PROGRESSIVE CORPORATION I. OVERVIEWThe Progressive Corporation's insurance subsidiaries generated$9.9 billion of net premiums written during the first quarter 2020, which is a 7% increase over the first quarter 2019, and recognized an underwriting profit margin of 13.1%. Policies in force grew 9% year over year to end the quarter with 22.9 million. Despite the 30% increase in underwriting income, on a consolidated basis, Progressive's net income and comprehensive income were down 36% and 45%, respectively, from the first quarter last year due to significant holding period losses on equity securities and a decrease in the change in unrealized gains on fixed-maturity securities in the first quarter 2020 compared to the same period last year. We ended the quarter with$19.7 billion of total capital (debt plus shareholders' equity), an increase of$1.7 billion from year end 2019. The changes during the quarter included the issuance of$1.0 billion of senior notes, split evenly between 10-year and 30-year maturities, and comprehensive income earned during the period. A. COVID-19 Our results for the first quarter were significantly impacted by the spread of the novel coronavirus, COVID-19, and federal, state, and local social distancing and shelter-in-place restrictions ("COVID-19 restrictions") that were enacted. During the last three weeks of March, which we refer to as the post-COVID-19 period, we saw the most significant impacts on our operations, including growth and profitability. In the post-COVID-19 period, we saw substantial declines in shopping activity and significant decreases in new applications in our Personal Lines businesses (with new personal auto applications down 23% compared to the same period in the prior year) and Commercial Lines businesses (new applications down 29%), although renewal application growth rates remained generally consistent with the pre-COVID period. In addition to the decrease in new applications, in March we reduced the net premiums written on our transportation network company business by$110.5 million to reflect the impact from COVID-19 restrictions on the estimated number of miles driven during the policy terms, as discussed below. As a result, on a year-over-year basis, companywide net premium written, which grew 14% and 10% in January and February, respectively, decreased 3% in March. Underwriting margins varied by month, with January reporting 7.9%, February 9.7%, and March 22.9%. Vehicle accidents declined significantly as COVID-related restrictions were imposed. Our personal auto incurred accident frequency was down about 47% for March, as compared to the prior year. In light of the reduced frequency and COVID-19 restrictions, we increased our loss adjustment expense reserves$103.0 million in March, based on revised estimates of our per claim settlement costs. Our expense ratio was also adversely impacted, including a$71.0 million increase in the allowance for doubtful accounts relating to our billing leniency efforts, such as suspending cancellations and non-renewals for non-payment and pausing collection activities that we put in place to help policyholders who may be experiencing financial hardships. Our non-U.S. Treasury fixed-income and equity investment portfolios suffered significant declines during March, after COVID-19 restrictions were put in place, although valuations recovered to an extent by month end. In April, we saw a partial market recovery in both the fixed-income and equity markets and continue to remain cautious in this uncertain environment. To fortify our balance sheet, we added the$1.0 billion in capital referenced above and temporarily suspended any open market repurchases of our common shares as we evaluate our overall capital needs. In April, Agency auto growth in quotes and new applications were consistent with the decreases that we recorded in March, post-COVID-19 restrictions. We believe that agents having to work from home could be contributing to the continuation of these decreases. In the Direct auto business, we have seen positive signs of shopping patterns, especially during the latter part of April, based on quoting activity; however, new applications are still less than the same period last year. With COVID-19 restrictions still in place for the majority of the country in April, we continued to see our incurred auto frequency down significantly from last year. As previously announced, we will pay back a total of about$1.0 billion to our personal auto customers, via credits or payments of 20% of their monthly premiums. These credits or payments, which will reduce our underwriting profitability, will be made separately in May and June for customers with a policy in force onApril 30 andMay 31, 2020 , respectively. From an operations perspective, we instituted work-from-home measures in mid-March, and by early April, over 95% of our employees were working from home. In this challenging environment, we believe we are effectively maintaining our insurance and investment operations, our financial reporting systems, and our internal controls over financial reporting. For those employees whose jobs require them to remain in the office, we have implemented social distancing, enhanced cleaning, and other protocols to promote employee health and safety. To help employees, we paid a portion of their annual bonus in April, excluding senior leaders, and are providing flexibility in their paid time off. We continue to make investments in our infrastructure and are currently maintaining our staffing levels, as we prepare for a return to more normal insurance markets and economic conditions. 28 -------------------------------------------------------------------------------- In addition to helping customers, we are offering our agents an opportunity to receive an advance on their 2020 annual bonuses and will make about$40 million available through these advances. We are also finding ways to help employees, agents, and our communities through charitable donations totaling over$10 million . More details on these effort and additional ways we are helping our constituents can be found inTricia Griffith's Letter to Shareholders that is filed as Exhibit 99 to this Quarterly Report on Form 10-Q. We currently expect that our operations and financial results will continue to be impacted as long as restrictions related to COVID-19 are in place, although the nature of these impacts may change over time, and we cannot predict the likely duration or extent of these impacts. Moreover, even after the current restrictions begin to be lifted, there remains significant uncertainty regarding the potential for and timing of any economic recovery, whether and when driving and insurance shopping patterns will return to historical patterns, and the near-term and longer-term impacts on insurance markets, small businesses, our critical vendors and counterparties, the investment markets, and the regulatory environment, among many other issues and, ultimately, how our businesses and financial results will be impacted during these recovery periods. Additional details on the significant impact of COVID-19 restrictions can be found under Financial Condition and Results of Operations - Underwriting and Investments sections of this Management's Discussion and Analysis. B. Insurance Operations We evaluate growth in terms of both net premiums written and policy in force growth. Our companywide net premiums written grew 7%, with Personal Lines growing 8% and Property growing 15%, primarily reflecting an increase in volume. Our Commercial Lines business net premiums written decreased 2% in the first quarter. In March, we decreased our net premiums written$110.5 million in our transportation network company (TNC) business to reflect the decrease in actual miles driven during the period and a revised estimate of the miles to be driven during the remainder of the policy terms. On a policy-by-policy basis, we determine the premiums on these policies monthly based on actual miles driven and an estimate of miles to be driven during the remaining policy terms. Therefore, premiums vary monthly, however, historically, these variations in premium have not been significant. Due to COVID-19 restrictions, the estimate of miles driven was dramatically reduced. Changes in actual and estimated miles driven will continue to impact our net premiums written in future periods. During the quarter, total new personal auto applications (i.e., issued policies) increased 1% on a year-over-year basis, with Agency new applications decreasing 3% and Direct increasing 5%. Prior to COVID-19 restrictions, during January andFebruary 2020 , we experienced total new personal auto application growth of 8% and 12%, respectively. Post-COVID-19, we experienced a decrease in new personal auto applications of about 23% on a year-over-year basis for the same period. Total personal auto renewal applications were 10% higher than the first quarter last year and the renewal application rate was relatively unchanged in the post-COVID period. New applications for our special lines products were up 10% during the first quarter 2020, but were down about 26% post-COVID-19, compared to the same periods last year. For the Commercial Lines business, new applications increased 5% on a year-over-year basis during the first quarter 2020. Prior to the impact of COVID-19 restrictions, during January andFebruary 2020 , our Commercial