Notes to Consolidated Financial Statements
(unaudited)
Note 1
Basis of Presentation
— The accompanying consolidated financial statements include the accounts of The Progressive Corporation and ARX Holding Corp. (ARX), and their respective wholly owned insurance and non-insurance subsidiaries and affiliates in which Progressive or ARX has a controlling financial interest. The Progressive Corporation owned
69.0%
of the outstanding capital stock of ARX at
September 30, 2017
and
69.2%
at
September 30, 2016
and
December 31, 2016
. The decrease reflects ARX employee stock options that were exercised during the first quarter 2017. All intercompany accounts and transactions are eliminated in consolidation.
The consolidated financial statements reflect all normal recurring adjustments that, in the opinion of management, were necessary for a fair statement of the results for the interim periods presented. The results of operations for the period ended
September 30, 2017
, are not necessarily indicative of the results expected for the full year. These consolidated financial statements and the notes thereto should be read in conjunction with Progressive’s audited financial statements and accompanying notes included in Exhibit 13 to our Annual Report on Form 10-K for the year ended
December 31, 2016
(
“
2016
Annual Report to Shareholders
”
).
Other assets on the consolidated balance sheets include properties that are considered
“
held for sale,
”
if any. The fair value of these properties, less the estimated cost to sell them, was
$5.3 million
at
September 30, 2017
, and
$8.7 million
at both September 30, 2016 and December 31, 2016.
Note 2
Investments
— Our securities are reported at fair value, with the changes in fair value of these securities (other than hybrid securities and derivative instruments) reported as a component of accumulated other comprehensive income, net of deferred income taxes. The changes in fair value of the hybrid securities and derivative instruments are recorded as a component of net realized gains (losses) on securities.
The following tables present the composition of our investment portfolio by major security type, consistent with our classification of how we manage, monitor, and measure the portfolio. The net holding period gains (losses) represent the amounts realized on our hybrid securities only.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Cost
|
|
|
Gross
Unrealized Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Net
Holding Period Gains
(Losses)
|
|
|
Fair
Value
|
|
|
% of
Total
Fair
Value
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations
|
$
|
4,612.2
|
|
|
$
|
3.0
|
|
|
$
|
(20.2
|
)
|
|
$
|
0
|
|
|
$
|
4,595.0
|
|
|
17.0
|
%
|
State and local government obligations
|
2,332.2
|
|
|
35.0
|
|
|
(3.1
|
)
|
|
0.1
|
|
|
2,364.2
|
|
|
8.7
|
|
Foreign government obligations
|
24.2
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
24.2
|
|
|
0.1
|
|
Corporate debt securities
|
5,195.7
|
|
|
32.7
|
|
|
(4.2
|
)
|
|
1.4
|
|
|
5,225.6
|
|
|
19.4
|
|
Residential mortgage-backed securities
|
911.3
|
|
|
12.2
|
|
|
(3.2
|
)
|
|
0
|
|
|
920.3
|
|
|
3.4
|
|
Agency residential pass-through obligations
|
35.7
|
|
|
0
|
|
|
(0.4
|
)
|
|
0
|
|
|
35.3
|
|
|
0.1
|
|
Commercial mortgage-backed securities
|
2,763.7
|
|
|
17.0
|
|
|
(12.8
|
)
|
|
0
|
|
|
2,767.9
|
|
|
10.3
|
|
Other asset-backed securities
|
2,485.6
|
|
|
6.4
|
|
|
(2.0
|
)
|
|
0.2
|
|
|
2,490.2
|
|
|
9.2
|
|
Redeemable preferred stocks
|
222.5
|
|
|
16.4
|
|
|
(2.0
|
)
|
|
0.4
|
|
|
237.3
|
|
|
0.9
|
|
Total fixed maturities
|
18,583.1
|
|
|
122.7
|
|
|
(47.9
|
)
|
|
2.1
|
|
|
18,660.0
|
|
|
69.1
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
Nonredeemable preferred stocks
|
700.6
|
|
|
120.4
|
|
|
(7.3
|
)
|
|
0
|
|
|
813.7
|
|
|
3.0
|
|
Common equities
|
1,485.5
|
|
|
1,729.5
|
|
|
(5.5
|
)
|
|
0
|
|
|
3,209.5
|
|
|
11.9
|
|
Short-term investments
|
4,311.5
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
4,311.5
|
|
|
16.0
|
|
Total portfolio
1,2
|
$
|
25,080.7
|
|
|
$
|
1,972.6
|
|
|
$
|
(60.7
|
)
|
|
$
|
2.1
|
|
|
$
|
26,994.7
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Cost
|
|
|
Gross
Unrealized Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Net
Holding Period Gains
(Losses)
|
|
|
Fair
Value
|
|
|
% of
Total
Fair
Value
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations
|
$
|
726.0
|
|
|
$
|
8.9
|
|
|
$
|
(0.3
|
)
|
|
$
|
0
|
|
|
$
|
734.6
|
|
|
3.1
|
%
|
State and local government obligations
|
2,508.9
|
|
|
58.7
|
|
|
(1.6
|
)
|
|
0
|
|
|
2,566.0
|
|
|
10.9
|
|
Foreign government obligations
|
25.4
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
25.4
|
|
|
0.1
|
|
Corporate debt securities
|
4,327.5
|
|
|
76.9
|
|
|
(1.8
|
)
|
|
0.7
|
|
|
4,403.3
|
|
|
18.7
|
|
Residential mortgage-backed securities
|
1,582.6
|
|
|
25.3
|
|
|
(15.5
|
)
|
|
1.8
|
|
|
1,594.2
|
|
|
6.8
|
|
Agency residential pass-through obligations
|
43.6
|
|
|
0.5
|
|
|
0
|
|
|
0
|
|
|
44.1
|
|
|
0.2
|
|
Commercial mortgage-backed securities
|
2,249.4
|
|
|
35.1
|
|
|
(6.1
|
)
|
|
0
|
|
|
2,278.4
|
|
|
9.7
|
|
Other asset-backed securities
|
2,037.5
|
|
|
7.9
|
|
|
(0.3
|
)
|
|
0.3
|
|
|
2,045.4
|
|
|
8.7
|
|
Redeemable preferred stocks
|
207.1
|
|
|
19.6
|
|
|
(1.2
|
)
|
|
0
|
|
|
225.5
|
|
|
1.0
|
|
Total fixed maturities
|
13,708.0
|
|
|
232.9
|
|
|
(26.8
|
)
|
|
2.8
|
|
|
13,916.9
|
|
|
59.2
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
Nonredeemable preferred stocks
|
726.6
|
|
|
146.2
|
|
|
(13.9
|
)
|
|
1.2
|
|
|
860.1
|
|
|
3.6
|
|
Common equities
|
1,576.1
|
|
|
1,296.3
|
|
|
(4.4
|
)
|
|
0
|
|
|
2,868.0
|
|
|
12.2
|
|
Short-term investments
|
5,876.2
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
5,876.2
|
|
|
25.0
|
|
Total portfolio
1,2
|
$
|
21,886.9
|
|
|
$
|
1,675.4
|
|
|
$
|
(45.1
|
)
|
|
$
|
4.0
|
|
|
$
|
23,521.2
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Cost
|
|
|
Gross
Unrealized Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Net
Holding Period Gains
(Losses)
|
|
|
Fair
Value
|
|
|
% of
Total
Fair
Value
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations
|
$
|
2,899.2
|
|
|
$
|
0
|
|
|
$
|
(29.1
|
)
|
|
$
|
0
|
|
|
$
|
2,870.1
|
|
|
12.2
|
%
|
State and local government obligations
|
2,509.5
|
|
|
13.8
|
|
|
(20.7
|
)
|
|
0
|
|
|
2,502.6
|
|
|
10.7
|
|
Foreign government obligations
|
24.5
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
24.5
|
|
|
0.1
|
|
Corporate debt securities
|
4,557.8
|
|
|
17.3
|
|
|
(24.3
|
)
|
|
0.1
|
|
|
4,550.9
|
|
|
19.4
|
|
Residential mortgage-backed securities
|
1,448.5
|
|
|
23.7
|
|
|
(15.0
|
)
|
|
1.5
|
|
|
1,458.7
|
|
|
6.2
|
|
Agency residential pass-through obligations
|
41.2
|
|
|
0
|
|
|
(0.6
|
)
|
|
0
|
|
|
40.6
|
|
|
0.2
|
|
Commercial mortgage-backed securities
|
2,266.9
|
|
|
12.0
|
|
|
(25.5
|
)
|
|
0
|
|
|
2,253.4
|
|
|
9.6
|
|
Other asset-backed securities
|
2,350.7
|
|
|
4.6
|
|
|
(4.4
|
)
|
|
0.2
|
|
|
2,351.1
|
|
|
10.0
|
|
Redeemable preferred stocks
|
188.8
|
|
|
5.1
|
|
|
(2.0
|
)
|
|
0
|
|
|
191.9
|
|
|
0.8
|
|
Total fixed maturities
|
16,287.1
|
|
|
76.5
|
|
|
(121.6
|
)
|
|
1.8
|
|
|
16,243.8
|
|
|
69.2
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
Nonredeemable preferred stocks
|
734.2
|
|
|
135.4
|
|
|
(16.1
|
)
|
|
0
|
|
|
853.5
|
|
|
3.6
|
|
Common equities
|
1,437.5
|
|
|
1,377.0
|
|
|
(2.1
|
)
|
|
0
|
|
|
2,812.4
|
|
|
12.0
|
|
Short-term investments
|
3,572.9
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
3,572.9
|
|
|
15.2
|
|
Total portfolio
1,2
|
$
|
22,031.7
|
|
|
$
|
1,588.9
|
|
|
$
|
(139.8
|
)
|
|
$
|
1.8
|
|
|
$
|
23,482.6
|
|
|
100.0
|
%
|
1
Our portfolio reflects the effect of unsettled security transactions and collateral on open derivative positions; at
September 30, 2017
and
2016
, and
December 31, 2016
, we had
$238.3 million
,
$185.3 million
, and
$27.8 million
, respectively, included in “other liabilities.”
2
The total fair value of the portfolio at
September 30, 2017
and
2016
, and
December 31, 2016
, included
$1.1 billion
,
$1.0 billion
, and
$1.3 billion
, respectively, of securities held in a consolidated, non-insurance subsidiary of the holding company, net of any unsettled security transactions.
Short-Term Investments
Our short-term investments may include commercial paper and other investments that are expected to mature within one year. We did
not
enter into any repurchase commitment transactions during the first
nine
months of
2017
or
2016
, and we had
no
open repurchase commitments at
September 30, 2017
and 2016, or
December 31, 2016
.
Also included in short-term investments are reverse repurchase commitment transactions, where we loan cash to approved counterparties and receive U.S. Treasury Notes pledged as collateral against the cash borrowed. Our exposure to credit risk is limited due to the nature of the collateral (i.e., U.S. Treasury Notes) received. We have counterparty exposure on these trades in the event of a counterparty default to the extent the collateral security’s value is below the amount of cash we delivered to acquire the collateral. The short-term duration of the transactions (primarily overnight) reduces that exposure.
We had
no
open reverse repurchase commitments at
September 30, 2017
or
December 31, 2016
, compared to
$68.0 million
open at September 30, 2016. We did
not
enter into any reverse repurchase commitments for the
nine
months ended
September 30, 2017
. During the nine months ended September 30, 2016, our largest outstanding balance of reverse repurchase commitments was
$265.0 million
, which was open for
one
day. For the
28
days we invested in these transactions, the average daily balance of reverse repurchase commitments was $
122.6 million
.
To the extent we enter into repurchase or reverse repurchase transactions, and consistent with past practice, we would elect not to offset these transactions and would report them on a gross basis on our balance sheets despite the option to elect to offset these transactions as long as they were with the same counterparty and subject to an enforceable master netting arrangement.
Hybrid Securities
Included in our fixed-maturity and equity securities are hybrid securities, which are reported at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
2016
|
|
(millions)
|
2017
|
|
|
2016
|
|
|
Fixed maturities:
|
|
|
|
|
|
State and local government obligations
|
$
|
2.4
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Corporate debt securities
|
114.9
|
|
|
31.2
|
|
|
40.1
|
|
Residential mortgage-backed securities
|
0
|
|
|
175.3
|
|
|
170.5
|
|
Other asset-backed securities
|
7.1
|
|
|
9.5
|
|
|
8.9
|
|
Redeemable preferred stocks
|
35.5
|
|
|
0
|
|
|
0
|
|
Total fixed maturities
|
159.9
|
|
|
216.0
|
|
|
219.5
|
|
Equity securities:
|
|
|
|
|
|
Nonredeemable preferred stocks
|
0
|
|
|
13.6
|
|
|
0
|
|
Total hybrid securities
|
$
|
159.9
|
|
|
$
|
229.6
|
|
|
$
|
219.5
|
|
The state and local government obligations in the table above were acquired at a premium and contain a contingently exercisable call feature that allows the issuer, at its discretion, to call the securities at par based on a provision that is unrelated to the economic characteristics of the issuer.
Certain corporate debt securities are accounted for as hybrid securities since they were acquired at a premium and contain a change-in-control put option (derivative) that permits the investor, at its sole option if and when a change in control is triggered, to put the security back to the issuer at a
1%
premium to par. Due to this change-in-control put option and the substantial market premium paid to acquire these securities, there is the potential that the election to put, upon the change in control, would result in an acceleration of the recognition of the remaining premium paid on these securities in our results of operations. The put feature limits the potential loss in value that could be experienced in the event a corporate action occurs that results in a change in control that materially diminishes the credit quality of the issuer. Exercises of the puts would result in a loss of
$9.6 million
as of
September 30, 2017
, if all of the bonds experienced a simultaneous change in control and we elected to exercise all of our put options. We are under no obligation to exercise the put option we hold if a change in control occurs.
The residential mortgage-backed securities accounted for as hybrid securities are obligations of the issuer with payments of principal based on the performance of a reference pool of loans. This embedded derivative results in the securities incorporating the risk of default from both the issuer and the related loan pool. These securities were sold during 2017.
The other asset-backed security in the table above represents one hybrid security that was acquired at a deep discount to par due to a failing auction, and contains a put option that allows the investor to put that security back to the auction at par if the auction is restored. This embedded derivative had the potential to more than double our initial investment yield at acquisition.
The redeemable preferred stock in the table above represents one hybrid security acquired in 2017 with a provision that requires the issuer, in the event of bankruptcy, to convert the security into an equivalent number of shares of a newly-issued perpetual preferred stock. This embedded derivative has the potential to result in the security converting from a debt instrument to an equity instrument.
During 2016, we sold the nonredeemable preferred stocks referred to in the table above. These securities were perpetual preferred stocks with fixed-rate coupons that have call features, whereby the change in value of the call features was a component of the overall change in value of the preferred stocks.
