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, 2010

¨	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		(I.R.S. Employer
incorporation or organization)		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 registrant’s classes of common stock, as of the latest practicable date.

Common Shares, $1.00 par value: 667,629,839 outstanding at June 30, 2010

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,	2010			2009			% Change		2010			2009			% Change
(millions - except per share amounts)

Revenues
Net premiums earned	$	3,590.2		$	3,441.4		4		$	7,091.3		$	6,848.0		4
Investment income		130.6			122.1		7			260.4			253.6		3
Net realized gains (losses) on securities:
Other-than-temporary impairment (OTTI) losses:
Total OTTI losses		(7.9	)		(53.8	)	(85	)		(17.2	)		(53.8	)	(68	)
Non-credit losses, net of credit losses recognized on previously recorded non-credit OTTI losses		(.7	)		23.8		NM			5.5			23.8		(77	)

Net impairment losses recognized in earnings		(8.6	)		(30.0	)	(71	)		(11.7	)		(30.0	)	(61	)
Net realized gains (losses) on securities		(30.9	)		45.9		NM			3.0			(27.5	)	NM

Total net realized gains (losses) on securities		(39.5	)		15.9		NM			(8.7	)		(57.5	)	(85	)
Service revenues		5.0			4.1		22			9.2			7.6		21

Total revenues		3,686.3			3,583.5		3			7,352.2			7,051.7		4


Expenses
Losses and loss adjustment expenses		2,543.2			2,462.6		3			4,966.6			4,799.6		3
Policy acquisition costs		338.8			334.1		1			671.9			670.3		0
Other underwriting expenses		446.2			390.9		14			872.7			768.3		14
Investment expenses		4.6			2.6		77			8.2			5.2		58
Service expenses		5.5			4.7		17			10.7			9.3		15
Interest expense		35.1			34.7		1			70.3			68.4		3

Total expenses		3,373.4			3,229.6		4			6,600.4			6,321.1		4


Net Income
Income before income taxes		312.9			353.9		(12	)		751.8			730.6		3
Provision for income taxes		101.0			103.8		(3	)		244.3			248.0		(1	)

Net income	$	211.9		$	250.1		(15	)	$	507.5		$	482.6		5


Computation of Earnings Per Share
Basic:
Average shares outstanding		660.4			669.2		(1	)		660.9			668.9		(1	)

Per share	$	.32		$	.37		(14	)	$	.77		$	.72		6

Diluted:
Average shares outstanding		660.4			669.2		(1	)		660.9			668.9		(1	)
Net effect of dilutive stock-based compensation		5.3			5.4		(2	)		5.2			4.4		18

Total equivalent shares		665.7			674.6		(1	)		666.1			673.3		(1	)

Per share	$	.32		$	.37		(14	)	$	.76		$	.72		6


Dividends declared per share¹	$	0		$	0				$	0		$	0

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)


(millions)	June 30,						December 31, 2009
(millions)	2010			2009			December 31, 2009

Assets
Investments - Available-for-sale, at fair value:
Fixed maturities (amortized cost: $11,699.5, $11,453.9, and $11,717.0)	$	11,885.3		$	10,935.3		$	11,563.4
Equity securities:
Nonredeemable preferred stocks (cost: $627.3, $810.4, and $665.4)		1,145.8			1,130.1			1,255.8
Common equities (cost: $1,005.1, $292.4, and $598.4)		1,150.0			408.7			816.2
Short-term investments (amortized cost: $1,648.9, $1,137.2, and $1,078.0)		1,648.9			1,137.2			1,078.0

Total investments		15,830.0			13,611.3			14,713.4
Cash		153.8			160.7			160.7
Accrued investment income		108.9			113.7			110.4
Premiums receivable, net of allowance for doubtful accounts of $105.8, $103.5, and $116.4		2,766.2			2,545.0			2,454.8
Reinsurance recoverables, including $35.7, $40.9, and $35.4 on paid losses and loss adjustment expenses		675.8			288.7			564.8
Prepaid reinsurance premiums		74.4			62.6			69.3
Deferred acquisition costs		443.1			436.3			402.2
Income taxes		318.2			727.6			416.7
Property and equipment, net of accumulated depreciation of $618.8, $591.4, and $595.8		947.7			989.9			961.3
Other assets		178.5			151.8			195.7

Total assets	$	21,496.6		$	19,087.6		$	20,049.3

Liabilities and Shareholders’ Equity
Unearned premiums	$	4,572.1		$	4,379.6		$	4,172.9
Loss and loss adjustment expense reserves		6,885.6			6,198.9			6,653.0
Accounts payable, accrued expenses, and other liabilities		1,556.2			1,407.7			1,297.6
Debt¹		2,178.1			2,176.4			2,177.2

Total liabilities		15,192.0			14,162.6			14,300.7

Common Shares, $1.00 par value (authorized 900.0; issued 797.7, 797.8, and 797.8, including treasury shares of 130.1, 117.8, and 125.2)		667.6			680.0			672.6
Paid-in capital		964.5			914.2			939.7
Retained earnings		4,097.9			3,353.3			3,683.1
Accumulated other comprehensive income (loss):
Net non-credit related OTTI losses, adjusted for valuation changes		(6.0	)		(19.8	)		(15.7	)
Other net unrealized gains (losses) on securities		560.0			(26.6	)		445.9

Total net unrealized gains (losses) on securities		554.0			(46.4	)		430.2
Net unrealized gains on forecasted transactions		20.0			23.9			21.6
Foreign currency translation adjustment		.6			0			1.4

Total accumulated other comprehensive income (loss)		574.6			(22.5	)		453.2

Total shareholders’ equity		6,304.6			4,925.0			5,748.6

Total liabilities and shareholders’ equity	$	21,496.6		$	19,087.6		$	20,049.3

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

See notes to consolidated financial statements.

