.4 | ||||||||
|
Deferred acquisition costs |
433.6 | 448.8 | 414.0 | ||||||||
|
Income taxes |
490.9 | 724.5 | 821.6 | ||||||||
|
Property and equipment, net of accumulated depreciation of $577.8, $647.2, and $653.6 |
974.1 | 1,001.5 | 997.1 | ||||||||
|
Other assets |
163.1 | 654.6 | 151.6 | ||||||||
|
Total assets |
$ | 20,047.4 | $ | 18,639.6 | $ | 18,250.5 | |||||
|
Liabilities and Shareholders’ Equity |
|||||||||||
|
Unearned premiums |
$ | 4,493.5 | $ | 4,499.2 | $ | 4,175.9 | |||||
|
Loss and loss adjustment expense reserves |
6,352.0 | 6,146.3 | 6,177.4 | ||||||||
|
Accounts payable, accrued expenses, and other liabilities |
1,528.7 | 1,558.4 | 1,506.4 | ||||||||
|
Debt 1 |
2,176.8 | 2,175.1 | 2,175.5 | ||||||||
|
Total liabilities |
14,551.0 | 14,379.0 | 14,035.2 | ||||||||
|
Common Shares, $1.00 par value (authorized 900.0; issued 797.8, 797.9, and 797.9, including treasury shares of 121.6, 122.3, and 121.4) |
676.2 | 675.6 | 676.5 | ||||||||
|
Paid-in capital |
922.2 | 874.9 | 892.9 | ||||||||
|
Accumulated other comprehensive income (loss): |
|||||||||||
|
Net unrealized gains (losses) on securities |
336.6 | 143.9 | (76.8 | ) | |||||||
|
Portion of OTI losses recognized in other comprehensive income |
(23.5 | ) | — | — | |||||||
|
Total net unrealized gains (losses) on securities |
313.1 | 143.9 | (76.8 | ) | |||||||
|
Net unrealized gains on forecasted transactions |
23.0 | 25.6 | 24.9 | ||||||||
|
Retained earnings |
3,561.9 | 2,540.6 | 2,697.8 | ||||||||
|
Total shareholders’ equity |
5,496.4 | 4,260.6 | 4,215.3 | ||||||||
|
Total liabilities and shareholders’ equity |
$ | 20,047.4 | $ | 18,639.6 | $ | 18,250.5 | |||||
| 1 |
Consists of long-term debt. See Note 4 - Debt . |
See notes to consolidated financial statements.
3
The Progressive Corporation and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
(unaudited)
|
Nine months ended September 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 (loss) |
752.5 | $ | 752.5 | (229.3 | ) | $ | (229.3 | ) | ||||||||
|
Treasury shares purchased |
(79.6 | ) | (155.6 | ) | ||||||||||||
|
Other, net 2 |
1.6 | (2.2 | ) | |||||||||||||
|
Balance, End of period |
$ | 3,561.9 | $ | 2,540.6 | ||||||||||||
|
Accumulated Other Comprehensive Income , 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 |
603.0 | (321.1 | ) | |||||||||||||
|
Portion of OTI losses recognized in other comprehensive income (loss) |
(23.5 | ) | — | |||||||||||||
|
Total net unrealized gains (losses) on securities |
579.5 | (321.1 | ) | |||||||||||||
|
Net unrealized gains on forecasted transactions |
(1.9 | ) | (2.2 | ) | ||||||||||||
|
Other comprehensive income (loss) |
577.6 | 577.6 | (323.3 | ) | (323.3 | ) | ||||||||||
|
Balance, End of period |
$ | 336.1 | $ | 169.5 | ||||||||||||
|
Comprehensive Income (Loss) |
$ | 1,330.1 | $ | (552.6 | ) | |||||||||||
|
Common Shares, $1.00 Par Value |
||||||||||||||||
|
Balance, Beginning of year |
$ | 676.5 | $ | 680.2 | ||||||||||||
|
Stock options exercised |
1.9 | 2.4 | ||||||||||||||
|
Treasury shares purchased |
(5.9 | ) | (9.8 | ) | ||||||||||||
|
Restricted stock issued, net of forfeitures |
3.7 | 2.8 | ||||||||||||||
|
Balance, End of period |
$ | 676.2 | $ | 675.6 | ||||||||||||
|
Paid-In Capital |
||||||||||||||||
|
Balance, Beginning of year |
$ | 892.9 | $ | 834.8 | ||||||||||||
|
Stock options exercised |
9.5 | 17.3 | ||||||||||||||
|
Tax benefits from exercise/vesting of stock-based compensation |
