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 March 31, 2011

¨	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 registrant’s classes of common stock, as of the latest practicable date.

Common Shares, $1.00 par value: 655,740,546 outstanding at March 31, 2011

PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements.

The Progressive Corporation and Subsidiaries

Consolidated Statements of Income

(unaudited)


Three months ended March 31,	2011			2010			% Change
(millions - except per share amounts)

Revenues
Net premiums earned	$	3,665.3		$	3,501.1			5
Investment income		123.3			129.8			(5	)
Net realized gains (losses) on securities:
Other-than-temporary impairment (OTTI) losses:
Total OTTI losses		(1.4	)		(9.3	)		(85	)
Non-credit losses, net of credit losses recognized on previously recorded non-credit OTTI losses		0			6.2			NM

Net impairment losses recognized in earnings		(1.4	)		(3.1	)		(55	)
Net realized gains (losses) on securities		101.1			33.9			198

Total net realized gains (losses) on securities		99.7			30.8			224
Service revenues		5.2			4.2			24

Total revenues		3,893.5			3,665.9			6


Expenses
Losses and loss adjustment expenses		2,508.1			2,423.4			3
Policy acquisition costs		346.7			333.1			4
Other underwriting expenses		454.7			426.5			7
Investment expenses		3.1			3.6			(14	)
Service expenses		4.0			5.2			(23	)
Interest expense		31.5			35.2			(11	)

Total expenses		3,348.1			3,227.0			4


Net Income
Income before income taxes		545.4			438.9			24
Provision for income taxes		182.5			143.3			27

Net income	$	362.9		$	295.6			23


Computation of Earnings Per Share
Basic:
Average shares outstanding		651.8			661.4			(1	)

Per share	$	.56		$	.45			25

Diluted:
Average shares outstanding		651.8			661.4			(1	)
Net effect of dilutive stock-based compensation		4.0			5.0			(20	)

Total equivalent shares		655.8			666.4			(2	)

Per share	$	.55		$	.44			25


Dividends declared per share¹	$	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)


	March 31,						December 31, 2010
(millions)	2011			2010			December 31, 2010

Assets
Investments - Available-for-sale, at fair value:
Fixed maturities (amortized cost: $11,713.6, $11,660.4, and $11,630.8)	$	11,890.3		$	11,673.2		$	11,850.0
Equity securities:
Nonredeemable preferred stocks (cost: $536.8, $648.6, and $601.3)		1,099.9			1,310.5			1,157.6
Common equities (cost: $1,169.3, $905.1, and $1,021.7)		1,658.9			1,191.4			1,425.0
Short-term investments (amortized cost: $1,128.4, $1,389.2, and $1,090.8)		1,128.4			1,389.2			1,090.8

Total investments		15,777.5			15,564.3			15,523.4
Cash		155.5			155.1			158.9
Accrued investment income		111.3			113.6			109.3
Premiums receivable, net of allowance for doubtful accounts of $103.5, $105.3, and $114.9		2,928.5			2,722.9			2,738.4
Reinsurance recoverables, including $34.9, $40.4, and $37.4 on paid losses and loss adjustment expenses		767.3			666.2			741.5
Prepaid reinsurance premiums		86.7			72.6			88.1
Deferred acquisition costs		437.7			428.9			417.2
Income taxes		7.5			177.3			189.0
Property and equipment, net of accumulated depreciation of $581.1, $606.1, and $564.3		927.4			956.3			932.6
Other assets		326.7			191.7			251.9

Total assets	$	21,526.1		$	21,048.9		$	21,150.3

Liabilities and Shareholders’ Equity
Unearned premiums	$	4,587.1		$	4,452.6		$	4,353.8
Loss and loss adjustment expense reserves		7,073.6			6,724.5			7,071.0
Accounts payable, accrued expenses, and other liabilities		1,586.1			1,482.6			1,718.4
Debt¹		1,958.7			2,177.7			1,958.2

Total liabilities		15,205.5			14,837.4			15,101.4

Common Shares, $1.00 par value (authorized 900.0; issued 797.6, 797.8, and 797.7, including treasury shares of 141.9, 127.3, and 135.3)		655.7			670.5			662.4
Paid-in capital		1,013.0			949.9			1,007.1
Retained earnings		3,839.2			3,942.5			3,595.7
Accumulated other comprehensive income (loss), net of tax:
Net non-credit related OTTI losses, adjusted for valuation changes		(2.7	)		(14.3	)		(1.8	)
Other net unrealized gains (losses) on securities		799.6			640.6			769.1

Total net unrealized gains (losses) on securities		796.9			626.3			767.3
Net unrealized gains on forecasted transactions		13.9			20.8			14.7
Foreign currency translation adjustment		1.9			1.5			1.7

Total accumulated other comprehensive income (loss)		812.7			648.6			783.7

Total shareholders’ equity		6,320.6			6,211.5			6,048.9

Total liabilities and shareholders’ equity	$	21,526.1		$	21,048.9		$	21,150.3

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

See notes to consolidated financial statements.

The Progressive Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(unaudited)


Three months ended March 31,	2011			2010
(millions)

Cash Flows From Operating Activities
Net income	$	362.9		$	295.6
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		21.0			21.4
Amortization of fixed-income securities		59.5			57.0
Amortization of stock-based compensation		12.2			10.2
Net realized (gains) losses on securities		(99.7	)		(30.8	)
Net loss on disposition of property and equipment		1.2			.4
Changes in:
Premiums receivable		(190.1	)		(268.1	)
Reinsurance recoverables		(25.8	)		(101.4	)
Prepaid reinsurance premiums		1.4			(3.3	)
Deferred acquisition costs		(20.5	)		(26.7	)
Income taxes		165.6			133.7
Unearned premiums		233.3			279.7
Loss and loss adjustment expense reserves		2.5			71.5
Accounts payable, accrued expenses, and other liabilities		153.0			229.9
Other, net		(3.0	)		.9

Net cash provided by operating activities		673.5			670.0

Cash Flows From Investing Activities
Purchases:
Fixed maturities		(3,173.0	)		(948.3	)
Equity securities		(150.6	)		(315.2	)
Sales:
Fixed maturities		2,722.5			740.7
Equity securities		124.8			52.9
Maturities, paydowns, calls, and other:
Fixed maturities		324.2			223.2
Net purchases of short-term investments - other		(37.6	)		(311.0	)
Net unsettled security transactions		(73.2	)		45.5
Purchases of property and equipment		(17.5	)		(17.0	)
Sales of property and equipment		.5			.2

Net cash used in investing activities		(279.9	)		(529.0	)

Cash Flows From Financing Activities
Proceeds from exercise of stock options		2.9			4.0
Tax benefit from exercise/vesting of stock-based compensation		1.5			.2
Dividends paid to shareholders¹		(263.6	)		(108.2	)
Acquisition of treasury shares		(138.0	)		(42.6	)

Net cash used in financing activities		(397.2	)		(146.6	)

Effect of exchange rate changes on cash		.2			0

Increase (decrease) in cash		(3.4	)		(5.6	)
Cash, January 1		158.9			160.7

Cash, March 31	$	155.5		$	155.1

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 that, in the opinion of management, were necessary for a fair statement of the results for the interim periods presented. The results of operations for the period ended March 31, 2011, 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, 2010.

