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
86.8%
of the outstanding capital stock of ARX at
September 30, 2018
and
69.0%
at
September 30, 2017
and
December 31, 2017
. The increase in Progressive’s ownership of ARX at September 30, 2018, is primarily due to the "put" by minority ARX shareholders of
204,527
of their ARX shares during the second quarter 2018, including exercised stock options, to Progressive pursuant to the stockholders’ agreement. 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, 2018
, 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, 2017
(
“
2017
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
$20.5 million
at
September 30, 2018
, and
$5.3 million
at both September 30, 2017 and December 31, 2017.
Note 2
Investments
— The following tables present the composition of our investment portfolio by major security type, consistent with our classification of how we manage, monitor, and measure the portfolio. Our securities are reported in our Consolidated Balance Sheets at fair value. The changes in fair value for our fixed-maturity securities (other than hybrid securities) are reported as a component of accumulated other comprehensive income, net of deferred income taxes, in our Consolidated Balance Sheets.
The net holding period gains (losses) reported below represent the inception-to-date changes in fair value. The changes in the net holding period gains (losses) between periods for the hybrid securities and, beginning in
2018
, equity securities are recorded as a component of net realized gains (losses) on securities in our Consolidated Statements of Comprehensive Income. Prior to 2018, the change in fair value of our equity securities was part of accumulated other comprehensive income (see
Note 14 – New Accounting Standards
for further discussion).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Cost
|
|
|
Gross
Unrealized Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Net
Holding Period Gains
(Losses)
|
|
|
Fair
Value
|
|
|
% of
Total
Fair
Value
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations
|
$
|
9,942.0
|
|
|
$
|
0
|
|
|
$
|
(189.5
|
)
|
|
$
|
0
|
|
|
$
|
9,752.5
|
|
|
30.2
|
%
|
State and local government obligations
|
1,610.1
|
|
|
1.9
|
|
|
(23.2
|
)
|
|
0
|
|
|
1,588.8
|
|
|
4.9
|
|
Foreign government obligations
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Corporate debt securities
|
7,229.1
|
|
|
4.9
|
|
|
(85.2
|
)
|
|
(2.0
|
)
|
|
7,146.8
|
|
|
22.1
|
|
Residential mortgage-backed securities
|
767.8
|
|
|
7.6
|
|
|
(5.6
|
)
|
|
0
|
|
|
769.8
|
|
|
2.4
|
|
Commercial mortgage-backed securities
|
2,986.5
|
|
|
3.3
|
|
|
(30.5
|
)
|
|
0
|
|
|
2,959.3
|
|
|
9.1
|
|
Other asset-backed securities
|
3,205.0
|
|
|
1.4
|
|
|
(13.6
|
)
|
|
0.1
|
|
|
3,192.9
|
|
|
9.9
|
|
Redeemable preferred stocks
|
222.9
|
|
|
13.2
|
|
|
(1.4
|
)
|
|
(2.1
|
)
|
|
232.6
|
|
|
0.7
|
|
Total fixed maturities
|
25,963.4
|
|
|
32.3
|
|
|
(349.0
|
)
|
|
(4.0
|
)
|
|
25,642.7
|
|
|
79.3
|
|
Short-term investments
|
2,809.7
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
2,809.7
|
|
|
8.7
|
|
Total available-for-sale securities
|
28,773.1
|
|
|
32.3
|
|
|
(349.0
|
)
|
|
(4.0
|
)
|
|
28,452.4
|
|
|
88.0
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
Nonredeemable preferred stocks
|
758.9
|
|
|
0
|
|
|
0
|
|
|
82.0
|
|
|
840.9
|
|
|
2.6
|
|
Common equities
|
1,135.0
|
|
|
0
|
|
|
0
|
|
|
1,922.3
|
|
|
3,057.3
|
|
|
9.4
|
|
Total equity securities
|
1,893.9
|
|
|
0
|
|
|
0
|
|
|
2,004.3
|
|
|
3,898.2
|
|
|
12.0
|
|
Total portfolio
1,2
|
$
|
30,667.0
|
|
|
$
|
32.3
|
|
|
$
|
(349.0
|
)
|
|
$
|
2,000.3
|
|
|
$
|
32,350.6
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ 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
|
947.0
|
|
|
12.2
|
|
|
(3.6
|
)
|
|
0
|
|
|
955.6
|
|
|
3.5
|
|
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
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations
|
$
|
6,688.8
|
|
|
$
|
1.1
|
|
|
$
|
(44.0
|
)
|
|
$
|
0
|
|
|
$
|
6,645.9
|
|
|
24.4
|
%
|
State and local government obligations
|
2,285.6
|
|
|
20.7
|
|
|
(9.3
|
)
|
|
0.1
|
|
|
2,297.1
|
|
|
8.4
|
|
Foreign government obligations
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Corporate debt securities
|
4,997.2
|
|
|
14.8
|
|
|
(14.4
|
)
|
|
0.1
|
|
|
4,997.7
|
|
|
18.3
|
|
Residential mortgage-backed securities
|
828.8
|
|
|
11.3
|
|
|
(3.4
|
)
|
|
0
|
|
|
836.7
|
|
|
3.1
|
|
Commercial mortgage-backed securities
|
2,760.1
|
|
|
11.8
|
|
|
(13.3
|
)
|
|
0
|
|
|
2,758.6
|
|
|
10.1
|
|
Other asset-backed securities
|
2,454.5
|
|
|
4.5
|
|
|
(4.5
|
)
|
|
0.2
|
|
|
2,454.7
|
|
|
9.0
|
|
Redeemable preferred stocks
|
194.9
|
|
|
17.8
|
|
|
(1.5
|
)
|
|
(0.2
|
)
|
|
211.0
|
|
|
0.8
|
|
Total fixed maturities
|
20,209.9
|
|
|
82.0
|
|
|
(90.4
|
)
|
|
0.2
|
|
|
20,201.7
|
|
|
74.1
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
Nonredeemable preferred stocks
|
698.6
|
|
|
114.0
|
|
|
(8.8
|
)
|
|
0
|
|
|
803.8
|
|
|
2.9
|
|
Common equities
|
1,499.0
|
|
|
1,901.0
|
|
|
(0.2
|
)
|
|
0
|
|
|
3,399.8
|
|
|
12.5
|
|
Short-term investments
|
2,869.4
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
2,869.4
|
|
|
10.5
|
|
Total portfolio
1,2
|
$
|
25,276.9
|
|
|
$
|
2,097.0
|
|
|
$
|
(99.4
|
)
|
|
$
|
0.2
|
|
|
$
|
27,274.7
|
|
|
100.0
|
%
|
1
Our portfolio reflects the effect of unsettled security transactions; at
September 30, 2018
and
2017
, we had
$5.2 million
and
$238.3 million
, respectively, included in “other liabilities,” compared to
$5.8 million
included in “other assets” at
December 31, 2017
.
2
The total fair value of the portfolio at
September 30, 2018
and
2017
, and
December 31, 2017
, included
$1.8 billion
,
$1.1 billion
, and
$1.6 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 or are redeemable within one year.
We did
not
have any open repurchase or reverse repurchase transactions in our short-term investment portfolio at
September 30, 2018
and
2017
, or
December 31, 2017
. 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 securities are hybrid securities, which are reported at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
(millions)
|
2018
|
|
|
2017
|
|
|
December 31, 2017
|
|
Fixed maturities:
|
|
|
|
|
|
State and local government obligations
|
$
|
3.6
|
|
|
$
|
2.4
|
|
|
$
|
6.1
|
|
Corporate debt securities
|
159.7
|
|
|
114.9
|
|
|
99.8
|
|
Other asset-backed securities
|
5.0
|
|
|
7.1
|
|
|
6.7
|
|
Redeemable preferred stocks
|
72.0
|
|
|
35.5
|
|
|
30.3
|
|
Total hybrid securities
|
$
|
240.3
|
|
|
$
|
159.9
|
|
|
$
|
142.9
|
|
Certain securities in our portfolio are accounted for as hybrid securities because they contain embedded derivatives that are not deemed to be clearly and closely related to the host investments. Since the embedded derivatives (e.g., change-in-control put option, debt-to-equity conversion, or any other feature unrelated to the credit quality or risk of default of the issuer that could impact the amount or timing of our expected future cash flows) do not have observable intrinsic values, we have elected to record the changes in fair value of these securities through income as realized gains or losses.
Fixed Maturities
The composition of fixed maturities by maturity at
September 30, 2018
, was:
|
|
|
|
|
|
|
|
|
(millions)
|
Cost
|
|
|
Fair Value
|
|
Less than one year
|
$
|
4,192.3
|
|
|
$
|
4,196.4
|
|
One to five years
|
16,545.0
|
|
|
16,315.6
|
|
Five to ten years
|
5,123.1
|
|
|
5,028.3
|
|
Ten years or greater
|
103.0
|
|
|
102.4
|
|
Total
|
$
|
25,963.4
|
|
|
$
|
25,642.7
|
|
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, 2018
, we had
$349.0 million
of gross unrealized losses in our fixed-maturity securities. A review of our fixed-maturity securities indicated that the issuers were current with respect to their interest obligations and that there was no evidence of deterioration of the current cash flow projections that would indicate we would not receive the remaining principal at maturity.
