Progressive 2012 Annual Report Download - page 84

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The Progressive Corporation and Subsidiaries
Quantitative Market Risk Disclosures
(unaudited)
Quantitative market risk disclosures are only presented for market risk categories when risk is considered material.
Materiality is determined based on the fair value of the financial instruments at December 31, 2012, and the potential for
near-term losses from reasonably possible near-term changes in market rates or prices. We had no trading financial
instruments at December 31, 2012 and 2011. See Management’s Discussion and Analysis of Financial Condition and
Results of Operations for our discussion of the qualitative information about market risk.
OTHER-THAN-TRADING FINANCIAL INSTRUMENTS
Financial instruments subject to interest rate risk were:
Fair Value
-200 bps -100 bps +100 bps +200 bps
(millions) Change1Change1Actual Change Change
U.S. government obligations2$ 2,888.6 $ 2,888.6 $ 2,896.5 $ 2,872.4 $ 2,848.7
State and local government obligations 2,022.3 2,010.0 1,964.4 1,912.0 1,861.0
Asset-backed securities 3,500.2 3,478.2 3,425.5 3,348.7 3,275.5
Corporate securities 3,197.1 3,179.6 3,113.0 3,008.7 2,907.5
Nonredeemable preferred stocks 832.7 822.5 812.4 802.2 767.7
Redeemable preferred stocks 384.0 379.3 374.7 370.0 354.0
Short-term investments 1,990.0 1,990.0 1,990.0 1,990.0 1,990.0
Balance as of December 31, 2012 $14,814.9 $14,748.2 $14,576.5 $14,304.0 $14,004.4
Balance as of December 31, 2011 $14,274.7 $14,253.2 $14,117.4 $13,865.7 $13,630.0
1The amounts reflect an interest rate of 1 basis point when the hypothetical decline in interest rates would have pushed yields to a negative level.
2Due to the low interest rate environment and our portfolio containing no U.S. Treasury Notes at the longer end of the yield curve, the loss in value
associated with the interest rate swap derivative positions with a short exposure (i.e., paying fixed, receiving variable) to interest rates would exceed
the increase in value of our long U.S. Treasury Notes, resulting in an overall decline in value of these securities at the -100 bps and -200 bps
movement.
Exposure to risk is represented in terms of changes in fair value due to selected hypothetical movements in market rates.
Bonds and preferred stocks are individually priced to yield to the worst case scenario, which includes any issuer-specific
features, such as a call option. Asset-backed securities and state and local government housing securities are priced
assuming deal specific prepayment scenarios, considering the deal structure, prepayment penalties, yield maintenance
agreements, and the underlying collateral.
Financial instruments subject to equity market risk were:
Fair Value
(millions) -10% Actual +10%
Common equities as of December 31, 2012 $ 1,705.3 $ 1,899.0 $ 2,092.7
Common equities as of December 31, 2011 $ 1,659.2 $ 1,845.6 $ 2,032.0
The model represents the estimated value of our common equity portfolio given a +/-10% change in the market, based on
the common stock portfolio’s weighted average beta of 1.02 for 2012 and 1.01 for 2011. The beta is derived from recent
historical experience, using the S&P 500 as the market surrogate. The historical relationship of the common stock portfolio’s
beta to the S&P 500 is not necessarily indicative of future correlation, as individual company or industry factors may affect
price movement. Betas are not available for all securities. In such cases, the change in fair value reflects a direct +/-10%
change; the portion of securities without betas is 0.6%.
App.-A-84