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 September 30, 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: 604,748,737 outstanding at September 30, 2012

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

The Progressive Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(unaudited)


	Three Months									Nine Months
Periods Ended September 30,	2012			2011			% Change			2012			2011			% Change
(millions - except per share amounts)
Revenues
Net premiums earned	$	4,054.8		$	3,740.7			8		$	11,912.4		$	11,125.9			7
Investment income		109.0			117.4			(7	)		336.2			361.5			(7	)
Net realized gains (losses) on securities:
Other-than-temporary impairment (OTTI) losses:
Total OTTI losses		(.4	)		(1.4	)		(71	)		(6.0	)		(5.9	)		2
Non-credit losses, net of credit losses recognized on previously recorded non-credit OTTI losses		0			0			NM			(.7	)		.9			NM

Net impairment losses recognized in earnings		(0.4	)		(1.4	)		(71	)		(6.7	)		(5.0	)		34
Net realized gains (losses) on securities		172.3			(51.2	)		NM			251.4			78.1			222

Total net realized gains (losses) on securities		171.9			(52.6	)		NM			244.7			73.1			235
Service revenues		9.9			5.6			77			28.3			16.8			68
Gains (losses) on extinguishment of debt		(.1	)		(.1	)		0			(1.8	)		(.1	)		1700

Total revenues		4,345.5			3,811.0			14			12,519.8			11,577.2			8

Expenses
Losses and loss adjustment expenses		3,068.2			2,749.3			12			8,874.3			7,918.3			12
Policy acquisition costs		357.3			350.2			2			1,081.4			1,045.2			3
Other underwriting expenses		464.1			460.5			1			1,467.7			1,381.2			6
Investment expenses		3.3			4.0			(18	)		11.3			10.6			7
Service expenses		9.6			5.1			88			27.7			13.9			99
Interest expense		30.6			33.4			(8	)		93.2			96.4			(3	)

Total expenses		3,933.1			3,602.5			9			11,555.6			10,465.6			10

Net Income
Income before income taxes		412.4			208.5			98			964.2			1,111.6			(13	)
Provision for income taxes		135.4			57.8			134			311.0			352.8			(12	)

Net income		277.0			150.7			84			653.2			758.8			(14	)

Other Comprehensive Income (Loss), Net of Tax
Net unrealized gains (losses) on securities:
Net non-credit related OTTI losses, adjusted for valuation changes		1.7			(1.4	)		NM			4.8			(4.5	)		NM
Other net unrealized gains (losses) on securities		60.6			(280.9	)		NM			209.0			(196.9	)		NM

Total net unrealized gains (losses) on securities		62.3			(282.3	)		NM			213.8			(201.4	)		NM
Net unrealized gains on forecasted transactions		(.3	)		(4.4	)		(93	)		(1.5	)		(6.0	)		(75	)
Foreign currency translation adjustment		.4			(.2	)		NM			.3			.3			0

Other comprehensive income (loss)		62.4			(286.9	)		NM			212.6			(207.1	)		NM

Comprehensive income (loss)	$	339.4		$	(136.2	)		NM		$	865.8		$	551.7			57

Computation of Net Income Per Share
Average shares outstanding—Basic		601.9			626.9			(4	)		604.3			640.5			(6	)
Net effect of dilutive stock-based compensation		4.6			4.5			2			4.2			4.3			(2	)

Total equivalent shares—Diluted		606.5			631.4			(4	)		608.5			644.8			(6	)

Basic: Net income per share	$	.46		$	.24			91		$	1.08		$	1.18			(9	)

Diluted: Net income per share	$	.46		$	.24			91		$	1.07		$	1.18			(9	)

Dividends declared per share¹	$	0		$	0					$	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)


	September 30,						December 31,
(millions)	2012			2011			2011
Assets
Investments—Available-for-sale, at fair value:
Fixed maturities (amortized cost: $11,864.0, $11,531.9, and $11,455.7)	$	12,295.2		$	11,815.6		$	11,759.3
Equity securities:
Nonredeemable preferred stocks (cost: $430.1, $493.6, and $473.7)		848.4			873.0			806.3
Common equities (cost: $1,101.5, $1,391.5, and $1,431.0)		1,639.2			1,599.5			1,845.6
Short-term investments (amortized cost: $2,394.1, $1,699.7, and $1,551.8)		2,394.1			1,699.7			1,551.8

