Edgar Filing: PROGRESSIVE CORP/OH/

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 1O-Q

(Mark One)

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

For the quarterly period ended March 31, 2012

¨	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 þ 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 þ 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 þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Shares, $1.00 par value: 611,155,122 outstanding at March 31, 2012

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

The Progressive Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(unaudited)


Three months ended March 31,	2012			2011			% Change
(millions—except per share amounts)
Revenues
Net premiums earned	$	3,861.5		$	3,665.3			5
Investment income		114.7			123.3			(7	)
Net realized gains (losses) on securities:
Other-than-temporary impairment (OTTI) losses:
Total OTTI losses		(.5	)		(1.4	)		(64	)
Non-credit losses, net of credit losses recognized on previously recorded non-credit OTTI losses		(.4	)		0			NM

Net impairment losses recognized in earnings		(.9	)		(1.4	)		(36	)
Net realized gains (losses) on securities		78.4			101.1			(22	)

Total net realized gains (losses) on securities		77.5			99.7			(22	)
Service revenues		8.2			5.2			58
Net gains (losses) on extinguishment of debt		(.7	)		0			NM

Total revenues		4,061.2			3,893.5			4

Expenses
Losses and loss adjustment expenses		2,762.4			2,508.1			10
Policy acquisition costs		359.6			346.7			4
Other underwriting expenses		510.8			454.7			12
Investment expenses		4.2			3.1			35
Service expenses		8.2			4.0			105
Interest expense		31.9			31.5			1

Total expenses		3,677.1			3,348.1			10

Net Income
Income before income taxes		384.1			545.4			(30	)
Provision for income taxes		126.5			182.5			(31	)

Net income		257.6			362.9			(29	)

Other Comprehensive Income, Net of Tax
Net unrealized gains (losses) on securities:
Net non-credit related OTTI losses, adjusted for valuation changes		3.0			(.9	)		NM
Other net unrealized gains (losses) on securities		199.4			30.5			554

Total net unrealized gains (losses) on securities		202.4			29.6			584
Net unrealized gains on forecasted transactions		(.6	)		(.8	)		(25	)
Foreign currency translation adjustment		.5			.2			150

Other comprehensive income		202.3			29.0			598

Comprehensive income	$	459.9		$	391.9			17

Computation of Net Income Per Share
Average shares outstanding—Basic		606.2			651.8			(7	)
Net effect of dilutive stock-based compensation		3.8			4.0			(5	)

Total equivalent shares—Diluted		610.0			655.8			(7	)

Basic: Net income per share	$	.42		$	.56			(24	)

Diluted: Net income per share	$	.42		$	.55			(24	)

Dividends declared per share¹	$	0		$	0

NM	= Not Meaningful

¹ Progressive maintains an annual dividend program. See Note 8—Dividends for further discussion.

See notes to consolidated financial statements.

The Progressive Corporation and Subsidiaries

Consolidated Balance Sheets

(unaudited)


	March 31,						December 31,
(millions)	2012			2011			2011
Assets
Investments—Available-for-sale, at fair value:
Fixed maturities (amortized cost: $11,623.7, $11,713.6, and $11,455.7)	$	11,952.7		$	11,890.3		$	11,759.3
Equity securities:
Nonredeemable preferred stocks (cost: $434.0, $536.8, and $473.7)		832.4			1,099.9			806.3
Common equities (cost: $1,457.3, $1,169.3, and $1,431.0)		2,096.5			1,658.9			1,845.6
Short-term investments (amortized cost: $1,520.1, $1,128.4, and $1,551.8)		1,520.1			1,128.4			1,551.8

Total investments		16,401.7			15,777.5			15,963.0
Cash		156.0			155.5			155.7
Accrued investment income		96.8			111.3			105.7
Premiums receivable, net of allowance for doubtful accounts of $113.9, $103.5, and $124.2		3,167.5			2,928.5			2,929.8
Reinsurance recoverables, including $41.6, $34.9, and $32.3 on paid losses and loss adjustment expenses		818.5			767.3			818.0
Prepaid reinsurance premiums		70.0			86.7			69.8
Deferred acquisition costs		441.7			437.7			433.6
Income taxes		0			7.5			208.0
Property and equipment, net of accumulated depreciation of $591.4, $581.1, and $573.8		916.4			927.4			911.3
Other assets		200.7			326.7			249.9

Total assets	$	22,269.3		$	21,526.1		$	21,844.8

Liabilities and Shareholders’ Equity
Unearned premiums	$	4,880.6		$	4,587.1		$	4,579.4
Loss and loss adjustment expense reserves		7,337.4			7,073.6			7,245.8
Accounts payable, accrued expenses, and other liabilities		1,709.6			1,586.1			1,770.8
Income taxes		11.3			0			0
Debt¹		2,080.0			1,958.7			2,442.1

Total liabilities		16,018.9			15,205.5			16,038.1

Common Shares, $1.00 par value (authorized 900.0; issued 797.6, 797.6, and 797.7, including treasury shares of 186.4, 141.9, and 184.7)		611.2			655.7			613.0
Paid-in capital		1,029.4			1,013.0			1,006.2
Retained earnings		3,715.0			3,839.2			3,495.0
Accumulated other comprehensive income, net of tax:
Net non-credit related OTTI losses, adjusted for valuation changes		(2.4	)		(2.7	)		(5.4	)
Other net unrealized gains (losses) on securities		887.6			799.6			688.2

Total net unrealized gains (losses) on securities		885.2			796.9			682.8
Net unrealized gains on forecasted transactions		7.3			13.9			7.9
Foreign currency translation adjustment		2.3			1.9			1.8

Total accumulated other comprehensive income		894.8			812.7			692.5

Total shareholders’ equity		6,250.4			6,320.6			5,806.7

Total liabilities and shareholders’ equity	$	22,269.3		$	21,526.1		$	21,844.8

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)


Three months ended March 31,	2012			2011
(millions)
Cash Flows From Operating Activities
Net income	$	257.6		$	362.9
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		22.3			21.0
Amortization of fixed-income securities		50.6			59.5
Amortization of stock-based compensation		16.8			12.2
Net realized (gains) losses on securities		(77.5	)		(99.7	)
Net (gains) losses on disposition of property and equipment		1.1			1.2
Net (gains) losses on extinguishment of debt		.7			0
Changes in:
Premiums receivable		(237.7	)		(190.1	)
Reinsurance recoverables		(.5	)		(25.8	)
Prepaid reinsurance premiums		(.2	)		1.4
Deferred acquisition costs		(8.1	)		(20.5	)
Income taxes		110.4			165.6
Unearned premiums		301.1			233.3
Loss and loss adjustment expense reserves		91.6			2.5
Accounts payable, accrued expenses, and other liabilities		168.5			153.0
Other, net		11.7			(3.0	)

Net cash provided by operating activities		708.4			673.5

Cash Flows From Investing Activities
Purchases:
Fixed maturities		(1,679.3	)		(3,173.0	)
Equity securities		(29.5	)		(150.6	)
Sales:
Fixed maturities		1,207.5			2,722.5
Equity securities		74.4			124.8
Maturities, paydowns, calls, and other:
Fixed maturities		287.8			324.2
Net purchases of short-term investments - other		32.2			(37.6	)
Net unsettled security transactions		74.3			(73.2	)
Purchases of property and equipment		(29.3	)		(17.5	)
Sales of property and equipment		.8			.5

Net cash used in investing activities		(61.1	)		(279.9	)

Cash Flows From Financing Activities
Proceeds from exercise of stock options		.5			2.9
Tax benefit from exercise/vesting of stock-based compensation		4.1			1.5
Payment of debt		(350.0	)		0
Reacquisition of debt		(13.3	)		0
Dividends paid to shareholders¹		(251.0	)		(263.6	)
Acquisition of treasury shares		(37.7	)		(138.0	)

Net cash used in financing activities		(647.4	)		(397.2	)

Effect of exchange rate changes on cash		.4			.2

Increase (decrease) in cash		.3			(3.4	)
Cash, January 1		155.7			158.9

Cash, March 31	$	156.0		$	155.5

¹ Progressive maintains an annual dividend program. See Note 8—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, 2012, 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, 2011.

