Progressive 2015 Annual Report Download - page 79

The increase in municipal securities since December 31, 2014 was the result of the addition of the ARX securities, which
accounts for $626.2 million, or 23.0%, of our total municipal securities at December 31, 2015. The ARX portfolio is
approximately 50% municipal securities, both taxable and tax-free, with the majority tax-free.
CORPORATE SECURITIES
Included in our fixed-income securities at December 31, 2015 and 2014, were $3,691.6 million and $2,836.7 million,
respectively, of corporate securities. These securities had a duration of 3.5 years and 3.3 years at December 31, 2015 and
2014, respectively, and an overall credit quality rating of BBB and BBB- at December 31, 2015 and 2014, respectively.
These securities had net unrealized losses of $21.7 million and net unrealized gains of $22.5 million at December 31, 2015
and 2014, respectively.
We have increased our allocation to corporate securities throughout 2015 due to attractive valuations and the addition of the
ARX portfolio, which accounts for $230.3 million, or 6.2%, of our total corporate securities at December 31, 2015. The
combination of many large acquisition-related financings in the investment-grade market, along with an increase in overall
market volatility, has given us the opportunity to add securities with a strong risk/return profile. The high-yield market
continued to experience turbulence throughout the year with much of it centered in areas where we do not have exposure
(e.g., the energy and metals/mining industries). New funds entering the high-yield market have been attracted to industries
that are perceived to be safer investments and that has allowed us to reduce our high-yield exposure at attractive levels this
year.
The table below shows the exposure break-down by sector and rating at year-end:
Corporate Securities (at December 31, 2015)
(millions)
Sector AAA AA A BBB
Non-Investment
Grade/
Non-Rated Total
Consumer $ 0 $ 2.1 $182.3 $ 863.3 $152.5 $1,200.2
Industrial 0 0 103.9 663.8 185.0 952.7
Communications 0 0 44.4 336.0 76.2 456.6
Financial Services 50.0 9.8 238.5 279.1 111.1 688.5
Agency 32.1 2.2 0 0 0 34.3
Technology 5.5 13.3 41.3 42.0 0 102.1
Basic Materials 0 0 4.9 48.4 0 53.3
Energy 3.5 38.6 115.2 46.6 0 203.9
Total $91.1 $66.0 $730.5 $2,279.2 $524.8 $3,691.6
We held $652.8 million of U.S. dollar-denominated corporate bonds issued by companies that are domiciled, or whose
parent companies are domiciled, in the U.K. and other European countries, primarily in the consumer, financial, and
communications industries at December 31, 2015. We had no direct exposure to southern European-domiciled companies
at December 31, 2015.
PREFERRED STOCKS – REDEEMABLE AND NONREDEEMABLE
We hold both redeemable (i.e., mandatory redemption dates) and nonredeemable (i.e., perpetual with call dates) preferred
stocks. At December 31, 2015, we held $234.3 million in redeemable preferred stocks and $782.6 million in nonredeemable
preferred stocks, compared to $279.2 million and $827.5 million, respectively, at December 31, 2014. Our preferred stock
portfolio had net unrealized gains of $81.4 million and $213.7 million at December 31, 2015 and 2014, respectively.
Preferred returns were positive, but weak in 2015. Because of their higher risk, preferred stocks offer a higher yield than the
majority of the fixed-income portfolio. Prices dropped during the year, almost enough to completely offset dividends and
coupon payments. In some cases, the price drops were due to wider credit spreads, while in other cases they were due to a
lower probability of a call on certain securities with low floating rate back-end coupons. We continue to view preferred stocks
as an attractive sector. During the year, we added selectively in the new issue market and also added some as the sector
dropped in price.
App.-A-78