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PROGRESSIVE CORP/OH/ – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations.
I. OVERVIEW
The Progressive Corporation's insurance subsidiaries recognized growth in premiums during the second quarter 2022, compared to the same period last year, driven primarily by rate increases taken during 2021 and the first half of 2022. On a companywide basis, policies in force were relatively flat year over year. During the second quarter 2022, we generated an underwriting profit margin of 4.4%, which was above our 4.0% underwriting profit goal and 0.9 points better than the same period last year. During the quarter, we generated$12.4 billion of net premiums written, which is an increase of$0.9 billion , or 8%, compared to second quarter 2021. We ended the second quarter 2022 with 26.5 million companywide policies in force, which is 130 thousand more policies than were in force atJune 30, 2021 . Personal auto policies in force decreased 2% year over year, while our Commercial Lines, Property, and special lines products grew policies 12%, 6%, and 5%, respectively. The decrease in our personal auto policies reflects the significant decrease experienced in new personal auto applications during the first half of 2022, compared to the same period last year, reflecting the personal auto rate increases taken since the first quarter of 2021 and decreased advertising spend, on a year-over-year basis, during the last 12 months. On a year-over-year basis, for the second quarter 2022, net income and comprehensive income decreased 169% and 255%, respectively. The decrease in net income was primarily driven by a$1,722.2 million net holding period loss on securities during the period, due to the change in equity market valuations, compared to a net holding period gain of$54.2 million in the second quarter of 2021. In addition, while preparing our financial statements for the second quarter 2022, we analyzed our goodwill for impairment given our revised forecasted profitability in our Property segment in light of the magnitude of recent weather events and the slower projected pace to restore profitability to this segment. Based on this analysis, we determined the carrying value of theARX Holding Corp. (ARX) reporting unit exceeded its fair value and, therefore, recorded a$224.8 million goodwill impairment charge during the second quarter. Similar to the decrease in net income, the decrease in comprehensive income was also primarily driven by changes in the value of our investment portfolio, as we recognized net unrealized losses on our fixed-maturity securities of$822.8 million in the second quarter of 2022, compared to net unrealized gains of$91.1 million in the prior year, primarily reflecting an increase in interest rates throughout 2021 and into the second quarter 2022. We ended the quarter with$22.0 billion of total capital (debt plus shareholders' equity), a decrease of$1.1 billion from year-end 2021. The decrease is primarily due to the comprehensive loss for the six months endedJune 30, 2022 , partially offset by the issuance of$1.5 billion of senior notes during the first quarter 2022.
A. Insurance Operations
For the second quarter 2022, we experienced a companywide underwriting profit margin of 4.4%, compared to our target profit margin of 4% and an underwriting profit margin of 3.5% for the same period last year. Net premiums written grew 8% over the second quarter last year, reflecting rate increases taken since the first quarter of 2021, while policies in force growth was flat on a companywide basis. The distribution of profitability and growth varied by segment during the second quarter 2022 as discussed below. During the second quarter 2022, our Personal and Commercial Lines operating segments generated an underwriting profit margin of 4.9% and 10.5%, respectively, while our Property business generated an underwriting loss margin of 27.5%, due to significant catastrophe losses incurred during the quarter. Our personal auto incurred accident frequency was down about 8% for the second quarter 2022, compared to the prior year, in part reflecting a modest tailwind from reduced driving resulting from record high fuel costs. We continued to see inflationary pressure in the average costs to settle a claim, which, along with the increase in the valuation of used vehicles on a year-over-year basis, contributed to an increase in severity of about 16% over the second quarter last year. During the quarter, catastrophe losses were fairly consistent on a year-over-year basis in our Personal Lines and Commercial Lines businesses but were up substantially in our Property business. For the second quarter 2022, our Property business recognized 40.9 points of weather-related catastrophe losses, primarily due to thunderstorms, hail, and tornadoes throughoutthe United States , compared to 25.5 points during same period in the prior year. During the quarter, we continued to take actions to address profitability, in response to the continued rising loss costs and other factors, and to strive to achieve our target goal of a 96 combined ratio on a calendar-year basis. During the second quarter 2022, we implemented personal auto rate increases in 17 states that represented nearly 40% of our trailing 12-month written premium. In the aggregate, rate changes for personal auto during the second quarter increased rates on a countrywide basis about 2%, which follows an increase of about 7% in the first quarter 2022 and a full year increase of about 8% in 2021. Of the rate 31 -------------------------------------------------------------------------------- increases that we elevated in prior periods, we estimate that we have nearly 5 points still to earn into our underwriting results. We currently believe that, with the exception of a few key states, the major personal auto rate increases are behind us for the remainder of 2022. However, management continues to assess used car prices, miles driven, driving patterns, loss severity, weather events, inflation, and other components of expected loss costs on a state-by-state basis for our personal auto business and will file for rate adjustments where deemed necessary. We believe a key element in improving the accuracy of our rating is Snapshot®, our usage-based insurance offering. During the first six months of 2022, the adoption rates for consumers enrolling in the program, when given the option, increased nearly 20% in Agency auto and nearly 10% in Direct auto, compared to the same period last year. Our latest model is available in states that represented about 70% of our countrywide personal auto premium. We continue to invest in our mobile application, with mobile devices being chosen for Snapshot monitoring for the majority of new enrollments. In addition to rate actions, during the second quarter 2022, we also continued to tighten underwriting criteria, limit bill plan payment options, and reduce advertising spend during the period in states where losses indicated rates are not meeting our profitability goals in our personal auto business. We reduced total advertising spend 7%, or 0.9 combined ratio points, compared to the second quarter last year, based on performance against our media and underwriting targets in certain types of advertising. Consistent with rate actions, management will continue to assess where additional non-rate actions may be needed. These rate and non-rate measures resulted in fewer new business auto applications during the year and could continue to impact personal auto growth in net premiums written and policies in force in future periods. During the second quarter 2022, our Property business continued to experience high volatility in underwriting profitability, primarily attributable to the impact from weather-related catastrophe losses. We remain focused on taking rate and non-rate actions in our Property business to reduce volatility in our underwriting results. We increased rates in our Property businesses 7% and 8% during the second quarter and first six months of 2022, respectively, and 10% during the last 12 months. These targeted rate increases are continuing to be earned into the book of business. We continue to focus our Property growth efforts in states with traditionally less catastrophe exposure and limit growth in the coastal and hail prone states. In response to this effort, in 2021, we announced plans to non-renew about 60,000 policies inFlorida , which we started doing in the second quarter 2022. This effort to non-renewFlorida policies was curtailed, in part, as new legislation was introduced inFlorida potentially prohibiting the non-renewal of certain policies based on the age of the roof of the insured structure. While the outcome is still pending, we believe we will non-renew significantly less of the policies previously intended for non-renewal, which will slow our efforts to reduce the volatility in Property underwriting results. We realized that our current pricing actions and underwriting activities to reduce our exposure in states with traditionally less catastrophe exposure and limit growth in the coastal and hail prone states will require more time than originally anticipated for our efforts to take effect to achieve our target combined ratio for the Property business. This information, combined with the continued extent of the weather-related losses, prompted us to reevaluate the forecasted combined ratio assumptions used in our 2021 annual goodwill impairment model for the ARX reporting unit as we were preparing our financial results for the second quarter 2022. In performing an interim goodwill impairment quantitative assessment, we determined the carrying value of ARX exceeded its currently forecasted fair value and recorded a non-cash goodwill impairment charge of$224.8 million during the quarter, which represented the entire amount of goodwill assigned to the ARX reporting unit. The write down is a nonrecurring item and did not impact underwriting profitability for the second quarter 2022. There are no indications of impairment on the remaining$227.9 million of goodwill, which is predominantly related to the ARX acquisition and assigned to ourPersonal Lines Agency auto business, since the primary intent of the acquisition was to give us the ability to better penetrate the Robinsons segment (i.e., bundled auto and home) within our independent agency distribution channel. We evaluate growth in terms of both net premiums written and policies in force growth. The rate and non-rate actions that began in 2021, and continued into the second quarter 2022, impacted premium and volume growth on a year-over-year basis. For the second quarter 2022, our companywide net premiums written grew 8%, with Personal Lines growing 6%, Commercial Lines 16%, and Property 8%, primarily reflecting higher average written premium per policy. On a companywide basis, policies in force growth was flat, with Personal Lines decreasing 1%, and Commercial Lines and Property growing 12% and 6%, respectively. Within Personal Lines, policies in force in Agency auto decreased 5% and were flat in Direct auto year over year, while the special lines policies increased 5%. The decrease in our personal auto policy in force growth is attributable to the decrease in the growth of new applications during the six months endedJune 30, 2022 , as discussed below, as well as a decrease in the rate of growth in our renewal applications.