On January 1, 2012, we adopted, on a prospective basis, the accounting standard update related to the accounting for the deferral of costs associated with the successful acquisition or renewal of insurance contracts. As a result, $23 million of deferred acquisition costs that no longer meet the criteria for deferral upon adoption are being recognized as a reduction to income primarily over the first six months of 2012, consistent with our insurance policy terms. During the first quarter 2012, we recognized $16.8 million of this accounting change.

Note 2 Investments — The following tables present 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
March 31, 2012
Fixed maturities:
U.S. government obligations	$	3,045.6	$	96.3	$	(1.8	)	$	0		$	3,140.1		19.1	%
State and local government obligations		1,718.3		47.2		(.8	)		0			1,764.7		10.8
Corporate debt securities		2,758.9		105.9		(2.2	)		5.6			2,868.2		17.5
Residential mortgage-backed securities		448.5		14.8		(24.6	)		0			438.7		2.7
Commercial mortgage-backed securities		2,052.2		70.8		(1.3	)		0			2,121.7		12.9
Other asset-backed securities		1,224.4		13.0		(.8	)		(.1	)		1,236.5		7.5
Redeemable preferred stocks		375.8		25.1		(18.1	)		0			382.8		2.3

Total fixed maturities		11,623.7		373.1		(49.6	)		5.5			11,952.7		72.8
Equity securities:
Nonredeemable preferred stocks		434.0		400.3		(1.1	)		(.8	)		832.4		5.1
Common equities		1,457.3		647.2		(8.0	)		0			2,096.5		12.8
Short-term investments:
Other short-term investments		1,520.1		0		0			0			1,520.1		9.3

Total portfolio^2,3	$	15,035.1	$	1,420.6	$	(58.7	)	$	4.7		$	16,401.7		100.0	%


($ 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

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
December 31, 2011
Fixed maturities:
U.S. government obligations	$	2,842.7	$	120.3	$	0		$	0		$	2,963.0		18.6	%
State and local government obligations		1,938.6		64.1		(.6	)		0			2,002.1		12.5
Corporate debt securities		2,801.5		94.3		(6.5	)		6.9			2,896.2		18.1
Residential mortgage-backed securities		452.9		9.3		(35.3	)		0			426.9		2.7
Commercial mortgage-backed securities		1,829.8		52.3		(5.5	)		0			1,876.6		11.8
Other asset-backed securities		1,210.9		11.3		(1.3	)		(.3	)		1,220.6		7.6
Redeemable preferred stocks		379.3		18.6		(24.0	)		0			373.9		2.3

Total fixed maturities		11,455.7		370.2		(73.2	)		6.6			11,759.3		73.6
Equity securities:
Nonredeemable preferred stocks		473.7		342.6		(3.7	)		(6.3	)		806.3		5.1
Common equities		1,431.0		440.0		(25.4	)		0			1,845.6		11.6
Short-term investments:
Other short-term investments		1,551.8		0		0			0			1,551.8		9.7

Total portfolio^2,3	$	14,912.2	$	1,152.8	$	(102.3	)	$	.3		$	15,963.0		100.0	%

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

²	At March 31, 2012, we had $27.4 million of net unsettled security transactions included in other liabilities, compared to $119.5 million and $46.9 million included in other assets at March 31, 2011 and December 31, 2011, respectively.

³	The total fair value of the portfolio at March 31, 2012 and 2011, and December 31, 2011 included $1.5 billion, $1.8 billion, and $2.0 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)	2012		2011		2011
Fixed maturities:
Corporate debt securities	$	167.7	$	221.2	$	234.9
Other asset-backed securities		15.8		15.8		15.5

Total fixed maturities		183.5		237.0		250.4
Equity securities:
Nonredeemable preferred stocks		19.7		34.0		14.2

Total hybrid securities	$	203.2	$	271.0	$	264.6

Certain corporate debt securities are accounted for as hybrid securities since they were acquired at a substantial premium and contain a change-in-control put option (derivative) that permits the investor, at its 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-in-control put option and the substantial market premium paid to acquire these securities, there is the potential that the election to put, upon the change in control, could result in an acceleration of the remaining premium paid on these securities, which would result in a loss of $12.1 million as of March 31, 2012, if all of the bonds experienced a simultaneous change-in-control and we elected to exercise all of our put options. The put feature limits the potential loss in value that could be experienced in the event a corporate action occurs that results in a change-in-control which materially diminishes the credit quality of the issuer. We are under no obligation to exercise the put option we hold if a change in control occurs.

In our asset-backed portfolio, we hold one hybrid security that was acquired at a deep discount to par due to a failing auction, and contains a put option 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, 2012, we had $50.7 million of gross unrealized losses in our fixed-income securities (i.e., fixed-maturity securities, nonredeemable preferred stocks, and short-term investments) and $8.0 million in our common equities. We currently do not intend to sell the fixed-income securities and determined that it is more likely than not that we will not be required to sell these securities during the period of time necessary to recover their cost bases. A review of our fixed-income securities indicated that the issuers were current with respect to their interest obligations and that there was no evidence of any deterioration of the current cash flow projections that would indicate we would not receive the remaining principal at maturity. In addition, 96% of our common stock portfolio was indexed to the Russell 1000; as such, this portfolio may contain securities in a loss position for an extended period of time, subject to possible write-downs, as described below. We may retain these securities as long as the portfolio and index correlation remain similar. To the extent there is issuer specific deterioration, we may write-down the securities. The remaining 4% of our common stocks are part of a managed equity strategy selected and administered by an external investment advisor. If our strategy were to change and these securities were determined to be other-than-temporarily impaired, we would recognize a write-down in accordance with our stated policy.

