IV. Results of Operations – InvestmentsA. Portfolio AllocationAt year-end 2009, the fair value of our investment portfolio was $14.7 billion, 13% greater than at year-end 2008, reflecting significant increases in the value of our fixed-maturity and preferred stock holdings. Our investment income (e.g., interest and dividends) decreased 20% in 2009, as compared to 2008, reflecting lower yields earned due to an extremely low interest rate environment and our decision to shorten our portfolio duration and to invest in U.S. Treasury Notes and short-term investments to reduce the potential for additional portfolio valuation declines. Our investment income (e.g., interest and dividends) decreased 6% in 2008, as compared to 2007, reflecting a decrease in average assets, as well as lower yields during the year.

In 2009, we recognized $27.1 million in net realized gains, primarily the result of security sales and changes in valuation of our hybrid preferred stocks and derivative positions, partially offset by write-downs of securities determined to have had other-than-temporary declines in fair value. In 2008, we recognized $1,445.1 million in net realized losses, primarily the result of write-downs of securities determined to have had other-than-temporary declines in fair value. In 2007, we recognized $106.3 million in net realized gains, primarily the result of security sales to fund our $1.4 billion extraordinary dividend payment in September 2007.

Progressive’s asset allocation strategy is to maintain 0-25% of our portfolio in Group I securities (i.e., common equities, redeemable and nonredeemable preferred stocks (preferred stocks), and non-investment-grade and non-rated fixed-maturity securities), with the balance (75%-100%) of our portfolio in Group II securities (i.e., all other fixed-maturity securities, including U.S. Treasury Notes, municipal bonds, asset-backed securities, and corporate debt, as well as short-term investments). This strategy is based on our need to maintain capital adequate to support our insurance operations, recognizing that our outstanding claims obligations are short in duration. Investments in our portfolio have varying degrees of risk. We evaluate the risk/reward trade-offs of investment opportunities, measuring their effects on stability, diversity, overall quality and liquidity, and the potential return of the investment portfolio. We also monitor the value at risk of the portfolio (see the Quantitative Market Risk Disclosures, a supplemental schedule provided in this Annual Report, for further information). The composition of the investment portfolio at December 31 was:

Unrealized Gains and Losses As of December 31, 2009, our portfolio had pretax net unrealized gains, recorded as part of accumulated other comprehensive income, of $661.8 million, compared to net unrealized losses of $118.2 million at December 31, 2008. During the year, our fixed-income portfolio generated net unrealized gains of $736.4 million as a result of price recovery throughout the portfolio, especially within our preferred stock (redeemable and nonredeemable), corporate, and mortgage-backed portfolios. The net unrealized gains in the common stock portfolio increased $43.6 million during 2009, reflecting positive returns in the equity market. See Note 2 – Investments for a further break-out of our gross unrealized gains and losses.

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, including redeemable preferred stocks, and short-term investments, as reported on the balance sheets at December 31, were comprised of the following:

The increase in fixed maturities over last year represents an increase in the fair value of those securities and management’s decision to invest new cash from operations in U.S. Treasury Notes and investment-grade, short- to intermediate-term securities primarily in the AAA asset-backed and non-financial corporate sectors. The increase in dollar amount of our non-investment-grade fixed maturities is largely the result of security credit downgrades since last year, primarily in our residential mortgage-backed sector.

A primary exposure for the fixed-income portfolio is interest rate risk, which is managed by maintaining the portfolio’s duration between 1.8 and 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 2.3 years at December 31, 2009, compared to 3.2 years at December 31, 2008. The reduction in duration from the prior year reflects our decision to reduce the overall portfolio valuation risk exposure to a rise in interest rates from their current low levels. 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) are monitored on a regular basis.

As of December 31, the duration distribution of our fixed-income portfolio, represented by the interest rate sensitivity of the comparable benchmark U.S. Treasury Notes, was:

Another primary exposure related to the fixed-income portfolio is credit risk. This risk is managed by maintaining a minimum average portfolio credit quality rating of A+, as defined by nationally recognized rating agencies. In addition, we limit our Group I investments (i.e., common equities, redeemable and nonredeemable preferred stocks (preferred stocks), and non-investment-grade and non-rated fixed-maturity securities), to between 0% and 25% of the portfolio.