The Progressive Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(unaudited)


Six months ended June 30,	2010			2009
(millions)

Cash Flows From Operating Activities
Net income	$	507.5		$	482.6
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		41.9			43.2
Amortization of fixed-income securities		110.7			118.3
Amortization of stock-based compensation		23.7			19.3
Net realized (gains) losses on securities		8.7			57.5
Net loss on disposition of property and equipment		1.1			1.5
Changes in:
Premiums receivable		(311.4	)		(136.4	)
Reinsurance recoverables		(111.0	)		(.2	)
Prepaid reinsurance premiums		(5.1	)		(.2	)
Deferred acquisition costs		(40.9	)		(22.3	)
Income taxes		31.8			(24.6	)
Unearned premiums		399.2			203.7
Loss and loss adjustment expense reserves		232.6			21.5
Accounts payable, accrued expenses, and other liabilities		297.1			146.4
Other, net		18.6			17.8

Net cash provided by operating activities		1,204.5			928.1

Cash Flows From Investing Activities
Purchases:
Fixed maturities		(2,281.3	)		(6,119.8	)
Equity securities		(444.2	)		(25.8	)
Sales:
Fixed maturities		1,683.6			4,850.5
Equity securities		118.9			456.3
Maturities, paydowns, calls, and other:
Fixed maturities		516.8			361.1
Net purchases of short-term investments - other		(571.1	)		16.3
Net unsettled security transactions		.1			(259.0	)
Purchases of property and equipment		(29.9	)		(38.3	)
Sales of property and equipment		.5			.8

Net cash used in investing activities		(1,006.6	)		(757.9	)

Cash Flows From Financing Activities
Proceeds from exercise of stock options		8.2			7.4
Tax benefit from exercise/vesting of stock-based compensation		2.7			.2
Dividends paid to shareholders¹		(108.2	)		0
Acquisition of treasury shares		(107.3	)		(20.0	)

Net cash used in financing activities		(204.6	)		(12.4	)

Effect of exchange rate changes on cash		(.2	)		0

Increase (decrease) in cash		(6.9	)		157.8
Cash, January 1		160.7			2.9

Cash, June 30	$	153.8		$	160.7

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 — The consolidated financial statements include the accounts of The Progressive Corporation, its subsidiaries, and a mutual company affiliate. All of the subsidiaries and the mutual company affiliate are wholly owned or controlled. 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, 2010, are not necessarily indicative of the results expected for the full year. These consolidated financial statements and the notes thereto should be read in conjunction with Progressive’s audited financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2009.

Note 2 Investments — The following table presents the composition of our investment portfolio by major security type consistent with our internal classification of how we manage, monitor, and measure the portfolio:


($ in millions)	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Net Realized Gains (Losses)¹			Fair Value		% of Total Fair Value
June 30, 2010
Fixed maturities:
U.S. government obligations	$	4,061.2	$	69.2	$	(15.7	)	$	0		$	4,114.7	26.0	%
State and local government obligations		1,723.8		59.0		(1.0	)		0			1,781.8	11.2
Corporate debt securities		2,039.3		85.7		(10.1	)		2.4			2,117.3	13.4
Residential mortgage-backed securities		560.9		10.0		(37.9	)		0			533.0	3.4
Commercial mortgage-backed securities		1,721.0		59.7		(8.7	)		0			1,772.0	11.2
Other asset-backed securities		976.1		12.4		(1.8	)		.1			986.8	6.2
Redeemable preferred stocks		617.2		20.3		(57.8	)		0			579.7	3.7
Other debt obligations		0		0		0			0			0	0

Total fixed maturities		11,699.5		316.3		(133.0	)		2.5			11,885.3	75.1
Equity securities:
Nonredeemable preferred stocks		627.3		524.1		0			(5.6	)		1,145.8	7.2
Common equities		1,005.1		170.7		(25.8	)		0			1,150.0	7.3
Short-term investments:
Other short-term investments		1,648.9		0		0			0			1,648.9	10.4

Total portfolio^2,3	$	14,980.8	$	1,011.1	$	(158.8	)	$	(3.1	)	$	15,830.0	100.0	%


($ 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	)	$	0		$	5,227.3	38.4	%
State and local government obligations		2,383.7		56.1		(36.8	)		0			2,403.0	17.7
Corporate debt securities		803.4		19.1		(25.8	)		0			796.7	5.8
Residential mortgage-backed securities		561.7		.7		(121.8	)		0			440.6	3.2
Commercial mortgage-backed securities		1,491.7		5.9		(111.6	)		0			1,386.0	10.2
Other asset-backed securities		200.5		3.3		(3.0	)		0			200.8	1.5
Redeemable preferred stocks		648.2		9.0		(179.3	)		0			477.9	3.5
Other debt obligations		2.1		.9		0			0			3.0	0

Total fixed maturities		11,453.9		104.3		(622.9	)		0			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	)		0			408.7	3.0
Short-term investments:
Other short-term investments		1,137.2		0		0			0			1,137.2	8.4

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


December 31, 2009
Fixed maturities:
U.S. government obligations	$	4,939.6	$	6.4	$	(128.5	)	$	0		$	4,817.5	32.8	%
State and local government obligations		1,974.2		55.1		(5.3	)		0			2,024.0	13.8
Corporate debt securities		1,244.9		43.4		(6.9	)		0			1,281.4	8.7
Residential mortgage-backed securities		592.0		4.3		(79.9	)		0			516.4	3.5
Commercial mortgage-backed securities		1,572.0		37.0		(18.9	)		0			1,590.1	10.8
Other asset-backed securities		721.9		6.1		(1.8	)		0			726.2	4.9
Redeemable preferred stocks		671.3		20.7		(85.3	)		0			606.7	4.1
Other debt obligations		1.1		0		0			0			1.1	0

Total fixed maturities		11,717.0		173.0		(326.6	)		0			11,563.4	78.6
Equity securities:
Nonredeemable preferred stocks		665.4		597.6		0			(7.2	)		1,255.8	8.5
Common equities		598.4		220.1		(2.3	)		0			816.2	5.6
Short-term investments:
Other short-term investments		1,078.0		0		0			0			1,078.0	7.3

Total portfolio^2,3	$	14,058.8	$	990.7	$	(328.9	)	$	(7.2	)	$	14,713.4	100.0	%

¹	Represents net holding period gains (losses) on certain hybrid securities (discussed below).

²	At June 30, 2010 and 2009, and December 31, 2009, we had net unsettled security transactions of $7.8 million (offset in other liabilities), $4.8 million (offset in other assets), and $7.7 million (offset in other liabilities), respectively.

³	The total fair value of the portfolio at June 30, 2010 and 2009, and December 31, 2009 includes $1.9 billion, $0.9 billion, and $2.2 billion, respectively, of securities held in a consolidated, non-insurance subsidiary of the holding company, net of any unsettled security transactions.

Our fixed-maturity securities include debt securities and redeemable preferred stocks. Common equities include common stocks and other equity-like 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, reverse repurchase transactions, and other investments which are expected to mature within one year. At June 30, 2010 and December 31, 2009, our other short-term investments also included $8.5 million and $0.9 million, respectively, in Treasury Bills issued by the Australian government; we held $0 in Australian Treasury Bills as of June 30, 2009.

