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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 both premiums written and policies in force during the third quarter 2022, compared to the same period last year. For the third quarter 2022, our underwriting profit margin of 0.8% fell short of our targets in large part due to the impact from Hurricane Ian and was better than the underwriting loss margin of 0.4% recognized during the same period last year. For the third quarter 2022, our underwriting profit was$94.3 million , compared to an underwriting loss of$46.9 million for the third quarter last year. The increase in underwriting profitability contributed to the 5% increase in net income on a year-over-year basis. Our comprehensive loss for the third quarter 2022 was$785 million greater than the comprehensive loss incurred in the third quarter 2021, due to the significant decline in the market value of our fixed-maturity securities, reflecting higher interest rates and wider credit spreads over the last 12 months. Total capital (debt plus shareholders' equity) atSeptember 30, 2022 , was$21.2 billion , which was down$2.0 billion from year-end 2021, primarily due to our$3.3 billion comprehensive loss for the first nine months of 2022, in part offset by our$1.5 billion debt issuance in the first quarter 2022. During the third quarter, we generated$13.0 billion of net premiums written, which is an increase of$0.6 billion , or 5%, compared to third quarter 2021, primarily reflecting rate increases taken during 2021 and the first nine months of 2022. We ended the third quarter 2022 with 26.9 million companywide policies in force, which is 300,000 more policies than were in force atSeptember 30, 2021 . Personal auto policies in force decreased 1% year over year, while our Commercial Lines, special lines, and Property products grew policies 9%, 5%, and 4%, respectively. On a year-over-year basis, new personal auto applications increased for the third quarter and were down the first nine months of 2022. During the quarter, we believe targeted advertising spend and competitor rate increases spurred the new personal auto application growth, which partially offset the decreases in renewal applications during the quarter and the decreases in new auto applications experienced during the first half of 2022 that reflected rate increases and decreased advertising spend during that period. During the third quarter 2022, we generated an underwriting profit margin of 0.8%, which was below our 4.0% underwriting target profit goal. Catastrophe losses reduced our profit margin by about seven loss ratio points for the third quarter with Hurricane Ian, which mostly impactedFlorida , accounting for 86% of catastrophe losses during the period. Excluding loss adjustment expenses, we incurred$585 million of vehicle losses and$175 million of net Property losses after reflecting the catastrophe reinsurance coverage we have on our Property business. Special Lines catastrophe losses, primarily boat losses, accounted for nearly$290 million of the total vehicle losses and personal auto accounted for about$285 million . The balance of the vehicle losses from the storm were minimal and were incurred in our commercial auto products. On the Property side, we retained$25 million of allocated loss adjustment expenses. Under our excess of loss reinsurance program, our total retention for combined losses and allocated loss adjustment expenses is$200 million .
A. Insurance Operations
For the third quarter 2022, we experienced a companywide underwriting profit
margin of 0.8%, compared to our target profit margin of 4% and an underwriting
loss margin of 0.4% for the same period last year. Net premiums written grew 5%
over the third quarter last year, reflecting rate increases that began in the
second quarter of 2021 and continued through the third quarter 2022, while
policies in force increased 1% on a companywide basis. The distribution of
profitability and growth varied by segment during the third quarter 2022 as
discussed below.
During the third quarter 2022, Commercial Lines was our only profitable
operating segment, generating an underwriting profit margin of 10.3%, while our
Personal Lines business broke even and our Property operating segment generated
a 25.1% underwriting loss margin due to the significant losses incurred from
Hurricane Ian during the quarter. Special lines products contributed about 3
points of underwriting loss to the Personal Lines results for the third quarter.
In total for the third quarter, catastrophe losses were up 0.7 points on a
year-over-year basis with catastrophe losses up nearly 60% in Personal Lines and
down about 35% in our Property business. Our Commercial Lines business
represented less than 2% of our total catastrophe losses given the nature of the
business and that most commercial auto customers move their vehicles out of the
path of the storms to protect their businesses. For the third quarter 2022, our
personal auto incurred accident frequency was down about 9%, compared to the
prior year. We continued to see inflationary pressure in the average costs to
settle a claim, driven primarily by the increase in the valuation of new and
used vehicles on a year-over-year basis, which led to an increase in severity of
about 13% over the third quarter last year.
In the aggregate, we raised our personal auto rates during 2021 by about 8% and
for the first half of 2022 by 9%. During the third quarter, in addition to
raising personal auto rates about 2% in the aggregate countrywide, we shifted
our focus to evaluating underwriting restrictions, bill plans, and media spend
to identify growth opportunities. During the quarter, quotes increased more than
20% in both the Agent and Direct auto channels and total personal auto new
business applications
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increased 20%. Our competitors continued to raise rates to address their
underwriting profitability issues, which also had a positive impact on our
competitive positioning and we believe contributed to our new business
application growth. 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 new and 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 nine months of 2022, the
adoption rates for consumers enrolling in the program, when given the option,
increased nearly 20% in Agency auto and nearly 15% in Direct auto, compared to
the same period last year. Our latest model is available in states that
represented about 11% 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.
During the third quarter 2022, we remained focused on taking rate and non-rate
actions in our Property business to reduce volatility in our underwriting
results, as discussed below. We increased rates in our Property businesses about
2% and 9% during the third quarter and first nine months of 2022, respectively,
and 9% 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 in Florida , which we started doing in the second quarter 2022.
This effort to non-renew Florida policies was curtailed, in part, as new
legislation was introduced in Florida potentially prohibiting the non-renewal of
certain policies based on the age of the roof of the insured structure. We
believe there is a potential we may non-renew less of the policies than
previously intended. While the extent to which the legislation will impact our
intentions to non-renew policies is not fully known, we are identifying other
opportunities to reduce weather-related volatility in Property underwriting
results, including actively managing the new business we will write. In
addition, in response to Hurricane Ian, a moratorium suspending non-renewals and
cancellations of policies for nonpayment was put into place in Florida , which
will also have a temporary impact on our plans to limit our growth in the
coastal states until the moratorium is lifted.
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
third quarter 2022, impacted premium and volume growth on a year-over-year
basis. For the third quarter 2022, our companywide net premiums written grew 5%,
with Personal Lines growing 9% and Property 3%, primarily reflecting higher
average written premium per policy, on a year-over-year basis. In our Commercial
Lines business, net premiums written decreased 13% during the third quarter
2022, primarily reflecting the timing of renewal events for certain
transportation network company (TNC) policies on a year-over-year basis and a
shift in the length of the policy terms. During October 2022 , we renewed certain
TNC policies that were previously renewed in September 2021 . During the first
quarter 2022, we renewed certain TNC polices on a 12-month basis that were
previously written on a 6-month basis and, therefore, had renewed in prior years
during the third quarter. As a result, Commercial Lines premiums written growth
was positively impacted in the first quarter 2022, while the third quarter 2022
premium growth experienced an unfavorable impact. Excluding the impact of TNC,
Commercial Lines net premiums written grew 2% during the third quarter 2022 and
16% year to date, compared to the prior year. The lower growth during the third
quarter relative to the year-to-date growth primarily reflected a decrease in
our for-hire transportation business market target due to less demand for the
product than last year, driven by the general weakening of the economy.