Total investments		17,176.9			15,987.8			15,963.0
Cash		192.2			170.3			155.7
Accrued investment income		88.2			98.3			105.7
Premiums receivable, net of allowance for doubtful accounts of $133.5, $117.0, and $124.2		3,356.0			3,086.0			2,929.8
Reinsurance recoverables, including $32.5, $36.5, and $32.3 on paid losses and loss adjustment expenses		880.5			798.1			818.0
Prepaid reinsurance premiums		72.8			81.8			69.8
Deferred acquisition costs		461.8			458.1			433.6
Income taxes		47.4			298.5			208.0
Property and equipment, net of accumulated depreciation of $603.7, $561.7, and $573.8		918.2			910.9			911.3
Other assets		235.3			254.5			249.9

Total assets	$	23,429.3		$	22,144.3		$	21,844.8

Liabilities and Shareholders’ Equity
Unearned premiums	$	5,203.4		$	4,830.1		$	4,579.4
Loss and loss adjustment expense reserves		7,760.2			7,256.8			7,245.8
Accounts payable, accrued expenses, and other liabilities		1,848.4			1,797.2			1,770.8
Debt¹		2,062.7			2,443.9			2,442.1

Total liabilities		16,874.7			16,328.0			16,038.1

Common Shares, $1.00 par value (authorized 900.0; issued 797.7, including treasury shares of 193.0, 177.1, and 184.7)		604.7			620.6			613.0
Paid-in capital		1,048.6			986.7			1,006.2
Retained earnings		3,996.2			3,632.4			3,495.0
Accumulated other comprehensive income, net of tax:
Net non-credit related OTTI losses, adjusted for valuation changes		(.6	)		(6.3	)		(5.4	)
Other net unrealized gains (losses) on securities		897.2			572.2			688.2

Total net unrealized gains (losses) on securities		896.6			565.9			682.8
Net unrealized gains on forecasted transactions		6.4			8.7			7.9
Foreign currency translation adjustment		2.1			2.0			1.8

Total accumulated other comprehensive income		905.1			576.6			692.5

Total shareholders’ equity		6,554.6			5,816.3			5,806.7

Total liabilities and shareholders’ equity	$	23,429.3		$	22,144.3		$	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)


Nine months ended September 30,	2012			2011
(millions)
Cash Flows From Operating Activities
Net income	$	653.2		$	758.8
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		69.1			65.3
Amortization of fixed-income securities		145.3			174.7
Amortization of stock-based compensation		45.8			36.4
Net realized (gains) losses on securities		(244.7	)		(73.1	)
Net (gains) losses on disposition of property and equipment		4.8			7.8
(Gains) losses on extinguishment of debt		1.8			.1
Changes in:
Premiums receivable		(426.2	)		(347.6	)
Reinsurance recoverables		(62.5	)		(56.6	)
Prepaid reinsurance premiums		(3.0	)		6.3
Deferred acquisition costs		(28.2	)		(40.9	)
Income taxes		45.7			.9
Unearned premiums		624.0			476.3
Loss and loss adjustment expense reserves		514.4			185.8
Accounts payable, accrued expenses, and other liabilities		306.6			278.9
Other, net		19.2			22.2

Net cash provided by operating activities		1,665.3			1,495.3

Cash Flows From Investing Activities
Purchases:
Fixed maturities		(3,997.0	)		(5,208.0	)
Equity securities		(176.1	)		(424.0	)
Sales:
Fixed maturities		2,416.0			4,057.2
Equity securities		737.4			264.8
Maturities, paydowns, calls, and other:
Fixed maturities		1,094.1			1,107.4
Equity securities		4.0			0
Net purchases of short-term investments - other		(842.9	)		(608.8	)
Net unsettled security transactions		14.5			(14.2	)
Purchases of property and equipment		(84.2	)		(53.3	)
Sales of property and equipment		3.4			1.9

Net cash used in investing activities		(830.8	)		(877.0	)

Cash Flows From Financing Activities
Proceeds from exercise of stock options		.5			6.8
Tax benefit from exercise/vesting of stock-based compensation		5.6			2.7
Proceeds from debt issuance		0			491.9
Payment of debt		(350.0	)		0
Reacquisition of debt		(32.5	)		(12.7	)
Dividends paid to shareholders¹		(252.4	)		(263.6	)
Acquisition of treasury shares		(170.1	)		(832.1	)

Net cash used in financing activities		(798.9	)		(607.0	)

Effect of exchange rate changes on cash		.9			.1

Increase (decrease) in cash		36.5			11.4
Cash, January 1		155.7			158.9

Cash, September 30	$	192.2		$	170.3

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 September 30, 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 met the criteria for deferral upon adoption were recognized as a reduction to income primarily over the first six months of 2012, consistent with our insurance policy terms.

