PGR-2015.6.30 10Q 2nd quarter


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 1O-Q
 
 
(Mark One)
ý
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2015
or
¨
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  ý    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  ý    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):
 
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
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: 585,932,347 outstanding at June 30, 2015
 

1


PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
The Progressive Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(unaudited)
 
Three Months
 
Six Months
Periods Ended June 30,
2015

 
2014

 
%
Change
 
2015

 
2014

 
%
Change
(millions—except per share amounts)
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
 
 
 
Net premiums earned
$
4,995.8

 
$
4,513.5

 
11
 
$
9,662.1

 
$
8,915.8

 
8
Investment income
113.3

 
99.2

 
14
 
218.4

 
202.5

 
8
Net realized gains (losses) on securities:
 
 
 
 
 
 
 
 
 
 
 
Net impairment losses recognized in earnings
(1.7
)
 
0

 
NM
 
(9.6
)
 
0

 
NM
Net realized gains (losses) on securities
77.7

 
40.4

 
92
 
118.6

 
159.8

 
(26)
Total net realized gains (losses) on securities
76.0

 
40.4

 
88
 
109.0

 
159.8

 
(32)
Fees and other revenues
74.9

 
74.4

 
1
 
148.6

 
147.2

 
1
Service revenues
23.3

 
14.0

 
66
 
40.5

 
23.8

 
70
Total revenues
5,283.3

 
4,741.5

 
11
 
10,178.6

 
9,449.1

 
8
Expenses
 
 
 
 

 
 
 
 
 
 
Losses and loss adjustment expenses
3,617.2

 
3,269.1

 
11
 
6,985.8

 
6,475.0

 
8
Policy acquisition costs
417.3

 
374.8

 
11
 
796.7

 
743.8

 
7
Other underwriting expenses
662.4

 
611.7

 
8
 
1,312.8

 
1,222.1

 
7
Investment expenses
5.7

 
6.0

 
(5)
 
11.0

 
10.1

 
9
Service expenses
20.5

 
12.9

 
59
 
36.4

 
22.6

 
61
Interest expense
34.9

 
29.6

 
18
 
67.4

 
56.3

 
20
Total expenses
4,758.0

 
4,304.1

 
11
 
9,210.1

 
8,529.9

 
8
Net Income
 
 
 
 

 
 
 
 
 
 
Income before income taxes
525.3

 
437.4

 
20
 
968.5

 
919.2

 
5
Provision for income taxes
156.8

 
144.0

 
9
 
304.4

 
304.5

 
0
Net income
368.5

 
293.4

 
26
 
664.1

 
614.7

 
8
Net income attributable to noncontrolling interest (NCI), net of tax
5.2

 
0

 
NM
 
5.2

 
0

 
NM
Net income attributable to Progressive
$
363.3

 
$
293.4

 
24
 
$
658.9

 
$
614.7

 
7
Other Comprehensive Income (Loss), Net of Tax
 
 
 
 

 
 
 
 
 
 
Changes in:
 
 
 
 
 
 
 
 
 
 
 
Total net unrealized gains (losses) on securities
$
(149.8
)
 
$
88.4

 
(269)
 
$
(114.4
)
 
$
88.3

 
(230)
Net unrealized gains (losses) on forecasted transactions
(0.3
)
 
(1.3
)
 
(77)
 
(9.0
)
 
(1.6
)
 
463
Foreign currency translation adjustment
0

 
0.5

 
(100)
 
(0.5
)
 
0.5

 
(200)
Other comprehensive income (loss)
(150.1
)
 
87.6

 
(271)
 
(123.9
)
 
87.2

 
(242)
Other comprehensive (income) loss attributable to NCI
2.8

 
0

 
NM
 
2.8

 
0

 
NM
Comprehensive income attributable to Progressive
$
216.0

 
$
381.0

 
(43)
 
$
537.8

 
$
701.9

 
(23)
Computation of Net Income Per Share
 
 
 
 

 
 
 
 
 
 
Average shares outstanding - Basic
585.7

 
591.2

 
(1)
 
586.6

 
592.6

 
(1)
Net effect of dilutive stock-based compensation
3.8

 
4.3

 
(12)
 
3.7

 
4.0

 
(8)
Total equivalent shares - Diluted
589.5

 
595.5

 
(1)
 
590.3

 
596.6

 
(1)
Basic: Net income per share
$
0.62

 
$
0.50

 
25
 
$
1.12

 
$
1.04

 
8
Diluted: Net income per share
$
0.62

 
$
0.49

 
25
 
$
1.12

 
$
1.03

 
8
Dividends declared per share1
$
0

 
$
0

 
 
 
$
0

 
$
0

 
 
NM = Not Meaningful
1Progressive maintains an annual dividend program. See Note 8 - Dividends for further discussion.
See notes to consolidated financial statements.