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


	Total		Gross			Less than 12 Months					12 Months or Greater
(millions)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
March 31, 2012
Fixed maturities:
U.S. government obligations	$	520.6	$	(1.8	)	$	520.6	$	(1.8	)	$	0	$	0
State and local government obligations		124.7		(.8	)		111.2		(.7	)		13.5		(.1	)
Corporate debt securities		192.1		(2.2	)		161.0		(1.7	)		31.1		(.5	)
Residential mortgage-backed securities		286.4		(24.6	)		21.6		(.5	)		264.8		(24.1	)
Commercial mortgage-backed securities		221.9		(1.3	)		196.6		(1.0	)		25.3		(.3	)
Other asset-backed securities		72.8		(.8	)		55.0		(.4	)		17.8		(.4	)
Redeemable preferred stocks		193.8		(18.1	)		43.8		(1.1	)		150.0		(17.0	)

Total fixed maturities		1,612.3		(49.6	)		1,109.8		(7.2	)		502.5		(42.4	)
Equity securities:
Nonredeemable preferred stocks		22.0		(1.1	)		22.0		(1.1	)		0		0
Common equities		92.1		(8.0	)		73.8		(7.2	)		18.3		(.8	)

Total equity securities		114.1		(9.1	)		95.8		(8.3	)		18.3		(.8	)

Total portfolio	$	1,726.4	$	(58.7	)	$	1,205.6	$	(15.5	)	$	520.8	$	(43.2	)


	Total		Gross			Less than 12 Months					12 Months or Greater
(millions)	Fair Value		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:
Nonredeemable preferred stocks		0		0			0		0			0		0
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		Gross			Less than 12 Months					12 Months or Greater
(millions)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
December 31, 2011
Fixed maturities:
U.S. government obligations	$	0	$	0		$	0	$	0		$	0	$	0
State and local government obligations		93.6		(.6	)		79.5		(.5	)		14.1		(.1	)
Corporate debt securities		262.7		(6.5	)		137.3		(4.6	)		125.4		(1.9	)
Residential mortgage-backed securities		308.7		(35.3	)		34.4		(2.0	)		274.3		(33.3	)
Commercial mortgage-backed securities		203.7		(5.5	)		161.4		(3.5	)		42.3		(2.0	)
Other asset-backed securities		284.2		(1.3	)		259.7		(1.0	)		24.5		(.3	)
Redeemable preferred stocks		191.4		(24.0	)		43.5		(1.5	)		147.9		(22.5	)

Total fixed maturities		1,344.3		(73.2	)		715.8		(13.1	)		628.5		(60.1	)
Equity securities:
Nonredeemable preferred stocks		19.5		(3.7	)		19.5		(3.7	)		0		0
Common equities		214.6		(25.4	)		196.7		(23.1	)		17.9		(2.3	)

Total equity securities		234.1		(29.1	)		216.2		(26.8	)		17.9		(2.3	)

Total portfolio	$	1,578.4	$	(102.3	)	$	932.0	$	(39.9	)	$	646.4	$	(62.4	)

Other-than-Temporary Impairment (OTTI) The following table shows the total non-credit portion of the OTTI recorded in accumulated other comprehensive income, reflecting the original non-credit loss at the time the credit impairment was determined:


	March 31,						December 31,
(millions)	2012			2011			2011
Fixed maturities:
Residential mortgage-backed securities	$	(44.5	)	$	(44.3	)	$	(44.8	)
Commercial mortgage-backed securities		(.9	)		(1.0	)		(1.0	)

Total fixed maturities	$	(45.4	)	$	(45.3	)	$	(45.8	)

The following tables provide rollforwards of the amounts related to credit losses recognized in earnings for the periods ended March 31, 2012 and 2011, for which portions of the OTTI losses were also recognized in accumulated other comprehensive income at the time the credit impairments were determined and recognized:


	Three Months Ended March 31, 2012
	Mortgage-Backed						Corporate
(millions)	Residential			Commercial			Debt		Total
Beginning balance at January 1, 2012	$	34.5		$	1.3		$	0	$	35.8
Credit losses for which an OTTI was previously recognized		0			0			0		0
Credit losses for which an OTTI was not previously recognized		.1			0			0		.1
Reductions for securities sold/matured		0			(.2	)		0		(.2	)
Change in recoveries of future cash flows expected to be collected¹		(2.3	)		0			0		(2.3	)
Reductions for previously recognized credit impairments written-down to fair value²		(4.0	)		(.3	)		0		(4.3	)

Ending balance at March 31, 2012	$	28.3		$	.8		$	0	$	29.1


	Three Months Ended March 31, 2011
	Mortgage-Backed						Corporate
(millions)	Residential			Commercial			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
Reductions for securities sold/matured		0			0			0		0
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

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).

Although we determined that it is more likely than not that we will not be required to sell the securities prior to the recovery of their respective cost bases (which could be maturity), we are required to measure the amount of credit losses on the securities that were determined to be other-than-temporarily impaired. In that process, 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 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, 2012 and 2011, and December 31, 2011, 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, 2012 and 2011.

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 an asset and 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, 2012 and 2011, and December 31, 2011, and for the three months ended March 31, 2012 and 2011; amounts are on a pretax basis:


(millions)								Balance Sheet										Income Statement
	Notional Value¹								Assets (Liabilities) Fair Value									Net Realized Gains (Losses) on Securities
	March 31,				Dec. 31,				March 31,						Dec. 31,			Three months ended March 31,
Derivatives designated as:	2012		2011		2011		Purpose	Classification	2012			2011			2011			2012			2011
Hedging instruments Closed:
Ineffective cash flow hedge		13		0		15	Manage interest rate risk	NA	$	0		$	0		$	0		$	.3		$	0
Non-hedging instruments
Assets:
Corporate credit default swaps		25		10		25	Manage credit risk	Investments - fixed maturities		.4			.7			.7			(.4	)		(.1	)
Liabilities:
Interest rate swaps		1,263		613		1,263	Manage portfolio duration	Other liabilities		(72.8	)		(27.9	)		(76.1	)		(2.3	)		2.6
Corporate credit default swaps		0		25		0	Manage credit risk	Other liabilities		0			0			0			0			(.6	)
Closed:
Interest rate swaps		0		100		350	Manage portfolio duration	NA		0			0			0			0			.5

Total		NA		NA		NA			$	(72.4	)	$	(27.2	)	$	(75.4	)	$	(2.4	)	$	2.4

NA= Not Applicable

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.

CASH FLOW HEDGES

During the quarter ended March 31, 2012, we repurchased $12.6 million principal amount of our 6.70% Junior Subordinated Debentures due 2067 (the “6.70% Debentures”) for $13.3 million in the open market. During the year ended December 31, 2011, we repurchased $15.0 million principal amount of the 6.70% Debentures for $15.1 million in the open market (see Note 4 – Debt for further discussion). We reclassified $0.3 million, in both the first quarter 2012 and during 2011, on a pretax basis, from accumulated other comprehensive income on the balance sheet to net realized gains (losses) on securities on the comprehensive income statement, reflecting the portion of the unrealized gain on forecasted transactions that was related to the portion of the 6.70% Debentures repurchased during the periods. We did not repurchase any debt during the quarter ended March 31, 2011.

INTEREST RATE SWAPS

During the periods ended March 31, 2012 and 2011, and December 31, 2011, we invested in interest rate swap positions, primarily to manage the fixed-income portfolio duration. At March 31, 2012, we held a 9-year interest rate swap position (opened in 2009) and two 5-year interest rate swap positions (opened in 2011); in each case, we are paying a fixed rate and receiving a variable rate, effectively shortening the duration of our fixed-income portfolio. We closed a portion of the 9-year position during the first quarter 2011. The combined open positions have generated an aggregate realized loss, as interest rates have fallen since the inception of these positions. As of March 31, 2012 and 2011, and December 31, 2011, we delivered $79.7 million, $36.3 million, and $81.7 million, respectively, in cash collateral to the applicable counterparty on these positions.

CORPORATE CREDIT DEFAULT SWAPS

Financial Services Sector - During the periods ended March 31, 2012 and 2011, and December 31, 2011, 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 some of our exposure to additional valuation declines on a preferred stock position of the same issuer. As of March 31, 2012 and December 31, 2011, we received $0.4 million and $0.7 million, respectively, in cash collateral from the counterparty on this position. As of March 31, 2011, we delivered $0.2 million in cash collateral to the counterparty on this position.