The credit quality distribution of the fixed-income portfolio at December 31 was:

During 2009, we added to our holdings of U.S. Treasury securities. We also added investment-grade, short- to intermediate-term asset-backed securities and non-financial corporate securities. The non-rated/other category increased largely due to credit downgrades primarily in our nonredeemable preferred stocks and residential mortgage-backed securities.

Our portfolio is also exposed to concentration risk. During 2009, the Board of Directors approved investment guidelines that further define our concentration exposure. Under the revised guidelines, investment in a single issuer, other than U.S. Treasury Notes or a state’s general obligation bonds, is limited to 2.5% of shareholders’ equity, while the single issuer limitation on preferred stocks and/or non-investment-grade debt is 1.25% of shareholders’ equity. Additionally, the limitation applicable to any state’s general obligation bond was reduced to 6% of shareholders’ equity. As of December 31, 2009, the investment portfolio exceeded the 1.25% limitation on preferred stocks and/or non-investment-grade debt, and the portfolio may continue to be outside this guideline for a period of time as management works to bring the portfolio into compliance effectively and efficiently. Our credit risk guidelines limit single issuer exposure; however, industry sector allocation is a key concentration risk. We also consider concentration risk in the context of asset classes, including but not limited to common equities, residential and commercial mortgage securities, municipal bonds, and high-yield bonds. During 2009, our exposure carryover from 2008, primarily representing investments in financial sector preferred stocks, had a positive impact on the overall fixed-income portfolio’s valuation; however, we continue to look for opportunities to reduce our overall concentration exposure.

We also monitor prepayment and extension risk, especially in our structured product and preferred stock portfolios. Prepayment risk includes the risk of early redemption of security principal that may need to be reinvested at less attractive rates. Extension risk includes the risk that a security will not be redeemed when anticipated, and that a security we hold has a lower yield than a security we might be able to obtain by reinvesting the expected redemption principal. The different types of structured debt and preferred securities that we hold help minimize this risk. During 2009, we did not experience significant prepayment or extension of principal relative to our cash flow expectations in the portfolio.

The pricing on the majority of our preferred stocks continues to reflect expectations that many issuers will not call such securities on the first call date, and hence reflects an assumption that the securities will remain outstanding for a period of time beyond such initial call date (extension risk).

We also face the risk that our preferred stock dividend payments could be deferred for one or more periods. As of December 31, 2009, all of our preferred securities continue to pay fully and timely dividends, with the exception of one issue, which is not expected to pay after the first quarter 2010; however, the amount is immaterial to our investment income.

Liquidity risk is another risk factor we monitor. Based on the volatility of the markets in general and the widening of credit spreads, we elected to reduce portfolio valuation risk in the first quarter 2009 by allocating new investments primarily to U.S. Treasury and short-term securities in order to preserve capital and maintain our desired liquidity position. Beginning in the second quarter 2009 and to a greater extent during the third and fourth quarter, as our capital position and the economic outlook improved, we added investment-grade, short- to intermediate-term securities primarily in the AAA asset-backed and non-financial corporate sectors. As of December 31, 2009, we had $5.9 billion in U.S. Treasury and short-term securities, approximately 25% more than we had at the same time last year. Our overall portfolio remains very liquid and sufficient to meet liquidity requirements; however, despite a significant improvement for most asset classes relative to the first half of 2009, liquidity has not returned to the levels of several years ago. The short-to-intermediate duration of our portfolio provides an additional source of liquidity, as we expect approximately $1.8 billion, or 23%, of our non-U.S. Treasury and short-term, fixed-income portfolio to repay principal over the course of 2010. In addition, cash from interest and dividend payments provides an additional source of recurring liquidity.

Included in the fixed-income portfolio are U.S. government obligations, which include U.S. Treasury Notes and interest rate swaps. Although the interest rate swaps are not obligations of the U.S. government, they are recorded in this portfolio as the change in fair value is correlated to movements in the U.S. Treasury market. The duration of these securities was comprised of the following at December 31, 2009:

The negative duration of the interest rate swap is due to the position being short interest-rate exposure (i.e., receiving a variable-rate coupon). In determining duration, we add the interest rate sensitivity of our interest rate swap positions to that of our Treasury holdings, but do not add the notional value of the swaps to our Treasury holdings in order to calculate an unlevered duration for the portfolio.