2


The Progressive Corporation and Subsidiaries
Consolidated Balance Sheets
(unaudited)
 
June 30,
 
December 31,
2014
(millions)
2015

 
2014

 
Assets
 
 
 
 
 
Investments - Available-for-sale, at fair value:
 
 
 
 
 
        Fixed maturities (amortized cost: $15,520.6, $12,265.4, and $13,374.2)
$
15,589.0

 
$
12,498.6

 
$
13,549.2

Equity securities:
 
 
 
 
 
             Nonredeemable preferred stocks (cost: $632.4, $497.1, and $590.4)
772.3

 
760.2

 
827.5

             Common equities (cost: $1,351.7, $1,265.2, and $1,289.2)
2,546.8

 
2,381.7

 
2,492.3

        Short-term investments (amortized cost: $1,669.3, $3,118.7, and $2,149.0)
1,669.3

 
3,118.7

 
2,149.0

Total investments
20,577.4

 
18,759.2

 
19,018.0

Cash
263.8

 
126.1

 
108.4

Accrued investment income
100.4

 
82.9

 
87.3

Premiums receivable, net of allowance for doubtful accounts of $140.6, $133.4, and $152.2
3,867.3

 
3,566.3

 
3,537.5

Reinsurance recoverables, including $46.2, $36.2, and $46.0 on paid losses and loss adjustment expenses
1,402.3

 
1,135.0

 
1,231.9

Prepaid reinsurance premiums
233.0

 
89.8

 
85.3

Deferred acquisition costs
568.2

 
479.0

 
457.2

Property and equipment, net of accumulated depreciation of $770.3, $706.3, and $731.0
1,018.9

 
952.5

 
960.6

Goodwill
472.9

 
1.6

 
1.6

Intangible assets, net of accumulated amortization of $16.3, $0.6, and $0.6
526.0

 
11.3

 
11.3

Other assets
274.0

 
249.0

 
288.5

Total assets
$
29,304.2

 
$
25,452.7

 
$
25,787.6

Liabilities
 
 
 
 
 
Unearned premiums
$
6,641.9

 
$
5,582.6

 
$
5,440.1

Loss and loss adjustment expense reserves
9,701.2

 
8,639.9

 
8,857.4

Net deferred income taxes
176.0

 
98.8

 
98.9

Dividends payable
0

 
0

 
404.1

Accounts payable, accrued expenses, and other liabilities
2,252.9

 
2,134.2

 
1,893.8

Debt1
2,739.0

 
2,208.0

 
2,164.7

Total liabilities
21,511.0

 
18,663.5

 
18,859.0

 
 
 
 
 
 
Redeemable noncontrolling interest (NCI)
433.4

 
0

 
0

Shareholders' Equity
 
 
 
 
 
Common Shares, $1.00 par value (authorized 900.0; issued 797.6, including treasury shares of 211.7, 206.1, and 209.8)
585.9


591.5


587.8

Paid-in capital
1,177.0


1,169.3


1,184.3

Retained earnings
4,694.9


3,989.5


4,133.4

Accumulated other comprehensive income, net of tax:





Net unrealized gains (losses) on securities
907.5

 
1,035.3

 
1,021.9

Net unrealized gains (losses) on forecasted transactions
(7.5
)
 
2.5

 
1.5

Foreign currency translation adjustment
(0.8
)
 
1.1

 
(0.3
)
Accumulated other comprehensive (income) loss attributable to noncontrolling interest
2.8

 
0

 
0

Total accumulated other comprehensive income
902.0

 
1,038.9

 
1,023.1

Total shareholders’ equity
7,359.8

 
6,789.2

 
6,928.6

Total liabilities, redeemable NCI, and shareholders’ equity
$
29,304.2

 
$
25,452.7

 
$
25,787.6

 
1Consists of both short-term and long-term debt. See Note 4 - Debt.
See notes to consolidated financial statements.

3


The Progressive Corporation and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
(unaudited)
 
Six months ended June 30,
 
 
(millions — except per share amounts)
2015

2014

Common Shares, $1.00 Par Value
 
 
Balance, Beginning of period
$
587.8

$
595.8

Treasury shares purchased
(4.0
)
(5.7
)
Net restricted equity awards issued/vested/(forfeited)
2.1

1.4

Balance, End of period
$
585.9

$
591.5

Paid-In Capital
 
 
Balance, Beginning of period
$
1,184.3

$
1,142.0

Tax benefit from vesting of equity-based compensation
8.7

10.6

Treasury shares purchased
(8.2
)
(11.1
)
Net restricted equity awards (issued)/(vested)/forfeited
(2.1
)
(1.4
)
Amortization of equity-based compensation
26.5

29.8

Reinvested dividends on restricted stock units
(0.1
)
(0.6
)
Adjustment to carrying amount of noncontrolling interest
(32.1
)
0