During the second quarter 2022, on a year-over-year basis, average written
premiums grew 11% in personal auto, 14% in commercial auto (excluding our
transportation network company (TNC), business owners policy (BOP), and
products), and 4% in Property, reflecting rate increases taken beginning in 2021
in response to rising loss costs. Growth may continue to be impacted by the
actions we are taking to address
32 -------------------------------------------------------------------------------- profitability in response to rising loss costs and increasing severity trends. Given that our Property policies are 12-month terms, compared to primarily 6-month policies in our personal auto business, these rate actions will take longer to earn in. The rate and non-rate measures we started taking during 2021, which continued into the second quarter 2022, resulted in fewer new business personal auto applications. During the second quarter 2022, new applications (i.e., issued policies) decreased 13% in our Personal Lines segment, with total new personal auto applications decreasing 15%. Agency auto new applications decreased 20% and Direct auto decreased 11%. We began to see slight improvement in new business auto applications toward the end of the second quarter as our competitors have more recently begun to increase rates. New applications for our special lines products were down 7% during the second quarter 2022, primarily reflecting the significant new application growth experienced during 2021, due to growth in RV, boat, and motorcycle demand. On a year-over-year basis for the second quarter 2022, renewal applications increased 2% in Personal Lines, with total personal auto renewal applications up 1% over the second quarter last year. On a year-over-year basis for the second quarter 2022, in our Commercial Lines business (excluding our TNC, BOP, andProtective Insurance products) new applications decreased 6%, primarily reflecting the significant new application growth experienced during 2021, while renewal applications increased 15%. In addition, we have begun to see growth headwinds in our for-hire transportation product as the transportation freight market softens. In our Property business, new applications decreased 5% and renewal applications increased 8% on a year-over-year basis for the second quarter. While the rate and non-rate actions resulted in fewer new business personal auto applications during the quarter, we strongly believe that achieving our target profit margin takes precedence over growing premiums and that the actions discussed above are necessary to position us well for the future. Nevertheless, 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 total auto retention using a trailing 12-month 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 second quarter 2022, our trailing 12-month total personal auto policy life expectancy decreased 11%, compared to last year, with the Agency channel down 13% and the Direct channel down 9%, respectively. Our trailing 3-month policy life expectancy for total personal auto was down 32% compared to the same period last year. The decreases in policy life expectancy reflect the impact of the rate actions we have taken, beginning in the second quarter 2021. Our Commercial Lines and special lines trailing 12-month policy life expectancy increased 1% and 6%, respectively, year over year, and Property decreased 8%.
B. Investments
The fair value of our investment portfolio was$51.9 billion atJune 30, 2022 , compared to$51.5 billion atDecember 31, 2021 . Declines in valuations of our portfolio nearly offset the increase in invested assets generated from the solid cash flows from our underwriting operations and the proceeds of the$1.5 billion debt offering in March. 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). AtJune 30, 2022 , 11% of our portfolio was allocated to Group I securities and 89% to Group II securities, compared to 17% and 83%, respectively, atDecember 31, 2021 . The decrease in the percentage of Group I securities since year end was primarily driven by sales in our common equity portfolio with proceeds reinvested in Group II short-term investments. Our recurring investment income generated a pretax book yield of 2.3% for the second quarter 2022, compared to 1.9% for the same period in 2021, due to the increase in interest rates on our floating-rate securities and the investment of cash and maturities at current higher interest rates. Our investment portfolio produced a fully taxable equivalent (FTE) total return of (3.6)% and 1.7% for the second quarter 2022 and 2021, respectively. Our fixed-income and common stock portfolios had FTE total returns of (2.4)% and (16.3)%, respectively, for the second quarter 2022, compared to 1.1% and 7.3%, respectively, last year. The fixed-income return variance reflects the impact of higher interest rates and wider credit spreads during the last twelve months. The common stock return variance reflects general market conditions. AtJune 30, 2022 , the fixed-income portfolio had a weighted average credit quality of AA- and a duration of 2.8 years, compared to AA- and 3.1 years atJune 30, 2021 and AA- and 3.0 years atDecember 31, 2021 . We have shortened our portfolio duration over the previous twelve months, which we believe provides some protection against further increases in interest rates. 33 --------------------------------------------------------------------------------
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. As primarily an auto insurer, our claims liabilities generally have a short-term duration. Operations generated positive cash flows of$3.9 billion and$4.9 billion for the six months endedJune 30, 2022 and 2021, respectively. While we continued to collect premiums at a faster rate than losses were paid, the decrease in operating cash flow for the six months endedJune 30, 2022 , is primarily driven by higher paid losses as the costs of losses continue to rise, compared to last year. We believe cash flows are expected to remain positive in the reasonably foreseeable future and do not expect we will have a need to raise capital to support our operations in that timeframe, although changes in market or regulatory conditions affecting the insurance industry, or other unforeseen events, may necessitate otherwise. Our total capital (debt plus shareholders' equity) was$22.0 billion , at book value, atJune 30, 2022 , compared to$24.1 billion atJune 30, 2021 , and$23.1 billion atDecember 31, 2021 . The decrease from the prior periods primarily reflects our comprehensive loss for the first half of 2022, driven by the negative market impact on the valuation of our investment portfolio, and the maturity of our 3.75% Senior Notes during the third quarter 2021, in part offset by the issuance inMarch 2022 of$500 million of 2.50% Senior Notes due 2027,$500 million of 3.00% Senior Notes due 2032, and$500 million of 3.70% Senior Notes due 2052. Our debt-to-total capital ratio was 29.0% atJune 30, 2022 , 22.4% atJune 30, 2021 , and 21.2% atDecember 31, 2021 . While our financial policies include maintaining debt below 30% of total capital at book value, which we achieved for all periods presented, a continued rise in interest rates, widening credits spreads, further declines in the equity markets, or erosion in operating results may result in that ratio exceeding 30% at times. We may choose to remain above 30% for some time, dependent upon market conditions and capital needs of our operating business. However, in such a situation, we would expect to return to being consistent with our stated policy in an appropriate timeframe. None of the covenants on our outstanding debt securities include rating or credit triggers that would require an adjustment of interest rates or an acceleration of principal payments in the event that our debt securities are downgraded by a rating agency. InApril 2022 , 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. During the first six months of 2022, we returned capital to shareholders primarily through common share dividends. Our Board of Directors declared a$0.10 per common share dividend in both the first and second quarters of 2022. These dividends, which were each$58.5 million in the aggregate, were paid inApril 2022 andJuly 2022 , respectively. InJanuary 2022 , we also paid common share dividends in the aggregate amount of$58.5 million , or$0.10 per share (see Note 9 - Dividends for further discussion). In addition to the common share dividends, inMarch 2022 , we paid Series B Preferred Share dividends in the aggregate amount of$13.4 million . Pursuant to our financial policies, we will repurchase common shares to neutralize dilution from equity-based compensation granted during the year and opportunistically when we believe our shares are trading below our determination of long-term fair value. During the first six months of 2022, we did not repurchase any shares in the open market and repurchased 0.3 million common shares, at a total cost of$29.5 million , to satisfy tax withholding obligations in connection with the vesting of equity awards 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 potential capital needs to expand our business operations. 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. 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 quarterly 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 first six months of 2022. At all times measured during the first six months of 2022 and during 2021, which at a minimum occurs at the end of each month, 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, 2021 (2021 Annual Report to Shareholders). As ofJune 30, 2022 , our estimated consolidated statutory surplus was$16.6 billion . During the first six months of 2022, our contractual obligations and critical accounting policies have not changed materially from those discussed in our 2021 Annual Report to Shareholders. Pursuant to our critical accounting policy for goodwill, we test our goodwill balance for impairment at the reporting unit level annually as ofOctober 1 , or more frequently if indicators of 34 -------------------------------------------------------------------------------- impairment exist. In conjunction with the preparation of our second quarter 2022 financial results, we performed a quantitative analysis of the goodwill attributable to our Property segment based on indications that impairment might exist. Based on this analysis, we wrote down$224.8 million of goodwill during the second quarter 2022. See Note 12 -Goodwill and Intangible Assets for further discussion. There have not been any material changes in off-balance-sheet leverage, which includes purchase obligations and catastrophe excess of loss reinsurance contracts, from those discussed in our 2021 Annual Report to Shareholders. 35
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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 June 30, Six Months Ended June 30,
2022 2021 2022 2021
Personal Lines
Agency 36 % 38 % 35 % 38 %
Direct 40 40 40 41
Total Personal Lines1 76 78 75 79
Commercial Lines 19 17 20 16
Property 5 5 5 5
Total underwriting operations 100 % 100 % 100 % 100 %
1 Personal auto products accounted for 91% of the total Personal Lines segment
net premiums written during the three months and 93% during the six months ended
June 30, 2022 and 2021, and our special lines products accounted for the
balance.