ASSET-BACKED SECURITIES Included in the fixed-income portfolio are asset-backed securities, which were comprised of the following at December 31:

At December 31, 2009, our asset-backed securities had a net unrealized loss of $53.2 million, compared to a net unrealized loss of $388.5 million at December 31, 2008. Substantially all of the asset-backed securities have widely available market quotes, with narrowing spreads between the bid and offer prices and greater liquidity since the end of the first quarter 2009. As of December 31, 2009, approximately 7% of our asset-backed securities are exposed to non-prime mortgage loans (home equity and Alt-A). Consistent with our plan to add high-quality, short-maturity fixed-income securities, during 2009 we purchased AAA securities backed by auto loans with an average life of one to three years. The underlying loans in these trusts are made to prime borrowers and the securities have substantial structural credit support. We reviewed all of our asset-backed securities for other-than-temporary impairment and yield or asset valuation adjustments under current accounting guidance, and we realized $33.6 million, $38.8 million, and $1.9 million in write-downs on these securities during the years ended December 31, 2009, 2008, and 2007, respectively. These write-downs occurred primarily in the residential mortgage sectors of our asset-backed portfolio as detailed below.

Collateralized Mortgage Obligations At December 31, 2009, 12.4% of our asset-backed securities were collateralized mortgage obligations (CMO), which are a component of our residential mortgage-backed securities. During the year ended December 31, 2009, we recorded $8.3 million in credit loss write-downs on our CMO portfolio, including $4.0 million of Alt-A securities, due to estimated principal losses in the security’s most recent cash flow projections. During the year ended December 31, 2008, we recorded $7.1 million in write-downs on our CMO portfolio; we had no write-downs on Alt-A securities. During the year ended December 31, 2007, we did not record any write-downs. The following table shows the collateralized mortgage obligations by deal origination year, along with the loan classification. In addition, the table shows a comparison of the fair value at December 31, 2009 to our original investment value (adjusted for returns of principal, amortization, and write-downs).

Commercial Mortgage-Backed Securities At December 31, 2009, 39.9% of our asset-backed securities were commercial mortgage-backed securities (CMBS). The following table details the credit quality rating and fair value of our CMBS portfolio by year of deal origination:

The CMBS portfolio contained 16.4% of securities that are rated BBB or lower, with a net unrealized loss of $10.4 million at December 31, 2009, and an average duration of 1.8 years, compared to 1.8 years for the entire CMBS portfolio.

During the years ended December 31, 2009, 2008, and 2007, we did not record any write-downs on our CMBS portfolio.

Our 2005 and 2006 deal origination (vintage) year AAA exposure is heavily weighted to securities with the most senior levels (over 20%) of credit support. As with many other asset-backed classes, CMBS underwriting grew increasingly aggressive over time, peaking from 2005–2007. These more aggressive underwriting guidelines have led to a higher level of investor concern for deals originated in this timeframe. While we expect CMBS delinquencies to continue to rise in 2010, we feel that we have an adequate level of credit support to protect the expected cash flows from loss for our investments in the 2005 to 2007 vintage securities. The following table displays the amount of senior and junior AAA and AA bonds that we have in each vintage. The average credit support and delinquencies are shown in order to indicate the cushion that is available in these tranches to sustain losses.

The entire 2005–2006 non-AAA segment is composed of cell phone tower securitizations. All of these bonds have a single borrower and are backed by a cross collateralized pool of cellular phone towers throughout the United States. Per the table below, these bonds have short average lives and have significant net cash flow relative to their interest payments.

Our entire 2007 exposure is made up of two different types of investments. The first is a group of cell tower transactions similar to the exposure in 2005 and 2006 non-AAA rated vintages discussed above. The group has a combined exposure of $48.6 million, and the ratings range from BBB/Baa2 to B/B2. The weighted average life on these bonds is 3.5 years and the weighted average yield to maturity is 7.0%. The second 2007 exposure is a $17.7 million position that consists of two different bonds with a single borrower, rated A+ and BBB-, and is secured by a cross collateralized portfolio of office properties. The average life on this position is just over 2.0 years, assuming the borrower exercises its option to extend the final maturity.