Fixed Maturities
The composition of fixed maturities by maturity at
September 30, 2017
, was:
|
|
|
|
|
|
|
|
|
(millions)
|
Cost
|
|
|
Fair Value
|
|
Less than one year
|
$
|
4,088.1
|
|
|
$
|
4,105.7
|
|
One to five years
|
11,476.9
|
|
|
11,508.8
|
|
Five to ten years
|
2,873.9
|
|
|
2,901.3
|
|
Ten years or greater
|
144.2
|
|
|
144.2
|
|
Total
|
$
|
18,583.1
|
|
|
$
|
18,660.0
|
|
Asset-backed securities are classified in the maturity distribution table based upon their projected cash flows. All other securities which do not have a single maturity date are reported based upon expected average maturity. Contractual maturities may differ from expected maturities because the issuers of the securities may have the right to call or prepay obligations.
Gross Unrealized Losses
As of
September 30, 2017
, we had
$55.2 million
of gross unrealized losses in our fixed-income securities (i.e., fixed-maturity securities and nonredeemable preferred stocks) and
$5.5 million
in our common equities. We currently do not intend to sell the fixed-income securities and determined that it is more likely that we will not be required to sell these securities for the period of time necessary to recover their cost bases. A review of our fixed-income securities indicated that the issuers were current with respect to their interest obligations and that there was no evidence of any deterioration of the current cash flow projections that would indicate we would not receive the remaining principal at maturity.
For common equities,
95%
of our common stock portfolio was indexed to the Russell 1000; as such, this portfolio may contain securities in a loss position for an extended period of time, subject to possible write-downs, as described below. We may retain these securities as long as the portfolio and index correlation remain similar. To the extent there is issuer-specific deterioration, we may write down the securities of that issuer. The remaining
5%
of our common stocks were part of a managed equity strategy selected and administered by an external investment advisor. If our review of loss position securities were to indicate there was a fundamental, or market, impairment on these securities that was determined to be other-than-temporary, we would recognize a write-down in accordance with our stated policy.
The following tables show the composition of gross unrealized losses by major security type and by the length of time that individual securities have been in a continuous unrealized loss position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total No. of Sec.
|
|
Total
Fair
Value
|
|
Gross Unrealized Losses
|
|
Less than 12 Months
|
|
12 Months or Greater
|
($ in millions)
|
No. of Sec.
|
|
Fair
Value
|
|
Unrealized Losses
|
|
|
No. of Sec.
|
|
Fair
Value
|
|
Unrealized Losses
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations
|
54
|
|
$
|
3,804.0
|
|
$
|
(20.2
|
)
|
31
|
|
$
|
2,302.2
|
|
$
|
(7.1
|
)
|
|
23
|
|
$
|
1,501.8
|
|
$
|
(13.1
|
)
|
State and local government obligations
|
169
|
|
610.4
|
|
(3.1
|
)
|
40
|
|
141.0
|
|
(0.7
|
)
|
|
129
|
|
469.4
|
|
(2.4
|
)
|
Corporate debt securities
|
113
|
|
1,523.8
|
|
(4.2
|
)
|
59
|
|
636.0
|
|
(1.1
|
)
|
|
54
|
|
887.8
|
|
(3.1
|
)
|
Residential mortgage-backed securities
|
126
|
|
308.8
|
|
(3.2
|
)
|
14
|
|
37.4
|
|
(0.1
|
)
|
|
112
|
|
271.4
|
|
(3.1
|
)
|
Agency residential pass-through obligations
|
65
|
|
32.7
|
|
(0.4
|
)
|
12
|
|
1.8
|
|
0
|
|
|
53
|
|
30.9
|
|
(0.4
|
)
|
Commercial mortgage-backed securities
|
105
|
|
1,588.9
|
|
(12.8
|
)
|
61
|
|
1,073.5
|
|
(4.6
|
)
|
|
44
|
|
515.4
|
|
(8.2
|
)
|
Other asset-backed securities
|
148
|
|
1,393.2
|
|
(2.0
|
)
|
103
|
|
920.8
|
|
(1.0
|
)
|
|
45
|
|
472.4
|
|
(1.0
|
)
|
Redeemable preferred stocks
|
2
|
|
21.4
|
|
(2.0
|
)
|
1
|
|
10.9
|
|
0
|
|
|
1
|
|
10.5
|
|
(2.0
|
)
|
Total fixed maturities
|
782
|
|
9,283.2
|
|
(47.9
|
)
|
321
|
|
5,123.6
|
|
(14.6
|
)
|
|
461
|
|
4,159.6
|
|
(33.3
|
)
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
Nonredeemable preferred stocks
|
3
|
|
72.4
|
|
(7.3
|
)
|
0
|
|
0
|
|
0
|
|
|
3
|
|
72.4
|
|
(7.3
|
)
|
Common equities
|
67
|
|
52.0
|
|
(5.5
|
)
|
62
|
|
49.3
|
|
(4.9
|
)
|
|
5
|
|
2.7
|
|
(0.6
|
)
|
Total equity securities
|
70
|
|
124.4
|
|
(12.8
|
)
|
62
|
|
49.3
|
|
(4.9
|
)
|
|
8
|
|
75.1
|
|
(7.9
|
)
|
Total portfolio
|
852
|
|
$
|
9,407.6
|
|
$
|
(60.7
|
)
|
383
|
|
$
|
5,172.9
|
|
$
|
(19.5
|
)
|
|
469
|
|
$
|
4,234.7
|
|
$
|
(41.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total No. of Sec.
|
|
Total
Fair
Value
|
|
Gross Unrealized Losses
|
|
Less than 12 Months
|
|
12 Months or Greater
|
($ in millions)
|
No. of Sec.
|
|
Fair
Value
|
|
Unrealized Losses
|
|
|
No. of Sec.
|
|
Fair
Value
|
|
Unrealized Losses
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations
|
4
|
|
$
|
104.8
|
|
$
|
(0.3
|
)
|
4
|
|
$
|
104.8
|
|
$
|
(0.3
|
)
|
|
0
|
|
$
|
0
|
|
$
|
0
|
|
State and local government obligations
|
151
|
|
512.0
|
|
(1.6
|
)
|
117
|
|
409.6
|
|
(1.0
|
)
|
|
34
|
|
102.4
|
|
(0.6
|
)
|
Corporate debt securities
|
52
|
|
598.3
|
|
(1.8
|
)
|
42
|
|
541.5
|
|
(0.8
|
)
|
|
10
|
|
56.8
|
|
(1.0
|
)
|
Residential mortgage-backed securities
|
138
|
|
915.8
|
|
(15.5
|
)
|
26
|
|
108.8
|
|
(0.4
|
)
|
|
112
|
|
807.0
|
|
(15.1
|
)
|
Agency residential pass-through obligations
|
15
|
|
4.2
|
|
0
|
|
7
|
|
1.9
|
|
0
|
|
|
8
|
|
2.3
|
|
0
|
|
Commercial mortgage-backed securities
|
56
|
|
610.6
|
|
(6.1
|
)
|
17
|
|
194.7
|
|
(1.7
|
)
|
|
39
|
|
415.9
|
|
(4.4
|
)
|
Other asset-backed securities
|
43
|
|
488.7
|
|
(0.3
|
)
|
16
|
|
219.5
|
|
(0.1
|
)
|
|
27
|
|
269.2
|
|
(0.2
|
)
|
Redeemable preferred stocks
|
2
|
|
31.8
|
|
(1.2
|
)
|
0
|
|
0
|
|
0
|
|
|
2
|
|
31.8
|
|
(1.2
|
)
|
Total fixed maturities
|
461
|
|
3,266.2
|
|
(26.8
|
)
|
229
|
|
1,580.8
|
|
(4.3
|
)
|
|
232
|
|
1,685.4
|
|
(22.5
|
)
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
Nonredeemable preferred stocks
|
7
|
|
187.5
|
|
(13.9
|
)
|
1
|
|
9.9
|
|
(0.2
|
)
|
|
6
|
|
177.6
|
|
(13.7
|
)
|
Common equities
|
86
|
|
53.4
|
|
(4.4
|
)
|
83
|
|
49.5
|
|
(4.2
|
)
|
|
3
|
|
3.9
|
|
(0.2
|
)
|
Total equity securities
|
93
|
|
240.9
|
|
(18.3
|
)
|
84
|
|
59.4
|
|
(4.4
|
)
|
|
9
|
|
181.5
|
|
(13.9
|
)
|
Total portfolio
|
554
|
|
$
|
3,507.1
|
|
$
|
(45.1
|
)
|
313
|
|
$
|
1,640.2
|
|
$
|
(8.7
|
)
|
|
241
|
|
$
|
1,866.9
|
|
$
|
(36.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total No. of Sec.
|
|
Total
Fair
Value
|
|
Gross Unrealized Losses
|
|
Less than 12 Months
|
|
12 Months or Greater
|
($ in millions)
|
No. of Sec.
|
|
Fair
Value
|
|
Unrealized Losses
|
|
|
No. of Sec.
|
|
Fair
Value
|
|
Unrealized Losses
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations
|
30
|
|
$
|
2,774.0
|
|
$
|
(29.1
|
)
|
30
|
|
$
|
2,774.0
|
|
$
|
(29.1
|
)
|
|
0
|
|
$
|
0
|
|
$
|
0
|
|
State and local government obligations
|
618
|
|
1,497.9
|
|
(20.7
|
)
|
584
|
|
1,404.3
|
|
(19.6
|
)
|
|
34
|
|
93.6
|
|
(1.1
|
)
|
Corporate debt securities
|
184
|
|
2,615.1
|
|
(24.3
|
)
|
175
|
|
2,559.9
|
|
(24.0
|
)
|
|
9
|
|
55.2
|
|
(0.3
|
)
|
Residential mortgage-backed securities
|
178
|
|
917.7
|
|
(15.0
|
)
|
69
|
|
175.8
|
|
(1.1
|
)
|
|
109
|
|
741.9
|
|
(13.9
|
)
|
Agency residential pass-through obligations
|
55
|
|
36.0
|
|
(0.6
|
)
|
48
|
|
33.9
|
|
(0.6
|
)
|
|
7
|
|
2.1
|
|
0
|
|
Commercial mortgage-backed securities
|
111
|
|
1,347.3
|
|
(25.5
|
)
|
85
|
|
1,061.2
|
|
(22.9
|
)
|
|
26
|
|
286.1
|
|
(2.6
|
)
|
Other asset-backed securities
|
103
|
|
1,605.2
|
|
(4.4
|
)
|
89
|
|
1,423.3
|
|
(3.9
|
)
|
|
14
|
|
181.9
|
|
(0.5
|
)
|
Redeemable preferred stocks
|
2
|
|
31.0
|
|
(2.0
|
)
|
0
|
|
0
|
|
0
|
|
|
2
|
|
31.0
|
|
(2.0
|
)
|
Total fixed maturities
|
1,281
|
|
10,824.2
|
|
(121.6
|
)
|
1,080
|
|
9,432.4
|
|
(101.2
|
)
|
|
201
|
|
1,391.8
|
|
(20.4
|
)
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
Nonredeemable preferred stocks
|
13
|
|
329.6
|
|
(16.1
|
)
|
8
|
|
175.2
|
|
(3.8
|
)
|
|
5
|
|
154.4
|
|
(12.3
|
)
|
Common equities
|
75
|
|
22.1
|
|
(2.1
|
)
|
69
|
|
19.7
|
|
(1.7
|
)
|
|
6
|
|
2.4
|
|
(0.4
|
)
|
Total equity securities
|
88
|
|
351.7
|
|
(18.2
|
)
|
77
|
|
194.9
|
|
(5.5
|
)
|
|
11
|
|
156.8
|
|
(12.7
|
)
|
Total portfolio
|
1,369
|
|
$
|
11,175.9
|
|
$
|
(139.8
|
)
|
1,157
|
|
$
|
9,627.3
|
|
$
|
(106.7
|
)
|
|
212
|
|
$
|
1,548.6
|
|
$
|
(33.1
|
)
|
Since
September 30, 2016
, the number of securities in our fixed-maturity portfolio with unrealized losses increased, primarily the result of rising interest rates during the latter part of
2016
. A narrowing of credit spreads for the first nine months of 2017 resulted in a decrease in the number of fixed-maturity securities with unrealized losses since
December 31, 2016
. We had no material decreases in valuation as a result of credit rating downgrades on our fixed-maturity securities. All of the fixed-maturity securities in an unrealized loss position at
September 30, 2017
in the table above are current with respect to required principal and interest payments.
Since
December 31, 2016
,
our nonredeemable preferred stocks with unrealized losses decreased to
three
securities, averaging approximately
9%
of their total cost. The decrease in the number of securities is the result of valuation increases in the portfolio. We reviewed these securities and concluded that the unrealized losses are market-related adjustments to the values, which we determined not to be other-than-temporary; we expect to recover our initial investments on these securities. The number of issuers with unrealized losses in our common stock portfolio decreased during the first
nine
months of 2017. A review of the securities in a loss position did not uncover fundamental issues with the issuers that would indicate other-than-temporary impairments existed. Additionally, market expectations for recovery in the next 12 months would put the fair values at or above our current book values. Lastly, we determined, as of the balance sheet date, that it was not likely these securities would be sold prior to that recovery.