The shift between our Personal Lines and Commercial Lines segments during both
the second quarter and first six months of 2022, compared to the same periods
last year, reflects Commercial Lines (including Protective Insurance products)
growing at a faster rate than Personal Lines.
Our Personal Lines business writes insurance for personal autos and special
lines products (e.g., motorcycles, watercraft, and RVs). Within Personal Lines
we often refer to our four consumer segments, which include:
•Sam - inconsistently insured;
•Diane - 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. At June 30, 2022 , 14% of our Agency auto policies in force were
12-month policies, compared to 13% a year earlier. While the shift to 12-month
policies is slow, to the extent our Agency application mix of annual policies
grows, that shift in policy term could increase our written premium mix by
channel as 12-month policies have about twice the amount of net premiums written
compared to 6-month policies. Our special lines products are written for
12-month terms.
Our Commercial Lines business writes auto-related liability and physical damage
insurance, workers' compensation insurance 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. To serve our direct channel customers, we continued to
expand our product offerings, including adding states where we offer BOP and
include the product on our digital platform serving direct small business
consumers (BusinessQuote Explorer®). The amount of commercial auto business
written through the direct channel, excluding our TNC business, grew 4% on a
quarter-over-prior-year-quarter basis. However, given the growth in our
commercial auto agency book of business, which includes the Protective Insurance
products, the direct commercial auto business represented 9% of our commercial
auto premiums, compared to 10% a year earlier. We write about 90% of Commercial
Lines policies for 12-month terms.
Our Property business writes residential property insurance for homeowners,
other property owners, and renters. 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 second quarter 2022, compared
to 22% for the same period last year. Property policies are written for 12-month
terms.
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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, and other
underwriting expenses. 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 June 30, Six Months Ended June 30,
2022 2021 2022 2021
Underwriting Underwriting Underwriting Underwriting
Profit (Loss) Profit (Loss) Profit (Loss) Profit (Loss)
($ in millions) $ Margin $ Margin $ Margin $ Margin
Personal Lines
Agency $ 260.3 6.0 % $ 207.5 4.9 % $ 548.9 6.3 % $ 755.0 9.1 %
Direct 198.4 4.0 128.4 2.8 348.8 3.6 543.0 6.0
Total Personal Lines 458.7 4.9 335.9 3.8 897.7 4.9 1,298.0 7.5
Commercial Lines 243.0 10.5 130.1 8.0 445.4 10.1 358.6 11.8
Property1 (156.9) (27.5) (83.3) (16.6) (148.6) (13.2) (154.0) (15.8)
Other indemnity2 (6.3) NM 0.1 NM (7.2) NM 0.1 NM
Total underwriting operations $ 538.5 4.4 % $ 382.8 3.5 % $ 1,187.3 5.0 % $ 1,502.7 7.0 %
1 For the three and six months ended June 30, 2022 , underwriting profit (loss)
includes $5.0 million and $19.1 million , respectively, of amortization expense
associated with acquisition-related intangible assets attributable to our
Property segment, compared to $14.1 million and $28.3 million for the respective
periods last year.
2 Underwriting margins for our other indemnity business are not meaningful (NM)
due to the low level of premiums earned by, and the variability of loss costs
in, such business.
During the second quarter 2022, the increase in our underwriting profitability
primarily reflected a decrease in our expenses, which in part were due to a
decrease in advertising spend and personnel costs, reflecting a decrease in our
annual cash-incentive Gainshare program accrual. For the first six months of
2022, our profitability decreased from the same period last year primarily
driven by higher accident severity and 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 period.
The pandemic has shifted consumer behavior and impacted general economic
conditions. We have seen volatility in our severity trends as inflation
continued to influence higher vehicle prices and costs to repair vehicles. We
have responded, and will continue to respond, to these market changes through
rate increases, underwriting restrictions, and other non-rate actions.
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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 June 30, Six Months Ended June 30,
Underwriting Performance1 2022 2021 Change 2022 2021 Change
Personal Lines - Agency
Loss & loss adjustment expense ratio 77.3 76.5 0.8 76.3 72.2 4.1
Underwriting expense ratio 16.7 18.6 (1.9) 17.4 18.7 (1.3)
Combined ratio 94.0 95.1 (1.1) 93.7 90.9 2.8
Personal Lines - Direct
Loss & loss adjustment expense ratio 77.9 77.0 0.9 77.5 72.8 4.7
Underwriting expense ratio 18.1 20.2 (2.1) 18.9 21.2 (2.3)
Combined ratio 96.0 97.2 (1.2) 96.4 94.0 2.4
Total Personal Lines
Loss & loss adjustment expense ratio 77.7 76.8 0.9 76.9 72.5 4.4
Underwriting expense ratio 17.4 19.4 (2.0) 18.2 20.0 (1.8)
Combined ratio 95.1 96.2 (1.1) 95.1 92.5 2.6
Commercial Lines
Loss & loss adjustment expense ratio 70.4 71.8 (1.4) 70.6 67.9 2.7
Underwriting expense ratio 19.1 20.2 (1.1) 19.3 20.3 (1.0)
Combined ratio 89.5 92.0 (2.5) 89.9 88.2 1.7
Property
Loss & loss adjustment expense ratio 101.7 87.5 14.2 86.4 86.2 0.2
Underwriting expense ratio2 25.8 29.1 (3.3) 26.8 29.6 (2.8)
Combined ratio2 127.5 116.6 10.9 113.2 115.8 (2.6)
Total Underwriting Operations
Loss & loss adjustment expense ratio 77.4 76.5 0.9 76.2 72.5 3.7
Underwriting expense ratio 18.2 20.0 (1.8) 18.8 20.5 (1.7)
Combined ratio 95.6 96.5 (0.9) 95.0 93.0 2.0
Accident year - Loss & loss adjustment expense
ratio3 77.8 75.8 2.0 75.6 71.6 4.0
1 Ratios are expressed as a percentage of net premiums earned. The portion of
fees and other revenues related to our loss adjustment activities are netted
against loss adjustment expenses and the portion of fees and other revenues
related to our underwriting operations are netted against underwriting expenses
in the ratio calculations.
2 Included in the three and six months ended June 30, 2022 , are 0.9 points and
1.7 points, respectively, of amortization expense on acquisition-related
intangible assets attributable to our Property segment, and 2.8 points and 2.9
points for the respective periods last year. Excluding this expense, for the
three months ended June 30, 2022 and 2021, the Property business would have
reported expense ratios of 24.9 and 26.3, respectively, and combined ratios of
126.6 and 113.8, respectively. For the six months ended June 30, 2022 and 2021,
excluding this expense, the Property business would have reported expense ratios
of 25.1 and 26.7, respectively, and combined ratios of 111.5 and 112.9,
respectively.
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 June 30, Six Months Ended June 30,
(millions) 2022 2021 2022 2021
Change in net loss and LAE reserves $ 1,131.6 $ 1,603.1 $ 1,696.9 $ 2,230.6
Paid losses and LAE 8,289.5 6,803.3 16,582.6 13,286.3
Total incurred losses and LAE $ 9,421.1 $ 8,406.4 $ 18,279.5 $ 15,516.9
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 0.9 points for the second quarter 2022,
compared to the same period last year, and 3.7 points on a year-to-date basis,
primarily due to increased accident severity in both our personal and commercial
auto businesses and higher catastrophe losses, partially offset by lower
accident frequency in our personal auto business and the higher premium per
vehicle due to rate increases in both our personal and commercial auto
businesses.
