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PROGRESSIVE CORP/OH/ – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations.
I. OVERVIEWThe Progressive Corporation's insurance subsidiaries recognized growth in both premiums and policies in force in the third quarter 2021, compared to the same period last year. During the quarter, we generated$12.4 billion of net premiums written, which is an increase of$1.4 billion , or 13%, compared to the third quarter 2020. We ended the third quarter 2021 with 26.6 million companywide policies in force, which is 2.1 million more policies than were in force atSeptember 30, 2020 . During the third quarter 2021, we generated an underwriting loss, primarily reflecting significant catastrophe losses during the period, mainly from Hurricane Ida, which hit both theGulf Coast andNortheastern United States and accounted for 70% of catastrophe losses during the quarter. Higher auto accident frequency and severity in our personal auto products also contributed to the underwriting loss during the third quarter. Our combined ratio was 100.4 for the third quarter 2021, 12.6 points higher than the same period last year. Certain growth and profitability comparisons to the same period last year were, in part, impacted by the effects COVID-19 restrictions had on our comparable prior year results. During the third quarter of 2020, we continued to experience driving patterns that differed from levels historically experienced, which began inMarch 2020 when shelter-in-place restrictions were put in place to help stop the spread of the novel coronavirus, COVID-19. We also saw a significant reduction in auto accident frequency resulting from changes in driving patterns in 2020. During 2021, our usage-based insurance data has shown driving patterns have begun to stabilize, although Personal Lines auto mileage has not yet returned to pre-COVID levels. The impact from the pandemic should be considered when comparing the current year to the prior year. The increase in personal auto severity reflects higher costs to both repair cars and for medical expenses. Our bodily injury coverage increased during the quarter due to a higher mix of more severe accidents. For our collision coverage, the year-over-year increase in severity primarily reflects an increase in the valuation of used vehicles in 2021, which increases total loss costs that are partly offset by higher salvage returns. We also had lower collision severity in the second quarter of 2020, due to a higher volume of subrogation collections relative to new claims made, as a result of the COVID-19 restrictions. Our underwriting expense ratios were 1.5 points and 4.9 points lower for the third quarter and first nine months of 2021, respectively, compared to the same periods last year, reflecting both actions taken during 2021 to reduce expenses and higher pandemic-related underwriting expenses incurred in 2020. During 2020, we issued credits to personal auto policyholders, which accounted for 0.3 points and 3.7 points for the third quarter and first nine months of 2020, respectively, and during the first half of 2020, we also recognized additional bad debt expense related to the billing leniencies and moratoriums that were in place beginning inMarch 2020 and continued through the middle ofMay 2020 . As previously disclosed, we have been taking actions to address profitability and to strive to meet our stated objective of underwriting margins of at least four points on a calendar year basis. We began to file for personal auto rate increases earlier this year where appropriate, and during the third quarter 2021, rate increases became effective in 20 states, which had an average increase of about 6%. In the aggregate, rate changes for personal auto for the quarter were about 3%. Management continues to assess miles driven, driving patterns, loss severity, weather events, and other components of expected loss costs on a state-by-state basis and, where appropriate, file for rate adjustments accordingly. We are also looking to identify where we may need to tighten underwriting criteria further where losses indicate rate inadequacy. In addition to rate actions, during the third quarter 2021, we started reducing spend in certain types of advertising based on performance against our media and underwriting targets. We will continue to look at key performance indicators to assess where additional action may be needed and will react swiftly to address those needs. Taking actions to reach our target profit margin always takes precedence over growing premiums, and while these actions resulted in fewer new business applications during the quarter, and could impact growth in future periods, we strongly believe that these steps are necessary to get us well positioned for the future. On a year-over-year basis, net income and comprehensive income decreased 92% and 101%, respectively, for the third quarter 2021 and 41% and 61% for the first nine months of 2021. The largest contributor to the year-over-year decreases was the reduction of underwriting income, which decreased 104% for the quarter and 60% for the first nine months of 2021, partially offset by an increase in net holding period gains for the nine months endedSeptember 30, 2021 , compared to the same period last year. 33
-------------------------------------------------------------------------------- A. Insurance Operations We evaluate growth in terms of both net premiums written and policies in force growth. All three of our operating segments contributed to our solid premium and policies in force growth during the third quarter on a year-over-year basis. Our companywide net premiums written grew 13%, with Personal Lines growing 7%, Commercial Lines 47%, and Property 16%, primarily reflecting an increase in policies in force from all of our segments. AtSeptember 30, 2021 , on a year-over-year basis, policies in force grew 9% companywide, with Personal Lines, Commercial Lines, and Property growing 8%, 19%, and 13%, respectively. The growth on a quarter-over-prior-year quarter in our commercial auto business includes a 20% increase in average written premium per policy in addition to an increase in policies in force. The increase in written premium per policy reflects a combination of a shift in the mix of business toward higher premium coverages, an increase in the number of vehicles per policy, and rate increases taken during the year. During the third quarter 2021, new applications (i.e., issued policies) decreased 15% in our Personal Lines segment, with total new personal auto applications decreasing 16%. Agency auto new applications decreased 20% and Direct auto decreased 14% as a result of the actions taken to address profitability, as discussed above. New applications for our special lines products were down 8% during the third quarter 2021, primarily reflecting the significant new application growth during the third quarter 2020, as people were purchasing more special lines products as a way to practice social distancing. New applications increased 18% in our Commercial Lines business (excluding our transportation network company, business owners policy, andProtective Insurance products), and 16% in our Property segment. On a year-over-year basis for the third quarter 2021, both our Personal Lines and Property renewal applications increased 11%, and Commercial Lines increased 15%. Total personal auto renewal applications increased 11% over the third quarter last year. While we are taking actions to address profitability as discussed above, we remain focused on growth and realize that to grow policies in force, it is critical that we retain our customers for longer periods. Consequently, increasing retention continues to be one of our most important priorities. Our efforts to increase our share of multi-product households remains a key initiative and we will continue to make investments to improve the customer experience in order to support that goal. Policy life expectancy, which is our actuarial estimate of the average length of time that a policy will remain in force before cancellation or lapse in coverage, is our primary measure of customer retention in our Personal Lines, Commercial Lines, and Property businesses. We evaluate retention using a trailing 12-month total auto policy life expectancy and a trailing 3-month policy life expectancy. The latter does not address seasonality and can reflect more volatility. As of the end of the third quarter 2021, our trailing 12-month total personal auto policy life expectancy increased 4%, compared to last year, with both the Agency and Direct channels up 4%. Our Commercial Lines and special lines trailing 12-month policy life expectancy increased 13% and 4%, respectively, year over year, and Property decreased 8%. For the third quarter 2021, we experienced a companywide underwriting loss margin of 0.4%, compared to an underwriting profit margin of 12.2% for the same period last year. Our Commercial Lines segment was profitable during the third quarter 2021, with an underwriting profit margin of 10.5%. Our Personal Lines and Property segments each generated an underwriting loss during the period, due to significant catastrophe losses incurred during the quarter, that more than offset the underwriting profit in Commercial Lines. Our Personal Lines segment generated an underwriting loss margin of 0.2% for the quarter. Our special lines business also had an underwriting loss during the third quarter due to normal seasonality and contributed a 0.2 unfavorable point impact on our Personal Lines combined ratio. Our Property segment had an underwriting loss margin of 42.3% for the quarter. On a net basis (i.e., after reinsurance), our Property business incurred catastrophe losses during the quarter of$289.1 million , or 54.9 points on its combined ratio. In addition to the significant catastrophe losses during the third quarter 2021, our personal auto incurred accident frequency was up 10% for the third quarter 2021, as compared to the prior year, and severity was up 12%. With more people driving and vehicle miles traveled increasing, loss frequency is up compared to the prior year; however, frequency remains lower than the levels we experienced prior to the onset of the pandemic. Collision is a significant driver of the increased severity we experienced during the current quarter as the continued increase in the valuation of used vehicles is increasing our total loss and repair costs. 34 -------------------------------------------------------------------------------- B. Investments The fair value of our investment portfolio was$52.3 billion atSeptember 30, 2021 , compared to$47.5 billion atDecember 31, 2020 . The$4.8 billion increase from year-end 2020 reflects positive investment results and solid cash flows from operations, net of shareholder dividends, common stock repurchases, debt pay off, and the acquisition ofProtective Insurance Corporation and its subsidiaries (Protective Insurance ) (see Note 14 - Acquisition for further discussion). Our asset allocation strategy is to maintain 0%-25% of our portfolio in Group I securities, with the balance (75%-100%) of our portfolio in Group II securities (the securities allocated to Group I and II are defined below under Results of Operations - Investments). AtSeptember 30, 2021 , 16% of our portfolio was allocated to Group I securities and 84% to Group II securities, compared to 14% and 86%, respectively, atDecember 31, 2020 . Our recurring investment income generated a pretax book yield of 1.8% for the third quarter 2021, compared to 2.3% for the same period in 2020, primarily due to investing new cash at lower interest rates. Our investment portfolio produced a fully taxable equivalent (FTE) total return of 0.2% and 1.7% for the third quarter 2021 and 2020, respectively. Both our fixed-income and common stock portfolios had FTE total returns of 0.2% for the third quarter 2021, compared to 1.1% and 9.6%, respectively, last year. The fixed-income return variance was due to the upward shift in interest rates that we have seen through the first nine months of the year. This negative effect on fixed-income returns has only been partially offset by tighter credit spreads across corporate, municipal, and securitized bonds. At bothSeptember 30, 2021 and 2020, the fixed-income portfolio had a weighted average credit quality of AA- and a duration of 3.0 years, compared to AA- and 2.9 years atDecember 31, 2020 . Our portfolio duration has remained relatively consistent over the previous twelve months and it remains below the midpoint of our 1.5-year to 5-year range, which we believe provides some protection against a further increase in interest rates. 