The following tables show the composition of gross unrealized losses by major security type and by the length of time that individual securities have been in a continuous unrealized loss position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total No. of Sec.
|
|
Total
Fair
Value
|
|
Gross Unrealized Losses
|
|
Less than 12 Months
|
|
12 Months or Greater
|
($ in millions)
|
No. of Sec.
|
|
Fair
Value
|
|
Unrealized Losses
|
|
|
No. of Sec.
|
|
Fair
Value
|
|
Unrealized Losses
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations
|
91
|
|
$
|
9,752.5
|
|
$
|
(189.5
|
)
|
39
|
|
$
|
5,025.0
|
|
$
|
(67.2
|
)
|
|
52
|
|
$
|
4,727.5
|
|
$
|
(122.3
|
)
|
State and local government obligations
|
459
|
|
1,394.3
|
|
(23.2
|
)
|
227
|
|
680.5
|
|
(6.4
|
)
|
|
232
|
|
713.8
|
|
(16.8
|
)
|
Corporate debt securities
|
369
|
|
5,959.2
|
|
(85.2
|
)
|
221
|
|
3,963.9
|
|
(45.3
|
)
|
|
148
|
|
1,995.3
|
|
(39.9
|
)
|
Residential mortgage-backed securities
|
234
|
|
521.7
|
|
(5.6
|
)
|
44
|
|
325.0
|
|
(0.6
|
)
|
|
190
|
|
196.7
|
|
(5.0
|
)
|
Commercial mortgage-backed securities
|
151
|
|
2,392.7
|
|
(30.5
|
)
|
80
|
|
1,164.2
|
|
(8.3
|
)
|
|
71
|
|
1,228.5
|
|
(22.2
|
)
|
Other asset-backed securities
|
219
|
|
2,828.6
|
|
(13.6
|
)
|
111
|
|
1,821.8
|
|
(4.0
|
)
|
|
108
|
|
1,006.8
|
|
(9.6
|
)
|
Redeemable preferred stocks
|
3
|
|
30.8
|
|
(1.4
|
)
|
1
|
|
4.7
|
|
(0.1
|
)
|
|
2
|
|
26.1
|
|
(1.3
|
)
|
Total fixed maturities
|
1,526
|
|
$
|
22,879.8
|
|
$
|
(349.0
|
)
|
723
|
|
$
|
12,985.1
|
|
$
|
(131.9
|
)
|
|
803
|
|
$
|
9,894.7
|
|
$
|
(217.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
191
|
|
341.5
|
|
(3.6
|
)
|
26
|
|
39.2
|
|
(0.1
|
)
|
|
165
|
|
302.3
|
|
(3.5
|
)
|
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
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations
|
58
|
|
$
|
5,817.0
|
|
$
|
(44.0
|
)
|
41
|
|
$
|
4,869.3
|
|
$
|
(34.6
|
)
|
|
17
|
|
$
|
947.7
|
|
$
|
(9.4
|
)
|
State and local government obligations
|
358
|
|
1,200.3
|
|
(9.3
|
)
|
230
|
|
737.6
|
|
(4.4
|
)
|
|
128
|
|
462.7
|
|
(4.9
|
)
|
Corporate debt securities
|
222
|
|
2,979.4
|
|
(14.4
|
)
|
171
|
|
2,072.9
|
|
(9.1
|
)
|
|
51
|
|
906.5
|
|
(5.3
|
)
|
Residential mortgage-backed securities
|
201
|
|
300.9
|
|
(3.4
|
)
|
30
|
|
75.1
|
|
(0.2
|
)
|
|
171
|
|
225.8
|
|
(3.2
|
)
|
Commercial mortgage-backed securities
|
105
|
|
1,682.3
|
|
(13.3
|
)
|
63
|
|
1,221.2
|
|
(5.9
|
)
|
|
42
|
|
461.1
|
|
(7.4
|
)
|
Other asset-backed securities
|
197
|
|
1,837.3
|
|
(4.5
|
)
|
134
|
|
1,377.8
|
|
(3.3
|
)
|
|
63
|
|
459.5
|
|
(1.2
|
)
|
Redeemable preferred stocks
|
2
|
|
21.8
|
|
(1.5
|
)
|
1
|
|
10.8
|
|
(0.1
|
)
|
|
1
|
|
11.0
|
|
(1.4
|
)
|
Total fixed maturities
|
1,143
|
|
13,839.0
|
|
(90.4
|
)
|
670
|
|
10,364.7
|
|
(57.6
|
)
|
|
473
|
|
3,474.3
|
|
(32.8
|
)
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
Nonredeemable preferred stocks
|
4
|
|
127.8
|
|
(8.8
|
)
|
1
|
|
56.5
|
|
(0.5
|
)
|
|
3
|
|
71.3
|
|
(8.3
|
)
|
Common equities
|
19
|
|
13.4
|
|
(0.2
|
)
|
18
|
|
13.4
|
|
(0.2
|
)
|
|
1
|
|
0
|
|
0
|
|
Total equity securities
|
23
|
|
141.2
|
|
(9.0
|
)
|
19
|
|
69.9
|
|
(0.7
|
)
|
|
4
|
|
71.3
|
|
(8.3
|
)
|
Total portfolio
|
1,166
|
|
$
|
13,980.2
|
|
$
|
(99.4
|
)
|
689
|
|
$
|
10,434.6
|
|
$
|
(58.3
|
)
|
|
477
|
|
$
|
3,545.6
|
|
$
|
(41.1
|
)
|
Since both
September 30, 2017
and
December 31, 2017
, the number of securities in our fixed-maturity portfolio with unrealized losses increased as a result of rising interest rates. We had no material decreases in valuation as a result of credit rating downgrades and all of the securities in the table above are current with respect to required principal and interest payments.
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,
2017
|
|
(millions)
|
2018
|
|
|
2017
|
|
|
Fixed maturities:
|
|
|
|
|
|
Residential mortgage-backed securities
|
$
|
(19.7
|
)
|
|
$
|
(19.7
|
)
|
|
$
|
(19.7
|
)
|
Commercial mortgage-backed securities
|
(0.1
|
)
|
|
(0.4
|
)
|
|
(0.3
|
)
|
Total fixed maturities
|
$
|
(19.8
|
)
|
|
$
|
(20.1
|
)
|
|
$
|
(20.0
|
)
|
The following tables provide rollforwards of the amounts related to credit losses recognized in earnings for the periods ended
September 30, 2018
and
2017
, 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, 2018
|
|
Mortgage-Backed
|
|
|
(millions)
|
Residential
|
|
|
Commercial
|
|
|
Total
|
|
Balance at June 30, 2018
|
$
|
0.3
|
|
|
$
|
0.5
|
|
|
$
|
0.8
|
|
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
|
|
|
0
|
|
|
0
|
|
Balance at September 30, 2018
|
$
|
0.3
|
|
|
$
|
0.5
|
|
|
$
|
0.8
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2018
|
|
Mortgage-Backed
|
|
|
(millions)
|
Residential
|
|
|
Commercial
|
|
|
Total
|
|
Balance at December 31, 2017
|
$
|
0
|
|
|
$
|
0.5
|
|
|
$
|
0.5
|
|
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, 2018
|
$
|
0.3
|
|
|
$
|
0.5
|
|
|
$
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
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, 2018
.