Lines experienced new application growth of 13% and 19%, respectively. Post-COVID-19, as a result of mandatory business closings and shelter-in-place orders, new commercial applications decreased 29% on a year-over-year basis compared to the same period in 2019. The Property business had a 7% increase in new applications for the first quarter 2020, compared to a 3% increase in new applications for the same period last year. Unlike the Personal and Commercial Lines businesses, the new application growth rate was not notably impacted as a result of COVID-19 restrictions during the first quarter 2020, due to a strong housing market for new home sales through the period. It is possible COVID-19 restrictions could impact Property operating results or growth in future periods. Post-COVID-19 restrictions, the rate of growth in our Personal Lines and Commercial Lines policies in force was lower than the year-over-year growth rate throughFebruary 2020 , in part reflecting the decreases in new business applications. During the quarter, policies in force grew 9% companywide, with Personal Lines, Commercial Lines, and Property growing 8%, 7%, and 13%, respectively. We ended the first quarter 2020, with 15.3 million personal auto policies in force, with Agent auto and Direct auto growing 8% and 11%, respectively, over the same period last year. AtMarch 31, 2020 , we estimate that about 200,000 of our personal auto policies remained in force as a result of the billing leniencies that we had in place during the month as discussed in more detail below. Our special lines products policies in force grew 4% over the first quarter last year. We realize the importance of retaining customers to grow policies in force and this remains one of our most important priorities. We remain focused on increasing our share of multi-product households and will continue to make investments to improve the customer experience to continue to support that goal. During these challenging times brought on by the COVID-19 virus, it may be difficult to assess the progress we are making against this goal. We will continue to monitor 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, and report it as our primary measure of customer retention in our Personal Lines and Commercial Lines auto business. As of the end of the first quarter 2020, our trailing 12-month total personal auto policy life expectancy was flat 29 -------------------------------------------------------------------------------- compared to last year and our trailing 3-month total auto policy life expectancy, which does not address seasonality and can reflect more volatility, was down 1%. Our Agency auto trailing 12-month policy life expectancy was up 4%, while Direct auto was down 3%. Our Commercial Lines trailing 12-month policy life expectancy increased 1% year over year and special lines was up 3%. In addition to application growth, written premium per policy contributes to our change in net premiums written. During the first quarter, on a year-over-year basis, our written premium per policy for our personal auto businesses increased about 1% and our special lines products increased about 2%. Written premium per policy for our Commercial Lines business increased 4%, primarily due to rate increases and shifts in the mix of business to higher premium market tiers, and our Property business increased 1%. During the first quarter 2020, each of our operating segments generated underwriting profitability. Our Personal Lines underwriting profit margin of 13.7% for the first quarter 2020, was favorably impacted by 1.4 points from our special lines products, since these products are used less in the colder weather months. Our Commercial Lines underwriting profit margin for the first quarter was 9.5%. On a year-to-date basis throughFebruary 2020 , Personal and Commercial Lines underwriting profit margins were 8.5% and 7.7%, respectively. DuringMarch 2020 , we began to experience a significant decrease in personal auto accident frequency of 47%, compared to the same period last year, and expect frequency will continue to be impacted by COVID-19 restrictions, to the extent individuals continue to drive less than during pre-COVID conditions. For the first quarter 2020, compared to the same period last year, frequency was down 18% for personal auto, and 5% for commercial auto on a trailing 12-month basis. Although frequency was down year over year, we saw an increase in severity for both personal and commercial auto products of 11% and 20%, respectively. During March, based on actuarial analysis, we recorded a$103.0 million increase to our loss and loss adjustment expenses to reflect revised estimates of our per claim settlement costs. This adjustment increased our loss and loss adjustment expense ratio 1.1 points for the first quarter. During March, we also instituted billing leniency, which included our program to not cancel or non-renew personal auto policies due to non-payment and to pause collection efforts. As a result of this billing leniency, along with considering the impact of the moratoriums that are in place throughMay 15, 2020 , we increased our allowance for doubtful accounts, which impacted our quarterly expense ratio by 0.8 points. If COVID-19 continues to impact our customers, we may choose to extend our leniency programs or one or more regulators may extend their moratoriums. Such actions could adversely impact our financial results. Our Property segment had an underwriting profit margin of 11.7%. We did not see an impact during the quarter of COVID-19 restrictions on the frequency or severity of claims on our home business. The profitability of our Property segment, relative to the first quarter of last year, primarily reflects rate increases and targeted underwriting changes made during 2019.C. Investments The fair value of our investment portfolio was$40.3 billion atMarch 31, 2020 , compared to$39.3 billion atDecember 31, 2019 . The increase from year-end 2019, reflects the$1.0 billion of proceeds from the debt issued during March, comprehensive income of$0.8 billion , and$0.6 billion of unsettled security transactions at the end of the first quarter, offset by the payment of$1.4 billion of shareholder dividends during the period. 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). AtMarch 31, 2020 , 10% of our portfolio was allocated to Group I securities and 90% to Group II securities, compared to 12% and 88%, respectively, atDecember 31, 2019 . The allocation to Group I securities declined slightly year over year as available cash was invested in Group II securities and Group I valuations declined while Group II valuations increased during the period. Our recurring investment income generated a pretax book yield of 2.7% for the first quarter 2020, compared to 3.1% for the same period in 2019. Our investment portfolio produced a fully taxable equivalent (FTE) total return of (0.6)% and 3.2% for the first quarter 2020 and 2019, respectively. Our fixed-income and common stock portfolios had FTE total returns of 1.2% and (20.5)%, respectively, for the first quarter 2020, compared to 2.3% and 13.3%, respectively, last year. ThroughFebruary 2020 , the fixed-income portfolio had an FTE total return of 2.4%, as interest rates continued to decline. In the post-COVID-19 period, there was a significant widening of credit spreads, which resulted in a (1.1)% FTE total return forMarch 2020 . In March, our common stock portfolio had a (13.4)% return, which was primarily the result of COVID-19. During the first quarter 2020, our common stock portfolio performed within its designated tracking error of +/ 50 bps, on a GAAP basis, to the Russell 1000 Index. AtMarch 31, 2020 , the fixed-income portfolio had a weighted average credit quality of AA- and a duration of 3.0 years, compared to AA- and 2.6 years and AA and 3.0 years at March andDecember 31, 2019 , respectively. While we have lengthened our portfolio duration over the previous twelve months, it remains slightly below the midpoint of our 1.5 year to 5 year range. We believe that being slightly below the midpoint provides some protection against an increase in interest rates. 