The following table shows our consolidated catastrophe losses and related
combined ratio point impact, excluding loss adjustment expenses, incurred during
the periods:
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
($ in millions) $ Point $ Point $ Point $ Point
Personal Lines $ 285.2 3.1 $ 211.8 2.4 $ 329.7 1.8 $ 276.9 1.6
Commercial Lines 9.6 0.4 6.6 0.4 12.4 0.3 8.4 0.3
Property 233.5 40.9 128.0 25.5 332.8 29.5 272.6 28.0
Total net catastrophe losses
incurred $ 528.3 4.3 $ 346.4 3.2 $ 674.9 2.8 $ 557.9 2.6
During the second quarter 2022, the majority of catastrophe losses were due to
thunderstorms, hail, and tornadoes, throughout the United States . 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.
Future catastrophes could have a material impact on our financial condition,
cash flows, or results of operations. As a result, we reinsure various risks
including, but not limited to, catastrophic losses. We do not have
catastrophe-specific reinsurance for our Personal Lines or commercial auto
businesses, but we reinsure portions of our Property business. The Property
business reinsurance programs include catastrophe occurrence excess of loss
contracts and aggregate excess of loss contracts. We also purchase
non-weather-related catastrophe reinsurance on our Protective Insurance workers'
compensation insurance.
We evaluate our reinsurance programs during the renewal process, if not more
frequently, to ensure our programs continue to effectively address the company's
risk tolerance. During the second quarter 2022, we entered into new reinsurance
contracts under our per occurrence excess of loss program for our Property
business. The reinsurance program has retention thresholds for losses and
allocated loss adjustment expense (ALAE) from a single catastrophic event of
$200 million , which is unchanged from the retention threshold on the prior
contracts. During 2022, we also entered into a new aggregate excess of loss
reinsurance contract that increased our retention from $475 million to $575
million and reduced aggregate potential coverage by $50 million , to a total of
$175 million , compared to our 2021 program. In our view, our capital position
and growing balance sheet enabled us to assume more of these risks via higher
retention levels. While the total coverage limit and per-event retention will
evolve to fit the growth of our business, we expect to remain a consistent
purchaser of reinsurance coverage. Consistent with this history, we were able to
fully place our desired coverage at both January 1st and June 1st renewal
events. See Item 1 - Description of Business-Reinsurance in our Annual Report on
Form 10-K for the year ended December 31, 2021 , for a discussion of our various
reinsurance programs. During the second quarter and first six months of 2022, we
did not experience significant excess of loss reinsurance activity and we have
not exceeded the annual retention thresholds under our 2022 catastrophe
aggregate excess of loss program.
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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.
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 16% during the second quarter and first six months of 2022,
compared to the same periods last year. These increases reflect the impact of
inflation, which continues to increase in the valuation of used vehicles and our
total loss and repair costs.
Following are the changes we experienced in severity in our auto coverages on a
year-over-year basis:
•Collision increased 23% and 26% for the second quarter and first six months of
2022, respectively, and auto property damage increased about 24% and 23%,
respectively, in part due to increased used car prices.
•Bodily injury increased about 9% and 8% for the second quarter and first six
months of 2022, respectively, due in part to increasing non-medical losses.
•Personal injury protection (PIP) decreased about 7% during the second quarter
and first six months of 2022, due in part to coverage reform in Michigan and
high reopen activity in Florida during the first half of 2021.
To address inherent seasonality trends and lessen the effects of month-to-month
variability in the commercial auto products, we use a trailing 12-month period
in assessing severity. In the second quarter 2022, our commercial auto products'
incurred severity, excluding our TNC business, increased 12% compared to the
same period last year. In addition to general trends in the marketplace, the
increase in our commercial auto products' severity primarily reflects shifts in
the mix of business to for-hire transportation, which has higher average
severity than the business auto and contractor business market targets. 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 representative of our overall experience for the majority of our
commercial auto products.
It is a challenge to estimate future severity, but we continue to monitor
changes in the underlying costs, such as general inflation, 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 year-over-year basis, decreased about
8% and 4% for the second quarter and first six months of 2022, respectively,
compared to the same periods last year. Following are the frequency changes we
experienced by coverage:
•PIP and bodily injury decreased about 11% and 9%, respectively, for the second
quarter 2022 and 5% for the first six months of 2022.
•Collision and auto property damage decreased about 10% and 8%, respectively,
for the second quarter and 5% and 3% for the first six months of 2022.
On a trailing 12-month basis, our commercial auto products' incurred frequency,
excluding our TNC business, increased 5% during the second quarter 2022,
compared to the same period last year. The frequency increase was in part due to
an uneven recovery across different commercial auto business markets, many of
which have not yet returned to pre-pandemic levels and are continuing to see
increasing frequency since the COVID-19 pandemic lows.
We closely monitor the changes in frequency, but the degree or direction of
near-term frequency change is not something that we are able to predict with any
degree of confidence, and this challenge is exacerbated by the uncertainty of
the current environment. 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.
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The table below presents the actuarial adjustments implemented and the loss
reserve development experienced on a companywide basis in the following periods:
Three Months Ended June 30, Six Months Ended June 30,
($ in millions) 2022 2021 2022 2021
ACTUARIAL ADJUSTMENTS
Reserve decrease (increase)
Prior accident years $ (65.5) $ (22.1) $ (50.4) $ (44.2)
Current accident year (14.4) 15.5 (53.2) 18.4
Calendar year actuarial adjustments $ (79.9) $ (6.6) $ (103.6) $ (25.8)
PRIOR ACCIDENT YEARS DEVELOPMENT
Favorable (unfavorable)
Actuarial adjustments $ (65.5) $ (22.1) $ (50.4) $ (44.2)
All other development 111.4 (50.5) (94.5) (152.8)
Total development $ 45.9 $ (72.6) $ (144.9) $ (197.0)
(Increase) decrease to calendar year combined
ratio 0.4 pts. (0.7) pts. (0.6) pts. (0.9) 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 in the vehicle businesses would be reflected
in "all other development," discussed below, to the extent they relate to prior
year reserves. We report these actuarial adjustments separately for the current
and prior accident years to reflect these adjustments as part of the total prior
accident years development.
"All other development" represents claims settling for more or less than
reserved, emergence of unrecorded claims at rates different than anticipated in
our incurred but not recorded (IBNR) reserves, and changes in reserve estimates
on specific claims. Although we believe the development from both the actuarial
adjustments and "all other development" generally results from the same factors,
we are unable to quantify the portion of the reserve development that might be
applicable to any one or more of those underlying factors.
Our objective is to establish case and IBNR reserves that are adequate to cover
all loss costs, while incurring minimal variation from the date the reserves are
initially established until losses are fully developed. Our ability to meet this
objective is impacted by many factors. Changes in case law, particularly related
to PIP, 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.
Underwriting Expenses
The companywide underwriting expense ratio (i.e., policy acquisition costs and
other underwriting expenses, net of certain fees and other revenues, expressed
as a percentage of net premiums earned) decreased 1.8 points for the second
quarter 2022, compared to the same period last year, and 1.7 points on a
year-to-date basis, primarily reflecting a decrease in our advertising spend and
a decrease in personnel costs. In total, our advertising spend decreased 7% for
both the second quarter and first six months of 2022, compared to the same
periods last year in an effort to improve profitability to reach our 96 combined
ratio goal, and had a 0.9 and 1.0 point, respectively, impact on our companywide
expense ratio. We experienced a decrease in personnel costs primarily resulting
from a decrease in our annual cash-incentive Gainshare program accrual,
reflecting lower year-to-date segment profitability, which had a 0.9 and 0.8
point, respective, impact on our companywide expense ratio.
