Edgar Filing: PROGRESSIVE CORP/OH/

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

Quarterly Report

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 share¹	$	—		$	—				$	—		$	—

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
Debt¹		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 principle¹		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, net²		.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 principle¹		(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
Other²		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 shareholders¹		—			(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 obligations⁴	$	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-bifurcated¹		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, 2009¹	$	6.5	$	24.2	$	30.7
Credit losses for which an OTI was previously recognized²		—		1.4		1.4
Credit losses for which an OTI was not previously recognized²		—		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 Losses¹
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)									Balance Sheet										Income Statement
	Notional Value									Fair Value									Net Realized Gains (Losses) on Securities
	June 30,					Dec. 31, 2008				June 30,						Dec. 31, 2008			Three months ended June 30,						Six months ended June 30,
Derivatives designated as:	2009			2008		Dec. 31, 2008		Purpose	Classification	2009			2008			Dec. 31, 2008			2009			2008			2009			2008
Hedging instruments
Foreign currency cash flow hedge	$	8		$	—	$	8	Forecasted transaction	Accumulated other comprehensive income	$	1.1		$	—		$	.2		$	—		$	—		$	—		$	—


Non-hedging instruments
Assets:
Interest rate swaps		—			1,275		1,800	Manage portfolio duration	Investments - fixed maturities		—			9.2			96.3			—			10.1			—			10.1

Equity options (32,190 contracts)¹		(a	)		—		—	Manage price risk	Investments - common equities		4.2			—			—			—			—			—			—

Liabilities:
Interest rate swaps		668			—		—	Manage portfolio duration	Other liabilities		(9.8	)		—			—			(8.8	)		—			(8.8	)		—

Corporate credit default swaps		32			—		25	Manage credit risk	Other liabilities		(.3	)		—			(.5	)		(1.1	)		—			(.6	)		—

Equity options (7,500 contracts)		(a	)		—		—	Manage price risk	Other liabilities		(.1	)		—			—			.3			—			.4			—

Asset-backed credit default swaps		—			140		—	General portfolio investing	Other liabilities		—			(83.8	)		—			—			(13.1	)		—			(26.2	)

Closed:
Interest rate swaps		3,518			1,550		NA	Manage portfolio duration	—		—			—			—			—			5.8			3.5			57.1

Equity options (137,500 contracts)		(a	)		—		NA	Manage price risk	—		—			—			—			(14.5	)		—			(11.0	)		—

Total		NA			NA		NA			$	(4.9	)	$	(74.6	)	$	96.0		$	(24.1	)	$	2.8		$	(16.5	)	$	41.0

(a)	Each contract is equivalent to 100 shares of common stock of the issuer.

NA = Not Applicable

¹	The realized gain (loss) for the three and six months ended June 30, 2009 is less than $.1 million.

CASH FLOW HEDGES

During the fourth quarter 2008, we entered into a cash flow hedge of forecasted foreign currency transactions. The hedge was designated as, and qualified for, cash flow hedge accounting treatment. We will defer the pretax gain or loss on this hedge and report the amount in accumulated other comprehensive income. The gain or loss on the contract will be amortized over the period during which foreign denominated expenses occur, which is expected to begin in the second half of 2009.

INTEREST RATE SWAPS

During the periods ended June 30, 2009, June 30, 2008, and December 31, 2008, we invested in interest rate swap positions primarily to manage the fixed-income portfolio duration. As of June 30, 2009, we delivered $7.6 million in cash collateral to the counterparties on our open interest rate swap positions. As of December 31, 2008, we had received $79.6 million in cash collateral from the counterparties on our then open interest rate swap positions, which was invested in short-term securities. We did not have any outstanding cash collateral at June 30, 2008.

CORPORATE CREDIT DEFAULT SWAPS

During the periods ended June 30, 2009 and December 31, 2008, we held a position on one corporate issuer within the financial services sector where we bought credit default protection in the form of credit default swaps for a 5-year time horizon. Additionally, during the second quarter 2009, we bought credit default protection in the form of credit default swaps for a 2-year time horizon on one corporate issuer within the industrial sector. We paid $.6 million in upfront cash when we entered the 2-year exposure position, which is offset against our current exposure. We hold this protection to reduce our exposure to additional valuation declines on our preferred stock due to potential credit impairment of the issuer. We held no corporate credit default swap positions during the first six months of 2008.

EQUITY OPTIONS

During the period ended June 30, 2009, we simultaneously sold and purchased a substantially equivalent amount of call and put options, respectively, on Citigroup common stock, one of our preferred stock holdings. The purpose of this transaction was to effect a forward sale of a portion of the common stock we expected to receive from Citigroup resulting from the planned conversion of our preferred stock into common stock pursuant to Citigroup’s intended exchange. This was achieved through matching the strike price and term of the option contracts and was meant to offset the downside price risk of the common stock during the time period pending the exchange. As of June 30, 2009, we delivered $5.4 million in the form of cash to a counterparty as collateral to cover potential assignments of outstanding call options.

ASSET-BACKED CREDIT DEFAULT SWAPS

We held no asset-backed credit default swap positions during the first six months of 2009. During the first six months of 2008, we held a position for which we sold credit protection in the form of a credit default swap comprised of a basket of 20 asset-backed bonds supported by sub-prime mortgage loans. We covered the credit default swap’s notional exposure by acquiring U.S. Treasury Notes of equal maturity and principal amount and reducing our overall exposure with any upfront cash received. During the fourth quarter 2008, we closed our entire asset-backed credit default swap position. As a result, we did not have any collateral deliveries related to this position outstanding at June 30, 2009 or December 31, 2008, compared to $49.6 million of delivered U.S. Treasury Notes collateral at June 30, 2008; we did not have any cash collateral outstanding at June 30, 2008.

Note 3 Fair Value — We have categorized our financial instruments, based on the degree of subjectivity inherent in the valuation technique, into a fair value hierarchy of three levels, as follows:

•

Level 1: Inputs are unadjusted, quoted prices in active markets for identical instruments at the measurement date (e.g., U.S. government obligations and active exchange-traded equity securities).

•

Level 2: Inputs (other than quoted prices included within Level 1) that are observable for the instrument either directly or indirectly (e.g., certain corporate and municipal bonds and certain preferred stocks). This includes: (i) quoted prices for similar instruments in active markets, (ii) quoted prices for identical or similar instruments in markets that are not active, (iii) inputs other than quoted prices that are observable for the instruments, and (iv) inputs that are derived principally from or corroborated by observable market data by correlation or other means.

•

Level 3: Inputs that are unobservable. Unobservable inputs reflect the reporting entity’s subjective evaluation about the assumptions market participants would use in pricing the financial instrument (e.g., certain structured securities and privately held investments).

During the second quarter 2009, we adopted the new fair value guidance (see Note 11 - New Accounting Standards for further information) that requires us to evaluate whether a market is distressed or inactive in determining the fair value for our portfolio. Based on this new guidance, we added to our review certain additional market level inputs to evaluate whether sufficient activity, volume, and new issuances existed to create an active market. Based on this evaluation, we concluded that there was sufficient activity related to the sectors and securities for which we obtained valuations.