On a companywide basis, as of September 30, 2022 , policies in force grew 1%,
with Commercial Lines and Property growing 9% and 4%, respectively, compared to
the prior year, and very minimal growth in our Personal Lines business. Within
Personal Lines, policies in force decreased 5% in Agency auto, increased 2% in
Direct auto, and increased 5% in special lines on a year-over-year basis. The
overall decrease in our personal auto policy in force growth is attributable to
the decrease in the growth of new applications during the nine months ended
September 30, 2022 , compared to the prior year, and a decline in renewal
applications during the third quarter 2022.
During the third quarter 2022, on a year-over-year basis, average written
premiums grew 10% in personal auto, 8% in commercial auto [excluding our TNC,
business owners policy (BOP), and Protective Insurance Corporation and
subsidiaries (Protective Insurance ) products], and 5% in Property, reflecting
rate increases taken beginning in 2021 and continuing into 2022, in response to
rising loss costs. Growth may continue to be impacted by the actions we are
taking to address profitability and volatility in our results. Given that our
Property policies are 12-month terms, compared to primarily 6-month policies in
our personal auto business, these rate actions take longer to earn in.
During the third quarter 2022, new applications (i.e., issued policies)
increased 16% in our Personal Lines segment, with total new personal auto
applications increasing 20%. Agency auto new applications increased 9% and
Direct auto increased 26%, as
33 -------------------------------------------------------------------------------- we continued to experience improvement in new business auto applications, as our competitors continued to raise rates and we re-evaluated our media spend to identify growth opportunities. Despite the strong new application growth during the quarter, our personal auto new applications are still down in both the Agency and Direct channels for the first nine months of 2022, compared to the same period last year. New applications for our special lines products were flat during the third 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 third quarter 2022, renewal applications decreased 2% in Personal Lines, with total personal auto renewal applications down 3% over the third quarter last year, primarily due to rate increases taken beginning in 2021. For the third quarter 2022, our Commercial Lines business (excluding our TNC, BOP, andProtective Insurance products) new applications decreased 6% and renewal applications increased 10%, on a year-over-year basis. The decrease during the quarter was primarily driven by a decreased demand in our for-hire transportation product, as the transportation freight market softened, and the significant new application growth experienced during 2021. We have observed declining trends in several macroeconomic factors that could impact our business, with home sales, freight tonnage, and aggregate deliveries all experiencing a decrease in activity compared to the prior year. We will continue to monitor these and other economic factors. On a year-over-year basis, new applications in our Property business decreased 9% and renewal applications increased 7% for the third quarter. While we remain focused on growth, we strongly believe that achieving our target profit margin takes precedence over growing premiums. We 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 can reflect more volatility and is more sensitive to seasonality. As of the end of the third quarter 2022, our trailing 12-month total personal auto policy life expectancy decreased 21%, compared to last year, with the Agency channel down 23% and the Direct channel down 18%, respectively. Our trailing 3-month policy life expectancy for total personal auto was down 30% compared to the same period last year. We believe that the decreases in policy life expectancy primarily reflect the impact of the rate actions we have taken, beginning in the second quarter 2021. Our special lines trailing 12-month policy life expectancy increased 4%, year over year, while Commercial Lines and Property both decreased 9%, primarily due to a decrease in for-hire transportation business market target demand and rate increases taken in 2021 and 2022, respectively.
B. Investments
The fair value of our investment portfolio was$52.3 billion atSeptember 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 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). AtSeptember 30, 2022 , 10% of our portfolio was allocated to Group I securities and 90% 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 and, to a lesser extent, high-yield bonds and preferred stocks with proceeds reinvested in Group II short-term investments. Our recurring investment income generated a pretax book yield of 2.5% for the third quarter 2022, compared to 1.8% 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 relatively higher interest rates. Our investment portfolio produced a fully taxable equivalent (FTE) total return of (1.9)% and 0.2% for the third quarter 2022 and 2021, respectively. Our fixed-income and common stock portfolios had FTE total returns of (1.8)% and (4.5)%, respectively, for the third quarter 2022, compared to 0.2% and 0.2%, respectively, last year. The decrease in the fixed-income return reflected the market impact of higher interest rates and wider credit spreads during the last twelve months. The common stock return decline reflected general market conditions. AtSeptember 30, 2022 , the fixed-income portfolio had a weighted average credit quality of AA and a duration of 2.7 years, compared to AA- and 3.0 years at bothSeptember 30, 2021 andDecember 31, 2021 . We have shortened our portfolio duration during the first nine months of 2022, which we believe provides some protection against further increases in interest rates. 34 --------------------------------------------------------------------------------
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$5.9 billion and$7.3 billion for the nine months endedSeptember 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 nine months endedSeptember 30, 2022 , is primarily driven by higher paid losses as the costs of losses continue to rise, compared to last year. We expect cash flows 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$21.2 billion , at book value, atSeptember 30, 2022 , compared to$23.5 billion atSeptember 30, 2021 , and$23.1 billion atDecember 31, 2021 . The decrease from the prior periods primarily reflected the comprehensive losses recognized over the last nine months and trailing 12-months, driven by the negative market impact on the valuation of our investment portfolio, 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 30.2% atSeptember 30, 2022 , 20.9% atSeptember 30, 2021 , and 21.2% atDecember 31, 2021 . While our financial policies include a goal of maintaining debt below 30% of total capital at book value, which we did not meet at the end of the third quarter 2022, we recognize that various factors, including rising interest rates, widening credits spreads, declines in the equity markets, or erosion in operating results, may result in that ratio exceeding 30% at times. As we have previously stated, in such a situation we may choose to remain above 30% for some time, dependent upon market conditions and the capital needs of our operating businesses. Accordingly, we do not currently anticipate taking specific actions to address this variance. We will continue to monitor this ratio, market conditions, and our capital needs going forward. 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 nine months of 2022, we returned capital to shareholders primarily through common share dividends and common share repurchases. Our Board of Directors declared a$0.10 per common share dividend in the first, second, and third quarters of 2022. These dividends, which were each$58.5 million in the aggregate per quarter, or$175.5 million on a year-to-date basis, were paid inApril 2022 ,July 2022 , andOctober 2022 . InJanuary 2022 , we also paid common share dividends declared in the fourth quarter 2021, 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 andSeptember 2022 , we paid Series B Preferred Share dividends in the aggregate amount of$26.8 million . Pursuant to our financial policies, we 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 nine months of 2022, we repurchased 0.7 million common shares, at a total cost of$78.6 million , including 0.4 million shares in the third quarter 2022, either in the open market or 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 overall capital position, the capital strength of our subsidiaries, 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 dividends on our Series B Preferred Shares, our contractual obligations, and other expected capital requirements for the foreseeable future. AtSeptember 30, 2022 , we had$4.2 billion in a consolidated, non-insurance subsidiary of the holding company that can be used to fund corporate obligations and provide additional capital to the insurance subsidiaries to fund potential future growth. During the first nine months of 2022, we did not experience a significant change in our liquidity needs. At all times measured during the first nine 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 , 35 --------------------------------------------------------------------------------
2021 (2021 Annual Report to Shareholders). As of
estimated consolidated statutory surplus was
During the first nine 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 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. During the second quarter 2022, we renewed our catastrophe excess of loss per risk reinsurance contract, which increased our noncancellable purchase obligation commitments about$160 million , bringing our total commitments related to the excess of loss contracts to$291.6 million atSeptember 30, 2022 . There have not been any other 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.