To analyze underwriting expenses, we also review our non-acquisition expense
ratio (NAER), which excludes costs related to policy acquisition, including
advertising and agency commissions, from our underwriting expense ratio. By
excluding acquisition costs from our underwriting expense ratio, we are able to
understand costs other than those necessary to acquire new policies and grow the
business. During the second quarter, our NAER decreased 0.5 points, 0.6 points,
and 0.8 points in our Personal Lines, Commercial Lines, and Property businesses,
respectively, compared to the same period last year. On a year-to-date basis,
our NAER decreased 0.2 points, 0.4 points, and 0.7 points in our Personal Lines,
Commercial Lines, and Property businesses, respectively, compared to the same
period last 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 June 30, Six Months Ended June 30,
($ in millions) 2022 2021 % Growth 2022 2021 % Growth
NET PREMIUMS WRITTEN
Personal Lines
Agency $ 4,493.6 $ 4,326.1 4 % $ 9,010.0 $ 8,784.8 3 %
Direct 4,978.9 4,574.1 9 10,181.4 9,576.8 6
Total Personal Lines 9,472.5 8,900.2 6 19,191.4 18,361.6 5
Commercial Lines 2,308.8 1,986.3 16 5,234.5 3,780.4 38
Property 639.6 590.9 8 1,175.7 1,064.5 10
Other indemnity1 1.2 2.9 (59) 1.5 2.9 (48)
Total underwriting operations $ 12,422.1 $ 11,480.3 8 % $ 25,603.1 $ 23,209.4 10 %
NET PREMIUMS EARNED
Personal Lines
Agency $ 4,366.5 $ 4,220.3 3 % $ 8,689.8 $ 8,318.5 4 %
Direct 4,905.9 4,633.9 6 9,699.5 9,065.6 7
Total Personal Lines 9,272.4 8,854.2 5 18,389.3 17,384.1 6
Commercial Lines 2,304.4 1,621.8 42 4,431.6 3,039.6 46
Property 570.5 502.3 14 1,128.6 974.8 16
Other indemnity1 0.6 4.0 (85) 1.3 4.0 (68)
Total underwriting operations $ 12,147.9 $ 10,982.3 11 % $ 23,950.8 $ 21,402.5 12 %
1 Represents Protective
Insurance's run-off business.
June 30,
(thousands) 2022 2021 % Growth
POLICIES IN FORCE
Personal Lines
Agency auto 7,619.5 8,014.2 (5) %
Direct auto 9,557.0 9,581.3 0
Total auto 17,176.5 17,595.5 (2)
Special lines1 5,485.0 5,211.7 5
Personal Lines - total 22,661.5 22,807.2 (1)
Commercial Lines 1,024.6 916.6 12
Property 2,823.0 2,655.5 6
Companywide total 26,509.1 26,379.3 0 %
1 Includes insurance for motorcycles, watercraft, RVs, and similar items.
To analyze growth, we review new policies, rate levels, and the retention
characteristics of our segments. 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. We believe the second quarter 2021 year-over-year change in the
trailing 3-month policy life expectancy is not representative of true retention
activity due to the significant renewal activity during the second quarter 2020,
as a result of suspending cancellations of policies for non-payment, and,
therefore, we have chosen not to disclose this measure in the tables below as we
do not believe the change is meaningful.
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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
2022 2021 2022 2021
Applications
New (13) % 7 % (18) % 11 %
Renewal 2 9 4 11
Written premium per policy - Auto 11 (2) 8 (3)
Policy life expectancy - Auto
Trailing 3 months (32) NM
Trailing 12 months (11) 3
NM = Not meaningful
New application growth in our Personal Lines products were down during the
second quarter and first six months of 2022, with our personal auto new
application growth down 15% and 21%, respectively, and our special lines new
application growth down 7% and 8%. The decrease in personal auto new
applications is primarily attributable to the rate actions and underwriting
restrictions that began in the second quarter of 2021 and continued through the
second quarter 2022. The decrease in special lines new applications primarily
reflects a decrease in demand for RV, boat, and motorcycle products, as compared
to the first half 2021 when sales of these products was strong. We continued to
see personal auto and special lines renewal application growth.
Results varied by consumer segment. At the end of the second quarter 2022,
Robinsons saw single-digit personal auto policy in force growth, compared to the
second quarter last year, while Sams saw a low double-digit decline in policy in
force growth. New auto applications experienced a decrease across all four
consumer segments in the second quarter, year over year. Quote volume increased
in the second quarter, on a year-over-year basis, in all of our consumer
segments, except Sams, with all consumer segments seeing a decreased rate of
conversion.
During the second quarter 2022, we implemented rate increases in 17 states. In
the aggregate, on a countrywide basis, personal auto net rate increases were
about 2% for the quarter. During the second quarter 2022, we also reduced
advertising spend and tightened underwriting criteria in consumer segments where
losses indicated rates are not meeting our profitability goals. These actions
had and may continue to have a negative impact on our new and renewal business
applications and policy life expectancy in the near term, as indicated by the
decline in the trailing 3-month and trailing 12-month policy life expectancy.
Our written premium per policy increased during the second quarter and first six
months of 2022, primarily due to the rate increases, which started in the second
quarter 2021 and continued throughout the first half of 2022. Our focus on
achieving our target underwriting profitability takes precedence over growth. 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 great
customer service at or below a companywide 96 combined ratio on a calendar-year
basis.
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 91% and 93% of the Personal Lines
segment net premiums written during the second quarter and first six months of
2022, respectively.
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The Agency Business
Growth Over Prior Year
Quarter Year-to-date
2022 2021 2022 2021
Applications - Auto
New (20) % 9 % (24) % 7 %
Renewal (2) 6 (1) 9
Written premium per policy - Auto 12 (1) 10 (1)
Policy life expectancy - Auto
Trailing 3 months (34) NM
Trailing 12 months (13) 3
NM = Not meaningful
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 second quarter 2022, only four states generated new
Agency auto application growth, including only one of our top 10 largest Agency
states. During the second quarter, each of our consumer segments experienced a
reduction in new applications and policies in force compared to the same period
last year.
During the second quarter and first six months of 2022, we experienced an
increase in Agency auto quote volume of 9% and 7%, respectively, with a rate of
conversion (i.e., converting a quote to a sale) decrease of 26% and 29%,
compared to the same periods last year. For the second quarter and year-to-date
periods, each consumer segment, other than Sams, saw increases in quote volume,
compared to last year. The rate of conversion was down significantly in the
second quarter and first six months of 2022, compared to the same periods last
year, reflecting rate increases and the impact from tightening underwriting
criteria. Written premium per policy for new and renewal Agency auto business
increased 6% and 14%, respectively, compared to the second quarter 2021. The
decreases in policy life expectancy were expected given the rate actions taken
over the last year, and policy life expectancy may continue to be negatively
impacted by our current rate actions.
The Direct Business
Growth Over Prior Year
Quarter Year-to-date
2022 2021 2022 2021
Applications - Auto
New (11) % 10 % (19) % 13 %
Renewal 4 12 6 15
Written premium per policy - Auto 10 (4) 7 (4)
Policy life expectancy - Auto
Trailing 3 months (29) NM
Trailing 12 months (9) 3
NM = Not meaningful
The Direct business includes business written directly by Progressive online,
through mobile devices, and over the phone. During the quarter, 21 states
generated new auto application growth, including three of our top 10 largest
Direct states. During the second quarter 2022, total applications increased 1%
due to growth in policy renewals. During the second quarter, new applications
decreased across all consumer segments except Robinsons, while policies in force
grew in our Wrights and Robinsons consumer segments, compared to last year.
During the second quarter and first six months of 2022, we experienced an
increase in Direct auto quote volume of 5% and a decrease of 6%, respectively,
while our rate of conversion decreased 14%, compared to the same periods last
year for both the quarter and year-to-date periods. The decrease we experienced
in our quote volume primarily reflected the decrease in advertising spending
during the first half of 2022. All consumer segments saw an increase in quotes
during the quarter except for Sams, with all consumer segments experiencing
decreased quote volume, except Robinsons, during the first six months of 2022.
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During the second quarter 2022, written premium per policy for new and renewal
Direct auto business increased 6% and 10%, respectively, compared to the same
period last year, primarily driven by rate increases. Consistent with our Agency
business, the Direct business decrease in policy life expectancy reflects the
rate actions taken over the last year.
E. Commercial Lines
The following table shows our year-over-year changes for our Commercial Lines
business, excluding our TNC, BOP, and
Growth Over Prior Year
Quarter Year-to-date
2022 2021 2022 2021
Applications
New (6) % 52 % 1 % 40 %
Renewal 15 8 14 10
Written premium per policy 14 20 17 16
Policy life expectancy - Trailing 12 months 1 5
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. In the second quarter 2021, we
acquired Protective Insurance , which expanded our portfolio of offerings to
larger fleet and workers' compensation insurance for trucking, along with
trucking industry independent contractors, and affinity programs; these products
are excluded from the table above.
During the second quarter 2022, the decrease in Commercial Lines new application
growth primarily reflected a slow down from the significant amount of growth
experienced in 2021, primarily in our for-hire transportation business market.
During the second quarter 2022, we experienced a 2% decline in quote volume and
a 4% decline in the rate of conversion, compared to the same period last year,
primarily driven by the for-hire transportation market. During the first six
months of 2022, quote volume increased 4%, while conversion decreased 3%,
compared to the same period last year.