Other-Than-Temporary Impairment (OTTI)
The following table shows the total non-credit portion of the OTTI recorded in accumulated other comprehensive income, reflecting the original non-credit loss at the time the credit impairment was determined (i.e., unadjusted for valuation changes subsequent to the original write-down):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
2016
|
|
(millions)
|
2017
|
|
|
2016
|
|
|
Fixed maturities:
|
|
|
|
|
|
Residential mortgage-backed securities
|
$
|
(19.7
|
)
|
|
$
|
(43.3
|
)
|
|
$
|
(43.3
|
)
|
Commercial mortgage-backed securities
|
(0.4
|
)
|
|
(0.6
|
)
|
|
(0.6
|
)
|
Total fixed maturities
|
$
|
(20.1
|
)
|
|
$
|
(43.9
|
)
|
|
$
|
(43.9
|
)
|
The following tables provide rollforwards of the amounts related to credit losses recognized in earnings for the periods ended
September 30, 2017
and
2016
, for which a portion of the OTTI losses were also recognized in accumulated other comprehensive income at the time the credit impairments were determined and recognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2017
|
|
Mortgage-Backed
|
|
|
(millions)
|
Residential
|
|
|
Commercial
|
|
|
Total
|
|
Balance at June 30, 2017
|
$
|
0.2
|
|
|
$
|
0.1
|
|
|
$
|
0.3
|
|
Credit losses for which an OTTI was not previously recognized
|
0
|
|
|
0.4
|
|
|
0.4
|
|
Reductions for securities sold/matured
|
0
|
|
|
0
|
|
|
0
|
|
Change in recoveries of future cash flows expected to be collected
1
|
0
|
|
|
0
|
|
|
0
|
|
Balance at September 30, 2017
|
$
|
0.2
|
|
|
$
|
0.5
|
|
|
$
|
0.7
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2017
|
|
Mortgage-Backed
|
|
|
(millions)
|
Residential
|
|
|
Commercial
|
|
|
Total
|
|
Balance at December 31, 2016
|
$
|
11.1
|
|
|
$
|
0.4
|
|
|
$
|
11.5
|
|
Credit losses for which an OTTI was not previously recognized
|
0
|
|
|
0.4
|
|
|
0.4
|
|
Reductions for securities sold/matured
|
(10.9
|
)
|
|
(0.3
|
)
|
|
(11.2
|
)
|
Change in recoveries of future cash flows expected to be collected
1
|
0
|
|
|
0
|
|
|
0
|
|
Balance at September 30, 2017
|
$
|
0.2
|
|
|
$
|
0.5
|
|
|
$
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2016
|
|
Mortgage-Backed
|
|
|
(millions)
|
Residential
|
|
|
Commercial
|
|
|
Total
|
|
Balance at June 30, 2016
|
$
|
11.8
|
|
|
$
|
0.4
|
|
|
$
|
12.2
|
|
Credit losses for which an OTTI was not previously recognized
|
0
|
|
|
0
|
|
|
0
|
|
Reductions for securities sold/matured
|
0
|
|
|
0
|
|
|
0
|
|
Change in recoveries of future cash flows expected to be collected
1
|
(0.3
|
)
|
|
0
|
|
|
(0.3
|
)
|
Balance at September 30, 2016
|
$
|
11.5
|
|
|
$
|
0.4
|
|
|
$
|
11.9
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
|
Mortgage-Backed
|
|
|
(millions)
|
Residential
|
|
|
Commercial
|
|
|
Total
|
|
Balance at December 31, 2015
|
$
|
12.4
|
|
|
$
|
0.4
|
|
|
$
|
12.8
|
|
Credit losses for which an OTTI was not previously recognized
|
0
|
|
|
0
|
|
|
0
|
|
Reductions for securities sold/matured
|
0
|
|
|
0
|
|
|
0
|
|
Change in recoveries of future cash flows expected to be collected
1
|
(0.9
|
)
|
|
0
|
|
|
(0.9
|
)
|
Balance at September 30, 2016
|
$
|
11.5
|
|
|
$
|
0.4
|
|
|
$
|
11.9
|
|
1
Reflects the current period change in the expected recovery of prior impairments that will be accreted into income over the remaining life of the security.
Although we determined it is more likely that we will not be required to sell the securities prior to the recovery of their respective cost bases (which could be maturity), we are required to measure the amount of potential credit losses on the securities that were in an unrealized loss position. In that process, we considered a number of factors and inputs related to the individual securities. The methodology and significant inputs used to measure the amount of credit losses in our portfolio included: current performance indicators on the business model or underlying assets (e.g., delinquency rates, foreclosure rates, and default rates); credit support (via current levels of subordination); historical credit ratings; and updated cash flow expectations based upon these performance indicators. In order to determine the amount of credit loss, if any, the net present value of the cash flows expected (i.e., expected recovery value) was calculated using the current book yield for each security, and was compared to its current amortized value. In the event that the net present value was below the amortized value, a credit loss would be deemed to exist, and the security would be written down. We did not have any credit impairment write-downs for the
nine
months ended
September 30, 2016
.
Realized Gains (Losses)
The components of net realized gains (losses) for the
three and nine
months ended
September 30,
were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
Nine Months
|
(millions)
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Gross realized gains on security sales
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
U.S. government obligations
|
$
|
0.9
|
|
|
$
|
6.4
|
|
|
$
|
5.8
|
|
|
$
|
24.1
|
|
State and local government obligations
|
4.0
|
|
|
0.6
|
|
|
7.1
|
|
|
16.0
|
|
Corporate and other debt securities
|
5.1
|
|
|
15.6
|
|
|
16.5
|
|
|
38.1
|
|
Residential mortgage-backed securities
|
2.8
|
|
|
0.2
|
|
|
23.8
|
|
|
1.9
|
|
Agency residential pass-through obligations
|
0
|
|
|
0
|
|
|
0
|
|
|
0.1
|
|
Commercial mortgage-backed securities
|
0
|
|
|
5.5
|
|
|
2.4
|
|
|
12.0
|
|
Other asset-backed securities
|
0
|
|
|
0
|
|
|
0.3
|
|
|
0
|
|
Redeemable preferred stocks
|
7.7
|
|
|
0
|
|
|
8.0
|
|
|
0
|
|
Total fixed maturities
|
20.5
|
|
|
28.3
|
|
|
63.9
|
|
|
92.2
|
|
Equity securities:
|
|
|
|
|
|
|
|
Nonredeemable preferred stocks
|
3.0
|
|
|
4.9
|
|
|
54.6
|
|
|
11.9
|
|
Common equities
|
5.7
|
|
|
14.4
|
|
|
23.0
|
|
|
43.3
|
|
Short-term investments
|
0
|
|
|
0.1
|
|
|
0
|
|
|
0.1
|
|
Subtotal gross realized gains on security sales
|
29.2
|
|
|
47.7
|
|
|
141.5
|
|
|
147.5
|
|
Gross realized losses on security sales
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
U.S. government obligations
|
(1.0
|
)
|
|
(0.8
|
)
|
|
(4.6
|
)
|
|
(1.2
|
)
|
State and local government obligations
|
0
|
|
|
0
|
|
|
(0.1
|
)
|
|
(1.6
|
)
|
Corporate and other debt securities
|
(1.8
|
)
|
|
(0.2
|
)
|
|
(4.6
|
)
|
|
(1.9
|
)
|
Residential mortgage-backed securities
|
(0.1
|
)
|
|
0
|
|
|
(0.4
|
)
|
|
0
|
|
Agency residential pass-through obligations
|
0
|
|
|
0
|
|
|
0
|
|
|
(0.2
|
)
|
Commercial mortgage-backed securities
|
(0.5
|
)
|
|
0
|
|
|
(3.6
|
)
|
|
(4.1
|
)
|
Redeemable preferred stocks
|
(6.4
|
)
|
|
(6.5
|
)
|
|
(6.4
|
)
|
|
(6.5
|
)
|
Total fixed maturities
|
(9.8
|
)
|
|
(7.5
|
)
|
|
(19.7
|
)
|
|
(15.5
|
)
|
Equity securities:
|
|
|
|
|
|
|
|
Nonredeemable preferred stocks
|
(0.1
|
)
|
|
(0.4
|
)
|
|
(5.9
|
)
|
|
(3.1
|
)
|
Common equities
|
(0.2
|
)
|
|
(0.3
|
)
|
|
(0.3
|
)
|
|
(5.3
|
)
|
Subtotal gross realized losses on security sales
|
(10.1
|
)
|
|
(8.2
|
)
|
|
(25.9
|
)
|
|
(23.9
|
)
|
Net realized gains (losses) on security sales
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
U.S. government obligations
|
(0.1
|
)
|
|
5.6
|
|
|
1.2
|
|
|
22.9
|
|
State and local government obligations
|
4.0
|
|
|
0.6
|
|
|
7.0
|
|
|
14.4
|
|
Corporate and other debt securities
|
3.3
|
|
|
15.4
|
|
|
11.9
|
|
|
36.2
|
|
Residential mortgage-backed securities
|
2.7
|
|
|
0.2
|
|
|
23.4
|
|
|
1.9
|
|
Agency residential pass-through obligations
|
0
|
|
|
0
|
|
|
0
|
|
|
(0.1
|
)
|
Commercial mortgage-backed securities
|
(0.5
|
)
|
|
5.5
|
|
|
(1.2
|
)
|
|
7.9
|
|
Other asset-backed securities
|
0
|
|
|
0
|
|
|
0.3
|
|
|
0
|
|
Redeemable preferred stocks
|
1.3
|
|
|
(6.5
|
)
|
|
1.6
|
|
|
(6.5
|
)
|
Total fixed maturities
|
10.7
|
|
|
20.8
|
|
|
44.2
|
|
|
76.7
|
|
Equity securities:
|
|
|
|
|
|
|
|
Nonredeemable preferred stocks
|
2.9
|
|
|
4.5
|
|
|
48.7
|
|
|
8.8
|
|
Common equities
|
5.5
|
|
|
14.1
|
|
|
22.7
|
|
|
38.0
|
|
Short-term investments
|
0
|
|
|
0.1
|
|
|
0
|
|
|
0.1
|
|
Subtotal net realized gains (losses) on security sales
|
19.1
|
|
|
39.5
|
|
|
115.6
|
|
|
123.6
|
|
Other-than-temporary impairment losses
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
Commercial mortgage-backed securities
|
(0.4
|
)
|
|
0
|
|
|
(0.4
|
)
|
|
0
|
|
Redeemable preferred stocks
|
0
|
|
|
(25.4
|
)
|
|
0
|
|
|
(25.4
|
)
|
Total fixed maturities
|
(0.4
|
)
|
|
(25.4
|
)
|
|
(0.4
|
)
|
|
(25.4
|
)
|
Equity securities:
|
|
|
|
|
|
|
|
Common equities
|
(8.9
|
)
|
|
(1.4
|
)
|
|
(12.5
|
)
|
|
(1.6
|
)
|
Subtotal investment other-than-temporary impairment losses
|
(9.3
|
)
|
|
(26.8
|
)
|
|
(12.9
|
)
|
|
(27.0
|
)
|
Other asset impairment
|
(33.7
|
)
|
|
(34.8
|
)
|
|
(44.9
|
)
|
|
(34.8
|
)
|
Subtotal other-than-temporary impairment losses
|
(43.0
|
)
|
|
(61.6
|
)
|
|
(57.8
|
)
|
|
(61.8
|
)
|
Other gains (losses)
|
|
|
|
|
|
|
|
Hybrid securities
|
(0.9
|
)
|
|
0.6
|
|
|
0.3
|
|
|
2.9
|
|
Derivative instruments
|
0
|
|
|
0.7
|
|
|
0
|
|
|
(35.8
|
)
|
Litigation settlements
|
0.1
|
|
|
0.1
|
|
|
1.2
|
|
|
0.1
|
|
Subtotal other gains (losses)
|
(0.8
|
)
|
|
1.4
|
|
|
1.5
|
|
|
(32.8
|
)
|
Total net realized gains (losses) on securities
|
$
|
(24.7
|
)
|
|
$
|
(20.7
|
)
|
|
$
|
59.3
|
|
|
$
|
29.0
|
|
Gross realized gains and losses were predominantly the result of sales transactions in our fixed-income portfolio related to movements in credit spreads and interest rates and sales from our equity portfolios. Our preferred stock portfolio reflects a large realized gain due primarily to one issue called by the issuer at par. This security was held at a deep discount due to previous other-than-temporary impairment write-downs taken during the market crisis of 2008. Subsequent to the write-down, the security experienced significant recovery and was trading near its anticipated call price. Upon call, we recognized the difference between the consideration received and our book value as a realized gain.
In addition, gains and losses reflect recoveries from litigation settlements related to investments and holding period valuation changes on hybrids and derivatives. Also included are write-downs for securities determined to be other-than-temporarily impaired. The other asset impairment relates to renewable energy investments, which are reflected in “other assets” on the balance sheet, under which the future pretax cash flows are expected to be less than the carrying value of the assets.
Net Investment Income
The components of net investment income for the
three and nine
months ended
September 30,
were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
Nine Months
|
(millions)
|
2017
|
|
2016
|
|
|
2017
|
|
2016
|
|
Fixed maturities:
|
|
|
|
|
|
U.S. government obligations
|
$
|
18.4
|
|
$
|
3.3
|
|
|
$
|
48.1
|
|
$
|
12.4
|
|
State and local government obligations
|
12.9
|
|
12.6
|
|
|
39.3
|
|
39.3
|
|
Foreign government obligations
|
0.1
|
|
0.1
|
|
|
0.3
|
|
0.3
|
|
Corporate debt securities
|
32.2
|
|
27.3
|
|
|
93.1
|
|
81.9
|
|
Residential mortgage-backed securities
|
7.8
|
|
11.1
|
|
|
27.3
|
|
34.9
|
|
Agency residential pass-through obligations
|
0.2
|
|
0.3
|
|
|
0.6
|
|
0.9
|
|
Commercial mortgage-backed securities
|
20.0
|
|
22.4
|
|
|
57.1
|
|
62.6
|
|
Other asset-backed securities
|
12.1
|
|
6.8
|
|
|
33.8
|
|
18.7
|
|
Redeemable preferred stocks
|
2.8
|
|
3.8
|
|
|
9.1
|
|
11.5
|
|
Total fixed maturities
|
106.5
|
|
87.7
|
|
|
308.7
|
|
262.5
|
|
Equity securities:
|
|
|
|
|
|
Nonredeemable preferred stocks
|
10.9
|
|
12.4
|
|
|
33.0
|
|
36.8
|
|
Common equities
|
14.9
|
|
13.9
|
|
|
42.8
|
|
42.0
|
|
Short-term investments
|
10.6
|
|
5.3
|
|
|
26.4
|
|
11.4
|
|
Investment income
|
142.9
|
|
119.3
|
|
|
410.9
|
|
352.7
|
|
Investment expenses
|
(5.8
|
)
|
(4.8
|
)
|
|
(18.0
|
)
|
(14.9
|
)
|
Net investment income
|
$
|
137.1
|
|
$
|
114.5
|
|
|
$
|
392.9
|
|
$
|
337.8
|
|
The amount of investment income (interest and dividends) we recognize varies from year to year based on the average assets held during the year and the book yields of the securities in our portfolio. The increase in income year-over-year for the three and nine months was mainly the result of an increase in assets, as yields remained relatively consistent.
Trading Securities
At
September 30, 2017
and
2016
, and
December 31, 2016
, we did
not
hold any trading securities and did
not
have any net realized gains (losses) on trading securities for the
three and nine
months ended
September 30, 2017
and
2016
.
Derivative Instruments
The following table shows the status of our derivative instruments at
September 30, 2017
and
2016
, and
December 31, 2016
, and for the
three and nine
months ended
September 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
|
|
|
Balance Sheet
2
|
|
Comprehensive Income Statement
|
|
|
|
|
|
|
|
Assets (Liabilities)
Fair Value
|
|
Pretax Net Realized
Gains (Losses)
|
|
Notional Value
1
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
Dec. 31,
|
|
|
|
|
|
September 30,
|
|
Dec. 31,
|
|
September 30,
|
|
September 30,
|
Derivatives designated as:
|
2017
|
|
|
2016
|
|
|
2016
|
|
|
Purpose
|
|
Classification
|
|
2017
|
|
|
2016
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Hedging instrument
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ineffective cash flow hedge
|
$
|
31
|
|
|
$
|
370
|
|
|
$
|
370
|
|
|
Manage
interest
rate risk
|
|
NA
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
(1.4
|
)
|
|
$
|
0
|
|
|
$
|
(1.3
|
)
|
Non-hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
0
|
|
|
315
|
|
|
0
|
|
|
Manage
portfolio
duration
|
|
Other liabilities
|
|
0
|
|
|
(13.0
|
)
|
|
0
|
|
|
0
|
|
|
1.7
|
|
|
0
|
|
|
(17.8
|
)
|
Closed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
0
|
|
|
435
|
|
|
750
|
|
|
Manage
portfolio
duration
|
|
NA
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0.3
|
|
|
0
|
|
|
(17.0
|
)
|
U.S. Treasury Note futures
|
0
|
|
|
135
|
|
|
135
|
|
|
Manage
portfolio
duration
|
|
NA
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0.1
|
|
|
0
|
|
|
0.3
|
|
Total
|
NA
|
|
|
NA
|
|
|
NA
|
|
|
|
|
|
|
$
|
0
|
|
|
$
|
(13.0
|
)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0.7
|
|
|
$
|
0
|
|
|
$
|
(35.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NA= Not applicable
1
The amounts represent the value held at quarter and year end for open positions and the maximum amount held during the period for closed positions.