35 -------------------------------------------------------------------------------- II. FINANCIAL CONDITION A. Liquidity and Capital Resources Progressive's insurance operations create liquidity by collecting and investing premiums from new and renewal business in advance of paying claims. Operations generated positive cash flows of$7.3 billion and$5.4 billion for the nine months endedSeptember 30, 2021 and 2020, respectively, in part due to collecting premiums at a faster rate than losses are being paid during 2021, as well as the policyholder credits paid from operating cash flow in 2020. Our total capital (debt plus shareholders' equity) was$23.5 billion , at book value, atSeptember 30, 2021 and 2020, and$22.4 billion atDecember 31, 2020 . The increase since year end primarily reflects comprehensive income, in part offset by the maturity of$500 million of 3.75% Senior Notes, common share repurchases, and common share dividends. Our debt-to-total capital ratio remained below 30% during all reported periods, consistent with our financial policy. This ratio, which reflects debt as a percent of debt plus shareholders' equity, was 20.9% atSeptember 30, 2021 , 23.0% atSeptember 30, 2020 , and 24.1% atDecember 31, 2020 . The decrease from the prior periods in 2020 reflects the maturity of our 3.75% Senior Notes during the third quarter 2021. None of our outstanding senior notes have restrictive financial covenants or credit rating triggers. We seek to deploy capital in a prudent manner and use multiple data sources and modeling tools to estimate the frequency, severity, and correlation of identified exposures, including, but not limited to, catastrophic and other insured losses, natural disasters, and other significant business interruptions, to estimate our potential capital needs. During the first nine months of 2021, we returned capital to shareholders primarily through dividends and common share repurchases. Our Board of Directors declared a$0.10 per common share dividend in the first, second, and third quarters of 2021. These dividends, which were each$58.5 million in the aggregate per quarter, or$175.5 million on a year-to-date basis, were paid inApril 2021 ,July 2021 , andOctober 2021 . InJanuary 2021 , we also paid common share dividends in the aggregate amount of$2.7 billion , or$4.60 per share (see Note 9 - Dividends for further discussion). In addition to the common share dividends, inMarch 2021 andSeptember 2021 , we paid Series B Preferred Share dividends in the aggregate amount of$26.8 million . In accordance with our financial policies, if we believe our share price is trading below our view of fair value and we are in a strong capital position then we will look to repurchase our shares. In the third quarter, we witnessed some volatility in our share price that presented us with an opportunity to engage in share repurchases after a period of relative inactivity. During the first three quarters of 2021, we repurchased 1.8 million common shares, at a total cost of$167.2 million , including 0.7 million shares in the third quarter 2021, either in the open market or to satisfy tax withholding obligations as permitted under our equity compensation plans. We will continue to make decisions on returning capital to shareholders based on the strength of our capital position and the potential capital needs to expand our business operations. InApril 2021 , we renewed the unsecured discretionary line of credit (the "Line of Credit") withPNC Bank, National Association , in the maximum principal amount of$250 million . We did not engage in short-term borrowings, including any borrowings under our Line of Credit, to fund our operations or for liquidity purposes during the reported periods. OnJune 1, 2021 , Progressive acquired all of the outstanding Class A and Class B common shares ofProtective Insurance for$23.30 per share, or approximately$338 million in aggregate. The acquisition was funded with cash held by Progressive. See Note 14 - Acquisition for further discussion. Based upon our capital planning and forecasting efforts, we believe we have sufficient capital resources and cash flows from operations to support our current business, scheduled principal and interest payments on our debt, anticipated dividends on our common shares and Series B Preferred Shares, our contractual obligations, and other expected capital requirements for the foreseeable future. We did not experience a significant change in our liquidity needs during the third quarter 2021. During the first nine months of 2021 and at all times during 2020, our total capital exceeded the sum of our regulatory capital layer plus our self-constructed extreme contingency layer, as described in Exhibit 13 to our Annual Report on Form 10-K for the year endedDecember 31, 2020 (2020 Annual Report to Shareholders). 36 -------------------------------------------------------------------------------- B. Commitments and Contingencies Contractual Obligations During the first nine months of 2021, our contractual obligations have not changed materially from those discussed in our 2020 Annual Report to Shareholders. Off-Balance-Sheet Arrangements Our off-balance-sheet leverage includes purchase obligations and catastrophe excess of loss reinsurance contracts. There have not been any material changes in off-balance-sheet items from those discussed in our 2020 Annual Report to Shareholders. 37 -------------------------------------------------------------------------------- III. RESULTS OF OPERATIONS - UNDERWRITING A. Segment Overview We report our underwriting operations in three segments: Personal Lines, Commercial Lines, and Property. As a component of our Personal Lines segment, we report our Agency and Direct business results to provide further understanding of our products by distribution channel. The following table shows the composition of our companywide net premiums written, by segment, for the respective periods: Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Personal Lines Agency 36 % 39 % 37 % 40 % Direct 40 42 41 43 Total Personal Lines1 76 81 78 83 Commercial Lines 19 14 17 13 Property 5 5 5 4 Total underwriting operations 100 % 100 % 100 % 100 % 1 Personal auto insurance accounted for 93% of the total Personal Lines segment net premiums written during the three and nine months endedSeptember 30, 2021 , compared to 94% and 93%, respectively, for the same periods last year; insurance for our special lines products accounted for the balance. Our Personal Lines business writes insurance for personal autos and special lines products (e.g., motorcycles, watercraft, and RVs). We currently write our Personal Lines products in all 50 states. We also offer our personal auto product (not special lines products) in theDistrict of Columbia . Within Personal Lines we often refer to our four consumer segments, which include: •Sams - inconsistently insured; •Dianes - consistently insured and maybe a renter; •Wrights - homeowners who do not bundle auto and home; and •Robinsons - homeowners who bundle auto and home. While our personal auto policies are primarily written for 6-month terms, we write 12-month auto policies in our Platinum agencies to promote bundled auto and home growth. AtSeptember 30, 2021 , 13% of our Agency auto policies in force were 12-month policies, compared to 11% a year earlier. Our special lines products are written for 12-month terms. Our Commercial Lines business writes auto-related liability and physical damage insurance, workers' compensation coverage primarily for the transportation industry, and business-related general liability and property insurance, predominately for small businesses. The majority of our Commercial Lines business is written through the independent agency channel although our direct business is growing. The amount of commercial auto business written through the direct channel, excluding our transportation network company (TNC) business, grew 55% on a quarter-over-prior-year and represented 10% of premiums written for the third quarter 2021, compared to 9% a year earlier. We write Commercial Lines business in all 50 states and about 90% of these policies are written for 12-month terms. To serve our direct channel customers, we continued to expand our product offerings, including the addition of our business owners policy (BOP) product in 29 states by the end of the third quarter, through our in-house agency and BusinessQuote Explorer®, our digital platform for small business consumers. Our Property business writes residential property insurance for single family homes, condominium unit owners, renters, etc. We write the majority of our Property business through the independent agency channel; however, we continue to expand the distribution of our Property product offerings in the direct channel, which represented about 24% of premiums written for the third quarter 2021, compared to 19% for the same period last year. Property policies are written for 12-month terms. We write residential property in 47 states, renters in 48 states, and flood insurance in 46 states; we also write all of these products in theDistrict of Columbia . Our flood insurance is written primarily through the National Flood Insurance Program and is 100% reinsured. 38 -------------------------------------------------------------------------------- B. Profitability Profitability for our underwriting operations is defined by pretax underwriting profit, which is calculated as net premiums earned plus fees and other revenues less losses and loss adjustment expenses, policy acquisition costs, other underwriting expenses, and policyholder credits. We also use underwriting margin, which is underwriting profit or loss expressed as a percentage of net premiums earned, to analyze our results. For the respective periods, our underwriting profitability results were as follows: Three Months Ended September 30,
Nine Months Ended
2021 2020 2021 2020
Underwriting Underwriting Underwriting Underwriting
Profit (Loss) Profit (Loss) Profit (Loss) Profit (Loss)
($ in millions) $ Margin $ Margin $ Margin $ Margin
Personal Lines
Agency $ 41.0 1.0 % $ 596.5 14.9 % $ 796.0 6.3 % $ 1,748.7 14.9 %
Direct (62.4) (1.3) 517.6 12.0 480.6 3.5 1,637.8 13.1
Total Personal Lines (21.4) (0.2) 1,114.1 13.4 1,276.6 4.9 3,386.5 14.0
Commercial Lines 197.5 10.5 155.9 12.8 556.1 11.3 448.2 12.7
Property1 (222.7) (42.3) (52.9) (11.8) (376.7) (25.1) (192.4) (14.8)
Other indemnity2 (0.3) NM 0 NM (0.2) NM 0 NM
Total underwriting operations $ (46.9) (0.4) % $ 1,217.1 12.2 % $ 1,455.8 4.4 % $ 3,642.3 12.5 %
1 For the three and nine months ended September 30, 2021 , pretax profit (loss)
includes $14.2 million and $42.5 million , respectively, of amortization expense
associated with acquisition-related intangible assets attributable to our
Property segment, and $14.2 million and $42.8 million for the respective periods
last year.
2 Primarily reflects Protective Insurance's run-off business operations.
Underwriting margins for our other indemnity business are not meaningful (NM)
due to the low level of premiums earned by such business.
The decreases in the companywide underwriting profit margins during the three
and nine months ended September 30, 2021 , compared to the same periods last
year, were primarily driven by higher accident frequency and severity, and
higher catastrophe losses. See the Losses and Loss Adjustment Expenses (LAE)
section below for further discussion of our frequency and severity trends and
catastrophe losses incurred during the periods.