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
September 30, 2012
Fixed maturities:
U.S. government obligations	$	3,433.7	$	110.4	$	(.1	)	$	0	$	3,544.0		20.6	%
State and local government obligations		1,898.9		61.0		(.4	)		0		1,959.5		11.4
Corporate debt securities		2,687.8		128.8		(.4	)		6.3		2,822.5		16.4
Residential mortgage-backed securities		399.5		21.6		(12.4	)		0		408.7		2.4
Commercial mortgage-backed securities		1,998.2		90.7		(1.3	)		0		2,087.6		12.2
Other asset-backed securities		1,077.9		14.5		(.1	)		0		1,092.3		6.4
Redeemable preferred stocks		368.0		27.1		(14.5	)		0		380.6		2.2

Total fixed maturities		11,864.0		454.1		(29.2	)		6.3		12,295.2		71.6
Equity securities:
Nonredeemable preferred stocks		430.1		416.8		0			1.5		848.4		4.9
Common equities		1,101.5		543.8		(6.1	)		0		1,639.2		9.6
Short-term investments:
Other short-term investments		2,394.1		0		0			0		2,394.1		13.9

Total portfolio^2,3	$	15,789.7	$	1,414.7	$	(35.3	)	$	7.8	$	17,176.9		100.0	%


($ in millions)	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Net Realized Gains (Losses)¹			Fair Value		% of Total Fair Value
September 30, 2011
Fixed maturities:
U.S. government obligations	$	2,921.7	$	129.1	$	(.1	)	$	0		$	3,050.7		19.1	%
State and local government obligations		1,930.6		56.4		(1.1	)		0			1,985.9		12.4
Corporate debt securities		2,680.2		86.4		(10.4	)		5.2			2,761.4		17.3
Residential mortgage-backed securities		471.3		9.4		(36.5	)		0			444.2		2.8
Commercial mortgage-backed securities		1,826.2		43.2		(9.7	)		0			1,859.7		11.6
Other asset-backed securities		1,265.5		14.8		(1.3	)		.7			1,279.7		8.0
Redeemable preferred stocks		436.4		20.1		(22.5	)		0			434.0		2.7

Total fixed maturities		11,531.9		359.4		(81.6	)		5.9			11,815.6		73.9
Equity securities:
Nonredeemable preferred stocks		493.6		387.4		(2.6	)		(5.4	)		873.0		5.5
Common equities		1,391.5		288.4		(80.4	)		0			1,599.5		10.0
Short-term investments:
Other short-term investments		1,699.7		0		0			0			1,699.7		10.6

Total portfolio^2,3	$	15,116.7	$	1,035.2	$	(164.6	)	$	.5		$	15,987.8		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 September 30, 2012, we had $32.4 million of net unsettled security transactions included in other assets, compared to $60.5 million and $46.9 million at September 30, 2011 and December 31, 2011, respectively.

³	The total fair value of the portfolio at September 30, 2012 and 2011, and December 31, 2011 included $1.6 billion, $1.7 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:


	September 30,				December 31,
(millions)	2012		2011		2011
Fixed maturities:
Corporate debt securities	$	177.5	$	234.8	$	234.9
Other asset-backed securities		16.4		16.4		15.5

Total fixed maturities		193.9		251.2		250.4
Equity securities:
Nonredeemable preferred stocks		50.5		15.1		14.2

Total hybrid securities	$	244.4	$	266.3	$	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 if and when a 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 $11.9 million as of September 30, 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 that 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.

The other asset-backed security in the table above represents 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.

Fixed Maturities The composition of fixed maturities by maturity at September 30, 2012, was:


(millions)	Cost		Fair Value
Less than one year	$	1,422.4	$	1,451.0
One to five years		8,885.4		9,214.2
Five to ten years		1,407.5		1,475.8
Ten years or greater		148.4		153.9

Total¹	$	11,863.7	$	12,294.9

¹	Excludes $0.3 million of gains on the open credit default swap position.