The composition of the investment portfolio by major security type was:


	Fair Value								Cost
(millions)	Level 1		Level 2		Level 3		Total		Cost
June 30, 2009
Fixed maturities:
U.S. government obligations	$	5,227.3	$	—	$	—	$	5,227.3	$	5,362.6
State and local government obligations		—		2,403.0		—		2,403.0		2,383.7
Corporate and other debt securities		—		772.3		27.4		799.7		805.5
Asset-backed securities:
Residential mortgage-backed		—		440.3		.3		440.6		561.7
Commercial mortgage-backed obligations		—		968.2		18.2		986.4		1,060.4
Commercial mortgage-backed obligations: interest only		—		394.8		4.8		399.6		431.3
Other asset-backed		—		181.0		19.8		200.8		200.5

Total asset-backed securities		—		1,984.3		43.1		2,027.4		2,253.9

Redeemable preferred stocks:
Financials		15.2		188.7		—		203.9		277.2
Utilities		—		56.9		—		56.9		70.9
Industrials		—		168.1		49.0		217.1		300.1

Total redeemable preferred stocks		15.2		413.7		49.0		477.9		648.2

Total fixed maturities		5,242.5		5,573.3		119.5		10,935.3		11,453.9

Equity securities:
Nonredeemable preferred stocks:
Agencies		2.0		—		—		2.0		.8
Financials		455.8		506.7		—		962.5		643.3
Utilities		—		53.4		—		53.4		50.8
Industrials		—		—		112.2		112.2		115.5

Total nonredeemable preferred stocks		457.8		560.1		112.2		1,130.1		810.4

Common equities:
Common stock		395.6		—		—		395.6		286.8
Other risk investments		—		—		13.1		13.1		5.6

Total common equities		395.6		—		13.1		408.7		292.4

	$	6,095.9	$	6,133.4	$	244.8		12,474.1		12,556.7

Other short-term investments¹								1,137.2		1,137.2

Total portfolio							$	13,611.3	$	13,693.9

Debt²							$	1,859.0	$	2,176.4


	Fair Value
(millions)	Level 1		Level 2		Level 3		Total		Cost
June 30, 2008
Fixed maturities:
U.S. government obligations	$	1,640.3	$	—	$	—	$	1,640.3	$	1,636.9
State and local government obligations		—		3,162.9		—		3,162.9		3,178.4
Foreign government obligations		—		30.4		—		30.4		30.0
Corporate and other debt securities		—		915.3		30.0		945.3		971.1
Asset-backed securities:
Residential mortgage-backed		—		780.6		42.2		822.8		853.9
Commercial mortgage-backed obligations		—		1,161.3		40.7		1,202.0		1,209.6
Commercial mortgage-backed obligations: interest only		—		616.8		7.8		624.6		646.6
Other asset-backed		—		137.3		28.6		165.9		167.1

Total asset-backed securities		—		2,696.0		119.3		2,815.3		2,877.2

Redeemable preferred stocks:
Financials		18.7		238.3		—		257.0		320.5
Utilities		—		66.9		—		66.9		70.6
Industrials		—		294.8		—		294.8		321.5

Total redeemable preferred stocks		18.7		600.0		—		618.7		712.6

Total fixed maturities		1,659.0		7,404.6		149.3		9,212.9		9,406.2

Equity securities:
Nonredeemable preferred stocks:
Agencies		422.8		—		—		422.8		499.3
Financials		705.9		901.4		—		1,607.3		2,058.8
Utilities		—		65.9		—		65.9		68.2
Industrials		—		114.5		—		114.5		115.5

Total nonredeemable preferred stocks		1,128.7		1,081.8		—		2,210.5		2,741.8


Common equities:
Common stock		2,025.6		—		—		2,025.6		1,304.7
Other risk investments		—		—		13.8		13.8		6.1

Total common equities		2,025.6		—		13.8		2,039.4		1,310.8

	$	4,813.3	$	8,486.4	$	163.1		13,462.8		13,458.8

Other short-term investments¹								513.2		513.2

Total portfolio							$	13,976.0	$	13,972.0

Debt²							$	2,052.6	$	2,174.7


	Fair Value
(millions)	Level 1		Level 2		Level 3		Total		Cost
December 31, 2008
Fixed maturities:
U.S. government obligations	$	3,693.6	$	—	$	—	$	3,693.6	$	3,565.7
State and local government obligations		—		3,004.4		—		3,004.4		3,041.4
Foreign government obligations		—		16.4		—		16.4		16.2
Corporate and other debt securities		—		615.1		27.2		642.3		694.2
Asset-backed securities:
Residential mortgage-backed		—		622.7		.3		623.0		758.7
Commercial mortgage-backed obligations		—		934.9		21.8		956.7		1,160.0
Commercial mortgage-backed obligations: interest only		—		488.7		4.6		493.3		532.7
Other asset-backed		—		118.1		11.0		129.1		139.2

Total asset-backed securities		—		2,164.4		37.7		2,202.1		2,590.6

Redeemable preferred stocks:
Financials		12.1		155.7		—		167.8		166.1
Utilities		—		37.0		—		37.0		37.0
Industrials		—		138.4		44.7		183.1		184.1

Total redeemable preferred stocks		12.1		331.1		44.7		387.9		387.2

Total fixed maturities		3,705.7		6,131.4		109.6		9,946.7		10,295.3

Equity securities:
Nonredeemable preferred stocks:
Agencies		—		1.0		—		1.0		1.0
Financials		477.2		505.9		—		983.1		960.3
Utilities		—		53.6		—		53.6		54.5
Industrials		—		—		112.3		112.3		115.5

Total nonredeemable preferred stocks		477.2		560.5		112.3		1,150.0		1,131.3


Common equities:
Common stock		714.3		—		—		714.3		547.8
Other risk investments		—		—		13.5		13.5		5.8

Total common equities		714.3		—		13.5		727.8		553.6

	$	4,897.2	$	6,691.9	$	235.4		11,824.5		11,980.2

Other short-term investments¹								1,153.6		1,153.6

Total portfolio							$	12,978.1	$	13,133.8

Debt²							$	1,581.6	$	2,175.5

¹	These securities are not subject to fair value measurement since they mature within six months; therefore, we report these securities at cost, which approximates fair value.

²	Debt is not subject to measurement at fair value in the Consolidated Balance Sheets; therefore, it is not broken out by hierarchy level. Fair values are obtained from publicly quoted sources.

Our portfolio valuations classified as either Level 1 or Level 2 in the above table are priced exclusively by external sources, including: pricing vendors, dealers/market makers, and exchange-quoted prices. With limited exceptions, our Level 3 securities are also priced externally; however, due to several factors (e.g., nature of the securities, level of activity, lack of similar securities trading to obtain observable market level inputs), these valuations are more subjective in nature. Certain private equity investments and fixed-income investments included in the Level 3 securities are valued using external pricing supplemented by internal review and analysis.