III. RESULTS OF OPERATIONS - UNDERWRITING
A. Segment Overview
We report our underwriting operations in three segments: Personal Lines, Commercial Lines, and Property. As a component of our Personal Lines segment, we report our Agency and Direct business results to provide further understanding of our products by distribution channel.
The following table shows the composition of our companywide net premiums
written, by segment, for the respective periods:
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Personal Lines
Agency 36 % 36 % 35 % 37 %
Direct 43 40 41 41
Total Personal Lines1 79 76 76 78
Commercial Lines 16 19 19 17
Property 5 5 5 5
Total underwriting operations 100 % 100 % 100 % 100 %
1 Personal auto products accounted for 93% of the total Personal Lines segment
net premiums written during the three and nine months ended September 30, 2022
and 2021, and our special lines products accounted for the balance.
Our Personal Lines business writes insurance for personal autos and special
lines products (e.g., motorcycles, watercraft, and RVs). 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 September 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 we continue
to focus on growing our direct business. To serve our direct channel customers,
we continue 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 direct commercial auto
business, excluding our TNC business, represented
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10% of our commercial auto premiums, for both the third quarter 2022 and 2021.
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 27% of premiums written for the third quarter 2022, compared to 24% for the same period last year. Property policies are written for 12-month terms.
B. Profitability
Profitability for our underwriting operations is defined by pretax underwriting
profit or loss, 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
was as follows:
Three Months Ended September 30 ,
Nine Months Ended
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 $ (41.3) (0.9) % $ 41.0 1.0 % $ 507.6 3.9 % $ 796.0 6.3 %
Direct 40.6 0.8 (62.4) (1.3) 389.4 2.6 480.6 3.5
Total Personal Lines (0.7) 0 (21.4) (0.2) 897.0 3.2 1,276.6 4.9
Commercial Lines 238.1 10.3 197.5 10.5 683.5 10.1 556.1 11.3
Property1 (141.0) (25.1) (222.7) (42.3) (289.6) (17.1) (376.7) (25.1)
Other indemnity2 (2.1) NM (0.3) NM (9.3) NM (0.2) NM
Total underwriting operations $ 94.3 0.8 % $ (46.9) (0.4) % $ 1,281.6 3.5 % $ 1,455.8 4.4 %
1 For the three and nine months ended September 30, 2022 , underwriting profit
(loss) includes $5.0 million and $24.1 million , respectively, of amortization
expense associated with acquisition-related intangible assets attributable to
our Property segment, compared to $14.2 million and $42.5 million for the
respective periods last year. The year-over-year decreases in amortization
expense reflects intangible assets that were fully amortized during the first
quarter 2022.
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.
For the three months ended September 30, 2022 and 2021, the pretax underwriting
profit (loss) reflects the significant amount of catastrophe losses incurred.
During the third quarter 2022, our Personal Lines business recognized about $570
million of losses related to Hurricane Ian and our Property business retained
$200 million of losses and allocated loss adjustment expenses. About 50% of the
Personal Lines catastrophe losses from Hurricane Ian were incurred on our
special lines products, mainly boats. Since the majority of our boat policies
are written through independent agents, the Agency Personal Lines channel
recognized an underwriting loss during the quarter, compared to an underwriting
profit in the Direct channel. During the third quarter 2021, the Direct channel
was more significantly impacted by the personal auto catastrophe losses that we
incurred, mainly from Hurricane Ida.
We have taken significant rate increases since the first quarter of 2021 and
through the third quarter 2022. In spite of the rate increases, on a
year-over-year basis for the first nine months of 2022, our underwriting
profitability decreased, 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 periods.
The COVID-19 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 when necessary, 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 September 30, Nine Months Ended September 30,
Underwriting Performance1 2022 2021 Change 2022 2021 Change
Personal Lines - Agency
Loss & loss adjustment expense ratio 82.9 80.9 2.0 78.5 75.2 3.3
Underwriting expense ratio 18.0 18.1 (0.1) 17.6 18.5 (0.9)
Combined ratio 100.9 99.0 1.9 96.1 93.7 2.4
Personal Lines - Direct
Loss & loss adjustment expense ratio 81.4 82.7 (1.3) 78.9 76.2 2.7
Underwriting expense ratio 17.8 18.6 (0.8) 18.5 20.3 (1.8)
Combined ratio 99.2 101.3 (2.1) 97.4 96.5 0.9
Total Personal Lines
Loss & loss adjustment expense ratio 82.1 81.8 0.3 78.7 75.7 3.0
Underwriting expense ratio 17.9 18.4 (0.5) 18.1 19.4 (1.3)
Combined ratio 100.0 100.2 (0.2) 96.8 95.1 1.7
Commercial Lines
Loss & loss adjustment expense ratio 70.5 70.2 0.3 70.6 68.8 1.8
Underwriting expense ratio 19.2 19.3 (0.1) 19.3 19.9 (0.6)
Combined ratio 89.7 89.5 0.2 89.9 88.7 1.2
Property
Loss & loss adjustment expense ratio 97.2 113.9 (16.7) 89.9 95.9 (6.0)
Underwriting expense ratio2 27.9 28.4 (0.5) 27.2 29.2 (2.0)
Combined ratio2 125.1 142.3 (17.2) 117.1 125.1 (8.0)
Total Underwriting Operations
Loss & loss adjustment expense ratio 80.6 81.4 (0.8) 77.7 75.6 2.1
Underwriting expense ratio 18.6 19.0 (0.4) 18.8 20.0 (1.2)
Combined ratio 99.2 100.4 (1.2) 96.5 95.6 0.9
Accident year - Loss & loss adjustment expense
ratio3 81.3 81.8 (0.5) 77.6 75.1 2.5
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 nine months ended September 30, 2022 , are 0.9 points
and 1.4 points, respectively, of amortization expense on acquisition-related
intangible assets attributable to our Property segment, and 2.7 points and 2.8
points for the respective periods last year. Excluding this expense, for the
three months ended September 30, 2022 and 2021, the Property business would have
reported expense ratios of 27.0 and 25.7, respectively, and combined ratios of
124.2 and 139.6, respectively. For the nine months ended September 30, 2022 and
2021, excluding this expense, the Property business would have reported expense
ratios of 25.8 and 26.4, respectively, and combined ratios of 115.7 and 122.3,
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 September 30, Nine Months Ended September 30,
(millions) 2022 2021 2022 2021
Change in net loss and LAE reserves $ 1,470.4 $
1,673.1
Paid losses and LAE
8,548.3 7,577.6 25,130.9 20,863.9 Total incurred losses and LAE$ 10,018.7 $
9,250.7
Claims costs, our most significant expense, represent payments made and
estimated future payments to be made, to or on behalf of our policyholders,
including expenses needed to adjust or settle claims. Claims costs are a
function of loss severity and frequency and, for our vehicle businesses, are
influenced by inflation and driving patterns, among other factors, some of which
are discussed below. In our Property business, severity is primarily a function
of construction costs and the age of the structure. Accordingly, anticipated
changes in these factors are taken into account when we establish premium rates
and loss reserves. Loss reserves are estimates of future costs and our reserves
are adjusted as underlying assumptions change and information develops.