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)
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Gross realized gains on security sales
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
U.S. government obligations
|
$
|
0.1
|
|
|
$
|
0.9
|
|
|
$
|
1.8
|
|
|
$
|
5.8
|
|
State and local government obligations
|
0.2
|
|
|
4.0
|
|
|
9.4
|
|
|
7.1
|
|
Corporate and other debt securities
|
1.7
|
|
|
5.1
|
|
|
2.1
|
|
|
16.5
|
|
Residential mortgage-backed securities
|
0
|
|
|
2.8
|
|
|
0
|
|
|
23.8
|
|
Commercial mortgage-backed securities
|
0
|
|
|
0
|
|
|
2.0
|
|
|
2.4
|
|
Other asset-backed securities
|
0
|
|
|
0
|
|
|
0.1
|
|
|
0.3
|
|
Redeemable preferred stocks
|
0.2
|
|
|
7.7
|
|
|
4.5
|
|
|
8.0
|
|
Total available-for-sale securities
|
2.2
|
|
|
20.5
|
|
|
19.9
|
|
|
63.9
|
|
Equity securities:
|
|
|
|
|
|
|
|
Nonredeemable preferred stocks
|
0.1
|
|
|
3.0
|
|
|
3.7
|
|
|
54.6
|
|
Common equities
|
126.8
|
|
|
5.7
|
|
|
265.2
|
|
|
23.0
|
|
Total equity securities
|
126.9
|
|
|
8.7
|
|
|
268.9
|
|
|
77.6
|
|
Subtotal gross realized gains on security sales
|
129.1
|
|
|
29.2
|
|
|
288.8
|
|
|
141.5
|
|
Gross realized losses on security sales
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
U.S. government obligations
|
(7.6
|
)
|
|
(1.0
|
)
|
|
(46.4
|
)
|
|
(4.6
|
)
|
State and local government obligations
|
(0.6
|
)
|
|
0
|
|
|
(2.5
|
)
|
|
(0.1
|
)
|
Corporate and other debt securities
|
(3.2
|
)
|
|
(1.8
|
)
|
|
(7.3
|
)
|
|
(4.6
|
)
|
Residential mortgage-backed securities
|
0
|
|
|
(0.1
|
)
|
|
0
|
|
|
(0.4
|
)
|
Commercial mortgage-backed securities
|
0
|
|
|
(0.5
|
)
|
|
(6.3
|
)
|
|
(3.6
|
)
|
Other asset-backed securities
|
(0.1
|
)
|
|
0
|
|
|
(1.1
|
)
|
|
0
|
|
Redeemable preferred stocks
|
0
|
|
|
(6.4
|
)
|
|
0
|
|
|
(6.4
|
)
|
Total available-for-sale securities
|
(11.5
|
)
|
|
(9.8
|
)
|
|
(63.6
|
)
|
|
(19.7
|
)
|
Equity securities:
|
|
|
|
|
|
|
|
Nonredeemable preferred stocks
|
0
|
|
|
(0.1
|
)
|
|
(2.3
|
)
|
|
(5.9
|
)
|
Common equities
|
(9.2
|
)
|
|
(0.2
|
)
|
|
(17.1
|
)
|
|
(0.3
|
)
|
Total equity securities
|
(9.2
|
)
|
|
(0.3
|
)
|
|
(19.4
|
)
|
|
(6.2
|
)
|
Subtotal gross realized losses on security sales
|
(20.7
|
)
|
|
(10.1
|
)
|
|
(83.0
|
)
|
|
(25.9
|
)
|
Net realized gains (losses) on security sales
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
U.S. government obligations
|
(7.5
|
)
|
|
(0.1
|
)
|
|
(44.6
|
)
|
|
1.2
|
|
State and local government obligations
|
(0.4
|
)
|
|
4.0
|
|
|
6.9
|
|
|
7.0
|
|
Corporate and other debt securities
|
(1.5
|
)
|
|
3.3
|
|
|
(5.2
|
)
|
|
11.9
|
|
Residential mortgage-backed securities
|
0
|
|
|
2.7
|
|
|
0
|
|
|
23.4
|
|
Commercial mortgage-backed securities
|
0
|
|
|
(0.5
|
)
|
|
(4.3
|
)
|
|
(1.2
|
)
|
Other asset-backed securities
|
(0.1
|
)
|
|
0
|
|
|
(1.0
|
)
|
|
0.3
|
|
Redeemable preferred stocks
|
0.2
|
|
|
1.3
|
|
|
4.5
|
|
|
1.6
|
|
Total available-for-sale securities
|
(9.3
|
)
|
|
10.7
|
|
|
(43.7
|
)
|
|
44.2
|
|
Equity securities:
|
|
|
|
|
|
|
|
Nonredeemable preferred stocks
|
0.1
|
|
|
2.9
|
|
|
1.4
|
|
|
48.7
|
|
Common equities
|
117.6
|
|
|
5.5
|
|
|
248.1
|
|
|
22.7
|
|
Total equity securities
|
117.7
|
|
|
8.4
|
|
|
249.5
|
|
|
71.4
|
|
Litigation settlements and other gains (losses)
|
0
|
|
|
0.1
|
|
|
0
|
|
|
1.2
|
|
Subtotal net realized gains (losses) on security sales
|
108.4
|
|
|
19.2
|
|
|
205.8
|
|
|
116.8
|
|
Net holding period gains (losses)
|
|
|
|
|
|
|
|
Hybrid securities
|
1.3
|
|
|
(0.9
|
)
|
|
(4.2
|
)
|
|
0.3
|
|
Equity securities
|
94.5
|
|
|
0
|
|
|
(1.7
|
)
|
|
0
|
|
Subtotal net holding period gains (losses)
|
95.8
|
|
|
(0.9
|
)
|
|
(5.9
|
)
|
|
0.3
|
|
Other-than-temporary impairment losses
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
Commercial mortgage-backed securities
|
0
|
|
|
(0.4
|
)
|
|
0
|
|
|
(0.4
|
)
|
Total fixed maturities
|
0
|
|
|
(0.4
|
)
|
|
0
|
|
|
(0.4
|
)
|
Equity securities:
|
|
|
|
|
|
|
|
Common equities
|
0
|
|
|
(8.9
|
)
|
|
0
|
|
|
(12.5
|
)
|
Subtotal investment other-than-temporary impairment losses
|
0
|
|
|
(9.3
|
)
|
|
0
|
|
|
(12.9
|
)
|
Other asset impairment
|
(22.1
|
)
|
|
(33.7
|
)
|
|
(33.2
|
)
|
|
(44.9
|
)
|
Subtotal other-than-temporary impairment losses
|
(22.1
|
)
|
|
(43.0
|
)
|
|
(33.2
|
)
|
|
(57.8
|
)
|
Total net realized gains (losses) on securities
|
$
|
182.1
|
|
|
$
|
(24.7
|
)
|
|
$
|
166.7
|
|
|
$
|
59.3
|
|
Gross realized gains were predominantly the result of sales in our indexed common stock portfolio in order to reduce the overall portfolio risk, while gross realized losses were predominantly in our available-for-sale securities and were largely the result of an increase in interest rates. Also included are holding period change in valuation gains and losses on equity securities and hybrid securities, recoveries from litigation settlements related to investments, and 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.
The following table reflects our holding period realized gains (losses) on equity securities recognized for the
three and nine
months ended
September 30, 2018
for equity securities held at quarter end:
|
|
|
|
|
|
|
|
|
Three Months
|
|
Nine Months
|
|
(millions)
|
2018
|
|
2018
|
|
Total net gains (losses) recognized during the period on equity securities
|
$
|
212.2
|
|
$
|
247.8
|
|
Less: Net gains (losses) recognized on equity securities sold during the period
|
117.7
|
|
249.5
|
|
Net holding period gains (losses) recognized during the period on equity securities held at period end
|
$
|
94.5
|
|
$
|
(1.7
|
)
|
Note: Comparative disclosure for the prior year period is not meaningful.
Net Investment Income
The components of net investment income for the
three and nine
months ended
September 30,
were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
Nine Months
|
(millions)
|
2018
|
|
2017
|
|
|
2018
|
|
2017
|
|
Available-for-sale securities:
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
U.S. government obligations
|
$
|
47.7
|
|
$
|
18.4
|
|
|
$
|
133.4
|
|
$
|
48.1
|
|
State and local government obligations
|
9.0
|
|
12.9
|
|
|
28.1
|
|
39.3
|
|
Foreign government obligations
|
0
|
|
0.1
|
|
|
0
|
|
0.3
|
|
Corporate debt securities
|
62.1
|
|
32.2
|
|
|
150.1
|
|
93.1
|
|
Residential mortgage-backed securities
|
6.9
|
|
8.0
|
|
|
20.4
|
|
27.9
|
|
Commercial mortgage-backed securities
|
24.1
|
|
20.0
|
|
|
65.5
|
|
57.1
|
|
Other asset-backed securities
|
21.2
|
|
12.1
|
|
|
50.9
|
|
33.8
|
|
Redeemable preferred stocks
|
3.3
|
|
2.8
|
|
|
8.8
|
|
9.1
|
|
Total fixed maturities
|
174.3
|
|
106.5
|
|
|
457.2
|
|
308.7
|
|
Short-term investments
|
15.7
|
|
10.6
|
|
|
40.7
|
|
26.4
|
|
Total available-for-sale securities
|
190.0
|
|
117.1
|
|
|
497.9
|
|
335.1
|
|
Equity securities:
|
|
|
|
|
|
Nonredeemable preferred stocks
|
11.2
|
|
10.9
|
|
|
32.5
|
|
33.0
|
|
Common equities
|
16.9
|
|
14.9
|
|
|
46.1
|
|
42.8
|
|
Total equity securities
|
28.1
|
|
25.8
|
|
|
78.6
|
|
75.8
|
|
Investment income
|
218.1
|
|
142.9
|
|
|
576.5
|
|
410.9
|
|
Investment expenses
|
(5.8
|
)
|
(5.8
|
)
|
|
(18.0
|
)
|
(18.0
|
)
|
Net investment income
|
$
|
212.3
|
|
$
|
137.1
|
|
|
$
|
558.5
|
|
$
|
392.9
|
|
The amount of investment income (interest and dividends) we recognize varies based on the average assets held during the year and the book yields of the securities in our portfolio. The increase in net investment income on a year-over-year basis for the three and nine months ended September 30, 2018, was due to a combination of an increase in average assets and an increase in portfolio yields. The increase in average assets was due to strong underwriting growth and profitability, as well as the
$600 million
debt and
$500 million
preferred stock issuances in the first quarter of 2018. The increase in portfolio yields was a result of our decisions to hold a short-duration portfolio, which allowed us to reinvest significant maturities and paydowns of principal at higher yields, and to increase the portfolio duration from
2.2
years at the end of the third quarter 2017 to
2.6
years at the end of the third quarter 2018 as interest rates generally rose.
Trading Securities
At
September 30, 2018
and
2017
, and
December 31, 2017
, 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, 2018
and
2017
.
