B. Profitability
Profitability for our underwriting operations is defined by pretax underwriting profit, which is calculated as net premiums earned plus fees and other revenues less losses and loss adjustment expenses, policy acquisition costs, other underwriting expenses, and policyholder credits. We also use underwriting margin, which is underwriting profit or loss expressed as a percentage of net premiums earned, to analyze our results. For the respective periods, our underwriting profitability results were as follows:
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Three Months Ended September 30,
|
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Nine Months Ended September 30,
|
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2021
|
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2020
|
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2021
|
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2020
|
|
Underwriting
Profit (Loss)
|
|
Underwriting
Profit (Loss)
|
|
Underwriting
Profit (Loss)
|
|
Underwriting
Profit (Loss)
|
($ in millions)
|
$
|
|
Margin
|
|
$
|
|
Margin
|
|
$
|
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Margin
|
|
$
|
|
Margin
|
Personal Lines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Agency
|
$
|
41.0
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|
|
1.0
|
%
|
|
$
|
596.5
|
|
|
14.9
|
%
|
|
$
|
796.0
|
|
|
6.3
|
%
|
|
$
|
1,748.7
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|
|
14.9
|
%
|
Direct
|
(62.4)
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|
(1.3)
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|
|
517.6
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|
|
12.0
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|
480.6
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|
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3.5
|
|
|
1,637.8
|
|
|
13.1
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Total Personal Lines
|
(21.4)
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|
|
(0.2)
|
|
|
1,114.1
|
|
|
13.4
|
|
|
1,276.6
|
|
|
4.9
|
|
|
3,386.5
|
|
|
14.0
|
|
Commercial Lines
|
197.5
|
|
|
10.5
|
|
|
155.9
|
|
|
12.8
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|
|
556.1
|
|
|
11.3
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|
|
448.2
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|
|
12.7
|
|
Property1
|
(222.7)
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|
|
(42.3)
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|
|
(52.9)
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|
(11.8)
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|
|
(376.7)
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|
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(25.1)
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|
|
(192.4)
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|
(14.8)
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Other indemnity2
|
(0.3)
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|
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NM
|
|
0
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|
NM
|
|
(0.2)
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|
|
NM
|
|
0
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|
NM
|
Total underwriting operations
|
$
|
(46.9)
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|
|
(0.4)
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%
|
|
$
|
1,217.1
|
|
|
12.2
|
%
|
|
$
|
1,455.8
|
|
|
4.4
|
%
|
|
$
|
3,642.3
|
|
|
12.5
|
%
|
1 For the three and nine months ended September 30, 2021, pretax profit (loss) includes $14.2 million and $42.5 million, respectively, of amortization expense associated with acquisition-related intangible assets attributable to our Property segment, and $14.2 million and $42.8 million for the respective periods last year.
2 Primarily reflects Protective Insurance’s run-off business operations. Underwriting margins for our other indemnity business are not meaningful (NM) due to the low level of premiums earned by such business.
The decreases in the companywide underwriting profit margins during the three and nine months ended September 30, 2021, compared to the same periods last year, were primarily driven by higher accident frequency and severity, and higher catastrophe losses. See the Losses and Loss Adjustment Expenses (LAE) section below for further discussion of our frequency and severity trends and catastrophe losses incurred during the periods.
Further underwriting results for our Personal Lines business, including results by distribution channel, the Commercial Lines business, the Property business, and our underwriting operations in total, were as follows:
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|
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|
|
|
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|
|
|
|
Three Months Ended September 30,
|
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Nine Months Ended September 30,
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Underwriting Performance1
|
2021
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2020
|
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Change
|
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2021
|
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2020
|
|
Change
|
Personal Lines – Agency
|
|
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|
|
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Loss & loss adjustment expense ratio
|
80.9
|
|
|
67.0
|
|
|
13.9
|
|
|
75.2
|
|
|
61.6
|
|
|
13.6
|
|
Underwriting expense ratio
|
18.1
|
|
|
18.1
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|
|
0
|
|
|
18.5
|
|
|
23.5
|
|
|
(5.0)
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|
Combined ratio
|
99.0
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|
|
85.1
|
|
|
13.9
|
|
|
93.7
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|
|
85.1
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|
|
8.6
|
|
Personal Lines – Direct
|
|
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|
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|
Loss & loss adjustment expense ratio
|
82.7
|
|
|
66.4
|
|
|
16.3
|
|
|
76.2
|
|
|
60.8
|
|
|
15.4
|
|
Underwriting expense ratio
|
18.6
|
|
|
21.6
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|
|
(3.0)
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|
|
20.3
|
|
|
26.1
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|
|
(5.8)
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Combined ratio
|
101.3
|
|
|
88.0
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|
|
13.3
|
|
|
96.5
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|
|
86.9
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|
|
9.6
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|
Total Personal Lines
|
|
|
|
|
|
|
|
|
|
|
|
Loss & loss adjustment expense ratio
|
81.8
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|
|
66.7
|
|
|
15.1
|
|
|
75.7
|
|
|
61.2
|
|
|
14.5
|
|
Underwriting expense ratio
|
18.4
|
|
|
19.9
|
|
|
(1.5)
|
|
|
19.4
|
|
|
24.8
|
|
|
(5.4)
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|
Combined ratio
|
100.2
|
|
|
86.6
|
|
|
13.6
|
|
|
95.1
|
|
|
86.0
|
|
|
9.1
|
|
Commercial Lines
|
|
|
|
|
|
|
|
|
|
|
|
Loss & loss adjustment expense ratio
|
70.2
|
|
|
66.6
|
|
|
3.6
|
|
|
68.8
|
|
|
64.1
|
|
|
4.7
|
|
Underwriting expense ratio
|
19.3
|
|
|
20.6
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|
|
(1.3)
|
|
|
19.9
|
|
|
23.2
|
|
|
(3.3)
|
|
Combined ratio
|
89.5
|
|
|
87.2
|
|
|
2.3
|
|
|
88.7
|
|
|
87.3
|
|
|
1.4
|
|
Property
|
|
|
|
|
|
|
|
|
|
|
|
Loss & loss adjustment expense ratio
|
113.9
|
|
|
81.2
|
|
|
32.7
|
|
|
95.9
|
|
|
84.7
|
|
|
11.2
|
|
Underwriting expense ratio2
|
28.4
|
|
|
30.6
|
|
|
(2.2)
|
|
|
29.2
|
|
|
30.1
|
|
|
(0.9)
|
|
Combined ratio2
|
142.3
|
|
|
111.8
|
|
|
30.5
|
|
|
125.1
|
|
|
114.8
|
|
|
10.3
|
|
Total Underwriting Operations
|
|
|
|
|
|
|
|
|
|
|
|
Loss & loss adjustment expense ratio
|
81.4
|
|
|
67.3
|
|
|
14.1
|
|
|
75.6
|
|
|
62.6
|
|
|
13.0
|
|
Underwriting expense ratio
|
19.0
|
|
|
20.5
|
|
|
(1.5)
|
|
|
20.0
|
|
|
24.9
|
|
|
(4.9)
|
|
Combined ratio
|
100.4
|
|
|
87.8
|
|
|
12.6
|
|
|
95.6
|
|
|
87.5
|
|
|
8.1
|
|
Accident year – Loss & loss adjustment expense ratio3
|
81.8
|
|
|
67.3
|
|
|
14.5
|
|
|
75.1
|
|
|
62.2
|
|
|
12.9
|
|
1 Ratios are expressed as a percentage of net premiums earned; fees and other revenues are netted with underwriting expenses in the ratio calculations.
2 Included in the three and nine months ended September 30, 2021, are 2.7 points and 2.8 points, respectively, of amortization expense associated with acquisition-related intangible assets attributable to our Property segment, and 3.2 points and 3.3 points for the respective periods last year. Excluding these additional expenses, for the three months ended September 30, 2021 and 2020, the Property business would have reported expense ratios of 25.7 and 27.4, respectively, and combined ratios of 139.6 and 108.6. For the nine months ended September 30, 2021 and 2020, excluding these additional expenses, the Property business would have reported expense ratios of 26.4 and 26.8, respectively, and combined ratios of 122.3 and 111.5.
3 The accident year ratios include only the losses that occurred during the period noted. As a result, accident period results will change over time, either favorably or unfavorably, as we revise our estimates of loss costs when payments are made or reserves for that accident period are reviewed.
Losses and Loss Adjustment Expenses (LAE)
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
(millions)
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Increase (decrease) in net loss and LAE reserves
|
$
|
1,673.1
|
|
|
$
|
775.6
|
|
|
$
|
3,903.7
|
|
|
$
|
891.7
|
|
Paid losses and LAE
|
7,577.6
|
|
|
5,937.5
|
|
|
20,863.9
|
|
|
17,298.0
|
|
Total incurred losses and LAE
|
$
|
9,250.7
|
|
|
$
|
6,713.1
|
|
|
$
|
24,767.6
|
|
|
$
|
18,189.7
|
|
Claims costs, our most significant expense, represent payments made and estimated future payments to be made, to or on behalf of our policyholders, including expenses needed to adjust or settle claims. Claims costs are a function of loss severity and frequency and, for our vehicle businesses, are influenced by inflation and driving patterns, among other factors, some of which are discussed below. In our Property business, severity is primarily a function of construction costs and the age of the structure. Accordingly, anticipated changes in these factors are taken into account when we establish premium rates and loss reserves. Loss reserves are estimates of future costs and our reserves are adjusted as underlying assumptions change and information develops.
Our total loss and LAE ratio increased 14.1 points for the third quarter 2021, compared to the same period last year, and 13.0 points on a year-to-date basis, primarily due to higher accident severity and frequency, and catastrophe losses.