Balance, End of period
$
1,177.0

$
1,169.3

Retained Earnings
 
 
Balance, Beginning of period
$
4,133.4

$
3,500.0

Net income attributable to Progressive
658.9

614.7

Treasury shares purchased
(95.9
)
(123.2
)
Cash dividends declared on common shares
0

1.1

Reinvested dividends on restricted stock units
0.1

0.6

Other, net
(1.6
)
(3.7
)
Balance, End of period
$
4,694.9

$
3,989.5

Accumulated Other Comprehensive Income, Net of Tax
 
 
Balance, Beginning of period
$
1,023.1

$
951.7

Attributable to noncontrolling interest
2.8

0

Other comprehensive income (loss)
(123.9
)
87.2

Balance, End of period
$
902.0

$
1,038.9

Total Shareholders’ Equity
$
7,359.8

$
6,789.2

There are 20.0 million Serial Preferred Shares authorized; no such shares are issued or outstanding.
There are 5.0 million Voting Preference Shares authorized; no such shares have been issued.
See notes to consolidated financial statements.










4


The Progressive Corporation and Subsidiaries
Consolidated Statements of Cash Flows        
(unaudited) (millions)
Six months ended June 30,
2015

 
2014

Cash Flows From Operating Activities
 
 
 
Net income available to Progressive
$
664.1

 
$
614.7

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
49.7

 
46.7

         Amortization of intangible assets
15.7

 
0

Amortization of fixed-income securities
43.5

 
38.1

Amortization of equity-based compensation
26.5

 
29.8

Net realized (gains) losses on securities
(109.0
)
 
(159.8
)
Net (gains) losses on disposition of property and equipment
0.7

 
3.3

Changes in:
 
 
 
Premiums receivable
(300.5
)
 
(255.4
)
Reinsurance recoverables
(116.1
)
 
(44.8
)
Prepaid reinsurance premiums
(1.2
)
 
(14.9
)
Deferred acquisition costs
(46.4
)
 
(31.4
)
Income taxes
(82.9
)
 
53.6

Unearned premiums
652.0

 
407.7

Loss and loss adjustment expense reserves
537.7

 
160.1

Accounts payable, accrued expenses, and other liabilities
66.9

 
164.0

Other, net
29.3

 
29.5

Net cash provided by operating activities
1,430.0

 
1,041.2

Cash Flows From Investing Activities
 
 
 
Purchases:
 
 
 
Fixed maturities
(5,316.7
)
 
(3,332.1
)
Equity securities
(257.2
)
 
(176.7
)
Sales:
 
 
 
Fixed maturities
2,780.0

 
3,329.3

Equity securities
200.4

 
446.4

Maturities, paydowns, calls, and other:
 
 
 
Fixed maturities
1,595.1

 
1,117.8

Equity securities
12.0

 
14.2

Net sales (purchases) of short-term investments
523.4

 
(1,846.0
)
Net unsettled security transactions
128.4

 
174.5

Purchases of property and equipment
(53.6
)
 
(44.7
)
Acquisition of ARX Holding Corp., net of cash acquired
(752.7
)
 
0

Acquisition of additional shares of ARX Holding Corp.
(12.6
)
 
0

Sales of property and equipment
7.1

 
3.1

Net cash used in investing activities
(1,146.4
)
 
(314.2
)
Cash Flows From Financing Activities
 
 
 
Tax benefit from vesting of equity-based compensation
8.7

 
10.7

Proceeds from debt issuance
382.0

 
344.7

Payment of debt
(6.8
)
 
0

Reacquisition of debt
0

 
0

Dividends paid to shareholders1
(403.6
)
 
(892.6
)
Acquisition of treasury shares
(108.1
)
 
(140.0
)
Net cash used in financing activities
(127.8
)
 
(677.2
)
Effect of exchange rate changes on cash
(0.4
)
 
1.2

Increase in cash
155.4

 
51.0

Cash, January 1
108.4

 
75.1

Cash, June 30
$
263.8

 
$
126.1

1Progressive maintains an annual dividend program. See Note 8 - Dividends for further discussion.
See notes to consolidated financial statements.