Derivative Instruments
At
September 30, 2018
and
2017
, and
December 31, 2017
, we had
no
open derivative positions. 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 unrealized loss of
$8.0 million
in April 2017.
See
Note 4 – Debt
for further discussion.
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, which are continually priced on a daily basis, 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, 2018
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
U.S. government obligations
|
$
|
9,752.5
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
9,752.5
|
|
|
$
|
9,942.0
|
|
State and local government obligations
|
0
|
|
|
1,588.8
|
|
|
0
|
|
|
1,588.8
|
|
|
1,610.1
|
|
Foreign government obligations
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Corporate debt securities
|
0
|
|
|
7,146.8
|
|
|
0
|
|
|
7,146.8
|
|
|
7,229.1
|
|
Subtotal
|
9,752.5
|
|
|
8,735.6
|
|
|
0
|
|
|
18,488.1
|
|
|
18,781.2
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed
|
0
|
|
|
769.8
|
|
|
0
|
|
|
769.8
|
|
|
767.8
|
|
Commercial mortgage-backed
|
0
|
|
|
2,959.3
|
|
|
0
|
|
|
2,959.3
|
|
|
2,986.5
|
|
Other asset-backed
|
0
|
|
|
3,192.9
|
|
|
0
|
|
|
3,192.9
|
|
|
3,205.0
|
|
Subtotal asset-backed securities
|
0
|
|
|
6,922.0
|
|
|
0
|
|
|
6,922.0
|
|
|
6,959.3
|
|
Redeemable preferred stocks:
|
|
|
|
|
|
|
|
|
|
Financials
|
0
|
|
|
67.8
|
|
|
0
|
|
|
67.8
|
|
|
65.2
|
|
Utilities
|
0
|
|
|
4.7
|
|
|
0
|
|
|
4.7
|
|
|
4.8
|
|
Industrials
|
10.1
|
|
|
150.0
|
|
|
0
|
|
|
160.1
|
|
|
152.9
|
|
Subtotal redeemable preferred stocks
|
10.1
|
|
|
222.5
|
|
|
0
|
|
|
232.6
|
|
|
222.9
|
|
Total fixed maturities
|
9,762.6
|
|
|
15,880.1
|
|
|
0
|
|
|
25,642.7
|
|
|
25,963.4
|
|
Short-term investments
|
2,573.4
|
|
|
236.3
|
|
|
0
|
|
|
2,809.7
|
|
|
2,809.7
|
|
Total available-for-sale securities
|
12,336.0
|
|
|
16,116.4
|
|
|
0
|
|
|
28,452.4
|
|
|
28,773.1
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
Nonredeemable preferred stocks:
|
|
|
|
|
|
|
|
|
|
Financials
|
76.3
|
|
|
724.0
|
|
|
0
|
|
|
800.3
|
|
|
718.9
|
|
Utilities
|
0
|
|
|
35.6
|
|
|
0
|
|
|
35.6
|
|
|
35.0
|
|
Industrials
|
0
|
|
|
0
|
|
|
5.0
|
|
|
5.0
|
|
|
5.0
|
|
Subtotal nonredeemable preferred stocks
|
76.3
|
|
|
759.6
|
|
|
5.0
|
|
|
840.9
|
|
|
758.9
|
|
Common equities:
|
|
|
|
|
|
|
|
|
|
Common stocks
|
3,057.0
|
|
|
0
|
|
|
0
|
|
|
3,057.0
|
|
|
1,134.7
|
|
Other risk investments
|
0
|
|
|
0
|
|
|
0.3
|
|
|
0.3
|
|
|
0.3
|
|
Subtotal common equities
|
3,057.0
|
|
|
0
|
|
|
0.3
|
|
|
3,057.3
|
|
|
1,135.0
|
|
Total equity securities
|
3,133.3
|
|
|
759.6
|
|
|
5.3
|
|
|
3,898.2
|
|
|
1,893.9
|
|
Total portfolio
|
$
|
15,469.3
|
|
|
$
|
16,876.0
|
|
|
$
|
5.3
|
|
|
$
|
32,350.6
|
|
|
$
|
30,667.0
|
|
Debt
|
$
|
0
|
|
|
$
|
3,926.9
|
|
|
$
|
0
|
|
|
$
|
3,926.9
|
|
|
$
|
3,859.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
955.6
|
|
|
0
|
|
|
955.6
|
|
|
947.0
|
|
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
|
|
Utilities
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
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
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
U.S. government obligations
|
$
|
6,645.9
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
6,645.9
|
|
|
$
|
6,688.8
|
|
State and local government obligations
|
0
|
|
|
2,297.1
|
|
|
0
|
|
|
2,297.1
|
|
|
2,285.6
|
|
Foreign government obligations
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Corporate debt securities
|
0
|
|
|
4,997.7
|
|
|
0
|
|
|
4,997.7
|
|
|
4,997.2
|
|
Subtotal
|
6,645.9
|
|
|
7,294.8
|
|
|
0
|
|
|
13,940.7
|
|
|
13,971.6
|
|
Asset-backed securities:
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed
|
0
|
|
|
836.7
|
|
|
0
|
|
|
836.7
|
|
|
828.8
|
|
Commercial mortgage-backed
|
0
|
|
|
2,758.6
|
|
|
0
|
|
|
2,758.6
|
|
|
2,760.1
|
|
Other asset-backed
|
0
|
|
|
2,454.7
|
|
|
0
|
|
|
2,454.7
|
|
|
2,454.5
|
|
Subtotal asset-backed securities
|
0
|
|
|
6,050.0
|
|
|
0
|
|
|
6,050.0
|
|
|
6,043.4
|
|
Redeemable preferred stocks:
|
|
|
|
|
|
|
|
|
|
Financials
|
0
|
|
|
64.1
|
|
|
0
|
|
|
64.1
|
|
|
61.3
|
|
Utilities
|
0
|
|
|
11.4
|
|
|
0
|
|
|
11.4
|
|
|
10.1
|
|
Industrials
|
0
|
|
|
135.5
|
|
|
0
|
|
|
135.5
|
|
|
123.5
|
|
Subtotal redeemable preferred stocks
|
0
|
|
|
211.0
|
|
|
0
|
|
|
211.0
|
|
|
194.9
|
|
Total fixed maturities
|
6,645.9
|
|
|
13,555.8
|
|
|
0
|
|
|
20,201.7
|
|
|
20,209.9
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
Nonredeemable preferred stocks:
|
|
|
|
|
|
|
|
|
|
Financials
|
80.6
|
|
|
718.2
|
|
|
0
|
|
|
798.8
|
|
|
693.6
|
|
Utilities
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Industrials
|
0
|
|
|
0
|
|
|
5.0
|
|
|
5.0
|
|
|
5.0
|
|
Subtotal nonredeemable preferred stocks
|
80.6
|
|
|
718.2
|
|
|
5.0
|
|
|
803.8
|
|
|
698.6
|
|
Common equities:
|
|
|
|
|
|
|
|
|
|
Common stocks
|
3,399.5
|
|
|
0
|
|
|
0
|
|
|
3,399.5
|
|
|
1,498.7
|
|
Other risk investments
|
0
|
|
|
0
|
|
|
0.3
|
|
|
0.3
|
|
|
0.3
|
|
Subtotal common equities
|
3,399.5
|
|
|
0
|
|
|
0.3
|
|
|
3,399.8
|
|
|
1,499.0
|
|
Total fixed maturities and equity securities
|
10,126.0
|
|
|
14,274.0
|
|
|
5.3
|
|
|
24,405.3
|
|
|
22,407.5
|
|
Short-term investments
|
1,824.4
|
|
|
1,045.0
|
|
|
0
|
|
|
2,869.4
|
|
|
2,869.4
|
|
Total portfolio
|
$
|
11,950.4
|
|
|
$
|
15,319.0
|
|
|
$
|
5.3
|
|
|
$
|
27,274.7
|
|
|
$
|
25,276.9
|
|
Debt
|
$
|
0
|
|
|
$
|
3,606.5
|
|
|
$
|
37.1
|
|
|
$
|
3,643.6
|
|
|
$
|
3,306.3
|
|
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
2018
or
2017
.
Our short-term security holdings classified as Level 1 are highly liquid, actively marketed, and have a very short duration, primarily 90 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 securities issued by municipalities that contain either liquidity facilities or mandatory put features within one year.
At
September 30, 2018
, vendor-quoted prices represented
76%
of our Level 1 classifications (excluding short-term investments), compared to
59%
and
66%
at
September 30, 2017
and
December 31, 2017
, 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, 2018
and
2017
, and
December 31, 2017
, vendor-quoted prices comprised
99%
,
98%
, and
98%
, respectively, of our Level 2 classifications (excluding short-term investments), while dealer-quoted prices represented
1%
,
2%
, and
2%
, respectively. In our process for selecting a source (e.g., dealer or 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 30 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, 2018
and
2017
, and
December 31, 2017
, we did
not
have any securities in our fixed-maturity portfolio listed as Level 3.
At
September 30, 2018
and
2017
, and
December 31, 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 all periods equals the cost at acquisition. A review of their latest available financial statements did not reveal any significant changes that would impact the security’s fair value.
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
2018
or
2017
, 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.