Note 2 Investments — The following table presents the composition of our investment portfolio by major security type consistent with our internal classification, which represents 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
March 31, 2011
Fixed maturities:
U.S. government obligations	$	2,965.7	$	25.2	$	(17.8	)	$	0		$	2,973.1		18.8	%
State and local government obligations		1,843.1		35.3		(9.7	)		0			1,868.7		11.8
Corporate debt securities		2,783.6		72.1		(9.3	)		3.3			2,849.7		18.1
Residential mortgage-backed securities		565.5		14.4		(24.1	)		0			555.8		3.5
Commercial mortgage-backed securities		1,826.9		57.4		(6.9	)		0			1,877.4		11.9
Other asset-backed securities		1,282.1		12.1		(1.7	)		.6			1,293.1		8.2
Redeemable preferred stocks		446.7		34.3		(8.5	)		0			472.5		3.0
Other debt obligations		0		0		0			0			0		0

Total fixed maturities		11,713.6		250.8		(78.0	)		3.9			11,890.3		75.3
Equity securities:
Nonredeemable preferred stocks		536.8		563.6		0			(.5	)		1,099.9		7.0
Common equities		1,169.3		494.3		(4.7	)		0			1,658.9		10.5
Short-term investments:
Other short-term investments		1,128.4		0		0			0			1,128.4		7.2

Total portfolio^2,3	$	14,548.1	$	1,308.7	$	(82.7	)	$	3.4		$	15,777.5		100.0	%


($ in millions)	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Net Realized Gains (Losses)¹			Fair Value		% of Total Fair Value

March 31, 2010
Fixed maturities:
U.S. government obligations	$	4,566.2	$	17.2	$	(100.1	)	$	0		$	4,483.3		28.8	%
State and local government obligations		1,676.4		53.3		(1.4	)		0			1,728.3		11.1
Corporate debt securities		1,619.2		70.3		(6.7	)		.4			1,683.2		10.8
Residential mortgage-backed securities		579.4		4.8		(60.6	)		0			523.6		3.4
Commercial mortgage-backed securities		1,686.1		57.9		(12.8	)		0			1,731.2		11.1
Other asset-backed securities		870.7		9.2		(2.1	)		(.1	)		877.7		5.6
Redeemable preferred stocks		661.3		25.4		(41.9	)		0			644.8		4.2
Other debt obligations		1.1		0		0			0			1.1		0

Total fixed maturities		11,660.4		238.1		(225.6	)		.3			11,673.2		75.0
Equity securities:
Nonredeemable preferred stocks		648.6		664.8		0			(2.9	)		1,310.5		8.4
Common equities		905.1		288.9		(2.6	)		0			1,191.4		7.7
Short-term investments:
Other short-term investments		1,389.2		0		0			0			1,389.2		8.9

Total portfolio^2,3	$	14,603.3	$	1,191.8	$	(228.2	)	$	(2.6	)	$	15,564.3		100.0	%


December 31, 2010
Fixed maturities:
U.S. government obligations	$	3,203.2	$	56.3	$	(16.9	)	$	0		$	3,242.6		20.9	%
State and local government obligations		1,955.5		43.0		(9.4	)		0			1,989.1		12.8
Corporate debt securities		2,579.0		78.1		(13.3	)		2.3			2,646.1		17.0
Residential mortgage-backed securities		567.1		17.8		(21.3	)		0			563.6		3.6
Commercial mortgage-backed securities		1,772.1		66.9		(6.9	)		0			1,832.1		11.8
Other asset-backed securities		1,063.9		12.4		(2.2	)		(.1	)		1,074.0		6.9
Redeemable preferred stocks		490.0		29.6		(17.1	)		0			502.5		3.3
Other debt obligations		0		0		0			0			0		0

Total fixed maturities		11,630.8		304.1		(87.1	)		2.2			11,850.0		76.3
Equity securities:
Nonredeemable preferred stocks		601.3		560.2		0			(3.9	)		1,157.6		7.5
Common equities		1,021.7		406.5		(3.2	)		0			1,425.0		9.2
Short-term investments:
Other short-term investments		1,090.8		0		0			0			1,090.8		7.0

Total portfolio^2,3	$	14,344.6	$	1,270.8	$	(90.3	)	$	(1.7	)	$	15,523.4		100.0	%

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

²	At March 31, 2011, we had $119.5 million of net unsettled security transactions offset in other assets, compared to $46.3 million at December 31, 2010; at March 31, 2010, we had $53.2 million of net unsettled security transactions offset in other liabilities.

³	The total fair value of the portfolio at March 31, 2011 and 2010, and December 31, 2010 included $1.8 billion, $2.1 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 other short-term investments include Eurodollar deposits, commercial paper, reverse repurchase transactions, and other investments that are expected to mature within one year.

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


	March 31,				December 31,
(millions)	2011		2010		2010
Fixed maturities:
Corporate debt securities	$	221.2	$	76.4	$	176.4
Other asset-backed securities		15.8		14.4		14.9

Total fixed maturities		237.0		90.8		191.3
Equity securities:
Nonredeemable preferred stocks		34.0		68.6		52.8

Total hybrid securities	$	271.0	$	159.4	$	244.1

Certain corporate debt securities are accounted for as hybrid securities since they were acquired at a substantial premium and contain a change-of-control put feature that permits the investor, at its sole option once the change of 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 upon the occurrence of a change in control could result in the investment not returning substantially all of the original investment. In the asset-backed portfolio, the hybrid security 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. If the auction is restored, this embedded derivative has the potential to more than double our initial investment yield. The hybrid securities in our nonredeemable preferred stock portfolio are perpetual preferred stocks that have call features with fixed-rate coupons, whereby the change in value of the call features is a component of the overall change in value of the preferred stocks.

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

Gross Unrealized Losses As of March 31, 2011, we had $78.0 million of gross unrealized losses in our fixed-maturity securities and $4.7 million in our common equities. We currently do not intend to sell the fixed-maturity 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 was 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 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
(millions)	Total Fair Value		Gross Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
March 31, 2011
Fixed maturities:
U.S. government obligations	$	1,592.2	$	(17.8	)	$	1,592.2	$	(17.8	)	$	0	$	0
State and local government obligations		494.8		(9.7	)		466.1		(8.9	)		28.7		(.8	)
Corporate debt securities		721.3		(9.3	)		691.7		(9.0	)		29.6		(.3	)
Residential mortgage-backed securities		363.6		(24.1	)		129.5		(1.3	)		234.1		(22.8	)
Commercial mortgage-backed securities		435.6		(6.9	)		363.7		(4.2	)		71.9		(2.7	)
Other asset-backed securities		297.5		(1.7	)		284.7		(1.1	)		12.8		(.6	)
Redeemable preferred stocks		161.5		(8.5	)		0		0			161.5		(8.5	)

Total fixed maturities		4,066.5		(78.0	)		3,527.9		(42.3	)		538.6		(35.7	)
Equity securities:
Common equities		48.4		(4.7	)		31.7		(3.2	)		16.7		(1.5	)

Total equity securities		48.4		(4.7	)		31.7		(3.2	)		16.7		(1.5	)

Total portfolio	$	4,114.9	$	(82.7	)	$	3,559.6	$	(45.5	)	$	555.3	$	(37.2	)


	Total Fair Value		Gross Unrealized Losses			Less than 12 Months					12 Months or Greater
(millions)	Total Fair Value		Gross Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses

March 31, 2010
Fixed maturities:
U.S. government obligations	$	2,158.1	$	(100.1	)	$	49.7	$	(.3	)	$	2,108.4	$	(99.8	)
State and local government obligations		86.4		(1.4	)		49.9		(.3	)		36.5		(1.1	)
Corporate debt securities		242.1		(6.7	)		197.5		(1.5	)		44.6		(5.2	)
Residential mortgage-backed securities		365.4		(60.6	)		35.1		(1.5	)		330.3		(59.1	)
Commercial mortgage-backed securities		140.4		(12.8	)		17.8		(.5	)		122.6		(12.3	)
Other asset-backed securities		39.1		(2.1	)		30.6		0			8.5		(2.1	)
Redeemable preferred stocks		425.8		(41.9	)		0		0			425.8		(41.9	)

Total fixed maturities		3,457.3		(225.6	)		380.6		(4.1	)		3,076.7		(221.5	)
Equity securities:
Common equities		52.0		(2.6	)		46.4		(2.2	)		5.6		(.4	)

Total equity securities		52.0		(2.6	)		46.4		(2.2	)		5.6		(.4	)

Total portfolio	$	3,509.3	$	(228.2	)	$	427.0	$	(6.3	)	$	3,082.3	$	(221.9	)


December 31, 2010
Fixed maturities:
U.S. government obligations	$	495.3	$	(16.9	)	$	495.3	$	(16.9	)	$	0	$	0
State and local government obligations		461.9		(9.4	)		454.0		(8.7	)		7.9		(.7	)
Corporate debt securities		589.3		(13.3	)		541.3		(11.6	)		48.0		(1.7	)
Residential mortgage-backed securities		314.1		(21.3	)		74.0		(1.0	)		240.1		(20.3	)
Commercial mortgage-backed securities		332.0		(6.9	)		269.7		(3.1	)		62.3		(3.8	)
Other asset-backed securities		214.8		(2.2	)		209.8		(1.1	)		5.0		(1.1	)
Redeemable preferred stocks		216.7		(17.1	)		0		0			216.7		(17.1	)

Total fixed maturities		2,624.1		(87.1	)		2,044.1		(42.4	)		580.0		(44.7	)
Equity securities:
Common equities		60.5		(3.2	)		57.3		(3.1	)		3.2		(.1	)

Total equity securities		60.5		(3.2	)		57.3		(3.1	)		3.2		(.1	)

Total portfolio	$	2,684.6	$	(90.3	)	$	2,101.4	$	(45.5	)	$	583.2	$	(44.8	)

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 March 31, 2011
(millions)	Residential Mortgage- Backed			Commercial Mortgage- Backed			Corporate Debt		Total
Beginning balance at January 1, 2011	$	32.3		$	1.0		$	6.5	$	39.8
Credit losses for which an OTTI was previously recognized		0			0			0		0
Credit losses for which an OTTI was not previously recognized		.1			.2			0		.3
Change in recoveries of future cash flows expected to be collected¹		3.2			.2			0		3.4
Reductions for previously recognized credit impairments written-down to fair value²		(1.1	)		(.4	)		0		(1.5	)

Ending balance at March 31, 2011	$	34.5		$	1.0		$	6.5	$	42.0


	Three Months Ended March 31, 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		.4			0			0		.4
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		(9.5	)		0			0		(9.5	)
Reductions for previously recognized credit impairments written-down to fair value²		0			(.2	)		0		(.2	)

Ending balance at March 31, 2010	$	33.2		$	.9		$	6.5	$	40.6

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 (increases) 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).

Since we 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 (e.g., 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 March 31, 2011, March 31, 2010, and December 31, 2010, we did not hold any trading securities and did not have any net realized gains (losses) on trading securities for the three months ended March 31, 2011 and 2010.

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 March 31, 2011, March 31, 2010, and December 31, 2010, and for the three months ended March 31, 2011 and 2010; amounts are on a pretax basis:


(millions)									Balance Sheet											Income Statement
	Notional Value¹										Fair Value									Net Realized Gains (Losses) on Securities
	March 31,				Dec. 31,						March 31,						Dec. 31,			Three months ended March 31,
Derivatives designated as:	2011		2010		2010		Purpose		Classification		2011			2010			2010			2011			2010

Non-hedging instruments
Assets:
Corporate credit default swaps	$	10	$	0	$	35		Manage credit risk		Investments - fixed maturities	$	.7		$	0		$	1.3		$	(.1	)	$	0
Liabilities:
Interest rate swaps		613		713		713		Manage portfolio duration		Other liabilities		(27.9	)		(11.7	)		(41.7	)		2.6			(17.9	)

Corporate credit default swaps		25		25		0		Manage credit risk		Other liabilities		0			(.5	)		0			(.6	)		.2

Closed:
Interest rate swaps		100		0		0		Manage portfolio duration		NA		0			0			0			.5			0

Total		NA		NA		NA					$	(27.2	)	$	(12.2	)	$	(40.4	)	$	2.4		$	(17.7	)

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.

NA= Not Applicable

INTEREST RATE SWAPS

During the periods ended March 31, 2011, March 31, 2010, and December 31, 2010, 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 pursuant to which we are paying a fixed rate and receiving a variable rate. We closed a portion of this position during the first quarter 2011. The open position has generated an aggregate realized loss of $27.9 million, as interest rates have fallen since the inception of this position. As of March 31, 2011, March 31, 2010, and December 31, 2010, we delivered $36.3 million, $17.0 million, and $52.2 million, respectively, in cash collateral to the counterparty on our open interest rate swap position.

CORPORATE CREDIT DEFAULT SWAPS

During the periods ended March 31, 2011, March 31, 2010, and December 31, 2010, 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. As of March 31, 2011 and March 31, 2010, we delivered $0.2 million and $0.6 million, respectively, in cash collateral to the counterparty on this position. As of December 31, 2010, we received $0.5 million in cash collateral from the counterparty on this position.

During the periods ended March 31, 2011 and December 31, 2010, we held a position opened during the second quarter 2010, where 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 would be required to cover a $10 million notional value if a credit event is triggered, including failure to pay or bankruptcy by the issuer. 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 March 31, 2011, the credit worthiness of the issuer is favorable and we received $0.9 million in cash collateral from the counterparty on this position; we received $1.1 million in cash collateral from the counterparty at December 31, 2010.

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).

We evaluate whether a market is distressed or inactive in determining the fair value of our portfolio. We review certain market level inputs to evaluate whether sufficient activity, volume, and new issuances exist 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
March 31, 2011
Fixed maturities:
U.S. government obligations	$	2,973.1	$	0	$	0	$	2,973.1	$	2,965.7
State and local government obligations		0		1,868.7		0		1,868.7		1,843.1
Corporate debt securities		0		2,820.1		29.6		2,849.7		2,783.6
Other debt obligations		0		0		0		0		0

Subtotal		2,973.1		4,688.8		29.6		7,691.5		7,592.4

Asset-backed securities:
Residential mortgage-backed		0		479.5		76.3		555.8		565.5
Commercial mortgage-backed		0		1,850.3		27.1		1,877.4		1,826.9
Other asset-backed		0		1,288.0		5.1		1,293.1		1,282.1

Subtotal asset-backed securities		0		3,617.8		108.5		3,726.3		3,674.5

Redeemable preferred stocks:
Financials		24.3		146.1		0		170.4		148.6
Utilities		0		72.1		0		72.1		70.4
Industrials		0		230.0		0		230.0		227.7