2
To the extent we hold both derivative assets and liabilities with the same counterparty that are subject to an enforceable master netting arrangement, we reported them on a gross basis on our balance sheets, consistent with our historical presentation.
CASH FLOW HEDGES
During March
2017
, we entered into a forecasted debt issuance hedge, against a possible rise in interest rates, in conjunction with the
$850 million
of
4.125%
Senior Notes due 2047 issued in April
2017
. Upon issuance, we closed the hedge and recognized, as part of accumulated other comprehensive income, a pretax loss of
$8.0 million
in April
2017
.
During the third quarter 2016, we entered into a
$350 million
forecasted transaction to hedge against a possible rise in interest rates in anticipation of a debt offering under which we issued
$500 million
of
2.45%
Senior Notes due 2027. When the contract was closed, the
$1.4 million
loss on the derivative was immediately recognized as a realized loss. The
$31 million
in 2017 and the remaining
$20 million
in 2016 of our ineffective cash flow hedge resulted from the repurchase of a portion of our
6.70%
Fixed-to-Floating Rate Junior Subordinated Debentures due 2067, and we reclassified the unrealized gain on forecasted transactions to net realized gains on securities. The portion repurchased in
2017
resulted in an immaterial gain.
See
Note 4 – Debt
for further discussion.
INTEREST RATE SWAPS and U.S. TREASURY FUTURES
We use interest rate swaps and treasury futures contracts from time to time to manage the fixed-income portfolio duration. We did
not
hold any interest rate swap positions at
September 30, 2017
or
December 31, 2016
. At
September 30, 2016
, we held interest rate swap positions for which we were paying a fixed rate and receiving a variable rate, effectively shortening the duration of our fixed-income portfolio. As of
September 30, 2016
, the balance of the cash collateral that we delivered to the applicable counterparties on the then open interest rate swaps was
$15.1 million
. We did
not
open any U.S. treasury futures during
2017
. During
2016
, we opened and closed treasury futures;
no
positions were outstanding at the end of the third quarter or year end.
Note 3
Fair Value
— We have categorized our financial instruments, based on the degree of subjectivity inherent in the method by which they are valued, into a fair value hierarchy of three levels, as follows:
|
|
•
|
Level 1
: Inputs are unadjusted quoted prices in active markets for identical instruments at the measurement date (e.g., U.S. government obligations, active exchange-traded equity securities, and certain short-term securities).
|
|
|
•
|
Level 2
: Inputs (other than quoted prices included within Level 1) that are observable for the instrument either directly or indirectly (e.g., certain corporate and municipal bonds and certain preferred stocks). This includes: (i) quoted prices for similar instruments in active markets, (ii) quoted prices for identical or similar instruments in markets that are not active, (iii) inputs other than quoted prices that are observable for the instruments, and (iv) inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
|
•
|
Level 3
: Inputs that are unobservable. Unobservable inputs reflect our subjective evaluation about the assumptions market participants would use in pricing the financial instrument (e.g., certain structured securities and privately held investments).
|
Determining the fair value of the investment portfolio is the responsibility of management. As part of the responsibility, we evaluate whether a market is distressed or inactive in determining the fair value for our portfolio. We review certain market level inputs to evaluate whether sufficient activity, volume, and new issuances exist to create an active market. Based on this evaluation, we concluded that there was sufficient activity related to the sectors and securities for which we obtained valuations.
The composition of the investment portfolio by major security type and our outstanding debt was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
(millions)
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Cost
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
U.S. government obligations
|
$
|
4,595.0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
4,595.0
|
|
|
$
|
4,612.2
|
|
State and local government obligations
|
0
|
|
|
2,364.2
|
|
|
0
|
|
|
2,364.2
|
|
|
2,332.2
|
|
Foreign government obligations
|
24.2
|
|
|
0
|
|
|
0
|
|
|
24.2
|
|
|
24.2
|
|
Corporate debt securities
|
0
|
|
|
5,225.6
|
|
|
0
|
|
|
5,225.6
|
|
|
5,195.7
|
|
Subtotal
|
4,619.2
|
|
|
7,589.8
|
|
|
0
|
|
|
12,209.0
|
|
|
12,164.3
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed
|
0
|
|
|
920.3
|
|
|
0
|
|
|
920.3
|
|
|
911.3
|
|
Agency residential pass-through obligations
|
0
|
|
|
35.3
|
|
|
0
|
|
|
35.3
|
|
|
35.7
|
|
Commercial mortgage-backed
|
0
|
|
|
2,767.9
|
|
|
0
|
|
|
2,767.9
|
|
|
2,763.7
|
|
Other asset-backed
|
0
|
|
|
2,490.2
|
|
|
0
|
|
|
2,490.2
|
|
|
2,485.6
|
|
Subtotal asset-backed securities
|
0
|
|
|
6,213.7
|
|
|
0
|
|
|
6,213.7
|
|
|
6,196.3
|
|
Redeemable preferred stocks:
|
|
|
|
|
|
|
|
|
|
Financials
|
0
|
|
|
63.8
|
|
|
0
|
|
|
63.8
|
|
|
61.4
|
|
Utilities
|
0
|
|
|
31.9
|
|
|
0
|
|
|
31.9
|
|
|
30.5
|
|
Industrials
|
0
|
|
|
141.6
|
|
|
0
|
|
|
141.6
|
|
|
130.6
|
|
Subtotal redeemable preferred stocks
|
0
|
|
|
237.3
|
|
|
0
|
|
|
237.3
|
|
|
222.5
|
|
Total fixed maturities
|
4,619.2
|
|
|
14,040.8
|
|
|
0
|
|
|
18,660.0
|
|
|
18,583.1
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
Nonredeemable preferred stocks:
|
|
|
|
|
|
|
|
|
|
Financials
|
82.2
|
|
|
726.5
|
|
|
0
|
|
|
808.7
|
|
|
695.6
|
|
Industrials
|
0
|
|
|
0
|
|
|
5.0
|
|
|
5.0
|
|
|
5.0
|
|
Subtotal nonredeemable preferred stocks
|
82.2
|
|
|
726.5
|
|
|
5.0
|
|
|
813.7
|
|
|
700.6
|
|
Common equities:
|
|
|
|
|
|
|
|
|
|
Common stocks
|
3,209.2
|
|
|
0
|
|
|
0
|
|
|
3,209.2
|
|
|
1,485.2
|
|
Other risk investments
|
0
|
|
|
0
|
|
|
0.3
|
|
|
0.3
|
|
|
0.3
|
|
Subtotal common equities
|
3,209.2
|
|
|
0
|
|
|
0.3
|
|
|
3,209.5
|
|
|
1,485.5
|
|
Total fixed maturities and equity securities
|
7,910.6
|
|
|
14,767.3
|
|
|
5.3
|
|
|
22,683.2
|
|
|
20,769.2
|
|
Short-term investments
|
3,175.4
|
|
|
1,136.1
|
|
|
0
|
|
|
4,311.5
|
|
|
4,311.5
|
|
Total portfolio
|
$
|
11,086.0
|
|
|
$
|
15,903.4
|
|
|
$
|
5.3
|
|
|
$
|
26,994.7
|
|
|
$
|
25,080.7
|
|
Debt
|
$
|
0
|
|
|
$
|
3,574.6
|
|
|
$
|
43.3
|
|
|
$
|
3,617.9
|
|
|
$
|
3,312.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
(millions)
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Cost
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
U.S. government obligations
|
$
|
734.6
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
734.6
|
|
|
$
|
726.0
|
|
State and local government obligations
|
0
|
|
|
2,566.0
|
|
|
0
|
|
|
2,566.0
|
|
|
2,508.9
|
|
Foreign government obligations
|
25.4
|
|
|
0
|
|
|
0
|
|
|
25.4
|
|
|
25.4
|
|
Corporate debt securities
|
0
|
|
|
4,403.3
|
|
|
0
|
|
|
4,403.3
|
|
|
4,327.5
|
|
Subtotal
|
760.0
|
|
|
6,969.3
|
|
|
0
|
|
|
7,729.3
|
|
|
7,587.8
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed
|
0
|
|
|
1,594.2
|
|
|
0
|
|
|
1,594.2
|
|
|
1,582.6
|
|
Agency residential pass-through obligations
|
0
|
|
|
44.1
|
|
|
0
|
|
|
44.1
|
|
|
43.6
|
|
Commercial mortgage-backed
|
0
|
|
|
2,277.8
|
|
|
0.6
|
|
|
2,278.4
|
|
|
2,249.4
|
|
Other asset-backed
|
0
|
|
|
2,045.4
|
|
|
0
|
|
|
2,045.4
|
|
|
2,037.5
|
|
Subtotal asset-backed securities
|
0
|
|
|
5,961.5
|
|
|
0.6
|
|
|
5,962.1
|
|
|
5,913.1
|
|
Redeemable preferred stocks:
|
|
|
|
|
|
|
|
|
|
Financials
|
0
|
|
|
95.7
|
|
|
0
|
|
|
95.7
|
|
|
77.1
|
|
Utilities
|
0
|
|
|
30.4
|
|
|
0
|
|
|
30.4
|
|
|
30.6
|
|
Industrials
|
0
|
|
|
99.4
|
|
|
0
|
|
|
99.4
|
|
|
99.4
|
|
Subtotal redeemable preferred stocks
|
0
|
|
|
225.5
|
|
|
0
|
|
|
225.5
|
|
|
207.1
|
|
Total fixed maturities
|
760.0
|
|
|
13,156.3
|
|
|
0.6
|
|
|
13,916.9
|
|
|
13,708.0
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
Nonredeemable preferred stocks:
|
|
|
|
|
|
|
|
|
|
Financials
|
154.6
|
|
|
705.5
|
|
|
0
|
|
|
860.1
|
|
|
726.6
|
|
Industrials
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Subtotal nonredeemable preferred stocks
|
154.6
|
|
|
705.5
|
|
|
0
|
|
|
860.1
|
|
|
726.6
|
|
Common equities:
|
|
|
|
|
|
|
|
|
|
Common stocks
|
2,867.6
|
|
|
0
|
|
|
0
|
|
|
2,867.6
|
|
|
1,575.7
|
|
Other risk investments
|
0
|
|
|
0
|
|
|
0.4
|
|
|
0.4
|
|
|
0.4
|
|
Subtotal common equities
|
2,867.6
|
|
|
0
|
|
|
0.4
|
|
|
2,868.0
|
|
|
1,576.1
|
|
Total fixed maturities and equity securities
|
3,782.2
|
|
|
13,861.8
|
|
|
1.0
|
|
|
17,645.0
|
|
|
16,010.7
|
|
Short-term investments
|
5,051.5
|
|
|
824.7
|
|
|
0
|
|
|
5,876.2
|
|
|
5,876.2
|
|
Total portfolio
|
$
|
8,833.7
|
|
|
$
|
14,686.5
|
|
|
$
|
1.0
|
|
|
$
|
23,521.2
|
|
|
$
|
21,886.9
|
|
Debt
|
$
|
0
|
|
|
$
|
3,371.6
|
|
|
$
|
133.6
|
|
|
$
|
3,505.2
|
|
|
$
|
3,153.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
(millions)
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Cost
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
U.S. government obligations
|
$
|
2,870.1
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
2,870.1
|
|
|
$
|
2,899.2
|
|
State and local government obligations
|
0
|
|
|
2,502.6
|
|
|
0
|
|
|
2,502.6
|
|
|
2,509.5
|
|
Foreign government obligations
|
24.5
|
|
|
0
|
|
|
0
|
|
|
24.5
|
|
|
24.5
|
|
Corporate debt securities
|
0
|
|
|
4,550.9
|
|
|
0
|
|
|
4,550.9
|
|
|
4,557.8
|
|
Subtotal
|
2,894.6
|
|
|
7,053.5
|
|
|
0
|
|
|
9,948.1
|
|
|
9,991.0
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed
|
0
|
|
|
1,458.7
|
|
|
0
|
|
|
1,458.7
|
|
|
1,448.5
|
|
Agency residential pass-through obligations
|
0
|
|
|
40.6
|
|
|
0
|
|
|
40.6
|
|
|
41.2
|
|
Commercial mortgage-backed
|
0
|
|
|
2,253.1
|
|
|
0.3
|
|
|
2,253.4
|
|
|
2,266.9
|
|
Other asset-backed
|
0
|
|
|
2,351.1
|
|
|
0
|
|
|
2,351.1
|
|
|
2,350.7
|
|
Subtotal asset-backed securities
|
0
|
|
|
6,103.5
|
|
|
0.3
|
|
|
6,103.8
|
|
|
6,107.3
|
|
Redeemable preferred stocks:
|
|
|
|
|
|
|
|
|
|
Financials
|
0
|
|
|
59.5
|
|
|
0
|
|
|
59.5
|
|
|
59.8
|
|
Utilities
|
0
|
|
|
30.9
|
|
|
0
|
|
|
30.9
|
|
|
30.5
|
|
Industrials
|
0
|
|
|
101.5
|
|
|
0
|
|
|
101.5
|
|
|
98.5
|
|
Subtotal redeemable preferred stocks
|
0
|
|
|
191.9
|
|
|
0
|
|
|
191.9
|
|
|
188.8
|
|
Total fixed maturities
|
2,894.6
|
|
|
13,348.9
|
|
|
0.3
|
|
|
16,243.8
|
|
|
16,287.1
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
Nonredeemable preferred stocks:
|
|
|
|
|
|
|
|
|
|
Financials
|
138.1
|
|
|
715.4
|
|
|
0
|
|
|
853.5
|
|
|
734.2
|
|
Industrials
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Subtotal nonredeemable preferred stocks
|
138.1
|
|
|
715.4
|
|
|
0
|
|
|
853.5
|
|
|
734.2
|
|
Common equities:
|
|
|
|
|
|
|
|
|
|
Common stocks
|
2,812.0
|
|
|
0
|
|
|
0
|
|
|
2,812.0
|
|
|
1,437.1
|
|
Other risk investments
|
0
|
|
|
0
|
|
|
0.4
|
|
|
0.4
|
|
|
0.4
|
|
Subtotal common equities
|
2,812.0
|
|
|
0
|
|
|
0.4
|
|
|
2,812.4
|
|
|
1,437.5
|
|
Total fixed maturities and equity securities
|
5,844.7
|
|
|
14,064.3
|
|
|
0.7
|
|
|
19,909.7
|
|
|
18,458.8
|
|
Short-term investments
|
3,009.3
|
|
|
563.6
|
|
|
0
|
|
|
3,572.9
|
|
|
3,572.9
|
|
Total portfolio
|
$
|
8,854.0
|
|
|
$
|
14,627.9
|
|
|
$
|
0.7
|
|
|
$
|
23,482.6
|
|
|
$
|
22,031.7
|
|
Debt
|
$
|
0
|
|
|
$
|
3,188.5
|
|
|
$
|
127.3
|
|
|
$
|
3,315.8
|
|
|
$
|
3,148.2
|
|
Our portfolio valuations, excluding short-term investments, classified as either Level 1 or Level 2 in the above tables are priced exclusively by external sources, including: pricing vendors, dealers/market makers, and exchange-quoted prices. We did
not
have any transfers between Level 1 and Level 2 during
2017
or
2016
. We recognize transfers between levels at the end of the reporting period.