We did not have any material changes in fair value associated with Level 3 assets for the
three and nine
months ended
September 30, 2018
and
2017
. 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, 2018
|
|
September 30, 2017
|
|
December 31, 2017
|
(millions)
|
Carrying
Value
|
|
Fair
Value
|
|
Carrying
Value
|
|
Fair
Value
|
|
Carrying
Value
|
|
Fair
Value
|
3.75% Senior Notes due 2021
|
$
|
499.0
|
|
|
$
|
503.9
|
|
|
$
|
498.7
|
|
|
$
|
525.7
|
|
|
$
|
498.8
|
|
|
$
|
520.7
|
|
2.45% Senior Notes due 2027
|
496.4
|
|
|
453.3
|
|
|
496.0
|
|
|
475.3
|
|
|
496.1
|
|
|
477.9
|
|
6 5/8% Senior Notes due 2029
|
296.3
|
|
|
360.3
|
|
|
296.0
|
|
|
388.3
|
|
|
296.1
|
|
|
382.3
|
|
6.25% Senior Notes due 2032
|
395.4
|
|
|
481.8
|
|
|
395.3
|
|
|
518.7
|
|
|
395.3
|
|
|
516.9
|
|
4.35% Senior Notes due 2044
|
346.6
|
|
|
349.7
|
|
|
346.5
|
|
|
379.8
|
|
|
346.5
|
|
|
388.7
|
|
3.70% Senior Notes due 2045
|
395.3
|
|
|
359.1
|
|
|
395.2
|
|
|
392.6
|
|
|
395.2
|
|
|
402.9
|
|
4.125% Senior Notes due 2047
|
841.3
|
|
|
828.4
|
|
|
841.2
|
|
|
894.2
|
|
|
841.2
|
|
|
917.1
|
|
4.20% Senior Notes due 2048
|
589.6
|
|
|
590.4
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Other debt instruments
|
0
|
|
|
0
|
|
|
43.3
|
|
|
43.3
|
|
|
37.1
|
|
|
37.1
|
|
Total
|
$
|
3,859.9
|
|
|
$
|
3,926.9
|
|
|
$
|
3,312.2
|
|
|
$
|
3,617.9
|
|
|
$
|
3,306.3
|
|
|
$
|
3,643.6
|
|
The Progressive Corporation issued
$600 million
of
4.20%
Senior Notes due 2048 (the “
4.20%
Senior Notes”) in March 2018, and
$850 million
of
4.125%
Senior Notes due 2047 (the “
4.125%
Senior Notes”) in April 2017, in underwritten public offerings. The net proceeds from these issuances, after deducting underwriters’ discounts, commissions, and other issuance costs, were approximately
$589.5 million
and
$841.1 million
, respectively. 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 unrealized loss as part of accumulated other comprehensive income (loss), which is being amortized as an adjustment to interest expense over the life of the
4.125%
Senior Notes. Consistent with the other senior notes
issued by Progressive, interest on the
4.20%
Senior Notes and
4.125%
Senior Notes is payable semiannually and both are redeemable, in whole or in part, at any time. See
Note 16
–
Subsequent Event
, for a discussion of senior notes issued in October 2018.
During the first quarter 2018, ARX repaid its term loans, in their entirety, in the aggregate principal amount of
$37.1 million
and, during the third quarter 2017, redeemed its junior subordinated notes and senior notes, in their entirety, in the aggregate principal amount of
$65.2 million
. Both the repayment and the redemptions were funded in part with proceeds from fixed-rate loans made by The Progressive Corporation. These intercompany transactions were eliminated in consolidation.
During the second quarter 2018, The Progressive Corporation entered into a new line of credit with PNC Bank, National Association (PNC) in the maximum principal amount of
$250 million
. The prior line of credit, entered into in April 2017, had expired. The line of credit is on the same terms and conditions as the previous line of credit. 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, 2019, the expiration date of the line of credit. Prepayments are permitted without penalty. The line of credit is uncommitted and, as such, all advances are subject to PNC’s discretion. We had
no
borrowings under either line of credit during any of the periods presented.
Note 5
Income Taxes
— Deferred tax assets and liabilities are recorded based on the difference between the financial statement and tax bases of assets and liabilities at the enacted tax rates. We review our deferred tax assets regularly for recoverability. At
September 30, 2018
and
2017
, and
December 31, 2017
, 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 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 deferred taxes on items that are reported in accumulated other comprehensive income, our policy is to release the income tax effects related to these items on an aggregate portfolio approach. For this purpose, we consider our available-for-sale fixed maturity securities and hedges on forecasted transactions as separate portfolios.
For the three and
nine months ended
September 30, 2018
, there have been no material changes in our uncertain tax positions.
For the third quarter 2018, our effective tax rate was
17.7%
compared to
14.6%
for the same period last year. On a year-to-date basis, the effective tax rate was
19.2%
, compared to
29.7%
for the same period last year. The federal corporate income tax rate decreased to 21% in 2018, from the previous rate of 35%, under the legislation commonly known as the Tax Cuts and Jobs Act of 2017. Despite the decrease in the federal rate, the effective tax rate for the third quarter 2018 was higher than the prior year quarter as the relative impact of the tax benefits decreased as pre-tax income increased quarter-over-prior-year quarter.
As of September 30, 2018, we have not fully completed our accounting for the tax effects of the enactment of the legislation commonly known as the Tax Cuts and Jobs Act of 2017, with regard to the deductibility of compensation expense for certain covered executives, due to uncertainty surrounding the appropriate tax treatment of outstanding performance-based awards, and with regard to loss reserve discounting due to uncertainty surrounding the discount factors to be applied. Based on an Internal Revenue Service issued notice of proposed rule-making, related to the compensation issue, we determined no adjustment was necessary during the nine months ended September 30, 2018; however, we are waiting for definitive guidance to be published on both items.
Note 6
Loss and Loss Adjustment Expense Reserves
— Activity in the loss and loss adjustment expense reserves is summarized as follows:
|
|
|
|
|
|
|
|
|
|
September 30,
|
(millions)
|
2018
|
|
2017
|
Balance, Beginning of period
|
$
|
13,086.9
|
|
|
$
|
11,368.0
|
|
Less reinsurance recoverables on unpaid losses
|
2,170.1
|
|
|
1,801.0
|
|
Net balance, Beginning of period
|
10,916.8
|
|
|
9,567.0
|
|
Incurred related to:
|
|
|
|
Current year
|
15,722.2
|
|
|
13,886.3
|
|
Prior years
|
47.0
|
|
|
42.5
|
|
Total incurred
|
15,769.2
|
|
|
13,928.8
|
|
Paid related to:
|
|
|
|
Current year
|
9,409.7
|
|
|
8,379.4
|
|
Prior years
|
5,031.9
|
|
|
4,387.8
|
|
Total paid
|
14,441.6
|
|
|
12,767.2
|
|
Net balance, End of period
|
12,244.4
|
|
|
10,728.6
|
|
Plus reinsurance recoverables on unpaid losses
|
2,376.4
|
|
|
2,624.7
|
|
Balance, End of period
|
$
|
14,620.8
|
|
|
$
|
13,353.3
|
|
We experienced unfavorable reserve development of
$47.0 million
and
$42.5 million
for the first nine months of 2018 and 2017, respectively, which is reflected as “Incurred related to prior years
”
in the table above.
Year-to-date September 30, 2018
|
|
•
|
Accident year 2016 had approximately
$52 million
of unfavorable prior year reserve development, which was in part offset by favorable development in 2017 as well as 2015 and prior accident years.
|
|
|
•
|
Our personal auto business incurred about
$41 million
of unfavorable loss and loss adjustment expense (LAE) reserve development, with the Agency and Direct auto businesses contributing about
$30 million
and
$11 million
, respectively, of unfavorable development. The unfavorable development was primarily due to an increase in reopened personal injury protection claims.
|
|
|
•
|
Our Property business recognized unfavorable development of about
$5 million
.
|
|
|
•
|
Our special lines products and Commercial Lines business had minimal development during the first nine months of the year.
|
Year-to-date September 30, 2017
|
|
•
|
Accident years 2016 and 2015 combined has approximately
$51 million
of unfavorable prior year reserve development. 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 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.
|
Note 7
Supplemental Cash Flow Information
— Cash and cash equivalents include bank demand deposits and daily overnight reverse repurchase commitments of funds held in bank demand deposit accounts on ARX’s subsidiaries, which are primarily collateralized by U.S. Treasury notes. The amount of reverse repurchase commitments held by ARX’s subsidiaries at
September 30, 2018
and
2017
, and
December 31, 2017
, were
$152.4 million
,
$189.2 million
, and
$247.2 million
, respectively.
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.