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


	June 30,				December 31, 2009
(millions)	2010		2009		December 31, 2009
Fixed maturities:
Corporate debt securities	$	117.6	$	0	$	0
Other asset-backed securities		14.8		0		0

Total fixed maturities		132.4		0		0
Equity securities:
Nonredeemable preferred stocks		55.5		17.3		66.3

Total hybrid securities	$	187.9	$	17.3	$	66.3

As permitted under current accounting guidance, we elected to treat the change in valuation of these hybrid securities as a component of realized gains (losses), rather than separate the host contract and the derivative component based on the underlying structure of the instruments. The hybrid instruments in our corporate debt securities were acquired at a substantial premium and contain a change of control put feature that permits the investor, at his sole option once the change in control is triggered, to put the security back to the issuer at a 1% premium to par. Due to this change of control put option and the substantial market premium paid, there is a potential that the election to put could result in the investment not returning substantially all of the original investment. The hybrid in the asset-backed portfolio was acquired at a deep discount to par, due to a failing auction and contains a put option (derivative feature) that allows the investor to put that security back to the auction at par. This embedded derivative has the potential, once the auction is restored, to more than double our initial investment yield. The hybrid securities in our nonredeemable preferred stock portfolio are perpetual preferred stocks that have call features with fixed-rate coupons, whereby the change in value of the call features is a component of the overall change in value of the preferred stocks.

Our securities are reported at fair value, with the changes in fair value of these securities (other than hybrid securities and derivative instruments) reported as a component of accumulated other comprehensive income, net of deferred income taxes. The changes in fair value of the hybrid securities and derivative instruments are recorded as a component of net realized gains (losses) on securities.

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


	Total Fair Value		Gross Unrealized Losses			Less than 12 Months					12 Months or Greater
						Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
(millions)						Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
June 30, 2010
Fixed maturities:
U.S. government obligations	$	639.1	$	(15.7	)	$	0	$	0		$	639.1	$	(15.7	)
State and local government obligations		71.5		(1.0	)		54.0		(.3	)		17.5		(.7	)
Corporate debt securities		293.7		(10.1	)		245.7		(8.4	)		48.0		(1.7	)
Residential mortgage-backed securities		339.6		(37.9	)		56.5		(1.5	)		283.1		(36.4	)
Commercial mortgage-backed securities		204.0		(8.7	)		112.4		(1.2	)		91.6		(7.5	)
Other asset-backed securities		105.5		(1.8	)		99.1		(.4	)		6.4		(1.4	)
Redeemable preferred stocks		508.0		(57.8	)		121.4		(1.0	)		386.6		(56.8	)

Total fixed maturities		2,161.4		(133.0	)		689.1		(12.8	)		1,472.3		(120.2	)
Equity securities:
Nonredeemable preferred stocks		0		0			0		0			0		0
Common equities		365.8		(25.8	)		361.5		(25.1	)		4.3		(.7	)

Total equity securities		365.8		(25.8	)		361.5		(25.1	)		4.3		(.7	)

Total portfolio	$	2,527.2	$	(158.8	)	$	1,050.6	$	(37.9	)	$	1,476.6	$	(120.9	)


	Total Fair Value		Gross Unrealized Losses			Less than 12 Months					12 Months or Greater
						Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
(millions)						Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
June 30, 2009
Fixed maturities:
U.S. government obligations	$	4,683.3	$	(144.6	)	$	4,683.3	$	(144.6	)	$	0	$	0
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	)		0		0			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	)


December 31, 2009
Fixed maturities:
U.S. government obligations	$	4,595.3	$	(128.5	)	$	2,408.1	$	(6.4	)	$	2,187.2	$	(122.1	)
State and local government obligations		448.6		(5.3	)		41.3		(.2	)		407.3		(5.1	)
Corporate debt securities		344.2		(6.9	)		264.6		(1.8	)		79.6		(5.1	)
Residential mortgage-backed securities		367.4		(79.9	)		27.9		(2.5	)		339.5		(77.4	)
Commercial mortgage-backed securities		386.1		(18.9	)		32.6		(.9	)		353.5		(18.0	)
Other asset-backed securities		81.6		(1.8	)		71.6		(.3	)		10.0		(1.5	)
Redeemable preferred stocks		507.5		(85.3	)		0		0			507.5		(85.3	)

Total fixed maturities		6,730.7		(326.6	)		2,846.1		(12.1	)		3,884.6		(314.5	)
Equity securities:
Nonredeemable preferred stocks		0		0			0		0			0		0
Common equities		30.7		(2.3	)		20.9		(1.7	)		9.8		(.6	)

Total equity securities		30.7		(2.3	)		20.9		(1.7	)		9.8		(.6	)

Total portfolio	$	6,761.4	$	(328.9	)	$	2,867.0	$	(13.8	)	$	3,894.4	$	(315.1	)

Included in gross unrealized losses at June 30, 2010, are securities for which an OTTI credit loss was also recorded in earnings. The fair value and gross unrealized losses for these securities are comprised of the following:


	Total Fair Value		Gross Unrealized Losses			Less than 12 Months					12 Months or Greater
						Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
(millions)						Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Fixed maturities:
Residential mortgage-backed securities	$	60.6	$	(8.5	)	$	1.1	$	(.5	)	$	59.5	$	(8.0	)
Commercial mortgage-backed securities		3.8		(.7	)		.6		(.2	)		3.2		(.5	)

Total fixed maturities	$	64.4	$	(9.2	)	$	1.7	$	(.7	)	$	62.7	$	(8.5	)

We currently do not intend to sell the fixed-income securities and determined that it is more likely than not that we will not be required to sell these securities for the period of time necessary to recover their cost bases. In addition, we may retain the common stocks to maintain correlation to the Russell 1000 Index, as long as the portfolio and index correlation remain similar. If our strategy were to change and these securities were determined to be other-than-temporarily impaired, we would recognize a write-down in accordance with our stated policy.