Our short-term security holdings classified as Level 1 are highly liquid, actively marketed, and have a very short duration, primarily 30 days or less to redemption. These securities are held at their original cost, adjusted for any accretion of discount, since that value very closely approximates what an active market participant would be willing to pay for such securities. The remainder of our short-term securities are classified as Level 2 and are not priced externally since these securities continually trade at par value. These securities are classified as Level 2 since they are primarily longer-dated auction securities issued by municipalities that contain a redemption put feature back to the auction pool with a redemption period typically less than seven days. The auction pool is created by a liquidity provider and if the auction is not available at the end of the seven days, we have the right to put the security back to the issuer at par.
At
September 30, 2017
, vendor-quoted prices represented
59%
of our Level 1 classifications (excluding short-term investments), compared to
24%
and
52%
at
September 30, 2016
and
December 31, 2016
, respectively. The securities quoted by vendors in Level 1 primarily represent our holdings in U.S. Treasury Notes, which are frequently traded, and the quotes are considered similar to exchange-traded quotes. The balance of our Level 1 pricing comes from quotes obtained directly from trades made on active exchanges.
At
September 30, 2017
and
2016
, and
December 31, 2016
, vendor-quoted prices comprised
98%
,
99%
, and
99%
, respectively, of our Level 2 classifications (excluding short-term investments), while dealer-quoted prices represented
2%
,
1%
, and
1%
, respectively. In our process for selecting a source (e.g., dealer, pricing service) to provide pricing for securities in our portfolio, we reviewed documentation from the sources that detailed the pricing techniques and methodologies used by these sources and determined if their policies adequately considered market activity, either based on specific transactions for the particular security type or based on modeling of securities with similar credit quality, duration, yield, and structure that were recently transacted. Once a source is chosen, we continue to monitor any changes or modifications to their processes by reviewing their documentation on internal controls for pricing and market reviews. We review quality control measures of our sources as they become available to determine if any significant changes have occurred from period to period that might indicate issues or concerns regarding their evaluation or market coverage.
As part of our pricing procedures, we obtain quotes from more than one source to help us fully evaluate the market price of securities. However, our internal pricing policy is to use a consistent source for individual securities in order to maintain the integrity of our valuation process. Quotes obtained from the sources are not considered binding offers to transact. Under our policy, when a review of the valuation received from our selected source appears to be outside of what is considered market level activity (which is defined as trading at spreads or yields significantly different than those of comparable securities or outside the general sector level movement without a reasonable explanation), we may use an alternate source’s price. To the extent we determine that it may be prudent to substitute one source’s price for another, we will contact the initial source to obtain an understanding of the factors that may be contributing to the significant price variance, which often leads the source to adjust their pricing input data for future pricing.
To allow us to determine if our initial source is providing a price that is outside of a reasonable range, we review our portfolio pricing on a weekly basis. When necessary, we challenge prices from our sources when a price provided does not match our expectations based on our evaluation of market trends and activity. Initially, we perform a review of our portfolio by sector to identify securities whose prices appear outside of a reasonable range. We then perform a more detailed review of fair values for securities disclosed as Level 2. We review dealer bids and quotes for these and/or similar securities to determine the market level context for our valuations. We then evaluate inputs relevant for each class of securities disclosed in the preceding hierarchy tables.
For our structured debt securities, including commercial, residential, and asset-backed securities, we evaluate available market-related data for these and similar securities related to collateral, delinquencies, and defaults for historical trends and reasonably estimable projections, as well as historical prepayment rates and current prepayment assumptions and cash flow estimates. We further stratify each class of our structured debt securities into more finite sectors (e.g., planned amortization class, first pay, second pay, senior, subordinated, etc.) and use duration, credit quality, and coupon to determine if the fair value is appropriate.
For our corporate debt and preferred stock (redeemable and nonredeemable) portfolios, as well as the notes and debentures issued by The Progressive Corporation (see
Note 4
–
Debt
), we review securities by duration, coupon, and credit quality, as well as changes in interest rate and credit spread movements within that stratification. The review also includes recent trades, including: volume traded at various levels that establish a market, issuer specific fundamentals, and industry specific economic news as it comes to light.
For our municipal securities (e.g., general obligations, revenue, and housing), we stratify the portfolio to evaluate securities by type, coupon, credit quality, and duration to review price changes relative to credit spread and interest rate changes. Additionally, we look to economic data as it relates to geographic location as an indication of price-to-call or maturity predictors. For municipal housing securities, we look to changes in cash flow projections, both historical and reasonably estimable projections, to understand yield changes and their effect on valuation.
Lastly, for our short-term securities, we look at acquisition price relative to the coupon or yield. Since our short-term securities are typically 90 days or less to maturity, with the majority listed in Level 2 being seven days or less to redemption, we believe that acquisition price is the best estimate of fair value.
We also review data assumptions as supplied by our sources to determine if that data is relevant to current market conditions. In addition, we independently review each sector for transaction volumes, new issuances, and changes in spreads, as well as the overall movement of interest rates along the yield curve to determine if sufficient activity and liquidity exists to provide a credible source for our market valuations.
During each valuation period, we create internal estimations of portfolio valuation (performance returns), based on current market-related activity (i.e., interest rate and credit spread movements and other credit-related factors) within each major sector of our portfolio. We compare our internally generated portfolio results with those generated based on quotes we receive externally and research material valuation differences. We compare our results to index returns for each major sector adjusting for duration and credit quality differences to better understand our portfolio’s results. Additionally, we review on a monthly basis our external sales transactions and compare the actual final market sales prices to previous market valuation prices. This review provides us further validation that our pricing sources are providing market level prices, since we are able to explain significant price changes (i.e., greater than 2%) as known events occur in the marketplace and affect a particular security’s price at sale.
This analysis provides us with additional comfort regarding the source’s process, the quality of its review, and its willingness to improve its analysis based on feedback from clients. We believe this effort helps ensure that we are reporting the most representative fair values for our securities.
Except as described below, our Level 3 securities are also priced externally; however, due to several factors (e.g., nature of the securities, level of activity, and lack of similar securities trading to obtain observable market level inputs), these valuations are more subjective in nature. Certain private equity investments and fixed-income investments included in the Level 3 category are valued using external pricing supplemented by internal review and analysis.
After all the valuations are received and our review is complete, if the inputs used by vendors are determined to not contain sufficient observable market information, we will reclassify the affected security valuations to Level 3. At
September 30, 2017
and
2016
, and
December 31, 2016
, securities in our fixed-maturity portfolio listed as Level 3 were comprised substantially of securities that were either: (i) private placements, (ii) thinly held and/or traded securities, or (iii) non-investment-grade or non-rated securities with little liquidity. Based on these factors, it was difficult to independently verify observable market inputs that were used to generate the external valuations we received. Despite the lack of sufficient observable market information for our Level 3 securities, we believe the valuations received in conjunction with our procedures for evaluating third-party prices support the fair values reported in the financial statements.
At
September 30, 2017
, we held
one
private nonredeemable preferred security with a value of
$5.0 million
that was priced internally. The security was purchased during the third quarter
2017
and the value at
September 30, 2017
equals the cost at acquisition. We did
not
hold any internally-priced securities at
September 30, 2016
or
December 31, 2016
.
We review the prices from our external sources for reasonableness using internally developed assumptions to derive prices for the securities, which are then compared to the prices we received. During
2017
or
2016
, there were no material assets or liabilities measured at fair value on a nonrecurring basis. Based on our review, all prices received from external sources remained unadjusted.
The following tables provide a summary of changes in fair value associated with Level 3 assets for the
three and nine
months ended
September 30, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Fair Value
|
|
Three Months Ended September 30, 2017
|
(millions)
|
Fair Value at June 30, 2017
|
|
|
Calls/
Maturities/
Paydowns
|
|
|
Purchases
|
|
|
Sales
|
|
|
Net Realized (Gain) Loss on Sales
|
|
|
Change in Valuation
|
|
|
Net
Transfers
In (Out)
|
|
|
Fair Value at September 30, 2017
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage-backed
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Total fixed maturities
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonredeemable preferred stocks:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrials
|
0
|
|
|
0
|
|
|
5.0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
5.0
|
|
Common equities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other risk investments
|
0.3
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0.3
|
|
Total Level 3 securities
|
$
|
0.3
|
|
|
$
|
0
|
|
|
$
|
5.0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
5.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Fair Value
|
|
Nine months ended September 30, 2017
|
(millions)
|
Fair Value at Dec. 31, 2016
|
|
|
Calls/
Maturities/
Paydowns
|
|
|
Purchases
|
|
|
Sales
|
|
|
Net Realized (Gain) Loss on Sales
|
|
|
Change in Valuation
|
|
|
Net
Transfers
In (Out)
|
|
|
Fair Value at September 30, 2017
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage-backed
|
$
|
0.3
|
|
|
$
|
(0.3
|
)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Total fixed maturities
|
0.3
|
|
|
(0.3
|
)
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonredeemable preferred stocks:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrials
|
0
|
|
|
0
|
|
|
5.0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
5.0
|
|
Common equities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other risk investments
|
0.4
|
|
|
(0.1
|
)
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0.3
|
|
Total Level 3 securities
|
$
|
0.7
|
|
|
$
|
(0.4
|
)
|
|
$
|
5.0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
5.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Fair Value
|
|
Three Months Ended September 30, 2016
|
(millions)
|
Fair Value at June 30, 2016
|
|
|
Calls/
Maturities/
Paydowns
|
|
|
Purchases
|
|
|
Sales
|
|
|
Net Realized (Gain) Loss on Sales
|
|
|
Change in
Valuation
|
|
|
Net
Transfers
In (Out)
|
|
|
Fair Value at September 30, 2016
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage-backed
|
$
|
9.2
|
|
|
$
|
(8.7
|
)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0.1
|
|
|
$
|
0
|
|
|
$
|
0.6
|
|
Total fixed maturities
|
9.2
|
|
|
(8.7
|
)
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0.1
|
|
|
0
|
|
|
0.6
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonredeemable preferred stocks:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrials
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Common equities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other risk investments
|
0.3
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0.1
|
|
|
0
|
|
|
0.4
|
|
Total Level 3 securities
|
$
|
9.5
|
|
|
$
|
(8.7
|
)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0.2
|
|
|
$
|
0
|
|
|
$
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Fair Value
|
|
Nine months ended September 30, 2016
|
(millions)
|
Fair Value at Dec. 31, 2015
|
|
|
Calls/
Maturities/
Paydowns
|
|
|
Purchases
|
|
|
Sales
|
|
|
Net Realized (Gain) Loss on Sales
|
|
|
Change in
Valuation
|
|
|
Net
Transfers
In (Out)
|
|
|
Fair Value at September 30, 2016
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage-backed
|
$
|
9.9
|
|
|
$
|
(9.3
|
)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0.6
|
|
Total fixed maturities
|
9.9
|
|
|
(9.3
|
)
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0.6
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonredeemable preferred stocks:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrials
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Common equities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other risk investments
|
0.3
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0.1
|
|
|
0
|
|
|
0.4
|
|
Total Level 3 securities
|
$
|
10.2
|
|
|
$
|
(9.3
|
)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0.1
|
|
|
$
|
0
|
|
|
$
|
1.0
|
|
The following tables provide a summary of the quantitative information about Level 3 fair value measurements for our applicable securities at
September 30, 2017
and
2016
, and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Quantitative Information about Level 3 Fair Value Measurements
|
($ in millions)
|
Fair Value at September 30, 2017
|
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Unobservable
Input Assumption
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
Commercial mortgage-backed
|
$
|
0
|
|
|
NA
|
|
NA
|
|
NA
|
|
Total fixed maturities
|
0
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
Nonredeemable preferred stocks:
|
|
|
|
|
|
|
|
Industrials
1
|
5.0
|
|
|
Internal price
|
|
Purchase price
|
|
3.9
|
|
Subtotal Level 3 securities
|
5.0
|
|
|
|
|
|
|
|
Pricing exemption securities
2
|
0.3
|
|
|
|
|
|
|
|
Total Level 3 securities
|
$
|
5.3
|
|
|
|
|
|
|
|
NA= Not applicable, since we did
not
hold any commercial mortgage-backed Level 3 securities at
September 30, 2017
.
1
The security was internally-priced since it is privately held and it was valued at
September 30, 2017
using the purchase price.
2
The fair values for these securities were determined with unobservable inputs not reasonably available to us.
|
|
|
|
|
|
|
|
|
|
|
|
|
Quantitative Information about Level 3 Fair Value Measurements
|
($ in millions)
|
Fair Value at September 30, 2016
|
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Unobservable
Input Assumption
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
Commercial mortgage-backed
|
$
|
0.6
|
|
|
External vendor
|
|
Prepayment rate
1
|
|
0
|
%
|
Total fixed maturities
|
0.6
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
Nonredeemable preferred stocks:
|
|
|
|
|
|
|
|
Industrials
|
0
|
|
|
NA
|
|
NA
|
|
NA
|
|
Subtotal Level 3 securities
|
0.6
|
|
|
|
|
|
|
|
Pricing exemption securities
2
|
0.4
|
|
|
|
|
|
|
|
Total Level 3 securities
|
$
|
1.0
|
|
|
|
|
|
|
|
NA= Not applicable, since we did
not
hold any nonredeemable preferred stock Level 3 securities at
September 30, 2016
.
1
Assumes that
one
security has
0%
of the principal amount of the underlying loans that will be paid off prematurely in each year.
2
The fair values for these securities were determined with unobservable inputs not reasonably available to us.
|
|
|
|
|
|
|
|
|
|
|
|
|
Quantitative Information about Level 3 Fair Value Measurements
|
($ in millions)
|
Fair Value at Dec. 31, 2016
|
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Unobservable
Input Assumption
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
Commercial mortgage-backed
|
$
|
0.3
|
|
|
External vendor
|
|
Prepayment rate
1
|
|
0
|
%
|
Total fixed maturities
|
0.3
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
Nonredeemable preferred stocks:
|
|
|
|
|
|
|
|
Industrials
|
0
|
|
|
NA
|
|
NA
|
|
NA
|
|
Subtotal Level 3 securities
|
0.3
|
|
|
|
|
|
|
|
Pricing exemption securities
2
|
0.4
|
|
|
|
|
|
|
|
Total Level 3 securities
|
$
|
0.7
|
|
|
|
|
|
|
|
NA= Not applicable, since we did
not
hold any nonredeemable preferred stock Level 3 securities at
December 31, 2016
.