30 -------------------------------------------------------------------------------- II. FINANCIAL CONDITION A. Liquidity and Capital Resources Progressive's insurance operations create liquidity by collecting and investing premiums from new and renewal business in advance of paying claims. Operations generated positive cash flows of$1.6 billion and$1.9 billion for the first three months of 2020 and 2019, respectively. We did not experience a significant change in our liquidity needs during the first quarter 2020. When COVID-19 restrictions were put in place during March, we saw a decrease in new applications, which, along with the suspending cancellations for non-payments and suspending collections, reduced the amount of cash we would have collected from customers. However, we also saw a significant decrease in accident claim frequency and, as a result, the amount of cash required to pay claims also decreased. See Overview - COVID-19 for further discussion. Nevertheless, despite the impact on the financial markets, we continue to believe that we have sufficient liquidity from our current operations and in our investment portfolio to meet all of our near-term operating cash needs. Considering the reduction in driving that we have seen and the financial hardships that our customers could be facing, we decided to issue a credit to all personal auto customers who have a policy in force at the end of April and/or May, 2020. These credits or payments will be made separately in May and June for customers with a policy in force onApril 30 andMay 31, 2020 , respectively. We estimate that this credit will cost Progressive$1.0 billion and will reduce our underwriting profitability during the second quarter 2020. We expect to fund these payments from operating cash flow. Our total capital (debt plus shareholders' equity) was$19.7 billion , at book value, atMarch 31, 2020 , compared to$16.5 billion atMarch 31, 2019 , and$18.1 billion atDecember 31, 2019 . The increase since year end reflects the increase in comprehensive income during that period as well as the issuance of$500 million of 3.20% Senior Notes due 2030 and$500 million of 3.95% Senior Notes due 2050, in underwritten public offerings during the first quarter 2020. Our debt-to-total capital ratio remained below 30% during all reported periods, consistent with our financial policy. This ratio, which reflects debt as a percent of debt plus shareholders' equity and excludes redeemable noncontrolling interest, was 27.3% atMarch 31, 2020 , 26.7% atMarch 31, 2019 , and 24.4% atDecember 31, 2019 . None of our outstanding senior notes have financial covenants that would be impacted by COVID-19. We seek to deploy capital in a prudent manner and use multiple data sources and modeling tools to estimate the frequency, severity, and correlation of identified exposures, including, but not limited to, catastrophic and other insured losses, natural disasters, and other significant business interruptions, to estimate our potential capital needs. During the first quarter 2020, we deployed capital primarily through dividends. During the quarter, the Board of Directors declared dividends on both our common shares and our Series B Preferred Shares. The Series B Preferred Share dividend of$13.4 million was paid during the quarter, while the common share dividend of$0.10 per common share, or$58.5 million in the aggregate, was paid inApril 2020 . During the first quarter 2020, we also paid the$2.25 and$0.10 common share dividends declared in 2019, in the aggregate amount of$1.4 billion (see Note 9 - Dividends for further discussion). During the first quarter 2020, we repurchased 0.3 million common shares, at a total cost of$26.5 million , pursuant to our equity compensation plans. As we evaluate our capital needs during these uncertain times, we are temporarily suspending any open market common share repurchases. We will continue to net shares to satisfy tax withholding obligations as required under our equity compensation plans. InApril 2020 ,The Progressive Corporation acquired the remaining outstanding stock ofARX Holding Corp. , for an aggregate cost of$243.0 million , which included the acquisition of vested stock options, making ARX a wholly owned subsidiary of Progressive. While this acquisition was originally expected to occur inApril 2021 , we believe that completing it a year earlier will benefit our continued efforts to expand our reach and grow our bundled home and auto customers. During the first three months of 2020 and at all times during 2019, our total capital exceeded the sum of our regulatory capital layer plus our self-constructed extreme contingency layer, as described in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Based upon our capital planning and forecasting efforts, we believe that we have sufficient capital resources and cash flows from operations to support our current business, scheduled principal and interest payments on our debt, dividends on common shares and Series B Preferred Shares, our contractual obligations, and other expected capital requirements for the foreseeable future. We do not currently expect COVID-19 to have a significant impact on our ability to meet our current obligations. InApril 2020 , we renewed the unsecured discretionary line of credit (the "Line of Credit") withPNC Bank, National Association , in the maximum principal amount of$250 million . This Line of Credit replaced the previous line of credit that expired onApril 30, 2020 . Subject to the terms and conditions of the line of credit documents, advances under the line of credit (if any) will bear interest at a variable rate equal to the higher of PNC's Prime Rate or the sum of the Federal Funds Open Rate plus 175 basis points. Each advance must be repaid on the 30th day after the advance or, if earlier, onApril 30, 2021 , the 31 -------------------------------------------------------------------------------- expiration date of the line of credit. Prepayments are permitted without penalty. All advances under the line of credit are subject to PNC's discretion. We did not engage in short-term borrowings, including any borrowings under our discretionary Line of Credit, to fund our operations or for liquidity purposes during the reported periods. B. Commitments and Contingencies Contractual Obligations During the first three months of 2020, our contractual obligations have not changed materially from those discussed in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . We are not aware of any significant changes to our contractual obligations that are likely to occur as a result of COVID-19. Off-Balance-Sheet Arrangements Our off-balance-sheet leverage includes purchase obligations and catastrophe excess of loss reinsurance contracts. There have not been any material changes in off-balance-sheet items from those discussed in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . 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 March 31, 2020 2019 Personal Lines Agency 41 % 40 % Direct 43 43 Total Personal Lines1 84 83 Commercial Lines 12 13 Property 4 4 Total underwriting operations 100 % 100 % 1 Personal auto insurance accounted for 95% of the total Personal Lines segment net premiums written during the three months endedMarch 31, 2020 and 2019; insurance for our special lines products accounted for the balance. Our Personal Lines business writes insurance for personal autos and special lines products (e.g., motorcycles, watercraft, and RVs). We currently write our Personal Lines products in all 50 states. We also offer our personal auto products (not special lines products) in theDistrict of Columbia . Our personal auto policies are primarily written for 6-month terms, although we do write 12-month personal auto policies mainly through our Platinum agents who are focused on selling bundled auto and home policies. AtMarch 31, 2020 , 10% of our Agency auto policies in force were 12-month policies, compared to about 8% a year earlier. Our special lines products are written for 12-month terms. Our Commercial Lines business writes auto-related primary liability and physical damage insurance, and other liability and property insurance, predominately for small businesses. The majority of our Commercial Lines business is written through the independent agency channel. The amount of commercial auto business written through the direct channel represented about 8% of premiums written for the first three months of both 2020 and 2019. We write Commercial Lines business in all 50 states and our policies are primarily written for 12-month terms. Our Property business writes residential property insurance for single family homes, condominium unit owners, renters, etc. We write the majority of our Property business through the independent agency channel; however, we continue to expand the distribution of our Property product offerings in the direct channel, which represented about 16% of premiums written for the first quarter of 2020, compared to 14% for the same period last year. Property policies are written for 12-month terms. We write residential property in 44 states and theDistrict of Columbia and renters and flood insurance in 45 states and theDistrict of Columbia . Our flood insurance is written primarily through the National Flood Insurance Program. 32 -------------------------------------------------------------------------------- B. Profitability Profitability for our underwriting operations is defined by pretax underwriting profit, which is calculated as net premiums earned plus fees and other revenues less losses and loss adjustment expenses, policy acquisition costs, and other underwriting expenses. We also use underwriting margin, which is underwriting profit or loss expressed as a percentage of net premiums earned, to analyze our results. For the respective periods, our underwriting profitability results were as follows: Three Months Ended March 31, 2020 2019 Underwriting Underwriting Profit (Loss) Profit (Loss) ($ in millions) $ Margin $ Margin Personal Lines Agency$ 601.6 15.7 %$ 453.0 12.9 % Direct 473.0 11.9 321.9 9.0 Total Personal Lines 1,074.6 13.7 774.9 10.9 Commercial Lines 112.5 9.5 166.6 16.4 Property1 49.2 11.7 7.7 2.1
Total underwriting operations