5


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, a mutual insurance company affiliate, and a limited partnership investment affiliate. During the second quarter 2015, Progressive acquired a controlling interest in ARX Holding Corp. (ARX), which wholly owns or controls insurance and non-insurance subsidiaries and affiliates. As of June 30, 2015, Progressive owns 69.1% of the outstanding capital stock of ARX. All of Progressive's other subsidiaries and affiliates are wholly owned or controlled.
Beginning April 1, 2015, we consolidated 100% of ARX's financial information into our results of operations, financial condition, and cash flows. The minority shareholders of ARX retain a 30.9% interest in the operating results of ARX. These interests are reflected in our comprehensive income statements as "Net income/Other comprehensive income attributable to noncontrolling interests (NCI)."
As part of a related stockholders' agreement, Progressive has the ability to "call" the remaining outstanding shares to achieve 100% ownership in ARX by the end of the second quarter of 2021. In addition, the minority ARX shareholders have the right to “put” their ARX shares to Progressive by that date. Since these securities are redeemable upon the occurrence of an event that is not solely within the control of Progressive, we have recorded the redeemable noncontrolling interest as mezzanine equity on our consolidated balance sheets. The redeemable noncontrolling interest was initially recorded at fair value of $411.5 million, reflecting the minority shares at the net acquisition price adjusted for the fair value of the put and call rights. The value of the put and call rights was based on an internally developed modified binomial model. Subsequent changes to the maximum redemption value as determined in accordance with the stockholders' agreement are recorded at the current reporting date.
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 June 30, 2015, 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, 2014.
Included in other assets in the consolidated balance sheets for June 30, 2015 and December 31, 2014, and for June 30, 2014, is $8.7 million and $13.4 million, respectively, of "held for sale" property, which represents the fair value of this property less the estimated costs to sell.

6


Note 2 Investments — 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.
The following tables present the composition of our investment portfolio by major security type, consistent with our classification of how we manage, monitor, and measure the portfolio:
 
($ in millions)
Cost

 
Gross
Unrealized Gains

 
Gross
Unrealized
Losses

 
Net
Realized
Gains
(Losses)1

 
Fair
Value

 
% of
Total
Fair
Value

June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
$
2,049.3

 
$
14.0

 
$
(0.1
)
 
$
0

 
$
2,063.2

 
10.0
%
State and local government obligations
3,177.2

 
32.2

 
(17.1
)
 
0

 
3,192.3

 
15.5

Foreign government obligations
18.6

 
0

 
0

 
0

 
18.6

 
0.1

Corporate debt securities
3,433.9

 
23.3

 
(22.6
)
 
0.2

 
3,434.8

 
16.7

Residential mortgage-backed securities
1,879.5

 
31.1

 
(17.6
)
 
(0.5
)
 
1,892.5

 
9.2

Agency residential pass-through obligations
116.0

 
0.1

 
(1.8
)
 
0

 
114.3

 
0.6

Commercial mortgage-backed securities
2,548.4

 
26.0

 
(14.2
)
 
(0.1
)
 
2,560.1

 
12.4

Other asset-backed securities
2,037.9

 
3.6

 
(0.7
)
 
0.7

 
2,041.5

 
9.9

Redeemable preferred stocks
259.8

 
21.7

 
(9.8
)
 
0

 
271.7

 
1.3

Total fixed maturities
15,520.6

 
152.0

 
(83.9
)
 
0.3

 
15,589.0

 
75.7

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks
632.4

 
150.0

 
(11.3
)
 
1.2

 
772.3

 
3.8

Common equities
1,351.7

 
1,204.7

 
(9.6
)
 
0

 
2,546.8

 
12.4

Short-term investments
1,669.3

 
0

 
0

 
0

 
1,669.3

 
8.1

Total portfolio2,3
$
19,174.0

 
$
1,506.7

 
$
(104.8
)
 
$
1.5

 
$
20,577.4

 
100.0
%

7



($ in millions)
Cost

 
Gross
Unrealized Gains

 
Gross
Unrealized
Losses

 
Net
Realized
Gains
(Losses)1

 
Fair
Value

 
% of
Total
Fair
Value

June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
$
3,249.0

 
$
43.5

 
$
(3.1
)
 
$
0

 
$
3,289.4

 
17.5
%
State and local government obligations
2,287.2

 
46.5

 
(2.6
)
 
0.1

 
2,331.2

 
12.4

Foreign government obligations
0

 
0

 
0

 
0

 
0

 
0

Corporate debt securities
2,215.4

 
47.9

 
(2.8
)
 
2.3

 
2,262.8

 
12.1

Residential mortgage-backed securities
1,312.0

 
32.7

 
(9.3
)
 
0

 
1,335.4

 
7.1

Agency residential pass-through obligations
0

 
0

 
0

 
0

 
0

 
0

Commercial mortgage-backed securities
1,974.4

 
47.8

 
(2.9
)
 
0

 
2,019.3

 
10.8

Other asset-backed securities
965.4

 
7.1

 
(0.1
)
 
0.6

 
973.0

 
5.2

Redeemable preferred stocks
262.0

 
31.5

 
(6.0
)
 
0

 
287.5

 
1.5

Total fixed maturities
12,265.4

 
257.0

 
(26.8
)
 
3.0

 
12,498.6

 
66.6

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks
497.1

 
247.5

 
(1.4
)
 
17.0

 
760.2

 
4.1

Common equities
1,265.2

 
1,118.9

 
(2.4
)
 
0

 
2,381.7

 
12.7

Short-term investments
3,118.7

 
0

 
0

 
0

 
3,118.7

 
16.6

Total portfolio2,3
$
17,146.4

 
$
1,623.4

 
$
(30.6
)
 