1
Assumes that
one
security has
0%
of the principal amount of the underlying loans that will be paid off prematurely in each year.
2
The fair values for these securities were determined with unobservable inputs not reasonably available to us.
Due to the relative size of the Level 3 securities’ fair values compared to the total portfolio’s fair value, any changes in pricing methodology would not have a significant change in valuation that would materially impact net or comprehensive income.
Note 4
Debt
— Debt at each of the balance sheet periods consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
September 30, 2016
|
|
December 31, 2016
|
(millions)
|
Carrying
Value
|
|
Fair
Value
|
|
Carrying
Value
|
|
Fair
Value
|
|
Carrying
Value
|
|
Fair
Value
|
3.75% Senior Notes due 2021
|
$
|
498.7
|
|
|
$
|
525.7
|
|
|
$
|
498.4
|
|
|
$
|
544.2
|
|
|
$
|
498.4
|
|
|
$
|
528.8
|
|
2.45% Senior Notes due 2027
|
496.0
|
|
|
475.3
|
|
|
495.6
|
|
|
497.5
|
|
|
495.8
|
|
|
464.6
|
|
6 5/8% Senior Notes due 2029
|
296.0
|
|
|
388.3
|
|
|
295.8
|
|
|
402.6
|
|
|
295.9
|
|
|
380.1
|
|
6.25% Senior Notes due 2032
|
395.3
|
|
|
518.7
|
|
|
395.1
|
|
|
533.3
|
|
|
395.2
|
|
|
499.0
|
|
4.35% Senior Notes due 2044
|
346.5
|
|
|
379.8
|
|
|
346.4
|
|
|
403.0
|
|
|
346.4
|
|
|
362.3
|
|
3.70% Senior Notes due 2045
|
395.2
|
|
|
392.6
|
|
|
395.1
|
|
|
418.7
|
|
|
395.1
|
|
|
372.5
|
|
4.125% Senior Notes due 2047
|
841.2
|
|
|
894.2
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
6.70% Fixed-to-Floating Rate Junior Subordinated Debentures due 2067
|
0
|
|
|
0
|
|
|
593.9
|
|
|
572.3
|
|
|
594.1
|
|
|
581.2
|
|
Other debt instruments
|
43.3
|
|
|
43.3
|
|
|
133.6
|
|
|
133.6
|
|
|
127.3
|
|
|
127.3
|
|
Total
|
$
|
3,312.2
|
|
|
$
|
3,617.9
|
|
|
$
|
3,153.9
|
|
|
$
|
3,505.2
|
|
|
$
|
3,148.2
|
|
|
$
|
3,315.8
|
|
The other debt instruments reported in the table above represent ARX indebtedness and consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
September 30, 2016
|
|
December 31, 2016
|
|
($ in millions)
Type of debt instrument
|
Number of Instruments
|
|
|
Carrying
Value
|
|
|
Number of Instruments
|
|
|
Carrying
Value
|
|
|
Number of Instruments
|
|
|
Carrying
Value
|
|
Stated Maturity Date(s)
|
Term loans
|
2
|
|
|
$
|
43.3
|
|
|
2
|
|
|
$
|
68.4
|
|
|
2
|
|
|
$
|
62.1
|
|
December 2018 and 2019
|
Junior subordinated notes
1
|
0
|
|
|
0
|
|
|
2
|
|
|
41.2
|
|
|
2
|
|
|
41.2
|
|
June 2036 and 2037
|
Senior notes
1
|
0
|
|
|
0
|
|
|
4
|
|
|
24.0
|
|
|
4
|
|
|
24.0
|
|
Various
2
|
Total
|
|
|
$
|
43.3
|
|
|
|
|
$
|
133.6
|
|
|
|
|
$
|
127.3
|
|
|
1
The notes were redeemed during the third quarter 2017 (discussed below).
2
The senior notes original maturity dates were May 2033, April 2034, December 2034, and June 2035.
The Progressive Corporation Debt
During the second quarter of 2017, we issued
$850 million
of
4.125%
Senior Notes due 2047 (the “
4.125%
Senior Notes”) in an underwritten public offering. We received proceeds, after deducting underwriter’s discounts, commissions and other issuance costs, of approximately
$841.1 million
. In addition, upon issuance of the
4.125%
Senior Notes, we closed a forecasted debt issuance hedge, which was entered into to hedge against a possible rise in interest rates, and recognized an
$8.0 million
pretax loss as part of accumulated other comprehensive income (loss); the loss will be recognized as an adjustment to interest expense and amortized over the life of the
4.125%
Senior Notes.
During the second quarter 2017, we redeemed our
6.70%
Fixed-to-Floating Rate Junior Subordinated Debentures due 2067 (the
“
6.70%
Debentures”), at par, in the aggregate principal amount of
$563.7 million
. During the first quarter of 2017 and the full year 2016, we repurchased, in the open market,
$30.9 million
and
$19.8 million
, respectively, in aggregate principal amount of our
6.70%
Debentures. Since the carrying value of the debt we repurchased differed from the amount paid to extinguish the debt, we recognized a gain of
$0.2 million
during the first quarter 2017 and
$1.6 million
in 2016.
During the third quarter 2016, we issued
$500 million
of our
2.45%
Senior Notes due 2027 in an underwritten public offering. We received proceeds, after deducting underwriter’s discounts, commissions, and other issuance costs, of approximately
$495.6 million
.
Consistent with the other senior notes issued by Progressive, interest on the
4.125%
Senior Notes and the
2.45%
Senior Notes is payable semiannually and both notes are redeemable, in whole or in part, at any time.
ARX Debt (i.e., Other debt instruments)
The other debt instruments were issued by ARX, prior to The Progressive Corporation acquiring a controlling interest in 2015. ARX, not The Progressive Corporation or any of its other subsidiaries, is responsible for the other debt, which includes amounts that were borrowed and contributed to the capital of ARX’s insurance subsidiaries or used, or made available for use, for other business purposes.
In estimating the fair values of the other debt instruments, it was determined that the fair values of these notes are substantially equal to their carrying values, based on the current rates offered for debt of similar maturities and interest rates.
During the third quarter 2017, ARX redeemed their junior subordinated notes and senior notes, in their entirety, in the aggregate principal amount of
$65.2 million
, with proceeds from a
5
-year, fixed-rate loan made by The Progressive Corporation to fund the redemptions; this intercompany transaction was eliminated in consolidation.
The Progressive Corporation Line of Credit
During the second quarter 2017, The Progressive Corporation entered into a new line of credit with PNC Bank, National Association (PNC) in the maximum principal amount of
$250 million
. This line of credit replaced a previous line of credit with a maximum principal amount of
$100 million
that expired in the second quarter 2017. Subject to the terms and conditions of the line of credit documents, advances under the line of credit (if any) will bear interest at a variable rate equal to the higher of PNC’s Prime Rate or the sum of the Federal Funds Open Rate plus 50 basis points. Each advance must be repaid on the
30
th day after the advance or, if earlier, on April 30, 2018, the expiration date of the line of credit. Prepayments are permitted without penalty. All advances under the line of credit are subject to PNC’s discretion. We had
no
borrowings under either line of credit during the first nine months of 2017 or throughout 2016.
Note 5
Income Taxes
— At
September 30, 2017
and
2016
, and
December 31, 2016
, we determined that we did
not
need a valuation allowance on our gross deferred tax assets. Although realization of the deferred tax assets is not assured, management believes that it is more likely than not that the deferred tax assets will be realized based on our expectation that we will be able to fully utilize the deductions that are ultimately recognized for tax purposes. For the
nine months ended
September 30, 2017
, there have been no material changes in our uncertain tax positions.
The effective tax rates for the three and nine months ended September 30, 2017, were
14.6%
and
29.7%
, respectively, compared to
20.5%
and
29.4%
for the same periods in 2016. On January 1, 2017, we began recording the excess tax benefits from stock-based compensation to the tax provision in accordance with the adoption of the new accounting standard update (see
Note 14 – New Accounting Standards
for additional discussion). Previously these benefits were recorded directly to paid-in capital. In addition, during the third quarter of both 2017 and 2016, we recorded the ratable portion of the tax benefits related to federal renewable energy tax credit fund investments that were entered into during the periods.
Note 6
Loss and Loss Adjustment Expense Reserves
— Activity in the loss and loss adjustment expense reserves during the nine month periods is summarized as follows:
|
|
|
|
|
|
|
|
|
|
September 30,
|
(millions)
|
2017
|
|
2016
|
Balance, Beginning of period
|
$
|
11,368.0
|
|
|
$
|
10,039.0
|
|
Less reinsurance recoverables on unpaid losses
|
1,801.0
|
|
|
1,442.7
|
|
Net balance, Beginning of period
|
9,567.0
|
|
|
8,596.3
|
|
Net loss and loss adjustment expense reserves disposed
1
|
0
|
|
|
(2.5
|
)
|
Total beginning reserves
|
9,567.0
|
|
|
8,593.8
|
|
Incurred related to:
|
|
|
|
Current year
|
13,886.3
|
|
|
12,577.5
|
|
Prior years
|
42.5
|
|
|
(22.9
|
)
|
Total incurred
|
13,928.8
|
|
|
12,554.6
|
|
Paid related to:
|
|
|
|
Current year
|
8,379.4
|
|
|
7,768.2
|
|
Prior years
|
4,387.8
|
|
|
3,986.2
|
|
Total paid
|
12,767.2
|
|
|
11,754.4
|
|
Net balance, End of period
|
10,728.6
|
|
|
9,394.0
|
|
Plus reinsurance recoverables on unpaid losses
|
2,624.7
|
|
|
1,834.2
|
|
Balance, End of period
|
$
|
13,353.3
|
|
|
$
|
11,228.2
|
|
1
During 2016,
$2.5 million
net reserves were disposed by ARX in an exchange transaction.
We experienced unfavorable reserve development of
$42.5 million
and favorable reserve development of
$22.9 million
for the first nine months of 2017 and 2016, respectively, which is reflected as “Incurred related to prior years
”
in the table above.
Year-to-date 2017
|
|
•
|
Approximately
$51 million
of unfavorable prior year reserve development was attributable to accident years 2016 and 2015. This unfavorable development was partially offset by
$8 million
of favorable development attributable to accident year 2014 and prior accident years.
|
|
|
•
|
Our personal auto businesses incurred
$76 million
of unfavorable loss and loss adjustment expense (LAE) reserve development for the first nine months of 2017, primarily in the Agency business, in part reflecting an increase in costs related to property damage and higher LAE costs.
|
|
|
•
|
Our Property business experienced
$24 million
in favorable development primarily due to the identification of prior year losses eligible to be ceded under our catastrophe bond reinsurance program and lower severity and frequency than anticipated for accident year 2016.
|
|
|
•
|
The remaining favorable development for the first nine months was attributable to both our special lines and commercial auto products.
|
Year-to-date 2016
|
|
•
|
Approximately
$30 million
of the favorable prior year reserve development was attributable to accident year 2015, partially offset by
$26 million
of unfavorable development attributable to accident year 2014; we had favorable development for 2013 and prior accident years.
|
|
|
•
|
Our Personal Lines and Property businesses incurred
$9 million
and
$46 million
, respectively, of favorable loss and LAE reserve development for the first nine months of 2016, partially offset by the unfavorable loss and LAE reserve development in our Commercial Lines business of
$31 million
. In our Property business, both the severity and frequency of late reported claims was less than anticipated.
|
|
|
•
|
Our personal auto product favorable development was in our Direct auto businesses.
|
|
|
•
|
Our personal auto and Commercial Lines businesses incurred unfavorable IBNR loss reserve development, primarily due to a higher severity and frequency of late reported claims than anticipated for accident year 2015, driven in part by storms in late December 2015, resulting in a greater number of claims being reported in January 2016 than anticipated.
|
|
|
•
|
In addition, our Commercial Lines business experienced unfavorable case reserve development for accident year 2014 primarily due to a higher severity than anticipated on our largest limits, while case reserve development for accident years 2015 and 2013 and prior was favorable.
|
Note 7
Supplemental Cash Flow Information
— Cash includes only bank demand deposits. We paid the following in the respective periods:
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
(millions)
|
2017
|
|
|
2016
|
|
Income taxes
|
$
|
538.7
|
|
|
$
|
380.8
|
|
Interest
|
107.4
|
|
|
98.0
|
|
Restricted cash on our consolidated balance sheets represents cash that is restricted to pay flood claims under the National Flood Insurance Program’s “Write Your Own
”
program, for which American Strategic Insurance and other subsidiaries of ARX (ASI) are administrators.
The cash transferred in the exchange transaction, which occurred in June 2016, was revised to correct the reclassification of a non-cash transaction; there was no overall impact on the decrease in cash that was reported in our consolidated statement of cash flows for the nine months ended September 30, 2016.
Note 8
Segment Information
— Our Personal Lines segment writes insurance for personal autos and recreational vehicles (our special lines products). Our Commercial Lines segment writes primary liability and physical damage insurance for automobiles and trucks owned and/or operated predominantly by small businesses in the business auto, for-hire transportation, contractor, for-hire specialty, tow, and for-hire livery markets. Our Property segment writes residential property insurance for homeowners, other property owners, and renters. Our other indemnity businesses manage our run-off businesses. Our service businesses provide insurance-related services, including processing Commercial Automobile Insurance Procedures/Plans (CAIP) business and serving as an agent for homeowners, general liability, and workers’ compensation insurance through our programs with ASI and unaffiliated insurance companies. All segment revenues are generated from external customers; all intercompany transactions, including those between Progressive and ASI, are eliminated in consolidation.