1 For the three months endedMarch 31, 2020 and 2019, pretax profit (loss) includes$14.5 million and$17.9 million , respectively, of amortization expense predominately associated with the acquisition of a controlling interest in ARX; the decrease in amortization expense reflects that the trade name intangible asset was fully amortized during the third quarter 2019. The increases in the underwriting profit margins were driven primarily by lower accident frequency experienced in first quarter 2020, compared to the first quarter 2019. See Overview - COVID-19 for further discussion. 33 -------------------------------------------------------------------------------- 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 March 31, Underwriting Performance1 2020 2019 Change Personal Lines-Agency Loss & loss adjustment expense ratio 64.7 67.8 (3.1 ) Underwriting expense ratio 19.6 19.3 0.3 Combined ratio 84.3 87.1 (2.8 ) Personal Lines-Direct Loss & loss adjustment expense ratio 65.7 69.9 (4.2 ) Underwriting expense ratio 22.4 21.1 1.3 Combined ratio 88.1 91.0 (2.9 ) Total Personal Lines Loss & loss adjustment expense ratio 65.2 68.9 (3.7 ) Underwriting expense ratio 21.1 20.2 0.9 Combined ratio 86.3 89.1 (2.8 ) Commercial Lines Loss & loss adjustment expense ratio 68.1 62.7 5.4 Underwriting expense ratio 22.4 20.9 1.5 Combined ratio 90.5 83.6 6.9 Property Loss & loss adjustment expense ratio 58.2 68.1 (9.9 ) Underwriting expense ratio2 30.1 29.8 0.3 Combined ratio2 88.3 97.9 (9.6 ) Total Underwriting Operations Loss & loss adjustment expense ratio 65.3 68.1 (2.8 ) Underwriting expense ratio 21.6 20.7 0.9 Combined ratio 86.9
88.8 (1.9 ) Accident year - Loss & loss adjustment expense ratio3 63.8 66.4 (2.6 )
1 Ratios are expressed as a percentage of net premiums earned; fees and other revenues are netted with underwriting expenses in the ratio calculations. 2 Included in the three months endedMarch 31, 2020 and 2019, are 3.4 points and 5.0 points, respectively, of amortization expense predominately associated with our acquisition of a controlling interest in ARX. Excluding these additional expenses, the Property business would have reported expense ratios of 26.7 and 24.8 and combined ratios of 84.9 and 92.9, respectively. 3 The accident year ratios include only the losses that occurred during the period noted. As a result, accident period results will change over time, either favorably or unfavorably, as we revise our estimates of loss costs when payments are made or reserves for that accident period are reviewed. 34 --------------------------------------------------------------------------------
Losses and Loss Adjustment Expenses (LAE)
Three Months Ended March 31 ,
(millions) 2020 2019
Increase (decrease) in net loss and LAE reserves
340.1 Paid losses and LAE 6,185.6 5,418.9 Total incurred losses and LAE$ 6,155.2 $ 5,759.0 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 related to the adjustment or settlement of 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 2.8 points for the first quarter 2020, compared to the same period last year, primarily due to lower auto frequency, partially offset by higher severity. The following table shows our consolidated catastrophe losses, excluding loss adjustment expenses, incurred during the periods: Three Months Ended March 31, ($ in millions) 2020 2019 Personal Lines$ 37.2 $ 44.8 Commercial Lines 1.3 1.5 Property Property business, net of reinsurance (excluding ASL) 41.8 61.6 Reinsurance recoverable on ASL1 0.1 (36.0 ) Property business, net 41.9 25.6 Total net catastrophe losses incurred$ 80.4 $ 71.9 Combined ratio effect 0.9 pts. 0.8 pts. 1 Represents the reinsurance recoverable recorded on the losses under our aggregate stop-loss agreements (ASL); see table below for further information. During the first quarter 2020, the majority of catastrophe losses were due to wind, hail, and tornadoes throughoutthe United States . We have responded, and plan to continue to respond, promptly to catastrophic events when they occur in order to provide exemplary claims service to our customers. We do not have catastrophe-specific reinsurance for our Personal Lines or Commercial Lines businesses, but we reinsure portions of our Property business against various risks, including, but not limited to, catastrophic losses through excess of loss reinsurance. We have aggregate stop-loss reinsurance agreements (ASL) in place, which are in effect for accident years 2019, 2018, and 2017. We did not renew our ASL program for accident year 2020. Instead, we entered into a property catastrophe aggregate excess of loss program inJanuary 2020 . Both the ASL and the aggregate excess of loss programs cover accident year Property catastrophe losses and a portion of LAE, known as allocated loss adjustment expenses (ALAE). See Item 1 - Description of Business-Reinsurance in our Annual Report on Form 10-K for the year endedDecember 31, 2019 for further discussion. 35 -------------------------------------------------------------------------------- The following table shows the total reinsurance recoverables activity under the aggregate stop-loss agreements by accident year, for the respective periods: Three Months Ended March 31, ($ in millions) 2020 2019
Reinsurance recoverable on ASL, beginning of period
$ 12.5 Reinsurance recoverables recognized on losses Accident year: 2019 (0.9 )$ 36.3 2018 0 0 2017 0.8 (0.3 ) Total (0.1 ) 36.0 Reinsurance recoverables recognized on ALAE Accident year: 2019 0.1 3.2 2018 0 0 2017 0 0.5 Total 0.1 3.7 Total reinsurance recoverables recognized Accident year: 2019 (0.8 ) 39.5 2018 0 0 2017 0.8 0.2 Total 0 39.7 Reinsurance recoverable on ASL, end of period$ 69.7
In addition to the aggregate excess of loss program, our Property business is covered by multi-year catastrophe reinsurance contracts, which carry retention thresholds for losses and LAE from a single catastrophic event of$60 million . We expect that in mid-2020 our retention threshold for this program will increase to at least$80 million (see Item 1 - Description of Business-Reinsurance in our Annual Report on Form 10-K for the year endedDecember 31, 2019 for further discussion). We have not had a catastrophe event in the first quarter 2020 that exceeded our retention threshold. During the first quarter 2020, relative to our Property business, we closed a$200 million catastrophe bond transaction. This bond replaces a similar$200 million bond that expired onDecember 31, 2019 . The bond will provide coverage in the unlikely event that a single catastrophe event exceeds the$1.6 billion in coverage provided by our traditional catastrophe reinsurance program. The following discussion of our severity and frequency trends in our personal auto businesses 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 11% for the three months endedMarch 31, 2020 , compared to the same period last year. Year-to-date throughFebruary 2020 , our incurred severity increased 7%, while for March, which includes the impact of COVID-19 restrictions, the incurred severity increased 21%, compared to the same periods in 2019. The year-over-year severity increase for March, primarily reflects a reduction in incoming new claims, which led to an older aged mix of inventory, which increases incurred losses. In addition, we have seen an increase in the number of claims that were reopened, and required an additional payment, duringMarch 2020 compared to a year ago. These supplemental payments are from older accident months, which were not impacted by COVID-19 restrictions. The increases we experienced in severity on a year-over-year basis throughFebruary 2020 , which is prior to COVID-19 restrictions, were in line with normal severity trends for personal injury protection (PIP) (+4%), bodily injury (+5%), and collision (+6%) coverages, while the 11% increase in our auto property damage coverage was in part due to an increase in both repairable and total loss costs. 36 -------------------------------------------------------------------------------- On a year-over-year basis for the first quarter 2020, personal auto incurred severity increased 14% for property damage, 12% for PIP, 9% for bodily injury, and 5% for collision. It is always a challenge to estimate future severity, and especially difficult in the current environment since we do not have similar historical data to compare. For bodily injury and PIP claims, we continue to monitor changes in the underlying costs, such as medical costs, health care reform, and jury verdicts, along with regulatory changes and other factors that may affect severity. Our personal auto incurred frequency, on a calendar-year basis, decreased about 18% for the first quarter 2020, compared to the same period last year. Year-to-date throughFebruary 2020 , our incurred frequency decreased 5%, while for March, which includes the impact of COVID-19 restrictions, incurred frequency decreased 47%, compared to the same periods in 2019. Following are the frequency changes we experienced by coverage on a year-over-year basis for both year-to-date throughFebruary 2020 and for the first quarter 2020, respectively: • Collision decreased about 10% and 23%.
• PIP decreased about 6% and 20%.
• Auto property damage decreased about 5% and 18%.
• Bodily injury was flat and decreased about 12%.
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
certainty, given the uncertainty of the current environment and when COVID-19
restrictions may be lifted and driving habits return to historical patterns. We
will continue to analyze trends to distinguish changes in our experience from
external factors, such as changes in the number of vehicles per household, miles
driven, gasoline prices, advances in vehicle safety, and unemployment rates,
versus those resulting from shifts in the mix of our business, to allow us to
reserve more accurately for our loss exposures.