Asset-backed securities are classified in the maturity distribution table based upon their projected cash flows. All other securities which do not have a single maturity date are reported at expected average maturity. Contractual maturities may differ from expected maturities because the issuers of the securities may have the right to call or prepay obligations.

Gross Unrealized Losses As of September 30, 2012, we had $29.2 million of gross unrealized losses in our fixed-income securities (i.e., fixed-maturity securities, nonredeemable preferred stocks, and short-term investments) and $6.1 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 periods of time necessary to recover their respective 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, 88% 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 of that issuer. The remaining 12% of our common stocks are part of a managed equity strategy selected and administered by

external investment advisors. 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
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(millions)	Value		Losses			Value		Losses			Value		Losses
September 30, 2012
Fixed maturities:
U.S. government obligations	$	83.1	$	(.1	)	$	83.1	$	(.1	)	$	0	$	0
State and local government obligations		61.4		(.4	)		29.1		(.2	)		32.3		(.2	)
Corporate debt securities		35.9		(.4	)		14.2		(.1	)		21.7		(.3	)
Residential mortgage-backed securities		177.2		(12.4	)		30.0		(.5	)		147.2		(11.9	)
Commercial mortgage-backed securities		44.0		(1.3	)		31.4		(.1	)		12.6		(1.2	)
Other asset-backed securities		21.0		(.1	)		9.0		(.0	)		12.0		(.1	)
Redeemable preferred stocks		164.1		(14.5	)		24.7		(.4	)		139.4		(14.1	)

Total fixed maturities		586.7		(29.2	)		221.5		(1.4	)		365.2		(27.8	)
Equity securities:
Nonredeemable preferred stocks		0		0			0		0			0		0
Common equities		80.8		(6.1	)		54.4		(3.4	)		26.4		(2.7	)

Total equity securities		80.8		(6.1	)		54.4		(3.4	)		26.4		(2.7	)

Total portfolio	$	667.5	$	(35.3	)	$	275.9	$	(4.8	)	$	391.6	$	(30.5	)


	Total		Gross			Less than 12 Months					12 Months or Greater
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(millions)	Value		Losses			Value		Losses			Value		Losses
September 30, 2011
Fixed maturities:
U.S. government obligations	$	125.3	$	(.1	)	$	125.3	$	(.1	)	$	0	$	0
State and local government obligations		154.3		(1.1	)		126.0		(.7	)		28.3		(.4	)
Corporate debt securities		466.3		(10.4	)		327.2		(7.7	)		139.1		(2.7	)
Residential mortgage-backed securities		320.7		(36.5	)		79.6		(4.1	)		241.1		(32.4	)
Commercial mortgage-backed securities		429.9		(9.7	)		342.8		(7.0	)		87.1		(2.7	)
Other asset-backed securities		169.0		(1.3	)		165.3		(.9	)		3.7		(.4	)
Redeemable preferred stocks		233.8		(22.5	)		85.0		(.9	)		148.8		(21.6	)

Total fixed maturities		1,899.3		(81.6	)		1,251.2		(21.4	)		648.1		(60.2	)
Equity securities:
Nonredeemable preferred stocks		20.5		(2.6	)		20.5		(2.6	)		0		0
Common equities		420.2		(80.4	)		407.3		(76.6	)		12.9		(3.8	)

Total equity securities		440.7		(83.0	)		427.8		(79.2	)		12.9		(3.8	)

Total portfolio	$	2,340.0	$	(164.6	)	$	1,679.0	$	(100.6	)	$	661.0	$	(64.0	)


	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:


	September 30,						December 31,
(millions)	2012			2011			2011
Fixed maturities:
Residential mortgage-backed securities	$	(44.2	)	$	(45.3	)	$	(44.8	)
Commercial mortgage-backed securities		(.9	)		(.9	)		(1.0	)

Total fixed maturities	$	(45.1	)	$	(46.2	)	$	(45.8	)