Following are the operating results for the respective periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
(millions)
|
Revenues
|
|
Pretax
Profit
(Loss)
|
|
Revenues
|
|
Pretax
Profit
(Loss)
|
|
Revenues
|
|
Pretax
Profit
(Loss)
|
|
Revenues
|
|
Pretax
Profit
(Loss)
|
Personal Lines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
$
|
2,840.0
|
|
|
$
|
69.5
|
|
|
$
|
2,474.3
|
|
|
$
|
98.6
|
|
|
$
|
8,224.0
|
|
|
$
|
524.7
|
|
|
$
|
7,245.5
|
|
|
$
|
354.5
|
|
Direct
|
2,734.8
|
|
|
128.7
|
|
|
2,391.2
|
|
|
84.4
|
|
|
7,908.5
|
|
|
466.7
|
|
|
6,946.7
|
|
|
237.5
|
|
Total Personal Lines
1
|
5,574.8
|
|
|
198.2
|
|
|
4,865.5
|
|
|
183.0
|
|
|
16,132.5
|
|
|
991.4
|
|
|
14,192.2
|
|
|
592.0
|
|
Commercial Lines
|
714.0
|
|
|
42.8
|
|
|
630.2
|
|
|
4.4
|
|
|
2,031.2
|
|
|
166.4
|
|
|
1,772.4
|
|
|
96.7
|
|
Property
2
|
255.2
|
|
|
(69.0
|
)
|
|
227.7
|
|
|
10.4
|
|
|
720.3
|
|
|
(57.5
|
)
|
|
638.0
|
|
|
(27.7
|
)
|
Other indemnity
|
0
|
|
|
0
|
|
|
0
|
|
|
(0.8
|
)
|
|
0
|
|
|
(0.3
|
)
|
|
0
|
|
|
(1.6
|
)
|
Total underwriting operations
|
6,544.0
|
|
|
172.0
|
|
|
5,723.4
|
|
|
197.0
|
|
|
18,884.0
|
|
|
1,100.0
|
|
|
16,602.6
|
|
|
659.4
|
|
Fees and other revenues
3
|
96.3
|
|
|
NA
|
|
|
86.8
|
|
|
NA
|
|
|
270.3
|
|
|
NA
|
|
|
248.2
|
|
|
NA
|
|
Service businesses
|
33.3
|
|
|
4.4
|
|
|
26.2
|
|
|
3.0
|
|
|
94.5
|
|
|
12.7
|
|
|
77.7
|
|
|
9.2
|
|
Investments
4
|
118.2
|
|
|
112.4
|
|
|
98.6
|
|
|
93.8
|
|
|
470.2
|
|
|
452.2
|
|
|
381.7
|
|
|
366.8
|
|
Gains on extinguishment of debt
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0.2
|
|
|
0.2
|
|
|
1.6
|
|
|
1.6
|
|
Interest expense
|
NA
|
|
|
(37.4
|
)
|
|
NA
|
|
|
(35.3
|
)
|
|
NA
|
|
|
(117.6
|
)
|
|
NA
|
|
|
(103.8
|
)
|
Consolidated total
|
$
|
6,791.8
|
|
|
$
|
251.4
|
|
|
$
|
5,935.0
|
|
|
$
|
258.5
|
|
|
$
|
19,719.2
|
|
|
$
|
1,447.5
|
|
|
$
|
17,311.8
|
|
|
$
|
933.2
|
|
NA = Not applicable
1
Personal auto insurance accounted for
93%
of the total Personal Lines segment net premiums earned in the three and
nine months
ended
September 30, 2017
, and
92%
for the same periods in
2016
; insurance for our special lines products (e.g., motorcycles, watercraft, and RVs) accounted for the balance of the Personal Lines net premiums earned.
2
For the three and nine months ended
September 30, 2017
, pretax profit (loss) includes
$17.2 million
and
$48.2 million
, respectively, of amortization expense predominately associated with the acquisition of a controlling interest in ARX and
$15.5 million
and
$46.6 million
for the same periods in 2016.
3
Pretax profit (loss) for fees and other revenues are attributable to operating segments.
4
Revenues represent recurring investment income and total net realized gains (losses) on securities; pretax profit is net of investment expenses.
Our management uses underwriting margin and combined ratio as primary measures of underwriting profitability. Underwriting profitability is calculated by subtracting losses and loss adjustment expenses, policy acquisition costs, and other underwriting expenses from the total of net premiums earned and fees and other revenues. The underwriting margin is the pretax underwriting profit (loss) expressed as a percentage of net premiums earned (i.e., revenues from underwriting operations). Combined ratio is the complement of the underwriting margin. Following are the underwriting margins and combined ratios for our underwriting operations for the respective periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Under-writing
Margin
|
|
Combined
Ratio
|
|
Under-writing
Margin
|
|
Combined
Ratio
|
|
Under-writing
Margin
|
|
Combined
Ratio
|
|
Under-writing
Margin
|
|
Combined
Ratio
|
Personal Lines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
2.4
|
%
|
|
97.6
|
|
4.0
|
%
|
|
96.0
|
|
6.4
|
%
|
|
93.6
|
|
4.9
|
%
|
|
95.1
|
Direct
|
4.7
|
|
|
95.3
|
|
3.5
|
|
|
96.5
|
|
5.9
|
|
|
94.1
|
|
3.4
|
|
|
96.6
|
Total Personal Lines
|
3.6
|
|
|
96.4
|
|
3.8
|
|
|
96.2
|
|
6.1
|
|
|
93.9
|
|
4.2
|
|
|
95.8
|
Commercial Lines
|
6.0
|
|
|
94.0
|
|
0.7
|
|
|
99.3
|
|
8.2
|
|
|
91.8
|
|
5.5
|
|
|
94.5
|
Property
1
|
(27.0
|
)
|
|
127.0
|
|
4.6
|
|
|
95.4
|
|
(8.0
|
)
|
|
108.0
|
|
(4.3
|
)
|
|
104.3
|
Other indemnity
2
|
NM
|
|
|
NM
|
|
NM
|
|
|
NM
|
|
NM
|
|
|
NM
|
|
NM
|
|
NM
|
Total underwriting operations
|
2.6
|
|
|
97.4
|
|
3.4
|
|
|
96.6
|
|
5.8
|
|
|
94.2
|
|
4.0
|
|
|
96.0
|
1
Included in both the three and nine months ended
September 30, 2017
are
6.7
points of amortization expense predominately associated with the acquisition of a controlling interest in ARX and
6.8
points and
7.3
points, respectively, for the three and nine months ended September 30, 2016. The nine months ended September 30, 2016, also include
0.7
points of expense related to the loss on the exchange transaction that occurred in 2016.
2
Underwriting margins and combined ratios are not meaningful (NM) for our other indemnity businesses due to the low level of premiums earned by, and the variability of loss costs in, such businesses.
Note 9
Dividends
— We maintain a policy of paying an annual variable dividend that, if declared, would be payable shortly after the close of the year. This annual variable dividend is based on a target percentage of after-tax underwriting income multiplied by a performance factor (Gainshare factor), which, beginning in 2017, is determined by reference to the Agency auto, Direct auto, special lines, Commercial Lines, and Property business units, with minor exclusions and subject to the limitations discussed below. The target percentage is determined by our Board of Directors on an annual basis and announced to shareholders and the public. In December
2016
, the Board determined the target percentage for
2017
to be
33-1/3
% of annual after-tax underwriting income, which is unchanged from the
2016
target percentage.
The Gainshare factor can range from
zero
to
two
and is determined by comparing our operating performance for the specified business units for the year to certain predetermined profitability and growth objectives approved by the Compensation Committee of the Board. This Gainshare factor is also used in the annual cash bonus program currently in place for our employees (our “Gainsharing program”). On a year-to-date basis, as of
September 30, 2017
, the Gainshare factor was
1.67
. Since the final factor will be determined based on our results for the full year, the final factor may vary from the current factor.
Our annual dividend program will result in a variable payment to shareholders each year, subject to certain limitations. If the Gainshare factor is
zero
or if our comprehensive income is less than after-tax underwriting income,
no
dividend would be payable under our annual variable dividend policy. In addition, the ultimate decision on whether or not a dividend will be paid is in the discretion of the Board of Directors. The Board could decide to alter our policy, or not to pay the annual variable dividend, at any time prior to the declaration of the dividend for the year. Such an action by the Board could result from, among other reasons, changes in the insurance marketplace, changes in our performance or capital needs, changes in federal income tax laws, disruptions of national or international capital markets, or other events affecting our business, liquidity, or financial position.
Following is a summary of our shareholder dividends that were declared in the last two years:
|
|
|
|
|
|
|
|
|
|
(millions, except per share amounts)
|
|
Amount
|
Dividend Type
|
Declared
|
Paid
|
Per Share
|
|
Total
1
|
|
Annual – Variable
|
December 2016
|
February 2017
|
$
|
0.6808
|
|
$
|
395.4
|
|
Annual – Variable
|
December 2015
|
February 2016
|
$
|
0.8882
|
|
$
|
519.2
|
|
1
Based on an estimate of shares outstanding as of the record date. For the dividends declared in December 2016 and 2015, we paid $
395.4 million
and
$519.0 million
, respectively.
Note 10
Other Comprehensive Income (Loss)
—
The components of other comprehensive income (loss), including reclassification adjustments by income statement line item, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Changes in
Accumulated Other
Comprehensive Income (after tax)
|
(millions)
|
Pretax total
accumulated
other
comprehensive
income
|
|
|
Total tax
(provision)
benefit
|
|
|
After tax total
accumulated
other
comprehensive
income
|
|
|
Total net
unrealized
gains
(losses)
on securities
|
|
|
Net
unrealized
gains on
forecasted
transactions
|
|
|
Foreign
currency
translation
adjustment
|
|
|
(Income)loss attributable to NCI
|
|
Balance at June 30, 2017
|
$
|
1,774.1
|
|
|
$
|
(623.4
|
)
|
|
$
|
1,150.7
|
|
|
$
|
1,164.6
|
|
|
$
|
(15.1
|
)
|
|
$
|
(0.9
|
)
|
|
$
|
2.1
|
|
Other comprehensive income (loss) before reclassifications:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
122.7
|
|
|
(43.0
|
)
|
|
79.7
|
|
|
79.7
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Net non-credit related OTTI losses, adjusted for valuation changes
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Forecasted transactions
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Foreign currency translation adjustment
|
0.9
|
|
|
(0.3
|
)
|
|
0.6
|
|
|
0
|
|
|
0
|
|
|
0.6
|
|
|
0
|
|
Loss attributable to noncontrolling interest (NCI)
|
(1.1
|
)
|
|
0.4
|
|
|
(0.7
|
)
|
|
0
|
|
|
0
|
|
|
0
|
|
|
(0.7
|
)
|
Total other comprehensive income (loss) before reclassifications
|
122.5
|
|
|
(42.9
|
)
|
|
79.6
|
|
|
79.7
|
|
|
0
|
|
|
0.6
|
|
|
(0.7
|
)
|
Less: Reclassification adjustment for amounts realized in net income by income statement line item:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings
|
(9.3
|
)
|
|
3.3
|
|
|
(6.0
|
)
|
|
(6.0
|
)
|
|
0
|
|
|
0
|
|
|
0
|
|
Net realized gains (losses) on securities
|
15.7
|
|
|
(5.5
|
)
|
|
10.2
|
|
|
10.2
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Interest expense
|
(0.2
|
)
|
|
0.1
|
|
|
(0.1
|
)
|
|
0
|
|
|
(0.1
|
)
|
|
0
|
|
|
0
|
|
Total reclassification adjustment for amounts realized in net income
|
6.2
|
|
|
(2.1
|
)
|
|
4.1
|
|
|
4.2
|
|
|
(0.1
|
)
|
|
0
|
|
|
0
|
|
Total other comprehensive income (loss)
|
116.3
|
|
|
(40.8
|
)
|
|
75.5
|
|
|
75.5
|
|
|
0.1
|
|
|
0.6
|
|
|
(0.7
|
)
|
Balance at September 30, 2017
|
$
|
1,890.4
|
|
|
$
|
(664.2
|
)
|
|
$
|
1,226.2
|
|
|
$
|
1,240.1
|
|
|
$
|
(15.0
|
)
|
|
$
|
(0.3
|
)
|
|
$
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Changes in
Accumulated Other
Comprehensive Income (after tax)
|
(millions)
|
Pretax total
accumulated
other
comprehensive
income
|
|
|
Total tax
(provision)
benefit
|
|
|
After tax total
accumulated
other
comprehensive
income
|
|
|
Total net
unrealized
gains
(losses)
on securities
|
|
|
Net
unrealized
gains on
forecasted
transactions
|
|
|
Foreign
currency
translation
adjustment
|
|
|
(Income)loss attributable to NCI
|
|
Balance at December 31, 2016
|
$
|
1,439.5
|
|
|
$
|
(506.1
|
)
|
|
$
|
933.4
|
|
|
$
|
939.6
|
|
|
$
|
(9.4
|
)
|
|
$
|
(1.1
|
)
|
|
$
|
4.3
|
|
Other comprehensive income (loss) before reclassifications:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
554.4
|
|
|
(194.3
|
)
|
|
360.1
|
|
|
360.1
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Net non-credit related OTTI losses, adjusted for valuation changes
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Forecasted transactions
|
(8.0
|
)
|
|
2.8
|
|
|
(5.2
|
)
|
|
0
|
|
|
(5.2
|
)
|
|
0
|
|
|
0
|
|
Foreign currency translation adjustment
|
1.2
|
|
|
(0.4
|
)
|
|
0.8
|
|
|
0
|
|
|
0
|
|
|
0.8
|
|
|
0
|
|
Loss attributable to noncontrolling interest (NCI)
|
(4.5
|
)
|
|
1.6
|
|
|
(2.9
|
)
|
|
0
|
|
|
0
|
|
|
0
|
|
|
(2.9
|
)
|
Total other comprehensive income (loss) before reclassifications
|
543.1
|
|
|
(190.3
|
)
|
|
352.8
|
|
|
360.1
|
|
|
(5.2
|
)
|
|
0.8
|
|
|
(2.9
|
)
|
Less: Reclassification adjustment for amounts realized in net income by income statement line item:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings
|
(12.9
|
)
|
|
4.6
|
|
|
(8.3
|
)
|
|
(8.3
|
)
|
|
0
|
|
|
0
|
|
|
0
|
|
Net realized gains (losses) on securities
|
104.5
|
|
|
(36.6
|
)
|
|
67.9
|
|
|
67.9
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Interest expense
|
0.6
|
|
|
(0.2
|
)
|
|
0.4
|
|
|
0
|
|
|
0.4
|
|
|
0
|
|
|
0
|
|
Total reclassification adjustment for amounts realized in net income
|
92.2
|
|
|
(32.2
|
)
|
|
60.0
|
|
|
59.6
|
|
|
0.4
|
|
|
0
|
|
|
0
|
|
Total other comprehensive income (loss)
|
450.9
|
|
|
(158.1
|
)
|
|
292.8
|
|
|
300.5
|
|
|
(5.6
|
)
|
|
0.8
|
|
|
(2.9
|
)
|
Balance at September 30, 2017
|
$
|
1,890.4
|
|
|
$
|
(664.2
|
)
|
|
$
|
1,226.2
|
|
|
$
|
1,240.1
|
|
|
$
|
(15.0
|
)
|
|
$
|
(0.3
|
)
|
|
$
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Changes in
Accumulated Other
Comprehensive Income (after tax)
|
(millions)
|
Pretax total
accumulated
other
comprehensive
income
|
|
|
Total tax
(provision)
benefit
|
|
|
After tax total
accumulated
other
comprehensive
income
|
|
|
Total net
unrealized
gains
(losses)
on securities
|
|
|
Net
unrealized
gains on
forecasted
transactions
|
|
|
Foreign
currency
translation
adjustment
|
|
|
(Income)loss attributable to NCI
|
|
Balance at June 30, 2016
|
$
|
1,477.0
|
|
|
$
|
(519.2
|
)
|
|
$
|
957.8
|
|
|
$
|
970.1
|
|
|
$
|
(8.8
|
)
|
|
$
|
(1.1
|
)
|
|
$
|
(2.4
|
)
|
Other comprehensive income (loss) before reclassifications:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
146.8
|
|
|
(51.4
|
)
|
|
95.4
|
|
|
95.4
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Net non-credit related OTTI losses, adjusted for valuation changes
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Forecasted transactions
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Foreign currency translation adjustment
|
0.4
|
|
|
(0.1
|
)
|
|
0.3
|
|
|
0
|
|
|
0
|
|
|
0.3
|
|
|
0
|
|
Loss attributable to noncontrolling interest (NCI)
|
1.8
|
|
|
(0.6
|
)
|
|
1.2
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
1.2
|
|
Total other comprehensive income (loss) before reclassifications
|
149.0
|
|
|
(52.1
|
)
|
|
96.9
|
|
|
95.4
|
|
|
0
|
|
|
0.3
|
|
|
1.2
|
|
Less: Reclassification adjustment for amounts realized in net income by income statement line item:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings
|
(26.8
|
)
|
|
9.4
|
|
|
(17.4
|
)
|
|
(17.4
|
)
|
|
0
|
|
|
0
|
|
|
0
|
|
Net realized gains (losses) on securities
|
39.6
|
|
|
(13.9
|
)
|
|
25.7
|
|
|
25.7
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Interest expense
|
0.5
|
|
|
(0.2
|
)
|
|
0.3
|
|
|
0
|
|
|
0.3
|
|
|
0
|
|
|
0
|
|
Total reclassification adjustment for amounts realized in net income
|
13.3
|
|
|
(4.7
|
)
|
|
8.6
|
|
|
8.3
|
|
|
0.3
|
|
|
0
|
|
|
0
|
|
Total other comprehensive income (loss)
|
135.7
|
|
|
(47.4
|
)
|
|
88.3
|
|
|
87.1
|
|
|
(0.3
|
)
|
|
0.3
|
|
|
1.2
|
|
Balance at September 30, 2016
|
$
|
1,612.7
|
|
|
$
|
(566.6
|
)
|
|
$
|
1,046.1
|
|
|
$
|
1,057.2
|
|
|
$
|
(9.1
|
)
|
|
$
|
(0.8
|
)
|
|
$
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Changes in
Accumulated Other
Comprehensive Income (after tax)
|
(millions)
|
Pretax total
accumulated
other
comprehensive
income
|
|
|
Total tax
(provision)
benefit
|
|
|
After tax total
accumulated
other
comprehensive
income
|
|
|
Total net
unrealized
gains
(losses)
on securities
|
|
|
Net
unrealized
gains on
forecasted
transactions
|
|
|
Foreign
currency
translation
adjustment
|
|
|
(Income)loss attributable to NCI
|
|
Balance at December 31, 2015
|
$
|
1,234.5
|
|
|
$
|
(434.1
|
)
|
|
$
|
800.4
|
|
|
$
|
809.0
|
|
|
$
|
(8.2
|
)
|
|
$
|
(1.5
|
)
|
|
$
|
1.1
|
|
Other comprehensive income (loss) before reclassifications:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
470.4
|
|
|
(165.2
|
)
|
|
305.2
|
|
|
305.2
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Net non-credit related OTTI losses, adjusted for valuation changes
|
(0.1
|
)
|
|
0.1
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Forecasted transactions
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Foreign currency translation adjustment
|
1.0
|
|
|
(0.3
|
)
|
|
0.7
|
|
|
0
|
|
|
0
|
|
|
0.7
|
|
|
0
|
|
Loss attributable to noncontrolling interest (NCI)
|
(3.7
|
)
|
|
1.4
|
|
|
(2.3
|
)
|
|
0
|
|
|
0
|
|
|
0
|
|
|
(2.3
|
)
|
Total other comprehensive income (loss) before reclassifications
|
467.6
|
|
|
(164.0
|
)
|
|
303.6
|
|
|
305.2
|
|
|
0
|
|
|
0.7
|
|
|
(2.3
|
)
|
Less: Reclassification adjustment for amounts realized in net income by income statement line item:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings
|
(27.0
|
)
|
|
9.5
|
|
|
(17.5
|
)
|
|
(17.5
|
)
|
|
0
|
|
|
0
|
|
|
0
|
|
Net realized gains (losses) on securities
|
114.9
|
|
|
(40.4
|
)
|
|
74.5
|
|
|
74.5
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Interest expense
|
1.5
|
|
|
(0.6
|
)
|
|
0.9
|
|
|
0
|
|
|
0.9
|
|
|
0
|
|
|
0
|
|
Total reclassification adjustment for amounts realized in net income
|
89.4
|
|
|
(31.5
|
)
|
|
57.9
|
|
|
57.0
|
|
|
0.9
|
|
|
0
|
|
|
0
|
|
Total other comprehensive income (loss)
|
378.2
|
|
|
(132.5
|
)
|
|
245.7
|
|
|
248.2
|
|
|
(0.9
|
)
|
|
0.7
|
|
|
(2.3
|
)
|
Balance at September 30, 2016
|
$
|
1,612.7
|
|
|
$
|
(566.6
|
)
|
|
$
|
1,046.1
|
|
|
$
|
1,057.2
|
|
|
$
|
(9.1
|
)
|
|
$
|
(0.8
|
)
|
|
$
|
(1.2
|
)
|
In an effort to manage interest rate risk, we entered into forecasted transactions on each of Progressive’s outstanding debt issuances. Upon issuing the debt, the gains (losses) recognized on the effective cash flow hedges are recorded as unrealized gains (losses) in accumulated other comprehensive income and amortized into interest expense over the term of the related debt issuance. We expect to reclassify
$1.0 million
(pretax) into interest expense during the next 12 months, related to net unrealized losses on forecasted transactions.
For the three and nine months ended September 30, 2016, the net impairment losses recognized in earnings were revised to reflect a decrease in a reclassification adjustment rather than an increase as previously disclosed. The offset was to other comprehensive income before reclassifications-investment securities.The impacts to classification within the table are immaterial. Overall, this revision had no impact on the total other comprehensive income (loss) reported for these periods.
Note 11
Litigation
— The Progressive Corporation and/or its insurance subsidiaries are named as defendants in various lawsuits arising out of claims made under insurance policies written by our insurance subsidiaries in the ordinary course of business. We consider all legal actions relating to such claims in establishing our loss and loss adjustment expense reserves. In addition, The Progressive Corporation and/or its insurance subsidiaries are named as defendants in a number of class action or individual lawsuits that challenge certain of the operations of the insurance subsidiaries.
These cases include those alleging damages as a result of our subsidiaries’ practices in evaluating or paying medical or injury claims or benefits, including, but not limited to, personal injury protection, medical payments, and bodily injury benefits; the utilization, content, or appearance of policy documents; labor rates paid to auto body repair shops; wage and hour issues; and cases challenging other aspects of our subsidiaries’ claims or marketing practices or other business operations. Other insurance companies face many of these same issues.
The nature and volume of litigation to which The Progressive Corporation is subject is similar to that which was disclosed in
Note 12
–
Litigation
in our 2016 Annual Report to Shareholders.
We plan to contest the pending lawsuits vigorously, but may pursue settlement negotiations in some cases, if appropriate. The outcomes of pending cases are uncertain at this time. We establish accruals for these lawsuits when it is probable that a loss has been or will be incurred and we can reasonably estimate potential loss exposure, which may include a range of loss. As to lawsuits for which the loss is considered neither probable or estimable, or is considered probable but not estimable, we do not establish an accrual. Nevertheless, we continue to evaluate this pending litigation to determine if any losses not deemed
probable and estimable become so, at which point we would establish an accrual at our best estimate of the loss or range of loss.
With respect to our pending lawsuits that are not related to claims under insurance policies, the accruals that we have established, if any, were not material at
September 30, 2017
or 2016, and there were no material settlements during the first nine months of 2017 or 2016. For most of these lawsuits, we do not consider any losses to be both probable and estimable, and we are unable to estimate a meaningful range of loss, if any, at this time, due to the factors discussed in
Note 12
–
Litigation
in our
2016
Annual Report to Shareholders.
In the event that any one or more of these lawsuits results in a substantial judgment against or settlement by us, or if our accruals (if any) prove to be inadequate by a significant amount, the resulting liability could have a material adverse effect on our consolidated financial condition, cash flows, and/or results of operations. For a further discussion on our pending litigation and related reserving policies, see
Note 12
–
Litigation
in our
2016
Annual Report to Shareholders.
Note 12
Redeemable Noncontrolling Interest
— In connection with the April 2015 acquisition of a controlling interest in ARX, The Progressive Corporation entered into a stockholders’ agreement with the other ARX stockholders. As part of the stockholders’ agreement, the minority ARX shareholders have the right to “put” their ARX shares to Progressive in
two
installments,
one
in early 2018 and
one
in early 2021, and Progressive has the ability to “call
”
a portion of the outstanding shares shortly thereafter. If these rights are exercised in full when available, our ownership stake in ARX capital stock will exceed
80%
in 2018 and will reach
100%
in 2021. See
Note 15 – Redeemable Noncontrolling Interest
in our 2016 Annual Report to Shareholders for a discussion of the purchase prices for shares to be purchased by Progressive pursuant to these put or call rights.
Since these securities are redeemable upon the occurrence of an event that is not solely within the control of Progressive, we have recorded the redeemable noncontrolling interest (NCI) as mezzanine equity on our consolidated balance sheets, which represents the minority shares at the current estimated purchase price pursuant to the put and call provisions of the stockholders’ agreement. The estimated purchase price is based, in part, on the change in tangible net book value of ARX from December 31, 2014 to the balance sheet dates.
In addition to these minority shares, at
September 30, 2017
, ARX employees hold options to purchase
22,550
ARX shares. These options and any shares issued upon exercise are subject to the stockholders’ agreement, including the right to “put
”
these shares to Progressive, as described above. Until the options are exercised, the underlying obligation of approximately
$32.2 million
is not recorded as part of redeemable NCI.
The changes in the components of redeemable NCI during the
nine months ended
September 30, 2017
and
2016
, and the year ended
December 31, 2016
, were:
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
December 31, 2016
|
|
Balance, Beginning of period
|
$
|
483.7
|
|
|
$
|
464.9
|
|
|
$
|
464.9
|
|
Net income attributable to NCI
|
1.9
|
|
|
11.3
|
|
|
26.2
|
|
Other comprehensive income (loss) attributable to NCI
|
2.9
|
|
|
2.3
|
|
|
(3.2
|
)
|
Exercise of employee stock options
|
3.4
|
|
|
0
|
|
|
0
|
|
Change in redemption value of NCI
|
6.3
|
|
|
(6.0
|
)
|
|
(4.2
|
)
|
Balance, End of period
|
$
|
498.2
|
|
|
$
|
472.5
|
|
|
$
|
483.7
|
|
Note 13
Goodwill and Intangible Assets
Goodwill
The carrying amount of goodwill increased
$3.3 million
as a result of the acquisition of a small excess and surplus lines insurance company during the second quarter 2017, which will provide us flexibility in our Commercial Lines business going forward. Goodwill recorded at
September 30, 2017
, was
$452.7 million
.
No
accumulated goodwill impairment losses exist.
Intangible Assets
The following table is a summary of the net carrying amount of other intangible assets as of
September 30, 2017
and
2016
, and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
September 30, 2017
|
|
|
September 30, 2016
|
|
|
December 31, 2016
|
|
Intangible assets subject to amortization
|
$
|
372.2
|
|
|
$
|
435.9
|
|
|
$
|
420.4
|
|
Indefinite-lived intangible assets
1
|
12.4
|
|
|
12.4
|
|
|
12.4
|
|
Total
|
$
|
384.6
|
|
|
$
|
448.3
|
|
|
$
|
432.8
|
|
1
Indefinite-lived intangible assets are comprised of state insurance and agent licenses. State insurance licenses were previously subject to amortization under superseded accounting guidance and have
$0.6 million
of accumulated amortization for all periods presented.
Intangible assets subject to amortization consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
September 30, 2017
|
|
September 30, 2016
|
|
December 31, 2016
|
Category
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Policies in force
|
$
|
256.2
|
|
$
|
91.5
|
|
$
|
164.7
|
|
|
$
|
256.2
|
|
$
|
55.0
|
|
$
|
201.2
|
|
|
$
|
256.2
|
|
$
|
64.1
|
|
$
|
192.1
|
|
Agency relationships
|
159.2
|
|
28.4
|
|
130.8
|
|
|
159.2
|
|
17.1
|
|
142.1
|
|
|
159.2
|
|
19.9
|
|
139.3
|
|
Software rights
|
79.1
|
|
26.8
|
|
52.3
|
|
|
79.1
|
|
16.1
|
|
63.0
|
|
|
79.1
|
|
18.8
|
|
60.3
|
|
Trade name
|
34.8
|
|
10.4
|
|
24.4
|
|
|
34.8
|
|
5.2
|
|
29.6
|
|
|
34.8
|
|
6.1
|
|
28.7
|
|
Total
|
$
|
529.3
|
|
$
|
157.1
|
|
$
|
372.2
|
|
|
$
|
529.3
|
|
$
|
93.4
|
|
$
|
435.9
|
|
|
$
|
529.3
|
|
$
|
108.9
|
|
$
|
420.4
|
|
Amortization expense was
$17.2 million
and
$48.2 million
for the
three and nine
months ended
September 30, 2017
, respectively, compared to
$15.5 million
and
$46.6 million
during the same period last year.
During the third quarter 2017, we revised our estimate of the economic useful life of our trade name intangible asset from an original life of
10 years
to a remaining life of
2 years
. The decrease in the useful life represents the estimated length of time that it is expected to take to transition the branding of our Property business from the ASI trade name to “Progressive Home.” As of September 30, 2017, the remaining average life of all of our intangible assets is
5.2 years
.
Note 14
New Accounting Standards
Issued
In March 2017, the Financial Accounting Standards Boards (FASB) issued an accounting standards update (ASU) related to premium amortization on purchased callable debt securities. The intent of the standard is to shorten the amortization period for certain purchased callable debt securities held at a premium. Under the ASU, the premium is required to be amortized to the earliest call date. The ASU more closely aligns interest income recorded on bonds held at a premium with the economics of the underlying instrument. The ASU, which is required to be applied on a modified retrospective basis, is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Since we have historically used a yield-to-worst scenario for our securities that were purchased at a premium, and the first call on a premium security most often produces the lowest and most conservative yield, we do not expect this standard to have a significant impact on our financial condition, cash flows, or results of operations.
Adopted
On January 1, 2017, we adopted the ASU to simplify the accounting for employee share-based payment transactions. There were several provisions that could be adopted under this ASU. We did not elect to make any changes to our method of recording forfeitures and are continuing to withhold taxes at the minimum statutory tax rate. We did elect, on a retrospective basis, to disclose the payment of cash to a taxing authority for which we withheld shares for this purpose as a financing activity. Lastly, during the first
nine months
of 2017, we recognized
$23.1 million
of excess tax benefits as an income tax benefit in our consolidated statements of comprehensive income; this provision was adopted on a prospective basis.