At June 30, 2009, vendor quoted prices represented approximately 94% of our Level 1 classifications, compared to 74% at December 31, 2008, and 58% at June 30, 2008. The securities quoted by vendors in Level 1 represent holdings in our U.S. Treasury Notes, which are frequently traded and the quotes are considered similar to exchange trade quotes. The increase in Level 1 percentages for the periods reported above was the result of increasing our holdings in U.S. Treasury Notes as a result of our decision to reduce valuation

volatility risk in the current environment. The balance of our Level 1 pricing comes from quotes obtained directly from trades made on an active exchange. Almost 95% of our Level 2 classifications were vendor quoted at both June 30, 2009 and 2008, compared to almost 97% at December 31, 2008. We reviewed independent documentation detailing the pricing techniques, models, and methodologies used by these pricing vendors and believe that their policies adequately consider market activity, either based on specific transactions for the issue valued or based on modeling of securities with similar credit quality, duration, yield, and structure that were recently transacted. We continue to monitor any changes or modifications to their processes due to the recent market events. During 2009 and 2008, we reviewed each sector for transaction volumes and determined that sufficient activity and liquidity existed to provide a source for market level valuations, despite being below historical averages.

At June 30, 2009 and 2008, broker quoted prices represented the remaining 5% of the Level 2 classification, compared to 3% at December 31, 2008. In these instances, we typically use broker/dealers because the security we hold is not widely held or frequently traded and thus is not serviced by the pricing vendors. We reviewed independent documentation detailing the pricing techniques, models, and methodologies used by broker/dealers and determined that they used the same pricing techniques as the external vendor pricing sources discussed above. The broker/dealers contain back office pricing desks, separate from the day-to-day traders that buy and sell the securities. This process creates uniformity in pricing when they quote externally to their various customers. The broker/dealer valuations are quoted in terms of spreads to various indices and the spreads are based off recent transactions adjusted for movements since the last trade or based off similar characteristic securities currently trading in the market. These quotes are not considered binding offers to transact. From time to time, we will obtain more than one broker quote for a security, when we feel it is necessary. In addition, from time to time, we will receive a broker/dealer quote for those securities priced by vendors as further evaluation of market price. We believe this additional step helps to ensure that we are reporting the most representative price and validates our pricing methodology.

To the extent the inputs used by external pricers are determined to not contain sufficient observable market information, we will reclassify the affected security valuations to Level 3. At June 30, 2009 and 2008, as well as December 31, 2008, securities in our fixed-maturity portfolio listed as Level 3 were comprised substantially of securities that were either (1) private placement deals, (2) thinly held and/or traded securities, or (3) lower rated non-investment-grade securities, where little liquidity exists. Based on these factors, it was difficult to independently verify observable market inputs that were used to generate the external valuations we received. At June 30, 2009 and December 31, 2008, our nonredeemable preferred stocks listed as Level 3 represented three issues of a single issuer for which, based on illiquidity in the general preferred stock market and the lack of recent trading activity on these specific issues, we concluded the valuation warranted this lower classification. There were no preferred stocks listed as Level 3 at June 30, 2008. Lastly, at June 30, 2009 and 2008, as well as December 31, 2008, one private common equity security with an aggregate value of $10.2 million was priced internally.

During each valuation period, we create internal estimations of portfolio valuation (performance returns), based on current market-related activity (i.e., interest rate and credit spread movements and other credit-related factors) within each major sector of our portfolio. We compare our internally generated portfolio results with those generated based on quotes we received externally and research material valuation differences.

Based on the criteria described above, we believe that the current level classifications are appropriate based on the valuation techniques used and that our fair values accurately reflect current market assumptions in the aggregate.

The following tables provide a summary of changes in fair value associated with Level 3 assets for the three months and six months ended June 30, 2009:


	Level 3 Fair Value
	Six months ended June 30, 2009
			Calls/
	Fair value at		Maturities/					Change in			Transfers			Fair value at
(millions)	December 31, 2008		Paydowns			Purchases		Valuation			in (out)¹			June 30, 2009
Fixed maturities:
Corporate debt securities	$	27.2	$	—		$	—	$	.2		$	—		$	27.4
Asset-backed securities
Residential mortgage-backed		.3		—			—		—			—			.3
Commercial mortgage-backed		21.8		(.1	)		—		(2.0	)		(1.5	)		18.2
Commercial mortgage-backed: interest-only		4.6		(.5	)		—		.7			—			4.8
Other asset-backed		11.0		(1.6	)		11.0		(0.6	)		—			19.8

Total asset-backed securities		37.7		(2.2	)		11.0		(1.9	)		(1.5	)		43.1

Redeemable preferred stocks
Industrials		44.7		—			—		4.3			—			49.0

Total redeemable preferred stocks		44.7		—			—		4.3			—			49.0

Total fixed maturities		109.6		(2.2	)		11.0		2.6			(1.5	)		119.5
Nonredeemable preferred stocks
Industrials		112.3		—			—		(.1	)		—			112.2

Total nonredeemable preferred stocks		112.3		—			—		(.1	)		—			112.2

Common equities
Other risk investments		13.5		(.1	)		—		(.3	)		—			13.1

Total common equities		13.5		(.1	)		—		(.3	)		—			13.1

Total level 3 securities	$	235.4	$	(2.3	)	$	11.0	$	2.2		$	(1.5	)	$	244.8


	Level 3 Fair Value
	Three months ended June 30, 2009
			Calls/
	Fair value at		Maturities/					Change in			Transfers			Fair value at
(millions)	March 31, 2009		Paydowns			Purchases		Valuation			in (out)¹			June 30, 2009
Fixed maturities:
Corporate debt securities	$	25.5	$	—		$	—	$	1.9		$	—		$	27.4
Asset-backed securities
Residential mortgage-backed		.3		—			—		—			—			.3
Commercial mortgage-backed		18.1		—			—		.1			—			18.2
Commercial mortgage-backed: interest-only		4.2		(.3	)		—		.9			—			4.8
Other asset-backed		9.2		(.7	)		11.0		.3			—			19.8

Total asset-backed securities		31.8		(1.0	)		11.0		1.3			—			43.1

Redeemable preferred stocks
Industrials		42.9		—			—		6.1			—			49.0

Total redeemable preferred stocks		42.9		—			—		6.1			—			49.0

Total fixed maturities		100.2		(1.0	)		11.0		9.3			—			119.5
Nonredeemable preferred stocks
Industrials		112.2		—			—		—			—			112.2

Total nonredeemable preferred stocks		112.2		—			—		—			—			112.2

Common equities
Other risk investments		13.5		(.1	)		—		(.3	)		—			13.1

Total common equities		13.5		(.1	)		—		(.3	)		—			13.1

Total level 3 securities	$	225.9	$	(1.1	)	$	11.0	$	9.0		$	—		$	244.8

¹	Represents movement between the fair value hierarchy levels during 2009, reflecting changes in the inputs used to measure fair value during the period.