The following tables provide rollforwards of the amounts related to credit losses recognized in earnings for the periods ended September 30, 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 September 30, 2012
	Mortgage-Backed						Corporate
(millions)	Residential			Commercial			Debt		Total
Beginning balance at July 1, 2012	$	28.1		$	.7		$	0	$	28.8
Credit losses for which an OTTI was previously recognized		0			0			0		0
Credit losses for which an OTTI was not previously recognized		0			0			0		0
Reductions for securities sold/matured		0			0			0		0
Change in recoveries of future cash flows expected to be collected¹		(.4	)		(.1	)		0		(.5	)
Reductions for previously recognized credit impairments written-down to fair value²		0			0			0		0

Ending balance at September 30, 2012	$	27.7		$	.6		$	0	$	28.3


	Nine Months Ended September 30, 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		.1			0			0		.1
Credit losses for which an OTTI was not previously recognized		.2			0			0		.2
Reductions for securities sold/matured		0			(.2	)		0		(.2	)
Change in recoveries of future cash flows expected to be collected¹		(3.1	)		(.2	)		0		(3.3	)
Reductions for previously recognized credit impairments written-down to fair value²		(4.0	)		(.3	)		0		(4.3	)

Ending balance at September 30, 2012	$	27.7		$	.6		$	0	$	28.3


	Three Months Ended September 30, 2011
	Mortgage-Backed						Corporate
(millions)	Residential			Commercial			Debt		Total
Beginning balance at July 1, 2011	$	36.2		$	.9		$	6.5	$	43.6
Credit losses for which an OTTI was previously recognized		0			0			0		0
Credit losses for which an OTTI was not previously recognized		0			0			0		0
Reductions for securities sold/matured		0			0			0		0
Change in recoveries of future cash flows expected to be collected¹		(1.6	)		.4			0		(1.2	)
Reductions for previously recognized credit impairments written-down to fair value²		0			0			0		0

Ending balance at September 30, 2011	$	34.6		$	1.3		$	6.5	$	42.4


	Nine Months Ended September 30, 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		1.0			0			0		1.0
Credit losses for which an OTTI was not previously recognized		1.1			.4			0		1.5
Reductions for securities sold/matured		0			0			0		0
Change in recoveries of future cash flows expected to be collected¹		1.3			.3			0		1.6
Reductions for previously recognized credit impairments written-down to fair value²		(1.1	)		(.4	)		0		(1.5	)

Ending balance at September 30, 2011	$	34.6		$	1.3		$	6.5	$	42.4

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

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

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); historical credit ratings; and updated cash flow expectations 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 September 30, 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 and nine months ended September 30, 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 September 30, 2012 and 2011, and December 31, 2011, and for the three and nine months ended September 30, 2012 and 2011; amounts are on a pretax basis:


(millions)								Balance Sheet										Comprehensive Income Statement
	Notional Value¹								Assets (Liabilities) Fair Value									Net Realized Gains (Losses) on Securities
	Sept. 30,				Dec. 31,				Sept. 30,						Dec. 31,			Three months ended Sept. 30,						Nine months ended Sept. 30,
Derivatives designated as:	2012		2011		2011		Purpose	Classification	2012			2011			2011			2012			2011			2012			2011
Hedging instruments
Closed:
Effective cash flow hedge	$	0	$	500	$	0	Forecasted transaction	Accumulated other comprehensive income	$	0		$	(5.1	)	$	0		$	0		$	0		$	0		$	0
Ineffective cash flow hedge		31		13		15	Manage interest rate risk	NA		0			0			0			0			.3			.6			.3
Non-hedging instruments
Assets:
Corporate credit default swaps		25		25		25	Manage credit risk	Investments - fixed maturities		.3			.8			.7			(.4	)		.5			(.7	)		(.1	)
Liabilities:
Interest rate swaps		1,263		1,513		1,263	Manage portfolio duration	Other liabilities		(101.6	)		(110.0	)		(76.1	)		(15.9	)		(72.4	)		(42.7	)		(93.8	)
Closed:
Interest rate swaps		0		100		350	Manage portfolio duration	NA		0			0			0			0			0			0			.5
Corporate credit default swaps		0		10		10	Manage credit risk	NA		0			0			0			0			.1			0			.5

Total		NA		NA		NA			$	(101.3	)	$	(114.3	)	$	(75.4	)	$	(16.3	)	$	(71.5	)	$	(42.8	)	$	(92.6	)

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 year for closed positions.

