Progressive 2004 Annual Report Download - page 37

APP.-B-37
Total Return1
2004 2003
Common Stocks 11.6% 28.6%
Russell 1000 Index 11.4% 29.9%
1Includes gross dividends reinvested and price appreciation/depreciation.
The Company’s common equity allocation is intended to enhance the return of and provide diversification for the total portfolio. To maintain
high correlation with the Russell 1000, the Company held 656 of the 990 common stocks comprising the index at December 31, 2004. The
Company’s individual holdings are selected based on their contribution to the correlation with the index. For 2003, the equity-indexed
portfolio returns were outside the anticipated annual tracking error, partially due to rebalancing the portfolio in response to tax initiated
strategies during the year.
Other risk investments include private equity investments and limited partnership interests in private equity and mezzanine investment
funds which have no off-balance-sheet exposure or contingent obligations, except for the $7.3 million of open funding commitments discussed
in
Note 12 — Commitments and Contingencies . The Company is no longer initiating investments of these types and expects to continue
reducing its current holdings over time.
The Company monitors the value at risk of the fixed-income and equity portfolios, as well as the total portfolio, to evaluate the potential
maximum expected loss. For further information, see Quantitative Market Risk Disclosures , a supplemental schedule provided in this Annual
Report.
TRADING SECURITIES Trading securities are entered into for the purpose of near-term profit generation. At December 31, 2004 and 2003, the
Company did not hold any trading securities. Net realized gains on trading securities for the year ended December 31, 2004 were $0,
compared to $.1 million in 2003 and $0 in 2002. Results from trading securities are immaterial to the Company’s financial condition, cash
flows and results of operations and are reported within the available-for-sale portfolio with gains (losses) reported as a component of realized
gains (losses) on securities.
DERIVATIVE INSTRUMENTS During 2003 and 2002, the Company entered into hedges on forecasted transactions in anticipation of its debt
issuances. See
Note 2 — Investments and Note 4 — Debt for further discussion of these hedges. The Company had no open positions at
December 31, 2004.
Derivative instruments may also be used for trading purposes or classified as trading due to the nature and characteristics of the transaction.
During 2004, the Company closed all of its credit default protection derivatives, along with the underlying Treasury notes, which had a
notional amount of $128.5 million. At December 31, 2003, these positions had a notional amount of $103.2 million. The net gain (loss)
recognized in 2004 was $(1.4) million, compared to $4.9 million and $(.1) million in 2003 and 2002, respectively.
Common equities, which generally have greater risk and volatility of market value than fixed-income securities, have a target allocation of
15% and may range from 0 to 25% of the investment portfolio. At December 31, 2004 and 2003, excluding the net unsettled security
transactions, these securities comprised 14.2% and 15.8%, respectively, of the total portfolio. Common stocks are managed externally to
track the Russell 1000 index with an anticipated annual tracking error of +/- 50 basis points. The results achieved by the common stock
portfolio relative to the benchmark index were as follows:
COMMON EQUITIES Common equities, as reported in the balance sheets, were comprised of the following:
(millions) December 31, 2004 December 31, 2003
Common Stocks $ 1,815.9 98.1% $ 1,929.7 97.9%
Other Risk Investments 36.0 1.9 42.4 2.1
Total Common Equities $ 1,851.9 100.0% $ 1,972.1 100.0%