Automotive Sector – We held no credit default swaps in this sector at March 31, 2012 or December 31, 2011. During the period ended March 31, 2011, we held a position, which was opened during 2010 and closed during the third quarter 2011, 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 have been required to cover a $10 million notional value if a credit event had been 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 was favorable and we received $0.9 million in cash collateral from the counterparty on this position.

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, active exchange-traded equity securities, and certain short-term 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).

Determining the fair value of the investment portfolio is the responsibility of management. As part of our responsibility, 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, 2012
Fixed maturities:
U.S. government obligations	$	3,140.1	$	0	$	0	$	3,140.1	$	3,045.6
State and local government obligations		0		1,764.7		0		1,764.7		1,718.3
Corporate debt securities		0		2,868.2		0		2,868.2		2,758.9

Subtotal		3,140.1		4,632.9		0		7,773.0		7,522.8

Asset-backed securities:
Residential mortgage-backed		0		380.0		58.7		438.7		448.5
Commercial mortgage-backed		0		2,098.9		22.8		2,121.7		2,052.2
Other asset-backed		0		1,234.7		1.8		1,236.5		1,224.4

Subtotal asset-backed securities		0		3,713.6		83.3		3,796.9		3,725.1

Redeemable preferred stocks:
Financials		24.8		109.3		0		134.1		120.7
Utilities		0		69.4		0		69.4		70.8
Industrials		0		179.3		0		179.3		184.3

Subtotal redeemable preferred stocks		24.8		358.0		0		382.8		375.8

Total fixed maturities		3,164.9		8,704.5		83.3		11,952.7		11,623.7

Equity securities:
Nonredeemable preferred stocks:
Financials		274.4		511.5		0		785.9		398.7
Utilities		0		46.5		0		46.5		35.3
Industrials		0		0		0		0		0

Subtotal nonredeemable preferred stocks		274.4		558.0		0		832.4		434.0

Common equities:
Common stocks		2,085.4		0		0		2,085.4		1,453.9
Other equity-like investments		0		0		11.1		11.1		3.4

Subtotal common equities		2,085.4		0		11.1		2,096.5		1,457.3

Total fixed maturities and equity securities		5,524.7		9,262.5		94.4		14,881.6		13,515.0

Short-term investments:
Other short-term investments		1,179.5		340.6		0		1,520.1		1,520.1

Total portfolio	$	6,704.2	$	9,603.1	$	94.4	$	16,401.7	$	15,035.1

Debt	$	0	$	2,337.0	$	0	$	2,337.0	$	2,080.0


	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

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 stocks		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 investments¹								1,128.4		1,128.4

Total portfolio							$	15,777.5	$	14,548.1

Debt¹							$	2,120.5	$	1,958.7


	Fair Value
(millions)	Level 1		Level 2		Level 3		Total		Cost
December 31, 2011
Fixed maturities:
U.S. government obligations	$	2,963.0	$	0	$	0	$	2,963.0	$	2,842.7
State and local government obligations		0		2,002.1		0		2,002.1		1,938.6
Corporate debt securities		0		2,896.2		0		2,896.2		2,801.5

Subtotal		2,963.0		4,898.3		0		7,861.3		7,582.8

Asset-backed securities:
Residential mortgage-backed		0		364.6		62.3		426.9		452.9
Commercial mortgage-backed		0		1,855.3		21.3		1,876.6		1,829.8
Other asset-backed		0		1,218.0		2.6		1,220.6		1,210.9

Subtotal asset-backed securities		0		3,437.9		86.2		3,524.1		3,493.6

Redeemable preferred stocks:
Financials		24.1		107.2		0		131.3		124.3
Utilities		0		68.1		0		68.1		70.8
Industrials		0		174.5		0		174.5		184.2

Subtotal redeemable preferred stocks		24.1		349.8		0		373.9		379.3

Total fixed maturities		2,987.1		8,686.0		86.2		11,759.3		11,455.7

Equity securities:
Nonredeemable preferred stocks:
Financials		227.9		525.4		0		753.3		433.7
Utilities		0		53.0		0		53.0		40.0
Industrials		0		0		0		0		0

Subtotal nonredeemable preferred stocks		227.9		578.4		0		806.3		473.7

Common equities:
Common stocks		1,834.1		0		0		1,834.1		1,427.3
Other equity-like investments		0		0		11.5		11.5		3.7

Subtotal common equities		1,834.1		0		11.5		1,845.6		1,431.0

Total fixed maturities and equity securities	$	5,049.1	$	9,264.4	$	97.7		14,411.2		13,360.4

Short-term investments:
Other short-term investments¹								1,551.8		1,551.8

Total portfolio							$	15,963.0	$	14,912.2

Debt¹							$	2,664.7	$	2,442.1

¹	Under the prior accounting guidance, fair value hierarchies were not required.

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 did not have any transfers between Level 1 and Level 2 at March 31, 2012. At March 31, 2011, we had two nonredeemable preferred securities with an aggregate value of $71.2 million that were transferred from Level 2 to Level 1 due to the availability of exchange pricing. At December 31, 2011, we had one nonredeemable preferred security with a value of $44.2 million that was transferred from Level 1 to Level 2 due to the lack of an exchange-quoted price at year-end. The exchange price was not available due to illiquidity in the market place. A consistent exchange-quoted price was previously available for this security, and we will continue to monitor the security for future exchange trading volume. We recognize transfers between levels at the end of the reporting period.

Our short-term security holdings classified as Level 1 are considered highly liquid, actively marketed, and have a very short duration, primarily seven days or less to redemption. These securities are held at their original cost, adjusted for any amortization of discount or premium, since that value very closely approximates what an active market participant would be willing to pay for such securities. The remainder of our short-term securities are classified as Level 2 and are not priced externally since these securities continually trade at par value. These securities are classified as Level 2 since they are primarily longer-dated auction securities issued by municipalities that contain a redemption put feature back to the auction pool with a redemption period of less than seven days. The auction pool is created by a liquidity provider and if the auction is not available at the end of the seven days, we are able to put the security back to the state of issuance at par.

At March 31, 2012 and 2011, vendor-quoted prices represented 57% of our Level 1 classifications (excluding short-term investments), compared to 59% at December 31, 2011. The securities quoted by vendors in Level 1 represent our holdings in U.S. Treasury Notes, which are frequently traded and the quotes are considered similar to exchange-traded quotes. The balance of our Level 1 pricing comes from quotes obtained directly from trades made on active exchanges.

At March 31, 2012, vendor-quoted prices comprised 97% of our Level 2 classifications (excluding short-term investments), while dealer-quoted prices represented 3%, compared to 96% and 4%, respectively, at both March 31, 2011 and December 31, 2011. In our process for selecting a source (e.g., dealer, pricing service) to provide pricing for securities in our portfolio, we reviewed documentation from the sources that detailed the pricing techniques and methodologies used by these sources and determined if their policies adequately considered market activity, either based on specific transactions for the particular security type or based on modeling of securities with similar credit quality, duration, yield, and structure that were recently transacted. Once a source is chosen, we continue to monitor any changes or modifications to their processes by reviewing their documentation on internal controls for pricing and market reviews.

Our internal pricing policy is to consistently use a single source in order to maintain the integrity established when selecting the source initially. From time to time, we will obtain a quote from more than one source to help us further evaluate the market price of a security. Quotes obtained from the sources are not considered binding offers to transact a trade. Under our policy, when a review of the valuation received from our selected source appears outside what is considered market level activity (which is defined as trading at spreads or yields significantly different than comparable securities or outside the general sector level movement without a reasonable explanation), we may use an alternate source’s price. To the extent we determine that it is prudent to substitute one source’s price for another, we will contact the initial source to obtain an understanding of the factors that may be contributing to the significant price variance, which often leads the source to adjust their pricing input data for future pricing.