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Further underwriting results for our Personal Lines business, including results
by distribution channel, the Commercial Lines business, the Property business,
and our underwriting operations in total, were as follows:
Three Months Ended September 30, Nine Months Ended September 30,
Underwriting Performance1 2021 2020 Change 2021 2020 Change
Personal Lines - Agency
Loss & loss adjustment expense ratio 80.9 67.0 13.9 75.2 61.6 13.6
Underwriting expense ratio 18.1 18.1 0 18.5 23.5 (5.0)
Combined ratio 99.0 85.1 13.9 93.7 85.1 8.6
Personal Lines - Direct
Loss & loss adjustment expense ratio 82.7 66.4 16.3 76.2 60.8 15.4
Underwriting expense ratio 18.6 21.6 (3.0) 20.3 26.1 (5.8)
Combined ratio 101.3 88.0 13.3 96.5 86.9 9.6
Total Personal Lines
Loss & loss adjustment expense ratio 81.8 66.7 15.1 75.7 61.2 14.5
Underwriting expense ratio 18.4 19.9 (1.5) 19.4 24.8 (5.4)
Combined ratio 100.2 86.6 13.6 95.1 86.0 9.1
Commercial Lines
Loss & loss adjustment expense ratio 70.2 66.6 3.6 68.8 64.1 4.7
Underwriting expense ratio 19.3 20.6 (1.3) 19.9 23.2 (3.3)
Combined ratio 89.5 87.2 2.3 88.7 87.3 1.4
Property
Loss & loss adjustment expense ratio 113.9 81.2 32.7 95.9 84.7 11.2
Underwriting expense ratio2 28.4 30.6 (2.2) 29.2 30.1 (0.9)
Combined ratio2 142.3 111.8 30.5 125.1 114.8 10.3
Total Underwriting Operations
Loss & loss adjustment expense ratio 81.4 67.3 14.1 75.6 62.6 13.0
Underwriting expense ratio 19.0 20.5 (1.5) 20.0 24.9 (4.9)
Combined ratio 100.4 87.8 12.6 95.6 87.5 8.1
Accident year - Loss & loss adjustment expense
ratio3 81.8 67.3 14.5 75.1 62.2 12.9
1 Ratios are expressed as a percentage of net premiums earned; fees and other
revenues are netted with underwriting expenses in the ratio calculations.
2 Included in the three and nine months ended September 30, 2021 , are 2.7 points
and 2.8 points, respectively, of amortization expense associated with
acquisition-related intangible assets attributable to our Property segment, and
3.2 points and 3.3 points for the respective periods last year. Excluding these
additional expenses, for the three months ended September 30, 2021 and 2020, the
Property business would have reported expense ratios of 25.7 and 27.4,
respectively, and combined ratios of 139.6 and 108.6. For the nine months ended
September 30, 2021 and 2020, excluding these additional expenses, the Property
business would have reported expense ratios of 26.4 and 26.8, respectively, and
combined ratios of 122.3 and 111.5.
3 The accident year ratios include only the losses that occurred during the
period noted. As a result, accident period results will change over time, either
favorably or unfavorably, as we revise our estimates of loss costs when payments
are made or reserves for that accident period are reviewed.
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Losses and Loss Adjustment Expenses (LAE)
Three Months Ended September 30, Nine Months Ended September 30,
(millions) 2021 2020 2021 2020
Increase (decrease) in net loss and LAE
reserves $ 1,673.1 $
775.6
Paid losses and LAE
7,577.6 5,937.5 20,863.9 17,298.0 Total incurred losses and LAE$ 9,250.7 $
6,713.1
Claims costs, our most significant expense, represent payments made and
estimated future payments to be made, to or on behalf of our policyholders,
including expenses needed to adjust or settle claims. Claims costs are a
function of loss severity and frequency and, for our vehicle businesses, are
influenced by inflation and driving patterns, among other factors, some of which
are discussed below. In our Property business, severity is primarily a function
of construction costs and the age of the structure. Accordingly, anticipated
changes in these factors are taken into account when we establish premium rates
and loss reserves. Loss reserves are estimates of future costs and our reserves
are adjusted as underlying assumptions change and information develops.
Our total loss and LAE ratio increased 14.1 points for the third quarter 2021,
compared to the same period last year, and 13.0 points on a year-to-date basis,
primarily due to higher accident severity and frequency, and catastrophe losses.
The following table shows our consolidated catastrophe losses, excluding loss
adjustment expenses, incurred during the periods:
Three Months Ended September 30, Nine Months Ended September 30,
($ in millions) 2021 2020 2021 2020
Personal Lines $ 421.1 $ 163.1 $ 698.0 $ 365.0
Commercial Lines 11.7 3.4 20.1 11.0
Property 289.1 115.1 561.7 391.8
Total net catastrophe losses incurred $ 721.9 $ 281.6 $ 1,279.8 $ 767.8
Combined ratio effect 6.4 pts. 2.8 pts. 3.9 pts. 2.6 pts.
During the three and nine months ended September 30, 2021 , approximately 70% and
40%, respectively, of our catastrophe losses were related to Hurricane Ida, with
nearly two-thirds of the losses impacting our vehicle businesses and the
remainder our Property business. In our Property business, we retained
approximately $185 million of losses and $15 million of allocated loss
adjustment expenses (ALAE), with the excess covered under our occurrence excess
of loss reinsurance program. We have responded, and plan to continue to respond,
promptly to catastrophic events when they occur in order to provide exemplary
claims service to our customers.
We do not have catastrophe-specific reinsurance for our Personal Lines or
Commercial Lines businesses, but we reinsure portions of our Property business
against various risks. The Property business reinsurance programs include:
multi-year catastrophe excess of loss, aggregate excess of loss, and catastrophe
bonds. During the second quarter 2021, we entered into new reinsurance contracts
under our per occurrence excess of loss program for our Property business. The
new reinsurance policies carry retention thresholds for losses and ALAE from a
single catastrophic event of $200 million , an increase from the retention
threshold on the prior contracts of $80 million . The increase in the threshold
from the prior contract primarily reflects our ability to assume more direct
risk on a companywide basis, while balancing this risk against the rising costs
for these types of contracts. See Item 1 - Description of Business-Reinsurance
in our Annual Report on Form 10-K for the year ended December 31, 2020 , for a
discussion of our various reinsurance programs. As of September 30, 2021 ,
subject to our 2021 catastrophe aggregate excess of loss program, we have not
exceeded the annual retention thresholds.
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Under our various Property catastrophe-specific reinsurance, we ceded the
following losses and ALAE, including development on prior year storms, during
the periods:
Three Months Ended September
30, Nine Months Ended September 30,
(millions) 2021 2020 2021 2020
Aggregate excess of loss:
Current accident year $ 0 $ 135.3 $ 0 $ 135.3
Prior accident years 12.0 NA 25.5 NA
Per occurrence excess of loss:
Current accident year1 250.0 10.0 257.5 10.0
Prior accident years2 0 15.0 134.6 95.0
Total $ 262.0 $ 160.3 $ 417.6 $ 240.3
NA = Not applicable; this reinsurance coverage was entered into on January 1,
2020 .
1 Amount for the three months ended September 30, 2021 , is solely attributable
to Hurricane Ida.
2 Amount for the nine months ended September 30, 2021 , is primarily attributable
to Hurricane Irma, which exceeded the excess of loss retention threshold in 2017
and, therefore, all development on this prior accident year storm is fully
ceded.
The following discussion of our severity and frequency trends in our personal
auto business excludes comprehensive coverage because of its inherent
volatility, as it is typically linked to catastrophic losses generally resulting
from adverse weather. For our commercial auto products, the reported frequency
and severity trends include comprehensive coverage. Comprehensive coverage
insures against damage to a customer's vehicle due to various causes other than
collision, such as windstorm, hail, theft, falling objects, and glass breakage.
Due to the impacts of shelter-in-place requirements that occurred throughout
much of 2020, we believe that comparing current year frequency and severity to
the prior year are not meaningful for our personal auto business. The trend
comparisons below compare a two-year annualized change between 2021 and 2019 for
personal auto frequency and severity for all coverages, excluding comprehensive
coverage, which we believe are more insightful when trying to understand our
current year profitability given the impact that COVID-19 restrictions had on
our 2020 trends.
We saw the number of vehicle miles driven decrease dramatically when the
COVID-19 restrictions were first put in place, especially during the early
months of the pandemic. Now that the shelter-in-place restrictions have been
eliminated, our usage-based insurance data has shown that the variance between
vehicle miles traveled and claims volume decreased as the number of claims grew
at a faster pace during the third quarter 2021.
Total personal auto incurred severity (i.e., average cost per claim, including
both paid losses and the change in case reserves) on a calendar-year basis
increased about 12% and 8% during the third quarter and the first nine months of
2021, respectively, compared to the same periods in 2020, and 10% and 9%,
compared to the same periods in 2019. While the total change in severity is
fairly consistent when comparing to prior year as well as to 2019, we believe
the individual line coverages are not indicative of the underlying trends,
primarily in the auto property damage and collision coverages due in part to the
timing of salvage and subrogation collections in 2020. Therefore, we continue to
believe comparisons to 2019 are more insightful.
Following are the changes we experienced in severity in our auto coverages on a
2021 year-over-2019 year annualized basis:
•Bodily injury increased about 11% for the third quarter and the first nine
months of 2021, due in part to a shift in the mix to more severe accidents
compared to 2019.
•Personal injury protection (PIP) increased about 10% during the third quarter
2021 and 8% during the first nine months of 2021, due in part to reopened
claims, primarily in Florida .
•Auto property damage increased about 8% and 7% for the third quarter 2021 and
the first nine months of 2021, respectively, and collision increased 14% and 9%,
in part due to shifts in the type of loss experienced, more total losses, and
increased used car prices.
It is a challenge to estimate future severity, but we continue to monitor
changes in the underlying costs, such as used car prices, vehicle repair costs,
medical costs, health care reform, court decisions, and jury verdicts, along
with regulatory changes and other factors that may affect severity.