During the second quarter, written premium per policy for new commercial auto
business increased 8%, while renewal business increased 20%, compared to the
same period last year. The increases in written premiums were primarily due to
rate increases. Our policy life expectancy increased primarily due to product
model enhancements, compared to 2021.
F. Property
The following table shows our year-over-year changes for our Property business:
Growth Over Prior Year
Quarter Year-to-date
2022 2021 2022 2021
Applications
New (5) % 29 % (6) % 28 %
Renewal 8 8 9 10
Written premium per policy 4 0 4 0
Policy life expectancy - Trailing 12 months (8)
(6)
Our Property business writes residential property insurance for homeowners, other property owners, and renters, in the agency and direct channels. During the second quarter and first six months of 2022, our Property business experienced a decrease in new applications, primarily due to the rate and other actions taken to address the profitability concerns. During 2022, we continued to make underwriting changes to reduce our concentration risks by focusing our growth efforts in states with traditionally less catastrophe exposure and limit growth in the coastal and hail prone states. During 2021, we announced plans to non-renew about 60,000 policies inFlorida , starting during the second quarter 2022. During the second quarter 2022, new legislation was introduced prohibiting the non-renewal of certain policies. In response, we changed our process to provide impacted policyholders the opportunity to have their policy renewed if meeting certain criteria. We expect to non-renew significantly less of the policies previously intended for non-renewal. 45 -------------------------------------------------------------------------------- The targeted rate increases taken during the last 12 months, are beginning to be earned into the book of business; however, we realize that our current pricing actions and underwriting activities to limit growth in the coastal and hail prone states and to increase our exposure in states with traditionally less catastrophe exposure will require more time than originally anticipated. This information, combined with the continued extent of the weather-related losses, prompted us to reevaluate the portion of goodwill assigned to our Property business for impairment, resulting in a non-cash goodwill impairment charge of$224.8 million during the second quarter 2022, which represented the entire amount of goodwill assigned to the ARX reporting unit. In addition to rate increases, as part of the underwriting changes discussed above, during the second quarter 2022 our written premium per policy increased, compared to the same period last year, primarily due to a shift in the mix of business toward providing coverage to higher valued properties. The written premium per policy impact from rate increases and underwriting changes were partially offset by 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 the targeted rate increases in states where we were not achieving our profitability targets. We intend to continue to make targeted rate increases in states where we believe it is necessary to achieve our profitability targets.
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. AtJune 30, 2022 , we reported a net federal deferred tax asset, compared to net federal deferred tax liabilities atJune 30, 2021 andDecember 31, 2021 . The change to a deferred asset from a deferred liability was primarily due to unrealized losses on securities in the fixed-income and equity portfolios. AtJune 30, 2022 and 2021, we had net current income taxes payable of$114.0 million and$37.2 million , respectively, which were reported as part of accounts payable, accrued expenses, and other liabilities in our consolidated balance sheets. AtDecember 31, 2021 , we reported recoverable income taxes of$19.2 million , which was reflected as part of other assets. The taxes payable/recoverable vary from period to period based on the amount of estimated taxes paid. The effective tax rate for the three and six months endedJune 30, 2022 , was 14.6% and 6.8%, respectively, compared to 20.9% and 20.8% for the same periods last year. Excluding the effect of the goodwill impairment, which was a one-time charge, the effective tax rate for the three and six months endedJune 30, 2022 , were 22.6% and 79.9%, respectively. The higher effective rates for the current quarter and year, excluding the goodwill impairment charge, are in part due to our permanent tax differences having a greater impact on the effective rate given our pretax loss, compared to pretax income in the same periods last year. 46 --------------------------------------------------------------------------------
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 endedJune 30 : Three Months Six Months 2022 2021 2022 2021 Pretax recurring investment book yield (annualized) 2.3 % 1.9 % 2.1 % 2.0 % FTE total return: Fixed-income securities (2.4) 1.1 (5.9) 0.2 Common stocks (16.3) 7.3 (20.4) 20.7 Total portfolio (3.6) 1.7 (7.2) 1.9 The increase in the book yield, compared to last year, for both periods, reflected investing new cash from operations at higher interest rates and an increase in interest rates on our floating rate securities. The decrease in the fixed-income total return, compared to last year, reflected the impact of rising interest rates during the last twelve months, as well as widening credit spreads.
A further break-down of our FTE total returns for our fixed-income portfolio for
the periods ended
Three Months Six Months
2022 2021 2022 2021
Fixed-income securities:
U.S. Treasury Notes (1.7) % 0.4 % (5.8) % (0.7) %
Municipal bonds (1.9) 1.4 (6.7) 0.4
Corporate bonds (3.1) 1.3 (6.7) (0.3)
Residential mortgage-backed securities (0.6) 0.5 (1.5) 0.9
Commercial mortgage-backed securities (3.6) 1.8 (7.7) 1.0
Other asset-backed securities (1.2) 0.5 (2.7) 0.7
Preferred stocks (8.1) 6.2 (10.9) 6.1
Short-term investments 0.1 0 0.2 0.1
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B. Portfolio Allocation
The composition of the investment portfolio was:
Fair % of Total Duration
($ in millions) Value Portfolio (years) Rating1
June 30, 2022
U.S. government obligations $ 18,719.2 36.0 % 3.7 AAA
State and local government obligations 2,135.4 4.1 3.7 AA+
Foreign government obligations 16.4 0.1 4.0 AAA
Corporate debt securities 10,167.8 19.6 3.0 BBB
Residential mortgage-backed securities 799.3 1.5 0.4 A
Commercial mortgage-backed securities 6,094.6 11.7 2.7 A+
Other asset-backed securities 5,036.0 9.7 1.1 AA
Preferred stocks 1,564.3 3.0 3.0 BBB-
Short-term investments 4,611.8 8.9 <0.1 AA
Total fixed-income securities 49,144.8 94.6 2.8 AA-
Common equities 2,784.7 5.4 na na
Total portfolio2 $ 51,929.5 100.0 % 2.8 AA-
June 30, 2021
U.S. government obligations $ 19,437.7 38.1 % 3.4 AAA
State and local government obligations 2,440.5 4.8 3.8 AA
Foreign government obligations 12.7 0.1 1.6 AA+
Corporate debt securities 10,678.2 20.9 3.3 BBB
Residential mortgage-backed securities 671.3 1.3 1.2 AA-
Commercial mortgage-backed securities 5,708.1 11.2 3.6 A+
Other asset-backed securities 3,899.0 7.7 1.3 AA
Preferred stocks 1,793.3 3.6 3.6 BBB-
Short-term investments 1,710.6 3.3 0.1 A+
Total fixed-income securities 46,351.4 91.0 3.1 AA-
Common equities 4,591.4 9.0 na na
Total portfolio2 $ 50,942.8 100.0 % 3.1 AA-
December 31, 2021
U.S. government obligations $ 18,488.2 35.9 % 3.6 AAA
State and local government obligations 2,185.3 4.2 3.6 AA+
Foreign government obligations 17.9 0.1 4.5 AAA
Corporate debt securities 10,692.1 20.7 2.9 BBB
Residential mortgage-backed securities 790.0 1.5 0.4 A-
Commercial mortgage-backed securities 6,535.6 12.7 3.2 A+
Other asset-backed securities 4,982.3 9.7 1.2 AA
Preferred stocks 1,821.6 3.6 3.6 BBB-
Short-term investments 942.6 1.8 0.2 AA
Total fixed-income securities 46,455.6 90.2 3.0 AA-
Common equities 5,058.5 9.8 na na
Total portfolio2 $ 51,514.1 100.0 % 3.0 AA-
na = not applicable
1 Represents ratings at period end. Credit quality ratings are assigned by
nationally recognized statistical rating organizations. To calculate the
weighted average credit quality ratings, we weight individual securities based
on fair value and assign a numeric score of 0-5, with non-investment-grade and
non-rated securities assigned a score of 0-1. To the extent the weighted average
of the ratings falls between AAA and AA+, we assign an internal rating of AAA -.
2 Includes $0 , $412.1 million , and $143.4 million of net unsettled security
purchase transactions at June 30, 2022 and 2021, and December 31, 2021 ,
respectively, with the offsetting payable included in other liabilities.
The total fair value of the portfolio at June 30, 2022 and 2021, and
December 31, 2021 , included $4.9 billion , $3.3 billion , and $4.2 billion ,
respectively, of securities held in a consolidated, non-insurance subsidiary of
the holding company, net of unsettled security transactions.