Commercial Mortgage-Backed Securities: Interest Only We also held CMBS interest only (IO) securities at December 31, 2009. The IO portfolio had an average credit quality of AAA- and a duration of 1.4 years. During the year ended December 31, 2009, we recorded write-downs on our IO portfolio of $0.9 million, compared to $0.6 million and $0.2 million of write-downs recorded during 2008 and 2007, respectively. The following table shows the fair value of the IO securities by deal origination year:

Planned amortization class IOs comprised 94.3% of our IO portfolio. This is a class that is structured to provide bondholders with greater protection against loan prepayment, default, or extension risk. The bonds are at the top of the payment order for interest distributions and benefit from increased structural support over time as they repay. Since 2004, 100% of the IO securities that we have purchased were made up of this more protected class.

We continue to monitor the announcement late in 2009 by one rating agency that they may make changes to their rating methodology for all structured finance IOs, including CMBS IOs. If these proposed changes are adopted, it could negatively impact the fair value of these securities. However, we evaluate the safety and adequacy of the expected cash flows based on the underlying loan credit quality and structural support of the deal regardless of the rating. Therefore, we do not expect these proposed rating changes to have a negative effect on our view of these securities.

Home-Equity Securities The following table shows the credit quality rating of our home-equity securities, which are a component of our residential mortgage-backed securities, by deal origination year, along with a comparison of the fair value at December 31, 2009, to our original investment value (adjusted for returns of principal, amortization, and write-downs). We recorded $23.7 million, $31.1 million, and $1.7 million in write-downs for the years ended December 31, 2009, 2008, and 2007, respectively. The 2009 write-downs included $22.8 million in credit loss write-downs due to estimated principal losses in the security’s most recent cash flow projections, pursuant to the accounting guidance adopted in the second quarter 2009 (see Note 2 – Investments for additional information).

MUNICIPAL SECURITIES Included in the fixed-income portfolio at December 31, 2009, were $2,024.0 million of state and local government obligations with an overall credit quality of AA, excluding the benefit of credit support from bond insurance. These securities had a net unrealized gain of $49.8 million at December 31, 2009, compared to a net unrealized loss of $37.0 million at December 31, 2008. During the years ended December 31, 2009, 2008, and 2007, we did not record any write-downs on our municipal portfolio. The following table details the credit quality rating of our municipal securities at December 31, 2009, without the benefit of credit or bond insurance as discussed below:

Included in revenue bonds are $824.8 million of single family housing revenue bonds issued by state housing finance agencies, of which $495.2 million are supported by individual mortgages held by the state housing finance agencies and $329.6 million are supported by mortgage-backed securities. Of the programs supported by mortgage-backed securities, approximately 40% are collateralized by Fannie Mae and Freddie Mac mortgages; the remaining 60% are collateralized by Ginnie Mae loans, which are fully guaranteed by the U.S. Government. Of the programs supported by individual mortgages held by the state housing finance agencies, the overall credit quality rating is AA. Most of these mortgages are supported by FHA, VA, or private mortgage insurance providers.

Approximately 25%, or $505.2 million (reflected in the table below), of our total municipal securities were insured general obligation or revenue bonds, which in the aggregate had a decline in credit quality from AA- at December 31, 2008, to A+ as of December 31, 2009. The credit quality decline was primarily due to our sales of higher-rated securities within this portfolio. The following table shows the composition and credit quality rating of these municipal obligations by monoline insurer at December 31, 2009. The credit quality rating represents the rating of the underlying security, excluding credit insurance, based on ratings by nationally recognized rating agencies.

As of December 31, 2009, the insurance-enhanced general obligation and revenue bonds had a net unrealized gain of $20.5 million, compared to a net unrealized gain of $12.9 million at December 31, 2008. We buy and hold these securities based on our evaluation of the underlying credit without reliance on the monoline insurance. Our investment policy does not require us to liquidate securities should the insurance provided by the monoline insurers cease to exist.

CORPORATE SECURITIES Included in our fixed-income securities at December 31, 2009, were $1,281.4 million of fixed-rate corporate securities, which had a duration of 3.1 years and an overall credit quality rating of BBB+. These securities had a net unrealized gain of $36.5 million at December 31, 2009, compared to a net unrealized loss of $52.8 million at December 31, 2008. During the second half of 2009, we added high-quality, non-financial corporate securities. During the year ended December 31, 2009, we did not record any write-downs on our corporate debt portfolio, compared to $69.0 million of write-downs recorded during 2008 and no write-downs recorded during 2007. The table below shows the exposure break-down by sector and current rating, reflecting any changes in ratings since acquisition:

PREFERRED STOCKS – REDEEMABLE AND NONREDEEMABLE We hold both redeemable (i.e., mandatory redemption dates) and nonredeemable (i.e., perpetual preferred stocks with call dates) preferred stocks. Nonredeemable preferred stocks also include securities that have call features with fixed-rate coupons (i.e., hybrid securities), whereby the change in value of the call features is a component of the overall change in value of the preferred stocks. At December 31, 2009, we held $606.7 million in redeemable preferred stocks and $1,255.8 million in nonredeemable preferred stocks. We made no material additional investments in preferred stocks during the year ended December 31, 2009.