Our total loss and LAE ratio decreased 0.8 points for the third quarter 2022,
compared to the same period last year, and increased 2.1 points on a
year-to-date basis. The decrease in the third quarter 2022, in part reflects
higher earned premiums and a decrease in the point impact of personnel costs
related to our annual cash-incentive Gainshare program accrual. The year-to-date
increase was 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 policy 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 September 30, 2022 Nine Months Ended September 30, 2022
2022 2021 2022 2021
($ in millions) $ Point1 $ Point1 $ Point1 $ Point1
Personal Lines $ 671.5 7.1 $ 421.1 4.7 $ 1,001.2 3.6 $ 698.0 2.6
Commercial Lines 16.7 0.7 11.7 0.6 29.1 0.4 20.1 0.4
Property 195.0 34.8 289.1 54.9 527.8 31.2 561.7 37.4
Total net catastrophe losses
incurred $ 883.2 7.1 $ 721.9 6.4 $ 1,558.1 4.3 $ 1,279.8 3.9
1 Represents catastrophe losses incurred during the period, including the impact
of reinsurance, as a percent of net premiums earned for each segment.
We incurred$760 million of catastrophe losses, or 6.1 loss ratio points, during the third quarter 2022 as a result of Hurricane Ian, compared to$510 million , or 4.5 loss ratio points, for the same period last year from Hurricane Ida. About 38% of the incurred catastrophe losses from Hurricane Ian during the three months endedSeptember 30, 2022 , were from losses on our special lines products, with boats making up nearly 60% of the special lines losses. In our boat product, we mitigate our hurricane/coastal exposure with underwriting restrictions limiting the insured valued and the length of boats compared to non-hurricane exposed areas, and increased deductibles for named storms. Additionally, we segment and price our hurricane risk by territory, to set rate levels with a catastrophe load based on historical losses to reduce volatile results over a longer time period. Personal and commercial auto losses accounted for 38% and 1%, respectively, while our Property business incurred 23% of the losses, net of reinsurance. Since the vehicle losses get paid fairly quickly, the additional loss adjustment expenses incurred from the storm is relatively small. For our Property business, we retained$25 million of allocated loss adjustment expenses (ALAE), net of reinsurance. On a gross basis, prior to giving effect to our excess of loss reinsurance contract, we estimate our Property catastrophe losses and ALAE from Hurricane Ian would be$1.4 billion . To assist our customers impacted by Hurricane Ian, we have deployed over 1,500 claim representative and independent adjusters. 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. Changes in our estimate of our ultimate losses on current catastrophes along with potential future catastrophes could have a material impact on our financial condition, cash flows, or results of operations. 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 ourProtective 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 39 -------------------------------------------------------------------------------- under our per occurrence excess of loss program for our Property business. The reinsurance program provides coverage of up to$2.5 billion if the first covered event occurs inFlorida and up to$2.0 billion if the first covered event occurs outside ofFlorida . Coverage for a second event (and, potentially, for subsequent covered events) would depend on several factors, including the location and the extent of covered losses of the earlier events in the contract period. The per occurrence excess of loss program has retention thresholds for losses and ALAE from the first catastrophic event of$200 million , which is unchanged from the prior contracts, with a retention threshold for a second catastrophic event of$100 million . Portions of our reinsurance programs include reinstatement limits providing coverage for subsequent events, with some portions having an obligatory reinstatement of coverage. Reinstatement premiums would have no effect on our results of operations since, per our contracts, we have reinsurance to cover these situations. As discussed above, in the third quarter 2022, we retained approximately$175 million of losses and$25 million of ALAE incurred related to Hurricane Ian and ceded$1.2 billion of losses and ALAE under our per occurrence excess of loss program. Under this program, we may be responsible for additional losses if we experience more than two such events or if claims incurred exceed the maximum coverage limits. Coverage for a second event (and, potentially, for subsequent covered events) depends on several factors, including the location and the extent of the losses covered for Hurricane Ian. Based on the estimated impact of Hurricane Ian, we anticipate we would be covered for up to approximately$2.1 billion of losses exceeding the retention threshold related to a second event. 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 bothJanuary 1 andJune 1 renewal events. See Item 1 - Description of Business-Reinsurance in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , for a discussion of our various reinsurance programs. During the third quarter and first nine months of 2022, we did not exceed the annual retention thresholds under our 2022 catastrophe aggregate excess of loss program. 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 13% and 15% during the third quarter and first nine months of 2022, respectively, compared to the same periods last year. These increases, in part, reflect the impact of inflation, which continues to increase 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: •Auto property damage increased about 24% and 23% for the third quarter and first nine months of 2022, respectively, and collision increased 13% and 21%, both in part due to increased used car prices. •Bodily injury increased about 7% and 8% for the third quarter and first nine months of 2022, respectively, due in part to increasing medical and general damage costs. •Personal injury protection (PIP) decreased about 14% and 9% during the third quarter and first nine months of 2022, respectively, due in part to coverage reform inMichigan and high reopen activity inFlorida 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 third quarter 2022, our commercial auto products' incurred severity, excludingProtective Insurance and our TNC business, increased 11%, 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. 40 -------------------------------------------------------------------------------- Our personal auto incurred frequency, on a year-over-year basis, decreased about 9% and 6% for the third quarter and first nine months of 2022, respectively, compared to the same periods last year. Following are the frequency changes we experienced by coverage: •PIP and auto property damage decreased about 8% for the third quarter 2022 and 6% and 5%, respectively, for the first nine months of 2022. •Collision and bodily injury decreased about 14% and 4%, respectively, for the third quarter and 8% and 5% for the first nine months of 2022. On a trailing 12-month basis, our commercial auto products' incurred frequency, excludingProtective Insurance and our TNC business, increased 3% during the third 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 recover at varying rates 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. 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 September 30, Nine Months Ended September 30, ($ in millions) 2022 2021 2022 2021 ACTUARIAL ADJUSTMENTS Reserve decrease (increase) Prior accident years$ (52.6) $ (45.5) $ (103.0) $ (89.7) Current accident year 25.1 20.5 (28.1) 38.9 Calendar year actuarial adjustments$ (27.5) $ (25.0) $ (131.1) $ (50.8) PRIOR ACCIDENT YEARS DEVELOPMENT Favorable (unfavorable) Actuarial adjustments$ (52.6) $ (45.5) $ (103.0) $ (89.7) All other development 144.7 85.7 50.2 (67.1) Total development$ 92.1 $ 40.2 $ (52.8) $ (156.8) (Increase) decrease to calendar year combined ratio 0.7 pts. 0.4 pts. (0.1) pts. (0.5) 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. 41 --------------------------------------------------------------------------------
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 0.4 points for the third
quarter 2022 and 1.2 points for the first nine months, compared to the same
periods last year. A decrease in the point impact of personnel costs contributed
to the decrease for both the third quarter and year to date, and a
year-over-year decrease in advertising spend for the first nine months of 2022.