2.9 | 8.4 | ||||||||||||||
|
Treasury shares purchased |
(7.9 | ) | (12.1 | ) | ||||||||||||
|
Restricted stock issued, net of forfeitures |
(3.7 | ) | (2.8 | ) | ||||||||||||
|
Amortization of stock-based compensation |
27.2 | 25.8 | ||||||||||||||
|
Other 2 |
1.3 | 3.5 | ||||||||||||||
|
Balance, End of period |
$ | 922.2 | $ | 874.9 | ||||||||||||
|
Total Shareholders’ Equity |
$ | 5,496.4 | $ | 4,260.6 | ||||||||||||
| 1 |
Pursuant to accounting guidance adopted during the second quarter 2009 relating to the recognition and presentation of other-than-temporary impairments. |
| 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.
4
The Progressive Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
|
Nine months ended September 30, |
2009 | 2008 | ||||||
| (millions) | ||||||||
|
Cash Flows From Operating Activities |
||||||||
|
Net income (loss) |
$ | 752.5 | $ | (229.3 | ) | |||
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||
|
Depreciation |
65.2 | 72.1 | ||||||
|
Amortization of fixed-income securities |
179.8 | 188.3 | ||||||
|
Amortization of stock-based compensation |
28.0 | 25.8 | ||||||
|
Net realized losses on securities |
18.7 | 1,385.8 | ||||||
|
Net loss on disposition of property and equipment |
7.1 | 1.5 | ||||||
|
Changes in: |
||||||||
|
Premiums receivable |
(227.5 | ) | (189.7 | ) | ||||
|
Reinsurance recoverables |
(47.4 | ) | 44.8 | |||||
|
Prepaid reinsurance premiums |
(6.0 | ) | 6.3 | |||||
|
Deferred acquisition costs |
(19.6 | ) | (22.5 | ) | ||||
|
Income taxes |
18.5 | (445.5 | ) | |||||
|
Unearned premiums |
317.6 | 288.8 | ||||||
|
Loss and loss adjustment expense reserves |
174.6 | 203.6 | ||||||
|
Accounts payable, accrued expenses, and other liabilities |
140.9 | 69.1 | ||||||
|
Other, net |
12.7 | 39.4 | ||||||
|
Net cash provided by operating activities |
1,415.1 | 1,438.5 | ||||||
|
Cash Flows From Investing Activities |
||||||||
|
Purchases: |
||||||||
|
Fixed maturities |
(8,078.6 | ) | (3,337.3 | ) | ||||
|
Equity securities |
(79.1 | ) | (568.8 | ) | ||||
|
Short-term investments - auction rate securities |
— | (631.5 | ) | |||||
|
Sales: |
||||||||
|
Fixed maturities |
6,134.5 | 2,382.3 | ||||||
|
Equity securities |
564.9 | 834.4 | ||||||
|
Short-term investments - auction rate securities |
— | 631.5 | ||||||
|
Maturities, paydowns, calls, and other: |
||||||||
|
Fixed maturities |
534.7 | 337.5 | ||||||
|
Equity securities |
— | 82.4 | ||||||
|
Net purchases of short-term investments - other |
(74.4 | ) | (351.1 | ) | ||||
|
Net unsettled security transactions |
(119.1 | ) | (494.7 | ) | ||||
|
Purchases of property and equipment |
(50.3 | ) | (75.5 | ) | ||||
|
Sales of property and equipment |
1.0 | .8 | ||||||
|
Net cash used in investing activities |
(1,166.4 | ) | (1,190.0 | ) | ||||
|
Cash Flows From Financing Activities |
||||||||
|
Proceeds from exercise of stock options |
11.4 | 19.7 | ||||||
|
Tax benefit from exercise/vesting of stock-based compensation |
2.9 | 8.4 | ||||||
|
Dividends paid to shareholders 1 |
— | (98.3 | ) | |||||
|
Acquisition of treasury shares |
(93.4 | ) | (177.5 | ) | ||||
|
Net cash used in financing activities |
(79.1 | ) | (247.7 | ) | ||||
|
Increase in cash |
169.6 | .8 | ||||||
|
Cash, January 1 |
2.9 | 5.8 | ||||||
|
Cash, September 30 |
$ | 172.5 | $ | 6.6 | ||||
| 1 |
Progressive maintains an annual dividend program. See Note 9 - Dividends for further discussion. |
See notes to consolidated financial statements.
