Progressive 2012 Annual Report Download - page 61

Fixed-Income Securities
The fixed-income portfolio is managed internally and includes fixed-maturity securities, short-term investments, and
nonredeemable preferred stocks. The fixed-maturity securities and short-term investments, as reported on the balance
sheets at December 31, were comprised of the following:
($ in millions) 2012 2011
Investment-grade fixed maturities:1
Short/intermediate term $12,803.8 93.0% $12,539.3 94.2%
Long term 91.0 .7 55.7 .4
Non-investment-grade fixed maturities2869.3 6.3 716.1 5.4
Total $13,764.1 100.0% $13,311.1 100.0%
1Long term includes securities with expected liquidation dates 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.
2Non-investment-grade fixed-maturity securities are non-rated or have a credit quality rating of an equivalent BB+ or lower, classified by the lowest
rating from a NRSRO.
A primary exposure for the fixed-income portfolio is interest rate risk, which is managed by maintaining the portfolio’s
duration between 1.5 and 5 years. Interest rate risk includes the change in value resulting from movements in the
underlying market rates of debt securities held. The duration of the fixed-income portfolio was 1.9 years at December 31,
2012 and 2011. The distribution of duration and convexity (i.e., a measure of the speed at which the duration of a security is
expected to change based on a rise or fall in interest rates) is monitored on a regular basis.
The duration distribution of our fixed-income portfolio, represented by the interest rate sensitivity of the comparable
benchmark U.S. Treasury Notes, was:
Duration Distribution 2012 2011
1 year 29.8% 22.6%
2 years 17.7 22.3
3 years 28.4 31.5
5 years 17.8 20.8
10 years 6.3 2.8
Total fixed-income portfolio 100.0% 100.0%
Another primary exposure related to the fixed-income portfolio is credit risk. This risk is managed by maintaining an A+
minimum average portfolio credit quality rating, as defined by NRSROs.
The credit quality distribution of the fixed-income portfolio was:
Rating 2012 2011
AAA 54.1% 53.6%
AA 12.2 13.4
A 4.0 5.1
BBB 21.3 21.3
Non-rated/other 8.4 6.6
Total fixed-income portfolio 100.0% 100.0%
Our portfolio is also exposed to concentration risk. Our investment constraints limit investment in a single issuer, other than
U.S. Treasury Notes or a state’s general obligation bonds, to 2.5% of shareholders’ equity, while the single issuer guideline
on preferred stocks and/or non-investment-grade debt is 1.25% of shareholders’ equity. Additionally, the guideline
applicable to any state’s general obligation bonds is 6% of shareholders’ equity. Our credit risk guidelines limit single issuer
exposure; however, we also consider sector concentration a risk, and we frequently evaluate the portfolio’s sector allocation
with regard to internal requirements and external market factors. We consider concentration risk in the context of asset
classes, including but not limited to common equities, residential and commercial mortgage-backed securities, municipal
bonds, and high-yield bonds. At December 31, 2012, we were within all of the constraints described above.
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