The following table shows our consolidated catastrophe losses, excluding loss adjustment expenses, incurred during the periods:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
($ in millions)
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Personal Lines
|
$
|
421.1
|
|
|
$
|
163.1
|
|
|
$
|
698.0
|
|
|
$
|
365.0
|
|
Commercial Lines
|
11.7
|
|
|
3.4
|
|
|
20.1
|
|
|
11.0
|
|
Property
|
289.1
|
|
|
115.1
|
|
|
561.7
|
|
|
391.8
|
|
Total net catastrophe losses incurred
|
$
|
721.9
|
|
|
$
|
281.6
|
|
|
$
|
1,279.8
|
|
|
$
|
767.8
|
|
Combined ratio effect
|
6.4
|
pts.
|
|
2.8
|
pts.
|
|
3.9
|
pts.
|
|
2.6
|
pts.
|
During the three and nine months ended September 30, 2021, approximately 70% and 40%, respectively, of our catastrophe losses were related to Hurricane Ida, with nearly two-thirds of the losses impacting our vehicle businesses and the remainder our Property business. In our Property business, we retained approximately $185 million of losses and $15 million of allocated loss adjustment expenses (ALAE), with the excess covered under our occurrence excess of loss reinsurance program. We have responded, and plan to continue to respond, promptly to catastrophic events when they occur in order to provide exemplary claims service to our customers.
We do not have catastrophe-specific reinsurance for our Personal Lines or Commercial Lines businesses, but we reinsure portions of our Property business against various risks. The Property business reinsurance programs include: multi-year catastrophe excess of loss, aggregate excess of loss, and catastrophe bonds. During the second quarter 2021, we entered into new reinsurance contracts under our per occurrence excess of loss program for our Property business. The new reinsurance policies carry retention thresholds for losses and ALAE from a single catastrophic event of $200 million, an increase from the retention threshold on the prior contracts of $80 million. The increase in the threshold from the prior contract primarily reflects our ability to assume more direct risk on a companywide basis, while balancing this risk against the rising costs for these types of contracts. See Item 1 – Description of Business-Reinsurance in our Annual Report on Form 10-K for the year ended December 31, 2020, for a discussion of our various reinsurance programs. As of September 30, 2021, subject to our 2021 catastrophe aggregate excess of loss program, we have not exceeded the annual retention thresholds.
Under our various Property catastrophe-specific reinsurance, we ceded the following losses and ALAE, including development on prior year storms, during the periods:
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
(millions)
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Aggregate excess of loss:
|
|
|
|
|
|
|
|
Current accident year
|
$
|
0
|
|
|
$
|
135.3
|
|
|
$
|
0
|
|
|
$
|
135.3
|
|
Prior accident years
|
12.0
|
|
|
NA
|
|
25.5
|
|
|
NA
|
Per occurrence excess of loss:
|
|
|
|
|
|
|
|
Current accident year1
|
250.0
|
|
|
10.0
|
|
|
257.5
|
|
|
10.0
|
|
Prior accident years2
|
0
|
|
|
15.0
|
|
|
134.6
|
|
|
95.0
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
262.0
|
|
|
$
|
160.3
|
|
|
$
|
417.6
|
|
|
$
|
240.3
|
|
NA = Not applicable; this reinsurance coverage was entered into on January 1, 2020.
1 Amount for the three months ended September 30, 2021, is solely attributable to Hurricane Ida.
2 Amount for the nine months ended September 30, 2021, is primarily attributable to Hurricane Irma, which exceeded the excess of loss retention threshold in 2017 and, therefore, all development on this prior accident year storm is fully ceded.
The following discussion of our severity and frequency trends in our personal auto business excludes comprehensive coverage because of its inherent volatility, as it is typically linked to catastrophic losses generally resulting from adverse weather. For our commercial auto products, the reported frequency and severity trends include comprehensive coverage. Comprehensive coverage insures against damage to a customer’s vehicle due to various causes other than collision, such as windstorm, hail, theft, falling objects, and glass breakage.
Due to the impacts of shelter-in-place requirements that occurred throughout much of 2020, we believe that comparing current year frequency and severity to the prior year are not meaningful for our personal auto business. The trend comparisons below compare a two-year annualized change between 2021 and 2019 for personal auto frequency and severity for all coverages, excluding comprehensive coverage, which we believe are more insightful when trying to understand our current year profitability given the impact that COVID-19 restrictions had on our 2020 trends.
We saw the number of vehicle miles driven decrease dramatically when the COVID-19 restrictions were first put in place, especially during the early months of the pandemic. Now that the shelter-in-place restrictions have been eliminated, our usage-based insurance data has shown that the variance between vehicle miles traveled and claims volume decreased as the number of claims grew at a faster pace during the third quarter 2021.
Total personal auto incurred severity (i.e., average cost per claim, including both paid losses and the change in case reserves) on a calendar-year basis increased about 12% and 8% during the third quarter and the first nine months of 2021, respectively, compared to the same periods in 2020, and 10% and 9%, compared to the same periods in 2019. While the total change in severity is fairly consistent when comparing to prior year as well as to 2019, we believe the individual line coverages are not indicative of the underlying trends, primarily in the auto property damage and collision coverages due in part to the timing of salvage and subrogation collections in 2020. Therefore, we continue to believe comparisons to 2019 are more insightful.
Following are the changes we experienced in severity in our auto coverages on a 2021 year-over-2019 year annualized basis:
•Bodily injury increased about 11% for the third quarter and the first nine months of 2021, due in part to a shift in the mix to more severe accidents compared to 2019.
•Personal injury protection (PIP) increased about 10% during the third quarter 2021 and 8% during the first nine months of 2021, due in part to reopened claims, primarily in Florida.
•Auto property damage increased about 8% and 7% for the third quarter 2021 and the first nine months of 2021, respectively, and collision increased 14% and 9%, in part due to shifts in the type of loss experienced, more total losses, and increased used car prices.
It is a challenge to estimate future severity, but we continue to monitor changes in the underlying costs, such as used car prices, vehicle repair costs, medical costs, health care reform, court decisions, and jury verdicts, along with regulatory changes and other factors that may affect severity.
Our personal auto incurred frequency, on a calendar-year annualized basis, decreased about 5% and 7% for the third quarter and for the first nine months of 2021, compared to the same periods in 2019. Following are the frequency changes we experienced by coverage, and primarily resulted from changes in driving patterns from those historically experienced:
•Auto property damage, bodily injury, and PIP decreased about 9%, 11%, and 7%, respectively, for the third quarter of 2021 and 10% to 11% for the first nine months of 2021, compared to 2019.
•Collision decreased about 1% for the quarter and 3% for the first nine months of 2021.
For reference, on a year-over-year basis for the third quarter and the first nine months of 2021, frequency increased 10% and 16%, respectively, for all coverages, excluding comprehensive coverage.
We will continue to analyze trends to distinguish changes in our experience from other external factors, such as changes in the number of vehicles per household, miles driven, vehicle usage, gasoline prices, advances in vehicle safety, and unemployment rates, versus those resulting from shifts in the mix of our business or changes in driving patterns, to allow us to react quickly to price for these trends and to reserve more accurately for our loss exposures.
The changes we are disclosing in the paragraph below for our commercial auto products’ severity and frequency use a trailing 12-month period and exclude our TNC business and Protective Insurance. Using a trailing 12-month period addresses inherent seasonality trends in the commercial auto products and lessens the effects of month-to-month variability, including the impact of COVID-19 restrictions. Since the loss patterns in the TNC business are not indicative of our other commercial auto products, disclosing severity and frequency trends excluding that business is more indicative of our overall experience for the majority of our commercial auto products.
For the trailing 12-month period ended September 30, 2021, compared to the same period in 2020, incurred severity in our commercial auto products increased 10% and frequency increased 5%. The increase in severity is in part due to increased medical costs and actuarially determined reserves due to accelerating paid loss trends and shifts in the mix of business to for-hire transportation, which has higher average severity than the business auto and contractor business market targets. These loss frequency and severity trends appear to be aligning more closely with what we forecasted in our rate level indications. When comparing the trailing 12-month period for 2021 to the trailing 12-month period for 2019, on an annualized basis, our commercial auto products experienced an increase in severity of 12% and a decrease in frequency of 5%.
The table below presents the actuarial adjustments implemented and the loss reserve development experienced in the following periods on a companywide basis:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
($ in millions)
|
2021
|
|
2020
|
|
2021
|
|
2020
|
ACTUARIAL ADJUSTMENTS
|
|
|
|
|
|
|
|
Reserve decrease (increase)
|
|
|
|
|
|
|
|
Prior accident years
|
$
|
(45.5)
|
|
|
$
|
10.0
|
|
|
$
|
(89.7)
|
|
|
$
|
(2.2)
|
|
Current accident year
|
20.5
|
|
|
20.0
|
|
|
38.9
|
|
|
50.2
|
|
Calendar year actuarial adjustment
|
$
|
(25.0)
|
|
|
$
|
30.0
|
|
|
$
|
(50.8)
|
|
|
$
|
48.0
|
|
PRIOR ACCIDENT YEARS DEVELOPMENT
|
|
|
|
|
|
|
|
Favorable (unfavorable)
|
|
|
|
|
|
|
|
Actuarial adjustment
|
$
|
(45.5)
|
|
|
$
|
10.0
|
|
|
$
|
(89.7)
|
|
|
$
|
(2.2)
|
|
All other development
|
85.7
|
|
|
(10.0)
|
|
|
(67.1)
|
|
|
(113.9)
|
|
Total development
|
$
|
40.2
|
|
|
$
|
0
|
|
|
$
|
(156.8)
|
|
|
$
|
(116.1)
|
|
(Increase) decrease to calendar year combined ratio
|
0.4
|
pts.
|
|
0
|
pts.
|
|
(0.5)
|
pts.
|
|
(0.4)
|
pts.
|
Total development consists of both actuarial adjustments and “all other development” on prior accident years. The actuarial adjustments represent the net changes made by our actuarial staff to both current and prior accident year reserves based on regularly scheduled reviews. Through these reviews, our actuaries identify and measure variances in the projected frequency and severity trends, which allow them to adjust the reserves to reflect the current cost trends. For our Property business, 100% of catastrophe losses are reviewed monthly, and any development on catastrophe reserves are included as part of the actuarial adjustments. For the Personal Lines and Commercial Lines businesses, development for catastrophe losses for the vehicle businesses would be reflected in “all other development,” discussed below, to the extent they relate to prior year reserves. We report these actuarial adjustments separately for the current and prior accident years to reflect these adjustments as part of the total prior accident years development.