5
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 September 30, 2009, are not necessarily indicative of the results expected for the full year.
Subsequent events have been evaluated through November 9, 2009, the date the financial statements were issued via filing this Quarterly Report on Form
Note 2 Investments — 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 |
||||||||||||||
|
September 30, 2009 |
||||||||||||||||||||
|
Fixed maturities: |
||||||||||||||||||||
|
U.S. government obligations |
$ | 5,444.4 | $ | 11.9 | $ | (90.9 | ) | $ | — | $ | 5,365.4 | 36.6 | % | |||||||
|
State and local government obligations |
2,131.5 | 57.3 | (14.8 | ) | — | 2,174.0 | 14.8 | |||||||||||||
|
Corporate debt securities |
1,026.3 | 47.5 | (5.5 | ) | — | 1,068.3 | 7.3 | |||||||||||||
|
Residential mortgage-backed securities |
590.6 | 2.9 | (82.2 | ) | — | 511.3 | 3.5 | |||||||||||||
|
Commercial mortgage-backed securities |
1,559.1 | 23.2 | (47.3 | ) | — | 1,535.0 | 10.5 | |||||||||||||
|
Other asset-backed securities |
501.2 | 5.4 | (2.3 | ) | — | 504.3 | 3.4 | |||||||||||||
|
Redeemable preferred stocks |
661.4 | 18.5 | (109.4 | ) | — | 570.5 | 3.9 | |||||||||||||
|
Other debt obligations |
1.1 | — | — | — | 1.1 | — | ||||||||||||||
|
Total fixed maturities |
11,915.6 | 166.7 | (352.4 | ) | — | 11,729.9 | 80.0 | |||||||||||||
|
Equity securities: |
||||||||||||||||||||
|
Nonredeemable preferred stocks |
762.7 | 497.0 | (5.8 | ) | (9.1 | ) | 1,244.8 | 8.4 | ||||||||||||
|
Common equities |
290.4 | 179.6 | (3.4 | ) | — | 466.6 | 3.2 | |||||||||||||
|
Short-term investments: |
||||||||||||||||||||
|
Other short-term investments |
1,227.9 | — | — | — | 1,227.9 | 8.4 | ||||||||||||||
|
Total portfolio 2,3 |
$ | 14,196.6 | $ | 843.3 | $ | (361.6 | ) | $ | (9.1 | ) | $ | 14,669.2 | 100.0 | % | ||||||
6
The Progressive Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(unaudited)
|
($ in millions) |
Cost |
Gross
Unrealized Gains |
Gross
Unrealized Losses |
Net
Realized Gains (Losses) 1 |
Fair Value |
% of
Total Fair Value |
||||||||||||||
|
September 30, 2008 |
||||||||||||||||||||
|
Fixed maturities: |
||||||||||||||||||||
|
U.S. government obligations 4 |
$ | 2,281.0 | $ | 31.9 | $ | (.4 | ) | $ | — | $ | 2,312.5 | 18.1 | % | |||||||
|
State and local government obligations |
3,099.6 | 21.2 | (66.7 | ) | — | 3,054.1 | 24.0 | |||||||||||||
|
Foreign government obligations |
30.1 | .3 | — | — | 30.4 | .2 | ||||||||||||||
|
Corporate debt securities |
857.8 | 1.5 | (34.5 | ) | — | 824.8 | 6.5 | |||||||||||||
|
Residential mortgage-backed securities |
807.3 | 1.0 | (62.2 | ) | — | 746.1 | 5.9 | |||||||||||||
|
Commercial mortgage-backed securities |
1,791.1 | 5.7 | (70.3 | ) | — | 1,726.5 | 13.5 | |||||||||||||