We paid the following in the respective periods:
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
(millions)
|
2018
|
|
|
2017
|
|
Income taxes
|
$
|
535.8
|
|
|
$
|
538.7
|
|
Interest
|
116.4
|
|
|
107.4
|
|
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 include 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, among other products, 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,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
(millions)
|
Revenues
|
|
Pretax
Profit (Loss)
|
|
Revenues
|
|
Pretax
Profit (Loss)
|
|
Revenues
|
|
Pretax
Profit
(Loss)
|
|
Revenues
|
|
Pretax
Profit
(Loss)
|
Personal Lines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
$
|
3,318.2
|
|
|
$
|
372.2
|
|
|
$
|
2,840.0
|
|
|
$
|
69.5
|
|
|
$
|
9,607.7
|
|
|
$
|
1,142.2
|
|
|
$
|
8,224.0
|
|
|
$
|
524.7
|
|
Direct
|
3,337.2
|
|
|
294.4
|
|
|
2,734.8
|
|
|
128.7
|
|
|
9,565.3
|
|
|
880.3
|
|
|
7,908.5
|
|
|
466.7
|
|
Total Personal Lines
1
|
6,655.4
|
|
|
666.6
|
|
|
5,574.8
|
|
|
198.2
|
|
|
19,173.0
|
|
|
2,022.5
|
|
|
16,132.5
|
|
|
991.4
|
|
Commercial Lines
|
939.6
|
|
|
112.7
|
|
|
714.0
|
|
|
42.8
|
|
|
2,632.5
|
|
|
307.8
|
|
|
2,031.2
|
|
|
166.4
|
|
Property
2
|
335.5
|
|
|
(7.8
|
)
|
|
255.2
|
|
|
(69.0
|
)
|
|
933.2
|
|
|
(31.2
|
)
|
|
720.3
|
|
|
(57.5
|
)
|
Other indemnity
|
0
|
|
|
(0.1
|
)
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0.1
|
|
|
0
|
|
|
(0.3
|
)
|
Total underwriting operations
|
7,930.5
|
|
|
771.4
|
|
|
6,544.0
|
|
|
172.0
|
|
|
22,738.7
|
|
|
2,299.2
|
|
|
18,884.0
|
|
|
1,100.0
|
|
Fees and other revenues
3
|
122.6
|
|
|
NA
|
|
|
96.3
|
|
|
NA
|
|
|
342.4
|
|
|
NA
|
|
|
270.3
|
|
|
NA
|
|
Service businesses
|
42.5
|
|
|
6.7
|
|
|
33.3
|
|
|
4.4
|
|
|
119.6
|
|
|
17.5
|
|
|
94.5
|
|
|
12.7
|
|
Investments
4
|
400.2
|
|
|
394.4
|
|
|
118.2
|
|
|
112.4
|
|
|
743.2
|
|
|
725.2
|
|
|
470.2
|
|
|
452.2
|
|
Other gains (losses)
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0.2
|
|
|
0.2
|
|
Interest expense
|
NA
|
|
|
(42.0
|
)
|
|
NA
|
|
|
(37.4
|
)
|
|
NA
|
|
|
(120.5
|
)
|
|
NA
|
|
|
(117.6
|
)
|
Consolidated total
|
$
|
8,495.8
|
|
|
$
|
1,130.5
|
|
|
$
|
6,791.8
|
|
|
$
|
251.4
|
|
|
$
|
23,943.9
|
|
|
$
|
2,921.4
|
|
|
$
|
19,719.2
|
|
|
$
|
1,447.5
|
|
NA = Not applicable
1
Personal auto insurance accounted for
94%
of the total Personal Lines segment net premiums earned during the three and nine months ended
September 30, 2018
, and
93%
for the same periods in
2017
; insurance for our special lines products (e.g., motorcycles, ATVs, RVs, watercraft, and snowmobiles) accounted for the balance of the Personal Lines net premiums earned.
2
For the three and nine months ended
September 30, 2018
, pretax profit (loss) includes
$18.0 million
and
$54.0 million
, respectively, of amortization expense predominately associated with the acquisition of a controlling interest in ARX and
$17.2 million
and
$48.2 million
for the same periods in
2017
. Although this expense is included in our Property segment, it is not reported in the consolidated results of ARX and, therefore, will not affect the value of net income (loss) attributable to noncontrolling interest.
3
Pretax profit (loss) for fees and other revenues is attributable to operating segments.
4
Revenues represent recurring investment income and total net realized gains (losses) on securities; pretax profit is net of investment expense.
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/combined ratios for our underwriting operations for the respective periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Under-writing
Margin
|
|
Combined
Ratio
|
|
Under-writing
Margin
|
|
Combined
Ratio
|
|
Under-writing
Margin
|
|
Combined
Ratio
|
|
Under-writing
Margin
|
|
Combined
Ratio
|
Personal Lines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
11.2
|
%
|
|
88.8
|
|
2.4
|
%
|
|
97.6
|
|
|
11.9
|
%
|
|
88.1
|
|
6.4
|
%
|
|
93.6
|
Direct
|
8.8
|
|
|
91.2
|
|
4.7
|
|
|
95.3
|
|
|
9.2
|
|
|
90.8
|
|
5.9
|
|
|
94.1
|
Total Personal Lines
|
10.0
|
|
|
90.0
|
|
3.6
|
|
|
96.4
|
|
|
10.5
|
|
|
89.5
|
|
6.1
|
|
|
93.9
|
Commercial Lines
|
12.0
|
|
|
88.0
|
|
6.0
|
|
|
94.0
|
|
|
11.7
|
|
|
88.3
|
|
8.2
|
|
|
91.8
|
Property
1
|
(2.3
|
)
|
|
102.3
|
|
(27.0
|
)
|
|
127.0
|
|
|
(3.3
|
)
|
|
103.3
|
|
(8.0
|
)
|
|
108.0
|
Total underwriting operations
|
9.7
|
|
|
90.3
|
|
2.6
|
|
|
97.4
|
|
|
10.1
|
|
|
89.9
|
|
5.8
|
|
|
94.2
|
1
Included in the three and nine months ended
September 30, 2018
, is
5.4
points and
5.8
points, respectively, of amortization expense predominately associated with the acquisition of a controlling interest in ARX and
6.7
points for the three and nine months ended
September 30, 2017
.
Note 9
Dividends
Common Share Dividends
We maintain a policy of paying an annual variable dividend on our common shares 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 (using the statutory tax rate) multiplied by a performance factor (Gainshare factor), which is determined based on the results of the Agency auto, Direct auto, special lines, Commercial Lines, and Property business units, with minor exclusions and adjustments, and subject to the limitations discussed below. The target percentage is determined by our Board of Directors on an annual basis as part of their review of the dividend policy and announced to shareholders and the public. In December
2017
, the Board determined the target percentage for
2018
to be
33-1/3
% of annual after-tax underwriting income.
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 incentive program currently in place for our employees (our “Gainsharing program”). On a year-to-date basis, as of
September 30, 2018
, the Gainshare factor was
1.91
. 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 2018 dividend program is 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. 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 the U.S. 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 common shareholder dividends that were declared in the last two years:
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions, except per share amounts)
|
|
Amount of Common Share Dividends
|
Dividend Type
|
Declared
|
Paid
|
Per Share
|
|
Accrued
1
|
|
Paid
1
|
|
Annual – Variable
|
December 2017
|
February 2018
|
$
|
1.1247
|
|
$
|
655.1
|
|
$
|
654.9
|
|
Annual – Variable
|
December 2016
|
February 2017
|
0.6808
|
|
395.4
|
|
395.4
|
|
1
Variance between accrued and paid, if any, reflects the difference between the number of estimated and actual shares outstanding as of the record date.
Preferred Share Dividends
In the first quarter 2018, we issued
500,000
Series B Fixed-to-Floating Rate Cumulative Perpetual Serial Preferred Shares, without par value (the “Series B Preferred Shares”), with a liquidation preference of
$1,000
per share (the “stated amount”). Holders of the Series B Preferred Shares will be entitled to receive cumulative cash dividends semi-annually in March and September, if and when declared by the Board of Directors. Until March 15, 2023 (the “fixed-rate period”), the annual dividend rate is fixed at
5.375%
of the stated amount per share. Beginning March 15, 2023, the annual dividend rate switches to a floating rate equal to the three-month LIBOR rate plus a spread of
2.539%
applied to the stated amount per share. After the fixed-rate period and up until redemption of the Series B Preferred Shares, the dividends would be payable quarterly, if and when declared by the Board of Directors. The Series B Preferred Shares are perpetual and have no stated maturity date. After the fixed-rate period, we may redeem the Series B Preferred Shares at the stated amount plus all accrued and unpaid dividends.
During the third quarter of 2018, the Board declared a
$27.024
per share, or
$13.5 million
, dividend on the Series B Preferred Shares, which was paid within the quarter.