“All other development” represents claims settling for more or less than reserved, emergence of unrecorded claims at rates different than anticipated in our incurred but not recorded (IBNR) reserves, and changes in reserve estimates on specific claims. Although we believe the development from both the actuarial adjustments and “all other development” generally results from the same factors, we are unable to quantify the portion of the reserve development that might be applicable to any one or more of those underlying factors.
Our objective is to establish case and IBNR reserves that are adequate to cover all loss costs, while incurring minimal variation from the date the reserves are initially established until losses are fully developed. Our ability to meet this objective is impacted by many factors. Changes in case law, particularly in PIP environments, can make it difficult to estimate reserves timely and with minimal variation. See Note 6 – Loss and Loss Adjustment Expense Reserves, for a more detailed discussion of our prior accident years development. We continue to focus on our loss reserve analysis, attempting to enhance accuracy and to further our understanding of our loss costs.
Underwriting Expenses
The companywide underwriting expense ratio (i.e., policy acquisition costs and other underwriting expenses and policyholder credits, net of fees and other revenues, expressed as a percentage of net premiums earned) decreased 1.5 points for the third quarter and 4.9 points for the first nine months of 2021, compared to the same periods in 2020, primarily reflecting 0.3 points and 3.7 points in 2020, respectively, of policyholder credits issued to personal auto customers, and 0.1 points of policyholder credits issued to commercial auto customers in both periods of 2020. In addition, the decrease in the underwriting expense ratio included a 1.5 point reduction in advertising expenses on a quarter-over-prior-year-quarter basis, reflecting a 14% decrease in advertising spend as part of our actions taken to address profitability.
Progressive’s other underwriting expenses, net of fees and other revenues and excluding policyholder credits, increased 3% and 1% for the three and nine months ended September 30, 2021, compared to the same periods last year. The increase in underwriting expense for the third quarter 2021 is primarily due to the prior year reduction in the allowance for premium receivables, resulting from higher than anticipated collections, partially offset by a decrease in advertising spend in the third quarter 2021 on a year-over-year basis. On a year-to-date basis, advertising spend increased 8% year over year.
C. Growth
For our underwriting operations, we analyze growth in terms of both premiums and policies. Net premiums written represent the premiums from policies written during the period, less any premiums ceded to reinsurers. Net premiums earned, which are a function of the premiums written in the current and prior periods, are earned as revenue over the life of the policy using a daily earnings convention. Policies in force, our preferred measure of growth since it removes the variability due to rate changes or mix shifts, represents all policies under which coverage was in effect as of the end of the period specified.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
($ in millions)
|
2021
|
|
2020
|
|
% Growth
|
|
2021
|
|
2020
|
|
% Growth
|
NET PREMIUMS WRITTEN
|
|
|
|
|
|
|
|
|
|
|
|
Personal Lines
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
$
|
4,472.2
|
|
|
$
|
4,251.7
|
|
|
5
|
%
|
|
$
|
13,257.0
|
|
|
$
|
12,382.9
|
|
|
7
|
%
|
Direct
|
4,994.9
|
|
|
4,633.0
|
|
|
8
|
|
|
14,571.7
|
|
|
13,257.2
|
|
|
10
|
|
Total Personal Lines
|
9,467.1
|
|
|
8,884.7
|
|
|
7
|
|
|
27,828.7
|
|
|
25,640.1
|
|
|
9
|
|
Commercial Lines
|
2,374.1
|
|
|
1,609.9
|
|
|
47
|
|
|
6,154.5
|
|
|
3,949.1
|
|
|
56
|
|
Property
|
604.0
|
|
|
520.5
|
|
|
16
|
|
|
1,668.5
|
|
|
1,437.2
|
|
|
16
|
|
Other indemnity
|
1.3
|
|
|
0
|
|
|
NM
|
|
4.2
|
|
|
0
|
|
|
NM
|
Total underwriting operations
|
$
|
12,446.5
|
|
|
$
|
11,015.1
|
|
|
13
|
%
|
|
$
|
35,655.9
|
|
|
$
|
31,026.4
|
|
|
15
|
%
|
NET PREMIUMS EARNED
|
|
|
|
|
|
|
|
|
|
|
|
Personal Lines
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
$
|
4,267.9
|
|
|
$
|
4,001.6
|
|
|
7
|
%
|
|
$
|
12,586.4
|
|
|
$
|
11,749.3
|
|
|
7
|
%
|
Direct
|
4,690.2
|
|
|
4,309.8
|
|
|
9
|
|
|
13,755.8
|
|
|
12,470.1
|
|
|
10
|
|
Total Personal Lines
|
8,958.1
|
|
|
8,311.4
|
|
|
8
|
|
|
26,342.2
|
|
|
24,219.4
|
|
|
9
|
|
Commercial Lines
|
1,877.4
|
|
|
1,214.8
|
|
|
55
|
|
|
4,917.0
|
|
|
3,532.8
|
|
|
39
|
|
Property
|
526.5
|
|
|
447.3
|
|
|
18
|
|
|
1,501.3
|
|
|
1,300.6
|
|
|
15
|
|
Other indemnity1
|
2.8
|
|
|
0
|
|
|
NM
|
|
6.8
|
|
|
0
|
|
|
NM
|
Total underwriting operations
|
$
|
11,364.8
|
|
|
$
|
9,973.5
|
|
|
14
|
%
|
|
$
|
32,767.3
|
|
|
$
|
29,052.8
|
|
|
13
|
%
|
NM = Not meaningful
|
|
|
|
|
|
|
|
|
|
|
|
1 Represents Protective Insurance’s run-off business.
|
|
|
|
|
|
|
September 30,
|
(thousands)
|
|
|
|
|
|
|
2021
|
|
2020
|
|
% Growth
|
POLICIES IN FORCE
|
|
|
|
|
|
|
|
|
|
|
|
Agency auto
|
|
|
|
|
|
|
7,973.6
|
|
|
7,527.1
|
|
|
6
|
%
|
Direct auto
|
|
|
|
|
|
|
9,613.1
|
|
|
8,774.3
|
|
|
10
|
|
Total auto
|
|
|
|
|
|
|
17,586.7
|
|
|
16,301.4
|
|
|
8
|
|
Special lines1
|
|
|
|
|
|
|
5,282.4
|
|
|
4,905.8
|
|
|
8
|
|
Personal Lines — total
|
|
|
|
|
|
|
22,869.1
|
|
|
21,207.2
|
|
|
8
|
|
Commercial Lines
|
|
|
|
|
|
|
952.7
|
|
803.9
|
|
19
|
|
Property
|
|
|
|
|
|
|
2,735.0
|
|
2,421.0
|
|
13
|
|
Companywide total
|
|
|
|
|
|
|
26,556.8
|
|
24,432.1
|
|
9
|
%
|
1 Includes insurance for motorcycles, watercraft, RVs, and similar items.
Although new policies are necessary to maintain a growing book of business, we recognize the importance of retaining our current customers as a critical component of our continued growth. As shown in the tables below, we measure retention by policy life expectancy. We review our customer retention for our personal auto products using both a trailing 3-month and a trailing 12-month period. We believe changes in policy life expectancy using a trailing 12-month period measure is indicative of recent experience, mitigates the effects of month-to-month variability, and addresses seasonality. Although using a trailing 3-month measure does not address seasonality and can reflect more volatility, this measure is more responsive to current experience and generally can be an indicator of how our retention rates are moving.
To analyze growth, we review new policies, rate levels, and the retention characteristics of our segments.
D. Personal Lines
The following table shows our year-over-year changes for our Personal Lines business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Growth Over Prior Year
|
|
Quarter
|
|
Year-to-date
|
|
2021
|
2020
|
|
2021
|
2020
|
Applications
|
|
|
|
|
|
New
|
(15)
|
%
|
11
|
%
|
|
2
|
%
|
5
|
%
|
Renewal
|
11
|
|
12
|
|
|
11
|
|
11
|
|
Written premium per policy - Auto
|
1
|
|
(2)
|
|
|
(1)
|
|
0
|
|
Policy life expectancy - Auto
|
|
|
|
|
|
Trailing 3-months
|
10
|
|
7
|
|
|
|
|
Trailing 12-months
|
4
|
|
9
|
|
|
|
|
In our Personal Lines business, we experienced negative new application growth in the third quarter 2021 in response to us raising rates and tightening underwriting criteria during the second and third quarters 2021. The decrease in new applications during the third quarter 2021 resulted from decreases in both our personal auto and special lines products.
During the three and nine months ended September 30, 2021, our personal auto new application growth decreased 16% and increased 1%, respectively, compared to the same periods last year. The decrease in new applications reflect both actions taken during 2021 as well as the impact of third quarter 2020 activity that increased new applications last year.