Other-Than-Temporary Impairment (OTTI) The following tables provide a rollforward of the amounts related to credit losses recognized in earnings for which a portion of the OTTI loss was recognized in accumulated other comprehensive income at the time the credit impairment was determined and recognized:


	Three Months Ended June 30, 2010
(millions)	Residential Mortgage- Backed			Commercial Mortgage- Backed			Corporate Debt		Total
Beginning balance at April 1, 2010	$	33.2		$	.9		$	6.5	$	40.6
Credit losses for which an OTTI was previously recognized		2.6			.4			0		3.0
Credit losses for which an OTTI was not previously recognized		1.2			.2			0		1.4
Change in recoveries of future cash flows expected to be collected¹		8.4			0			0		8.4
Reductions for previously recognized credit impairments written-down to fair value²		(1.2	)		0			0		(1.2	)

Ending balance at June 30, 2010	$	44.2		$	1.5		$	6.5	$	52.2


	Six Months Ended June 30, 2010
(millions)	Residential Mortgage- Backed			Commercial Mortgage- Backed			Corporate Debt		Total
Beginning balance at January 1, 2010	$	41.1		$	.9		$	6.5	$	48.5
Credit losses for which an OTTI was previously recognized		3.0			.3			0		3.3
Credit losses for which an OTTI was not previously recognized		2.4			.5			0		2.9
Change in recoveries of future cash flows expected to be collected¹		(1.1	)		0			0		(1.1	)
Reductions for previously recognized credit impairments written-down to fair value²		(1.2	)		(.2	)		0		(1.4	)

Ending balance at June 30, 2010	$	44.2		$	1.5		$	6.5	$	52.2


	Three Months Ended June 30, 2009³
(millions)	Residential Mortgage- Backed			Commercial Mortgage- Backed			Corporate Debt		Total
Beginning balance at April 1, 2009	$	24.2		$	0		$	6.5	$	30.7
Credit losses for which an OTTI was previously recognized		1.4			0			0		1.4
Credit losses for which an OTTI was not previously recognized		13.1			0			0		13.1
Change in recoveries of future cash flows expected to be collected¹		0			0			0		0
Reductions for previously recognized credit impairments written-down to fair value²		0			0			0		0

Ending balance at June 30, 2009	$	38.7		$	0		$	6.5	$	45.2

¹	Reflects expected recovery of prior period impairments that will be accreted into income over the remaining life of the security, net of any current quarter decreases in expected cash flows on previously recorded reductions.

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

³	Reflects the period since adoption of the new accounting standards, which was effective beginning in the second quarter 2009.

Since it was 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, we considered a number of factors and inputs related to the individual securities. The methodology and significant inputs used to measure the amount of credit losses in our asset-backed 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 loss, if any, the net present value of the cash flows expected (i.e., expected recovery value) was calculated using the current book yield for each security, and was compared to its current amortized value. In the event that the net present value was below the amortized value, a credit loss was deemed to exist, and the security was written-down.

Trading Securities At June 30, 2010, June 30, 2009, and December 31, 2009, 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, 2010 and 2009.

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, cash flow hedges, and equity options.

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, 2010, June 30, 2009, and December 31, 2009, and for the three and six months ended June 30, 2010 and 2009; amounts are on a pretax basis:


(millions)										Balance Sheet										Income Statement
	Notional Value¹										Assets (Liabilities) Fair Value									Net Realized Gains (Losses) on Securities
Derivatives	June 30,					Dec. 31,					June 30,						Dec. 31,			Three months ended June 30,						Six months ended June 30,
designated as:	2010			2009		2009			Purpose	Classification	2010			2009			2009			2010			2009			2010			2009
Hedging instruments
Foreign currency cash flow hedge	$	0		$	8	$	0		Forecasted transaction	Accumulated other comprehensive income	$	0		$	1.1		$	0		$	0		$	0		$	0		$	0


Non-hedging instruments

Assets:
Interest rate swaps²		0			0		713		Manage portfolio duration	Investments - fixed maturities		0			0			.1			0			0			0			0

Corporate credit default swaps³		40			0		0		Manage credit risk	Investments - fixed maturities		.8			0			0			1.2			0			1.4			0

Equity options⁴ (32,190 contracts)		(a	)		NA		(a	)	Manage price risk	Investments - common equities		0			4.2			0			0			0			0			0


Liabilities:
Interest rate swaps²		713			668		0		Manage portfolio duration	Other liabilities		(55.8	)		(9.8	)		0			(50.5	)		(8.8	)		(68.4	)		(8.8	)

Corporate credit default swaps³		10			32		25		Manage credit risk	Other liabilities		(.8	)		(.3	)		(.8	)		(.3	)		(1.1	)		(.3	)		(.6	)

Equity options⁴ (7,500 contracts)		(a	)		NA		(a	)	Manage price risk	Other liabilities		0			(.1	)		0			0			.3			0			.4


Closed:
Interest rate swaps		0			3,518		4,186		Manage portfolio duration	NA		0			0			0			0			0			0			3.5

Corporate credit default swaps⁵		10			0		7		Manage credit risk	NA		0			0			0			0			0			0			0

Equity options⁴ (137,500 contracts)		(a	)		NA		(a	)	Manage price risk	NA		0			0			0			0			(14.5	)		0			(11.0	)

Total		NA			NA		NA				$	(55.8	)	$	(4.9	)	$	(.7	)	$	(49.6	)	$	(24.1	)	$	(67.3	)	$	(16.5	)

¹	The amounts represent the value held at quarter and year-end for open positions and the maximum amount held during the quarter for closed positions.

²	The $713 million notional value swap at June 30, 2010 and December 31, 2009 was entered into as a short position (i.e., receive variable and pay fixed coupon) while the swaps held at June 30, 2009 were long positions (i.e., receive fixed and pay variable coupon).

³	We sold protection on the open $10 million notional value swap held at June 30, 2010, while we bought protection on the remaining swap positions held at June 30, 2010 and the positions held at December 31, 2009 and June 30, 2009.

⁴	Each contract is equivalent to 100 shares of common stock of the issuer; we had no option activity in 2010.

⁵	This position was closed during the second quarter 2010 and generated an immaterial amount of realized losses for the three and six months ended June 30, 2010.

(a)	No equity option positions were open at these periods.

NA= Not Applicable

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 closed our hedge position during the third quarter 2009 and we did not have any hedge activity during 2010.

INTEREST RATE SWAPS

During the periods ended June 30, 2010, June 30, 2009, and December 31, 2009, we invested in interest rate swap positions, primarily to manage the fixed-income portfolio duration. During the fourth quarter 2009, we entered into a 9-year interest rate swap position where we are paying a fixed rate and receiving a variable rate. Since that time, the position has generated a realized loss, as interest rates have fallen since the inception of this position. As of June 30, 2010, June 30, 2009, and December 31, 2009, we delivered $65.0 million, $7.6 million, and $0, respectively, in cash collateral to the counterparty on our then open interest rate swap positions.

CORPORATE CREDIT DEFAULT SWAPS

During the periods ended June 30, 2010, June 30, 2009, and December 31, 2009, we held a position, which was opened during the third quarter 2008, on one corporate issuer within the financial services sector for which we bought credit default protection in the form of a credit default swap for a 5-year time horizon. We hold this protection to reduce our exposure to additional valuation declines on a preferred stock position of the same issuer.