CASH FLOW HEDGES

During the third quarter and first nine months of 2012, and the second half of 2011, we repurchased, in the open market, $0.5 million, $30.9 million, and $15.0 million, respectively, in aggregate principal amount of our 6.70% Fixed-to-Floating Rate Junior Subordinated Debentures due 2067 (the “6.70% Debentures”). For the portion of the 6.70% Debentures we repurchased, we reclassified $0, $0.6 million, and $0.3 million, in the respective periods, on a pretax basis, of the unrealized gain on forecasted transactions from accumulated other comprehensive income on the balance sheet to net realized gains on securities on the comprehensive income statement.

In August 2011, we issued $500 million of 3.75% Senior Notes due 2021 and entered into a forecasted debt issuance hedge (cash flow hedge) against a possible rise in interest rates (see Note – 4 Debt for further discussion). Upon issuance of the 3.75% Senior Notes, the hedge was closed and we recognized, as part of accumulated other comprehensive income, a pretax unrealized loss of $5.1 million.

INTEREST RATE SWAPS

During the periods ended September 30, 2012 and 2011, and December 31, 2011, we invested in interest rate swap positions, primarily to manage the fixed-income portfolio duration. At September 30, 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 2011. The combined open positions have generated an aggregate realized loss, as interest rates have fallen since the inception of these positions. As of September 30, 2012 and 2011, and December 31, 2011, the balance of the cash collateral that we had delivered to the applicable counterparty on these positions was $107.2 million, $117.8 million, and $81.7 million, respectively.

CORPORATE CREDIT DEFAULT SWAPS

Financial Services Sector – During the periods ended September 30, 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 September 30, 2012 and 2011, and December 31, 2011, we received $0.3 million, $0.8 million, and $0.7 million, respectively, in cash collateral from the counterparty on this position.

Automotive Sector – We held no credit default swaps in this sector at September 30, 2012 or December 31, 2011. During the period ended September 30, 2011, we closed a position 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; the position was opened during the second quarter 2010. 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.

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
September 30, 2012
Fixed maturities:
U.S. government obligations	$	3,544.0	$	0	$	0	$	3,544.0	$	3,433.7
State and local government obligations		0		1,959.5		0		1,959.5		1,898.9
Corporate debt securities		0		2,822.5		0		2,822.5		2,687.8

Subtotal		3,544.0		4,782.0		0		8,326.0		8,020.4

Asset-backed securities:
Residential mortgage-backed		0		358.8		49.9		408.7		399.5
Commercial mortgage-backed		0		2,065.0		22.6		2,087.6		1,998.2
Other asset-backed		0		1,092.0		.3		1,092.3		1,077.9

Subtotal asset-backed securities		0		3,515.8		72.8		3,588.6		3,475.6

Redeemable preferred stocks:
Financials		0		133.9		0		133.9		120.8
Utilities		0		66.9		0		66.9		65.9
Industrials		0		179.8		0		179.8		181.3

Subtotal redeemable preferred stocks		0		380.6		0		380.6		368.0

Total fixed maturities		3,544.0		8,678.4		72.8		12,295.2		11,864.0

Equity securities:
Nonredeemable preferred stocks:
Financials		265.2		524.4		29.3		818.9		407.3
Utilities		0		29.5		0		29.5		22.8

Subtotal nonredeemable preferred stocks		265.2		553.9		29.3		848.4		430.1

Common equities:
Common stocks		1,627.2		0		0		1,627.2		1,098.3
Other equity-like investments		0		0		12.0		12.0		3.2

Subtotal common equities		1,627.2		0		12.0		1,639.2		1,101.5

Total fixed maturities and equity securities		5,436.4		9,232.3		114.1		14,782.8		13,395.6

Short-term investments:
Other short-term investments		2,120.7		273.4		0		2,394.1		2,394.1

Total portfolio	$	7,557.1	$	9,505.7	$	114.1	$	17,176.9	$	15,789.7

Debt	$	0	$	2,405.9	$	0	$	2,405.9	$	2,062.7


	Fair Value
(millions)	Level 1		Level 2		Level 3		Total		Cost
September 30, 2011
Fixed maturities:
U.S. government obligations	$	3,050.7	$	0	$	0	$	3,050.7	$	2,921.7
State and local government obligations		0		1,985.9		0		1,985.9		1,930.6
Corporate debt securities		0		2,731.8		29.6		2,761.4		2,680.2