During the third quarter 2021, rate increases became effective in 20 states, which had an average increase of about 6%. In the aggregate, rate changes for personal auto for the quarter were about 3% and about 5% for the year. These rate changes, coupled with reduced advertising spend and tightening underwriting criteria in consumer segments where losses indicate rate inadequacy, are the actions that we are taking to address rising auto accident frequency and severity as people are driving more. We will continue to manage growth and profitability in accordance with our long-standing goal of growing as fast as we can as long as we can provide good customer service at or below a companywide 96 combined ratio on a calendar-year basis.
In addition to the actions taken in 2021, during the third quarter 2020, new applications were elevated due in part to increased shopping during the period along with the impact from personal injury protection reform in Michigan and government stimulus checks. Early in the pandemic, the COVID-19 restrictions greatly reduced consumer shopping, which resumed to a great extent during the third quarter 2020.
During the third quarter 2021, we continued to see strong renewal personal auto application growth, we believe aided in part by our competitive product offerings and position in the marketplace. On a year-to-date basis, rate decreases taken throughout 2020 also helped spur the increase in renewal applications.
Our special lines products saw new applications decrease 8% and increase 5% during the quarter and year-to-date period, respectively. Year-over-year new application growth in the third quarter 2021 was less than the first nine months due to the significant application growth we experienced last year. During the third quarter 2020, we recorded a 21% increase in new applications due to high demand in our special lines products reflecting the overall growth in the RV, boat, and motorcycle industries as consumers focused on activities that promoted social distancing.
At the end of the third quarter 2021, we saw our Robinsons continue to enjoy year-over-year growth in personal auto policies in force that outpaced our other consumer segments (Sams, Dianes, and Wrights). New auto applications decreased year over year across all four consumer segments for the quarter. Quote volume decreased on a year-over-year basis for the third quarter in all consumer segments, except Robinsons. During the third quarter 2021, compared to the same period last year, all consumer segments saw a decreased rate of conversion.
We report our Agency and Direct business results separately as components of our Personal Lines segment to provide further understanding of our products by distribution channel. The channel discussions below are focused on personal auto insurance since this product accounted for 93% of the Personal Lines segment net premiums written during the third quarter and the first nine months of 2021.
The Agency Business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Growth Over Prior Year
|
|
Quarter
|
|
Year-to-date
|
|
2021
|
2020
|
|
2021
|
2020
|
Applications - Auto
|
|
|
|
|
|
New
|
(20)
|
%
|
4
|
%
|
|
(3)
|
%
|
(4)
|
%
|
Renewal
|
8
|
|
12
|
|
|
9
|
|
10
|
|
Written premium per policy - Auto
|
2
|
|
(1)
|
|
|
0
|
|
0
|
|
Policy life expectancy - Auto
|
|
|
|
|
|
Trailing 3-months
|
10
|
|
6
|
|
|
|
|
Trailing 12-months
|
4
|
|
10
|
|
|
|
|
The Agency business includes business written by more than 40,000 independent insurance agencies that represent Progressive, as well as brokerages in New York and California. During the third quarter and first nine months of 2021, the Agency auto business experienced a decrease in new applications, primarily due to the rate and underwriting changes previously discussed. During the quarter, new auto applications were down in 44 states, including all of our top 10 largest Agency states. Each of our consumer segments experienced a reduction in new applications and, due to growth in policy renewals, growth in policies in force.
During the third quarter 2021, we experienced a decrease in Agency auto quote volume of 5% and a decrease of 17% in the rate of conversion (i.e., converting a quote to a sale). During the first nine months of 2021, Agency auto quote volume increased 2%, while rate of conversion decreased 5%, compared to the same period last year. For the third quarter, each consumer segment other than the Robinsons saw decreases in quote volume, and for the year, each consumer segment other than the Wrights saw increases, compared to last year. The rate of conversion was down significantly in the third quarter 2021, compared to the same period last year, reflecting rate increases and the impact from tightening underwriting criteria this year, along with elevated conversion rates last year due in part to coverage reform in Michigan.
We experienced an increase in the percentage of Agency auto policies written for 12-month terms, primarily bundled policies, which have about twice the amount of net premiums written compared to 6-month policies. At the end of the third quarter 2021, 13% of our Agency auto policies in force were 12-month policies, compared to about 11% a year earlier. Written premium per policy on new and renewal Agency auto business was up 2%, compared to the third quarter last year.
The Direct Business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Growth Over Prior Year
|
|
Quarter
|
|
Year-to-date
|
|
2021
|
2020
|
|
2021
|
2020
|
Applications - Auto
|
|
|
|
|
|
New
|
(14)
|
%
|
13
|
%
|
|
4
|
%
|
8
|
%
|
Renewal
|
13
|
|
15
|
|
|
14
|
|
14
|
|
Written premium per policy - Auto
|
0
|
|
(2)
|
|
|
(2)
|
|
(1)
|
|
Policy life expectancy - Auto
|
|
|
|
|
|
Trailing 3-months
|
11
|
|
8
|
|
|
|
|
Trailing 12-months
|
4
|
|
7
|
|
|
|
|
The Direct business includes business written directly by Progressive on the Internet, through mobile devices, and over the phone. The Direct business experienced a decrease in new application growth during the third quarter 2021, which primarily reflects a decrease in advertising spend during the quarter and the rate and underwriting changes discussed elsewhere. During the quarter, new auto applications were down in 32 states, including all of our top 10 largest Direct states. During the third quarter, similar to Agency auto, although new applications decreased our Direct auto policies in force grew across all consumer segments, compared to last year.
During the third quarter 2021, we experienced a decrease in Direct auto quote volume of 12%, while our rate of conversion decreased 2%. During the first nine months of 2021,we experienced a decrease in Direct auto quote volume of 3%, while our rate of conversion increased 7%, compared to the same period last year. The decreases we experienced in our quote volume primarily reflect both the decrease in advertising spending during the third quarter 2021, and higher than expected quote volume last year, reflecting increased shopping in the third quarter 2020 that was delayed from the second quarter due to the COVID-19 restrictions. All consumer segments saw a decrease in quotes during the quarter, with the Sams showing the largest decrease of 16%, and on a year-over-year basis, all consumer segments saw a decrease in quotes.
During the third quarter 2021, written premium per policy for new Direct auto business decreased 4% and renewal business was flat. The decrease in the third quarter year over year is primarily driven by a shift in the mix of business. The rate increases did not have a significant effect on written premium per policy for the quarter since they were predominately effective later in the period.
E. Commercial Lines
The following table shows our year-over-year changes for our Commercial Lines business, excluding our TNC, BOP, and Protective Insurance products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Growth Over Prior Year
|
|
Quarter
|
|
Year-to-date
|
|
2021
|
2020
|
|
2021
|
2020
|
Applications - Auto
|
|
|
|
|
|
New
|
18
|
%
|
18
|
%
|
|
32
|
%
|
4
|
%
|
Renewal
|
15
|
|
9
|
|
|
12
|
|
8
|
|
Written premium per policy
|
20
|
|
4
|
|
|
17
|
|
2
|
|
Policy life expectancy - Trailing 12-months
|
13
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Our Commercial Lines business operates in five traditional business markets, which include business auto, for-hire transportation, contractor, for-hire specialty, and tow markets, primarily written through the agency channel. We also write TNC business and BOP insurance. With the acquisition of Protective Insurance and its subsidiaries during the second quarter, we expanded our offerings to larger fleet, workers’ compensation coverage for the transportation industry, and affinity programs.
Similar to our experience in our personal auto businesses, our Commercial Lines business results for the first half of 2020 were negatively impacted by COVID-19 restrictions, which influenced the demands and general consumer habits for goods and services provided by our Commercial Lines customers and required that certain businesses undergo temporary closure. During the third quarter 2020, Commercial Lines experienced significant new application growth, primarily driven by growth in our for-hire transportation business market target, due to greater demand for shipping services in light of the pandemic.
During the third quarter 2021, Commercial Lines continued to experience very strong new application growth that began in the third quarter 2020, reflecting continued improvement in the economy and our competitiveness in the marketplace. The new application growth during the third quarter was primarily driven by continued growth in our for-hire transportation business market target.
During the third quarter 2021, demand in the for-hire transportation market drove new customer shopping, which resulted in a 15% increase in quote volume and a 3% increase in the rate of conversion, compared to the same period last year. During the quarter, miles traveled in our TNC business increased significantly, compared to the third quarter last year when COVID-19 restrictions were in place. Our TNC net premiums written are impacted by miles driven and our third quarter 2021 net premiums written reflected the increase in rideshare miles that started to increase during the second half of 2020.
During the third quarter 2021, written premium per policy for new commercial auto business increased 21% and renewal business increased 19%, compared to the same period last year. The increases were due to more vehicles per policy, a shift in the mix of business toward higher premium coverages, and rate increases.
F. Property
The following table shows our year-over-year changes for our Property business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Growth Over Prior Year
|
|
Quarter
|
|
Year-to-date
|
|
2021
|
2020
|
|
2021
|
2020
|
Applications
|
|
|
|
|
|
New
|
16
|
%
|
17
|
%
|
|
24
|
%
|
10
|
%
|
Renewal
|
11
|
|
14
|
|
|
10
|
|
15
|
|
Written premium per policy
|
1
|
|
(1)
|
|
|
1
|
|
0
|
|
Policy life expectancy - Trailing 12-months
|
(8)
|
|
(1)
|
|
|
|
|
Our Property business writes residential property insurance for homeowners, other property owners, and renters, in the agency and direct channels. During the third quarter 2021, our Property business experienced a solid increase in new applications, primarily driven by growth in our direct channel and a continued rebound in the housing market for new home sales. Our Property segment was not significantly impacted by COVID-19 restrictions during 2020.
Despite rate increases taken during the last 12 months in our home product, we did not experience the same rate of change in written premium per policy on a year-over-year basis due to a shift in the mix of business to a larger share of renters policies, which have lower written premiums per policy. Our policy life expectancy decreased from the same period last year, primarily due to targeted underwriting changes being made in states where losses indicate rate inadequacy.