48
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Our asset allocation strategy is to maintain 0%-25% of our portfolio in Group I
securities, with the balance (75%-100%) of our portfolio in Group II securities.
We define Group I securities to include:
•common equities,
•nonredeemable preferred stocks,
•redeemable preferred stocks, except for 50% of investment-grade redeemable
preferred stocks with cumulative dividends, which are included in Group II, and
•all other non-investment-grade fixed-maturity securities.
Group II securities include:
•short-term securities, and
•all other fixed-maturity securities, including 50% of the investment-grade
redeemable preferred stocks with cumulative dividends.
We believe this asset allocation strategy allows us to appropriately assess the
risks associated with these securities for capital purposes and is in line with
the treatment by our regulators.
The following table shows the composition of our Group I and Group II
securities:
June 30, 2022 June 30, 2021 December 31, 2021
Fair % of Total Fair % of Total Fair % of Total
($ in millions) Value Portfolio Value Portfolio Value Portfolio
Group I securities:
Non-investment-grade fixed maturities $ 1,648.7 3.2 % $ 1,834.2 3.6 % $ 2,032.4 3.9 %
Redeemable preferred stocks1 101.9 0.2 91.7 0.2 90.9 0.2
Nonredeemable preferred stocks 1,360.5 2.6 1,609.8 3.2 1,639.9 3.2
Common equities 2,784.7 5.4 4,591.4 9.0 5,058.5 9.8
Total Group I securities 5,895.8 11.4 8,127.1 16.0 8,821.7 17.1
Group II securities:
Other fixed maturities 41,421.9 79.7 41,105.1 80.7 41,749.8 81.1
Short-term investments 4,611.8 8.9 1,710.6 3.3 942.6 1.8
Total Group II securities 46,033.7 88.6 42,815.7 84.0 42,692.4 82.9
Total portfolio $ 51,929.5 100.0 % $ 50,942.8 100.0 % $ 51,514.1 100.0 %
1 We did not hold any non-investment-grade redeemable preferred stocks at
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) to classify our residential and commercial mortgage-backed securities, excluding interest-only securities, and the credit ratings from nationally recognized statistical rating organizations (NRSRO) to classify 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. The decrease in the percentage of Group I securities since year end was driven by sales and valuation declines in our common equity portfolio with the proceeds from the common stock sales and the$1.5 billion debt offering inMarch 2022 , reinvested in Group II short-term investments. Unrealized Gains and Losses As ofJune 30, 2022 , our fixed-maturity portfolio had pretax net unrealized losses, recorded as part of accumulated other comprehensive income, of$2,776.4 million , compared to net unrealized gains of$638.8 million and$71.4 million atJune 30, 2021 andDecember 31, 2021 , respectively. The decreases from both periods in 2021 were due to increasing interest rates across our fixed-maturity portfolio and wider credit spreads outside of our short-term andTreasury portfolios.
See Note 2 - Investments for a further break-out of our gross unrealized gains
(losses).
49 --------------------------------------------------------------------------------
Holding Period Gains and Losses
The following table provides the balance and activity for both the gross and net
holding period gains (losses) for the six months ended
Net Holding
Gross Holding Gross Holding Period Gains
(millions) Period Gains Period Losses (Losses)
Balance at December 31, 2021
Hybrid fixed-maturity securities $ 13.0 $ (5.5) $ 7.5
Equity securities 3,877.2 (14.7) 3,862.5
Total holding period securities 3,890.2 (20.2) 3,870.0
Current year change in holding period securities
Hybrid fixed-maturity securities (13.0) (74.4) (87.4)
Equity securities (1,859.8) (163.6) (2,023.4)
Total changes in holding period securities (1,872.8) (238.0) (2,110.8)
Balance at June 30, 2022
Hybrid fixed-maturity securities 0 (79.9) (79.9)
Equity securities 2,017.4 (178.3) 1,839.1
Total holding period securities $ 2,017.4 $
(258.2)
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.
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 2021 Annual Report to Shareholders. •Interest rate risk - our duration of 2.8 years atJune 30, 2022 , fell within our acceptable range of 1.5 to 5 years. We shortened our portfolio duration from 3.0 years atDecember 31, 2021 , which we believe provides some protection against further increases in interest rates. 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 June 30, 2022 June 30, 2021 December 31, 2021 1 year 18.4 % 21.9 % 22.0 % 2 years 17.9 18.5 18.8 3 years 23.6 24.4 23.5 5 years 20.8 17.1 17.6 7 years 14.3 12.2 13.1 10 years 5.0 5.9 5.0 Total fixed-income portfolio 100.0 % 100.0 % 100.0 % 50
-------------------------------------------------------------------------------- •Credit risk - our credit quality rating of AA- was above our minimum threshold during the second quarter 2022. The credit quality distribution of the fixed-income portfolio was: Rating June 30, 2022 June 30, 2021 December 31, 2021 AAA 57.7 % 55.8 % 54.7 % AA 8.5 7.5 8.7 A 8.4 9.3 8.6 BBB 21.0 22.1 21.7
Non-investment grade/non-rated1
BB 3.5 4.3 4.8
B 0.6 0.5 1.1
CCC and lower 0.1 0.1 0.1
Non-rated 0.2 0.4 0.3
Total fixed-income portfolio 100.0 % 100.0 % 100.0 %
1 The ratings in the table above are assigned by NRSROs.
•Concentration risk - we did not have any investments in a single issuer, either overall or in the context of individual asset classes and sectors, that exceeded our thresholds during the second quarter 2022. •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 second quarter 2022. •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$2.6 billion , or 9.9%, of principal repayment from our fixed-income portfolio, excludingU.S. Treasury Notes and short-term investments, during 2022. Cash from interest and dividend payments and our short-term portfolio provide additional sources of recurring liquidity. •The duration of ourU.S. government obligations, which are included in the fixed-income portfolio, was comprised of the following atJune 30, 2022 : Fair Duration ($ in millions) Value (years) U.S. Treasury Notes Less than one year$ 219.5 0.5 One to two years 4,094.7 1.6 Two to three years 4,102.8 2.5 Three to five years 5,235.1 4.0 Five to seven years 3,946.2 5.8 Seven to ten years 1,120.9 8.3 Total U.S. Treasury Notes$ 18,719.2 3.7 51
--------------------------------------------------------------------------------
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
June 30, 2022
Residential mortgage-backed securities $ 799.3 $ (10.2) 6.7 % 0.4
A
Commercial mortgage-backed securities 6,094.6 (644.8) 51.1 2.7
A+
Other asset-backed securities 5,036.0 (201.6) 42.2 1.1
AA
Total asset-backed securities$ 11,929.9 $ (856.6) 100.0 % 1.9
AA-
Residential mortgage-backed securities
6.5 % 1.2
AA-
Commercial mortgage-backed securities 5,708.1 79.9 55.6 3.6
A+
Other asset-backed securities 3,899.0 33.1 37.9 1.3
AA
Total asset-backed securities$ 10,278.4 $ 116.5 100.0 % 2.6
AA-
Residential mortgage-backed securities
6.4 % 0.4
A-
Commercial mortgage-backed securities 6,535.6 (25.4) 53.1 3.2 A+ Other asset-backed securities 4,982.3 0.9 40.5 1.2 AA Total asset-backed securities$ 12,307.9 $ (22.8) 100.0 % 2.2
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 atJune 30, 2022 , to our original investment value (adjusted for returns of principal, amortization, and write-downs): Residential Mortgage-Backed Securities (at June 30, 2022) ($ in millions) Rating1 Non-Agency Government/GSE2 Total % of Total AAA$ 138.4 $ 1.3$ 139.7 17.5 % AA 34.6 0.4 35.0 4.4 A 400.1 0 400.1 50.0 BBB 213.0 0 213.0 26.6 Non-investment grade/non-rated: BB 0.6 0 0.6 0.1 B 0 0 0 0 CCC and lower 3.2 0 3.2 0.4 Non-rated 7.7 0 7.7 1.0 Total fair value$ 797.6 $ 1.7$ 799.3 100.0 % Increase (decrease) in value (3.3) % 0.7 % (3.3) % 1 The credit quality ratings are assigned by NRSROs; when we assigned the NAIC ratings for our RMBS, 92.6% of our non-investment-grade securities were rated investment grade and reported as Group II securities, with the remainder 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 the U.S.Department of Veteran Affairs (VA). . In the residential mortgage-backed sector, our portfolio consists of deals that are backed by high-credit quality borrowers or have strong structural protections through underlying loan collateralization. During the second quarter 2022, we selectively added to our portfolio and opportunistically tendered some of the securities at attractive levels. 