Subtotal		3,050.7		4,717.7		29.6		7,798.0		7,532.5

Asset-backed securities:
Residential mortgage-backed		0		377.1		67.1		444.2		471.3
Commercial mortgage-backed		0		1,837.9		21.8		1,859.7		1,826.2
Other asset-backed		0		1,276.1		3.6		1,279.7		1,265.5

Subtotal asset-backed securities		0		3,491.1		92.5		3,583.6		3,563.0

Redeemable preferred stocks:
Financials		24.1		118.0		0		142.1		136.7
Utilities		0		68.6		0		68.6		70.8
Industrials		0		223.3		0		223.3		228.9

Subtotal redeemable preferred stocks		24.1		409.9		0		434.0		436.4

Total fixed maturities		3,074.8		8,618.7		122.1		11,815.6		11,531.9

Equity securities:
Nonredeemable preferred stocks:
Financials		332.3		487.6		0		819.9		453.6
Utilities		0		53.1		0		53.1		40.0

Subtotal nonredeemable preferred stocks		332.3		540.7		0		873.0		493.6

Common equities:
Common stocks		1,587.7		0		0		1,587.7		1,387.4
Other equity-like investments		0		0		11.8		11.8		4.1

Subtotal common equities		1,587.7		0		11.8		1,599.5		1,391.5

Total fixed maturities and equity securities	$	4,994.8	$	9,159.4	$	133.9		14,288.1		13,417.0

Short-term investments:
Other short-term investments¹								1,699.7		1,699.7

Total portfolio							$	15,987.8	$	15,116.7

Debt¹							$	2,605.8	$	2,443.9


	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

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 during the third quarter 2012 or 2011. 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 have the right to put the security back to the state of issuance at par.

At September 30, 2012, vendor-quoted prices represented 65% of our Level 1 classifications (excluding short-term investments), compared to 61% and 59% at September 30, 2011 and December 31, 2011, respectively. 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 September 30, 2012, vendor-quoted prices comprised 96% of our Level 2 classifications (excluding short-term investments), while dealer-quoted prices represented 4%, compared to 94% and 6%, and 96% and 4%, at September 30, 2011 and December 31, 2011, respectively. 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.

As part of our pricing procedures, we obtain quotes from more than one source to help us fully evaluate the market price of securities. However, our internal pricing policy is to use a consistent source for individual securities in order to maintain the integrity of our valuation process. Quotes obtained from the sources are not considered binding offers to transact. 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 its review, and its willingness to improve its analysis based on feedback from clients. We believe this 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 September 30, 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 September 30, 2012, we had one private common equity security with a value of $11.2 million that was priced internally. The same security had a value of $10.2 million at both September 30, 2011 and December 31, 2011. At September 30, 2012, we had one private preferred equity security, which was purchased during the third quarter, with a value of $29.3 million that was priced internally. At September 30, 2012, we did not have any securities in our fixed-maturity portfolio that were priced internally. At September 30, 2011 and December 31, 2011, we had two fixed-maturity securities with an aggregate value of $0.5 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 and nine months ended September 30, 2012 and 2011:


	Level 3 Fair Value Three months ended September 30, 2012
	Fair value		Calls/							Net Realized				Net		Fair value
	at June 30,		Maturities/							(gain)/loss		Change in		Transfers		at Sept. 30,
(millions)	2012		Paydowns			Purchases		Sales		on sales		Valuation		in (out)		2012
Fixed maturities:
Asset-backed securities:
Residential mortgage-backed	$	54.5	$	(5.0	)	$	0	$	0	$	0	$	.4	$	0	$	49.9
Commercial mortgage-backed		23.2		(2.6	)		0		0		0		2.0		0		22.6
Other asset-backed		1.1		(.8	)		0		0		0		0		0		.3

Total asset-backed securities		78.8		(8.4	)		0		0		0		2.4		0		72.8
Corporate debt securities		0		0			0		0		0		0		0		0

Total fixed maturities		78.8		(8.4	)		0		0		0		2.4		0		72.8

Equity securities:
Nonredeemable preferred stocks:
Financials¹		0		0			28.5		0		0		.8		0		29.3
Common equities:
Other equity-like investments		12.2		(.2	)		0		0		0		0		0		12.0