Subtotal redeemable preferred stocks		24.3		448.2		0		472.5		446.7

Total fixed maturities		2,997.4		8,754.8		138.1		11,890.3		11,713.6

Equity securities:
Nonredeemable preferred stocks:
Financials		556.0		466.0		0		1,022.0		474.9
Utilities		0		64.2		0		64.2		47.9
Industrials		0		13.7		0		13.7		14.0

Subtotal nonredeemable preferred stocks		556.0		543.9		0		1,099.9		536.8

Common equities:
Common stocks¹		1,647.1		0		0		1,647.1		1,165.2
Other equity-like investments		0		0		11.8		11.8		4.1

Subtotal common equities		1,647.1		0		11.8		1,658.9		1,169.3

Total fixed maturities and equity securities	$	5,200.5	$	9,298.7	$	149.9		14,649.1		13,419.7

Short-term investments:
Other short-term investments²								1,128.4		1,128.4

Total portfolio							$	15,777.5	$	14,548.1

Debt³							$	2,120.5	$	1,958.7


	Fair Value
(millions)	Level 1		Level 2		Level 3		Total		Cost

March 31, 2010
Fixed maturities:
U.S. government obligations	$	4,483.3	$	0	$	0	$	4,483.3	$	4,566.2
State and local government obligations		0		1,728.3		0		1,728.3		1,676.4
Corporate debt securities		0		1,654.3		28.9		1,683.2		1,619.2
Other debt obligations		0		0		1.1		1.1		1.1

Subtotal		4,483.3		3,382.6		30.0		7,895.9		7,862.9

Asset-backed securities:
Residential mortgage-backed		0		450.1		73.5		523.6		579.4
Commercial mortgage-backed		0		1,710.2		21.0		1,731.2		1,686.1
Other asset-backed		0		871.5		6.2		877.7		870.7

Subtotal asset-backed securities		0		3,031.8		100.7		3,132.5		3,136.2

Redeemable preferred stocks:
Financials		21.0		248.4		0		269.4		272.2
Utilities		0		69.2		0		69.2		69.6
Industrials		0		306.2		0		306.2		319.5

Subtotal redeemable preferred stocks		21.0		623.8		0		644.8		661.3

Total fixed maturities		4,504.3		7,038.2		130.7		11,673.2		11,660.4

Equity securities:
Nonredeemable preferred stocks:
Financials		618.5		574.5		0		1,193.0		546.7
Utilities		0		66.7		0		66.7		50.8
Industrials		0		50.8		0		50.8		51.1

Subtotal nonredeemable preferred stocks		618.5		692.0		0		1,310.5		648.6

Common equities:
Common stocks¹		1,178.4		0		0		1,178.4		899.9
Other equity-like investments		0		0		13.0		13.0		5.2

Subtotal common equities		1,178.4		0		13.0		1,191.4		905.1

Total fixed maturities and equity securities	$	6,301.2	$	7,730.2	$	143.7		14,175.1		13,214.1

Short-term investments:
Other short-term investments²								1,389.2		1,389.2

Total portfolio							$	15,564.3	$	14,603.3

Debt³							$	2,252.9	$	2,177.7


	Fair Value
(millions)	Level 1		Level 2		Level 3		Total		Cost

December 31, 2010
Fixed maturities:
U.S. government obligations	$	3,242.6	$	0	$	0	$	3,242.6	$	3,203.2
State and local government obligations		0		1,989.1		0		1,989.1		1,955.5
Corporate debt securities		0		2,616.6		29.5		2,646.1		2,579.0
Other debt obligations		0		0		0		0		0

Subtotal		3,242.6		4,605.7		29.5		7,877.8		7,737.7

Asset-backed securities:
Residential mortgage-backed		0		466.9		96.7		563.6		567.1
Commercial mortgage-backed		0		1,804.6		27.5		1,832.1		1,772.1
Other asset-backed		0		1,069.0		5.0		1,074.0		1,063.9

Subtotal asset-backed securities		0		3,340.5		129.2		3,469.7		3,403.1

Redeemable preferred stocks:
Financials		23.4		172.4		0		195.8		183.8
Utilities		0		71.4		0		71.4		70.2
Industrials		0		235.3		0		235.3		236.0

Subtotal redeemable preferred stocks		23.4		479.1		0		502.5		490.0

Total fixed maturities		3,266.0		8,425.3		158.7		11,850.0		11,630.8

Equity securities:
Nonredeemable preferred stocks:
Financials		490.2		565.1		0		1,055.3		514.3
Utilities		0		67.9		0		67.9		50.8
Industrials		0		34.4		0		34.4		36.2

Subtotal nonredeemable preferred stocks		490.2		667.4		0		1,157.6		601.3

Common equities:
Common stocks¹		1,413.2		0		0		1,413.2		1,017.6
Other equity-like investments		0		0		11.8		11.8		4.1

Subtotal common equities		1,413.2		0		11.8		1,425.0		1,021.7

Total fixed maturities and equity securities	$	5,169.4	$	9,092.7	$	170.5		14,432.6		13,253.8

Short-term investments:
Other short-term investments²								1,090.8		1,090.8

Total portfolio							$	15,523.4	$	14,344.6

Debt³							$	2,105.7	$	1,958.2

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 external sources.

Our portfolio valuations classified as either Level 1 or Level 2 in the above tables are priced exclusively by external sources, including: pricing vendors, dealers/market makers, and exchange-quoted prices. We had two nonredeemable preferred securities with an aggregate value of $71.2 million that were transferred from Level 2 to Level 1 during the first quarter 2011 due to the availability of exchange pricing. We did not have any transfers between Level 1 and Level 2 for the periods ended March 31, 2010 and December 31, 2010.

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 and fixed-income investments included in the Level 3 securities are valued using external pricing supplemented by internal review and analysis.

At March 31, 2011, vendor-quoted prices represented 57% of our Level 1 classifications, compared to 71% at March 31, 2010 and 63% at December 31, 2010. 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 significant reduction in Level 1 vendor-quoted prices is due to our reduction in U.S. Treasury Notes since March 31, 2010. The balance of our Level 1 pricing comes from quotes obtained directly from trades made on an active exchange.

At March 31, 2011, vendor-quoted prices comprised 96% of our Level 2 classifications, compared to 94% at both March 31, 2010 and December 31, 2010. 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. We reviewed each sector for transaction volumes and determined that sufficient activity and liquidity existed to provide a credible source for market level valuations, despite being below historical averages, for all periods presented.

Broker/dealer-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/dealer quote for a security, and we will also obtain 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 validate 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 March 31, 2011 and 2010, and December 31, 2010, 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) non-investment-grade securities with little liquidity. Based on these factors, it was difficult to independently verify observable market inputs that were used to generate the external valuations we received. At March 31, 2011 and 2010, as well as December 31, 2010, one private common equity security with an aggregate value of $10.2 million was priced internally. Additionally, at March 31, 2011, we had two fixed-maturity securities with an aggregate value of $0.6 million that were priced internally, compared to one fixed-maturity security with a value of $0.3 million at March 31, 2010 and two fixed-maturity securities with an aggregate value of $0.5 million at December 31, 2010.