There were no sales, or realized gains (losses) associated with the Level 3 securities during the three months and six months ended June 30, 2009.

Note 4 Debt — Debt consisted of:


	June 30, 2009				June 30, 2008				December 31, 2008
	Carrying		Fair		Carrying		Fair		Carrying		Fair
(millions)	Value		Value		Value		Value		Value		Value
6.375% Senior Notes due 2012	$	349.0	$	351.8	$	348.7	$	362.2	$	348.9	$	355.3
7% Notes due 2013		149.4		161.2		149.3		159.1		149.3		154.3
6 5/8% Senior Notes due 2029		294.7		279.3		294.5		293.6		294.6		272.0
6.25% Senior Notes due 2032		394.1		361.7		394.0		377.0		394.0		350.0
6.70% Fixed-to-Floating Rate Junior Subordinated Debentures due 2067		989.2		705.0		988.2		860.7		988.7		450.0

Total	$	2,176.4	$	1,859.0	$	2,174.7	$	2,052.6	$	2,175.5	$	1,581.6

On December 31, 2008, we entered into a 364-Day Secured Liquidity Credit Facility Agreement with National City Bank (NCB). Under this agreement, we may borrow up to $125 million, which may be increased to $150 million at our request but subject to NCB’s discretion. In conjunction with this agreement, we deposited $125 million into an FDIC-insured deposit account at NCB in January 2009 to provide us with additional cash availability in the event of a disruption to our cash management operations. Our access to these funds is unrestricted. However, if we withdraw funds from this account for any reason other than in connection with such a disruption in our cash management operations, the availability of borrowings under the NCB credit facility will be reduced on a dollar-for-dollar basis until such time as we replenish the funds to the deposit account. The credit facility will expire on December 31, 2009, unless earlier terminated according to its terms. We had no borrowings under this arrangement in 2008 or through the first six months of 2009.

Note 5 Income Taxes — At June 30, 2009, our current estimate of the valuation allowance on our deferred tax asset was $18.0 million, which reflects our potential inability to realize the full amount of the deferred tax asset related to our unrealized losses on securities that were either determined to be fundamentally impaired or that we may not hold until recovery. During the second quarter 2009, we reversed $17.0 million of the valuation allowance that was originally established in the first quarter 2009 ($8.0 million was previously reported as a component of “net unrealized gains (losses) on securities” and $9.0 million was included in our “provision for income taxes”), reflecting the improved market conditions during the period. At December 31, 2008, management believed that it was more likely than not that the deferred tax asset would be realized and that we would be able to fully use the deductions that are ultimately recognized for tax purposes. We will continue to evaluate our deferred tax assets to determine if any changes to the valuation allowance are necessary.

The effective tax rate for the six months ended June 30, 2009 was 34%, compared with 29% for the same period last year, primarily reflecting the $18.0 million valuation allowance discussed above.

There have been no material changes in our uncertain tax positions during the quarter ended June 30, 2009.

Note 6 Supplemental Cash Flow Information — Cash includes only bank demand deposits, including $125 million on deposit with National City Bank (see Note 4 – Debt for additional discussion). We paid income taxes of $271.0 million and $118.0 million during the six months ended June 30, 2009 and 2008, respectively. Total interest paid was $72.3 million for both the six months ended June 30, 2009 and 2008, respectively. Non-cash activity includes changes in net unrealized gains (losses) on investment securities.

Note 7 Segment Information — Our Personal Lines segment writes insurance for private passenger automobiles and recreational vehicles. Our Commercial Auto segment writes primary liability and physical damage insurance for automobiles and trucks owned by small businesses in the specialty truck and business auto markets. Our other indemnity businesses primarily include writing professional liability insurance for community banks and managing a small amount of run-off business. Our service businesses include providing insurance-related services, primarily policy issuance and claims adjusting services, for Commercial Auto Insurance Procedures/Plans (CAIP), which are state-supervised plans serving the involuntary market. All revenues are generated from external customers.

Following are the operating results for the respective periods:


	Three Months Ended June 30,										Six Months Ended June 30,
	2009					2008					2009					2008
			Pretax					Pretax					Pretax					Pretax
			Profit					Profit					Profit					Profit
(millions)	Revenues		(Loss)			Revenues		(Loss)			Revenues		(Loss)			Revenues		(Loss)
Personal Lines
Agency	$	1,826.5	$	127.0		$	1,848.0	$	93.5		$	3,643.8	$	309.8		$	3,694.0	$	208.0
Direct		1,205.6		86.0			1,113.1		92.0			2,376.7		184.7			2,207.1		133.9

Total Personal Lines¹		3,032.1		213.0			2,961.1		185.5			6,020.5		494.5			5,901.1		341.9
Commercial Auto		403.3		38.7			445.3		33.9			815.6		112.5			890.0		59.8
Other indemnity		6.0		2.1			4.8		.3			11.9		2.8			10.1		.2

Total underwriting operations		3,441.4		253.8			3,411.2		219.7			6,848.0		609.8			6,801.2		401.9
Service businesses		4.1		(.6	)		4.2		(1.2	)		7.6		(1.7	)		8.6		(1.9	)
Investments²		138.0		135.4			121.2		118.3			196.1		190.9			312.7		308.3
Interest expense		—		(34.7	)		—		(34.3	)		—		(68.4	)		—		(68.6	)

Consolidated total	$	3,583.5	$	353.9		$	3,536.6	$	302.5		$	7,051.7	$	730.6		$	7,122.5	$	639.7

¹	Private passenger automobile insurance accounted for 90% of the total Personal Lines segment net premiums earned in all periods; insurance for recreational vehicles (special lines products) accounted for the balance of the Personal Lines net premiums earned.

²	Revenues represent recurring investment income and total net realized gains (losses) on securities; pretax profit is net of investment expenses.

Progressive’s management uses underwriting margin and combined ratio as primary measures of underwriting profitability. The underwriting margin is the pretax underwriting profit (loss) expressed as a percentage of net premiums earned (i.e., revenues from insurance operations). Combined ratio is the complement of the underwriting margin. Following are the underwriting margins/combined ratios for our underwriting operations:


	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
	Under-			Under-			Under-			Under-
	writing		Combined	writing		Combined	writing		Combined	writing		Combined
	Margin		Ratio	Margin		Ratio	Margin		Ratio	Margin		Ratio
Personal Lines
Agency	7.0	%	93.0	5.1	%	94.9	8.5	%	91.5	5.6	%	94.4
Direct	7.1		92.9	8.3		91.7	7.8		92.2	6.1		93.9
Total Personal Lines	7.0		93.0	6.3		93.7	8.2		91.8	5.8		94.2
Commercial Auto	9.6		90.4	7.6		92.4	13.8		86.2	6.7		93.3
Other indemnity¹	NM		NM	NM		NM	NM		NM	NM		NM
Total underwriting operations	7.4		92.6	6.4		93.6	8.9		91.1	5.9		94.1

¹	Underwriting margins/combined ratios are not meaningful (NM) for our other indemnity businesses due to the low level of premiums earned by, and the variability of loss costs in, such businesses.