To allow us to determine if our initial source is providing a price that is outside of a reasonable range, we review our portfolio pricing on a weekly basis. We frequently challenge prices from our sources when a price provided does not match our expectations based on our evaluation of market trends/activity. Initially, we perform a global review of our portfolio by sector to identify securities whose prices appear outside of a reasonable range. We refine our review to analyze prices by specific criteria, such as whether the security is investment or non-investment-grade, prime or sub-prime, or a consumer product (e.g., auto, credit card). Through this review, we try to determine what contributed to the price variances among sources by analyzing spread movement, comparable security trades, if available, or industry or specific issuer fundamentals. We review quality control measures of our sources as they become available to determine if any significant changes have occurred from period to period that might indicate issues/concerns regarding their evaluation or market coverage. We also review data assumptions as supplied by our sources to determine if that data is relevant to current market conditions. In addition, we independently review each sector for transaction volumes, new issuances, and changes in spreads, as well as the overall movement of interest rates along the yield curve to determine if sufficient activity and liquidity exists to provide a credible source for our market valuations.

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. We compare our results to index returns for each major sector adjusting for duration and credit quality differences to better understand our portfolio’s results. Additionally, we review on a monthly basis our external sales transactions and compare the actual final market sales price to a previous market valuation price. This review provides us further validation that our pricing sources are providing market level prices, since we are able to explain significant price changes (i.e., greater than 2%) as known events occur in the market place and affect a particular security’s price at sale.

This analysis provides us additional comfort regarding the source’s process, the quality of their review, and their willingness to improve their analysis based on feedback from clients. We believe this collaborative effort helps ensure that we are reporting the most representative fair values of our securities.

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, and 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 category are valued using external pricing supplemented by internal review and analysis.

After all the valuations are received and our review is complete, if the inputs used by vendors are determined to not contain sufficient observable market information, we will reclassify the affected security valuations to Level 3. At March 31, 2012 and 2011, and December 31, 2011, 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, 2012 and 2011, and December 31, 2011, we had one private common equity security with a value of $10.2 million that was priced internally. Additionally, at March 31, 2012 and December 31, 2011, we had two fixed-maturity securities with an aggregate value of $0.5 million that were priced internally. At March 31, 2011, we had two fixed-maturity securities with an aggregate value of $0.6 million that were priced internally. Despite the lack of sufficient observable market information, we believe the valuations received in conjunction with our procedures for evaluating third-party prices support the fair values as reported in the financial statements.

We review the prices from our external sources for reasonableness using internally developed assumptions to derive a price for the security, which is then compared to the price we received. Based on our review, all of the prices received from external sources remained unadjusted.

The following tables provide a summary of changes in fair value associated with Level 3 assets for the three months ended March 31, 2012 and 2011:


	Level 3 Fair Value Three months ended March 31, 2012
	Fair Value		Calls/							Net					Net		Fair value
	at Dec. 31,		Maturities/							Realized		Change in			Transfers		at March 31,
(millions)	2011		Paydowns			Purchases		Sales		(gain)/loss		Valuation			in (out)		2012
Fixed maturities:
Asset-backed securities:
Residential mortgage-backed	$	62.3	$	(3.7	)	$	0	$	0	$	0	$	.1		$	0	$	58.7
Commercial mortgage-backed		21.3		0			0		0		0		1.5			0		22.8
Other asset-backed		2.6		(.8	)		0		0		0		0			0		1.8

Total asset-backed securities		86.2		(4.5	)		0		0		0		1.6			0		83.3
Corporate debt securities		0		0			0		0		0		0			0		0

Total fixed maturities		86.2		(4.5	)		0		0		0		1.6			0		83.3

Equity securities:
Common equities:
Other equity-like investments		11.5		0			0		0		0		(.4	)		0		11.1

Total Level 3 securities	$	97.7	$	(4.5	)	$	0	$	0	$	0	$	1.2		$	0	$	94.4


	Level 3 Fair Value Three months ended March 31, 2011
	Fair Value		Calls/							Net					Net			Fair value
	at Dec. 31,		Maturities/							Realized		Change in			Transfers			at March 31,
(millions)	2010		Paydowns			Purchases		Sales		(gain)/loss		Valuation			in (out)¹			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

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.

The following table provides a summary of the quantitative information about Level 3 fair value measurements for our internally priced securities at March 31, 2012:


	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value at				Unobservable
(millions)	Mar. 31, 2012		Valuation Technique	Unobservable Input	Input Assumption
Fixed maturities:
Asset-backed securities:
Residential mortgage-backed	$	.3	Prepayment model	Prepayment rate¹	7
Commercial mortgage-backed		.2	Matrix pricing model	Prepayment rate²	100

Total fixed maturities		.5

Equity securities:
Common equities:
Other equity-like investments		10.2	Discounted consolidated equity	Discount for lack of marketability	20%

Total internally priced securities	$	10.7

¹	The 7 constant prepayment rate (CPR) assumes that 7% of the principal amount of the underlying loans will be paid off prematurely in each year.

²	The 100 constant prepayment rate after yield maintenance (CPY) assumes that all loans will pay off as soon as their contractual lockout and yield maintenance period ends.

The quantitative table does not include securities whose Level 3 fair values are obtained from non-binding broker quotes where unobservable inputs are not reasonably available to us. Due to the immateriality of the security values, any changes in pricing methodology would not have a significant change in valuation that would materially impact other comprehensive income.

Note 4 Debt — Debt consisted of:


	March 31, 2012				March 31, 2011				December 31, 2011
	Carrying		Fair		Carrying		Fair		Carrying		Fair
(millions)	Value		Value		Value		Value		Value		Value
6.375% Senior Notes due 2012	$	0	$	0	$	349.7	$	365.8	$	350.0	$	350.5
7% Notes due 2013		149.8		163.1		149.6		167.6		149.7		162.4
3.75% Senior Notes due 2021		497.1		532.2		0		0		497.0		525.3
6 5/8% Senior Notes due 2029		295.0		370.2		294.9		337.9		295.0		364.4
6.25% Senior Notes due 2032		394.4		486.4		394.3		429.4		394.4		492.4
6.70% Fixed-to-Floating Rate Junior
Subordinated Debentures due 2067		743.7		785.1		770.2		819.8		756.0		769.7

Total	$	2,080.0	$	2,337.0	$	1,958.7	$	2,120.5	$	2,442.1	$	2,664.7

In March 2012, we repurchased $12.6 million in aggregate principal amount of our 6.70% Fixed-to-Floating Rate Junior Subordinated Debentures due 2067 (the “6.70% Debentures”), for $13.3 million in the open market, resulting in a loss on these extinguishments of $0.7 million. During the second half of 2011, we repurchased $15.0 million in aggregate principal amount of our 6.70% Debentures, for $15.1 million in the open market, resulting in a loss on these debt extinguishments of $0.1 million. In addition, we reclassified $0.3 million, in both the first quarter 2012 and during 2011, on a pretax basis, from accumulated other comprehensive income on the balance sheet to net realized gains (losses) on securities on the comprehensive income statement, reflecting the portion of the unrealized gain on forecasted transactions that was related to the portion of the 6.70% Debentures repurchased during the periods.

In January 2012, we retired all $350 million of our 6.375% Senior Notes at maturity.