Total Level 3 securities	$	91.0	$	(8.6	)	$	28.5	$	0	$	0	$	3.2	$	0	$	114.1


	Level 3 Fair Value Nine months ended September 30, 2012
										Net
	Fair Value		Calls/							Realized				Net		Fair value
	at Dec. 31,		Maturities/							(gain)/loss		Change in		Transfers		at Sept. 30,
(millions)	2011		Paydowns			Purchases		Sales		on sales		Valuation		in (out)		2012
Fixed maturities:
Asset-backed securities:
Residential mortgage-backed	$	62.3	$	(12.8	)	$	0	$	0	$	0	$	.4	$	0	$	49.9
Commercial mortgage-backed		21.3		(2.7	)		0		0		0		4.0		0		22.6
Other asset-backed		2.6		(2.3	)		0		0		0		0		0		.3

Total asset-backed securities		86.2		(17.8	)		0		0		0		4.4		0		72.8
Corporate debt securities		0		0			0		0		0		0		0		0

Total fixed maturities		86.2		(17.8	)		0		0		0		4.4		0		72.8

Equity securities:
Nonredeemable preferred stocks:
Financials¹		0		0			28.5		0		0		.8		0		29.3
Common equities:
Other equity-like investments		11.5		(.2	)		0		0		0		.7		0		12.0

Total Level 3 securities	$	97.7	$	(18.0	)	$	28.5	$	0	$	0	$	5.9	$	0	$	114.1

¹	The $0.8 million represents net holding period gains on a hybrid security which is reflected in net realized gains (losses) on securities in the comprehensive income statement.


	Level 3 Fair Value Three months ended September 30, 2011
										Net
	Fair Value		Calls/							Realized					Net			Fair value
	at June 30,		Maturities/							(gain)/loss		Change in			Transfers			at Sept. 30,
(millions)	2011		Paydowns			Purchases		Sales		on sales		Valuation			in (out)			2011
Fixed maturities:
Asset-backed securities:
Residential mortgage-backed	$	71.5	$	(4.9	)	$	0	$	0	$	0	$	.5		$	0		$	67.1
Commercial mortgage-backed		26.5		(.1	)		0		0		0		(4.6	)		0			21.8
Other asset-backed		4.5		(.8	)		0		0		0		(.1	)		0			3.6

Total asset-backed securities		102.5		(5.8	)		0		0		0		(4.2	)		0			92.5
Corporate debt securities		29.8		0			0		0		0		(.2	)		0			29.6

Total fixed maturities		132.3		(5.8	)		0		0		0		(4.4	)		0			122.1

Equity securities:
Nonredeemable preferred stocks:
Financials		0		0			0		0		0		0			0			0
Common equities:
Other equity-like investments		11.9		0			0		0		0		(.1	)		0			11.8

Total Level 3 securities	$	144.2	$	(5.8	)	$	0	$	0	$	0	$	(4.5	)	$	0		$	133.9


	Level 3 Fair Value Nine months ended September 30, 2011
										Net
	Fair Value		Calls/							Realized					Net			Fair value
	at Dec. 31,		Maturities/							(gain)/loss		Change in			Transfers			at Sept. 30,
(millions)	2010		Paydowns			Purchases		Sales		on sales		Valuation			in (out)¹			2011
Fixed maturities:
Asset-backed securities:
Residential mortgage-backed	$	96.7	$	(14.7	)	$	0	$	0	$	0	$	.5		$	(15.4	)	$	67.1
Commercial mortgage-backed		27.5		(.2	)		0		0		0		(5.5	)		0			21.8
Other asset-backed		5.0		(1.7	)		0		0		0		.3			0			3.6

Total asset-backed securities		129.2		(16.6	)		0		0		0		(4.7	)		(15.4	)		92.5
Corporate debt securities		29.5		0			0		0		0		.1			0			29.6

Total fixed maturities		158.7		(16.6	)		0		0		0		(4.6	)		(15.4	)		122.1

Equity securities:
Nonredeemable preferred stocks:
Financials		0		0			0		0		0		0			0			0
Common equities:
Other equity-like investments		11.8		0			0		0		0		0			0			11.8

Total Level 3 securities	$	170.5	$	(16.6	)	$	0	$	0	$	0	$	(4.6	)	$	(15.4	)	$	133.9

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 applicable securities at September 30, 2012:


	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value at				Unobservable
(millions)	Sept. 30, 2012		Valuation Technique	Unobservable Input	Input Assumption
Fixed maturities:
Asset-backed securities:
Residential mortgage-backed	$	15.3