G. Income Taxes
A deferred tax asset or liability is a tax benefit or expense that is expected to be realized in a future period. At September 30, 2021 and 2020, and December 31, 2020, we reported net federal deferred tax liabilities. At September 30, 2021 and 2020, and December 31, 2020, we had net current income taxes payable of $36.2 million, $197.1 million, and $163.5 million, respectively, which were reported as part of other liabilities.
Our effective tax rate for the three and nine months ended September 30, 2021, was 14.7% and 20.5%, respectively, compared to 20.4% and 20.7% for the same periods last year. The lower effective tax rate for the current quarter was primarily due to our underwriting loss during the quarter, compared to an underwriting profit in the other periods presented.
IV. RESULTS OF OPERATIONS – INVESTMENTS
A. Investment Results
Our management philosophy governing the portfolio is to evaluate investment results on a total return basis. The fully taxable equivalent (FTE) total return includes recurring investment income, adjusted to a fully taxable amount for certain securities that receive preferential tax treatment (e.g., municipal securities), and total net realized, and changes in total net unrealized, gains (losses) on securities.
The following table summarizes investment results for the periods ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
Nine Months
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Pretax recurring investment book yield (annualized)
|
1.8
|
%
|
|
2.3
|
%
|
|
1.9
|
%
|
|
2.5
|
%
|
Weighted average FTE book yield (annualized)
|
1.8
|
|
|
2.3
|
|
|
1.9
|
|
|
2.5
|
|
FTE total return:
|
|
|
|
|
|
|
|
Fixed-income securities
|
0.2
|
|
|
1.1
|
|
|
0.3
|
|
|
5.8
|
|
Common stocks
|
0.2
|
|
|
9.6
|
|
|
21.0
|
|
|
5.8
|
|
Total portfolio
|
0.2
|
|
|
1.7
|
|
|
2.1
|
|
|
5.7
|
|
The decrease in the book yield compared to last year reflects that during the past twelve months we invested new cash from operations and portfolio turnover in lower interest rate securities. The decrease in our fixed-income total return reflects the increase in interest rates during 2021. During the first half of 2021, we held a common stock outside our indexed fund that had significant return volatility, which contributed to the significant return for the nine months ended September 30, 2021. The prior year returns in our common stock portfolio reflect the initial market decline due to COVID concerns in early 2020 and the subsequent market rebound.
A further break-down of our FTE total returns for our fixed-income portfolio for the periods ended September 30, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
Nine Months
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Fixed-income securities:
|
|
|
|
|
|
|
|
U.S. Treasury Notes
|
0.1
|
%
|
|
0.3
|
%
|
|
(0.6)
|
%
|
|
7.4
|
%
|
Municipal bonds
|
(0.2)
|
|
|
1.6
|
|
|
0.2
|
|
|
8.3
|
|
Corporate bonds
|
0.3
|
|
|
1.3
|
|
|
0
|
|
|
6.9
|
|
Residential mortgage-backed securities
|
0.3
|
|
|
0.8
|
|
|
1.1
|
|
|
2.3
|
|
Commercial mortgage-backed securities
|
0.1
|
|
|
1.6
|
|
|
1.1
|
|
|
2.7
|
|
Other asset-backed securities
|
0.3
|
|
|
0.6
|
|
|
0.9
|
|
|
2.5
|
|
Preferred stocks
|
1.0
|
|
|
4.9
|
|
|
7.2
|
|
|
0.6
|
|
Short-term investments
|
0
|
|
|
0.1
|
|
|
0.1
|
|
|
1.0
|
|
B. Portfolio Allocation
The composition of the investment portfolio was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Fair
Value
|
|
% of
Total
Portfolio
|
|
Duration
(years)
|
|
Rating1
|
September 30, 2021
|
|
|
|
|
|
|
|
U.S. government obligations
|
$
|
21,142.1
|
|
|
40.3
|
%
|
|
3.2
|
|
AAA
|
State and local government obligations
|
2,165.9
|
|
|
4.1
|
|
|
3.7
|
|
AA+
|
Corporate debt securities
|
10,874.0
|
|
|
20.8
|
|
|
3.1
|
|
BBB
|
Residential mortgage-backed securities
|
627.9
|
|
|
1.2
|
|
|
1.2
|
|
A+
|
Commercial mortgage-backed securities
|
5,789.0
|
|
|
11.1
|
|
|
3.5
|
|
A+
|
Other asset-backed securities
|
4,262.2
|
|
|
8.2
|
|
|
1.3
|
|
AA
|
Preferred stocks
|
1,757.4
|
|
|
3.4
|
|
|
3.5
|
|
BBB-
|
Short-term investments
|
1,088.7
|
|
|
2.1
|
|
|
0.2
|
|
AA+
|
Total fixed-income securities
|
47,707.2
|
|
|
91.2
|
|
|
3.0
|
|
AA-
|
Common equities
|
4,580.2
|
|
|
8.8
|
|
|
na
|
|
na
|
Total portfolio2
|
$
|
52,287.4
|
|
|
100.0
|
%
|
|
3.0
|
|
AA-
|
September 30, 2020
|
|
|
|
|
|
|
|
U.S. government obligations
|
$
|
10,203.8
|
|
|
22.3
|
%
|
|
3.5
|
|
AAA
|
State and local government obligations
|
4,529.8
|
|
|
9.9
|
|
|
4.6
|
|
AA
|
Corporate debt securities
|
10,612.0
|
|
|
23.2
|
|
|
3.9
|
|
BBB
|
Residential mortgage-backed securities
|
531.0
|
|
|
1.2
|
|
|
0.9
|
|
AA
|
Commercial mortgage-backed securities
|
6,053.6
|
|
|
13.2
|
|
|
2.9
|
|
AA
|
Other asset-backed securities
|
4,200.3
|
|
|
9.2
|
|
|
1.0
|
|
AA+
|
Preferred stocks
|
1,481.2
|
|
|
3.2
|
|
|
3.4
|
|
BBB-
|
Short-term investments
|
4,667.8
|
|
|
10.2
|
|
|
0.1
|
|
AA+
|
Total fixed-income securities
|
42,279.5
|
|
|
92.4
|
|
|
3.0
|
|
AA-
|
Common equities3
|
3,484.8
|
|
|
7.6
|
|
|
na
|
|
na
|
Total portfolio2
|
$
|
45,764.3
|
|
|
100.0
|
%
|
|
3.0
|
|
AA-
|
December 31, 2020
|
|
|
|
|
|
|
|
U.S. government obligations
|
$
|
12,740.0
|
|
|
26.8
|
%
|
|
3.3
|
|
AAA
|
State and local government obligations
|
3,221.8
|
|
|
6.8
|
|
|
4.4
|
|
AA
|
Corporate debt securities
|
10,185.2
|
|
|
21.4
|
|
|
3.8
|
|
BBB
|
Residential mortgage-backed securities
|
509.5
|
|
|
1.1
|
|
|
1.0
|
|
AA
|
Commercial mortgage-backed securities
|
6,175.1
|
|
|
13.0
|
|
|
3.2
|
|
AA-
|
Other asset-backed securities
|
3,784.6
|
|
|
7.9
|
|
|
1.0
|
|
AA+
|
Preferred stocks
|
1,617.6
|
|
|
3.4
|
|
|
3.6
|
|
BBB-
|
Short-term investments
|
5,218.5
|
|
|
11.0
|
|
|
<0.1
|
|
AA
|
Total fixed-income securities
|
43,452.3
|
|
|
91.4
|
|
|
2.9
|
|
AA-
|
Common equities
|
4,078.0
|
|
|
8.6
|
|
|
na
|
|
na
|
Total portfolio2
|
$
|
47,530.3
|
|
|
100.0
|
%
|
|
2.9
|
|
AA-
|
na = not applicable
|
|
|
|
|
|
|
|
1 Represents ratings at period end. Credit quality ratings are assigned by nationally recognized statistical rating organizations. To calculate the weighted average credit quality ratings, we weight individual securities based on fair value and assign a numeric score of 0-5, with non-investment-grade and non-rated securities assigned a score of 0-1. To the extent the weighted average of the ratings falls between AAA and AA+, we assign an internal rating of AAA-.
2 Our portfolio reflects the effect of net unsettled security transactions; at September 30, 2021, we had $399.7 million in other liabilities, compared to $469.2 million and $95.5 million at September 30, 2020 and December 31, 2020, respectively.
The total fair value of the portfolio at September 30, 2021 and 2020, and December 31, 2020, included $2.9 billion, $2.8 billion, and $6.2 billion, respectively, of securities held in a consolidated, non-insurance subsidiary of the holding company, net of any unsettled security transactions. During the first nine months of 2021, we used a portion of these investments to pay our common share dividends, repurchase common shares, and pay off debt.
Our asset allocation strategy is to maintain 0%-25% of our portfolio in Group I securities, with the balance (75%-100%) of our portfolio in Group II securities.
We define Group I securities to include:
•common equities,
•nonredeemable preferred stocks,
•redeemable preferred stocks, except for 50% of investment-grade redeemable preferred stocks with cumulative dividends, which are included in Group II, and
•all other non-investment-grade fixed-maturity securities.
Group II securities include:
•short-term securities, and
•all other fixed-maturity securities, including 50% of the investment-grade redeemable preferred stocks with cumulative dividends.
We believe this asset allocation strategy allows us to appropriately assess the risks associated with these securities for capital purposes and is in line with the treatment by our regulators.