Our personal auto incurred frequency, on a calendar-year annualized basis,
decreased about 5% and 7% for the third quarter and for the first nine months of
2021, compared to the same periods in 2019. Following are the frequency changes
we experienced by coverage, and primarily resulted from changes in driving
patterns from those historically experienced:
•Auto property damage, bodily injury, and PIP decreased about 9%, 11%, and 7%,
respectively, for the third quarter of 2021 and 10% to 11% for the first nine
months of 2021, compared to 2019.
•Collision decreased about 1% for the quarter and 3% for the first nine months
of 2021.
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For reference, on a year-over-year basis for the third quarter and the first
nine months of 2021, frequency increased 10% and 16%, respectively, for all
coverages, excluding comprehensive coverage.
We will continue to analyze trends to distinguish changes in our experience from
other external factors, such as changes in the number of vehicles per household,
miles driven, vehicle usage, gasoline prices, advances in vehicle safety, and
unemployment rates, versus those resulting from shifts in the mix of our
business or changes in driving patterns, to allow us to react quickly to price
for these trends and to reserve more accurately for our loss exposures.
The changes we are disclosing in the paragraph below for our commercial auto
products' severity and frequency use a trailing 12-month period and exclude our
TNC business and Protective Insurance . Using a trailing 12-month period
addresses inherent seasonality trends in the commercial auto products and
lessens the effects of month-to-month variability, including the impact of
COVID-19 restrictions. Since the loss patterns in the TNC business are not
indicative of our other commercial auto products, disclosing severity and
frequency trends excluding that business is more indicative of our overall
experience for the majority of our commercial auto products.
For the trailing 12-month period ended September 30, 2021 , compared to the same
period in 2020, incurred severity in our commercial auto products increased 10%
and frequency increased 5%. The increase in severity is in part due to increased
medical costs and actuarially determined reserves due to accelerating paid loss
trends and shifts in the mix of business to for-hire transportation, which has
higher average severity than the business auto and contractor business market
targets. These loss frequency and severity trends appear to be aligning more
closely with what we forecasted in our rate level indications. When comparing
the trailing 12-month period for 2021 to the trailing 12-month period for 2019,
on an annualized basis, our commercial auto products experienced an increase in
severity of 12% and a decrease in frequency of 5%.
The table below presents the actuarial adjustments implemented and the loss
reserve development experienced in the following periods on a companywide basis:
Three Months Ended September 30, Nine Months Ended September 30,
($ in millions) 2021 2020 2021 2020
ACTUARIAL ADJUSTMENTS
Reserve decrease (increase)
Prior accident years $ (45.5) $ 10.0 $ (89.7) $ (2.2)
Current accident year 20.5 20.0 38.9 50.2
Calendar year actuarial adjustment $ (25.0) $ 30.0 $ (50.8) $ 48.0
PRIOR ACCIDENT YEARS DEVELOPMENT
Favorable (unfavorable)
Actuarial adjustment $ (45.5) $ 10.0 $ (89.7) $ (2.2)
All other development 85.7 (10.0) (67.1) (113.9)
Total development $ 40.2 $ 0 $ (156.8) $ (116.1)
(Increase) decrease to calendar year combined
ratio 0.4 pts. 0 pts. (0.5) pts. (0.4) pts.
Total development consists of both actuarial adjustments and "all other
development" on prior accident years. The actuarial adjustments represent the
net changes made by our actuarial staff to both current and prior accident year
reserves based on regularly scheduled reviews. Through these reviews, our
actuaries identify and measure variances in the projected frequency and severity
trends, which allow them to adjust the reserves to reflect the current cost
trends. For our Property business, 100% of catastrophe losses are reviewed
monthly, and any development on catastrophe reserves are included as part of the
actuarial adjustments. For the Personal Lines and Commercial Lines businesses,
development for catastrophe losses for the vehicle businesses would be reflected
in "all other development," discussed below, to the extent they relate to prior
year reserves. We report these actuarial adjustments separately for the current
and prior accident years to reflect these adjustments as part of the total prior
accident years development.
"All other development" represents claims settling for more or less than
reserved, emergence of unrecorded claims at rates different than anticipated in
our incurred but not recorded (IBNR) reserves, and changes in reserve estimates
on specific claims. Although we believe the development from both the actuarial
adjustments and "all other development" generally results from the same factors,
we are unable to quantify the portion of the reserve development that might be
applicable to any one or more of those underlying factors.
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Our objective is to establish case and IBNR reserves that are adequate to cover
all loss costs, while incurring minimal variation from the date the reserves are
initially established until losses are fully developed. Our ability to meet this
objective is impacted by many factors. Changes in case law, particularly in PIP
environments, can make it difficult to estimate reserves timely and with minimal
variation. See Note 6 - Loss and Loss Adjustment Expense Reserves, for a more
detailed discussion of our prior accident years development. We continue to
focus on our loss reserve analysis, attempting to enhance accuracy and to
further our understanding of our loss costs.
Underwriting Expenses
The companywide underwriting expense ratio (i.e., policy acquisition costs and
other underwriting expenses and policyholder credits, net of fees and other
revenues, expressed as a percentage of net premiums earned) decreased 1.5 points
for the third quarter and 4.9 points for the first nine months of 2021, compared
to the same periods in 2020, primarily reflecting 0.3 points and 3.7 points in
2020, respectively, of policyholder credits issued to personal auto customers,
and 0.1 points of policyholder credits issued to commercial auto customers in
both periods of 2020. In addition, the decrease in the underwriting expense
ratio included a 1.5 point reduction in advertising expenses on a
quarter-over-prior-year-quarter basis, reflecting a 14% decrease in advertising
spend as part of our actions taken to address profitability.
Progressive's other underwriting expenses, net of fees and other revenues and
excluding policyholder credits, increased 3% and 1% for the three and nine
months ended September 30, 2021 , compared to the same periods last year. The
increase in underwriting expense for the third quarter 2021 is primarily due to
the prior year reduction in the allowance for premium receivables, resulting
from higher than anticipated collections, partially offset by a decrease in
advertising spend in the third quarter 2021 on a year-over-year basis. On a
year-to-date basis, advertising spend increased 8% year over year.
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C. Growth
For our underwriting operations, we analyze growth in terms of both premiums and
policies. Net premiums written represent the premiums from policies written
during the period, less any premiums ceded to reinsurers. Net premiums earned,
which are a function of the premiums written in the current and prior periods,
are earned as revenue over the life of the policy using a daily earnings
convention. Policies in force, our preferred measure of growth since it removes
the variability due to rate changes or mix shifts, represents all policies under
which coverage was in effect as of the end of the period specified.
Three Months Ended September 30, Nine Months Ended September 30,
($ in millions) 2021 2020 % Growth 2021 2020 % Growth
NET PREMIUMS WRITTEN
Personal Lines
Agency $ 4,472.2 $ 4,251.7 5 % $ 13,257.0 $ 12,382.9 7 %
Direct 4,994.9 4,633.0 8 14,571.7 13,257.2 10
Total Personal Lines 9,467.1 8,884.7 7 27,828.7 25,640.1 9
Commercial Lines 2,374.1 1,609.9 47 6,154.5 3,949.1 56
Property 604.0 520.5 16 1,668.5 1,437.2 16
Other indemnity 1.3 0 NM 4.2 0 NM
Total underwriting operations $ 12,446.5 $ 11,015.1 13 % $ 35,655.9 $ 31,026.4 15 %
NET PREMIUMS EARNED
Personal Lines
Agency $ 4,267.9 $ 4,001.6 7 % $ 12,586.4 $ 11,749.3 7 %
Direct 4,690.2 4,309.8 9 13,755.8 12,470.1 10
Total Personal Lines 8,958.1 8,311.4 8 26,342.2 24,219.4 9
Commercial Lines 1,877.4 1,214.8 55 4,917.0 3,532.8 39
Property 526.5 447.3 18 1,501.3 1,300.6 15
Other indemnity1 2.8 0 NM 6.8 0 NM
Total underwriting operations $ 11,364.8 $ 9,973.5 14 % $ 32,767.3 $ 29,052.8 13 %
NM = Not meaningful
1 Represents Protective Insurance's
run-off business. September 30,
(thousands) 2021 2020 % Growth
POLICIES IN FORCE
Agency auto 7,973.6 7,527.1 6 %
Direct auto 9,613.1 8,774.3 10
Total auto 17,586.7 16,301.4 8
Special lines1 5,282.4 4,905.8 8
Personal Lines - total 22,869.1 21,207.2 8
Commercial Lines 952.7 803.9 19
Property 2,735.0 2,421.0 13
Companywide total 26,556.8 24,432.1 9 %
1 Includes insurance for motorcycles, watercraft, RVs, and similar items.
Although new policies are necessary to maintain a growing book of business, we
recognize the importance of retaining our current customers as a critical
component of our continued growth. As shown in the tables below, we measure
retention by policy life expectancy. We review our customer retention for our
personal auto products using both a trailing 3-month and a trailing 12-month
period. We believe changes in policy life expectancy using a trailing 12-month
period measure is indicative of recent experience, mitigates the effects of
month-to-month variability, and addresses seasonality. Although using a trailing
3-month measure does not address seasonality and can reflect more volatility,
this measure is more responsive to current experience and generally can be an
indicator of how our retention rates are moving.
To analyze growth, we review new policies, rate levels, and the retention
characteristics of our segments.
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D. Personal Lines
The following table shows our year-over-year changes for our Personal Lines
business:
Growth Over Prior Year
Quarter Year-to-date
2021 2020 2021 2020
Applications
New (15) % 11 % 2 % 5 %
Renewal 11 12 11 11
Written premium per policy - Auto 1 (2) (1) 0
Policy life expectancy - Auto
Trailing 3-months 10 7
Trailing 12-months 4 9
In our Personal Lines business, we experienced negative new application growth
in the third quarter 2021 in response to us raising rates and tightening
underwriting criteria during the second and third quarters 2021. The decrease in
new applications during the third quarter 2021 resulted from decreases in both
our personal auto and special lines products.