Our preferred stock portfolio had a net unrealized gain of $533.0 million at December 31, 2009, compared to a net unrealized gain of $56.9 million at December 31, 2008. During the years ended December 31, 2009, 2008, and 2007, we wrote down $213.2 million, $1,676.7 million, and $17.4 million, respectively, in redeemable and nonredeemable preferred stocks due to a combination of weakened issuer fundamentals and severe market declines where we were unable to determine objectively that the securities would recover substantially in the near term, in each case in accordance with the applicable accounting guidance at the time the write-downs were taken. See the Other-Than-Temporary Impairment section below for further discussion.

Our preferred stocks had an overall credit quality rating of BBB at December 31, 2009. The table below shows the exposure break-down by sector and current rating, reflecting any changes in ratings since acquisition:

Approximately 50% of our preferred stock securities pay dividends that have tax preferential characteristics, while the balance pay dividends that are fully taxable. In addition, all of our non-investment-grade preferred stocks were with issuers that maintain investment-grade senior debt ratings.

Approximately 60% of our preferred stock securities are fixed-rate securities, and 40% are floating-rate securities. All of our preferred securities have call or mandatory redemption features. Most of the securities are structured to provide some protection against extension risk in the event the issuer elects not to call such securities at their initial call date, by either paying a higher dividend amount or by paying floating-rate coupons. Of our fixed-rate securities, approximately 90% will convert to floating-rate dividend payments if not called at their initial call date.

Common equities Common equities, as reported on the balance sheets at December 31 were comprised of the following:

At December 31, 2009 and 2008, 5.6% of the portfolio was in common equities. Beginning late in 2008 and continuing into early in 2009, as part of our risk mitigation strategy in the uncertain financial market, we reduced our common stock portfolio to approximately 2.5% of the total portfolio’s fair value. During the fourth quarter 2009, with the markets showing significant recovery and a more stable and positive outlook, we decided to add to the common stock portfolio by increasing our position near the level at year-end 2008. In early February 2010, we added an additional $300 million to our common stock portfolio. Our allocation to Group I securities remains between 0% and 25% 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. Our individual holdings are selected based on their contribution to the correlation with the index. For 2009, the GAAP basis total return was within the desired tracking error when compared to the Russell 1000 Index. We held 715 out of 964, or 74%, of the common stocks comprising the Russell 1000 Index at December 31, 2009, which made up 94% of the total market capitalization of the index.

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 $0.2 million of open funding commitments at December 31, 2009.

The following is a summary of our common equity holdings by sector compared to the Russell 1000 Index:

Trading Securities At December 31, 2009 and 2008, we did not hold any trading securities and we did not have any net realized gains (losses) on trading securities for the years ended December 31, 2009, 2008, and 2007.

Derivative Instruments We have invested in the following derivative exposures at various times: interest rate swaps, asset-backed credit default swaps, U.S. corporate debt credit default swaps, cash flow hedges, and equity options. See Note 2 – Investments for further discussion of our derivative positions.

For all derivative positions discussed below, realized holding period gains and losses are netted with any upfront cash that may be exchanged under the contract to determine if the net position should be classified either as an asset or liability. To be reported as a component of the available-for-sale portfolio, the inception-to-date realized gain on the derivative position at period end would have to exceed any upfront cash received (net derivative asset). On the other hand, a net derivative liability would include any inception-to-date realized loss plus the amount of upfront cash received (or netted, if upfront cash was paid) and would be reported as a component of other liabilities. These net derivative assets/liabilities are not separately disclosed on the balance sheet due to their immaterial effect on our financial condition, cash flows, and results of operations.