The decrease in personnel costs primarily resulted from a decrease in our annual
cash-incentive Gainshare program accrual, reflecting lower year-to-date policies
in force growth and segment profitability. In total, our advertising spend was
flat for the third quarter and decreased 5% for the first nine months of 2022,
compared to the same periods last year, as a result of an effort to improve
profitability to reach our 96 combined ratio goal.
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. During
the third quarter, our NAER increased 0.1 points, 0.6 points, and 0.4 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 0.1 points in Personal Lines and Commercial Lines, and 0.3 points in
Property, compared to the same period last year.
42
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C. Growth
For our underwriting operations, we analyze growth in terms of both premiums and
policies. Net premiums written represent the premiums from policies written
during the period, less any premiums ceded to reinsurers. Net premiums earned,
which are a function of the premiums written in the current and prior periods,
are earned as revenue over the life of the policy using a daily earnings
convention. Policies in force, our preferred measure of growth since it removes
the variability due to rate changes or mix shifts, represents all policies under
which coverage was in effect as of the end of the period specified.
Three Months Ended September 30, Nine Months Ended September 30,
($ in millions) 2022 2021 % Growth 2022 2021 % Growth
NET PREMIUMS WRITTEN
Personal Lines
Agency $ 4,744.9 $ 4,472.2 6 % $ 13,754.9 $ 13,257.0 4 %
Direct 5,584.1 4,994.9 12 15,765.5 14,571.7 8
Total Personal Lines 10,329.0 9,467.1 9 29,520.4 27,828.7 6
Commercial Lines 2,063.9 2,374.1 (13) 7,298.4 6,154.5 19
Property 624.5 604.0 3 1,800.2 1,668.5 8
Other indemnity1 0.4 1.3 (69) 1.9 4.2 (55)
Total underwriting operations $ 13,017.8 $ 12,446.5 5 % $ 38,620.9 $ 35,655.9 8 %
NET PREMIUMS EARNED
Personal Lines
Agency $ 4,441.9 $ 4,267.9 4 % $ 13,131.7 $ 12,586.4 4 %
Direct 5,077.4 4,690.2 8 14,776.9 13,755.8 7
Total Personal Lines 9,519.3 8,958.1 6 27,908.6 26,342.2 6
Commercial Lines 2,317.9 1,877.4 23 6,749.5 4,917.0 37
Property 561.0 526.5 7 1,689.6 1,501.3 13
Other indemnity1 0.7 2.8 (75) 2.0 6.8 (71)
Total underwriting operations $ 12,398.9 $ 11,364.8 9 % $ 36,349.7 $ 32,767.3 11 %
1 Primarily includes run-off
business operations.
September 30,
(thousands) 2022 2021 % Growth
POLICIES IN FORCE
Personal Lines
Agency auto 7,600.3 7,973.6 (5) %
Direct auto 9,823.8 9,613.1 2
Total auto 17,424.1 17,586.7 (1)
Special lines1 5,558.0 5,282.4 5
Personal Lines - total 22,982.1 22,869.1 0
Commercial Lines 1,039.8 952.7 9
Property 2,835.5 2,735.0 4
Companywide total 26,857.4 26,556.8 1 %
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 the trailing 3-month measure is sensitive to 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.
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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 16 % (15) % (8) % 2 %
Renewal (2) 11 2 11
Written premium per policy - Auto 10 1
9 (1)
Policy life expectancy - Auto
Trailing 3 months (30) 10
Trailing 12 months (21) 4
In our Personal Lines business, we experienced positive new application growth
in the third quarter 2022, in part driven by competitor rate increases and
targeted media spend. The increase in new applications during the third quarter
2022 resulted from increases in our personal auto products, while our special
lines products did not grow during the period. The decrease in our renewal
applications reflected the impact of the 8% rate increases that we took during
2021 and the 9% increases taken in the first half of 2022.
Results varied by consumer segment. During the third quarter 2022, personal auto
policies in force grew by single digits for the Robinsons and Wrights and
decreased by single digits for the Sams and Dianes. New auto applications
experienced an increase across all four consumer segments in the third quarter,
year over year. Quote volume increased in the third quarter, on a year-over-year
basis, in all of our consumer segments, with all consumer segments seeing a flat
or decreased rate of conversion.
During the third quarter 2022, we began to loosen underwriting criteria in
consumer segments where losses indicated rates are meeting our profitability
goals. We implemented personal auto rate increases in 20 states that, in the
aggregate, on a countrywide basis, increased rates about 2% for the quarter. The
rate increases, which started in the second quarter 2021 and continued
throughout the first nine months of 2022, had and may continue to have a
negative impact on our 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 third quarter and first nine
months of 2022, primarily due to the rate increases previously discussed. 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 93% of the Personal Lines segment net
premiums written during both the third quarter and first nine months of 2022.
44
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The Agency Business
Growth Over Prior Year
Quarter Year-to-date
2022 2021 2022 2021
Applications - Auto
New 9 % (20) % (14) % (3) %
Renewal (6) 8 (3) 9
Written premium per policy - Auto 12 2 11 0
Policy life expectancy - Auto
Trailing 3 months (33) 10
Trailing 12 months (23) 4
The Agency business includes business written by more than 40,000 independent
insurance agencies that represent Progressive, as well as brokerages in New York
and California . During the third quarter 2022, 33 states generated new Agency
auto application growth, including seven of our top 10 largest Agency states.
During the third quarter, each of our consumer segments experienced an increase
in new applications except Robinsons, which experienced a single digit decrease
year over year. Policies in force decreased in each segment, compared to the
same period last year.
During the third quarter and first nine months of 2022, we experienced an
increase in Agency auto quote volume of 23% and 12%, respectively. The rate of
conversion (i.e., converting a quote to a sale) decreased 10% and 23%, compared
to the same periods last year, reflecting the impact of rate increases and
tightened underwriting criteria. For the third quarter and year-to-date periods,
quote volume increased and conversion decreased, compared to last year, in each
consumer segment. Written premium per policy for new and renewal Agency auto
business increased 9% and 12%, respectively, compared to the third 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 26 % (14) % (5) % 4 %
Renewal (1) 13 3 14
Written premium per policy - Auto 9 0 8 (2)
Policy life expectancy - Auto
Trailing 3 months (27) 11
Trailing 12 months (18) 4
The Direct business includes business written directly by Progressive online,
through mobile devices, and over the phone. During the quarter, 39 states and
the District of Columbia generated new auto application growth, including five
of our top 10 largest Direct states. During the third quarter 2022, total auto
applications increased 4% due to growth in new applications. During the third
quarter, new applications increased across all consumer segments, while policies
in force grew in all consumer segments except Sams, which experienced a single
digit decrease.