$
20.0

 
$
18,759.2

 
100.0
%
 
($ in millions)
Cost

 
Gross
Unrealized Gains

 
Gross
Unrealized
Losses

 
Net
Realized
Gains
(Losses)1

 
Fair
Value

 
% of
Total
Fair
Value

December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
$
2,641.1

 
$
27.3

 
$
(1.3
)
 
$
0

 
$
2,667.1

 
14.0
%
State and local government obligations
2,095.7

 
44.6

 
(1.1
)
 
0

 
2,139.2

 
11.2

Foreign government obligations
14.2

 
0

 
0

 
0

 
14.2

 
0.1

Corporate debt securities
2,813.9

 
32.9

 
(10.4
)
 
0.3

 
2,836.7

 
14.9

Residential mortgage-backed securities
1,635.5

 
34.5

 
(10.8
)
 
(0.7
)
 
1,658.5

 
8.7

Agency residential pass-through obligations
0

 
0

 
0

 
0

 
0

 
0

Commercial mortgage-backed securities
2,278.7

 
39.3

 
(2.6
)
 
0.2

 
2,315.6

 
12.2

Other asset-backed securities
1,634.9

 
3.8

 
(0.8
)
 
0.8

 
1,638.7

 
8.6

Redeemable preferred stocks
260.2

 
24.7

 
(5.7
)
 
0

 
279.2

 
1.5

Total fixed maturities
13,374.2

 
207.1

 
(32.7
)
 
0.6

 
13,549.2

 
71.2

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks
590.4

 
201.1

 
(6.4
)
 
42.4

 
827.5

 
4.4

Common equities
1,289.2

 
1,213.2

 
(10.1
)
 
0

 
2,492.3

 
13.1

Short-term investments
2,149.0

 
0

 
0

 
0

 
2,149.0

 
11.3

Total portfolio2,3
$
17,402.8

 
$
1,621.4

 
$
(49.2
)
 
$
43.0

 
$
19,018.0

 
100.0
%
 
1Represents net holding period gains (losses) on certain hybrid securities (discussed below).
2Our portfolio reflects the effect of unsettled security transactions and collateral on open derivative positions; at June 30, 2015, $159.7 million was included in "other liabilities," compared to $235.8 million and $31.3 million at June 30, 2014 and December 31, 2014, respectively.
3The total fair value of the portfolio at June 30, 2015 and 2014, and December 31, 2014 included $0.7 billion, $1.1 billion, and $1.9 billion, respectively, of securities held in a consolidated, non-insurance subsidiary of the holding company, net of any unsettled security transactions.


8


Short-Term Investments Our short-term investments may include commercial paper and other investments that are expected to mature within one year. We did not hold any repurchase transactions where we lent collateral at June 30, 2015, June 30, 2014, or December 31, 2014. To the extent our repurchase transactions were with the same counterparty and subject to an enforceable master netting arrangement, we could elect to offset these transactions. Consistent with past practice, we have elected not to offset these transactions and therefore report these transactions on a gross basis on our balance sheets.
Also included in short-term investments are reverse repurchase commitment transactions, where we loan cash to approved counterparties and receive U.S. Treasury Notes pledged as collateral against the cash borrowed. Our exposure to credit risk is limited due to the nature of the collateral (i.e., U.S. Treasury Notes) received. We have counterparty exposure on these trades in the event of a counterparty default to the extent the general collateral security's value is below the amount of cash we delivered to acquire the collateral. The short-term duration of the transactions (primarily overnight) reduces that exposure.

We had no open reverse repurchase commitments at June 30, 2015, June 30, 2014, or December 31, 2014. For the six months ended June 30, 2015, our largest outstanding balance of reverse repurchase commitments was $275.0 million, which was open for one day; the average daily balance of reverse repurchase commitments was $135.8 million.

Hybrid Securities Included in our fixed-maturity and equity securities are hybrid securities, which are reported at fair value:
 
 
June 30,
 
December 31,
2014

(millions)
2015

 
2014

 
Fixed maturities:
 
 
 
 
 
State and local government obligations
$
0

 
$
5.1

 
$
0

Corporate debt securities
105.6

 
142.0

 
139.8

Residential mortgage-backed securities
117.5

 
27.6

 
120.7

Commercial mortgage-backed securities
17.3

 
0

 
31.2

Other asset-backed securities
12.5

 
14.3

 
13.7

Total fixed maturities
252.9

 
189.0

 
305.4

Equity securities:
 
 
 
 
 