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 (loss)
|
|
|
Total tax
(provision)
benefit
|
|
|
After tax total
accumulated
other
comprehensive
income (loss)
|
|
|
Total net
unrealized
gains
(losses)
on securities
|
|
|
Net
unrealized
gains
(losses) on
forecasted
transactions
|
|
|
Foreign
currency
translation
adjustment
|
|
|
(Income) loss attributable to NCI
|
|
Balance at June 30, 2018
|
$
|
(280.8
|
)
|
|
$
|
58.9
|
|
|
$
|
(221.9
|
)
|
|
$
|
(210.9
|
)
|
|
$
|
(17.6
|
)
|
|
$
|
0
|
|
|
$
|
6.6
|
|
Reclassification of disproportionate amounts
1
|
(4.3
|
)
|
|
0.9
|
|
|
(3.4
|
)
|
|
0
|
|
|
0
|
|
|
0
|
|
|
(3.4
|
)
|
Adjusted balance at June 30, 2018
|
(285.1
|
)
|
|
59.8
|
|
|
(225.3
|
)
|
|
(210.9
|
)
|
|
(17.6
|
)
|
|
0
|
|
|
3.2
|
|
Other comprehensive income (loss) before reclassifications:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
(58.7
|
)
|
|
12.3
|
|
|
(46.4
|
)
|
|
(46.4
|
)
|
|
0
|
|
|
0
|
|
|
0
|
|
Forecasted transactions
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Foreign currency translation adjustment
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Loss attributable to noncontrolling interest (NCI)
|
0.6
|
|
|
(0.2
|
)
|
|
0.4
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0.4
|
|
Total other comprehensive income (loss) before reclassifications
|
(58.1
|
)
|
|
12.1
|
|
|
(46.0
|
)
|
|
(46.4
|
)
|
|
0
|
|
|
0
|
|
|
0.4
|
|
Less: Reclassification adjustment for amounts realized in net income by income statement line item:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Net realized gains (losses) on securities
|
(9.3
|
)
|
|
1.9
|
|
|
(7.4
|
)
|
|
(7.4
|
)
|
|
0
|
|
|
0
|
|
|
0
|
|
Interest expense
|
(0.2
|
)
|
|
0
|
|
|
(0.2
|
)
|
|
0
|
|
|
(0.2
|
)
|
|
0
|
|
|
0
|
|
Total reclassification adjustment for amounts realized in net income
|
(9.5
|
)
|
|
1.9
|
|
|
(7.6
|
)
|
|
(7.4
|
)
|
|
(0.2
|
)
|
|
0
|
|
|
0
|
|
Total other comprehensive income (loss)
|
(48.6
|
)
|
|
10.2
|
|
|
(38.4
|
)
|
|
(39.0
|
)
|
|
0.2
|
|
|
0
|
|
|
0.4
|
|
Balance at September 30, 2018
|
$
|
(333.7
|
)
|
|
$
|
70.0
|
|
|
$
|
(263.7
|
)
|
|
$
|
(249.9
|
)
|
|
$
|
(17.4
|
)
|
|
$
|
0
|
|
|
$
|
3.6
|
|
1
Reflects the change in value on (income) loss attributable to NCI in conjunction with the "put" transaction (See
Note 12 – Redeemable Noncontrolling Interest
for additional information).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Changes in
Accumulated Other
Comprehensive Income (after tax)
|
(millions)
|
Pretax total
accumulated
other
comprehensive
income (loss)
|
|
|
Total tax
(provision)
benefit
|
|
|
After tax total
accumulated
other
comprehensive
income (loss)
|
|
|
Total net
unrealized
gains
(losses)
on securities
|
|
|
Net
unrealized
gains
(losses) on
forecasted
transactions
|
|
|
Foreign
currency
translation
adjustment
|
|
|
(Income) loss attributable to NCI
|
|
Balance at December 31, 2017
|
$
|
1,977.8
|
|
|
$
|
(695.6
|
)
|
|
$
|
1,282.2
|
|
|
$
|
1,295.0
|
|
|
$
|
(14.8
|
)
|
|
$
|
0
|
|
|
$
|
2.0
|
|
Cumulative effect adjustment
1
|
(2,006.0
|
)
|
|
705.8
|
|
|
(1,300.2
|
)
|
|
(1,300.2
|
)
|
|
0
|
|
|
0
|
|
|
0
|
|
Reclassification of disproportionate amounts
2
|
(4.3
|
)
|
|
(3.4
|
)
|
|
(7.7
|
)
|
|
(1.1
|
)
|
|
(3.2
|
)
|
|
0
|
|
|
(3.4
|
)
|
Adjusted balance at December 31, 2017
|
(32.5
|
)
|
|
6.8
|
|
|
(25.7
|
)
|
|
(6.3
|
)
|
|
(18.0
|
)
|
|
0
|
|
|
(1.4
|
)
|
Other comprehensive income (loss) before reclassifications:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
(352.5
|
)
|
|
73.9
|
|
|
(278.6
|
)
|
|
(278.6
|
)
|
|
0
|
|
|
0
|
|
|
0
|
|
Forecasted transactions
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Foreign currency translation adjustment
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Loss attributable to noncontrolling interest (NCI)
|
6.4
|
|
|
(1.4
|
)
|
|
5.0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
5.0
|
|
Total other comprehensive income (loss) before reclassifications
|
(346.1
|
)
|
|
72.5
|
|
|
(273.6
|
)
|
|
(278.6
|
)
|
|
0
|
|
|
0
|
|
|
5.0
|
|
Less: Reclassification adjustment for amounts realized in net income by income statement line item:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Net realized gains (losses) on securities
|
(44.2
|
)
|
|
9.2
|
|
|
(35.0
|
)
|
|
(35.0
|
)
|
|
0
|
|
|
0
|
|
|
0
|
|
Interest expense
|
(0.7
|
)
|
|
0.1
|
|
|
(0.6
|
)
|
|
0
|
|
|
(0.6
|
)
|
|
0
|
|
|
0
|
|
Total reclassification adjustment for amounts realized in net income
|
(44.9
|
)
|
|
9.3
|
|
|
(35.6
|
)
|
|
(35.0
|
)
|
|
(0.6
|
)
|
|
0
|
|
|
0
|
|
Total other comprehensive income (loss)
|
(301.2
|
)
|
|
63.2
|
|
|
(238.0
|
)
|
|
(243.6
|
)
|
|
0.6
|
|
|
0
|
|
|
5.0
|
|
Balance at September 30, 2018
|
$
|
(333.7
|
)
|
|
$
|
70.0
|
|
|
$
|
(263.7
|
)
|
|
$
|
(249.9
|
)
|
|
$
|
(17.4
|
)
|
|
$
|
0
|
|
|
$
|
3.6
|
|
1
Reflects the fair value changes on equity securities as of
December 31, 2017
, which are reported as realized gains (losses) under the new accounting guidance. See
Note 14 – New Accounting Standards
for additional information.
2
Reflects the effect of the change in the U.S. federal tax rate on our available-for-sale fixed-maturity securities and our hedges on forecasted transactions as of
December 31, 2017
(See
Note 14 – New Accounting Standards
for additional information) and the adjustment to reflect the change in value on (income) loss attributable to NCI in conjunction with the "put" transaction (See
Note 12 – Redeemable Noncontrolling Interest
for additional information).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Changes in
Accumulated Other
Comprehensive Income (after tax)
|
(millions)
|
Pretax total
accumulated
other
comprehensive
income (loss)
|
|
|
Total tax
(provision)
benefit
|
|
|
After tax total
accumulated
other
comprehensive
income (loss)
|
|
|
Total net
unrealized
gains
(losses)
on securities
|
|
|
Net
unrealized
gains
(losses) 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
|
|
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 (loss)
|
|
|
Total tax
(provision)
benefit
|
|
|
After tax total
accumulated
other
comprehensive
income (loss)
|
|
|
Total net
unrealized
gains
(losses)
on securities
|
|
|
Net
unrealized
gains
(losses) 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
|
|
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
|
|
In an effort to manage interest rate risk, we often enter into forecasted transactions on Progressive’s debt issuances. We expect to reclassify
$1.0 million
(pretax) into interest expense during the next 12 months, related to net unrealized losses on forecasted transactions (see
Note 4 – Debt
for further discussion).
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 subsidiaries are named as defendants in a number of class action or individual lawsuits that challenge certain of the operations of the 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, marketing, or sales 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 2017 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, 2018
or 2017, and there were no material settlements during the first nine months of 2018 or 2017. 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
2017
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
2017
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 stockholders had the right to “put” a portion of their ARX shares to Progressive in 2018, and have the right to put all of their remaining shares to Progressive in 2021. During the second quarter 2018, minority ARX stockholders put
204,527
shares, including
5,483
shares that were issued upon the exercise of outstanding stock options. Progressive acquired these additional shares, in a cash transaction, for a total cost of
$295.9 million
. If ARX stockholders do not put all of their shares to Progressive in 2021, Progressive has the ability to “call
”
all of the outstanding shares shortly thereafter and to bring its ownership stake to
100%
in 2021. See
Note 15 – Redeemable Noncontrolling Interest
in our
2017
Annual Report to Shareholders for a discussion of the purchase price for shares to be purchased by Progressive pursuant to these put or call rights. At September 30, 2018, Progressive’s share ownership interest in ARX was
86.8%
.
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, 2018
, ARX employees held options to purchase
16,067
ARX shares. These options and any shares issued upon exercise are subject to the stockholders’ agreement, including the “put
”
and “call
”
rights described above. Until the options are exercised, the underlying obligation of approximately
$23.4 million
is not recorded as part of redeemable NCI. See
Note 9 – Employee Benefit Plans
in our
2017
Annual Report to Shareholders for a discussion of our employee stock options.
