Progressive 2014 Annual Report Download - page 71

Commercial Mortgage-Backed Securities The following table details the credit quality rating and fair value of our CMBS
bond and IO portfolios:
Commercial Mortgage-Backed Securities (at December 31, 2014)1
($ in millions)
Category AAA AA A BBB
Non-Investment
Grade Total
%of
Total
Multi-borrower $ 469.4 $ 83.7 $ 0 $ 0 $23.6 $ 576.7 24.9%
Single-borrower 637.9 281.8 243.6 382.9 16.7 1,562.9 67.5
Total CMBS bonds 1,107.3 365.5 243.6 382.9 40.3 2,139.6 92.4
IO 173.4 0 0 0 2.6 176.0 7.6
Total fair value $1,280.7 $365.5 $243.6 $382.9 $42.9 $2,315.6 100.0%
% of Total fair value 55.3% 15.8% 10.5% 16.5% 1.9% 100.0%
1The credit quality ratings in the table above are assigned by NRSROs; when we assign the NAIC ratings, all of our CMBS bonds are rated
investment grade and classified as Group II.
During the year, we increased our allocation to single borrower and floating rate large loan issuances. We have elected to
add these securities to our portfolio mix because we believe these transactions provide for the opportunity to select
investments based on real estate and underwriting that fit our preferred credit risk and duration profile. Our multi-borrower,
fixed-rate CMBS portfolio is concentrated in vintages with more conservative underwriting. We have been very selective
with regard to vintage in pre-crisis (legacy) issuances, with a very small allocation to the aggressive 2006-2008 vintages.
Also, we have not purchased any new issue fixed-rate, multi-borrower securities since 2012, as we feel that underwriting
standards were less stringent and these loans may have more difficulty refinancing at maturity.
With the exception of $167.1 million in Freddie Mac senior multi-family IOs, we have no multi-borrower deal IOs originated
after 2006.
MUNICIPAL SECURITIES
Included in the fixed-income portfolio at December 31, 2014 and 2013, were $2,139.2 million and $2,256.0 million,
respectively, of state and local government obligations. These securities had a duration of 3.0 years and an overall credit
quality rating of AA (excluding the benefit of credit support from bond insurance) at December 31, 2014, compared to 3.1
years and AA at December 31, 2013. These securities had net unrealized gains of $43.5 million and $8.7 million at
December 31, 2014 and 2013, respectively.
During 2014, we modestly reduced our exposure to municipals as a percentage of the aggregate portfolio, as the asset
class became slightly less attractive on a relative value basis. While holding the duration of our municipal holdings relatively
constant, our additions to the portfolio were slightly longer than existing holdings, to take advantage of a steep yield
curve. The credit quality of our municipal holdings in aggregate were unchanged year over year, at AA. We continue to have
a strong preference for high-quality revenue bonds, and for general obligation bonds issued primarily at the state level.
The following table details the credit quality rating of our municipal securities at December 31, 2014, without the benefit of
credit or bond insurance:
Municipal Securities (at December 31, 2014)
(millions)
Rating
General
Obligations
Revenue
Bonds Total
AAA $346.1 $ 467.3 $ 813.4
AA 315.8 642.2 958.0
A 0 344.3 344.3
BBB 0 23.3 23.3
Non-investment grade/non-rated 0 0.2 0.2
Total $661.9 $1,477.3 $2,139.2
Included in revenue bonds were $795.3 million of single family housing revenue bonds issued by state housing finance
agencies, of which $453.0 million were supported by individual mortgages held by the state housing finance agencies and
$342.3 million were supported by mortgage-backed securities. Of the programs supported by mortgage-backed securities,
approximately 25% were collateralized by Fannie Mae and Freddie Mac mortgages; the remaining 75% were collateralized
App.-A-70