During the second quarter 2010, we opened two positions on one corporate issuer within the industrial sector for which we bought credit default protection in the form of credit default swaps for 2-year and 4-year time horizons; we closed the 2-year exposure position as of June 30, 2010. We paid $0.2 million in upfront cash when we entered the 4-year exposure position, which is offset against our current exposure. We hold this protection to reduce our exposure to additional valuation declines on a corporate position of the same issuer due to potential future credit impairment. We also held a position during the second quarter 2009, for which 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 $0.6 million in upfront cash when we entered this position; the position was closed during the third quarter 2009.

As of June 30, 2010, we received $0.9 million in cash collateral from the counterparty on the above open corporate credit default swap positions. As of December 31, 2009 and June 30, 2009, we delivered $0.6 million and $0, respectively, in cash collateral to the counterparty on our open corporate credit default swap positions.

Additionally, during the second quarter 2010, we sold credit protection in the form of a corporate credit default swap on one issuer in the automotive sector for a 5-year time horizon. We acquired an equal par value amount of U.S. Treasury Notes with a similar maturity to cover the credit default swap’s notional exposure. As of June 30, 2010, we delivered $0.8 million in cash collateral to the counterparty on this position.

EQUITY OPTIONS

We had no equity option activity during the periods ended June 30, 2010. During the six-month period ended June 30, 2009, we simultaneously sold and purchased a substantially equivalent amount of call and put options, respectively, on Citigroup common stock, related to 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 conversion of our preferred stock holding into common stock pursuant to Citigroup’s exchange that occurred during the third quarter 2009. 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. All of the common stock we received from the preferred stock conversion into common stock was sold by the end of the third quarter 2009. As of June 30, 2009, we delivered $5.4 million in the form of cash to a counterparty as collateral to cover potential assignment of outstanding call options.

Note 3 Fair Value — We have categorized our financial instruments, based on the degree of subjectivity inherent in the method by which they are valued, 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 our subjective evaluation about the assumptions market participants would use in pricing the financial instrument (e.g., certain structured securities and privately held investments).

Pursuant to generally accepted accounting principles, which require us to evaluate whether a market is distressed or inactive in determining the fair value for our portfolio, we review certain 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
(millions)	Level 1		Level 2		Level 3		Total		Cost
June 30, 2010
Fixed maturities:
U.S. government obligations	$	4,114.7	$	0	$	0	$	4,114.7	$	4,061.2
State and local government obligations		0		1,781.8		0		1,781.8		1,723.8
Corporate debt securities		0		2,088.3		29.0		2,117.3		2,039.3
Other debt obligations		0		0		0		0		0

Subtotal		4,114.7		3,870.1		29.0		8,013.8		7,824.3

Asset-backed securities:
Residential mortgage-backed		0		444.5		88.5		533.0		560.9
Commercial mortgage-backed		0		1,749.4		22.6		1,772.0		1,721.0
Other asset-backed		0		980.4		6.4		986.8		976.1

Subtotal asset-backed securities		0		3,174.3		117.5		3,291.8		3,258.0

Redeemable preferred stocks:
Financials		19.8		218.9		0		238.7		252.6
Utilities		0		67.3		0		67.3		69.8
Industrials		0		273.7		0		273.7		294.8

Subtotal redeemable preferred stocks		19.8		559.9		0		579.7		617.2

Total fixed maturities		4,134.5		7,604.3		146.5		11,885.3		11,699.5

Equity securities:
Nonredeemable preferred stocks:
Agencies		0		0		0		0		0
Financials		526.0		513.0		0		1,039.0		535.9
Utilities		0		67.0		0		67.0		50.8
Industrials		0		39.8		0		39.8		40.6

Subtotal nonredeemable preferred stocks		526.0		619.8		0		1,145.8		627.3

Common equities:
Common stocks¹		1,137.3		0		0		1,137.3		1,000.1
Other equity-like investments		0		0		12.7		12.7		5.0

Subtotal common equities		1,137.3		0		12.7		1,150.0		1,005.1

Total fixed maturities and equity securities	$	5,797.8	$	8,224.1	$	159.2		14,181.1		13,331.9

Short-term investments:
Other short-term investments²								1,648.9		1,648.9

Total portfolio							$	15,830.0	$	14,980.8

Debt³							$	2,237.4	$	2,178.1


	Fair Value
(millions)	Level 1		Level 2		Level 3		Total		Cost
June 30, 2009
Fixed maturities:
U.S. government obligations	$	5,227.3	$	0	$	0	$	5,227.3	$	5,362.6
State and local government obligations		0		2,403.0		0		2,403.0		2,383.7
Corporate debt securities		0		772.3		24.4		796.7		803.4
Other debt obligations		0		0		3.0		3.0		2.1

Subtotal		5,227.3		3,175.3		27.4		8,430.0		8,551.8

Asset-backed securities:
Residential mortgage-backed		0		440.3		.3		440.6		561.7
Commercial mortgage-backed		0		1,363.0		23.0		1,386.0		1,491.7
Other asset-backed		0		181.0		19.8		200.8		200.5

Subtotal asset-backed securities		0		1,984.3		43.1		2,027.4		2,253.9

Redeemable preferred stocks:
Financials		15.2		188.7		0		203.9		277.2
Utilities		0		56.9		0		56.9		70.9
Industrials		0		168.1		49.0		217.1		300.1

Subtotal 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		0		0		2.0		.8
Financials		455.8		506.7		0		962.5		643.3
Utilities		0		53.4		0		53.4		50.8
Industrials		0		0		112.2		112.2		115.5

Subtotal nonredeemable preferred stocks		457.8		560.1		112.2		1,130.1		810.4

Common equities:
Common stocks¹		395.6		0		0		395.6		286.8
Other equity-like investments		0		0		13.1		13.1		5.6

Subtotal common equities		395.6		0		13.1		408.7		292.4

Total fixed maturities and equity securities	$	6,095.9	$	6,133.4	$	244.8		12,474.1		12,556.7

Short-term investments:
Other short-term investments²								1,137.2		1,137.2

Total portfolio							$	13,611.3	$	13,693.9

Debt³							$	1,859.0	$	2,176.4


	Fair Value
(millions)	Level 1		Level 2		Level 3		Total		Cost
December 31, 2009
Fixed maturities:
U.S. government obligations	$	4,817.5	$	0	$	0	$	4,817.5	$	4,939.6
State and local government obligations		0		2,024.0		0		2,024.0		1,974.2
Corporate debt securities		0		1,253.2		28.2		1,281.4		1,244.9
Other debt obligations		0		0		1.1		1.1		1.1