Note 8 Comprehensive Income — Total comprehensive income was:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
(millions)	2009			2008			2009			2008
Net income	$	250.1		$	215.5		$	482.6		$	454.9
After-tax changes in (excluding cumulative effect adjustment):
Net unrealized gains (losses) on securities		386.5			120.3			235.5			(449.6	)
Portion of OTI losses recognized in other comprehensive income		(15.5	)		—			(15.5	)		—

Total net unrealized gains (losses) on securities		371.0			(120.3	)		220.0			(449.6	)
Net unrealized gains on forecasted transactions		(.2	)		(.8	)		(1.0	)		(1.5	)

Comprehensive income	$	620.9		$	94.4		$	701.6		$	3.8

Note 9 Dividends — Progressive maintains a policy of paying an annual variable dividend that, if declared, would be payable shortly after the close of each year. This annual variable dividend is based on a target percentage of after-tax underwriting income multiplied by a companywide performance factor (“Gainshare factor”), subject to the limitations discussed below. The target percentage is determined by our Board of Directors on an annual basis and announced to shareholders and the public. For 2009, the Board determined the target percentage to be 20% of annual after-tax underwriting income.

The Gainshare factor can range from zero to two and is determined by comparing our operating performance for the year to certain predetermined profitability and growth objectives approved by the Board. This dividend program is consistent with the variable cash incentive program currently in place for our employees (referred to as our “Gainsharing program”). Although recalibrated every year, the structure of the Gainsharing program generally remains the same. Through the second quarter 2009, the Gainshare factor was .71. Since the final factor will be determined based on our results for the full year, the final factor may vary significantly from the factor of any interim period.

Our annual variable dividend program is subject to certain limitations. If the Gainshare factor is zero or our after-tax comprehensive income (see Note 8 - Comprehensive Income above) is less than after-tax underwriting income, no dividend will be paid. While the declaration of the dividend remains within the Board’s discretion and subject to the above limitations, the Board is expected to declare the 2009 annual dividend in December 2009 with a record date in January 2010 and payment shortly thereafter.

In January 2008, Progressive paid $98.3 million, or $.145 per common share, pursuant to a December 2007 declaration by the Board of Directors under our annual variable dividend policy. However, no dividend was declared for 2008, since we generated a comprehensive loss for the year. For the six months ended June 30, 2009, our after-tax comprehensive income was $701.6 million, which is higher than the $396.4 million of after-tax underwriting income for the same period.

Note 10 Litigation — The Progressive Corporation and/or its insurance subsidiaries are named as defendants in various lawsuits arising out of claims made under insurance policies issued by our subsidiaries in the ordinary course of their businesses. All legal actions relating to such insurance claims are considered by us in establishing our loss and loss adjustment expense reserves.

In addition, various Progressive entities are named as defendants in various class action or individual lawsuits arising out of the operations of our insurance subsidiaries. These cases include those alleging damages as a result of our use of consumer reports (such as credit reports) in underwriting and related notice requirements under the federal Fair Credit Reporting Act; practices in evaluating or paying medical or injury claims or benefits, including, but not limited to, personal injury protection, medical payments, uninsured motorist/underinsured motorist (UM/UIM) coverage, and bodily injury benefits; rating practices at policy renewal; the utilization, content, or appearance of UM/UIM rejection forms; the practice of taking betterment on boat repairs; labor rates paid to auto body repair shops; and cases challenging other aspects of our claims or marketing practices or other business operations. Other insurance companies face many of these same issues.

We plan to contest the outstanding suits vigorously, but may pursue settlement negotiations in some cases, if appropriate. In accordance with accounting principles generally accepted in the United States of America (GAAP), we establish loss reserves for a lawsuit when it is probable that a loss has been incurred and we can reasonably estimate its potential exposure. Pursuant to GAAP, we have not established reserves for those lawsuits where the loss is not probable and/or we are currently unable to estimate our potential exposure. If any one or more of these lawsuits results in a judgment against, or settlement by, our insurance subsidiaries for an amount that is significantly greater than the amount, if any, so reserved, the resulting liability could have a material effect on our financial condition, cash flows, and results of operations.

For a further discussion on our pending litigation, see “Item 3-Legal Proceedings” in our Annual Report on Form 10-K for the year ended December 31, 2008.

Note 11 New Accounting Standards — For the second quarter 2009, we adopted the three FASB Staff Positions (FSPs) finalized in April 2009. FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions that Are Not Orderly,” provides additional guidance on estimating fair value when the volume and level of activity for an asset or liability have significantly decreased in relation to normal market activity for the asset or liability and clarifies that the use of multiple valuation techniques may be appropriate. In addition, the FSP re-emphasized that fair value continues to be the exit price in an orderly market. The adoption of this FSP did not have an impact on our financial condition or results of operations, but will increase our quarterly and annual disclosures.

FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” requires companies to disclose the fair value of its financial instruments in its interim reports. Since we have always disclosed the fair value of financial instruments in our quarterly reports, the adoption of this FSP had no impact on us.

FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” provides guidance in determining whether impairments in debt securities are other-than-temporary and requires additional disclosures relating to other-than-temporary impairments (OTI) and unrealized losses on investments in both quarterly and annual reports. Upon adoption of this FSP, we recorded a cumulative effect of change in accounting principle that resulted in a reclassification from retained earnings to accumulated other comprehensive income (loss) of $189.6 million (or $291.8 million on a pretax basis) for the non-credit portion of the OTI losses previously recognized in retained earnings, as of April 1, 2009. This reclassification had no effect on total shareholders’ equity.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

I. OVERVIEW

In the second quarter 2009, we achieved growth in both premiums and policies in force, and reported net income of $250.1 million, or $.37 per share, compared to $215.5 million, or $.32 per share, for the same period last year. During the quarter, The Progressive Corporation’s insurance subsidiaries generated underwriting profitability of 7.4%, or $253.8 million on a pretax basis. Our investment operations experienced pretax net investment income of $135.4 million, after $30.0 million of write-downs of securities determined to be other-than-temporarily impaired. These write-downs primarily related to the decline in value due to credit losses on certain of our structured debt securities.

A. Operations

During the second quarter 2009, we realized a year-over-year increase of 1% in net premiums written, led by solid increases in our Direct auto business and despite the continued decline in our Commercial Auto business. Net premiums earned were also up 1% for the quarter, compared to last year. Companywide policies in force increased 3% over the second quarter last year. Policies in force grew 12% in our Direct auto business and 4% in our special lines products. On the other hand, our Agency auto and Commercial Auto businesses experienced decreases in policies in force of 1% and 5%, respectively.

