Progressive 2004 Annual Report Download - page 36

APP.-B-36
FIXED-INCOME SECURITIES The fixed-income portfolio includes fixed-maturity securities, preferred stocks and short-term investments. The
fixed-maturity securities and short-term securities, as reported on the balance sheets, were comprised of the following:
The quality distribution of the fixed-income portfolio was as follows:
Rating December 31, 2004 December 31, 2003
AAA 61.0% 63.9%
AA 14.6 10.7
A14.2 13.1
BBB 9.5 9.5
Non Rated/Other .7 2.8
100.0% 100.0%
(millions) December 31, 2004 December 31, 2003
Investment-grade fixed maturities:1
Short/intermediate term $ 10,285.0 98.3% $ 9,446.0 96.6%
Long term 109.4 1.0 70.3 .7
Non-investment-grade fixed maturities266.8 .7 265.1 2.7
Total $ 10,461.2 100.0% $ 9,781.4 100.0%
1Long term includes securities with maturities of 10 years or greater. Asset-backed securities are reported at their weighted average maturity based upon their projected
cash flows. All other securities that do not have a single expected maturity date are reported at average maturity. See
Note 2 — Investments .
2Non-investment-grade fixed-maturity securities are non-rated or have a quality rating of an equivalent BB or lower, classified by the lowest rating from a nationally
recognized rating agency.
Also included in fixed-maturity securities at December 31, 2004, are $2,368.7 million of asset-backed securities. These asset-backed
securities are comprised of residential mortgage-backed ($637.6 million), commercial mortgage-backed ($959.6 million) and other asset-
backed ($771.5 million) securities, with a duration of 2.3 years and a weighted average credit quality of AA+. The largest components of
the other asset-backed securities are automobile receivable loans ($378.2 million) and home equity loans ($256.7 million). Substantially
all of the asset-backed securities are liquid with available market quotes and contain no residual interest (i.e., the most subordinated class
in a pool of securitized assets).
A primary exposure for the fixed-income portfolio is interest rate risk, which is managed by restricting the portfolio’s duration between
1.8 to 5 years. Interest rate risk includes the change in value resulting from movements in the underlying market rates of debt securities
held. The fixed-income portfolio had a duration of 2.9 years at December 31, 2004, compared to 3.3 years at December 31, 2003. The
distribution of duration and convexity (i.e., a measure of the speed at which the duration of a security will change market value based on
a rise or fall in interest rates) are monitored on a regular basis. Excluding the unsettled securities transactions, the allocation to fixed-income
securities at December 31, 2004, was 85.8% of the portfolio, within the Company’s normal range of variation; at December 31, 2003, the
allocation was 84.2%.
Another exposure related to the fixed-income portfolio is credit risk, which is managed by maintaining a minimum average portfolio credit
quality rating of A+, as defined by nationally recognized rating agencies, and limiting non-investment-grade securities to a maximum of 5% of
the fixed-income portfolio. Concentration in a single issuer’s bonds and preferred stocks is limited to no more than 6% of the Company’s
shareholders’ equity, except for U.S. Treasury and agency bonds; any state’s general obligation bonds are limited to 12% of shareholders’ equity.