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 ended March 31, 2011 and 2010:


	Level 3 Fair Value
(millions)	Fair Value at Dec. 31, 2010		Calls/ Maturities/ Paydowns			Purchases		Sales		Net Realized (gain)/loss		Change in Valuation			Net Transfers in (out)¹			Fair value at March 31, 2011
Fixed maturities:
Asset-backed securities:
Residential mortgage-backed	$	96.7	$	(5.0	)	$	0	$	0	$	0	$	0		$	(15.4	)	$	76.3
Commercial mortgage-backed		27.5		0			0		0		0		(.4	)		0			27.1
Other asset-backed		5.0		(.4	)		0		0		0		.5			0			5.1

Total asset-backed securities		129.2		(5.4	)		0		0		0		.1			(15.4	)		108.5
Corporate debt securities		29.5		0			0		0		0		.1			0			29.6
Other debt obligations		0		0			0		0		0		0			0			0
Redeemable preferred stocks:
Industrials		0		0			0		0		0		0			0			0

Total fixed maturities		158.7		(5.4	)		0		0		0		.2			(15.4	)		138.1

Equity securities:
Common equities:
Other equity-like investments		11.8		0			0		0		0		0			0			11.8

Total Level 3 securities	$	170.5	$	(5.4	)	$	0	$	0	$	0	$	.2		$	(15.4	)	$	149.9

¹	The $(15.4) million was transferred out of Level 3 into Level 2 due to the availability of vendor pricing on a residential mortgage-backed security.


	Level 3 Fair Value
(millions)	Fair Value at Dec. 31, 2009		Calls/ Maturities/ Paydowns			Purchases		Sales		Net Realized (gain)/loss		Change in Valuation			Net Transfers in (out)¹			Fair value at March 31, 2010
Fixed maturities:
Asset-backed securities:
Residential mortgage-backed	$	46.1	$	(3.0	)	$	18.0	$	0	$	0	$	.3		$	12.1		$	73.5
Commercial mortgage-backed		21.6		0			0		0		0		(.6	)		0			21.0
Other asset-backed		7.8		(.7	)		0		0		0		(.9	)		0			6.2

Total asset-backed securities		75.5		(3.7	)		18.0		0		0		(1.2	)		12.1			100.7
Corporate debt securities		28.2		0			0		0		0		.7			0			28.9
Other debt obligations		1.1		0			0		0		0		0			0			1.1
Redeemable preferred stocks:
Industrials		53.1		0			0		0		0		0			(53.1	)		0

Total fixed maturities		157.9		(3.7	)		18.0		0		0		(.5	)		(41.0	)		130.7

Equity securities:
Common equities:
Other equity-like investments		12.9		0			0		0		0		.1			0			13.0

Total Level 3 securities	$	170.8	$	(3.7	)	$	18.0	$	0	$	0	$	(.4	)	$	(41.0	)	$	143.7

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.

Note 4 Debt — Debt consisted of:


(millions)	March 31, 2011				March 31, 2010				December 31, 2010
(millions)	Carrying Value		Fair Value		Carrying Value		Fair Value		Carrying Value		Fair Value
6.375% Senior Notes due 2012	$	349.7	$	365.8	$	349.3	$	378.4	$	349.6	$	369.3
7% Notes due 2013		149.6		167.6		149.5		164.8		149.6		165.0
6 5/8% Senior Notes due 2029		294.9		337.9		294.7		318.6		294.8		329.9
6.25% Senior Notes due 2032		394.3		429.4		394.2		409.2		394.2		433.3
6.70% Fixed-to-Floating Rate Junior Subordinated Debentures due 2067		770.2		819.8		990.0		981.9		770.0		808.2

Total	$	1,958.7	$	2,120.5	$	2,177.7	$	2,252.9	$	1,958.2	$	2,105.7

On December 31, 2010, we entered into an amendment to the 364-Day Secured Liquidity Credit Facility Agreement (“Credit Facility Agreement”) with PNC Bank, National Association (PNC), which extended the expiration date of our outstanding credit facility agreement until December 31, 2011, 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 or related facilities that affect our ability to transfer or receive funds. Under this credit facility, 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) 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 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 2010 or through the first three months of 2011.

In June 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 on July 8, 2010. We received valid tenders from holders of the Debentures in the aggregate principal amount of $222.9 million. All of the tendering holders validly tendered by the early tender date of June 23, 2010 and received consideration of $950 per $1,000 principal amount of the Debentures accepted for purchase, which included an early tender payment of $50 per $1,000 principal amount of Debentures accepted. We recognized a net gain on the debt extinguishment of $6.4 million, after deducting expenses and fees associated with the Tender Offer and related Consent Solicitation discussed below.

As a condition of the Tender Offer, we solicited consents (the “Consent Solicitation”) from the holders of our 6.25% Senior Notes to terminate the Replacement Capital Covenant (the “RCC”) relating to the 6.25% Senior Notes. The RCC was originally entered into by Progressive in June 2007 for the benefit of the holders of the 6.25% Senior 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 6.25% Senior 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 6.25% Senior Notes.

Note 5 Income Taxes — At March 31, 2011 and 2010 and December 31, 2010, 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.

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


	Three Months Ended March 31,
(millions)	2011		2010
Income taxes, net of refunds	$	15.0	$	9.0
Interest		21.1		21.1

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 was sold in 2010. 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 March 31,
	2011					2010
(millions)	Revenues		Pretax Profit (Loss)			Revenues		Pretax Profit (Loss)
Personal Lines
Agency	$	1,887.8	$	210.1		$	1,827.9	$	196.1
Direct		1,420.0		105.2			1,299.6		70.7

Total Personal Lines¹		3,307.8		315.3			3,127.5		266.8
Commercial Auto		355.7		41.1			369.2		44.3
Other indemnity		1.8		(.6	)		4.4		7.0

Total underwriting operations		3,665.3		355.8			3,501.1		318.1
Service businesses		5.2		1.2			4.2		(1.0	)
Investments²		223.0		219.9			160.6		157.0
Interest expense		NA		(31.5	)		NA		(35.2	)

Consolidated total	$	3,893.5	$	545.4		$	3,665.9	$	438.9

Personal auto insurance accounted for 91% and 90% of the total Personal Lines segment net premiums earned in the first quarters of 2011 and 2010, respectively; 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 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 and combined ratios for our underwriting operations:


	Three Months Ended March 31,
	2011						2010
	Underwriting Margin			Combined Ratio			Underwriting Margin			Combined Ratio
Personal Lines
Agency		11.1	%		88.9	%		10.7	%		89.3	%
Direct		7.4			92.6			5.4			94.6
Total Personal Lines		9.5			90.5			8.5			91.5
Commercial Auto		11.6			88.4			12.0			88.0
Other indemnity¹		NM			NM			NM			NM
Total underwriting operations		9.7			90.3			9.1			90.9

¹	Underwriting margins and 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 March 31,
(millions)	2011			2010
Net income	$	362.9		$	295.6
After-tax changes in:
Non-credit related OTTI losses¹		(.4	)		(4.0	)
Additional credit-related OTTI losses recognized on previously recorded non-credit losses		.4			0

Net non-credit related OTTI losses		0			(4.0	)
Sales/valuation changes on previously recorded non-credit related losses		(.9	)		5.4

Net non-credit related OTTI losses, adjusted for valuation changes		(.9	)		1.4
Other net unrealized gains (losses) on securities		30.5			194.7

Total net unrealized gains (losses) on securities		29.6			196.1
Net unrealized gains on forecasted transactions		(.8	)		(.8	)
Foreign currency translation adjustment		.2			.1

Comprehensive income	$	391.9		$	491.0

¹	Amounts represent the portion of 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 2011, the Board has determined the target percentage to be 33-1/3% 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 in advance 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, as of March 31, 2011, the Gainshare factor was 1.26. Since the final factor will be determined based on our results for the full year, the final factor may vary from the current factor.