Premium growth reflects a combination of new business applications (i.e., issued policies), premium per policy (i.e., rates), and customer retention. On a quarter-over-prior-year-quarter basis, companywide new business applications were flat, while renewal applications increased 4%. Our Direct auto business experienced double-digit increases in both new and renewal applications, compared to the second quarter last year. The new business acquisition in our Agency auto business was up slightly for the quarter, while renewal business was down slightly. Our Commercial Auto business continues to be a challenge, as it is still being adversely affected by the downturn in the economy, primarily in the housing and construction sectors.

We have several initiatives underway aimed at providing consumers with distinctive new auto insurance options, including Name Your Price^® (a program that provides Direct Internet consumers the opportunity to submit the price they would like to pay for auto insurance), a new product in our Agency auto business which is designed to help improve competitiveness through further price segmentation, and the expansion of MyRate^sm (our usage-based insurance product).

On a quarter-over-prior-year-quarter basis, for the second quarter 2009, our total auto written premium per policy decreased 1.5% despite a slight increase in filed rates, reflecting shifts in the mix of business. We have seen average written premium per policy remain relatively flat for our Agency auto and special lines products, while premiums per policy are down in both Direct auto and Commercial Auto. We continue to evaluate future rate needs and intend to react quickly as we recognize changing trends.

To continue to grow policies in force, it is critical that we retain our customers for longer periods, which is why increasing retention continues to be one of our most important priorities. Policy life expectancy, which is our actuarial estimate of the average length of time that a policy will remain in force before cancellation or lapse in coverage, is one measure of customer retention. The policy life expectancy for our Agency and Direct auto businesses has been on a continuing upward trend over the past few quarters and are now about 4% and 7%, respectively, higher than at the end of the second quarter last year. Our special lines products retention was down 1%, while Commercial Auto’s retention was down about 2%, compared to the same period last year.

Our 7.4% companywide underwriting profit margin for the second quarter 2009 exceeded our target of 4% and was a 1.0 point improvement over the second quarter last year. All businesses performed better than their profitability targets. As we entered the warmer weather months, our special lines products experienced higher losses than in the first quarter 2009. During the second quarter 2009, we experienced 1.0 point of unfavorable prior accident year development, compared to 0.2 points in the second quarter last year. The 2009 development was primarily in our personal auto business. During the second quarter 2009, as compared to the second quarter last year, our personal auto paid severity decreased about 1%. Our incurred accident frequency on a calendar year basis increased approximately 4% on a quarter-over-prior-year-quarter basis, primarily reflecting increases in our bodily injury and personal injury protection coverages; on a year-to-date basis, our frequency was relatively unchanged from last year.

B. Investments and Capital Management

The fair value of our investment portfolio was $13.6 billion at June 30, 2009. At the end of the second quarter 2009, our asset allocation strategy was to maintain 0-25% of our portfolio in Group I securities (i.e., common equities, redeemable and nonredeemable preferred stocks (preferred stocks), and non-investment-grade and non-rated fixed-maturity securities) with the balance (75%-100%) of our portfolio in Group II securities (i.e., all other fixed-income securities, including U.S. Treasury Notes, municipal bonds, asset-backed securities, corporate debt, and short-term investments). At June 30, 2009, our portfolio was allocated 17% to Group I and 83% to Group II.

Our investment portfolio produced a fully taxable equivalent (FTE) total return of +5.5% for the second quarter 2009, with both common stocks (+16.6%) and fixed-income securities (+5.2%) contributing to the total. At June 30, 2009, the fixed-income portfolio duration was 2.7 years with a weighted average credit quality of AA.

For the second quarter 2009, we adopted the three FASB Staff Positions (FSPs) finalized in April 2009. FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions that Are Not Orderly,” provides additional guidance on estimating fair value when the volume and level of activity for an asset or liability have significantly decreased in relation to normal market activity for the asset or liability and clarifies that the use of multiple valuation techniques may be appropriate. In addition, the FSP re-emphasized that fair value continues to be the exit price in an orderly market. The adoption of this FSP did not have an impact on our portfolio valuation, financial condition or results of operations, but will increase our quarterly and annual disclosures to show greater detail of our financial instruments (see Note 3 - Fair Value).

During the second quarter 2009, in accordance with FSP FAS 115-2 and FAS 124-2, we recorded $30.0 million of other-than-temporary impairment losses on our investment portfolio. The write-downs were primarily in our structured debt portfolio and reflected the portion of the impairment loss that was attributable to credit-related factors. The balance of the decline in fair value (i.e., the non-credit portion of the impairment loss) was reflected in accumulated other comprehensive income (loss).

As a result of the improved market conditions during the second quarter 2009, we revised our estimate of the valuation allowance on our deferred tax asset to $18.0 million by reversing $8.0 million out of “net unrealized gains (losses) on securities” and $9.0 million from our “provision for income taxes.” Our current valuation allowance reflects our potential inability to realize the full amount of the deferred tax asset related to our unrealized losses on securities that were either determined to be fundamentally impaired or that we may not hold until recovery.

Our overall capital position (debt and equity) increased $622.2 million during the quarter to $7.1 billion at June 30, 2009. The increase reflects our strong underwriting and investment results due to improved market conditions during the second quarter 2009. We continue to manage our investing and financing activities in order to maintain sufficient capital to support all the insurance we can profitably underwrite and service.

II. FINANCIAL CONDITION

A. Liquidity and Capital Resources

Progressive’s insurance operations create liquidity by collecting and investing premiums from new and renewal business in advance of paying claims. For the six months ended June 30, 2009 and 2008, operations generated a positive cash flow of $928.1 million and $939.7 million, respectively. During the second quarter 2009, we repurchased just over 1.0 million of our common shares at a total cost of $15.0 million (average cost of $14.83 per share). Year-to-date, we have repurchased 1.3 million common shares at a total cost of $20.0 million (average cost of $14.77 per share).

In June 2009, our Board of Directors approved a new authorization for the Company to repurchase up to 50 million of our common shares, beginning on July 1, 2009. This authorization replaced a 2007 Board authorization that expired on June 30, 2009. There is no expiration date for this new authorization. From time to time, we may also elect to repurchase our outstanding debt securities in the open market or in privately negotiated transactions, when management believes that such securities are attractively priced and capital is available for such purposes; we did not make any such debt repurchases during the second quarter 2009.

We also have the ability to borrow up to $125 million under a 364-Day Secured Liquidity Credit Facility with National City Bank (NCB). We entered into this agreement at the end of 2008 to provide liquidity in the event of a disruption in our cash management operations that could affect our ability to transfer or receive funds. We did not borrow under this agreement in the first six months of 2009. In addition, we deposited $125 million into an FDIC-insured deposit account at NCB during the first quarter 2009 to provide us with additional cash availability in the event of such a disruption to our cash management operations.

Based upon our capital planning and forecasting efforts, we believe that we have sufficient capital resources, cash flows from operations, and borrowing capacity to support our current and anticipated business, scheduled principal and interest payments on our debt, and expected capital requirements. The covenants on our existing debt securities do not include any rating or credit triggers that would require an adjustment of the interest rate or an acceleration of principal payments in the event our securities are downgraded.