The following table shows the composition of our Group I and Group II securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
September 30, 2020
|
|
December 31, 2020
|
($ in millions)
|
Fair
Value
|
% of Total
Portfolio
|
|
Fair
Value
|
% of Total
Portfolio
|
|
Fair
Value
|
% of Total
Portfolio
|
Group I securities:
|
|
|
|
|
|
|
|
|
Non-investment-grade fixed maturities
|
$
|
2,149.4
|
|
4.1
|
%
|
|
$
|
617.8
|
|
1.4
|
%
|
|
$
|
1,006.4
|
|
2.1
|
%
|
Redeemable preferred stocks1
|
92.3
|
|
0.2
|
|
|
91.5
|
|
0.2
|
|
|
97.3
|
|
0.2
|
|
Nonredeemable preferred stocks
|
1,572.8
|
|
3.0
|
|
|
1,298.2
|
|
2.8
|
|
|
1,422.9
|
|
3.0
|
|
Common equities
|
4,580.2
|
|
8.8
|
|
|
3,484.8
|
|
7.6
|
|
|
4,078.0
|
|
8.6
|
|
Total Group I securities
|
8,394.7
|
|
16.1
|
|
|
5,492.3
|
|
12.0
|
|
|
6,604.6
|
|
13.9
|
|
Group II securities:
|
|
|
|
|
|
|
|
|
Other fixed maturities
|
42,804.0
|
|
81.8
|
|
|
35,604.2
|
|
77.8
|
|
|
35,707.2
|
|
75.1
|
|
Short-term investments
|
1,088.7
|
|
2.1
|
|
|
4,667.8
|
|
10.2
|
|
|
5,218.5
|
|
11.0
|
|
Total Group II securities
|
43,892.7
|
|
83.9
|
|
|
40,272.0
|
|
88.0
|
|
|
40,925.7
|
|
86.1
|
|
Total portfolio
|
$
|
52,287.4
|
|
100.0
|
%
|
|
$
|
45,764.3
|
|
100.0
|
%
|
|
$
|
47,530.3
|
|
100.0
|
%
|
1 We did not hold any non-investment-grade redeemable preferred stocks at September 30, 2021 and 2020, or December 31, 2020.
To determine the allocation between Group I and Group II, we use the credit ratings from models provided by the National Association of Insurance Commissioners (NAIC) for classifying our residential and commercial mortgage-backed securities, excluding interest-only securities, and the credit ratings from nationally recognized statistical rating organizations (NRSRO) for all other debt securities. NAIC ratings are based on a model that considers the book price of our securities when assessing the probability of future losses in assigning a credit rating. As a result, NAIC ratings can vary from credit ratings issued by NRSROs. Management believes NAIC ratings more accurately reflect our risk profile when determining the asset allocation between Group I and Group II securities.
Unrealized Gains and Losses
As of September 30, 2021, our fixed-maturity portfolio had pretax net unrealized gains, recorded as part of accumulated other comprehensive income, of $474.5 million, compared to $1,226.1 million and $1,206.6 million at September 30, 2020 and December 31, 2020, respectively. The decrease in unrealized gains from both periods in 2020 was primarily due to increasing interest rates, which resulted in valuation declines in all fixed-maturity sectors, most prominently in the U.S. government and corporate debt securities portfolios.
See Note 2 – Investments for a further break-out of our gross unrealized gains and losses.
Holding Period Gains and Losses
The following table provides the gross and net holding period gain (loss) balance and activity during the nine months ended September 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
Gross Holding
Period Gains
|
Gross Holding
Period Losses
|
Net Holding Period Gains (Losses)
|
Balance at December 31, 2020
|
|
|
|
Hybrid fixed-maturity securities
|
$
|
15.2
|
|
$
|
0
|
|
$
|
15.2
|
|
Equity securities
|
2,961.5
|
|
(6.6)
|
|
2,954.9
|
|
Total holding period securities
|
2,976.7
|
|
(6.6)
|
|
2,970.1
|
|
Current year change in holding period securities
|
|
|
|
Hybrid fixed-maturity securities
|
2.1
|
|
(2.1)
|
|
0
|
|
Equity securities
|
490.9
|
|
(11.1)
|
|
479.8
|
|
Total changes in holding period securities
|
493.0
|
|
(13.2)
|
|
479.8
|
|
Balance at September 30, 2021
|
|
|
|
Hybrid fixed-maturity securities
|
17.3
|
|
(2.1)
|
|
15.2
|
|
Equity securities
|
3,452.4
|
|
(17.7)
|
|
3,434.7
|
|
Total holding period securities
|
$
|
3,469.7
|
|
$
|
(19.8)
|
|
$
|
3,449.9
|
|
Changes in holding period gains (losses), similar to unrealized gains (losses) in our fixed-maturity portfolio, are the result of changes in market performance as well as sales of securities based on various portfolio management decisions.
Fixed-Income Securities
The fixed-income portfolio is managed internally and includes fixed-maturity securities, short-term investments, and nonredeemable preferred stocks.
Following are the primary exposures for our fixed-income portfolio. Details of our policies related to these exposures can be found in the Management’s Discussion and Analysis included in our 2020 Annual Report to Shareholders.
•Interest rate risk - our duration of 3.0 years at September 30, 2021, fell within our acceptable range of 1.5 to 5 years. The duration distribution of our fixed-income portfolio, excluding short-term investments, represented by the interest rate sensitivity of the comparable benchmark U.S. Treasury Notes, was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Duration Distribution
|
September 30, 2021
|
|
September 30, 2020
|
|
December 31, 2020
|
1 year
|
25.2
|
%
|
|
26.5
|
%
|
|
19.5
|
%
|
2 years
|
19.5
|
|
|
15.1
|
|
|
18.7
|
|
3 years
|
22.5
|
|
|
21.4
|
|
|
24.9
|
|
5 years
|
15.9
|
|
|
18.4
|
|
|
18.5
|
|
7 years
|
11.8
|
|
|
10.8
|
|
|
10.9
|
|
10 years
|
5.1
|
|
|
7.8
|
|
|
7.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed-income portfolio
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
•Credit risk - our credit quality rating of AA- was above our minimum threshold during the third quarter 2021. The credit quality distribution of the fixed-income portfolio was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rating
|
September 30, 2021
|
|
September 30, 2020
|
|
December 31, 2020
|
AAA
|
58.3
|
%
|
|
53.3
|
%
|
|
53.3
|
%
|
AA
|
7.2
|
|
|
10.4
|
|
|
9.8
|
|
A
|
8.4
|
|
|
11.8
|
|
|
11.1
|
|
BBB
|
20.6
|
|
|
22.4
|
|
|
22.9
|
|
Non-investment grade/non-rated1
|
|
|
|
|
|
BB
|
4.1
|
|
|
1.6
|
|
|
2.4
|
|
B
|
1.0
|
|
|
0.3
|
|
|
0.2
|
|
CCC and lower
|
0.1
|
|
|
0
|
|
|
0.1
|
|
Non-rated
|
0.3
|
|
|
0.2
|
|
|
0.2
|
|
Total fixed-income portfolio
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
1 The ratings in the table above are assigned by NRSROs. The non-investment-grade fixed-income securities based upon our Group I classification represented 5.3% of the total fixed-income portfolio at September 30, 2021, compared to 2.1% at September 30, 2020 and 2.9% at December 31, 2020.
•Concentration risk - we did not have any investments in a single issuer, either overall or in the context of individual assets classes and sectors, that exceeded our thresholds during the third quarter 2021.
•Prepayment and extension risk - we did not experience significant adverse prepayment or extension of principal relative to our cash flow expectations in the portfolio during the third quarter 2021.
•Liquidity risk - our overall portfolio remains very liquid and we believe that it is sufficient to meet expected near-term liquidity requirements.
◦The short-to-intermediate duration of our portfolio provides a source of liquidity, as we expect approximately $4.9 billion, or 19.3%, of principal repayment from our fixed-income portfolio, excluding U.S. Treasury Notes and short-term investments, during the remainder of 2021 and all of 2022. Cash from interest and dividend payments provides an additional source of recurring liquidity.
◦The duration of our U.S. government obligations, which are included in the fixed-income portfolio, was comprised of the following at September 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Fair
Value
|
|
Duration
(years)
|
U.S. Treasury Notes
|
|
|
|
Less than one year
|
$
|
2,255.5
|
|
|
0.7
|
|
One to two years
|
5,689.6
|
|
|
1.6
|
|
Two to three years
|
5,026.1
|
|
|
2.5
|
|
Three to five years
|
4,423.7
|
|
|
4.2
|
|
Five to seven years
|
2,711.4
|
|
|
6.4
|
|
Seven to ten years
|
1,035.8
|
|
|
8.8
|
|
Total U.S. Treasury Notes
|
$
|
21,142.1
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSET-BACKED SECURITIES
Included in the fixed-income portfolio are asset-backed securities, which were comprised of the following at the balance sheet dates listed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Fair
Value
|
|
Net Unrealized
Gains (Losses)
|
|
% of Asset-
Backed
Securities
|
|
Duration
(years)