Nonredeemable preferred stocks
66.6

 
66.1

 
122.3

Total hybrid securities
$
319.5

 
$
255.1

 
$
427.7

Certain corporate debt securities are accounted for as hybrid securities since they were acquired at a 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, would result in an acceleration of the recognition of the remaining premium paid on these securities in our results of operations. This would result in a loss of $5.1 million as of June 30, 2015, 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 residential mortgage-backed securities accounted for as hybrid securities are obligations of the issuer with payments of principal based on the performance of a reference pool of loans. This embedded derivative results in the securities incorporating the risk of default from both the issuer and the related loan pool.
The commercial mortgage-backed securities in the table above contain fixed interest rate reset features that will increase the coupons in the event the securities are not fully paid off on the anticipated repayment date. These reset features have the potential to more than double our initial purchase yield for each security.
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 at acquisition.
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. In the second quarter 2015, we acquired a controlling interest in ARX Holdings Corp. and transferred our previous 5% preferred stock investment in ARX to a component of our total ownership interest (see Note 15 – Acquisition for further discussion). This transfer was offset by purchases of new hybrid securities since June 30, 2014.

9


Fixed Maturities The composition of fixed maturities by maturity at June 30, 2015, was:
 
(millions)
Cost

 
Fair Value

Less than one year
$
4,470.5

 
$
4,504.4

One to five years
6,978.4

 
7,007.0

Five to ten years
3,858.9

 
3,858.6

Ten years or greater
194.2

 
200.4

Total1
$
15,502.0

 
$
15,570.4

 
1Excludes $18.6 million related to our open interest rate swap positions.
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 based upon 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 June 30, 2015, we had $95.2 million of gross unrealized losses in our fixed-income securities (i.e., fixed-maturity securities, nonredeemable preferred stocks, and short-term investments) and $9.6 million in our common equities. We currently do not intend to sell the fixed-income securities and determined that it is more likely than not that we will not be required to sell these securities for the period of time necessary to recover their 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. For common equities, 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 were part of a managed equity strategy selected and administered by external investment advisors. If our review of loss position securities indicates there was a fundamental, or market, impairment on these securities that was determined to be other-than-temporary, 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 No. of Sec.

Total
Fair
Value

Gross Unrealized Losses

Less than 12 Months
 
12 Months or Greater
($ in millions)
No. of Sec.

Fair
Value

Unrealized Losses

 
No. of Sec.

Fair
Value

Unrealized Losses

June 30, 2015
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
11

$
7.6

$
(0.1
)
11

$
7.6

$
(0.1
)
 
0

$
0

$
0

State and local government obligations
736

1,319.3

(17.1
)
720

1,277.5

(16.5
)
 
16

41.8

(0.6
)
Corporate debt securities
160

1,693.6

(22.6
)
146

1,406.4

(18.5
)
 
14

287.2

(4.1
)
Residential mortgage-backed securities
140

1,189.2

(17.6
)
87

668.1

(5.9
)
 
53

521.1

(11.7
)
Agency residential pass-through obligations
53

104.6

(1.8
)
53

104.6

(1.8
)
 
0

0

0

Commercial mortgage-backed securities
155

1,426.9

(14.2
)
132

1,205.9

(13.5
)
 
23

221.0

(0.7
)
Other asset-backed securities
38

715.3

(0.7
)
30

566.2

(0.5
)
 
8

149.1

(0.2
)
Redeemable preferred stocks
5

123.7

(9.8
)
3

55.6

(3.1
)
 
2

68.1

(6.7
)
Total fixed maturities
1,298

6,580.2

(83.9
)
1,182

5,291.9

(59.9
)
 
116

1,288.3

(24.0
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks
14

345.9

(11.3
)
9

163.7

(1.8
)
 
5

182.2

(9.5
)
Common equities
73

129.4

(9.6
)
72

128.9

(9.5
)
 
1

0.5

(0.1
)
Total equity securities
87

475.3

(20.9
)
81

292.6

(11.3
)
 
6

182.7

(9.6
)
Total portfolio
1,385

$
7,055.5

$
(104.8
)
1,263

$
5,584.5

$
(71.2
)
 
122

$
1,471.0

$
(33.6
)
 

10


 
Total No. of Sec.

Total
Fair
Value

Gross Unrealized Losses

Less than 12 Months
 
12 Months or Greater
($ in millions)
No. of Sec.

Fair
Value

Unrealized Losses

 
No. of Sec.

Fair
Value

Unrealized Losses

June 30, 2014
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
12

$
460.0

$
(3.1
)
1

$
14.9

$
(0.1
)
 
11

$
445.1

$
(3.0
)
State and local government obligations
55

333.9

(2.6
)
22

52.2

(0.1
)
 
33

281.7

(2.5
)
Corporate debt securities
15

265.1

(2.8
)
6

112.2

(0.5
)
 
9

152.9

(2.3
)
Residential mortgage-backed securities
56

684.2

(9.3
)
17

263.2

(1.7
)
 
39

421.0

(7.6
)
Agency residential pass-through obligations
0

0

0

0

0

0

 
0

0

0

Commercial mortgage-backed securities
23

256.7

(2.9
)
7

37.1

(0.2
)
 