Management views our capital position as consisting of three layers, each with a specific size and purpose. The first layer of capital, which we refer to as “regulatory capital,” is the amount of capital we need to satisfy state insurance regulatory requirements and support our objective of writing all the business we can write and service, consistent with our underwriting discipline of achieving a 96 combined ratio. This capital is held largely within our various insurance entities.

The second layer of capital we call “extreme contingency.” While our regulatory capital is, by definition, a cushion for absorbing financial consequences of adverse events, such as loss reserve development, litigation, weather catastrophes, or investment market corrections, we view that as a base and hold additional capital for even more extreme conditions. The modeling used to quantify capital needs for these conditions is quite extensive, including tens of thousands of simulations, representing our best estimates of such contingencies based on historical experience. This capital is held either at the holding company or in our insurance entities, where it is potentially eligible for a dividend up to the holding company.

The third layer of capital is capital in excess of the sum of the first two layers and provides maximum flexibility to repurchase stock, consider acquisitions, and pay dividends to shareholders, among other purposes. This capital is largely held at the holding company.

At all times during 2008 and the first six months of 2009, our total capital exceeded the sum of our regulatory capital layer plus our self-constructed extreme contingency load. At June 30, 2009, we held total capital, debt plus equity, of $7.1 billion at book value.

The speed by which the market valuations of the assets held in our portfolio changed, and may continue to change, has our full attention and is a basis for our ongoing review of portfolio risk. To help manage these risks and preserve our capital base, as of June 30, 2009, we held approximately $6.4 billion in short-term investments and U.S. Treasury securities.

B. Commitments and Contingencies

During the first six months of 2009, we completed construction of one new service center to provide concierge level claims service; this project was funded through operating cash flows and replaced a previously leased location. We currently have a total of 54 such centers that are located in 41 metropolitan areas across the United States and serve as our primary approach to damage assessment and coordination of vehicle repairs at authorized auto repair facilities in these markets.

There is currently no significant construction under way.

Off-Balance-Sheet Arrangements

Our off-balance-sheet leverage includes derivative positions, open investment funding commitments, and operating leases and purchase obligations. See the “Derivative Instruments” section of Note 2 - Investments and of this Management’s Discussion and Analysis for a summary of our derivative activity since year-end 2008. There have been no material changes in the other off-balance-sheet items since the discussion in the notes to the financial statements in Progressive’s Annual Report on Form 10-K for the year ended December 31, 2008.

Contractual Obligations

During the second quarter 2009, our contractual obligations have not changed materially from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2008.

III. RESULTS OF OPERATIONS – UNDERWRITING

A. Growth


	Three Months Ended June 30,						Six Months Ended June 30,
(millions)	2009		2008		% Change		2009		2008		% Change
NET PREMIUMS WRITTEN
Personal Lines
Agency	$	1,887.7	$	1,908.3	(1	)	$	3,734.5	$	3,777.1	(1	)
Direct		1,217.7		1,118.3	9			2,482.7		2,278.3	9

Total Personal Lines		3,105.4		3,026.6	3			6,217.2		6,055.4	3
Commercial Auto		417.2		479.4	(13	)		823.4		936.6	(12	)
Other indemnity		6.0		4.7	28			10.9		9.1	20

Total underwriting operations	$	3,528.6	$	3,510.7	1		$	7,051.5	$	7,001.1	1


NET PREMIUMS EARNED
Personal Lines
Agency	$	1,826.5	$	1,848.0	(1	)	$	3,643.8	$	3,694.0	(1	)
Direct		1,205.6		1,113.1	8			2,376.7		2,207.1	8

Total Personal Lines		3,032.1		2,961.1	2			6,020.5		5,901.1	2
Commercial Auto		403.3		445.3	(9	)		815.6		890.0	(8	)
Other indemnity		6.0		4.8	25			11.9		10.1	18

Total underwriting operations	$	3,441.4	$	3,411.2	1		$	6,848.0	$	6,801.2	1

Net premiums written represent the premiums generated from policies written during the period less any premiums ceded to reinsurers. Net premiums earned, which are a function of the premiums written in the current and prior periods, are earned as revenue over the life of the policy using a daily earnings convention.

Policies in force, our preferred measure of growth, represents all policies under which coverage is in effect as of the end of the period specified. As of June 30, our policies in force were:


(thousands)	2009	2008	% Change
POLICIES IN FORCE
Personal Lines:
Agency auto	4,345.9	4,411.2	(1	)
Direct auto	3,040.9	2,716.7	12

Total auto	7,386.8	7,127.9	4
Special lines¹	3,470.8	3,328.7	4

Total Personal Lines	10,857.6	10,456.6	4

Commercial Auto	531.3	556.8	(5	)

¹	Includes insurance for motorcycles, recreational vehicles (RV), mobile homes, watercraft, snowmobiles, and similar items, as well as a personal umbrella product.

To analyze growth, we review growth in new policies, rate levels, and the retention characteristics of our books of business. During the second quarter and year-to-date period, we experienced the following growth in new and renewal applications:


	Growth Over Prior Year
	Quarter				Year-to-date
	2009		2008		2009		2008
Personal Lines:
New applications	—	%	(5	)%	2	%	(6	)%
Renewal applications	4	%	5	%	4	%	4	%
Commercial Auto:
New applications	(15	)%	(6	)%	(15	)%	(4	)%
Renewal applications	—	%	6	%	2	%	4	%

During the second quarter 2009, new applications for our Personal Lines business remained relatively flat, compared to the second quarter last year, with growth in our personal auto business applications being offset by significant declines in our special lines products; on a year-to-date basis, total Personal Lines new applications increased slightly. Our Direct auto business continued to see double-digit increases in new applications, while Agency auto experienced a small increase in the second quarter, while still down slightly on a year-to-date basis. The significant decline in year-over-year motorcycle and scooter sales, reflecting lower gas prices in 2009 as compared to 2008, contributed to the large decrease in our new applications in our special lines products.

We have several initiatives underway aimed at providing consumers with distinctive new auto insurance options. During 2008, we introduced a program called Name Your Price^® that allows Direct Internet consumers to submit a price they would like to pay for their auto insurance; we then will tell them the level of coverage that price provides. As of the end of the second quarter 2009, Name Your Price is available in 30 states, including six states that rolled-out during the second quarter. We plan to expand this program to the rest of the country during the remainder of 2009 and first quarter 2010.

We also continued the rollout of a new product model in our Agency auto business to nine additional states during the second quarter 2009, bringing the total number of states to 27 at quarter end. This product model is designed to help improve competitiveness through further price segmentation; we plan to increase the number of states offering this product to about 35 by year end. Even as we continue this rollout, we have already begun shifting our focus to an even newer product model, which further refines our segmentation and integrates the best of the Agency and Direct auto products; this latest product model has been elevated in one state.