During the third quarter and first nine months of 2022, Direct auto quote volume
increased 31% and 6%, respectively, while our rate of conversion decreased 2%
and 10%, compared to the same periods last year. The increase we experienced in
our quote volume primarily reflected competitors raising rates. We also
experienced gains in the efficiency of our media spend during the quarter, which
contributed to the increase in quotes and the significant increase in new auto
applications. During the third quarter, quote volume increased in all consumer
segments and, during the first nine months, increased in all consumer segments
except Sams. Wrights and Robinsons saw an increase in conversion for the third
quarter 2022, while all consumer segments experienced flat to decreased
conversion during the first nine months.
During the third quarter 2022, written premium per policy for new and renewal
Direct auto business increased 8% and 9%, 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.
45
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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) % 18 % (1) % 32 %
Renewal 10 15 13 12
Written premium per policy 8 20 14 17
Policy life expectancy - Trailing 12 months (9)
13
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 acquiredProtective 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 third 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 and for-hire specialty business markets, and the softening of the freight market during the period. During the third quarter 2022, we experienced flat quote volume and a decrease of 6% in the rate of conversion, compared to the same period last year, primarily driven by the for-hire transportation market. During the first nine months of 2022, quote volume increased 3%, while conversion decreased 4%, compared to the same period last year. During the third quarter, written premium per policy for new commercial auto business increased 2%, while renewal business increased 14%, compared to the same period last year. The increases in written premiums were primarily due to rate increases. Our policy life expectancy decreased primarily driven by our for-hire transportation business market. Given the rise in costs to operate a trucking business, many independent owner/operators, who were our core customers, have begun to migrate back to leasing with larger motor carriers.
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 (9) % 16 % (7) % 24 %
Renewal 7 11 8 10
Written premium per policy 5 1 4 1
Policy life expectancy - Trailing 12 months (9)
(8)
Our Property business writes residential property insurance for homeowners, other property owners, and renters, in the agency and direct channels. During the third quarter and first nine 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 less of the policies formerly intended for non-renewal, as previously discussed. In light of the regulatory changes, we are identifying other opportunities to reduce our exposure in the coastal states. 46 -------------------------------------------------------------------------------- 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 third quarter 2022 our written premium per policy increased, compared to the same period last year, primarily due to an increase in coverage values to account for inflation. 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. AtSeptember 30, 2022 , we reported a net federal deferred tax asset of$1.3 billion , compared to a net federal deferred tax liability atSeptember 30, 2021 , andDecember 31, 2021 , of$110.7 million and$152.9 million , respectively. 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 recognized over the last 12 months. Based on all of the available evidence, including the existing taxable temporary differences that will generate capital gains, our realized capital gains available in the carryback period, and our intent and ability to hold a portion of our fixed-maturity securities in an unrealized tax loss position until maturity, we determined that no valuation allowance is required atSeptember 30, 2022 . AtSeptember 30, 2022 , andDecember 31, 2021 , we had recoverable income taxes of$31.0 million and$19.2 million , respectively, which were reported as part of other assets in our consolidated balance sheets, compared to net current income taxes payable of$36.2 million , which were reported as part of accounts payable, accrued expenses, and other liabilities atSeptember 30, 2021 . The taxes payable/recoverable vary from period to period based on the amount of estimated taxes paid. The effective tax rates for the three and nine months endedSeptember 30, 2022 , were 12.9% and (1.6)%, respectively, compared to 14.7% and 20.5% for the same periods last year. The difference between the reported effective tax rates and the statutory tax rate of 21% reflects the impact of a number of factors, including the amount of pretax income (loss) earned in the period, our typical permanent tax differences such as stock-based compensation, and, for the nine months endedSeptember 30, 2022 , the effect of the goodwill impairment, which was a nonrecurring charge. See Note 5 - Income Taxes for a reconciliation between the statutory and the effective tax rates. 47 --------------------------------------------------------------------------------
IV. RESULTS OF OPERATIONS - INVESTMENTS
A. Investment Results
Our management philosophy governing the portfolio is to evaluate investment results on a total return basis. The fully taxable equivalent (FTE) total return includes recurring investment income, adjusted to a fully taxable amount for certain securities that receive preferential tax treatment (e.g., municipal securities), and total net realized, and changes in total net unrealized, gains (losses) on securities. The following table summarizes investment results for the periods endedSeptember 30 : Three Months Nine Months 2022 2021 2022 2021 Pretax recurring investment book yield (annualized) 2.5 % 1.8 % 2.2 % 1.9 % FTE total return: Fixed-income securities (1.8) 0.2 (7.6) 0.3 Common stocks (4.5) 0.2 (24.0) 21.0 Total portfolio (1.9) 0.2 (9.0) 2.1 The increase in the book yield, compared to last year, for both periods, primarily reflected investing new cash from operations and proceeds from maturing bonds 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, while the decrease in common stocks reflected general market conditions.
A further break-down of our FTE total returns for our fixed-income portfolio for
the periods ended
Three Months Nine Months
2022 2021 2022 2021
Fixed-income securities:
U.S. Treasury Notes (2.9) % 0.1 % (8.5) % (0.6) %
Municipal bonds (2.9) (0.2) (9.4) 0.2
Corporate bonds (1.5) 0.3 (8.0) 0
Residential mortgage-backed securities 0.6 0.3 (0.9) 1.1
Commercial mortgage-backed securities (2.0) 0.1 (9.5) 1.1
Other asset-backed securities (0.4) 0.3 (3.0) 0.9
Preferred stocks 0.6 1.0 (10.4) 7.2
Short-term investments 0.5 0 0.7 0.1
48
--------------------------------------------------------------------------------
B. Portfolio Allocation
The composition of the investment portfolio was:
Fair % of Total Duration
($ in millions) Value Portfolio (years) Rating1
September 30, 2022
U.S. government obligations $ 22,405.5 42.8 % 3.5 AAA
State and local government obligations 1,925.5 3.7 3.7 AA+
Foreign government obligations 15.3 0.1 3.8 AAA
Corporate debt securities 9,228.4 17.6 2.9 BBB
Residential mortgage-backed securities 723.0 1.4 0.4 A
Commercial mortgage-backed securities 5,087.9 9.7 2.7 A+
Other asset-backed securities 4,605.9 8.8 1.1 AA+
Preferred stocks 1,436.0 2.7 2.9 BBB-
Short-term investments 4,237.6 8.1 <0.1 AA+
Total fixed-income securities 49,665.1 94.9 2.7 AA
Common equities 2,665.3 5.1 na na
Total portfolio2 $ 52,330.4 100.0 % 2.7 AA
September 30, 2021
U.S. government obligations $ 21,142.1 40.3 % 3.2 AAA
State and local government obligations 2,165.9 4.1 3.7 AA+
Foreign government obligations 12.3 0.1 1.3 AA+
Corporate debt securities 10,861.7 20.7 3.1 BBB
Residential mortgage-backed securities 627.9 1.2 1.2 A+
Commercial mortgage-backed securities 5,789.0 11.1 3.5 A+
Other asset-backed securities 4,262.2 8.2 1.3 AA
Preferred stocks 1,757.4 3.4 3.5 BBB-
Short-term investments 1,088.7 2.1 0.2 AA+
Total fixed-income securities 47,707.2 91.2 3.0 AA-
Common equities 4,580.2 8.8 na na
Total portfolio2 $ 52,287.4 100.0 % 3.0 AA-
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 $74.7 million , $399.7 million , and $143.4 million of net unsettled
security purchase transactions at September 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 September 30, 2022 and 2021, and
December 31, 2021 , included $4.2 billion , $2.9 billion , and $4.2 billion ,
respectively, of securities held in a consolidated, non-insurance subsidiary of
the holding company, net of unsettled security transactions.