On December 31, 2011, 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, 2012, 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 2011 or through the first three months of 2012.

In September 2011, we entered into an agreement with The Bank of New York Mellon Trust Company, N.A., as trustee, modifying the terms of our 6.70% Debentures. Pursuant to that agreement, among other changes, we surrendered our right to temporarily defer the payment of interest on the 6.70% Debentures and terminated a related obligation to reserve 250 million of our unissued common shares as a source of potential funding to pay any such deferred interest. The changes were effective immediately upon execution of the agreement. Prior to this time, and subject to certain conditions, we had the right to defer the payment of interest on our 6.70% Debentures for one or more periods not exceeding ten consecutive years each.

In August 2011, we issued $500 million of 3.75% Senior Notes due 2021 (the “3.75% Senior Notes”). We received proceeds of $497 million, after deducting underwriter’s discounts and commissions, and incurred an additional $1.0 million of expenses related to the issuance. In addition, upon issuance of the 3.75% Senior Notes, we closed a forecasted debt issuance hedge, which was entered into to hedge against a possible rise in interest rates, and recognized a $5.1 million pretax loss as part of accumulated other comprehensive income (loss); the loss will be recognized as an increase to interest expense and amortized over the life of the 3.75% Senior Notes.

Note 5 Income Taxes — At March 31, 2012 and 2011 and December 31, 2011, 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 that 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. For the three months ended March 31, 2012, there have been no material changes in our uncertain tax positions.

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


	Three Months Ended March 31,
(millions)	2012		2011
Income taxes, net of refunds	$	12.0	$	15.0
Interest		30.6		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, contractor, tow, for-hire specialty, and for-hire transportation markets. Our other indemnity businesses manage our run-off businesses, including the run-off of our professional liability insurance program for community banks. Our service businesses provide insurance-related services, including processing Commercial Auto Insurance Procedures/Plans (“CAIP”) business and serving as an agent for homeowners, general liability, and workers’ compensation insurance through our programs with unaffiliated insurance companies. All revenues are generated from external customers.

Following are the operating results for the respective periods:


	Three Months Ended March 31,
	2012						2011
				Pretax					Pretax
				Profit					Profit
(millions)	Revenues			(Loss)			Revenues		(Loss)
Personal Lines
Agency	$	1,960.6		$	139.2		$	1,887.8	$	210.1
Direct		1,513.2			61.3			1,420.0		105.2

Total Personal Lines¹		3,473.8			200.5			3,307.8		315.3
Commercial Auto		387.3			29.4			355.7		41.1
Other indemnity		.4			(1.2	)		1.8		(.6	)

Total underwriting operations		3,861.5			228.7			3,665.3		355.8
Service businesses		8.2			0			5.2		1.2
Investments²		192.2			188.0			223.0		219.9
Net gains (losses) on extinguishment of debt		(.7	)		(.7	)		0		0
Interest expense		NA			(31.9	)		NA		(31.5	)

Consolidated total	$	4,061.2		$	384.1		$	3,893.5	$	545.4

Personal auto insurance accounted for 91% of the total Personal Lines segment net premiums earned in both the first quarters of 2012 and 2011; 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 and combined ratios for our underwriting operations:


	Three Months Ended March 31,
	2012						2011
	Underwriting			Combined			Underwriting			Combined
	Margin			Ratio			Margin			Ratio
Personal Lines
Agency		7.1	%		92.9	%		11.1	%		88.9	%
Direct		4.1			95.9			7.4			92.6
Total Personal Lines		5.8			94.2			9.5			90.5
Commercial Auto		7.6			92.4			11.6			88.4
Other indemnity¹		NM			NM			NM			NM
Total underwriting operations		5.9			94.1			9.7			90.3

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 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 2012, 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 by the Compensation Committee of 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, 2012, 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 (net income plus the after-tax change in net unrealized gains (losses) on securities, among other factors) is less than after-tax underwriting income, no dividend will be paid. Nevertheless, the declaration and amount of the dividend remains within the Board’s discretion. If a dividend for 2012 will be paid, the Board would likely declare the 2012 annual dividend in December 2012, with a record date in January 2013 and payment shortly thereafter. For the three months ended March 31, 2012, our after-tax comprehensive income was $459.9 million, which is higher than the $148.7 million of after-tax underwriting income for the same period.

Progressive paid dividends per common share of $.4072 and $.3987 in February 2012 and 2011, respectively, under our annual variable dividend policy. These dividends were paid pursuant to declarations made by the Board of Directors in December 2011 and 2010, respectively.

Note 9 Litigation — The Progressive Corporation and/or its insurance subsidiaries are named as defendants in various lawsuits arising out of claims made under insurance policies in the ordinary course of our business. We consider all legal actions relating to such claims in establishing our loss and loss adjustment expense reserves.

In addition, The Progressive Corporation and/or its insurance subsidiaries are named as defendants in a number of class action or individual lawsuits arising out of the operations of the 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; 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. We establish accruals for lawsuits when it is probable that a loss has been incurred and we can reasonably estimate its potential exposure, which may include a range of loss. As to lawsuits in which the loss is not considered both probable and estimable, we have not established a liability at this time. In the event that any one or more of these cases results in a substantial judgment against, or settlement by, Progressive, the resulting liability could have a material effect on our consolidated financial condition, cash flows, and/or 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, 2011.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

I. OVERVIEW

In the first quarter 2012, The Progressive Corporation’s insurance subsidiaries generated net premiums written and policies in force growth of 7% and 6%, respectively. Underwriting profitability for the quarter was 5.9%, or $228.7 million, and our investment operations produced investment income of $114.7 million. We also recognized $77.5 million of net realized gains on securities during the quarter. Overall, we reported net income of $257.6 million, or $.42 per share, for the first quarter 2012. Our total capital position (debt plus equity) increased $81.6 million during the quarter, to $8.3 billion at March 31, 2012.

A. Operations

During the first quarter 2012, we realized a year-over-year increase in net premiums written of 7% on a companywide basis. Our Agency and Direct Personal Lines businesses grew 5% and 7%, respectively, and our Commercial Auto business grew 13%. 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, Personal Lines new applications increased 7%, with 8% growth in our Agency auto business, reflecting stronger conversion in this channel, and 4% growth in the Direct auto business. Our advertising and media placement remain a critical component of our new customer generation. We will continue to take advantage of the brand assets we have developed in both the “Superstore” and the “Messenger” campaigns, but realize that it is essential that we have fresh and appealing messages to present the consumer with compelling reasons to select and retain Progressive.

Both our Agency and Direct businesses contributed to the 4% increase in our Personal Lines renewal applications. The Personal Lines increase in part reflects our retention efforts, which include:

•

further penetration into multi-product households,

•

the use of multi-product quoting applications, which help improve the efficiency of quoting and buying a combination of Personal Lines products, and

•

the expansion of the number of insurance carriers that participate in our Progressive Home Advantage^® program, in which we bundle these unaffiliated companies’ home or renters’ policies with a Progressive product.

In our Commercial Auto business, new applications increased 8%, led by an increase in our for-hire transportation business market target. The 3% decrease in our Commercial Auto renewal applications partially reflects the reduction in policies in force last year.