|
Other asset-backed securities |
144.5 | — | (4.1 | ) | — | 140.4 | 1.1 | |||||||||||||
|
Redeemable preferred stocks |
543.8 | — | (14.2 | ) | — | 529.6 | 4.2 | |||||||||||||
|
Other debt obligations |
2.1 | .9 | — | — | 3.0 | — | ||||||||||||||
|
Total fixed maturities |
9,557.3 | 62.5 | (252.4 | ) | — | 9,367.4 | 73.5 | |||||||||||||
|
Equity securities: |
||||||||||||||||||||
|
Nonredeemable preferred stocks |
1,357.0 | 1.3 | (9.2 | ) | (38.2 | ) | 1,310.9 | 10.3 | ||||||||||||
|
Common equities |
903.5 | 457.5 | (38.4 | ) | — | 1,322.6 | 10.4 | |||||||||||||
|
Short-term investments: |
||||||||||||||||||||
|
Other short-term investments |
733.8 | — | — | — | 733.8 | 5.8 | ||||||||||||||
|
Total portfolio 2,3 |
$ | 12,551.6 | $ | 521.3 | $ | (300.0 | ) | $ | (38.2 | ) | $ | 12,734.7 | 100.0 | % | ||||||
|
($ in millions) |
Cost |
Gross
Unrealized Gains |
Gross
Unrealized Losses |
Net
Realized Gains (Losses) 1 |
Fair Value |
% of
Total Fair Value |
||||||||||||||
|
December 31, 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). |
| 2 |
At September 30, 2009 and December 31, 2008, we had $135.1 million and $254.2 million, respectively, of net unsettled security purchases (offset in other liabilities). At September 30, 2008, we had $484.7 million of net unsettled security sales (offset in other assets) and $67.0 million of other net unsettled security transactions (offset in other liabilities). |
| 3 |
Includes $0.9 billion at September 30, 2009, and $1.0 billion at both September 30, 2008 and December 31, 2008, of securities in the portfolio of a consolidated, non-insurance subsidiary of the holding company, net of any unsettled security transactions. |
| 4 |
Balance at September 30, 2008 includes $49.1 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. |
7
The Progressive Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(unaudited)
Our fixed-maturity securities include debt securities and redeemable preferred stocks. At September 30, 2009, September 30, 2008, and December 31, 2008, the nonredeemable preferred stock portfolio included $11.4 million, $55.4 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) For the second quarter 2009, we adopted the new accounting standards related to OTI that provide guidance in determining whether impairments in debt securities are other-than-temporary and require additional disclosures relating to OTI and unrealized losses on investments; the new standards 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 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 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 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) during the second quarter 2009.