16

219.6

(2.7
)
Other asset-backed securities
3

47.4

(0.1
)
2

28.3

0

 
1

19.1

(0.1
)
Redeemable preferred stocks
3

93.6

(6.0
)
0

0

0

 
3

93.6

(6.0
)
Total fixed maturities
167

2,140.9

(26.8
)
55

507.9

(2.6
)
 
112

1,633.0

(24.2
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks
4

121.4

(1.4
)
1

33.7

(0.2
)
 
3

87.7

(1.2
)
Common equities
14

50.4

(2.4
)
14

50.4

(2.4
)
 
0

0

0

Total equity securities
18

171.8

(3.8
)
15

84.1

(2.6
)
 
3

87.7

(1.2
)
Total portfolio
185

$
2,312.7

$
(30.6
)
70

$
592.0

$
(5.2
)
 
115

$
1,720.7

$
(25.4
)
 
Total No. of Sec.

Total
Fair
Value

Gross Unrealized Losses

Less than 12 Months
 
12 Months or Greater
($ in millions)
No. of Sec.

Fair
Value

Unrealized Losses

 
No. of Sec.

Fair
Value

Unrealized Losses

December 31, 2014
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
11

$
428.2

$
(1.3
)
5

$
150.7

$
(0.3
)
 
6

$
277.5

$
(1.0
)
State and local government obligations
46

234.2

(1.1
)
28

177.9

(0.4
)
 
18

56.3

(0.7
)
Corporate debt securities
53

843.2

(10.4
)
43

647.5

(6.1
)
 
10

195.7

(4.3
)
Residential mortgage-backed securities
70

844.2

(10.8
)
33

465.2

(3.1
)
 
37

379.0

(7.7
)
Agency residential pass-through obligations
0

0

0

0

0

0

 
0

0

0

Commercial mortgage-backed securities
63

723.4

(2.6
)
54

667.5

(1.4
)
 
9

55.9

(1.2
)
Other asset-backed securities
44

741.8

(0.8
)
42

715.7

(0.7
)
 
2

26.1

(0.1
)
Redeemable preferred stocks
3

103.0

(5.7
)
1

33.0

(1.0
)
 
2

70.0

(4.7
)
Total fixed maturities
290

3,918.0

(32.7
)
206

2,857.5

(13.0
)
 
84

1,060.5

(19.7
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks
8

231.4

(6.4
)
5

143.2

(3.6
)
 
3

88.2

(2.8
)
Common equities
20

68.4

(10.1
)
19

61.8

(9.6
)
 
1

6.6

(0.5
)
Total equity securities
28

299.8

(16.5
)
24

205.0

(13.2
)
 
4

94.8

(3.3
)
Total portfolio
318

$
4,217.8

$
(49.2
)
230

$
3,062.5

$
(26.2
)
 
88

$
1,155.3

$
(23.0
)

Since both June 30, 2014 and December 31, 2014, the number of securities in our fixed-maturity portfolio with unrealized losses increased, reflecting a decline in prices associated with a general increase in interest rates at certain maturities. The unrealized losses at June 30, 2015 included losses on 806 securities added to the portfolio as a result of our acquisition of a controlling interest in ARX during the second quarter, and reflect declines in the prices of these securities since the acquisition date averaging approximately 1.3% of their total cost. We had no material decreases in valuation as a result of credit rating downgrades on our fixed-maturity securities. All of the fixed-maturity securities in an unrealized loss position at June 30, 2015 in the table above are current with respect to required principal and interest payments. Since December 31, 2014, our nonredeemable preferred stocks with unrealized losses increased to 14 securities, averaging approximately 3% of their total cost. We reviewed these securities and concluded that the unrealized losses are market-related adjustments to the values, which we determined not to be other-than-temporary; we expect to recover our initial investments on these securities. The number of issuers with unrealized losses in our common stock portfolio increased during the first six months of 2015, though the total gross unrealized loss for the portfolio decreased during the same period. A review of the securities in a loss position did not uncover fundamental issues with the issuers that would indicate other-than-temporary impairments existed. Additionally,

11


expectations for recovery in the next 12 months would put the fair values at or above our current book values. Lastly, we determined, as of the balance sheet date, that it was not likely these securities would be sold prior to that recovery.