|
|
Rating
(at period end)1
|
September 30, 2021
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities
|
$
|
627.9
|
|
|
$
|
2.5
|
|
|
5.9
|
%
|
|
1.2
|
|
|
A+
|
Commercial mortgage-backed securities
|
5,789.0
|
|
|
49.6
|
|
|
54.2
|
|
|
3.5
|
|
|
A+
|
Other asset-backed securities
|
4,262.2
|
|
|
26.6
|
|
|
39.9
|
|
|
1.3
|
|
|
AA
|
Total asset-backed securities
|
$
|
10,679.1
|
|
|
$
|
78.7
|
|
|
100.0
|
%
|
|
2.5
|
|
|
AA-
|
September 30, 2020
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities
|
$
|
531.0
|
|
|
$
|
5.6
|
|
|
4.9
|
%
|
|
0.9
|
|
|
AA
|
Commercial mortgage-backed securities
|
6,053.6
|
|
|
89.2
|
|
|
56.1
|
|
|
2.9
|
|
|
AA
|
Other asset-backed securities
|
4,200.3
|
|
|
44.5
|
|
|
39.0
|
|
|
1.0
|
|
|
AA+
|
Total asset-backed securities
|
$
|
10,784.9
|
|
|
$
|
139.3
|
|
|
100.0
|
%
|
|
2.1
|
|
|
AA
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities
|
$
|
509.5
|
|
|
$
|
6.2
|
|
|
4.9
|
%
|
|
1.0
|
|
|
AA
|
Commercial mortgage-backed securities
|
6,175.1
|
|
|
132.5
|
|
|
59.0
|
|
|
3.2
|
|
|
AA-
|
Other asset-backed securities
|
3,784.6
|
|
|
39.6
|
|
|
36.1
|
|
|
1.0
|
|
|
AA+
|
Total asset-backed securities
|
$
|
10,469.2
|
|
|
$
|
178.3
|
|
|
100.0
|
%
|
|
2.3
|
|
|
AA
|
1 The credit quality ratings in the table above are assigned by NRSROs.
Residential Mortgage-Backed Securities (RMBS) The following table details the credit quality rating and fair value of our RMBS, along with the loan classification and a comparison of the fair value at September 30, 2021, to our original investment value (adjusted for returns of principal, amortization, and write-downs):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Mortgage-Backed Securities (at September 30, 2021)
|
($ in millions)
Rating1
|
Non-Agency
|
|
Agency
|
|
Government/GSE2
|
|
Total
|
|
% of Total
|
AAA
|
$
|
225.3
|
|
|
$
|
86.8
|
|
|
$
|
3.3
|
|
|
$
|
315.4
|
|
|
50.2
|
%
|
AA
|
59.8
|
|
|
0
|
|
|
0.6
|
|
|
60.4
|
|
|
9.6
|
|
A
|
32.9
|
|
|
0
|
|
|
0
|
|
|
32.9
|
|
|
5.2
|
|
BBB
|
71.5
|
|
|
0
|
|
|
0
|
|
|
71.5
|
|
|
11.4
|
|
Non-investment grade/non-rated:
|
|
|
|
|
|
|
|
|
|
BB
|
101.5
|
|
|
0
|
|
|
0
|
|
|
101.5
|
|
|
16.2
|
|
B
|
26.1
|
|
|
0
|
|
|
0
|
|
|
26.1
|
|
|
4.2
|
|
CCC and lower
|
6.6
|
|
|
0
|
|
|
0
|
|
|
6.6
|
|
|
1.1
|
|
Non-rated
|
13.5
|
|
|
0
|
|
|
0
|
|
|
13.5
|
|
|
2.1
|
|
Total fair value
|
$
|
537.2
|
|
|
$
|
86.8
|
|
|
$
|
3.9
|
|
|
$
|
627.9
|
|
|
100.0
|
%
|
Increase (decrease) in value
|
0.7
|
%
|
|
(0.3)
|
%
|
|
4.6
|
%
|
|
0.6
|
%
|
|
|
1 The credit quality ratings in the table above are assigned by NRSROs; when we assign the NAIC ratings for our RMBS, $56.0 million of our non-investment-grade securities are rated investment-grade and classified as Group II, and $91.7 million, or 14.6% of our total RMBS, are not rated by the NAIC and are classified as Group I.
2 The securities in this category are insured by a Government Sponsored Entity (GSE) and/or collateralized by mortgage loans insured by the Federal Housing Administration (FHA) or the U.S. Department of Veteran Affairs (VA).
In the residential mortgage-backed sector, our portfolio consists of deals that are backed by high-credit quality borrowers or have strong structural protections through underlying loan collateralization. During the first nine months of 2021, we selectively added to this sector.
Commercial Mortgage-Backed Securities (CMBS) The following table details the credit quality rating and fair value of our CMBS, along with a comparison of the fair value at September 30, 2021, to our original investment value (adjusted for returns of principal, amortization, and write-downs):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Mortgage-Backed Securities (at September 30, 2021)
|
($ in millions)
Rating1
|
Multi-Borrower
|
|
Single-Borrower
|
|
Total
|
|
% of Total
|
AAA
|
$
|
306.7
|
|
|
$
|
1,530.7
|
|
|
$
|
1,837.4
|
|
|
31.7
|
%
|
AA
|
3.2
|
|
|
1,355.9
|
|
|
1,359.1
|
|
|
23.5
|
|
A
|
0
|
|
|
1,096.5
|
|
|
1,096.5
|
|
|
19.0
|
|
BBB
|
0
|
|
|
1,073.3
|
|
|
1,073.3
|
|
|
18.5
|
|
Non-investment grade/non-rated:
|
|
|
|
|
|
|
|
BB
|
0
|
|
|
422.4
|
|
|
422.4
|
|
|
7.3
|
|
B
|
0.3
|
|
|
0
|
|
|
0.3
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value
|
$
|
310.2
|
|
|
$
|
5,478.8
|
|
|
$
|
5,789.0
|
|
|
100.0
|
%
|
Increase (decrease) in value
|
4.1
|
%
|
|
0.7
|
%
|
|
0.9
|
%
|
|
|
1 The credit quality ratings in the table above are assigned by NRSROs; when we assign the NAIC ratings for our CMBS, $43.2 million of our non-investment-grade securities are rated investment-grade and classified as Group II, and $379.5 million, or 6.6% of our total CMBS, are not rated by the NAIC and are classified as Group I.
During the third quarter 2021, we were active in purchasing single-asset/single-borrower securities in both new issue and secondary markets, in addition to focusing on adding to some of our existing positions in the high-credit quality office and life sciences sectors. The market tone remained positive during the third quarter with credit spreads seeing a small tightening.
During the third quarter 2021, we sold some of our AAA-rated securities, in both the fixed-rate and floating-rate sectors, and continued scaling back on positions that met or exceeded our performance objectives or were no longer core to our strategy.
Other Asset-Backed Securities (OABS) The following table details the credit quality rating and fair value of our OABS, along with a comparison of the fair value at September 30, 2021, to our original investment value (adjusted for returns of principal, amortization, and write-downs):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Asset-Backed Securities (at September 30, 2021)
|
($ in millions)
Rating
|
Automobile
|
Collateralized Loan Obligations
|
Student Loan
|
Whole Business Securitizations
|
Equipment
|
Other
|
Total
|
% of
Total
|
AAA
|
$
|
767.7
|
|
$
|
900.9
|
|
$
|
89.4
|
|
$
|
0
|
|
$
|
579.8
|
|
$
|
202.9
|
|
$
|
2,540.7
|
|
59.6
|
%
|
AA
|
255.1
|
|
365.2
|
|
14.1
|
|
0
|
|
105.5
|
|
16.5
|
|
756.4
|
|
17.8
|
|
A
|
35.9
|
|
1.0
|
|
9.1
|
|
0
|
|
122.4
|
|
111.6
|
|
280.0
|
|
6.6
|
|
BBB
|
7.2
|
|
30.6
|
|
0
|
|
606.7
|
|
0
|
|
22.1
|
|
666.6
|
|
15.6
|
|
Non-investment grade/non-rated:
|
|
|
|
|
|
|
|
|
BB
|
0
|
|
3.0
|
|
0
|
|
0
|
|
0
|
|
15.5
|
|
18.5
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value
|
$
|
1,065.9
|
|
$
|
1,300.7
|
|
$
|
112.6
|
|
$
|
606.7
|
|
$
|
807.7
|
|
$
|
368.6
|
|
$
|
4,262.2
|
|
100.0
|
%
|
Increase (decrease) in value
|
0.3
|
%
|
0
|
%
|
1.6
|
%
|
2.2
|
%
|
0.8
|
%
|
0.7
|
%
|
0.6
|
%
|
|
During the third quarter 2021, we selectively added to our automobile, equipment, whole business securitization, and other OABS sectors mostly through new issuances as we viewed spreads, and potential returns, across this sector to be less attractive compared to previous quarters. Our allocation to collateralized loan obligation securities increased during the quarter, as we perceived the sector provided better return potential than the other OABS sectors, primarily focusing on higher credit tranched securities in the capital structure.
MUNICIPAL SECURITIES
The following table details the credit quality rating of our municipal securities at September 30, 2021, without the benefit of credit or bond insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Securities (at September 30, 2021)
|
(millions)
Rating
|
General
Obligations
|
|
Revenue
Bonds
|
|
Total
|
AAA
|
$
|
635.2
|
|
|
$
|
243.9
|
|
|
$
|
879.1
|
|
AA
|
491.2
|
|
|
697.8
|
|
|
1,189.0
|
|
A
|
0
|
|
|
96.6
|
|
|
96.6
|
|
BBB
|
0
|
|
|
1.0
|
|
|
1.0
|
|
Non-rated
|
0
|
|
|
0.2
|
|
|
0.2
|
|
Total
|
$
|
1,126.4
|
|
|
$
|
1,039.5
|
|
|
$
|
2,165.9
|
|
Included in revenue bonds were $478.3 million of single-family housing revenue bonds issued by state housing finance agencies, of which $342.2 million were supported by individual mortgages held by the state housing finance agencies and $136.1 million were supported by mortgage-backed securities.
Of the programs supported by mortgage-backed securities, approximately 75% were collateralized by Ginnie Mae mortgages, which are fully guaranteed by the U.S. government; the remaining 25% were collateralized by Fannie Mae and Freddie Mac mortgages. Of the programs supported by individual mortgages held by the state housing finance agencies, the overall credit quality rating was AA+. Most of these mortgages were supported by the Federal Housing Administration, the U.S. Department of Veterans Affairs, or private mortgage insurance providers.