The changes in the components of redeemable NCI during the
nine months ended
September 30, 2018
and
2017
, and the year ended
December 31, 2017
, were:
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
September 30, 2018
|
|
|
September 30, 2017
|
|
|
December 31, 2017
|
|
Balance, Beginning of period
|
$
|
503.7
|
|
|
$
|
483.7
|
|
|
$
|
483.7
|
|
Net income attributable to NCI
|
10.6
|
|
|
1.9
|
|
|
5.9
|
|
Other comprehensive income (loss) attributable to NCI
1
|
(5.0
|
)
|
|
2.9
|
|
|
2.3
|
|
Exercise of employee stock options
|
9.4
|
|
|
3.4
|
|
|
3.4
|
|
Purchase/change of ARX minority shares
|
(298.2
|
)
|
|
0
|
|
|
0
|
|
Change in redemption value of NCI
|
(3.1
|
)
|
|
6.3
|
|
|
8.4
|
|
Balance, End of period
|
$
|
217.4
|
|
|
$
|
498.2
|
|
|
$
|
503.7
|
|
1
Amount represents the other comprehensive income (loss) attributable to NCI, as reflected on the the Consolidated Statements of Comprehensive Income; any reclassification to accumulated other comprehensive income (loss) attributable to NCI due to a change in the minority ownership percentage does not impact the amount of redeemable NCI.
Note 13
Goodwill and Intangible Assets
Goodwill
During the nine months ended
September 30, 2018
, there were
no
changes to the carrying amount of goodwill.
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, 2018
and
2017
, and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
September 30, 2018
|
|
|
September 30, 2017
|
|
|
December 31, 2017
|
|
Intangible assets subject to amortization
|
$
|
300.2
|
|
|
$
|
372.2
|
|
|
$
|
354.2
|
|
Indefinite-lived intangible assets
1
|
12.4
|
|
|
12.4
|
|
|
12.4
|
|
Total
|
$
|
312.6
|
|
|
$
|
384.6
|
|
|
$
|
366.6
|
|
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 include
$0.6 million
of accumulated amortization for all periods presented.
Intangible assets subject to amortization consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
September 30, 2018
|
|
September 30, 2017
|
|
December 31, 2017
|
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
|
|
$
|
128.1
|
|
$
|
128.1
|
|
|
$
|
256.2
|
|
$
|
91.5
|
|
$
|
164.7
|
|
|
$
|
256.2
|
|
$
|
100.7
|
|
$
|
155.5
|
|
Agency relationships
|
159.2
|
|
39.8
|
|
119.4
|
|
|
159.2
|
|
28.4
|
|
130.8
|
|
|
159.2
|
|
31.3
|
|
127.9
|
|
Software rights
|
79.1
|
|
37.4
|
|
41.7
|
|
|
79.1
|
|
26.8
|
|
52.3
|
|
|
79.1
|
|
29.4
|
|
49.7
|
|
Trade name
|
34.8
|
|
23.8
|
|
11.0
|
|
|
34.8
|
|
10.4
|
|
24.4
|
|
|
34.8
|
|
13.7
|
|
21.1
|
|
Total
|
$
|
529.3
|
|
$
|
229.1
|
|
$
|
300.2
|
|
|
$
|
529.3
|
|
$
|
157.1
|
|
$
|
372.2
|
|
|
$
|
529.3
|
|
$
|
175.1
|
|
$
|
354.2
|
|
Amortization expense was
$18.0 million
and
$54.0 million
for the
three and nine
months ended
September 30, 2018
, respectively, compared to
$17.2 million
and
$48.2 million
during the same periods 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 transition the branding of our Property products from the ASI trade name to the Progressive brand. As of
September 30, 2018
, the remaining average life of all of our intangible assets is
4.2 years
.
Note 14
New Accounting Standards
Issued
In August 2018, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU), which provides additional guidance on the requirements for capitalizing and amortizing implementation costs incurred in a cloud computing arrangement that does not include a software license. This ASU will be effective for fiscal years (including interim periods within those fiscal years) beginning after December 15, 2019 (2020 for calendar-year companies). We do not expect this standard to have a material impact on our financial condition, cash flows, or results of operations.
In August 2018, the FASB issued an ASU, which amends the disclosure requirements for fair value measurements. The ASU requires companies to disclose the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The ASU also removes current disclosure requirements for the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. The ASU is effective for fiscal years beginning after December 15, 2019, and should be applied prospectively for the additions to the disclosure requirements and applied retrospectively to all periods presented for all other amendments. Early adoption of this ASU is permitted, including the ability to early adopt the removal of current disclosures while delaying the adoption of new disclosures until the effective date. We do not expect this standard to have an impact on our financial condition, cash flows, or results of operations.
In July 2018, the FASB issued an ASU, which provides targeted improvements to the new lease accounting guidance issued by the FASB in February 2016. The ASU, which eliminates the off-balance-sheet accounting for leases, will require lessees to report their operating leases as both an asset and liability on the statement of financial position and to disclose key information about leasing arrangements in the financial statement footnotes. Under the ASU, there will be no change to the recognition of lease expense in our results of operations. The ASU will be effective for fiscal years (including interim periods within those fiscal years) beginning after December 15, 2018 (2019 for calendar-year companies). Under the ASU, companies will have the option to apply the new lease requirements either as of the effective date (i.e., January 1, 2019), with comparative information presented in accordance with the previous standard, or on a modified retrospective basis, which would restate all financial statement information as of the beginning of the earliest period presented. Based on our lease portfolio at September 30, 2018, and in accordance with the accounting elections available in the ASU, we would have recorded an increase to assets and liabilities of approximately
$160 million
, and there would have been no impact on our results of operations or cash flows. Therefore, we do not expect this standard to have a material impact on our financial condition.
In March 2017, the FASB issued an 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 (2019 for calendar-year companies), 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.
In January 2017, the FASB issued an ASU, which eliminates the requirement to determine the implied fair value of goodwill in measuring an impairment loss. Upon adoption, the measurement of a goodwill impairment will represent the excess of the reporting unit’s carrying value over fair value, limited to the carrying value of goodwill. This ASU is effective for goodwill impairment tests in fiscal years beginning after December 15, 2019 (2020 for calendar-year companies), with early adoption permitted. We do not expect this standard to have a material impact on our financial position or results of operations.
In June 2016, the FASB issued an ASU intended to improve the timing, and enhance the accounting and disclosure, of credit losses on financial assets. Additionally, this update will modify the existing accounting guidance related to the impairment evaluation for available-for-sale debt securities and will result in the creation of an allowance for credit losses as a contra asset account. The ASU will require cumulative-effect changes to retained earnings in the period of adoption, if any occur, and will also require prospective changes on previously recorded impairments. This ASU is effective for fiscal years (including interim periods within those fiscal years) beginning after December 15, 2019 (2020 for calendar-year companies), with early adoption permissible (including interim periods within that fiscal year) beginning after December 15, 2018 (2019 for calendar-year companies). While the ASU creates additional accounting complexities related to the recognition of the impairment losses, and subsequent recoveries, through an allowance for credit losses account, we do not expect the ASU to have a material impact on our current method of evaluating securities for credit losses or the timing or recognition of the amounts of the impairment losses.
Adopted
On January 1, 2018, we adopted the ASU intended to improve the recognition and measurement of financial instruments. Under this update, the changes in fair value of equity securities are recognized as a component of net income. Upon adoption, we recorded a cumulative-effect adjustment of
$1.3 billion
, which is net of taxes. The cumulative-effect adjustment represents the amount of after-tax net unrealized gains on equity securities that was recorded as part of accumulated other comprehensive income at December 31, 2017. The adoption of this ASU had no impact on comprehensive income. Consistent with our historical presentation, cash flows on equity securities will be reflected as investing activities in the Consolidated Statements of Cash Flows.
In the first quarter 2018, we adopted the ASU related to the reclassification of certain tax effects from accumulated other comprehensive income. This update provided companies with the option to reclassify disproportionate tax effects in accumulated other comprehensive income caused by the legislation commonly known as the Tax Cuts and Jobs Act of 2017 to retained earnings. We opted to make the reclassification, which resulted in a decrease to accumulated other comprehensive income and an offsetting increase to retained earnings of
$4.3 million
. This reclass was solely due to the effect of the change in the U.S. federal tax rate on our available-for-sale fixed-maturity securities and our hedges on forecasted transactions. There were no disproportionate tax effects related to our equity securities subsequent to adopting the ASU related to classification and measurement discussed above.
Note 15
Reclassification
— For the three and nine months ended September 30, 2017, we reclassified the change in the net holding period gains (losses) on hybrid securities held at September 30, 2017 to “net holding period gains (losses) on securities” out of “net realized gains (losses) on security sales” to conform with the current-year Consolidated Statements of Comprehensive Income presentation. There was no overall impact on total net realized gains (losses) on securities. We also reclassified the classification and presentation of restricted cash in our Consolidated Statements of Cash Flows in accordance with the accounting guidance we adopted for the year ended December 31, 2017 relating to this item; there was no overall impact on the increase in cash, cash equivalents, and restricted cash as a result of this reclassification. In addition, on our Consolidated Balance Sheets for December 31, 2017, we reclassified our “dividends payable” into “accounts payable, accrued expenses, and other liabilities” to be consistent with the current period presentation.
Note 16
Subsequent Event
— On October 18, 2018, we issued
$550.0 million
of
4.00%
Senior Notes due 2029 (the “
4.00%
Senior Notes”) in an underwritten public offering. We received net proceeds, which will be used for general corporate purposes, of about
$544.5 million
, after deducting underwriters’ discounts, commissions, and other issuance costs.