49
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Our asset allocation strategy is to maintain 0%-25% of our portfolio in Group I
securities, with the balance (75%-100%) of our portfolio in Group II securities.
We define Group I securities to include:
•common equities,
•nonredeemable preferred stocks,
•redeemable preferred stocks, except for 50% of investment-grade redeemable
preferred stocks with cumulative dividends, which are included in Group II, and
•all other non-investment-grade fixed-maturity securities.
Group II securities include:
•short-term securities, and
•all other fixed-maturity securities, including 50% of the investment-grade
redeemable preferred stocks with cumulative dividends.
We believe this asset allocation strategy allows us to appropriately assess the
risks associated with these securities for capital purposes and is in line with
the treatment by our regulators.
The following table shows the composition of our Group I and Group II
securities:
September 30, 2022 September 30, 2021 December 31, 2021
Fair % of Total Fair % of Total Fair % of Total
($ in millions) Value Portfolio Value Portfolio Value Portfolio
Group I securities:
Non-investment-grade fixed maturities $ 1,419.9 2.7 % $ 2,149.4 4.1 % $ 2,032.4 3.9 %
Redeemable preferred stocks1 90.8 0.2 92.3 0.2 90.9 0.2
Nonredeemable preferred stocks 1,254.4 2.4 1,572.8 3.0 1,639.9 3.2
Common equities 2,665.3 5.1 4,580.2 8.8 5,058.5 9.8
Total Group I securities 5,430.4 10.4 8,394.7 16.1 8,821.7 17.1
Group II securities:
Other fixed maturities 42,662.4 81.5 42,804.0 81.8 41,749.8 81.1
Short-term investments 4,237.6 8.1 1,088.7 2.1 942.6 1.8
Total Group II securities 46,900.0 89.6 43,892.7 83.9 42,692.4 82.9
Total portfolio $ 52,330.4 100.0 % $ 52,287.4 100.0 % $ 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 ofSeptember 30, 2022 , our fixed-maturity portfolio had pretax net unrealized losses, recorded as part of accumulated other comprehensive income, of$3,941.3 million , compared to net unrealized gains of$474.5 million and$71.4 million atSeptember 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).
50 --------------------------------------------------------------------------------
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 nine 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) (85.8) (98.8)
Equity securities (1,990.7) (173.4) (2,164.1)
Total changes in holding period securities (2,003.7) (259.2) (2,262.9)
Balance at September 30, 2022
Hybrid fixed-maturity securities 0 (91.3) (91.3)
Equity securities 1,886.5 (188.1) 1,698.4
Total holding period securities $ 1,886.5 $
(279.4)
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 2.7 years atSeptember 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 (excluding short-term securities) September 30, 2022 September 30, 2021 December 31, 2021 1 year 19.3 % 25.2 % 22.0 % 2 years 19.1 19.5 18.8 3 years 23.1 22.5 23.5 5 years 20.4 15.9 17.6 7 years 13.5 11.8 13.1 10 years 4.6 5.1 5.0 Total fixed-income portfolio 100.0 % 100.0 % 100.0 % 51
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•Credit risk - our credit quality rating of AA was above our minimum threshold
during the third quarter 2022. The credit quality distribution of the
fixed-income portfolio was:
Rating September 30, 2022 September 30, 2021 December 31, 2021 AAA 63.2 % 58.3 % 54.7 % AA 6.7 7.2 8.7 A 7.1 8.4 8.6 BBB 19.1 20.6 21.7 Non-investment grade/non-rated1 BB 3.1 4.1 4.8 B 0.5 1.0 1.1 CCC and lower 0.1 0.1 0.1 Non-rated 0.2 0.3 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 third 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 third 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$6.2 billion , or 28.3%, of principal repayment from our fixed-income portfolio, excludingU.S. Treasury Notes and short-term investments, during the remainder of 2022 and all of 2023. Cash from interest and dividend payments and our short-term portfolio provide additional sources of recurring liquidity. •The duration of ourU.S. government obligations, which are included in the fixed-income portfolio, was comprised of the following atSeptember 30, 2022 : Fair Duration ($ in millions) Value (years) U.S. Treasury Notes Less than one year$ 581.5 0.7 One to two years 5,559.2 1.6 Two to three years 4,844.5 2.4 Three to five years 5,774.6 3.9 Five to seven years 4,217.3 5.6 Seven to ten years 1,428.4 8.0 Total U.S. Treasury Notes$ 22,405.5 3.5 52
--------------------------------------------------------------------------------
ASSET-BACKED SECURITIES
Included in the fixed-income portfolio are asset-backed securities, which were
comprised of the following at the balance sheet dates listed:
% of Asset-
Fair Net Unrealized Backed Duration Rating
($ in millions) Value Gains (Losses) Securities (years) (at period end)1
September 30, 2022
Residential mortgage-backed securities $ 723.0 $ (16.1) 6.9 % 0.4
A
Commercial mortgage-backed securities 5,087.9 (746.0) 48.9 2.7
A+
Other asset-backed securities 4,605.9 (268.9) 44.2 1.1
AA+
Total asset-backed securities$ 10,416.8 $ (1,031.0) 100.0 % 1.8
AA-
Residential mortgage-backed securities
5.9 % 1.2
A+
Commercial mortgage-backed securities 5,789.0 49.6 54.2 3.5
A+
Other asset-backed securities 4,262.2 26.6 39.9 1.3
AA
Total asset-backed securities$ 10,679.1 $ 78.7 100.0 % 2.5
AA-
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 atSeptember 30, 2022 , to our original investment value (adjusted for returns of principal, amortization, and write-downs): Residential Mortgage-Backed Securities (at September 30, 2022) ($ in millions) Rating1 Non-Agency Government/GSE2 Total % of Total AAA$ 137.0 $ 1.2$ 138.2 19.1 % AA 17.3 0.4 17.7 2.4 A 361.5 0 361.5 50.0 BBB 196.1 0 196.1 27.1 Non-investment grade/non-rated: BB 0.5 0 0.5 0.1 B 0 0 0 0 CCC and lower 2.7 0 2.7 0.4 Non-rated 6.3 0 6.3 0.9 Total fair value$ 721.4 $ 1.6$ 723.0 100.0 % Increase (decrease) in value (4.1) % (3.1) % (4.1) % 1 The credit quality ratings are assigned by NRSROs; when we assigned the NAIC ratings for our RMBS, 96.5% 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 third quarter 2022, we did not make any purchases or sales to the residential mortgage-backed portfolio. The decrease in market value was mostly attributed to principal paydowns. 53 --------------------------------------------------------------------------------Commercial Mortgage-Backed Securities (CMBS) The following table details the credit quality rating and fair value of our CMBS, along with a comparison of the fair value atSeptember 30, 2022 , to our original investment value (adjusted for returns of principal, amortization, and write-downs): Commercial Mortgage-Backed Securities (at September 30, 2022) ($ in millions) Rating1 Multi-Borrower Single-Borrower Total % of Total AAA$ 227.1 $ 1,233.8 $ 1,460.9 28.7 % AA 0 1,267.1 1,267.1 24.9 A 0 948.3 948.3 18.7 BBB 0 953.3 953.3 18.7 Non-investment grade/non-rated: BB 0 458.2 458.2 9.0 B 0.1 0 0.1 0 Total fair value$ 227.2 $ 4,860.7 $ 5,087.9 100.0 % Increase (decrease) in value (6.4) % (13.1) % (12.8) %
1 The credit quality ratings are assigned by NRSROs; when we assigned the NAIC
ratings for our CMBS, 38% 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 third quarter 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 at
returns of principal, amortization, and write-downs):
Other Asset-Backed Securities (at September 30, 2022)
($ in millions) Collateralized Loan Whole Business % of
Rating Automobile Obligations Student Loan Securitizations Equipment Other Total Total
AAA $ 975.2 $ 1,182.0 $ 43.8 $ 0 $ 508.0 $ 190.2 $ 2,899.2 62.9 %
AA 133.6 566.1 5.4 0 125.2 25.3 855.6 18.6
A 17.6 0 7.2 0 69.7 135.6 230.1 5.0
BBB 6.6 0 0 548.7 0 34.7 590.0 12.8
Non-investment grade/non-rated:
BB 0 0 0 0 0 31.0 31.0 0.7
Total fair value $ 1,133.0 $ 1,748.1 $ 56.4 $ 548.7 $ 702.9 $ 416.8 $ 4,605.9 100.0 %
Increase (decrease) in value (1.8) % (4.9) % (9.7) % (14.3) % (2.5) % (9.7) % (5.6) %
Our OABS portfolio offered less relative value in the third quarter 2022. The
portfolio decreased due to sales, amortization, and scheduled paydowns. We
selectively added short-maturity securities in our OABS portfolio and we did not
add any collateralized loan obligations during the quarter.