Subtotal		4,817.5		3,277.2		29.3		8,124.0		8,159.8

Asset-backed securities:
Residential mortgage-backed		0		470.3		46.1		516.4		592.0
Commercial mortgage-backed		0		1,568.5		21.6		1,590.1		1,572.0
Other asset-backed		0		718.4		7.8		726.2		721.9

Subtotal asset-backed securities		0		2,757.2		75.5		2,832.7		2,885.9

Redeemable preferred stocks:
Financials		17.8		231.9		0		249.7		277.2
Utilities		0		66.9		0		66.9		69.4
Industrials		0		237.0		53.1		290.1		324.7

Subtotal redeemable preferred stocks		17.8		535.8		53.1		606.7		671.3

Total fixed maturities		4,835.3		6,570.2		157.9		11,563.4		11,717.0

Equity securities:
Nonredeemable preferred stocks:
Agencies		0		0		0		0		0
Financials		604.2		534.2		0		1,138.4		561.6
Utilities		0		65.8		0		65.8		50.8
Industrials		0		51.6		0		51.6		53.0

Subtotal nonredeemable preferred stocks		604.2		651.6		0		1,255.8		665.4

Common equities:
Common stocks¹		803.3		0		0		803.3		593.2
Other equity-like investments		0		0		12.9		12.9		5.2

Subtotal common equities		803.3		0		12.9		816.2		598.4

Total fixed maturities and equity securities	$	6,242.8	$	7,221.8	$	170.8		13,635.4		12,980.8

Short-term investments:
Other short-term investments²								1,078.0		1,078.0

Total portfolio							$	14,713.4	$	14,058.8

Debt³							$	2,154.2	$	2,177.2

¹	Common stocks are managed externally to track the Russell 1000 Index. Therefore, a break-out by major sector type is not provided.

²	Due to the underlying nature of these securities, cost approximates fair value.

³	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. We did not have any transfers between Level 1 and Level 2 for the periods presented.

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, 2010, vendor-quoted prices represented 71% of our Level 1 classifications, compared to 77% at December 31, 2009, and 94% at June 30, 2009. 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 decrease in Level 1 percentage from June 2009 to December 2009 reflected a decrease in our U.S. Treasury holdings as a percentage of total invested assets. Corporate and structured securities are valued primarily using vendor quotes and classified as Level 2 or 3 as appropriate. The balance of our Level 1 pricing comes from quotes obtained directly from trades made on an active exchange.

At June 30, 2010, vendor-quoted prices comprised 94% of our Level 2 classifications, compared to 92% at December 31, 2009, and 95% at June 30, 2009. 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. 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, for all periods presented.

Broker-quoted prices represented the balance of our Level 2 classifications. 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 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 and we will also receive a broker/dealer quote for those securities priced by vendors as further evaluation of market price. We believe these additional steps help to ensure that we are reporting the most representative price and validates our pricing methodology.

To the extent the inputs used by external pricing sources are determined to not contain sufficient observable market information, we will reclassify the affected security valuations to Level 3. At June 30, 2010 and 2009, and December 31, 2009, securities in our fixed-maturity portfolio listed as Level 3 were comprised substantially of securities that were either (i) private placement deals, (ii) thinly held and/or traded securities, or (iii) 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. During all three periods reported, 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 and valuation techniques used, we believe that the current level classifications are appropriate 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 and six months ended June 30, 2010 and 2009:


(millions)	Level 3 Fair Value Six months ended June 30, 2010
(millions)	Fair Value at Dec. 31, 2009		Calls/ Maturities/ Paydowns			Purchases		Sales		Realized (gain)/loss		Change in Valuation			Gross Transfers in (out)¹			Fair value at June 30, 2010
Fixed maturities:
Asset-backed securities:
Residential mortgage-backed	$	46.1	$	(7.5	)	$	34.3	$	0	$	0	$	3.5		$	12.1		$	88.5
Commercial mortgage-backed		21.6		0			0		0		0		1.0			0			22.6
Other asset-backed		7.8		(1.2	)		0		0		0		(.2	)		0			6.4

Total asset-backed securities		75.5		(8.7	)		34.3		0		0		4.3			12.1			117.5
Corporate debt securities		28.2		0			0		0		0		.8			0			29.0
Other debt obligations		1.1		0			0		0		0		(1.1	)		0			0
Redeemable preferred stocks:
Industrials		53.1		0			0		0		0		0			(53.1	)		0

Total fixed maturities		157.9		(8.7	)		34.3		0		0		4.0			(41.0	)		146.5

Equity securities:
Nonredeemable preferred stocks:
Industrials		0		0			0		0		0		0			0			0
Common equities:
Other equity-like investments		12.9		(.6	)		0		0		0		.4			0			12.7

Total Level 3 securities	$	170.8	$	(9.3	)	$	34.3	$	0	$	0	$	4.4		$	(41.0	)	$	159.2

¹	The $12.1 million was transferred from Level 2 into Level 3 due to a lack of trade volume and the $53.1 million was transferred out of Level 3 into Level 2 due to the availability of vendor pricing on a redeemable preferred stock.


	Level 3 Fair Value Three months ended June 30, 2010
(millions)	Fair Value at Mar. 31, 2010		Calls/ Maturities/ Paydowns			Purchases		Sales		Realized (gain)/loss		Change in Valuation			Gross Transfers in (out)		Fair value at June 30, 2010
Fixed maturities:
Asset-backed securities:
Residential mortgage-backed	$	73.5	$	(4.5	)	$	16.3	$	0	$	0	$	3.2		$	0	$	88.5
Commercial mortgage-backed		21.0		0			0		0		0		1.6			0		22.6
Other asset-backed		6.2		(.5	)		0		0		0		.7			0		6.4

Total asset-backed securities		100.7		(5.0	)		16.3		0		0		5.5			0		117.5
Corporate debt securities		28.9		0			0		0		0		.1			0		29.0
Other debt obligations		1.1		0			0		0		0		(1.1	)		0		0
Redeemable preferred stocks:
Industrials		0		0			0		0		0		0			0		0

Total fixed maturities		130.7		(5.0	)		16.3		0		0		4.5			0		146.5

Equity securities:
Nonredeemable preferred stocks:
Industrials		0		0			0		0		0		0			0		0
Common equities:
Other equity-like investments		13.0		(.6	)		0		0		0		.3			0		12.7