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:
 
 
June 30,
 
December 31,
2014

(millions)
2015

 
2014

 
Fixed maturities:
 
 
 
 
 
Residential mortgage-backed securities
$
(44.1
)
 
$
(44.1
)
 
$
(44.1
)
Commercial mortgage-backed securities
(0.6
)
 
(0.6
)
 
(0.6
)
Total fixed maturities
$
(44.7
)
 
$
(44.7
)
 
$
(44.7
)

The following tables provide rollforwards of the amounts related to credit losses recognized in earnings for the periods ended June 30, 2015 and 2014, for which a portion 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 June 30, 2015
 
Mortgage-Backed
 
 
(millions)
Residential 

 
Commercial 

 
Total

Balance at March 31, 2015
$
12.2

 
$
0.4

 
$
12.6

Change in recoveries of future cash flows expected to be collected1
1.8

 
0

 
1.8

Balance at June 30, 2015
$
14.0

 
$
0.4

 
$
14.4

 
 
 
 
 
 
 
Six Months Ended June 30, 2015
 
Mortgage-Backed
 
 
(millions)
Residential 

 
Commercial 

 
Total

Balance at December 31, 2014
$
12.7

 
$
0.4

 
$
13.1

Change in recoveries of future cash flows expected to be collected1
1.3

 
0

 
1.3

Balance at June 30, 2015
$
14.0

 
$
0.4

 
$
14.4


 
Three Months Ended June 30, 2014
 
Mortgage-Backed
 
 
(millions)
Residential 

 
Commercial 

 
Total

Balance at March 31, 2014
$
19.1

 
$
0.4

 
$
19.5

Change in recoveries of future cash flows expected to be collected1
(6.1
)
 
0

 
(6.1
)
Balance at June 30, 2014
$
13.0

 
$
0.4

 
$
13.4

 
 
 
 
 
 
 
Six Months Ended June 30, 2014
 
Mortgage-Backed
 
 
(millions)
Residential 

 
Commercial 

 
Total

Balance at December 31, 2013
$
19.2

 
$
0.4

 
$
19.6

Change in recoveries of future cash flows expected to be collected1
(6.2
)
 
0

 
(6.2
)
Balance at June 30, 2014
$
13.0

 
$
0.4

 
$
13.4


1Reflects the current period change in the expected recovery of prior impairments that will be accreted into income over the remaining life of the security.
Although we determined 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 potential credit losses on the

12


securities that were in an unrealized loss position. 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. We did not have any credit impairment write-downs as of June 30, 2015 or 2014.

Realized Gains (Losses) The components of net realized gains (losses) for the three and six months ended June 30, were:
 
Three Months
 
Six Months
(millions)
2015

 
2014

 
2015

 
2014

Gross realized gains on security sales
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
U.S. government obligations
$
9.5

 
$
4.2

 
$
14.4

 
$
10.7

State and local government obligations
0

 
0

 
0

 
4.4

Corporate and other debt securities
6.8

 
9.8

 
15.9

 
32.9

Residential mortgage-backed securities
0.1

 
1.0

 
0.2

 
2.0

Commercial mortgage-backed securities
3.6

 
3.5

 
14.4

 
9.6

Redeemable preferred stocks
0.1

 
0.4

 
0.1

 
0.4

Total fixed maturities
20.1

 
18.9

 
45.0

 
60.0

Equity securities:
 
 
 
 
 
 
 
Nonredeemable preferred stocks
34.4

 
33.2

 
50.2

 
59.1

Common equities
12.7

 
9.4

 
30.5

 
92.4

Subtotal gross realized gains on security sales
67.2

 
61.5

 
125.7

 
211.5

Gross realized losses on security sales
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
U.S. government obligations
(0.1
)
 
(0.4
)
 
(0.9
)
 
(5.1
)
State and local government obligations
0

 
(0.1
)
 
0

 
(0.2
)
Corporate and other debt securities
(0.5
)
 
(0.1
)
 
(1.3
)
 
(2.3
)
Residential mortgage-backed securities
0

 
(0.2
)
 
0

 
(0.2
)
Commercial mortgage-backed securities
(0.8
)
 
(4.1
)
 
(1.0
)
 
(6.8
)
Redeemable preferred stocks
0

 
0

 
0

 
(3.2
)
Total fixed maturities
(1.4
)
 
(4.9
)
 
(3.2
)
 
(17.8
)
Equity securities:
 
 
 
 
 
 
 
Nonredeemable preferred stocks
(1.4
)
 
0

 
(1.4
)
 
0

Common equities
(0.1
)
 
0

 
(0.7
)
 
(3.4
)
Subtotal gross realized losses on security sales
(2.9
)
 
(4.9
)
 
(5.3
)
 
(21.2
)
Net realized gains (losses) on security sales
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
U.S. government obligations
9.4

 
3.8

 
13.5

 
5.6

State and local government obligations
0

 
(0.1
)
 
0

 
4.2

Corporate and other debt securities
6.3

 
9.7

 
14.6

 
30.6

Residential mortgage-backed securities
0.1

 
0.8

 
0.2

 
1.8

Commercial mortgage-backed securities
2.8

 
(0.6
)
 
13.4

 
2.8

Redeemable preferred stocks
0.1

 
0.4

 
0.1

 
(2.8
)
Total fixed maturities
18.7

 
14.0

 
41.8

 
42.2

Equity securities:
 
 
 
 
 
 
 
Nonredeemable preferred stocks
33.0

 
33.2

 
48.8

 
59.1

Common equities
12.6