52 --------------------------------------------------------------------------------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 atJune 30, 2022 , to our original investment value (adjusted for returns of principal, amortization, and write-downs): Commercial Mortgage-Backed Securities (at June 30, 2022) ($ in millions) Rating1 Multi-Borrower Single-Borrower Total % of Total AAA$ 246.5 $ 1,536.0 $ 1,782.5 29.2 % AA 0 1,754.5 1,754.5 28.9 A 0 1,034.8 1,034.8 17.0 BBB 0 1,026.2 1,026.2 16.8 Non-investment grade/non-rated: BB 0 496.4 496.4 8.1 B 0.2 0 0.2 0 Total fair value$ 246.7 $ 5,847.9 $ 6,094.6 100.0 % Increase (decrease) in value (3.4) % (9.8) % (9.6) % 1 The credit quality ratings are assigned by NRSROs; when we assigned the NAIC ratings for our CMBS, 36.9% of our non-investment-grade securities were rated investment grade and reported as Group II securities, with the remainder classified as Group I. The CMBS portfolio experienced wider spreads and high volatility in the second quarter of 2022. New issuances in the single-asset single-borrower (SASB) market slowed significantly due to less favorable market conditions, as well as low trading volumes and liquidity in the secondary trading market. Given ongoing uncertainty about the future trajectory of the economy and its impact on real estate, we did not add to our portfolio during the quarter, and reduced certain positions that we believe will be sensitive to potential future economic weakness. Our focus continues to be on SASB with high-quality collateral in the office, self-storage, multi-family, and industrial sectors. 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 atJune 30, 2022 , to our original investment value (adjusted for returns of principal, amortization, and write-downs): Other Asset-Backed Securities (at June 30, 2022) ($ in millions) Collateralized Loan Whole Business % of Rating Automobile Obligations Student Loan Securitizations Equipment Other Total Total AAA$ 1,094.7 $ 1,207.8 $ 48.9 $ 0$ 561.8 $ 200.3 $ 3,113.5 61.8 % AA 217.9 570.2 5.7 0 146.3 29.9 970.0 19.3 A 17.7 0 7.7 0 107.4 146.0 278.8 5.5 BBB 6.6 0 0 598.6 0 36.3 641.5 12.7 Non-investment grade/non-rated: BB 0 0 0 0 0 32.2 32.2 0.7 Total fair value$ 1,336.9 $ 1,778.0 $ 62.3 $ 598.6$ 815.5 $ 444.7 $ 5,036.0 100.0 % Increase (decrease) in value (1.6) % (3.3) % (5.0) % (9.8) % (1.9) % (7.6) % (3.9) % Our allocation to OABS remained fairly consistent over the last 12 months. As valuations across other asset classes were more attractive, our OABS portfolio offered less relative value. 53 --------------------------------------------------------------------------------
MUNICIPAL SECURITIES
The following table details the credit quality rating of our municipal
securities at
Municipal Securities (at June 30, 2022 )
(millions) General Revenue
Rating Obligations Bonds Total
AAA $ 629.2 $ 248.4 $ 877.6
AA 506.0 709.8 1,215.8
A 0 41.1 41.1
BBB 0 0.7 0.7
Non-rated 0 0.2 0.2
Total $ 1,135.2 $ 1,000.2 $ 2,135.4
Included in revenue bonds were $498.8 million of single-family housing revenue
bonds issued by state housing finance agencies, of which $352.5 million were
supported by individual mortgages held by the state housing finance agencies and
$146.3 million were supported by mortgage-backed securities.
Of the programs supported by mortgage-backed securities, 82% were collateralized
by Ginnie Mae mortgages, which are fully guaranteed by the U.S. government; the
remaining 18% 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.
Credit spreads for tax-exempt municipal bonds tightened during the second
quarter 2022, while spreads for taxable municipal bonds widened. Our allocation
to the sector declined modestly and we were not active during the quarter.
CORPORATE DEBT SECURITIES
The following table details the credit quality rating of our corporate debt
securities at
Corporate Securities (at June 30, 2022)
(millions) Financial
Rating Consumer Industrial Communication Services Technology Basic Materials Energy Total
AA $ 22.5 $ 0 $ 0 $ 223.1 $ 13.6 $ 0 $ 43.0 $ 302.2
A 325.7 271.4 203.6 1,093.2 44.8 114.7 183.5 2,236.9
BBB 2,305.8 1,314.2 123.3 1,040.5 618.0 12.8 912.0 6,326.6
Non-investment grade/non-rated:
BB 362.7 195.9 195.1 96.5 37.7 30.8 60.0 978.7
B 245.8 24.7 0 8.9 0 0 0 279.4
CCC and lower 44.0 0 0 0 0 0 0 44.0
Total fair value $ 3,306.5 $ 1,806.2 $ 522.0 $ 2,462.2 $ 714.1 $ 158.3 $ 1,198.5 $ 10,167.8
During the second quarter of 2022, the size of our corporate debt portfolio saw
a modest decrease primarily due to sales of securities with less attractive
risk/reward profiles and securities that matured. The portfolio valuation also
declined due to the increase in interest rates and wider credit spreads. In
addition, we have agreements to purchase bank loan investments and have an
associated open funding commitment of $14.0 million at June 30, 2022 .
We slightly shortened the maturity profile of the corporate portfolio during the
second quarter 2022. The duration of the corporate portfolio was 3.0 years at
June 30, 2022 , compared to 3.1 years at March 31, 2022 . Overall, our corporate
securities, as a percentage of the fixed-income portfolio decreased during the
second quarter 2022. At June 30, 2022 , our corporate securities made up
approximately 21% of the fixed-income portfolio, compared to approximately 23%
at March 31, 2022 .
54
--------------------------------------------------------------------------------
PREFERRED STOCKS - REDEEMABLE AND NONREDEEMABLE
The table below shows the exposure break-down by sector and rating atJune 30, 2022 : Preferred Stocks (at June 30, 2022) Financial Services (millions) U.S. Foreign Rating Banks Banks Insurance Other Financial Industrials Utilities Total BBB$ 874.7 $ 33.6 $ 111.2 $ 37.6$ 136.3 $ 41.7 $ 1,235.1 Non-investment grade/non-rated: BB 151.4 37.7 0 0 23.8 34.4 247.3 Non-rated 0 0 43.8 21.1 17.0 0 81.9 Total fair value$ 1,026.1 $ 71.3 $ 155.0 $ 58.7$ 177.1 $ 76.1 $ 1,564.3 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 ofJune 30, 2022 , all of our preferred securities continued to pay their dividends in full and on time. Approximately 81% of our preferred stock securities pay dividends that have tax preferential characteristics, while the balance pay dividends that are fully taxable.
During the second quarter 2022, the portfolio market valuation decreased as
credit spreads widened, interest rates increased, and we sold some preferred
positions. We primarily sold nonredeemable preferred securities with less
attractive risk/reward profiles.
Common equities, as reported on the balance sheets, were comprised of the
following:
($ in millions) June 30, 2022 June 30, 2021 December 31, 2021 Common stocks$ 2,766.2 99.3 %$ 4,579.8 99.7 %$ 5,041.6 99.7 % Other risk investments 18.5 0.7 11.6 0.3 16.9 0.3 Total common equities$ 2,784.7 100.0 %$ 4,591.4 100.0 %$ 5,058.5 100.0 % The majority of our common stock portfolio consists of individual holdings selected based on their contribution to the correlation with the Russell 1000 Index. We held 783 out of 1,020, or 77%, of the common stocks comprising the index atJune 30, 2022 , which made up 94% of the total market capitalization of the index. AtJune 30, 2022 and 2021, andDecember 31, 2021 , the year-to-date total return, based on GAAP income, was within our targeted tracking error, which is +/- 50 basis points. The other risk investments consist of limited partnership interests. During the second quarter 2022, we did not fund any partnership investments, and we have an open funding commitment of$7.3 million atJune 30, 2022 . 55 -------------------------------------------------------------------------------- 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 and the continued availability of reinsurance and performance by reinsurers; •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 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 and changing 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 acquire or 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 impact on our investment returns and strategies from regulations and societal pressures relating to environmental, social, and other public policy matters; •the elimination of 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; •the impacts of the COVID-19 pandemic and measures taken in response; 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, 2021 . 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. 56
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