The changes we are disclosing in the paragraph below for our commercial auto
products severity and frequency uses a trailing 12-month period and excludes our
transportation network company (TNC) business. Using a trailing 12-month period
addresses inherent seasonality trends in the commercial auto products and
mitigates the effects of month-to-month variability, which includes the impact
of COVID-19 restrictions. Since the loss patterns in the TNC business are not
indicative of our other commercial auto products, disclosing severity and
frequency trends without that business is more indicative of our overall
experience for the majority of our commercial auto products.
On a year-over-year basis, our commercial auto products incurred severity
increased 20% and frequency decreased 5%. In addition to general trends in the
marketplace, the increase in our commercial auto products severity reflects
increased medical costs and actuarially determined reserves due to accelerating
paid loss trends and shifts in the mix of business to for-hire trucking, which
has higher average severity than the business auto and contractor market tiers.
The frequency decrease was in part due to continued product segmentation and
underwriting, which created a mix shift toward more preferred, lower-frequency,
business.
The table below presents the actuarial adjustments implemented and the loss
reserve development experienced in the following periods on a companywide basis:
Three Months Ended March 31,
($ in millions) 2020 2019
ACTUARIAL ADJUSTMENTS
Reserve decrease (increase)
Prior accident years $ (9.5 ) $ (16.7 )
Current accident year 1.6 13.3
Calendar year actuarial adjustment $ (7.9 ) $ (3.4 )
PRIOR ACCIDENT YEARS DEVELOPMENT
Favorable (unfavorable)
Actuarial adjustment $ (9.5 ) $ (16.7 )
All other development (134.6 ) (125.9 )
Total development $ (144.1 ) $(142.6 ) (Increase) decrease to calendar year combined ratio (1.5 ) pts. (1.7 ) pts.
Total development consists of both actuarial adjustments and "all other
development." 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
37
--------------------------------------------------------------------------------
Personal Lines and Commercial Lines businesses, development for catastrophe
losses for the vehicle businesses would be reflected in "all other development,"
discussed below, to the extent they relate to prior year reserves. We report
these actuarial adjustments separately for the current and prior accident years
to reflect these adjustments as part of the total prior accident years
development.
"All other development" represents claims settling for more or less than
reserved, emergence of unrecorded claims at rates different than anticipated in
our incurred but not recorded (IBNR) reserves, and changes in reserve estimates
on specific claims. Also included in "all other development" for the first
quarter 2020, is $103.0 million of reserve increases that were made during the
quarter to reflect revised estimates of our per claim settlement costs. The
increase in these per claim settlement costs in part reflects the potential
inefficiencies that could result from working from home along with the
allocation of our adjusting expenses across a smaller inventory of claims at the
end of the first quarter 2020. Although we believe the development from both the
actuarial adjustments and "all other development" generally results from the
same factors, excluding the impact from COVID-19 restrictions, 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. As reflected in the
table above, we experienced unfavorable prior year development during the three
months ended March 31, 2020 . See Note 6 - Loss and Loss Adjustment Expense
Reserves, for a more detailed discussion of our prior accident years
development. We continue to focus on our loss reserve analysis, attempting to
enhance accuracy and to further our understanding of our loss costs.
Underwriting Expenses
Progressive's other underwriting expenses increased 20% for the first quarter
2020, compared to the same period last year, primarily reflecting the increase
of $71.0 million in our allowance for uncollectable accounts, due to the billing
leniencies that we put in place following COVID-19 restrictions, and advertising
spend. During the first quarter 2020, our advertising expenditures increased
18%, compared to the same period last year. Year-to-date through February 2020 ,
we increased advertising expenditures 28%, while in March advertising expenses
decreased 2%. We will continue to invest in advertising as long as we generate
sales at a cost below the maximum amount we are willing to spend to acquire a
new customer.
The underwriting expense ratio (i.e., policy acquisition costs and other
underwriting expenses, net of fees and other revenues, expressed as a percentage
of net premiums earned) was 0.9 points higher for the three months ended March
31, 2020 , compared to the same period last year. The 1.6 point increase to the
expense ratio from the greater advertising spend and additional bad debt
expenses discussed above was in part offset by the other underwriting expenses
growing at a slower rate than the earned premiums we realized during the
quarter.
38
--------------------------------------------------------------------------------
C. Growth
For our underwriting operations, we analyze growth in terms of both premiums and
policies. Net premiums written represent the premiums from policies written
during the period, less any premiums ceded to reinsurers. Net premiums earned,
which are a function of the premiums written in the current and prior periods,
are earned as revenue over the life of the policy using a daily earnings
convention. Policies in force, our preferred measure of growth since it removes
the variability due to rate changes or mix shifts, represents all policies under
which coverage was in effect as of the end of the period specified.
Three Months Ended March 31,
($ in millions) 2020 2019 % Growth
NET PREMIUMS WRITTEN
Personal Lines
Agency $ 4,026.5 $ 3,766.4 7 %
Direct 4,297.4 3,956.1 9
Total Personal Lines 8,323.9 7,722.5 8
Commercial Lines 1,144.1 1,165.2 (2 )
Property 403.3 352.2 15
Total underwriting operations $ 9,871.3 $ 9,239.9 7 %
NET PREMIUMS EARNED
Personal Lines
Agency $ 3,828.7 $ 3,508.5 9 %
Direct 3,992.4 3,576.3 12
Total Personal Lines 7,821.1 7,084.8 10
Commercial Lines 1,189.0 1,013.0 17
Property 420.6 362.0 16
Total underwriting operations
March 31,
(thousands) 2020 2019 % Growth
POLICIES IN FORCE
Agency auto 7,164.6 6,609.1 8 %
Direct auto 8,126.3 7,335.3 11
Total auto 15,290.9 13,944.4 10
Special lines1 4,574.5 4,402.1 4
Personal Lines - total 19,865.4 18,346.5 8
Commercial Lines 759.7 711.6 7
Property 2,264.1 2,002.3 13
Companywide total 22,889.2 21,060.4 9 %
1 Includes insurance for motorcycles, watercraft, RVs, and similar items.
We evaluate growth in terms of both net premiums written and policy in force
growth. Our companywide net premiums written grew less than policies in force
growth in part due to a shift in the mix of business resulting from lower new
applications in higher average premium consumer segments (i.e., Sams). In March,
we decreased our Commercial Lines transportation network company (TNC) business
net premiums written $110.5 million to reflect the decrease in actual miles
driven during the period and a revised estimate of the miles to be driven during
the remainder of the policy terms. See Overview - Insurance Operations for a
further discussion. We will continue to monitor the actual miles driven to
determine if any future adjustments need to be recorded.
We started to see a reduction in our new Personal and Commercial Lines policies
post-COVID-19. Although new policies are necessary to maintain a growing book of
business, we continue to 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 disclose our
changes in policy life expectancy using a trailing 12-month period, since we
believe this measure is indicative of recent experience, mitigates the effects
of month-to-month variability, and addresses seasonality. We also review our
customer retention for our personal auto products using a trailing 3-month
period. Although using a trailing 3-month measure does not address seasonality
and can reflect more volatility, this measure is more responsive to current
experience and can be an indicator of how our retention rates are moving.
39
--------------------------------------------------------------------------------
To analyze growth, we review new policies, rate levels, and the retention
characteristics of our segments.
D. Personal Lines
The following table shows our year-over-year changes for our Personal Lines
business:
Growth Over Prior Year Quarter
2020 2019
Applications
New 2 % 8 %
Renewal 10 12
Written premium per policy - Auto 1 3
Policy life expectancy - Auto
Trailing 3-months (1 ) (2 )
Trailing 12-months 0 (1 )
In our Personal Lines business, the increase in both new and renewal
applications resulted from increases in both our personal auto and special lines
products. We generated new and renewal personal auto application growth of about
1% and 10%, respectively, compared to the first quarter last year. During the
quarter, auto quote volume increased 2% and the rate of conversion decreased 1%.