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 2011 annual dividend in December 2011, with a record date in January 2012 and payment shortly thereafter. For the three months ended March 31, 2011, our after-tax comprehensive income was $391.9 million, which is higher than the $231.3 million of after-tax underwriting income for the same period.

In February 2011, Progressive paid $.3987 per common share, pursuant to a December 2010 declaration by the Board of Directors under our annual variable dividend policy. In February 2010, Progressive paid $.1613 per common share, pursuant to a December 2009 declaration by the Board. In addition to the annual variable dividend, Progressive paid a $1.00 per common share extraordinary dividend in December 2010, pursuant to an October 2010 declaration by the Board.

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 practices in evaluating or paying medical or injury claims or benefits, including, but not limited to, personal injury protection, medical payments, and bodily injury benefits; rating practices at policy renewal; the utilization, content, or appearance of policy documents; 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 accruals for lawsuits 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 accruals for those lawsuits for which a 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 accrued, 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 Note 12 – Litigation in our Annual Report to Shareholders for the year ended December 31, 2010.

Note 11 New Accounting Standard — During 2010, the Financial Accounting Standards Board issued an accounting standard update related to the accounting for the deferral of costs associated with the successful acquisition or renewal of insurance contracts. This standard is intended to help reduce diversity in practice and is effective for fiscal years beginning after December 15, 2011 (January 2012 for calendar-year companies). We are currently analyzing the impact this standard will have on our financial condition, cash flows, and results of operations, and anticipate that we will defer less acquisition costs under this standard.

Item 2.

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

I. OVERVIEW

In the first quarter 2011, The Progressive Corporation’s insurance subsidiaries generated net premiums written and policies in force growth of 3% and 6%, respectively, and underwriting profitability of 9.7%, or $355.8 million. Our investment operations produced recurring investment income of $123.3 million and experienced $99.7 million of net realized gains on securities. We reported net income of $362.9 million, or $.55 per share, for the first quarter 2011. Our total capital position increased $272.2 million during the quarter, to $8.3 billion at March 31, 2011.

A. Operations

During the first quarter 2011, we realized a year-over-year increase in net premiums written of 3%, with our Agency and Direct Personal Lines businesses growing 2% and 7%, respectively, and our Commercial Auto business declining 3%. Premium growth reflects a combination of new business applications (i.e., issued policies), premium per policy (i.e., rates), and customer retention. On a year-over-year basis, our Personal Lines new business applications decreased 2%, while our Commercial Auto new applications decreased 6%. The decrease in new applications partially reflects the strong new application volume we generated in the first quarter last year and some apparent decline in the level of consumers shopping for auto insurance. Our advertising and media placement remain a critical component of our new customer generation and we will continue to take advantage of the brand assets we have developed in both “Flo” and the “Messenger.” For our Commercial Auto business, we cannot predict when the commercial auto market will begin to expand and will stay focused on our efforts in capturing additional business within the existing market.

Both our Agency and Direct businesses contributed to the 7% increase in our Personal Lines renewal applications. The increase in part reflects our retention efforts (e.g., rate stability and loyalty programs) as well as an increase in the number of Agency auto customers in tiers that generally stay with us longer. In addition, we are continuing to expand our penetration of multi-product households, which we believe will strengthen selected policyholder retention. During the quarter, we introduced a multi-product quoting application to improve the efficiency of quoting and buying a combination of Personal Lines products. Commercial Auto experienced a decline of 2% in renewal applications.

Our efforts remain focused on several other initiatives we put in place that are designed to help stimulate growth and provide consumers with distinctive new insurance options. These initiatives include:

•

the national advertising launch of Snapshot^SM, our usage-based insurance product,

•

new product models in both our personal and commercial auto businesses, which are designed to help improve competitiveness, and

•

improving our presence in the mobile device space.

In addition, Name Your Price^®, which is a program that provides Direct auto customers the opportunity to select the price they would like to pay for auto insurance, remains a key initiative. We completed the countrywide rollout of this program in 2010.

On a year-over-year basis, for the first quarter 2011, written premium per policy remained relatively flat in our Agency auto business, but decreased about 1% in Direct auto. Commercial Auto also saw premiums per policy remain relatively flat during the first quarter 2011, compared to decreases throughout 2010. The average written premium for our special lines products was down 5%, primarily driven by a decline in written premium on our motorcycle policies, partially reflecting older bikes on the roads. Adjusting rates is an ongoing process, and we will continue to evaluate future rate needs and react quickly as we recognize changing trends.

On a companywide basis, we grew policies in force 6%, with Personal Lines growing 6% and Commercial Auto decreasing 1%. Our Direct auto business continues to be the biggest contributor to this increase with policies in force growth of 10%, or 327,300 policies. In our Agency auto business, policies in force reached an all-time high with 4.6 million policies, an increase of 164,600 policies, or 4%, over last March; our previous high-water mark was in April 2006. With a 5% increase in our special lines policies over the first quarter last year, we are close to 12 million Personal Lines policyholders.

To continue to grow policies in force, it is critical that we retain our customers for longer periods, which is why increasing retention remains one of our most important priorities and why we have stepped up our efforts to increase the number of multi-product households. 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. Policy life expectancy for our Agency auto business increased about 8% over the same time last year, and in our Direct auto business remained healthy, although relatively flat. Our policy life expectancy in both our Commercial Auto and special lines products was down about 1%.

Our 9.7% companywide underwriting profit margin for the first quarter 2011 exceeded our target of 4% and was 0.6 percentage points better than in the first quarter 2010. All of the businesses contributed to these strong results. During the first quarter 2011, we experienced $99.0 million, or 2.7 points, of favorable prior accident year development, compared to 3.0 points of favorable development in the first quarter last year. Nearly 75% of the development was in our Personal Lines business, with the balance in

Commercial Auto. On a year-over-year basis, for the first quarter 2011, our personal auto products experienced an aggregate decrease in both severity and frequency.

B. Investments and Capital Management

The fair value of our investment portfolio was $15.8 billion at March 31, 2011. During the first quarter, 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-maturity securities, including U.S. Treasury Notes, municipal bonds, asset-backed securities, and corporate debt, as well as short-term investments). At quarter end, our portfolio was allocated 24% to Group I and 76% to Group II.

In April 2011, the Investment and Capital Committee of the Board of Directors approved a management-proposed change to the definitions of Group I and Group II securities. Investment-grade redeemable preferred stocks with cumulative dividends, which were previously allocated 100% to Group I, will be allocated 50% to Group I and 50% to Group II. In addition, for the allocation between Group I and Group II securities only, residential and commercial mortgage-backed securities will derive their credit ratings from models provided by the National Association of Insurance Commissioners (NAIC); all other debt securities will continue to obtain their credit rating from external vendors. Based on the credit ratings assigned by the NAIC, some of these mortgage-backed securities may no longer be categorized as non-investment-grade securities for our Group I classification. We believe these changes allow our asset allocation strategy to be more in line with our capital planning initiatives and more accurately reflect the general economics of these particular securities. If these changes had been effective for the first quarter 2011, our portfolio would have been allocated 22% to Group I and 78% to Group II.