In addition to our efforts to further penetrate customer households through cross-selling products, we remain focused on several other programs/initiatives we have that are designed to help stimulate growth and provide consumers with distinctive insurance options. These items include:

•

Snapshot^®, our usage-based insurance product

•

Name Your Price^®, a tool that allows consumers to name or select the price they would like to pay for auto insurance and match it to a range of coverage combinations

•

new product models in both our Personal Lines and Commercial Auto businesses, which are designed to improve competitiveness with advanced segmentation and product features, and

•

additional functionality in the mobile device space, including:

•

a feature that enables customers in certain states to purchase insurance for up to three drivers and three vehicles directly from their mobile devices after receiving a quote

•

the nationwide rollout of a mobile quoting application for our Commercial Auto business and special lines products

•

an application available in certain states with the ability to use the camera in a mobile device to send a photo of a driver’s license and/or insurance card, along with some additional information, to get an instantaneous quote, and

•

expansion of our agent offerings on tablet computers, including full quote/buy capabilities.

After years of flat to slightly lower average personal auto premiums, we began to see written premium per policy increase. On a year-over-year basis, for the first quarter 2012, written premium per policy increased 1% in our Agency auto business and, although flat on a year-to-date basis, was up slightly by the end of the quarter in Direct auto. Commercial Auto saw premiums per policy increase about 10% for the first quarter 2012, primarily reflecting rate increases taken during 2011 and shifts in our mix of business to higher average premium policies. Written premium per policy for our special lines products was down 2%, driven largely by older average model years of motorcycles insured. 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, year-over-year, we grew policies in force 6%, with Personal Lines growing 6% and Commercial Auto increasing 1%. Our Direct auto business continues to be the biggest contributor to this increase with policies in force growth of 7%, or 265,300 additional policies. In our Agency auto business, policies in force grew 5%, or 235,300 policies, over last March. With a 6% increase in our special lines policies over last year, we ended the first quarter with nearly 12.7 million Personal Lines policyholders.

To further grow policies in force, it is critical that we retain our customers for longer periods, which is why increasing retention continues to be one of our most important priorities and why our efforts to increase the number of multi-product households continues to be a key initiative. 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 6% over the same time last year and in our Direct auto business decreased about 1%; our policy life expectancy is similar in both channels. Our policy life expectancy for both our Commercial Auto business and our special lines products was relatively flat compared to last year.

Our 5.9% companywide underwriting profit margin for the first quarter 2012 exceeded our target of 4%. On a year-over-year basis, our margin decreased 3.8 percentage points from the first quarter 2011. During the first quarter 2012, we experienced $44.3 million, or 1.1 points, of unfavorable prior accident year reserve development, compared to $99.0 million, or 2.7 points of favorable reserve development in the first quarter last year, which accounts for much of the variance in profitability. Nearly 95% of the unfavorable development reflected in our 2012 results was in our Personal Lines business (Agency channel), with the balance primarily in Commercial Auto. On a year-over-year basis, for the first quarter 2012, our personal auto business experienced an increase in incurred severity across most coverages, while frequency declined, primarily for our collision coverage.

B. Investments and Capital Management

The fair value of our investment portfolio was $16.4 billion at March 31, 2012. Our asset allocation strategy is to maintain 0-25% of our portfolio in Group I securities, with the balance (75%-100%) of our portfolio in Group II securities. We define Group I securities to include:

•

common equities

•

nonredeemable preferred stocks

•

redeemable preferred stocks, except for 50% of investment-grade redeemable preferred stocks with cumulative dividends, and

•

all other non-investment-grade fixed-maturity securities

Group II securities include:

•

short-term securities, and

•

all other fixed-maturity securities

At March 31, 2012, 23% of our portfolio was allocated to Group I securities and 77% to Group II securities. We use the credit ratings from models provided by the National Association of Insurance Commissioners (NAIC) for classifying our residential and commercial mortgage-backed securities, while all other debt securities derive their credit ratings from external vendors in determining whether securities should be classified as Group I or Group II.

Our investment portfolio produced a fully taxable equivalent (FTE) total return of 3.3% for the first quarter 2012. We experienced gains in both our fixed-income and common stock portfolios, with FTE total returns of 2.0% and 12.3%, respectively. At March 31, 2012, 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. At March 31, 2012, our duration was 1.9 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, 2012, our total capital (debt plus equity) was $8.3 billion, compared to $8.2 billion at December 31, 2011, and our debt-to-total capital ratio was 25.0%. During the quarter, we retired $350 million of our 6.375% Senior Notes, which matured in January, repurchased $12.6 million in principal amount of our 6.70% Fixed-to-Floating Rate Junior Subordinated Debentures due 2067 (the “6.70% Debentures”), and repurchased 1.9 million of our common shares at a total cost of $37.7 million (average cost of $20.19 per share). 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, 2012 and 2011, operations generated positive cash flows of $708.4 million and $673.5 million, respectively.

We held total capital (debt plus equity) of $8.3 billion, at book value, at both March 31, 2012 and March 31, 2011, compared to $8.2 billion at December 31, 2011.

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

We seek to deploy capital in a prudent manner and use 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 by our various insurance entities.

•

The second layer of capital we call “extreme contingency.” While our regulatory capital is, by definition, a cushion for absorbing financial consequences of adverse events, such as loss reserve development, litigation, weather catastrophes, or investment market corrections, we view that as a base and hold additional capital for even more extreme conditions. The modeling used to quantify capital needs for these conditions is quite extensive, including tens of thousands of simulations, representing our best estimates of such contingencies based on historical experience. This capital is held either at 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, 2011.

•

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.

During the first three months of 2012 and at all times during 2011, our total capital exceeded the sum of our regulatory capital layer plus our self-constructed extreme contingency load.

The combination of strong operating and investment results increased the amount of capital in our third layer to a level that allowed our Board of Directors to take several actions to return underleveraged capital to our investors, including:

•

Repurchases of our outstanding debt securities. From time to time, we 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 a purpose. We repurchased $12.6 million and $15.0 million in aggregate principal amount of our 6.70% Debentures in the open market, during the first quarter 2012 and in 2011, respectively. As a result of these debt extinguishments, we recognized a loss of $0.7 million and $0.1 million, respectively, reflecting the amount we paid above par. In addition, since this portion of the debt is no longer outstanding, we were required to reclassify $0.3 million in each of these periods to realized gains on securities from unrealized gains on forecasted transactions.

•

Repurchases of our common shares. We continued our practice of repurchasing our common shares when we deem it appropriate. During the first quarter 2012, we repurchased 1.9 million of our common shares at a total cost of $37.7 million (average cost of $20.19 per share). In June 2011, the Board of Directors approved an authorization to repurchase up to 75 million common shares; we have 48.8 million shares remaining under this authorization.

•

Declaration of dividends. As part of our capital strategy, in December 2011, we declared a dividend of $.4072 per share under our annual variable dividend policy, which was paid in February 2012.

In January 2012, we retired $350 million of our 6.375% Senior Notes at maturity. Our next scheduled debt maturity is $150 million of our 7% Notes due October 2013.

During the third quarter 2011, we issued $500 million of 3.75% Senior Notes due 2021 (the “3.75% Senior Notes”). We received proceeds of $497 million, after deducting underwriter’s discounts and commissions, and incurred an additional $1.0 million of expenses related to the issuance. In addition, upon issuance of the 3.75% Senior Notes, we closed a forecasted debt issuance hedge, which was entered into to hedge against a possible rise in interest rates, and recognized a $5.1 million pretax loss as part of accumulated other comprehensive income (loss); the loss will be recognized as an increase to interest expense and amortized over the life of the 3.75% Senior Notes.

Short-Term Borrowings

During the three months ended March 31, 2012 and throughout 2011, 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.