However, during the period after COVID-19 restrictions were imposed, new
consumer shopping significantly declined. Post-COVID-19 restrictions, our new
auto application growth declined 23%, quote volume decreased 21%, and rate of
conversion decreased 6%, compared to the same period last year.
We continued to experience slight increases in average written premium per auto
policy during the first quarter 2020, primarily driven by a shift in mix to
products and consumer segments with higher premiums and an increase in insured
vehicles per policy.
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 Agency Business
Growth Over Prior Year Quarter
2020 2019
Applications - Auto
New (3 )% 9 %
Renewal 9 11
Written premium per policy - Auto 1 3
Policy life expectancy - Auto
Trailing 3-months 2 0
Trailing 12-months 4 1
The Agency business includes business written by more than 35,000 independent
insurance agencies that represent Progressive, as well as brokerages in New York
and California . During the first quarter, the Agency business experienced a 3%
decline in new application growth and a 9% increase renewal application growth,
and generated new auto application growth in only 18 states, including only two
of our top 10 largest Agency states. During the quarter auto quote volume was
flat and the rate of conversion decreased 3%.
While application growth during the quarter in the renewal business was not
significantly impacted by COVID-19 restrictions, new applications growth
decreased significantly. Prior to COVID-19 restrictions, on a year-to-date basis
through February 2020 , we experienced total Agency new auto application growth
of 5%, quote volume growth of 9%, and a rate of conversion decrease of 2%,
compared to the same period last year. Subsequent to the implementation of
COVID-19 restrictions, our Agency auto new application growth declined 27%,
quote volume decreased 23%, and rate of conversion decreased 8%, compared to the
same period last year. See Overview - COVID-19 for further discussion.
We analyze growth in each of our four consumers segments (e.g., inconsistently
insured, consistently insured and maybe a renter, homeowners who do not bundle
auto and home, and homeowners who bundle auto and home). The only segment that
40
--------------------------------------------------------------------------------
did not experience new application and policy in force growth during the first
quarter 2020 was the inconsistently insured segment (i.e., Sams), with the
largest percentage of new application increases from both our non-bundled
homeowner (i.e., Wrights) and bundled auto and home consumer segments (i.e.,
Robinsons), albeit on a smaller base.
On a year-over-year basis for the first quarter 2020, Agency auto written
premium per policy increased 3% for new business and 1% for renewal business,
partially reflecting shifts in policy terms. During the trailing 12-month
period, we experienced an increase in the percentage of bundled Agency auto
policies written for 12-month terms, which have about twice the amount of net
premiums written compared to 6-month policies. At the end of the first quarter
2020, 10% of our Agency auto policies in force were 12-month policies, compared
to about 8% a year earlier.
The Direct Business
Growth Over Prior Year Quarter
2020 2019
Applications - Auto
New 5 % 8 %
Renewal 11 16
Written premium per policy - Auto 0 3
Policy life expectancy - Auto
Trailing 3-months (4 ) (5 )
Trailing 12-months (3 ) (3 )
The Direct business includes business written directly by Progressive on the
Internet, through mobile devices, and over the phone. Similar to the impact
experienced in our Agency business, the quarterly results of the Direct business
were negatively impacted by COVID-19 restrictions during the quarter.
The Direct business experienced new and renewal application growth of about 5%
and 11%, respectively, and generated new auto application growth in 33 states,
including eight of our top 10 largest Direct states. During the quarter auto
quote volume increased 4% and the rate of conversion was flat.
While application growth during the quarter in the renewal business was not
significantly impacted by COVID-19 restrictions, new applications growth
decreased significantly. Prior to COVID-19 restrictions, on a year-to-date basis
through February 2020 , we experienced total Direct new auto application growth
of 14%, quote volume growth of 14%, and rate of conversion growth of 1%,
compared to the same period last year. Subsequent to the implementation of
COVID-19 restrictions, our Direct auto new application growth decreased 20%, our
quote volume decreased 18%, and our rate of conversion decreased 4%, compared to
the same period last year. See Overview - COVID-19 for further discussion.
During the first quarter, all consumer segments saw increases in Direct auto new
applications and policies in force. With the marketing investments that
continued to target auto/home bundlers, we grew our Direct Robinsons
applications at a rate about five times faster than the other consumer segments
combined, albeit on a smaller base.
On a year-over-year basis for the first quarter 2020, Direct auto written
premium per policy was flat for new and renewal business.
E. Commercial Lines
Growth Over Prior Year Quarter
2020 2019
Applications - Auto
New 5 % 11 %
Renewal 8 9
Written premium per policy - Auto 4 15
Policy life expectancy - Auto - trailing 12-months 1
(3 )
Our Commercial Lines business operates in five traditional business markets, which include business auto, for-hire transportation, contractor, for-hire specialty, and tow markets and is primarily written through the agency channel.
41
--------------------------------------------------------------------------------
Similar to our experience in our Personal Lines businesses, the quarterly
results of our Commercial Lines business were negatively impacted by COVID-19
restrictions, which influenced the demands and general consumer habits for goods
and services provided by our Commercial Lines customers and required that
certain businesses undergo temporary closure.
Commercial Lines experienced new and renewal application growth of 5% and 8%,
respectively, during the quarter, however, new consumer shopping significantly
declined during the period after COVID-19 restrictions were imposed. During the
first quarter, quote volume decreased 1% and the rate of conversion increased
5%.
While application growth during the quarter in the renewal business was not
significantly impacted by COVID-19 restrictions, new applications growth
decreased significantly. Prior to COVID-19 restrictions, on a year-to-date basis
through February
2020 , we experienced application growth of 15%, quote volume growth of 8%, and
rate of conversion growth of 5%, compared to the same period last year.
Subsequent to the implementation of COVID-19 restrictions, our new application
growth decreased 29%, our quote volume decreased 28%, and our rate of conversion
decreased 1%, compared to the same period last year.
F. Property
Growth Over Prior Year Quarter
2020 2019
Applications
New 7 % 3 %
Renewal 17 25
Written premium per policy 1 0
Our Property business writes residential property insurance for homeowners,
other property owners, and renters, in the agency and direct channels. During
the first quarter 2020, our Property business experienced an increase in new
applications, primarily driven from the growth in our bundled Robinsons consumer
segment, previously noted in our Personal Lines Agency and Direct discussions,
and a strong housing market for new home sales through the period. While
COVID-19 restrictions had a negative impact our Personal Lines and Commercial
Lines segments, our Property segment was not notably impacted during the first
quarter 2020.
G. Income Taxes
A deferred tax asset or liability is a tax benefit or expense that is expected
to be realized in a future period. At March 31, 2020 , we reported a net deferred
tax asset, and a net deferred tax liability at March 31, 2019 , and December 31,
2019 . At March 31, 2020 and 2019, and December 31, 2019 , we had net current
income taxes payable of $508.0 million , $480.3 million , and $195.5 million ,
respectively, which were reported as part of other liabilities.
Our effective tax rate was 20.1% for the first quarter 2020, compared to 30.9%
for the same period last year. The higher effective rate for the prior year was
due primarily to the reversal of tax credits and other tax benefits previously
recognized from certain renewable energy investments, where the sponsor plead
guilty to fraud through these investments and the tax credits and other benefits
related to those investments were not valid. See Note 5 - Income Taxes in our
2019 Annual Report to Shareholders for a further discussion.
42
--------------------------------------------------------------------------------
IV. RESULTS OF OPERATIONS - INVESTMENTS
A. Investment Results
Our management philosophy governing the portfolio is to evaluate investment
results on a total return basis. The fully taxable equivalent (FTE) total return
includes recurring investment income, adjusted to a fully taxable amount for
certain securities that receive preferential tax treatment (e.g., municipal
securities), and total net realized, and changes in total net unrealized, gains
(losses) on securities.