Total Level 3 securities	$	143.7	$	(5.6	)	$	16.3	$	0	$	0	$	4.8		$	0	$	159.2


	Level 3 Fair Value Six months ended June 30, 2009
(millions)	Fair Value at Dec. 31, 2008		Calls/ Maturities/ Paydowns			Purchases		Sales		Realized (gain)/loss		Change in Valuation			Gross Transfers in (out)¹			Fair value at June 30, 2009
Fixed maturities:
Asset-backed securities:
Residential mortgage-backed	$	.3	$	0		$	0	$	0	$	0	$	0		$	0		$	.3
Commercial mortgage-backed		26.4		(.6	)		0		0		0		(1.3	)		(1.5	)		23.0
Other asset-backed		11.0		(1.6	)		11.0		0		0		(.6	)		0			19.8

Total asset-backed securities		37.7		(2.2	)		11.0		0		0		(1.9	)		(1.5	)		43.1
Corporate debt securities		24.2		0			0		0		0		.2			0			24.4
Other debt obligations		3.0		0			0		0		0		0			0			3.0
Redeemable preferred stocks:
Industrials		44.7		0			0		0		0		4.3			0			49.0

Total fixed maturities		109.6		(2.2	)		11.0		0		0		2.6			(1.5	)		119.5

Equity securities:
Nonredeemable preferred stocks:
Industrials		112.3		0			0		0		0		(.1	)		0			112.2
Common equities:
Other equity-like investments		13.5		(.1	)		0		0		0		(.3	)		0			13.1

Total Level 3 securities	$	235.4	$	(2.3	)	$	11.0	$	0	$	0	$	2.2		$	(1.5	)	$	244.8

¹	The $1.5 million was transferred into Level 2 from Level 3 due to the availability of vendor pricing on a commercial mortgage-backed security.


	Level 3 Fair Value Three months ended June 30, 2009
(millions)	Fair Value at Mar. 31, 2009		Calls/ Maturities/ Paydowns			Purchases		Sales		Realized (gain)/loss		Change in Valuation			Gross Transfers in (out)		Fair value at June 30, 2009
Fixed maturities:
Asset-backed securities:
Residential mortgage-backed	$	.3	$	0		$	0	$	0	$	0	$	0		$	0	$	.3
Commercial mortgage-backed		22.3		(.3	)		0		0		0		1.0			0		23.0
Other asset-backed		9.2		(.7	)		11.0		0		0		.3			0		19.8

Total asset-backed securities		31.8		(1.0	)		11.0		0		0		1.3			0		43.1
Corporate debt securities		22.5		0			0		0		0		1.9			0		24.4
Other debt obligations		3.0		0			0		0		0		0			0		3.0
Redeemable preferred stocks:
Industrials		42.9		0			0		0		0		6.1			0		49.0

Total fixed maturities		100.2		(1.0	)		11.0		0		0		9.3			0		119.5

Equity securities:
Nonredeemable preferred stocks:
Industrials		112.2		0			0		0		0		0			0		112.2
Common equities:
Other equity-like investments		13.5		(.1	)		0		0		0		(.3	)		0		13.1

Total Level 3 securities	$	225.9	$	(1.1	)	$	11.0	$	0	$	0	$	9.0		$	0	$	244.8

Note 4 Debt — Debt consisted of:


	June 30, 2010				June 30, 2009				December 31, 2009
(millions)	Carrying Value		Fair Value		Carrying Value		Fair Value		Carrying Value		Fair Value
6.375% Senior Notes due 2012	$	349.4	$	374.1	$	349.0	$	351.8	$	349.2	$	375.1
7% Notes due 2013		149.5		166.1		149.4		161.2		149.5		166.9
6 ⁵/8% Senior Notes due 2029		294.8		331.2		294.7		279.3		294.7		317.9
6.25% Senior Notes due 2032		394.2		430.1		394.1		361.7		394.1		409.4
6.70% Fixed-to-Floating Rate Junior Subordinated Debentures due 2067		990.2		935.9		989.2		705.0		989.7		884.9

Total	$	2,178.1	$	2,237.4	$	2,176.4	$	1,859.0	$	2,177.2	$	2,154.2

On December 31, 2009, we entered into an amendment to the 364-Day Secured Liquidity Credit Facility Agreement with PNC Bank, National Association (PNC), successor to National City Bank (NCB), which extended the expiration date of our outstanding credit facility agreement until December 31, 2010, unless earlier terminated pursuant to the terms of the agreement. Under this agreement, we may borrow up to $125 million, which may be increased to $150 million at our request but subject to PNC’s discretion. The purpose of the credit facility is to provide liquidity in the event of disruptions in our cash management operations, such as disruptions in the financial markets that affect our ability to transfer or receive funds. We may borrow funds, on a revolving basis, either in the form of Eurodollar Loans or Base Rate Loans. Eurodollar Loans will bear interest at one-, two-, three-, or six-month LIBOR (as selected by us), adjusted as provided in the credit facility agreement, plus 50 basis points for the selected period. Base Rate Loans will bear daily interest at the greater of (a) PNC’s prime rate for such day, (b) the federal funds effective rate for such day plus ¹/2% per annum, or (c) one-month LIBOR, adjusted as provided in the credit facility agreement, plus 2% per annum. Any borrowings under this agreement will be secured by a lien on certain marketable securities held in our investment portfolio. We had no borrowings under this arrangement in 2009 or through the first six months of 2010.

On June 10, 2010, we commenced an offer to purchase for cash (the “Tender Offer”) up to $350 million in aggregate principal amount of our 6.70% Fixed-to-Floating Rate Junior Subordinated Debentures due 2067 (the “Debentures”). The Tender Offer expired July 8, 2010. See Note 11 - Subsequent Event for the results of the Tender Offer.

As a condition of the Tender Offer, we solicited consents (the “Consent Solicitation”) from the holders of our 6.25% Senior Notes due 2032 (the “2032 Notes”) to terminate the Replacement Capital Covenant (the “RCC”) relating to those 2032 Notes. The RCC was originally entered into by Progressive in June 2007 for the benefit of the holders of the 2032 Notes in connection with the issuance of the Debentures. Under the RCC, we agreed that we would not repay, redeem, defease, or purchase all or any part of the Debentures before June 15, 2047, unless Progressive was to obtain a specified portion of the funds used in the transaction through the sale of its common shares or certain other equity or equity-like securities. The RCC was terminated on June 23, 2010, the expiration date of the Consent Solicitation, at which time we had received the consent of holders of a majority of the outstanding aggregate principal amount of the 2032 Notes. Those holders who validly delivered their consent by the expiration date received a consent fee of $5.00 for each $1,000 principal amount of their 2032 Notes.

Note 5 Income Taxes — At June 30, 2010 and December 31, 2009, we determined that we did not need a valuation allowance on our deferred tax asset. Although realization of the deferred tax asset is not assured, management believes it is more likely than not that the gross deferred tax asset will be realized based on our expectation that we will be able to fully utilize the deductions that are ultimately recognized for tax purposes.