As spreads tightened during the quarter, we continued to reduce our allocation to the municipal sector. Our sales were primarily in revenue bonds that were purchased in 2020 when spreads were wider and offered attractive performance opportunities. As mutual funds continued receiving strong inflows from investors, the municipal sector has performed well. At current valuations, however, municipal bonds are less attractive to us on a relative value basis.
CORPORATE DEBT SECURITIES
The following table details the credit quality rating of our corporate debt securities at September 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Securities (at September 30, 2021)
|
(millions)
Rating
|
Consumer
|
Industrial
|
Communication
|
Financial Services
|
Agency
|
Technology
|
Basic Materials
|
Energy
|
Total
|
AAA
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
38.3
|
|
$
|
3.1
|
|
$
|
1.7
|
|
$
|
0
|
|
$
|
0
|
|
$
|
43.1
|
|
AA
|
97.5
|
|
1.8
|
|
0.5
|
|
125.7
|
|
3.9
|
|
18.4
|
|
0
|
|
16.1
|
|
263.9
|
|
A
|
402.8
|
|
262.5
|
|
243.5
|
|
1,168.8
|
|
0
|
|
174.1
|
|
131.7
|
|
109.2
|
|
2,492.6
|
|
BBB
|
2,198.6
|
|
1,457.0
|
|
197.6
|
|
1,129.0
|
|
0
|
|
676.6
|
|
36.9
|
|
719.3
|
|
6,415.0
|
|
Non-investment grade/non-rated:
|
|
|
|
|
|
|
|
|
|
BB
|
519.2
|
|
152.4
|
|
123.0
|
|
167.0
|
|
0
|
|
86.9
|
|
36.7
|
|
53.8
|
|
1,139.0
|
|
B
|
342.6
|
|
82.0
|
|
2.3
|
|
36.1
|
|
0
|
|
4.2
|
|
0
|
|
0
|
|
467.2
|
|
CCC and lower
|
51.2
|
|
0
|
|
2.0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
53.2
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value
|
$
|
3,611.9
|
|
$
|
1,955.7
|
|
$
|
568.9
|
|
$
|
2,664.9
|
|
$
|
7.0
|
|
$
|
961.9
|
|
$
|
205.3
|
|
$
|
898.4
|
|
$
|
10,874.0
|
|
During the third quarter of 2021, the valuation of our corporate debt portfolio saw a modest increase as credit spreads narrowed slightly. Activity during the quarter was primarily a combination of selling some of our investment-grade longer-maturity holdings we believed had exceeded our performance objective and continuing to selectively increase our allocation to high-yield securities that we believed would benefit from the continuation of the economic recovery.
We also shortened the maturity profile of the corporate portfolio to 3.1 years at September 30, 2021, compared to 3.3 years at June 30, 2021. Overall, our corporate securities, as a percentage of the fixed-income portfolio, has remained consistent since the end of the second quarter 2021. At September 30, 2021 and June 30, 2021, the portfolio was approximately 23% of our fixed-income portfolio.
PREFERRED STOCKS – REDEEMABLE AND NONREDEEMABLE
The table below shows the exposure break-down by sector and rating at September 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stocks (at September 30, 2021)
|
|
Financial Services
|
|
|
|
(millions)
Rating
|
U.S.
Banks
|
Foreign
Banks
|
Insurance
|
Other
|
Industrials
|
Utilities
|
Total
|
|
|
|
|
|
|
|
|
BBB
|
$
|
1,006.6
|
|
$
|
55.4
|
|
$
|
129.8
|
|
$
|
46.8
|
|
$
|
133.2
|
|
$
|
0
|
|
$
|
1,371.8
|
|
Non-investment grade/non-rated:
|
|
|
|
|
|
|
|
BB
|
183.1
|
|
24.1
|
|
0
|
|
0
|
|
25.5
|
|
42.1
|
|
274.8
|
|
|
|
|
|
|
|
|
|
Non-rated
|
0
|
|
0
|
|
35.0
|
|
41.4
|
|
34.4
|
|
0
|
|
110.8
|
|
Total fair value
|
$
|
1,189.7
|
|
$
|
79.5
|
|
$
|
164.8
|
|
$
|
88.2
|
|
$
|
193.1
|
|
$
|
42.1
|
|
$
|
1,757.4
|
|
The majority of our preferred securities have fixed-rate dividends until a call date and then, if not called, generally convert to floating-rate dividends. The interest rate duration of our preferred securities is calculated to reflect the call, floor, and floating-rate features. Although a preferred security will remain outstanding if not called, its interest rate duration will reflect the variable nature of the dividend. Our non-investment-grade preferred stocks were all with issuers that maintain investment-grade senior debt ratings.
We also face the risk that dividend payments on our preferred stock holdings could be deferred for one or more periods or skipped entirely. As of September 30, 2021, all of our preferred securities continued to pay their dividends in full and on time. Approximately 84% of our preferred stock securities pay dividends that have tax preferential characteristics, while the balance pay dividends that are fully taxable.
During third quarter 2021, our preferred stock portfolio produced a positive return as their high level of income offset slight price declines due to higher interest rates.
Common Equities
Common equities, as reported on the balance sheets, were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
September 30, 2021
|
|
September 30, 2020
|
|
December 31, 2020
|
Common stocks
|
$
|
4,567.6
|
|
|
99.7
|
%
|
|
$
|
3,482.1
|
|
|
99.9
|
%
|
|
$
|
4,074.9
|
|
|
99.9
|
%
|
Other risk investments
|
12.6
|
|
|
0.3
|
|
|
2.7
|
|
|
0.1
|
|
|
3.1
|
|
|
0.1
|
|
Total common equities
|
$
|
4,580.2
|
|
|
100.0
|
%
|
|
$
|
3,484.8
|
|
|
100.0
|
%
|
|
$
|
4,078.0
|
|
|
100.0
|
%
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The majority of our common stock portfolio is an indexed portfolio, which consists of individual holdings selected based on their contribution to the correlation with the Russell 1000 Index. We held 832 out of 1,026, or 81%, of the common stocks comprising the index at September 30, 2021, which made up 96% of the total market capitalization of the index. At September 30, 2021 and December 31, 2020, the year-to-date total return, based on GAAP income, was within our targeted tracking error, which is +/- 50 basis points, while at September 30, 2020, the year-to-date total return, based on GAAP income, was outside the targeted tracking error.
The other risk investments consist of limited partnership interests. During the third quarter 2021, we funded $0.7 million on a partnership investment and have an open funding commitment of $5.4 million at September 30, 2021 on this investment. In addition, partnership investments with a value of $7.7 million at September 30, 2021 were assumed as part of our acquisition of Protective Insurance.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995: Investors are cautioned that certain statements in this report not based upon historical fact are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements often use words such as “estimate,” “expect,” “intend,” “plan,” “believe,” and other words and terms of similar meaning, or are tied to future periods, in connection with a discussion of future operating or financial performance. Forward-looking statements are based on current expectations and projections about future events, and are subject to certain risks, assumptions and uncertainties that could cause actual events and results to differ materially from those discussed herein. These risks and uncertainties include, without limitation, uncertainties related to:
•our ability to underwrite and price risks accurately and to charge adequate rates to policyholders;
•our ability to establish accurate loss reserves;
•the impact of severe weather, other catastrophe events and climate change;
•the effectiveness of our reinsurance programs;
•the highly competitive nature of property-casualty insurance markets;
•whether we innovate effectively and respond to our competitors’ initiatives;
•whether we effectively manage complexity as we develop and deliver products and customer experiences;
•how intellectual property rights could affect our competitiveness and our business operations;
•whether we adjust claims accurately;
•our ability to maintain a recognized and trusted brand;
•our ability to attract, develop and retain talent and maintain appropriate staffing levels;
•compliance with complex laws and regulations;
•litigation challenging our business practices, and those of our competitors and other companies;
•the impacts of a security breach or other attack involving our computer systems or the systems of one or more of our vendors;
•the secure and uninterrupted operation of the facilities, systems, and business functions that are critical to our business;
•the success of our efforts to develop new products or enter into new areas of business and navigate related risks;
•our continued ability to send and accept electronic payments;
•the possible impairment of our goodwill or intangible assets;
•the performance of our fixed-income and equity investment portfolios;
•the potential elimination of, or change in, the London Interbank Offered Rate;
•our continued ability to access our cash accounts and/or convert securities into cash on favorable terms;
•the impact if one or more parties with which we enter into significant contracts or transact business fail to perform;
•legal restrictions on our insurance subsidiaries’ ability to pay dividends to The Progressive Corporation;
•limitations on our ability to pay dividends on our common shares under the terms of our outstanding preferred shares;
•our ability to obtain capital when necessary to support our business and potential growth;
•evaluations by credit rating and other rating agencies;
•the variable nature of our common share dividend policy;
•whether our investments in certain tax-advantaged projects generate the anticipated returns;
•the impact from not managing to short-term earnings expectations in light of our goal to maximize the long-term value of the enterprise;
•impacts from the outbreak of the novel coronavirus, or COVID-19, and the restrictions put in place to help slow and/or stop the spread of the virus; and
•other matters described from time to time in our releases and publications, and in our periodic reports and other documents filed with the United States Securities and Exchange Commission, including, without limitation, the Risk Factors section of our Annual Report on Form 10-K for the year ending December 31, 2020.
In addition, investors should be aware that generally accepted accounting principles prescribe when a company may reserve for particular risks, including litigation exposures. Accordingly, results for a given reporting period could be significantly affected if and when we establish reserves for one or more contingencies. Also, our regular reserve reviews may result in adjustments of varying magnitude as additional information regarding claims activity becomes known. Reported results, therefore, may be volatile in certain accounting periods.