The following table summarizes investment results for the periods ended
Three Months
2020 2019
Pretax recurring investment book yield (annualized) 2.7 % 3.1 %
Weighted average FTE book yield (annualized) 2.7 3.2
FTE total return:
Fixed-income securities 1.2 2.3
Common stocks (20.5 ) 13.3
Total portfolio (0.6 ) 3.2
The fixed-income portfolio duration was 3.0 years and 2.6 years at March 31,
2020 and 2019, respectively. The fixed-income portfolio generated a positive
return for the quarter based on the declines in interest rates since December
31, 2019 . By mid-March, credit spreads significantly widened as the market
anticipated the effects of COVID-19 and the subsequent government responses on
the economy. By quarter end, our non-Treasury securities experienced lower
valuations as investors moved quickly away from instruments that contained
credit risk. Our equity indexed portfolio was within the +/- 50 bps on a GAAP
basis tracking error to the Russell 1000 Index for the first quarter of 2020. We
received the final cash distribution from the unwinding of our managed equity
portfolio during February, completing the closure of that fund.
A further break-down of our FTE total returns for our portfolio for the periods
ended March 31 , follows:
Three Months
2020 2019
Fixed-income securities:
U.S. Treasury Notes 6.3 % 1.6 %
Municipal bonds 2.7 1.8
Corporate bonds (0.7 ) 3.7
Residential mortgage-backed securities (2.8 ) 0.9
Commercial mortgage-backed securities (2.8 ) 2.4
Other asset-backed securities (0.5 ) 1.1
Preferred stocks (12.2 ) 6.3
Short-term investments 0.4 0.6
Common stocks:
Indexed (20.5 ) 13.4
Actively managed 0 12.1
43
--------------------------------------------------------------------------------
B. Portfolio Allocation
The composition of the investment portfolio was:
% of
Fair Total Duration
($ in millions) Value Portfolio (years) Rating1
March 31, 2020
U.S. government obligations $ 11,495.7 28.5 % 4.2 AAAState and local government obligations 2,304.2 5.7 3.9
AA+
Corporate debt securities 9,491.9 23.5 3.6
BBB+
Residential mortgage-backed securities 556.6 1.4 0.8
AA
Commercial mortgage-backed securities 5,664.3 14.0 2.4
AA
Other asset-backed securities 4,639.1 11.5 0.9 AAA-
Preferred stocks 1,058.2 2.6 2.5 BBB-
Short-term investments 2,524.2 6.3 0.1 A
Total fixed-income securities 37,734.2 93.5 3.0 AA-
Common equities 2,608.1 6.5 na na
Total portfolio2,3 $ 40,342.3 100.0 % 3.0 AA-
March 31, 2019
U.S. government obligations $ 9,770.5 28.3 % 3.5 AAAState and local government obligations 1,515.8 4.4 2.8
AA+
Corporate debt securities 7,978.0 23.1 3.2
BBB
Residential mortgage-backed securities 613.0 1.8 0.8
AA-
Commercial mortgage-backed securities 3,853.6 11.2 2.5
AA-
Other asset-backed securities 3,839.8 11.1 1.0 AA+
Preferred stocks 1,346.6 3.9 2.6 BBB-
Short-term investments 2,584.7 7.5 0.1 AA
Total fixed-income securities 31,502.0 91.3 2.6 AA-
Common equities 3,010.5 8.7 na na
Total portfolio2,3 $ 34,512.5 100.0 % 2.6 AA-
December 31, 2019
U.S. government obligations $ 13,251.1 33.7 % 4.9 AAAState and local government obligations 1,713.3 4.4 3.1
AA+
Corporate debt securities 7,067.7 18.0 2.7
BBB
Residential mortgage-backed securities 627.5 1.6 0.9
AA
Commercial mortgage-backed securities 5,076.2 12.9 2.0
AA
Other asset-backed securities 5,179.5 13.2 0.8 AAA- Preferred stocks 1,233.9 3.2 2.6 BBB- Short-term investments 1,798.8 4.6 0.1 AA- Total fixed-income securities 35,948.0 91.6 3.0 AA Common equities 3,306.3 8.4 na na Total portfolio2,3$ 39,254.3 100.0 % 3.0 AA na = not applicable 1Represents ratings at period end. Credit quality ratings are assigned by nationally recognized statistical rating organizations. To calculate the weighted average credit quality ratings, we weight individual securities based on fair value and assign a numeric score of 0-5, with non-investment-grade and non-rated securities assigned a score of 0-1. To the extent the weighted average of the ratings falls betweenAAA and AA+, we would assign an internal rating ofAAA -. 2Our portfolio reflects the effect of net unsettled security transactions; we had$598.0 million and$11.9 million in other liabilities atMarch 31, 2020 andDecember 31, 2019 , respectively, compared to$76.5 million in other assets atMarch 31, 2019 . 3The total fair value of the portfolio atMarch 31, 2020 and 2019, andDecember 31, 2019 , included$2.6 billion ,$1.2 billion , and$3.2 billion , respectively, of securities held in a consolidated, non-insurance subsidiary of the holding company, net of any unsettled security transactions. During the first quarter 2020, we paid$1.4 billion of common share dividends and issued$1.0 billion of senior notes, both of which impacted the amount held in this non-insurance subsidiary. 44 --------------------------------------------------------------------------------
Our asset allocation strategy is to maintain 0%-25% of our portfolio in Group I securities, with the balance (75%-100%) of our portfolio in Group II securities.
We define Group I securities to include: • common equities
• nonredeemable preferred stocks
• redeemable preferred stocks, except for 50% of
investment-grade
redeemable preferred stocks with cumulative dividends, which are
included in Group II, and
• all other non-investment-grade fixed-maturity securities.
Group II securities include:
• short-term securities, and
• all other fixed-maturity securities, including 50% of the
investment-grade redeemable preferred stocks with cumulative
dividends.
We believe this asset allocation strategy allows us to appropriately assess the
risks associated with these securities for capital purposes and is in line with
the treatment by our regulators.