At June 30, 2009, our estimate of the valuation allowance on our deferred tax asset was $18.0 million, which reflected 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 $35.0 million 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.

The effective tax rate for the six months ended June 30, 2010 was 32%, compared with 34% for the same period last year, primarily reflecting the $18.0 million valuation allowance in the first six months of 2009 discussed above.

Note 6 Supplemental Cash Flow Information — Cash includes only bank demand deposits. We paid the following for the respective time periods:


	Six Months Ended June 30,
(millions)	2010		2009
Taxes	$	209.0	$	271.0
Interest		72.3		72.3

Note 7 Segment Information — Our Personal Lines segment writes insurance for personal autos and recreational vehicles. Our Commercial Auto segment writes primary liability and physical damage insurance for automobiles and trucks owned by small businesses in the business auto and truck markets. Our other indemnity businesses manage our run-off businesses, including the run-off of our professional liability insurance for community banks which is 100% reinsured as of August 1, 2009. Our service businesses provide insurance-related services, including processing Commercial Auto Insurance Procedures/Plans (“CAIP”) business and serving as an agent for homeowners insurance through our programs with three unaffiliated homeowner insurance companies. 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,
	2010					2009					2010					2009
(millions)	Revenues		Pretax Profit (Loss)			Revenues		Pretax Profit (Loss)			Revenues		Pretax Profit (Loss)			Revenues		Pretax Profit (Loss)
Personal Lines
Agency	$	1,862.9	$	138.9		$	1,826.5	$	127.0		$	3,690.8	$	335.0		$	3,643.8	$	309.8
Direct		1,352.1		83.5			1,205.6		86.0			2,651.7		154.2			2,376.7		184.7

Total Personal Lines¹		3,215.0		222.4			3,032.1		213.0			6,342.5		489.2			6,020.5		494.5
Commercial Auto		371.3		38.7			403.3		38.7			740.5		83.0			815.6		112.5
Other indemnity		3.9		.9			6.0		2.1			8.3		7.9			11.9		2.8

Total underwriting operations		3,590.2		262.0			3,441.4		253.8			7,091.3		580.1			6,848.0		609.8
Service businesses		5.0		(.5	)		4.1		(.6	)		9.2		(1.5	)		7.6		(1.7	)
Investments²		91.1		86.5			138.0		135.4			251.7		243.5			196.1		190.9
Interest expense		NA		(35.1	)		NA		(34.7	)		NA		(70.3	)		NA		(68.4	)

Consolidated total	$	3,686.3	$	312.9		$	3,583.5	$	353.9		$	7,352.2	$	751.8		$	7,051.7	$	730.6

¹	Personal auto insurance accounted for 90% of the total Personal Lines segment net premiums earned in all periods; insurance for our special lines products (e.g., motorcycles, ATVs, RVs, mobile homes, watercraft, and snowmobiles) 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.

NA = Not Applicable

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,
	2010			2009			2010			2009
	Underwriting Margin		Combined Ratio	Underwriting Margin		Combined Ratio	Underwriting Margin		Combined Ratio	Underwriting Margin		Combined Ratio
Personal Lines
Agency	7.5	%	92.5	7.0	%	93.0	9.1	%	90.9	8.5	%	91.5
Direct	6.2		93.8	7.1		92.9	5.8		94.2	7.8		92.2
Total Personal Lines	6.9		93.1	7.0		93.0	7.7		92.3	8.2		91.8
Commercial Auto	10.4		89.6	9.6		90.4	11.2		88.8	13.8		86.2
Other indemnity¹	NM		NM	NM		NM	NM		NM	NM		NM
Total underwriting operations	7.3		92.7	7.4		92.6	8.2		91.8	8.9		91.1

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:


(millions)	Three Months Ended June 30,						Six Months Ended June 30,
(millions)	2010			2009			2010			2009
Net income	$	211.9		$	250.1		$	507.5		$	482.6
After-tax changes (excluding cumulative effect adjustment in 2009) in:¹
Non-credit related OTTI losses²		(2.2	)		(15.5	)		(6.2	)		(15.5	)
Additional credit-related OTTI losses recognized on previously recorded non-credit losses		2.6			0			2.6			0

Net non-credit related OTTI losses³		0.4			(15.5	)		(3.6	)		(15.5	)
Sales/valuation changes on previously recorded non-credit related losses		7.9			(4.3	)		13.3			(4.3	)

Net non-credit related OTTI losses, adjusted for valuation changes		8.3			(19.8	)		9.7			(19.8	)
Other net unrealized gains (losses) on securities		(80.6	)		390.8			114.1			239.8

Total net unrealized gains (losses) on securities		(72.3	)		371.0			123.8			220.0
Net unrealized gains on forecasted transactions		(.8	)		(.2	)		(1.6	)		(1.0	)
Foreign currency translation adjustment		(.9	)		0			(.8	)		0

Comprehensive income	$	137.9		$	620.9		$	628.9		$	701.6

In June 2009, we reclassified OTTI losses of $189.6 million ($291.8 million pretax) from retained earnings to accumulated other comprehensive income (loss) as a cumulative effect of change in accounting principle in accordance with the new accounting guidance for other-than-temporary impairments we adopted during the second quarter 2009; this adjustment had no effect on comprehensive income for 2009.

²	Amount represents the portion of OTTI losses recognized in other comprehensive income during the period.

³	A positive amount for the period reflects credit losses reclassed from other comprehensive income that exceeded the amount of non-credit OTTI losses recognized in other comprehensive income during the period.

Note 9 Dividends — Progressive maintains a policy of paying an annual variable dividend that, if declared, would be payable shortly after the close of the 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 2010, the Board has determined the target percentage to be 25% 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 Gainshare factor is also used in 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. On a year-to-date basis, the Gainshare factor was 1.51. Since the final factor will be determined based on our results for the full year, the final factor may vary significantly from the factor at the end of any interim period.

Our annual variable dividend program is subject to certain limitations. If the Gainshare factor is zero or if our after-tax comprehensive income (see Note 8 - Comprehensive Income) 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 is subject to the above limitations, the Board is expected to declare the 2010 annual dividend in December 2010, with a record date in January 2011 and payment shortly thereafter.

In February 2010, Progressive paid $.1613 per common share, pursuant to a December 2009 declaration by the Board of Directors under our annual variable dividend policy. No dividend was declared for 2008, since we generated a comprehensive loss for the year. For the six months ended June 30, 2010, our after-tax comprehensive income was $628.9 million, which is higher than the $377.1 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 bodi