INTEREST RATE SWAPS We invest in interest rate swaps primarily to manage the fixed-income portfolio duration. The following table summarizes our interest rate swap activity classified by the status (open vs. closed) of the swap position as of December 31, 2009:

ASSET-BACKED CREDIT DEFAULT SWAPS The following table summarizes our holding period gains (losses) on the asset-backed credit default swaps classified by the status of the swap position as of December 31, 2009:

CORPORATE CREDIT DEFAULT SWAPS The following table summarizes our corporate credit default swap activity classified by the status of the swap position as of December 31, 2009:

EQUITY OPTIONS The following table summarizes the activity of our equity options, classified by the status of the option position as of December 31, 2009:

CASH FLOW HEDGES In the fourth quarter 2009, we recognized a realized gain of $0.9 million reflecting the previously deferred gain on our foreign currency cash flow hedge.

During the second quarter 2007, we entered into a forecasted debt issuance hedge against a possible rise in interest rates in anticipation of issuing $1 billion of our 6.70% Fixed-to-Floating Rate Junior Subordinated Debentures due 2067 (the “Debentures”). The hedge was designated as, and qualified for, cash flow hedge accounting treatment. Upon issuance of the Debentures, the hedge was closed, and we recognized a pretax gain of $34.4 million, which is recorded as part of accumulated other comprehensive income. The $34.4 million gain is deferred and is being recognized as an adjustment to interest expense over the 10-year fixed interest rate term of the Debentures. During 2009, 2008, and 2007, we recognized $2.8 million, $2.6 million, and $1.3 million, respectively, as an adjustment to interest expense.

B. Investment Results Investment income (interest and dividends, before investment and interest expenses) decreased 20% for 2009, compared to a decrease of 6% and an increase of 5% for 2008 and 2007, respectively. The reductions in 2009 and 2008 were primarily the result of investing new cash and proceeds from security sales, redemptions, and maturities into lower-yielding U.S. Treasury Notes and short-term investments as a means to protect the portfolio from additional valuation declines and the current historically low rate environment. During the second half of 2009, we began to reallocate a portion of our short-term investments to select credit-related products that had attractive risk/return profiles and modest duration risks. The increase in 2007 was primarily the result of a decision to add certain higher-yielding, though lower-rated, assets. These lower-rated assets provided additional income over our previous investments.

We report total return to reflect more accurately the management philosophy governing the portfolio and our evaluation of investment results. The fully taxable equivalent (FTE) total return includes investment income, net realized gains (losses) on securities, and changes in unrealized gains (losses) on investments.

The following summarizes investment results for the years ended December 31:

A further break-down of our total returns for our fixed-income securities, including the net gains (losses) on our derivative positions, for the years ended December 31 follows:

Investment expenses were $11.1 million in 2009, compared to $8.8 million in 2008 and $12.4 million in 2007. The increase in 2009 reflects an estimated Gainsharing (cash incentive) payout to our investment managers; no bonus was accrued for 2008. For 2007, the investment expenses included the costs associated with the June 2007 issuance of our Debentures.

Interest expense in 2009 was $139.0 million, compared to $136.7 million in 2008 and $108.6 million in 2007. The increases in 2009 and 2008 reflect interest following the June 2007 issuance of our Debentures.

Other-Than-Temporary Impairment (OTTI) Realized losses may include write-downs of securities determined to have had an other-than-temporary decline in fair value. We routinely monitor our portfolio for pricing changes that might indicate potential impairments and perform detailed reviews of securities with unrealized losses based on predetermined guidelines. In such cases, changes in fair value are evaluated to determine the extent to which such changes are attributable to (i) fundamental factors specific to the issuer, such as financial conditions, business prospects, or other factors, (ii) market-related factors, such as interest rates or equity market declines (e.g., negative return at either a sector index level or at the broader market level), or (iii) credit-related losses where the present value of cash flows expected to be collected are lower than the amortized cost basis of the security.

Fixed-income securities and common equities with declines attributable to issuer-specific fundamentals are reviewed to identify all available evidence, circumstances, and influences to estimate the potential for, and timing of, recovery of the investment’s impairment. An other-than-temporary impairment loss is deemed to have occurred when the potential for recovery does not satisfy the criteria set forth in the current accounting guidance.