During the three and nine months ended September 30, 2021 , our personal auto new
application growth decreased 16% and increased 1%, respectively, compared to the
same periods last year. The decrease in new applications reflect both actions
taken during 2021 as well as the impact of third quarter 2020 activity that
increased new applications last year.
During the third quarter 2021, rate increases became effective in 20 states,
which had an average increase of about 6%. In the aggregate, rate changes for
personal auto for the quarter were about 3% and about 5% for the year. These
rate changes, coupled with reduced advertising spend and tightening underwriting
criteria in consumer segments where losses indicate rate inadequacy, are the
actions that we are taking to address rising auto accident frequency and
severity as people are driving more. We will continue to manage growth and
profitability in accordance with our long-standing goal of growing as fast as we
can as long as we can provide good customer service at or below a companywide 96
combined ratio on a calendar-year basis.
In addition to the actions taken in 2021, during the third quarter 2020, new
applications were elevated due in part to increased shopping during the period
along with the impact from personal injury protection reform in Michigan and
government stimulus checks. Early in the pandemic, the COVID-19 restrictions
greatly reduced consumer shopping, which resumed to a great extent during the
third quarter 2020.
During the third quarter 2021, we continued to see strong renewal personal auto
application growth, we believe aided in part by our competitive product
offerings and position in the marketplace. On a year-to-date basis, rate
decreases taken throughout 2020 also helped spur the increase in renewal
applications.
Our special lines products saw new applications decrease 8% and increase 5%
during the quarter and year-to-date period, respectively. Year-over-year new
application growth in the third quarter 2021 was less than the first nine months
due to the significant application growth we experienced last year. During the
third quarter 2020, we recorded a 21% increase in new applications due to high
demand in our special lines products reflecting the overall growth in the RV,
boat, and motorcycle industries as consumers focused on activities that promoted
social distancing.
At the end of the third quarter 2021, we saw our Robinsons continue to enjoy
year-over-year growth in personal auto policies in force that outpaced our other
consumer segments (Sams, Dianes, and Wrights). New auto applications decreased
year over year across all four consumer segments for the quarter. Quote volume
decreased on a year-over-year basis for the third quarter in all consumer
segments, except Robinsons. During the third quarter 2021, compared to the same
period last year, all consumer segments saw a decreased rate of conversion.
We report our Agency and Direct business results separately as components of our
Personal Lines segment to provide further understanding of our products by
distribution channel. The channel discussions below are focused on personal auto
insurance since this product accounted for 93% of the Personal Lines segment net
premiums written during the third quarter and the first nine months of 2021.
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The Agency Business
Growth Over Prior Year
Quarter Year-to-date
2021 2020 2021 2020
Applications - Auto
New (20) % 4 % (3) % (4) %
Renewal 8 12 9 10
Written premium per policy - Auto 2 (1) 0 0
Policy life expectancy - Auto
Trailing 3-months 10 6
Trailing 12-months 4 10
The Agency business includes business written by more than 40,000 independent
insurance agencies that represent Progressive, as well as brokerages in New York
and California . During the third quarter and first nine months of 2021, the
Agency auto business experienced a decrease in new applications, primarily due
to the rate and underwriting changes previously discussed. During the quarter,
new auto applications were down in 44 states, including all of our top 10
largest Agency states. Each of our consumer segments experienced a reduction in
new applications and, due to growth in policy renewals, growth in policies in
force.
During the third quarter 2021, we experienced a decrease in Agency auto quote
volume of 5% and a decrease of 17% in the rate of conversion (i.e., converting a
quote to a sale). During the first nine months of 2021, Agency auto quote volume
increased 2%, while rate of conversion decreased 5%, compared to the same period
last year. For the third quarter, each consumer segment other than the Robinsons
saw decreases in quote volume, and for the year, each consumer segment other
than the Wrights saw increases, compared to last year. The rate of conversion
was down significantly in the third quarter 2021, compared to the same period
last year, reflecting rate increases and the impact from tightening underwriting
criteria this year, along with elevated conversion rates last year due in part
to coverage reform in Michigan .
We experienced an increase in the percentage of Agency auto policies written for
12-month terms, primarily bundled policies, which have about twice the amount of
net premiums written compared to 6-month policies. At the end of the third
quarter 2021, 13% of our Agency auto policies in force were 12-month policies,
compared to about 11% a year earlier. Written premium per policy on new and
renewal Agency auto business was up 2%, compared to the third quarter last year.
The Direct Business
Growth Over Prior Year
Quarter Year-to-date
2021 2020 2021 2020
Applications - Auto
New (14) % 13 % 4 % 8 %
Renewal 13 15 14 14
Written premium per policy - Auto 0 (2) (2) (1)
Policy life expectancy - Auto
Trailing 3-months 11 8
Trailing 12-months 4 7
The Direct business includes business written directly by Progressive on the
Internet, through mobile devices, and over the phone. The Direct business
experienced a decrease in new application growth during the third quarter 2021,
which primarily reflects a decrease in advertising spend during the quarter and
the rate and underwriting changes discussed elsewhere. During the quarter, new
auto applications were down in 32 states, including all of our top 10 largest
Direct states. During the third quarter, similar to Agency auto, although new
applications decreased our Direct auto policies in force grew across all
consumer segments, compared to last year.
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During the third quarter 2021, we experienced a decrease in Direct auto quote
volume of 12%, while our rate of conversion decreased 2%. During the first nine
months of 2021,we experienced a decrease in Direct auto quote volume of 3%,
while our rate of conversion increased 7%, compared to the same period last
year. The decreases we experienced in our quote volume primarily reflect both
the decrease in advertising spending during the third quarter 2021, and higher
than expected quote volume last year, reflecting increased shopping in the third
quarter 2020 that was delayed from the second quarter due to the COVID-19
restrictions. All consumer segments saw a decrease in quotes during the quarter,
with the Sams showing the largest decrease of 16%, and on a year-over-year
basis, all consumer segments saw a decrease in quotes.
During the third quarter 2021, written premium per policy for new Direct auto
business decreased 4% and renewal business was flat. The decrease in the third
quarter year over year is primarily driven by a shift in the mix of business.
The rate increases did not have a significant effect on written premium per
policy for the quarter since they were predominately effective later in the
period.
E. Commercial Lines
The following table shows our year-over-year changes for our Commercial Lines
business, excluding our TNC, BOP, and Protective Insurance products:
Growth Over Prior Year
Quarter Year-to-date
2021 2020 2021 2020
Applications - Auto
New 18 % 18 % 32 % 4 %
Renewal 15 9 12 8
Written premium per policy 20 4 17 2
Policy life expectancy - Trailing 12-months 13
4
Our Commercial Lines business operates in five traditional business markets, which include business auto, for-hire transportation, contractor, for-hire specialty, and tow markets, primarily written through the agency channel. We also write TNC business and BOP insurance. With the acquisition ofProtective Insurance and its subsidiaries during the second quarter, we expanded our offerings to larger fleet, workers' compensation coverage for the transportation industry, and affinity programs. Similar to our experience in our personal auto businesses, our Commercial Lines business results for the first half of 2020 were negatively impacted by COVID-19 restrictions, which influenced the demands and general consumer habits for goods and services provided by our Commercial Lines customers and required that certain businesses undergo temporary closure. During the third quarter 2020, Commercial Lines experienced significant new application growth, primarily driven by growth in our for-hire transportation business market target, due to greater demand for shipping services in light of the pandemic. During the third quarter 2021, Commercial Lines continued to experience very strong new application growth that began in the third quarter 2020, reflecting continued improvement in the economy and our competitiveness in the marketplace. The new application growth during the third quarter was primarily driven by continued growth in our for-hire transportation business market target. During the third quarter 2021, demand in the for-hire transportation market drove new customer shopping, which resulted in a 15% increase in quote volume and a 3% increase in the rate of conversion, compared to the same period last year. During the quarter, miles traveled in our TNC business increased significantly, compared to the third quarter last year when COVID-19 restrictions were in place. Our TNC net premiums written are impacted by miles driven and our third quarter 2021 net premiums written reflected the increase in rideshare miles that started to increase during the second half of 2020. During the third quarter 2021, written premium per policy for new commercial auto business increased 21% and renewal business increased 19%, compared to the same period last year. The increases were due to more vehicles per policy, a shift in the mix of business toward higher premium coverages, and rate increases. 48 --------------------------------------------------------------------------------
F. Property
The following table shows our year-over-year changes for our Property business:
Growth Over Prior Year
Quarter Year-to-date
2021 2020 2021 2020
Applications
New 16 % 17 % 24 % 10 %
Renewal 11 14 10 15
Written premium per policy 1 (1) 1 0
Policy life expectancy - Trailing 12-months (8)
(1)
Our Property business writes residential property insurance for homeowners, other property owners, and renters, in the agency and direct channels. During the third quarter 2021, our Property business experienced a solid increase in new applications, primarily driven by growth in our direct channel and a continued rebound in the housing market for new home sales. Our Property segment was not significantly impacted by COVID-19 restrictions during 2020. Despite rate increases taken during the last 12 months in our home product, we did not experience the same rate of change in written premium per policy on a year-over-year basis due to a shift in the mix of business to a larger share of renters policies, which have lower written premiums per policy. Our policy life expectancy decreased from the same period last year, primarily due to targeted underwriting changes being made in states where losses indicate rate inadequacy. G. Income Taxes A deferred tax asset or liability is a tax benefit or expense that is expected to be realized in a future period. AtSeptember 30, 2021 and 2020, andDecember 31, 2020 , we reported net federal deferred tax liabilities. AtSeptember 30, 2021 and 2020, andDecember 31, 2020 , we had net current income taxes payable of$36.2 million ,$197.1 million , and$163.5 million , respectively, which were reported as part of other liabilities. Our effective tax rate for the three and nine months endedSeptember 30, 2021 , was 14.7% and 20.5%, respectively, compared to 20.4% and 20.7% for the same periods last year. The lower effective tax rate for the current quarter was primarily due to our underwriting loss during the quarter, compared to an underwriting profit in the other periods presented. 49 -------------------------------------------------------------------------------- IV. RESULTS OF OPERATIONS - INVESTMENTS A. Investment Results Our management philosophy governing the portfolio is to evaluate investment results on a total return basis. The fully taxable equivalent (FTE) total return includes recurring investment income, adjusted to a fully taxable amount for certain securities that receive preferential tax treatment (e.g., municipal securities), and total net realized, and changes in total net unrealized, gains (losses) on securities. The following table summarizes investment results for the periods endedSeptember 30 : Three Months Nine Months 2021 2020 2021 2020 Pretax recurring investment book yield (annualized) 1.8 % 2.3 % 1.9 % 2.5 % Weighted average FTE book yield (annualized) 1.8 2.3 1.9 2.5 FTE total return: Fixed-income securities 0.2 1.1 0.3 5.8 Common stocks 0.2 9.6 21.0 5.8 Total portfolio 0.2 1.7 2.1 5.7 The decrease in the book yield compared to last year reflects that during the past twelve months we invested new cash from operations and portfolio turnover in lower interest rate securities. The decrease in our fixed-income total return reflects the increase in interest rates during 2021. During the first half of 2021, we held a common stock outside our indexed fund that had significant return volatility, which contributed to the significant return for the nine months endedSeptember 30, 2021 . The prior year returns in our common stock portfolio reflect the initial market decline due to COVID concerns in early 2020 and the subsequent market rebound. A further break-down of our FTE total returns for our fixed-income portfolio for the periods endedSeptember 30 , follows: Three Months Nine Months 2021 2020 2021 2020 Fixed-income securities: U.S. Treasury Notes 0.1 % 0.3 % (0.6) % 7.4 % Municipal bonds (0.2) 1.6 0.2 8.3 Corporate bonds 0.3 1.3 0 6.9 Residential mortgage-backed securities 0.3 0.8 1.1 2.3 Commercial mortgage-backed securities 0.1 1.6 1.1 2.7 Other asset-backed securities 0.3 0.6 0.9 2.5 Preferred stocks 1.0 4.9 7.2 0.6 Short-term investments 0 0.1 0.1 1.0 50
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B. Portfolio Allocation
The composition of the investment portfolio was:
% of
Fair Total Duration
($ in millions) Value Portfolio (years) Rating1
September 30, 2021
U.S. government obligations $ 21,142.1 40.3 % 3.2 AAA
State and local government obligations 2,165.9 4.1 3.7 AA+
Corporate debt securities 10,874.0 20.8 3.1 BBB
Residential mortgage-backed securities 627.9 1.2 1.2 A+
Commercial mortgage-backed securities 5,789.0 11.1
3.5 A+ Other asset-backed securities 4,262.2 8.2 1.3 AA Preferred stocks 1,757.4 3.4 3.5 BBB- Short-term investments 1,088.7 2.1 0.2 AA+ Total fixed-income securities 47,707.2 91.2 3.0 AA- Common equities 4,580.2 8.8 na na Total portfolio2$ 52,287.4 100.0 % 3.0 AA-September 30, 2020 U.S. government obligations$ 10,203.8 22.3 % 3.5 AAA State and local government obligations 4,529.8 9.9 4.6 AA Corporate debt securities 10,612.0 23.2 3.9 BBB Residential mortgage-backed securities 531.0 1.2 0.9 AA
Commercial mortgage-backed securities 6,053.6 13.2
2.9 AA Other asset-backed securities 4,200.3 9.2 1.0 AA+ Preferred stocks 1,481.2 3.2 3.4 BBB- Short-term investments 4,667.8 10.2 0.1 AA+ Total fixed-income securities 42,279.5 92.4 3.0 AA- Common equities3 3,484.8 7.6 na na Total portfolio2$ 45,764.3 100.0 % 3.0 AA-December 31, 2020 U.S. government obligations$ 12,740.0 26.8 % 3.3 AAA State and local government obligations 3,221.8 6.8 4.4 AA Corporate debt securities 10,185.2 21.4 3.8 BBB Residential mortgage-backed securities 509.5 1.1 1.0 AA
Commercial mortgage-backed securities 6,175.1 13.0
3.2 AA- Other asset-backed securities 3,784.6 7.9 1.0 AA+ Preferred stocks 1,617.6 3.4 3.6 BBB- Short-term investments 5,218.5 11.0 <0.1 AA Total fixed-income securities 43,452.3 91.4 2.9 AA- Common equities 4,078.0 8.6 na na Total portfolio2$ 47,530.3 100.0 % 2.9 AA- na = not applicable 1 Represents ratings at period end. Credit quality ratings are assigned by nationally recognized statistical rating organizations. To calculate the weighted average credit quality ratings, we weight individual securities based on fair value and assign a numeric score of 0-5, with non-investment-grade and non-rated securities assigned a score of 0-1. To the extent the weighted average of the ratings falls betweenAAA and AA+, we assign an internal rating ofAAA -. 2 Our portfolio reflects the effect of net unsettled security transactions; atSeptember 30, 2021 , we had$399.7 million in other liabilities, compared to$469.2 million and$95.5 million atSeptember 30, 2020 andDecember 31, 2020 , respectively. The total fair value of the portfolio atSeptember 30, 2021 and 2020, andDecember 31, 2020 , included$2.9 billion ,$2.8 billion , and$6.2 billion , respectively, of securities held in a consolidated, non-insurance subsidiary of the holding company, net of any unsettled security transactions. During the first nine months of 2021, we used a portion of these investments to pay our common share dividends, repurchase common shares, and pay off debt. 51 -------------------------------------------------------------------------------- Our asset allocation strategy is to maintain 0%-25% of our portfolio in Group I securities, with the balance (75%-100%) of our portfolio in Group II securities. We define Group I securities to include: •common equities, •nonredeemable preferred stocks, •redeemable preferred stocks, except for 50% of investment-grade redeemable preferred stocks with cumulative dividends, which are included in Group II, and •all other non-investment-grade fixed-maturity securities. Group II securities include: •short-term securities, and •all other fixed-maturity securities, including 50% of the investment-grade redeemable preferred stocks with cumulative dividends. We believe this asset allocation strategy allows us to appropriately assess the risks associated with these securities for capital purposes and is in line with the treatment by our regulators. The following table shows the composition of our Group I and Group II securities: September 30, 2021 September 30, 2020 December 31, 2020 Fair % of Total Fair % of Total Fair % of Total ($ in millions) Value Portfolio Value Portfolio Value Portfolio Group I securities: Non-investment-grade fixed maturities$ 2,149.4 4.1 %$ 617.8 1.4 %$ 1,006.4 2.1 % Redeemable preferred stocks1 92.3 0.2 91.5 0.2 97.3 0.2 Nonredeemable preferred stocks 1,572.8 3.0 1,298.2 2.8 1,422.9 3.0 Common equities 4,580.2 8.8 3,484.8 7.6 4,078.0 8.6 Total Group I securities 8,394.7 16.1 5,492.3 12.0 6,604.6 13.9 Group II securities: Other fixed maturities 42,804.0 81.8 35,604.2 77.8 35,707.2 75.1 Short-term investments 1,088.7 2.1 4,667.8 10.2 5,218.5 11.0 Total Group II securities 43,892.7 83.9 40,272.0 88.0 40,925.7 86.1 Total portfolio$ 52,287.4 100.0 %$ 45,764.3 100.0 %$ 47,530.3 100.0 % 1 We did not hold any non-investment-grade redeemable preferred stocks atSeptember 30, 2021 and 2020, orDecember 31, 2020 . To determine the allocation between Group I and Group II, we use the credit ratings from models provided by theNational Association of Insurance Commissioners (NAIC) for classifying our residential and commercial mortgage-backed securities, excluding interest-only securities, and the credit ratings from nationally recognized statistical rating organizations (NRSRO) for all other debt securities. NAIC ratings are based on a model that considers the book price of our securities when assessing the probability of future losses in assigning a credit rating. As a result, NAIC ratings can vary from credit ratings issued by NRSROs. Management believes NAIC ratings more accurately reflect our risk profile when determining the asset allocation between Group I and Group II securities. Unrealized Gains and Losses As ofSeptember 30, 2021 , our fixed-maturity portfolio had pretax net unrealized gains, recorded as part of accumulated other comprehensive income, of$474.5 million , compared to$1,226.1 million and$1,206.6 million atSeptember 30, 2020 andDecember 31, 2020 , respectively. The decrease in unrealized gains from both periods in 2020 was primarily due to increasing interest rates, which resulted in valuation declines in all fixed-maturity sectors, most prominently in theU.S. government and corporate debt securities portfolios. See Note 2 - Investments for a further break-out of our gross unrealized gains and losses. 52 --------------------------------------------------------------------------------
Holding Period Gains and Losses
The following table provides the gross and net holding period gain (loss)
balance and activity during the nine months ended
Net Holding
Gross Holding Gross Holding Period Gains