Our investment portfolio produced a fully taxable equivalent (FTE) total return of 1.8% for the first quarter 2011. We experienced gains in both our common stock and fixed-income portfolios, with FTE total returns of 6.5% and 1.3%, respectively. At March 31, 2011, the fixed-income portfolio had a weighted average credit quality of AA-. We continue to maintain our fixed-income portfolio strategy of investing in high-quality securities. Our current duration is 2.2 years to limit the potential loss of capital in the event of an increase in interest rates from their present low levels.

At March 31, 2011, our total capital (debt plus equity) was $8.3 billion, up from the $8.0 billion held at December 31, 2010. We continue to manage our investing and financing activities in order to maintain sufficient capital to support all of 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 three months ended March 31, 2011 and 2010, operations generated positive cash flows of $673.5 million and $670.0 million, respectively. During the first quarter 2011, we repurchased 6.8 million of our common shares at a total cost of $138.0 million (average cost of $20.29 per share) and paid $.3987 per share pursuant to our annual variable dividend policy. From time to time, we also may 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 first three months of 2011 or 2010. However, during July 2010, we repurchased $222.9 million in the aggregate principal amount of our $1 billion 6.70% Fixed-to-Floating Rate Junior Subordinated Debentures due 2067 (See Note 4 – Debt for additional information).

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. Our next scheduled debt maturity will be in January 2012 in the amount of $350 million. 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 by a rating agency.

Progressive seeks to deploy capital in a prudent manner and uses multiple data sources and modeling tools to estimate the frequency, severity, and correlation of identified exposures, including, but not limited to, catastrophic losses, natural disasters, and other significant business interruptions to estimate our potential capital needs.

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 in 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 in a non-insurance subsidiary of the holding company or in our insurance entities, where it is potentially eligible for a dividend up to the holding company. Regulatory restrictions on subsidiary dividends are discussed in Note 8 – Statutory Financial Information in our Annual Report to Shareholders for the year ended December 31, 2010.

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

At all times during 2010 and the first three months of 2011, our total capital exceeded the sum of our regulatory capital layer plus our self-constructed extreme contingency load. At March 31, 2011, we held total capital (debt plus equity) of $8.3 billion at book value, compared to $8.0 billion at December 31, 2010 and $8.4 billion at March 31, 2010.

Short-Term Borrowings

During the three months ended March 31, 2011 and 2010, we did not engage in short-term borrowings to fund our operations. As discussed above, our insurance operations create liquidity by collecting and investing insurance premiums in advance of paying claims. Information concerning our insurance operations can be found below under Results of Operations—Underwriting, and details about our investment portfolio can be found below under Results of Operations—Investments. In addition, we have $125 million available under a secured line of credit that is described in further detail in Note 4—Debt. The line of credit is intended to provide liquidity in the event of disruptions in our cash management operations; we have never borrowed under this line of credit.

B. Commitments and Contingencies

Contractual Obligations

During the first three months of 2011, our contractual obligations have not changed materially from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2010.

Off-Balance-Sheet Arrangements

Our off-balance-sheet leverage includes derivative positions, 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 2010. 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, 2010.

Other

We currently have no significant construction underway.

III. RESULTS OF OPERATIONS – UNDERWRITING

A. Growth


	Three Months Ended March 31,
($ in millions)	2011		2010		% Change
NET PREMIUMS WRITTEN
Personal Lines
Agency	$	1,970.2	$	1,933.3		2
Direct		1,551.1		1,454.5		7

Total Personal Lines		3,521.3		3,387.8		4
Commercial Auto		378.7		388.5		(3	)
Other indemnity		0		1.2		NM

Total underwriting operations	$	3,900.0	$	3,777.5		3

NET PREMIUMS EARNED
Personal Lines
Agency	$	1,887.8	$	1,827.9		3
Direct		1,420.0		1,299.6		9

Total Personal Lines		3,307.8		3,127.5		6
Commercial Auto		355.7		369.2		(4	)
Other indemnity		1.8		4.4		(59	)

Total underwriting operations	$	3,665.3	$	3,501.1		5

NM = Not Meaningful

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 was in effect as of the end of the period specified. As of March 31, our policies in force were:


(thousands)	2011		2010		% Change
POLICIES IN FORCE
Personal Lines:
Agency auto		4,581.3		4,416.7		4
Direct auto		3,722.2		3,394.9		10

Total auto		8,303.5		7,811.6		6
Special lines¹		3,645.5		3,479.0		5

Total Personal Lines		11,949.0		11,290.6		6

Commercial Auto		506.5		510.8		(1	)

¹	Includes insurance for motorcycles, ATVs, RVs, mobile homes, watercraft, snowmobiles, and similar items, as well as a personal umbrella product.

To analyze growth, we review new policies, rate levels, and the retention characteristics of our books of business. We experienced the following growth in new and renewal applications:


	Growth Over Prior Year Quarter
	2011			2010
APPLICATIONS
Personal Lines
New		(2	) %		16	%
Renewal		7	%		9	%
Commercial Auto
New		(6	) %		2	%
Renewal		(2	) %		(2	) %

Our Personal Lines business had a decline in new applications for the first three months of 2011, compared to last year, as both our Direct and Agency auto businesses saw decreases. The decline in 2011 is due in large part to the significant growth in new applications we experienced in the first quarter 2010 and our assessment of decreased consumer shopping levels. We remain committed to our advertising campaigns, product enhancements, and brand-building efforts in order to stimulate new business. Our Commercial Auto business also experienced a decrease in new applications for the first quarter 2011, compared to the same period last year. This business continues to be affected by the economic downturn, particularly in the housing and construction sectors.

We continue to pursue initiatives aimed at providing consumers with distinctive new auto insurance options. During the first quarter 2011, we continued the rollout of new auto product models, which further refine our segmentation and incorporate the best design elements of the Agency and Direct auto products. We introduced these models in 12 additional states in the first quarter 2011, bringing the total number of states to 31. We plan to continue the rollout to 5 to 10 additional states during the remainder of 2011.

During the first quarter 2011, we launched the national advertising of Snapshot^SM, our usage-based insurance product. As of March 31, 2011, Snapshot was available to Direct auto customers in 33 states, including 6 states added during the quarter. By early April 2011, Agency auto customers in 23 of these 33 states had access to this product. We plan to continue expansion of Snapshot into about 10 additional states, depending on regulatory approval and business results, over the remainder of the year.

We are also continuing with our efforts to further penetrate customer households through cross-selling products. Progressive Home Advantage^®, the program in which we “bundle” our auto product with property insurance provided by one of three unaffiliated insurance carriers, is becoming an integral part of our consumer offerings. The program is currently available to Agency customers in 43 states and Direct customers in 48 states and the District of Columbia; this program is not available to customers in Florida and Alaska. 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, have better loss experience, and represent a sizable segment of the market.

We are also focused on improving our presence in the mobile space. In the first quarter 2011, we added the ability to quote auto insurance on our mobile website in 14 states, bringing the total number of states with this capability to 27. During the quarter, we also upgraded the functionality available to current policyholders on our mobile website, including the ability to make payments via their checking account, view their vehicle and policy level coverages, and make certain changes to their policy (i.e., address and phone number). We plan to invest in adding more mobile capabilities as consumer demand for these services continues to grow.

During the first quarter, we experienced the following change in average written premium per policy:


	Growth Over Prior Year Quarter
	2011			2010
WRITTTEN PREMIUM PER POLICY
Personal Lines - auto		(1	) %		(2	) %
Commercial Auto		0	%		(8	) %

In the first quarter 2011, written premium per policy for both our personal auto and Commercial Auto businesses remained relatively flat, compared to decreases for both businesses in the first quarter last year. Adjusting rates is a continuous process and we will continue to evaluate future rate needs and react quickly as we recognize changing trends. See below for additional discussion on written premium per policy for our Agency and Direct auto channels and our Commercial Auto business.