In addition, during the second quarter 2009, we expanded MyRate^sm, our usage-based insurance product into six additional states. This product is now available to auto customers in a total of 15 states, which includes 7 states that offer the product in both our Direct and Agency channels, 5 states that offer to Direct customers only, and 3 states that offer to Agency customers only. During the remainder of 2009, we plan to continue expansion of MyRate into additional states depending on regulatory approval and business results.

We are also continuing with our efforts to further penetrate customer households through cross-selling products. Progressive Home Advantage, where we “bundle” our auto product with homeowners insurance provided by an unaffiliated insurance carrier, is becoming an integral part of our consumer offerings. During the second half of 2009, we expect to add two additional homeowner carriers to continue to promote this program. In addition, we are focused on selling auto policies to our special lines customers and vice versa. These multi-product customers are an important part of our strategic agenda since they tend to stay with us longer and have better loss experience.

During both the second quarter and first six months of 2009, total personal auto written premium per policy decreased about 1%, despite a slight increase in rates in 2009, primarily reflecting shifts in the mix of business. On a year-over-year basis for both the three and six month periods ended June 30, 2009, our Agency auto business experienced a 2% increase in premium per policy on new business and was relatively flat on renewal business, while our Direct auto premium per policy was down about 8% on new business and about 3% on renewals. The decrease in our Direct auto premium per policy primarily reflects mix shifts (e.g., age of drivers, existence of prior insurance, and driving records). We believe our pricing levels are aligned with our profitability targets, but we remain ready to react quickly, and as often as necessary, should trends change.

Another important element affecting growth is customer retention. One measure of retention is policy life expectancy, which is our actuarial estimate of the average length of time that a policy will remain in force before cancellation or lapse in coverage. Our policy life expectancy measures for our Agency and Direct private passenger auto products are now higher than the same measures a year ago by approximately 4% and 7%, respectively. Our policy life expectancy in our Commercial Auto business was down 2%, compared to the end of the second quarter 2008. Realizing the importance that retention has on our ability to continue to grow profitably, we continue to emphasize competitive pricing, quality service, and other retention initiatives for our current customers.

B. Profitability

Profitability in our underwriting operations is defined by pretax underwriting profit, which is calculated as net premiums earned less losses and loss adjustment expenses, policy acquisition costs, and other underwriting expenses. We also use underwriting profit margin, which is underwriting profit expressed as a percentage of net premiums earned, to analyze our results. For the respective periods our underwriting profitability measures were as follows:


	Three Months Ended June 30,								Six Months Ended June 30,
	2009				2008				2009				2008
	Underwriting Profit (Loss)				Underwriting Profit (Loss)				Underwriting Profit (Loss)				Underwriting Profit (Loss)
(millions)	$		Margin		$		Margin		$		Margin		$		Margin
Personal Lines
Agency	$	127.0	7.0	%	$	93.5	5.1	%	$	309.8	8.5	%	$	208.0	5.6	%
Direct		86.0	7.1			92.0	8.3			184.7	7.8			133.9	6.1

Total Personal Lines		213.0	7.0			185.5	6.3			494.5	8.2			341.9	5.8
Commercial Auto		38.7	9.6			33.9	7.6			112.5	13.8			59.8	6.7
Other indemnity¹		2.1	NM			.3	NM			2.8	NM			.2	NM

Total underwriting operations	$	253.8	7.4	%	$	219.7	6.4	%	$	609.8	8.9	%	$	401.9	5.9	%

¹	Underwriting margins for our other indemnity businesses are not meaningful (NM) due to the low level of premiums earned by, and the variability of loss costs in, such businesses.

On a year-over-year basis, our strong underwriting profitability for both the second quarter and first six months of 2009 primarily reflects modest severity trends, favorable frequency levels, and lower catastrophic losses incurred in 2009.

Further underwriting results for our Personal Lines business, including its channel components, the Commercial Auto business and other indemnity businesses, were as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
Underwriting Performance¹	2009	2008	Change		2009	2008	Change
Personal Lines - Agency
Loss & loss adjustment expense ratio	71.8	73.5	(1.7	) pts.	70.4	73.0	(2.6	) pts.
Underwriting expense ratio	21.2	21.4	(.2	) pts.	21.1	21.4	(.3	) pts.

Combined ratio	93.0	94.9	(1.9	) pts.	91.5	94.4	(2.9	) pts.

Personal Lines - Direct
Loss & loss adjustment expense ratio	72.1	71.5	.6	pts.	71.5	73.1	(1.6	) pts.
Underwriting expense ratio	20.8	20.2	.6	pts.	20.7	20.8	(.1	) pts.

Combined ratio	92.9	91.7	1.2	pts.	92.2	93.9	(1.7	) pts.

Total Personal Lines
Loss & loss adjustment expense ratio	72.0	72.7	(.7	) pts.	70.9	73.0	(2.1	) pts.
Underwriting expense ratio	21.0	21.0	—	pts.	20.9	21.2	(.3	) pts.

Combined ratio	93.0	93.7	(.7	) pts.	91.8	94.2	(2.4	) pts.

Commercial Auto
Loss & loss adjustment expense ratio	69.3	70.8	(1.5	) pts.	65.0	72.0	(7.0	) pts.
Underwriting expense ratio	21.1	21.6	(.5	) pts.	21.2	21.3	(.1	) pts.

Combined ratio	90.4	92.4	(2.0	) pts.	86.2	93.3	(7.1	) pts.

Total Underwriting Operations²
Loss & loss adjustment expense ratio	71.5	72.5	(1.0	) pts.	70.1	72.9	(2.8	) pts.
Underwriting expense ratio	21.1	21.1	—	pts.	21.0	21.2	(.2	) pts.

Combined ratio	92.6	93.6	(1.0	) pts.	91.1	94.1	(3.0	) pts.

Accident year loss & loss adjustment expense ratio³	70.5	72.3	(1.8	) pts.	69.9	72.3	(2.4	) pts.

¹	Ratios are expressed as a percentage of net premiums earned.

Combined ratios for the other indemnity businesses are not presented separately due to the low level of premiums earned by, and the variability of loss costs in, such businesses. These businesses generated an underwriting profit of $2.1 million and $.3 million for the three months ended June 30, 2009 and 2008, respectively, and $2.8 million and $.2 million for the six months ended June 30, 2009 and 2008, respectively.

³	The accident year ratio includes only the losses that occurred during the period noted. As a result, accident period results will change over time as our estimates of loss costs improve or deteriorate when payments are made or reserves for that accident period are reviewed.

Losses and Loss Adjustment Expenses (LAE)


	Three Months Ended June 30,				Six Months Ended June 30,
(millions)	2009		2008		2009		2008
Change in net loss and LAE reserves	$	117.6	$	61.8	$	18.2	$	79.3
Paid losses and LAE		2,345.0		2,409.5		4,781.4		4,876.0

Total incurred losses and LAE	$	2,462.6	$	2,471.3</