(millions) Period Gains Period Losses (Losses)
Balance at December 31, 2020
Hybrid fixed-maturity securities $ 15.2 $ 0 $ 15.2
Equity securities 2,961.5 (6.6) 2,954.9
Total holding period securities 2,976.7 (6.6) 2,970.1
Current year change in holding period securities
Hybrid fixed-maturity securities 2.1 (2.1) 0
Equity securities 490.9 (11.1) 479.8
Total changes in holding period securities 493.0 (13.2) 479.8
Balance at September 30, 2021
Hybrid fixed-maturity securities 17.3 (2.1) 15.2
Equity securities 3,452.4 (17.7) 3,434.7
Total holding period securities $ 3,469.7 $
(19.8)
Changes in holding period gains (losses), similar to unrealized gains (losses) in our fixed-maturity portfolio, are the result of changes in market performance as well as sales of securities based on various portfolio management decisions.Fixed-Income Securities The fixed-income portfolio is managed internally and includes fixed-maturity securities, short-term investments, and nonredeemable preferred stocks. Following are the primary exposures for our fixed-income portfolio. Details of our policies related to these exposures can be found in the Management's Discussion and Analysis included in our 2020 Annual Report to Shareholders. •Interest rate risk - our duration of 3.0 years atSeptember 30, 2021 , fell within our acceptable range of 1.5 to 5 years. The duration distribution of our fixed-income portfolio, excluding short-term investments, represented by the interest rate sensitivity of the comparable benchmarkU.S. Treasury Notes, was: Duration Distribution September 30, 2021 September 30, 2020 December 31, 2020 1 year 25.2 % 26.5 % 19.5 % 2 years 19.5 15.1 18.7 3 years 22.5 21.4 24.9 5 years 15.9 18.4 18.5 7 years 11.8 10.8 10.9 10 years 5.1 7.8 7.5 Total fixed-income portfolio 100.0 % 100.0 % 100.0 % 53
-------------------------------------------------------------------------------- •Credit risk - our credit quality rating of AA- was above our minimum threshold during the third quarter 2021. The credit quality distribution of the fixed-income portfolio was: Rating September 30, 2021 September 30, 2020 December 31, 2020 AAA 58.3 % 53.3 % 53.3 % AA 7.2 10.4 9.8 A 8.4 11.8 11.1 BBB 20.6 22.4 22.9 Non-investment grade/non-rated1 BB 4.1 1.6 2.4 B 1.0 0.3 0.2 CCC and lower 0.1 0 0.1 Non-rated 0.3 0.2 0.2 Total fixed-income portfolio 100.0 % 100.0 % 100.0 %
1 The ratings in the table above are assigned by NRSROs. The
non-investment-grade fixed-income securities based upon our Group I
classification represented 5.3% of the total fixed-income portfolio at
•Concentration risk - we did not have any investments in a single issuer, either overall or in the context of individual assets classes and sectors, that exceeded our thresholds during the third quarter 2021. •Prepayment and extension risk - we did not experience significant adverse prepayment or extension of principal relative to our cash flow expectations in the portfolio during the third quarter 2021. •Liquidity risk - our overall portfolio remains very liquid and we believe that it is sufficient to meet expected near-term liquidity requirements. •The short-to-intermediate duration of our portfolio provides a source of liquidity, as we expect approximately$4.9 billion , or 19.3%, of principal repayment from our fixed-income portfolio, excludingU.S. Treasury Notes and short-term investments, during the remainder of 2021 and all of 2022. Cash from interest and dividend payments provides an additional source of recurring liquidity. •The duration of ourU.S. government obligations, which are included in the fixed-income portfolio, was comprised of the following atSeptember 30, 2021 : Fair Duration ($ in millions) Value (years) U.S. Treasury Notes Less than one year$ 2,255.5 0.7 One to two years 5,689.6 1.6 Two to three years 5,026.1 2.5 Three to five years 4,423.7 4.2 Five to seven years 2,711.4 6.4 Seven to ten years 1,035.8 8.8 Total U.S. Treasury Notes$ 21,142.1 3.2 54
--------------------------------------------------------------------------------
ASSET-BACKED SECURITIES
Included in the fixed-income portfolio are asset-backed securities, which were
comprised of the following at the balance sheet dates listed:
% of Asset-
Fair Net Unrealized Backed Duration Rating
($ in millions) Value Gains (Losses) Securities (years) (at period end)1
September 30, 2021
Residential mortgage-backed securities $ 627.9 $ 2.5 5.9 % 1.2
A+
Commercial mortgage-backed securities 5,789.0 49.6 54.2 3.5 A+ Other asset-backed securities 4,262.2 26.6 39.9 1.3 AA Total asset-backed securities$ 10,679.1 $ 78.7 100.0 % 2.5 AA-September 30, 2020 Residential mortgage-backed securities$ 531.0 $ 5.6 4.9 % 0.9
AA
Commercial mortgage-backed securities 6,053.6 89.2 56.1 2.9 AA Other asset-backed securities 4,200.3 44.5 39.0 1.0 AA+ Total asset-backed securities$ 10,784.9 $ 139.3 100.0 % 2.1 AADecember 31, 2020 Residential mortgage-backed securities$ 509.5 $ 6.2 4.9 % 1.0
AA
Commercial mortgage-backed securities 6,175.1 132.5 59.0 3.2 AA- Other asset-backed securities 3,784.6 39.6 36.1 1.0 AA+ Total asset-backed securities$ 10,469.2 $ 178.3 100.0 % 2.3 AA 1 The credit quality ratings in the table above are assigned by NRSROs.Residential Mortgage-Backed Securities (RMBS) The following table details the credit quality rating and fair value of our RMBS, along with the loan classification and a comparison of the fair value atSeptember 30, 2021 , to our original investment value (adjusted for returns of principal, amortization, and write-downs): Residential Mortgage-Backed Securities (at September 30, 2021) ($ in millions) Rating1 Non-Agency Agency Government/GSE2 Total % of Total AAA$ 225.3 $ 86.8 $ 3.3$ 315.4 50.2 % AA 59.8 0 0.6 60.4 9.6 A 32.9 0 0 32.9 5.2 BBB 71.5 0 0 71.5 11.4 Non-investment grade/non-rated: BB 101.5 0 0 101.5 16.2 B 26.1 0 0 26.1 4.2 CCC and lower 6.6 0 0 6.6 1.1 Non-rated 13.5 0 0 13.5 2.1 Total fair value$ 537.2 $ 86.8 $ 3.9$ 627.9 100.0 % Increase (decrease) in value 0.7 % (0.3) % 4.6 % 0.6 % 1 The credit quality ratings in the table above are assigned by NRSROs; when we assign the NAIC ratings for our RMBS,$56.0 million of our non-investment-grade securities are rated investment-grade and classified as Group II, and$91.7 million , or 14.6% of our total RMBS, are not rated by the NAIC and are classified as Group I. 2 The securities in this category are insured by a Government Sponsored Entity (GSE) and/or collateralized by mortgage loans insured by theFederal Housing Administration (FHA) or theU.S. Department of Veteran Affairs (VA). In the residential mortgage-backed sector, our portfolio consists of deals that are backed by high-credit quality borrowers or have strong structural protections through underlying loan collateralization. During the first nine months of 2021, we selectively added to this sector. 55 --------------------------------------------------------------------------------Commercial Mortgage-Backed Securities (CMBS) The following table details the credit quality rating and fair value of our CMBS, along with a comparison of the fair value atSeptember 30, 2021 , to our original investment value (adjusted for returns of principal, amortization, and write-downs): Commercial Mortgage-Backed Securities (at September 30, 2021) ($ in millions) Rating1 Multi-Borrower Single-Borrower Total % of Total AAA$ 306.7 $ 1,530.7 $ 1,837.4 31.7 % AA 3.2 1,355.9 1,359.1 23.5 A 0 1,096.5 1,096.5 19.0 BBB 0 1,073.3 1,073.3 18.5 Non-investment grade/non-rated: BB 0 422.4 422.4 7.3 B 0.3 0 0.3 0 Total fair value$ 310.2 $ 5,478.8 $ 5,789.0 100.0 % Increase (decrease) in value 4.1 % 0.7 % 0.9 % 1 The credit quality ratings in the table above are assigned by NRSROs; when we assign the NAIC ratings for our CMBS,$43.2 million of our non-investment-grade securities are rated investment-grade and classified as Group II, and$379.5 million , or 6.6% of our total CMBS, are not rated by the NAIC and are classified as Group I. During the third quarter 2021, we were active in purchasing single-asset/single-borrower securities in both new issue and secondary markets, in addition to focusing on adding to some of our existing positions in the high-credit quality office and life sciences sectors. The market tone remained positive during the third quarter with credit spreads seeing a small tightening. During the third quarter 2021, we sold some of our AAA-rated securities, in both the fixed-rate and floating-rate sectors, and continued scaling back on positions that met or exceeded our performance objectives or were no longer core to our strategy. Other Asset-Backed Securities (OABS) The following table details the credit quality rating and fair value of our OABS, along with a comparison of the fair value atSeptember 30, 2021 , to our original investment value (adjusted for returns of principal, amortization, and write-downs): Other Asset-Backed Securities (at September 30, 2021) ($ in millions) Collateralized Loan Whole Business % of Rating Automobile Obligations Student Loan Securitizations Equipment Other Total Total AAA$ 767.7 $ 900.9$ 89.4 $ 0$ 579.8 $ 202.9 $ 2,540.7 59.6 % AA 255.1 365.2 14.1 0 105.5 16.5 756.4 17.8 A 35.9 1.0 9.1 0 122.4 111.6 280.0 6.6 BBB 7.2 30.6 0 606.7 0 22.1 666.6 15.6 Non-investment grade/non-rated: BB 0 3.0 0 0 0 15.5 18.5 0.4 Total fair value$ 1,065.9 $ 1,300.7 $ 112.6 $ 606.7$ 807.7 $ 368.6 $ 4,262.2 100.0 % Increase (decrease) in value 0.3 % 0 % 1.6 % 2.2 % 0.8 % 0.7 % 0.6 % During the third quarter 2021, we selectively added to our automobile, equipment, whole business securitization, and other OABS sectors mostly through new issuances as we viewed spreads, and potential returns, across this sector to be less attractive compared to previous quarters. Our allocation to collateralized loan obligation securities increased during the quarter, as we perceived the sector provided better return potential than the other OABS sectors, primarily focusing on higher credit tranched securities in the capital structure. 56 --------------------------------------------------------------------------------
MUNICIPAL SECURITIES
The following table details the credit quality rating of our municipal
securities at
insurance:
Municipal Securities (at September 30, 2021 )
(millions) General Revenue
Rating Obligations Bonds Total
AAA $ 635.2 $ 243.9 $ 879.1
AA 491.2 697.8 1,189.0
A 0 96.6 96.6
BBB 0 1.0 1.0
Non-rated 0 0.2 0.2
Total $ 1,126.4 $ 1,039.5 $ 2,165.9
Included in revenue bonds were $478.3 million of single-family housing revenue
bonds issued by state housing finance agencies, of which $342.2 million were
supported by individual mortgages held by the state housing finance agencies and
$136.1 million were supported by mortgage-backed securities.