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. The following table shows quarter-over-prior-year quarter changes in policy life expectancy:


	Growth Over Prior Year Quarter
	2011			2010
POLICY LIFE EXPECTANCY
Personal Lines:
Auto		4	%		4	%
Special Lines		(1	) %		(3	) %
Commercial Auto		(1	) %		(3	) %

The lengthening policy life expectancies in our personal auto business in part reflects improved loyalty programs, efforts to stabilize rates at renewal, an increase in the number of Agency auto customer in tiers that generally stay with us longer, and the greater penetration of the multi-product offerings discussed above. Both our special lines and Commercial Auto businesses did not see significant changes in policy life expectancy in the first quarter 2011. Realizing the importance that retention has on our ability to continue to grow profitably, we continue to emphasize pricing, quality service, and other retention initiatives for our current customers.

B. Profitability

Profitability for 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:


	2011						2010
	Underwriting Profit (Loss)						Underwriting Profit (Loss)
($ in millions)	$			Margin			$		Margin
Personal Lines
Agency	$	210.1			11.1	%	$	196.1		10.7	%
Direct		105.2			7.4			70.7		5.4

Total Personal Lines		315.3			9.5			266.8		8.5
Commercial Auto		41.1			11.6			44.3		12.0
Other indemnity¹		(.6	)		NM			7.0		NM

Total underwriting operations	$	355.8			9.7	%	$	318.1		9.1	%

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 underwriting profit margin improved 0.6 percentage points in the first quarter 2011, compared to the same period last year, and exceeded our long-term profitability target of 4%. The increase in underwriting profitability primarily reflects our lower loss and loss adjustment expense ratio due to a decrease in both incurred frequency and severity over the first quarter last year. Increased advertising expenditures contributed to the slight increase in the quarter-over-prior-year quarter underwriting expense ratio.

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 March 31,
Underwriting Performance¹	2011		2010		Change
Personal Lines - Agency
Loss & loss adjustment expense ratio		68.0		68.1		(.1	) pts.
Underwriting expense ratio		20.9		21.2		(.3	) pts.

Combined ratio		88.9		89.3		(.4	) pts.

Personal Lines - Direct
Loss & loss adjustment expense ratio		69.7		71.9		(2.2	) pts.
Underwriting expense ratio		22.9		22.7		.2	pts.

Combined ratio		92.6		94.6		(2.0	) pts.

Total Personal Lines
Loss & loss adjustment expense ratio		68.7		69.6		(.9	) pts.
Underwriting expense ratio		21.8		21.9		(.1	) pts.

Combined ratio		90.5		91.5		(1.0	) pts.

Commercial Auto
Loss & loss adjustment expense ratio		65.7		65.1		.6	pts.
Underwriting expense ratio		22.7		22.9		(.2	) pts.

Combined ratio		88.4		88.0		.4	pts.

Total Underwriting Operations²
Loss & loss adjustment expense ratio		68.4		69.2		(.8	) pts.
Underwriting expense ratio		21.9		21.7		.2	pts.

Combined ratio		90.3		90.9		(.6	) pts.

Accident year loss & loss adjustment expense ratio³		71.1		72.2		(1.1	) 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 (loss) of $(0.6) million and $7.0 million for the three months ended March 31, 2011 and 2010, respectively; see the “Other Indemnity” section of this Management’s Discussion and Analysis for further discussion.

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 March 31,
(millions)	2011			2010
Change in net loss and LAE reserves	$	(25.7	)	$	(24.9	)
Paid losses and LAE		2,533.8			2,448.3

Total incurred losses and LAE	$	2,508.1		$	2,423.4

Claims costs, our most significant expense, represent payments made, and estimated future payments to be made, to or on behalf of our policyholders, including expenses needed to adjust or settle claims. Claims costs are defined by loss severity and frequency and are influenced by inflation and driving patterns, among other factors. Accordingly, anticipated changes in these factors are taken into account when we establish premium rates and loss reserves. Our reserves would differ if the underlying assumptions were changed.

On a quarter-over-prior-year quarter basis, our total loss and loss adjustment expense ratio decreased 0.8 points, primarily reflecting decreases in both frequency and severity for both our personal auto and Commercial Auto businesses. Similarly, our loss and loss adjustment expense ratio on an accident year basis was down 1.1 points year-over-year.

The following discussion of our severity and frequency trends excludes the impact from comprehensive coverage due to the volatility related to certain types of losses, such as catastrophe losses and glass claims.

Total personal auto incurred severity (i.e., average cost per claim, including both paid losses and the change in reserves) decreased about 3% on a quarter-over-prior-year quarter basis, with decreases in severity for our personal injury protection (PIP), bodily injury, and collision coverages. It is difficult to estimate future severity, especially for bodily injury and PIP claims, but we continue to

monitor changes in the underlying costs, such as medical costs, health care reform, jury verdicts, and regulatory changes, which may affect severity. The severity we experience will also vary with changes in our mix of business by policy limits and coverages.

Our incurred frequency of auto accidents, on a calendar-year basis, was down about 1% for the first quarter 2011, compared to the same period last year. On a quarter-over-prior-year quarter basis, frequency was down for both our PIP and bodily injury coverages, while frequency for our collision coverage increased about 2.5%. We cannot predict with any certainty the degree or direction of frequency change that we will experience in the future. We continue to analyze trends to distinguish changes in our experience from external factors, such as changes in the number of vehicles per household, miles driven, gasoline prices, greater vehicle safety, and unemployment rates, versus those resulting from shifts in the mix of our business, to allow us to reserve more accurately for our loss exposure.

The table below presents the actuarial adjustments implemented and the loss reserve development experienced in the following periods:


	Three Months Ended March 31,
($ in millions)	2011			2010
ACTUARIAL ADJUSTMENTS
Reserve decrease/(increase)
Prior accident years	$	46.1		$	39.1
Current accident year		2.8			11.1

Calendar year actuarial adjustments	$	48.9		$	50.2


PRIOR ACCIDENT YEARS DEVELOPMENT
Favorable/(Unfavorable)
Actuarial adjustments	$	46.1		$	39.1
All other development		52.9			64.4

Total development	$	99.0		$	103.5

Decrease to calendar year combined ratio		2.7	pts.		3.0	pts.

Total development consists of both actuarial adjustments and “all other development.” The actuarial adjustments represent the net changes made by our actuarial department to both current and prior accident year reserves based on regularly scheduled reviews. Through these reviews, the actuaries have the ability to identify and measure variances in frequency and severity trends and adjust the reserves to reflect the current costs. We report these actuarial adjustments separately for the current and prior accident years to show the impact of these changes on the prior accident years’ development.

“All other development” represents claims settling for more or less than reserved, emergence of unrecorded claims at rates different than our incurred but not recorded (IBNR) reserves, and changes in reserve estimates on specific claims. Although we believe that the development from both the actuarial adjustments and “all other development” generally results from the same factors, as discussed below, we are unable to quantify the portion of the reserve development that might be applicable to any one or more of those underlying factors.

Our objective is to establish case and IBNR reserves that are adequate to cover all loss costs, while sustaining minimal variation from the date that the reserves are initially establis