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 under this guidance for the periods ended September 30, 2009:
| Three Months | Six Months 1 | |||||||||||||||||
|
(millions) |
Total
OTI |
Credit Related
and Other OTI (Income Statement) |
Non-Credit
Related (Balance Sheet) |
Total
OTI |
Credit Related
and Other OTI (Income Statement) |
Non-Credit
Related (Balance Sheet) |
||||||||||||
|
Fixed maturities: |
||||||||||||||||||
|
Residential mortgage-backed: |
||||||||||||||||||
|
Bifurcated |
$ | 14.6 | $ | 2.2 | $ | 12.4 | $ | 52.9 | $ | 16.7 | $ | 36.2 | ||||||
|
Non-bifurcated 2 |
— | — | — | 14.2 | 14.2 | — | ||||||||||||
|
Total fixed maturities |
14.6 | 2.2 | 12.4 | 67.1 | 30.9 | 36.2 | ||||||||||||
|
Nonredeemable preferred stocks 3 |
5.6 | 5.6 | NA | 5.6 | 5.6 | NA | ||||||||||||
|
Common stocks |
— | — | NA | 1.3 | 1.3 | NA | ||||||||||||
|
Total |
$ | 20.2 | $ | 7.8 | $ | 12.4 | $ | 74.0 | $ | 37.8 | $ | 36.2 | ||||||
NA = Not Applicable
| 1 |
Reflects the period of time from the adoption of the new accounting standards, which was effective beginning in the second quarter 2009. |
| 2 |
Represents securities where our total OTI was credit related; no unrealized losses are recorded as a component of accumulated other comprehensive income. |
| 3 |
Write-down was due to weakened issuer fundamentals. |
8
The Progressive Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(unaudited)
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:
| Six Months 1 | |||||||||
|
(millions) |
Corporate
Debt |
Residential
Mortgage- Backed |
Total | ||||||
|
Beginning balance at April 1, 2009 |
$ | 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 |
— | 15.3 | 15.3 | ||||||
|
Ending balance at September 30, 2009 |
$ | 6.5 | $ | 40.9 | $ | 47.4 | |||
| Three Months | |||||||||
|
(millions) |
Corporate
Debt |
Residential
Mortgage- Backed |
Total | ||||||
|
Beginning balance at July 1, 2009 |
$ | 6.5 | $ | 38.7 | $ | 45.2 | |||
|
Credit losses for which an OTI was previously recognized 2 |
— | 1.5 | 1.5 | ||||||
|
Credit losses for which an OTI was not previously recognized 2 |
— | .7 | .7 | ||||||
|
Ending balance at September 30, 2009 |
$ | 6.5 | $ | 40.9 | $ | 47.4 | |||
| 1 |
Reflects the period since adoption of the new accounting standards, which was effective beginning in the second quarter 2009. |
| 2 |
Amounts reflect credit losses taken during the period on securities held and in an unrealized loss position at September 30, 2009. |
At September 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 third quarter 2009, we considered a number of factors and inputs related to the individual securities. During the third quarter 2009, all of the securities that comprise the $2.2 million in credit losses were within the home-equity 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 September 30, 2009, we had $358.2 million of gross unrealized losses in our fixed-income securities (i.e., fixed-maturity securities and nonredeemable preferred stocks) and $3.4 million in our common equities. We currently do not intend to sell the fixed-income securities and determined that it is more likely than not that we will not be required to sell these securities for the period of time necessary to recover their cost bases. In addition, we may retain the common stocks to maintain correlation to the Russell 1000 Index, 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.