During eight days in the first quarter 2012, we engaged in repurchase agreements under which we loaned U.S. Treasury securities to accredited brokerage firms in exchange for cash equal to the fair value of the securities, as described in more detail below under Results of Operations—Investments; Repurchase Transactions. These investment transactions were entered into to enhance the yield from our fixed-income portfolio and not as a source of liquidity or funding for our operations. We had no open repurchase commitments at March 31, 2012 or 2011, and we did not engage in any repurchase agreements during the first quarter 2011.

B. Commitments and Contingencies

Contractual Obligations

During the first three months of 2012, our contractual obligations have not changed materially from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2011.

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 2011. 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, 2011.

III. RESULTS OF OPERATIONS – UNDERWRITING

A. Growth


	Three Months Ended March 31,
					%
($ in millions)	2012		2011		Change
NET PREMIUMS WRITTEN
Personal Lines
Agency	$	2,076.5	$	1,970.2		5
Direct		1,656.5		1,551.1		7

Total Personal Lines		3,733.0		3,521.3		6
Commercial Auto		429.5		378.7		13
Other indemnity		0		0		NM

Total underwriting operations	$	4,162.5	$	3,900.0		7

NET PREMIUMS EARNED
Personal Lines
Agency	$	1,960.6	$	1,887.8		4
Direct		1,513.2		1,420.0		7

Total Personal Lines		3,473.8		3,307.8		5
Commercial Auto		387.3		355.7		9
Other indemnity		.4		1.8		(78	)

Total underwriting operations	$	3,861.5	$	3,665.3		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)	2012		2011		Change
POLICIES IN FORCE
Personal Lines:
Agency auto		4,816.6		4,581.3		5
Direct auto		3,987.5		3,722.2		7

Total auto		8,804.1		8,303.5		6
Special lines¹		3,852.3		3,645.5		6

Total Personal Lines		12,656.4		11,949.0		6

Commercial Auto		513.8		506.5		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. The following table shows our year-over-year changes in new and renewal applications (i.e., issued policies):


	Growth Over Prior Year Quarter
	2012			2011
APPLICATIONS
Personal Lines
New		7	%		(2	)%
Renewal		4	%		7	%
Commercial Auto
New		8	%		(6	)%
Renewal		(3	)%		(2	)%

Our Personal Lines business had a solid increase in new applications for the first three months of 2012, compared to last year, with increases in both our Agency and Direct auto businesses, primarily due to growth in several large states, reflecting previous actions to make our rates more competitive. In addition, unseasonably warm weather in much of the country contributed to significant new application growth for our special lines products on a quarter-over-prior-year quarter basis, particularly in our motorcycle business. Our Commercial Auto business also experienced an increase in new applications for the first quarter 2012, driven by an increase in new applications in our for-hire transportation business market target, and a significant increase in new applications in Florida, our largest Commercial Auto state, compared to the same period last year. We remain committed to our advertising campaigns, product enhancements, and brand-building efforts in order to stimulate new business.

We have several initiatives underway aimed at providing consumers with distinctive auto insurance options, including the rollout of personal auto product models, which began in 2010 and further refines our segmentation and incorporates the best design elements of the Agency and Direct auto products. As of March 31, 2012, these products have been rolled out to 43 jurisdictions, including three states added during the first quarter. We plan to extend the rollout to about four additional states, which will substantially complete the rollout of these product models.

In the first quarter 2012, we continued the expansion of Snapshot^®, our usage-based insurance product. Snapshot was made available in one additional state in the first quarter, bringing the total number of Direct markets to 41. Agency auto customers have access to Snapshot in 34 of those 41 jurisdictions. We plan to expand Snapshot into additional states, depending on regulatory approval and business results.

We are also continuing with our efforts to further penetrate customer households through cross-selling products. Progressive Home Advantage^®, the program in which we “bundle” our auto product with property insurance provided by one of five unaffiliated insurance carriers (including two carriers added in the first quarter 2012), is becoming an integral part of our consumer offerings. This program is currently available to Direct customers in 48 states, Agency customers in 36 states, and to both Direct and Agency customers in the District of Columbia. Progressive Home Advantage is not available to customers in Florida and Alaska. In 2012, we began to scale back the number of states in which we offer Progressive Home Advantage to new Agency customers until we are able to determine which of these unaffiliated carriers are best suited to offer this program through independent agents. 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. In addition to our Progressive Home Advantage program, we are continuing to focus on selling auto policies to our special lines customers and vice versa.

Improving our offerings in the mobile space remains an important initiative. Consumers have the ability to obtain a quote and buy an auto insurance policy on our mobile website in 42 states and the District of Columbia. In April 2012, we began to offer the ability to quote up to three drivers and three vehicles on mobile devices in ten states. We plan to make this multi-driver, multi-vehicle feature available in all states in the near future. In the first quarter 2012, we also launched a feature in 28 states that allows consumers to use the camera from their mobile device to take a picture of their driver license, and/or current insurance card, to provide easy data fill for an instantaneous quote. In addition, policyholders are able to make payments and certain endorsements from their mobile device, as well as receive identification cards and severe weather text alerts. Furthermore, much of our agency-dedicated website is now accessible to agents from most tablet computers, including full quote/buy capability. We expect to add new functionality to our mobile site and mobile applications over the remainder of the year.

We also continued the national rollout of a product model in our Commercial Auto business that began in 2011. This model, which expands our coverage offerings, simplifies the quoting and claims experience, and provides incentives for customers to stay with us longer, is available in 21 states, including 7 states added in the first quarter 2012. We plan to continue the rollout to our remaining 28 Commercial Auto business states over the remainder of the year. We also offer our Commercial Auto customers general liability coverage in 26 states and workers’ compensation coverage in 14 states through our Progressive Commercial Advantage^SM program; these products are underwritten by four unaffiliated insurance companies.

We experienced the following changes in written premium per policy:


	Growth Over Prior Year Quarter
	2012			2011
WRITTTEN PREMIUM PER POLICY
Personal Lines — auto		1	%		(1	)%
Commercial Auto		10	%		0	%

In the first quarter 2012, written premium per policy for our personal auto business remained relatively flat. For our Commercial Auto business, written premium per policy increased significantly, primarily reflecting rate increases taken since the beginning of 2011 and continuing into the first quarter 2012, as well as shifts in our mix of business. 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 (including any renewals) will remain in force before cancellation or lapse in coverage. The following table shows our year-over-year changes in policy life expectancy:


	Growth Over Prior Year
	2012			2011
POLICY LIFE EXPECTANCY
Personal Lines:
Auto		3	%		4	%
Special lines		0	%		(1	)%
Commercial Auto		0	%		(1	)%

The lengthening policy life expectancies in our personal auto business in part reflect our state mix, payment mix, and rate level competitiveness in our Agency business. Policy life expectancy for our special lines products and our Commercial Auto business remained flat, compared to last year. Realizing the importance that retention has on our ability to continue to grow profitably, we continue to emphasize competitive pricing, quality service, and other retention initiatives for our 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 results were as follows:


	2012						2011
	Underwriting Profit (Loss)						Underwriting Profit (Loss)
($ in millions)	$			Margin			$			Margin
Personal Lines
Agency	$	139.2			7.1	%	$	210.1			11.1	%
Direct		61.3			4.1			105.2			7.4

Total Personal Lines		200.5			5.8			315.3			9.5
Commercial Auto		29.4			7.6			41.1			11.6
Other indemnity¹		(1.2	)		NM			(.6	)