54
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MUNICIPAL SECURITIES
The following table details the credit quality rating of our municipal
securities at
insurance:
Municipal Securities (at September 30, 2022 )
(millions) General Revenue
Rating Obligations Bonds Total
AAA $ 540.1 $ 235.2 $ 775.3
AA 448.7 663.0 1,111.7
A 0 37.7 37.7
BBB 0 0.6 0.6
Non-rated 0 0.2 0.2
Total $ 988.8 $ 936.7 $ 1,925.5
Included in revenue bonds were $463.8 million of single-family housing revenue
bonds issued by state housing finance agencies, of which $322.6 million were
supported by individual mortgages held by the state housing finance agencies and
$141.2 million were supported by mortgage-backed securities.
Of the programs supported by mortgage-backed securities, 81% were collateralized
by Ginnie Mae mortgages, which are fully guaranteed by the U.S. government; the
remaining 19% 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 longer tax-exempt municipal bonds tightened during the third
quarter 2022, while spreads for shorter tax-exempt municipal bonds, as well as
taxable municipal bonds, widened. Our allocation to the municipal bond 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 September 30, 2022)
(millions) Financial
Rating Consumer Industrial Communication Services Technology Basic Materials Energy Total
AA $ 22.3 $ 0 $ 0 $ 217.0 $ 1.2 $ 0 $ 40.6 $ 281.1
A 306.0 235.1 152.4 924.8 28.2 112.4 176.1 1,935.0
BBB 2,127.5 1,256.7 115.5 957.9 569.4 12.5 868.5 5,908.0
Non-investment grade/non-rated:
BB 268.0 143.6 188.9 89.3 33.8 22.2 57.3 803.1
B 236.5 17.0 0 0 0 0 0 253.5
CCC and lower 47.7 0 0 0 0 0 0 47.7
Total fair value $ 3,008.0 $ 1,652.4 $ 456.8 $ 2,189.0 $ 632.6 $ 147.1 $ 1,142.5 $ 9,228.4
The size of our corporate debt portfolio decreased from $10.2 billion at June
30, 2022 to $9.2 billion at September 30, 2022 . This decrease was due to
securities that matured, sales of securities with less attractive risk/reward
profiles, and a decline in the portfolio valuation due to the increase in
interest rates.
We slightly shortened the maturity profile of the corporate debt portfolio
during the third quarter 2022. The duration of the corporate portfolio was 2.9
years at September 30, 2022 , compared to 3.0 years at June 30, 2022 . Overall,
our corporate securities, as a percentage of the fixed-income portfolio,
decreased during the third quarter 2022. At September 30, 2022 , our corporate
debt securities made up approximately 19% of the fixed-income portfolio,
compared to approximately 21% at June 30, 2022 . This decrease reflects our more
conservative stance in the economic environment prevailing during the quarter.
55
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PREFERRED STOCKS - REDEEMABLE AND NONREDEEMABLE
The table below shows the exposure break-down by sector and rating atSeptember 30, 2022 : Preferred Stocks (at September 30, 2022) Financial Services (millions) U.S. Foreign Rating Banks Banks Insurance Other Financial Industrials Utilities Total BBB$ 775.7 $ 31.4 $ 92.5 $ 36.4$ 133.0 $ 42.7 $ 1,111.7 Non-investment grade/non-rated: BB 144.6 35.7 0 0 24.7 37.4 242.4 Non-rated 0 0 43.8 21.1 17.0 0 81.9 Total fair value$ 920.3 $ 67.1 $ 136.3 $ 57.5$ 174.7 $ 80.1 $ 1,436.0 The majority of our preferred securities have fixed-rate dividends until a call date and then, if not called, generally convert to floating-rate dividends. The interest rate duration of our preferred securities is calculated to reflect the call, floor, and floating-rate features. Although a preferred security will remain outstanding if not called, its interest rate duration will reflect the variable nature of the dividend. Our non-investment-grade preferred stocks were all with issuers that maintain investment-grade senior debt ratings. We also face the risk that dividend payments on our preferred stock holdings could be deferred for one or more periods or skipped entirely. As ofSeptember 30, 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. Our preferred stock portfolio declined from$1.6 billion atJune 30, 2022 to$1.4 billion atSeptember 30, 2022 . The decline was primarily due to sales of preferred securities with less attractive risk/reward profiles as we took a more conservative stance in the economic environment prevailing during the quarter.
Common equities, as reported on the balance sheets, were comprised of the following: ($ in millions) September 30, 2022 September 30, 2021 December 31, 2021 Common stocks$ 2,646.6 99.3 %
$ 4,567.6 99.7 %$ 5,041.6 99.7 % Other risk investments 18.7 0.7 12.6 0.3 16.9 0.3 Total common equities$ 2,665.3 100.0 %$ 4,580.2 100.0 %$ 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 791 out of 1,016, or 78%, of the common stocks comprising the index atSeptember 30, 2022 , which made up 95% of the total market capitalization of the index. AtSeptember 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 third quarter 2022, we funded partnership investments of$0.2 million , and we have an open funding commitment of$7.1 million atSeptember 30, 2022 . 56 -------------------------------------------------------------------------------- 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. 57
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