Of the programs supported by mortgage-backed securities, approximately 75% were
collateralized by Ginnie Mae mortgages, which are fully guaranteed by the U.S.
government; the remaining 25% were collateralized by Fannie Mae and Freddie Mac
mortgages. Of the programs supported by individual mortgages held by the state
housing finance agencies, the overall credit quality rating was AA+. Most of
these mortgages were supported by the Federal Housing Administration , the U.S.
Department of Veterans Affairs , or private mortgage insurance providers.
As spreads tightened during the quarter, we continued to reduce our allocation
to the municipal sector. Our sales were primarily in revenue bonds that were
purchased in 2020 when spreads were wider and offered attractive performance
opportunities. As mutual funds continued receiving strong inflows from
investors, the municipal sector has performed well. At current valuations,
however, municipal bonds are less attractive to us on a relative value basis.
CORPORATE DEBT SECURITIES
The following table details the credit quality rating of our corporate debt
securities at September 30, 2021 :
Corporate Securities (at September 30, 2021)
(millions)
Financial
Rating Consumer Industrial
Communication Services Agency Technology Basic Materials
Energy Total AAA$ 0 $ 0 $ 0$ 38.3 $ 3.1 $ 1.7 $ 0$ 0 $ 43.1 AA 97.5 1.8 0.5 125.7 3.9 18.4 0 16.1 263.9 A 402.8 262.5 243.5 1,168.8 0 174.1 131.7 109.2 2,492.6 BBB 2,198.6 1,457.0 197.6 1,129.0 0 676.6 36.9 719.3 6,415.0 Non-investment grade/non-rated: BB 519.2 152.4 123.0 167.0 0 86.9 36.7 53.8 1,139.0 B 342.6 82.0 2.3 36.1 0 4.2 0 0 467.2 CCC and lower 51.2 0 2.0 0 0 0 0 0 53.2 Total fair value$ 3,611.9 $ 1,955.7 $ 568.9 $ 2,664.9 $ 7.0 $ 961.9 $ 205.3$ 898.4 $ 10,874.0 During the third quarter of 2021, the valuation of our corporate debt portfolio saw a modest increase as credit spreads narrowed slightly. Activity during the quarter was primarily a combination of selling some of our investment-grade longer-maturity holdings we believed had exceeded our performance objective and continuing to selectively increase our allocation to high-yield securities that we believed would benefit from the continuation of the economic recovery. We also shortened the maturity profile of the corporate portfolio to 3.1 years atSeptember 30, 2021 , compared to 3.3 years atJune 30, 2021 . Overall, our corporate securities, as a percentage of the fixed-income portfolio, has remained consistent since the end of the second quarter 2021. AtSeptember 30, 2021 andJune 30, 2021 , the portfolio was approximately 23% of our fixed-income portfolio. 57 -------------------------------------------------------------------------------- PREFERRED STOCKS - REDEEMABLE AND NONREDEEMABLE The table below shows the exposure break-down by sector and rating atSeptember 30, 2021 : Preferred Stocks (at September 30, 2021) Financial Services (millions) U.S. Foreign Rating Banks Banks Insurance Other Industrials Utilities Total BBB$ 1,006.6 $ 55.4 $ 129.8 $ 46.8 $ 133.2 $ 0 $ 1,371.8 Non-investment grade/non-rated: BB 183.1 24.1 0 0 25.5 42.1 274.8 Non-rated 0 0 35.0 41.4 34.4 0 110.8 Total fair value$ 1,189.7 $ 79.5 $ 164.8 $ 88.2 $ 193.1 $ 42.1 $ 1,757.4 The majority of our preferred securities have fixed-rate dividends until a call date and then, if not called, generally convert to floating-rate dividends. The interest rate duration of our preferred securities is calculated to reflect the call, floor, and floating-rate features. Although a preferred security will remain outstanding if not called, its interest rate duration will reflect the variable nature of the dividend. Our non-investment-grade preferred stocks were all with issuers that maintain investment-grade senior debt ratings. We also face the risk that dividend payments on our preferred stock holdings could be deferred for one or more periods or skipped entirely. As ofSeptember 30, 2021 , all of our preferred securities continued to pay their dividends in full and on time. Approximately 84% of our preferred stock securities pay dividends that have tax preferential characteristics, while the balance pay dividends that are fully taxable. During third quarter 2021, our preferred stock portfolio produced a positive return as their high level of income offset slight price declines due to higher interest rates. Common Equities Common equities, as reported on the balance sheets, were comprised of the following: ($ in millions) September 30, 2021 September 30, 2020 December 31, 2020 Common stocks$ 4,567.6 99.7 %
$ 3,482.1 99.9 %$ 4,074.9 99.9 % Other risk investments 12.6 0.3 2.7 0.1 3.1 0.1 Total common equities$ 4,580.2 100.0 %$ 3,484.8 100.0 %$ 4,078.0 100.0 % The majority of our common stock portfolio is an indexed portfolio, which consists of individual holdings selected based on their contribution to the correlation with the Russell 1000 Index. We held 832 out of 1,026, or 81%, of the common stocks comprising the index atSeptember 30, 2021 , which made up 96% of the total market capitalization of the index. AtSeptember 30, 2021 andDecember 31, 2020 , the year-to-date total return, based on GAAP income, was within our targeted tracking error, which is +/- 50 basis points, while atSeptember 30, 2020 , the year-to-date total return, based on GAAP income, was outside the targeted tracking error. The other risk investments consist of limited partnership interests. During the third quarter 2021, we funded$0.7 million on a partnership investment and have an open funding commitment of$5.4 million atSeptember 30, 2021 on this investment. In addition, partnership investments with a value of$7.7 million atSeptember 30, 2021 were assumed as part of our acquisition ofProtective Insurance . 58 -------------------------------------------------------------------------------- Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995: Investors are cautioned that certain statements in this report not based upon historical fact are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements often use words such as "estimate," "expect," "intend," "plan," "believe," and other words and terms of similar meaning, or are tied to future periods, in connection with a discussion of future operating or financial performance. Forward-looking statements are based on current expectations and projections about future events, and are subject to certain risks, assumptions and uncertainties that could cause actual events and results to differ materially from those discussed herein. These risks and uncertainties include, without limitation, uncertainties related to: •our ability to underwrite and price risks accurately and to charge adequate rates to policyholders; •our ability to establish accurate loss reserves; •the impact of severe weather, other catastrophe events and climate change; •the effectiveness of our reinsurance programs; •the highly competitive nature of property-casualty insurance markets; •whether we innovate effectively and respond to our competitors' initiatives; •whether we effectively manage complexity as we develop and deliver products and customer experiences; •how intellectual property rights could affect our competitiveness and our business operations; •whether we adjust claims accurately; •our ability to maintain a recognized and trusted brand; •our ability to attract, develop and retain talent and maintain appropriate staffing levels; •compliance with complex laws and regulations; •litigation challenging our business practices, and those of our competitors and other companies; •the impacts of a security breach or other attack involving our computer systems or the systems of one or more of our vendors; •the secure and uninterrupted operation of the facilities, systems, and business functions that are critical to our business; •the success of our efforts to develop new products or enter into new areas of business and navigate related risks; •our continued ability to send and accept electronic payments; •the possible impairment of our goodwill or intangible assets; •the performance of our fixed-income and equity investment portfolios; •the potential elimination of, or change in, the London Interbank Offered Rate; •our continued ability to access our cash accounts and/or convert securities into cash on favorable terms; •the impact if one or more parties with which we enter into significant contracts or transact business fail to perform; •legal restrictions on our insurance subsidiaries' ability to pay dividends toThe Progressive Corporation ; •limitations on our ability to pay dividends on our common shares under the terms of our outstanding preferred shares; •our ability to obtain capital when necessary to support our business and potential growth; •evaluations by credit rating and other rating agencies; •the variable nature of our common share dividend policy; •whether our investments in certain tax-advantaged projects generate the anticipated returns; •the impact from not managing to short-term earnings expectations in light of our goal to maximize the long-term value of the enterprise; •impacts from the outbreak of the novel coronavirus, or COVID-19, and the restrictions put in place to help slow and/or stop the spread of the virus; and •other matters described from time to time in our releases and publications, and in our periodic reports and other documents filed with theUnited States Securities and Exchange Commission , including, without limitation, the Risk Factors section of our Annual Report on Form 10-K for the year endingDecember 31, 2020 . In addition, investors should be aware that generally accepted accounting principles prescribe when a company may reserve for particular risks, including litigation exposures. Accordingly, results for a given reporting period could be significantly affected if and when we establish reserves for one or more contingencies. Also, our regular reserve reviews may result in adjustments of varying magnitude as additional information regarding claims activity becomes known. Reported results, therefore, may be volatile in certain accounting periods. 59
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