For fixed-income investments with unrealized losses due to market- or sector-related declines, the losses are not deemed to qualify as other-than-temporary where we do not have the intent to sell an investment, and it is more likely than not that we will not be required to sell the investment, prior to the period of time that we anticipate to be necessary for the investment to recover its cost basis. In general, our policy for common equity securities with market- or sector-related declines is to recognize impairment losses on individual securities with losses we cannot reasonably conclude will recover in the near term under historical conditions by the earlier of (i) when we are able to objectively determine that the loss is other-than-temporary, or (ii) when the security has been in such a loss position for three consecutive quarters.

When a security in our fixed-maturity portfolio has an unrealized loss and we intend to sell the security, or it is more likely than not that we will be required to sell the security, then we write-down the security to its current fair value and recognize the entire unrealized loss through the income statement as a realized loss. If a fixed-maturity security has an unrealized loss and it is more likely than not that we will hold the debt security until recovery (which could be maturity), then we need to determine if any of the decline in value is due to a credit loss (i.e., where the present value of cash flows expected to be collected is lower than the amortized cost basis of the security) and, if so, we will recognize that portion of the impairment in the income statement as a realized loss; any remaining unrealized loss on the security is considered to be due to other factors (e.g., interest rate and credit spread movements) and is reflected in shareholders’ equity, along with unrealized gains or losses on securities that are not deemed to be other-than-temporarily impaired. The write-down activity recorded in the income statement for the years ended December 31 was as follows:

See Critical Accounting Policies, Other-Than-Temporary Impairment for further discussion.

C. Repurchase Transactions From time to time we enter into repurchase commitment transactions, under which we loan U.S. Treasury or U.S. Government agency securities to accredited brokerage firms in exchange for cash equal to the fair value of the securities. These internally managed transactions are typically overnight arrangements. The cash proceeds are invested in Eurodollar deposits, reverse repurchase transactions, or unsecured commercial paper obligations issued by large, high-quality institutions with yields that exceed our interest obligation on the borrowed cash. We are able to borrow the cash at low rates since the securities loaned are in either short supply or high demand. Our interest rate exposure does not increase or decrease since the borrowing and investing periods match. However, these transactions carry the risk that the counterparty in the arrangement could default, in which event we would be unable to recover our collateral in a timely manner. To help mitigate this risk, we hold our counterparty’s cash for the full value of the securities we lend and revalue the securities on a regular basis to ensure that we hold sufficient cash to cover the market value of the securities. Nevertheless, in the event of a counterparty default, we may be unable to obtain additional cash if our securities on loan appreciate in value prior to their return.

During the third quarter 2008, we suspended our repurchase activity due to increased counterparty risk and high market volatility. We have not invested in any repurchase transactions during 2009 since the overnight rates did not provide the desired return we would require. For the period in 2008 during which we invested in the transactions, our largest single outstanding balance of repurchase commitments was $1.1 billion, which was open for one day; the average daily balance of repurchase commitments was $0.4 billion. We earned income of $1.7 million and $3.7 million during 2008 and 2007, respectively, on repurchase commitments.

Additionally, we enter into reverse repurchase commitment transactions. In these transactions, we loan cash to accredited banks and receive U.S. Treasury Notes pledged as general collateral against the cash borrowed. We choose to enter into these transactions as rates on general collateral are more attractive than other short-term rates available in the market. Our exposure to credit risk is limited, as these internally managed transactions are typically overnight arrangements. The income generated on these transactions is calculated at the then applicable general collateral rates on the value of U.S. Treasury securities received. We have counterparty exposure on reverse repurchase agreements in the event of a counterparty default to the extent the general collateral security’s value is below the cash we delivered to acquire the collateral. The short-term duration of the transactions (primarily overnight investing) reduces that default exposure.

For the year ended December 31, 2009, our largest single outstanding balance of reverse repurchase commitments was $1,845.8 million, which was open for one day; the average daily balance of reverse repurchase commitments was $657.3 million. During 2008, our largest single outstanding balance of reverse repurchase commitments was $600.0 million, which was open for one day; the average daily balance of reverse repurchase commitments was $206.5 million. We earned income of $0.9 million and $1.6 million on reverse repurchase agreements for the years ended 2009 and 2008, respectively. No reverse repurchase commitments were entered into during 2007. We had $775.0 million of open reverse repurchase commitments at December 31, 2009 with two counterparties, reported as part of other short-term investments. No reverse repurchase commitments were open at December 31, 2008.