9
The Progressive Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(unaudited)
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:
|
(millions) |
Total Fair
Value |
Total
Unrealized Losses |
Less than 12 Months | 12 Months or Greater | |||||||||||||||||
|
Fair
Value |
Unrealized
Losses |
Fair
Value |
Unrealized
Losses |
||||||||||||||||||
|
September 30, 2009 |
|||||||||||||||||||||
|
Fixed maturities: |
|||||||||||||||||||||
|
U.S. government obligations |
$ | 3,842.3 | $ | (90.9 | ) | $ | 3,614.2 | $ | (85.6 | ) | $ | 228.1 | $ | (5.3 | ) | ||||||
|
State and local government obligations |
684.3 | (14.8 | ) | 23.7 | (.1 | ) | 660.6 | (14.7 | ) | ||||||||||||
|
Corporate debt securities |
203.3 | (5.5 | ) | 83.4 | (.8 | ) | 119.9 | (4.7 | ) | ||||||||||||
|
Residential mortgage-backed securities |
386.8 | (82.2 | ) | 26.0 | (2.2 | ) | 360.8 | (80.0 | ) | ||||||||||||
|
Commercial mortgage-backed securities |
572.8 | (47.3 | ) | 30.7 | (.6 | ) | 542.1 | (46.7 | ) | ||||||||||||
|
Other asset-backed securities |
104.2 | (2.3 | ) | 93.5 | (.3 | ) | 10.7 | (2.0 | ) | ||||||||||||
|
Redeemable preferred stocks |
504.2 | (109.4 | ) | 16.8 | (3.1 | ) | 487.4 | (106.3 | ) | ||||||||||||
|
Total fixed maturities |
6,297.9 | (352.4 | ) | 3,888.3 | (92.7 | ) | 2,409.6 | (259.7 | ) | ||||||||||||
|
Equity securities: |
|||||||||||||||||||||
|
Nonredeemable preferred stocks |
51.4 | (5.8 | ) | 1.0 | (.4 | ) | 50.4 | (5.4 | ) | ||||||||||||
|
Common equities |
35.2 | (3.4 | ) | 21.0 | (1.8 | ) | 14.2 | (1.6 | ) | ||||||||||||
|
Total equity securities |
86.6 | (9.2 | ) | 22.0 | (2.2 | ) | 64.6 | (7.0 | ) | ||||||||||||
|
Total portfolio |
$ | 6,384.5 | $ | (361.6 | ) | $ | 3,910.3 | $ | (94.9 | ) | $ | 2,474.2 | $ | (266.7 | ) | ||||||
|
(millions) |
Total Fair
Value |
Total
Unrealized Losses |
Less than 12 Months | 12 Months or Greater | |||||||||||||||||
|
Fair
Value |
Unrealized
Losses |
Fair
Value |
Unrealized
Losses |
||||||||||||||||||
|
September 30, 2008 |
|||||||||||||||||||||
|
Fixed maturities: |
|||||||||||||||||||||
|
U.S. government obligations |
$ | 34.8 | $ | (.4 | ) | $ | 34.8 | $ | (.4 | ) | $ | — | $ | — | |||||||
|
State and local government obligations |
1,544.2 | (66.7 | ) | 1,218.9 | (50.9 | ) | 325.3 | (15.8 | ) | ||||||||||||
|
Corporate debt securities |
652.4 | (34.5 | ) | 482.9 | (20.3 | ) | 169.5 | (14.2 | ) | ||||||||||||
|
Residential mortgage-backed securities |
723.3 | (62.2 | ) | 522.0 | (42.2 | ) | 201.3 | (20.0 | ) | ||||||||||||
|
Commercial mortgage-backed securities |
1,626.6 | (70.3 | ) | 1,106.7 | (35.2 | ) | 519.9 | (35.1 | ) | ||||||||||||
|
Other asset-backed securities |
127.6 | (4.1 | ) | 114.1 | (2.9 | ) | 13.5 | (1.2 | ) | ||||||||||||
|
Redeemable preferred stocks |
515.2 | (14.2 | ) | 216.5 | (14.1 | ) | 298.7 | (.1 | ) | ||||||||||||
|
Total fixed maturities |
5,224.1 | (252.4 | ) | 3,695.9 | (166.0 | ) | 1,528.2 | (86.4 | ) | ||||||||||||
|
Equity securities: |
|||||||||||||||||||||
|
Nonredeemable preferred stocks |
334.9 | (9.2 | ) | 128.9 | (5.1 | ) | 206.0 | (4.1 | ) | ||||||||||||
|
Common equities |
217.5 | (38.4 | ) | 202.7 | (36.5 | ) | 14.8 | (1.9 | ) | ||||||||||||
|
Total equity securities |
552.4 | (47.6 | ) | 331.6 | (41.6 | ) | 220.8 | (6.0 | ) | ||||||||||||
|
Total portfolio |
$ | 5,776.5 | $ | (300.0 | ) | $ | 4,027.5 | $ | (207.6 | ) | $ | 1,749.0 | $ | (92.4 | ) | ||||||