The following table shows the composition of our Group I and Group II
securities:
March 31, 2020 March 31, 2019 December 31, 2019
Fair % of Total Fair % of Total Fair % of Total
($ in millions) Value Portfolio Value Portfolio Value PortfolioGroup I securities: Non-investment-grade fixed maturities$ 357.4 0.9 %$ 672.0 1.9 %$ 327.2 0.8 % Redeemable preferred stocks1 62.4 0.1 161.1 0.5 117.6 0.3 Nonredeemable preferred stocks 933.4 2.3 1,095.4 3.2 1,038.9 2.7 Common equities 2,608.1 6.5 3,010.5 8.7 3,306.3 8.4 Total Group I securities 3,961.3 9.8 4,939.0 14.3 4,790.0 12.2 Group II securities: Other fixed maturities2 33,856.8 83.9 26,988.8 78.2 32,665.5 83.2 Short-term investments 2,524.2 6.3 2,584.7 7.5 1,798.8 4.6 Total Group II securities 36,381.0 90.2 29,573.5 85.7 34,464.3 87.8 Total portfolio$ 40,342.3 100.0 %$ 34,512.5 100.0 %$ 39,254.3 100.0 % 1Includes non-investment-grade redeemable preferred stocks of$71.0 million and$40.2 million atMarch 31, 2019 andDecember 31, 2019 , respectively; we held no non-investment-grade redeemable preferred stocks atMarch 31, 2020 . 2Includes investment-grade redeemable preferred stocks, with cumulative dividends, of$62.4 million ,$90.1 million , and$77.4 million atMarch 31, 2020 and 2019, andDecember 31, 2019 , respectively. To determine the allocation between Group I and Group II, we use the credit ratings from models provided by theNational Association of Insurance Commissioners (NAIC) for classifying our residential and commercial mortgage-backed securities, excluding interest-only securities, and the credit ratings from nationally recognized statistical rating organizations (NRSRO) for all other debt securities. NAIC ratings are based on a model that considers the book price of our securities when assessing the probability of future losses in assigning a credit rating. As a result, NAIC ratings can vary from credit ratings issued by NRSROs. Management believes NAIC ratings more accurately reflect our risk profile when determining the asset allocation between Group I and Group II securities. Unrealized Gains and Losses As ofMarch 31, 2020 , our fixed-maturity portfolio had pretax net unrealized gains, recorded as part of accumulated other comprehensive income, of$538.9 million , compared to$246.9 million and$459.4 million atMarch 31, 2019 andDecember 31, 2019 , respectively. The changes in interest rates during the first three months of 2020, contributed to the increase in unrealized gains, compared to year-end and first quarter 2019. As COVID-19 restrictions increased in scope and duration, our portfolio experienced valuation decreases in all sectors, except forU.S. Treasury Notes, which had increases that partially offset the losses. See Note 2 - Investments for a further break-out of our gross unrealized gains and losses. 45 --------------------------------------------------------------------------------
Holding Period Gains and Losses
The following table provides the gross and net holding period gain (loss)
balance and activity during the three months ended
Net Holding
Gross Holding Gross Holding Period Gains
(millions) Period Gains Period Losses (Losses)
Beginning of period
Hybrid fixed-maturity securities $ 7.8 $ 0 $ 7.8
Equity securities 2,263.9 (15.5 ) 2,248.4
Balance at December 31, 2019 2,271.7 (15.5 ) 2,256.2
Year-to-date change in fair value
Hybrid fixed-maturity securities (7.7 ) (23.5 ) (31.2 )
Equity securities (733.3 ) (104.3 ) (837.6 )
Total holding period gains (losses) during the
period (741.0 ) (127.8 ) (868.8 )
End of period
Hybrid fixed-maturity securities 0.1 (23.5 ) (23.4 )
Equity securities 1,530.6 (119.8 ) 1,410.8
Balance at March 31, 2020 $ 1,530.7 $ (143.3 ) $ 1,387.4
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.
Credit Allowance and Uncollectible Losses
We did not record any allowances for credit losses or any write-offs on
securities held in our investment portfolio during the first quarter of 2020.
The fixed-income markets experienced heightened volatility during the first
quarter and the value of our fixed-maturity portfolio, excluding U.S.
Treasuries, decreased during the first quarter 2020 as a result of market
movement. As the pandemic spread across the U.S. and governments reacted by
implementing sheltering in place orders, the credit risks on bonds widened,
reducing our valuations on the majority of our securities. We saw the losses
rise in the portfolio through mid-to-late March, but began to recover by the end
of the quarter. Prior to the pandemic, all the securities in our portfolio were
expected to pay their principal and interest obligations and we continue to hold
that expectation at quarter end. In determining not to record any allowance or
any write-off, we considered this fact and recent Federal actions taken to
support the U.S. economy. See Critical Accounting Policies for additional
discussion.
46
--------------------------------------------------------------------------------
Fixed-Income Securities
The fixed-income portfolio is managed internally and includes fixed-maturity
securities, short-term investments, and nonredeemable preferred stocks.
Following are the primary exposures for our fixed-income portfolio. Details of
the individual constraints can be found in the Management's Discussion and
Analysis included in our 2019 Annual Report.
• Interest rate risk - our duration of 3.0 years at March 31, 2020 , fell
within our acceptable range.
• The duration distribution of our fixed-income portfolio, excluding
short-term investments, represented by the interest rate sensitivity
of the comparable benchmark U.S. Treasury Notes, was:
Duration Distribution March 31, 2020 March 31, 2019 December 31, 2019
1 year 24.6 % 21.6 % 23.9 %
2 years 13.6 19.7 11.8
3 years 22.8 23.6 20.6
5 years 21.3 19.9 23.1
7 years 11.2 11.5 15.1
10 years 6.5 3.8 5.5
20 years1 0 (0.1 ) 0
Total fixed-income portfolio 100.0 % 100.0 % 100.0 %
1The negative duration in the 20-year category atMarch 31, 2019 , arose from the variable rate nature of the dividends on some of our preferred stocks. If not called at their call dates, the dividends on these securities will generally reset from a fixed rate to a floating rate, which could cause these securities to trade at a discount and, therefore, with a negative duration as the securities' valuation will likely rise if the floating rate moves higher.
• Credit risk - our credit quality rating was above the minimum threshold
during the first quarter 2020.
• The credit quality distribution of the fixed-income portfolio was:
Rating March 31, 2020 March 31, 2019 December 31, 2019 AAA 54.4 % 52.0 % 60.8 % AA 8.7 12.2 9.9 A 12.5 7.9 7.9 BBB 22.7 23.9 19.5 Non-investment grade/non-rated1 BB 1.3 2.8 1.4 B 0.2 0.9 0.3 CCC and lower 0 0 0 Non-rated 0.2 0.3 0.2 Total fixed-income portfolio 100.0 % 100.0 % 100.0 % 1The ratings in the table above are assigned by NRSROs. The non-investment-grade fixed-income securities based upon our Group I classification represented 1.5% of the total fixed-income portfolio atMarch 31, 2020 , compared to 3.5% atMarch 31, 2019 and 1.7% atDecember 31, 2019 .
• Concentration risk - we did not have any investments in a single issuer,
either overall or in the context of individual assets classes and sectors,
that exceeded our thresholds during the first quarter 2020.
• 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 first quarter 2020.
• 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 $5.0 billion , or
21.3%, of principal repayment from our fixed-income portfolio,
excluding U.S. Treasury Notes and short-term investments, during the
remainder of 2020. Cash from interest and dividend payments provides
an additional source of recurring liquidity.
47
--------------------------------------------------------------------------------
• The duration of our U.S. government obligations, which are included
in the fixed-income portfolio, was comprised of the following at
March 31, 2020:
Fair Duration
($ in millions) Value (years)
U.S. Treasury Notes
Less than one year $ 337.8 0.7
One to two years 1,405.7 1.6
Two to three years 2,011.0 2.6
Three to five years 3,657.8 4.0
Five to seven years 3,197.5 5.9
Seven to ten years 885.9 8.5
Total
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
March 31, 2020
Residential mortgage-backed securities $ 556.6 $ (17.7 ) 5.1 % 0.8 AA
Commercial mortgage-backed securities 5,664.3 (158.1 ) 52.2 2.4 AA
Other asset-backed securities 4,639.1 (35.7 ) 42.7 0.9 AAA-
Total asset-backed securities $ 10,860.0 $ (211.5 ) 100.0 % 1.7 AA+
March 31, 2019
Residential mortgage-backed securities $ 613.0 $ 3.1 7.4 % 0.8 AA-
Commercial mortgage-backed securities 3,853.6 28.0 46.4 2.5 AA-
Other asset-backed securities 3,839.8 5.5 46.2 1.0 AA+
Total asset-backed securities $ 8,306.4 $ 36.6 100.0 % 1.7 AA
December 31, 2019
Residential mortgage-backed securities $ 627.5 $ 2.5 5.8 % 0.9 AA
Commercial mortgage-backed securities 5,076.2 55.5 46.6 2.0 AA
Other asset-backed securities 5,179.5 14.8 47.6 0.8 AAA-
Total asset-backed securities $ 10,883.2 $ 72.8 100.0 % 1.4 AA+
1 The credit quality ratings in the table above are assigned by NRSROs.
48
--------------------------------------------------------------------------------
Residential Mortgage-Backed Securities (RMBS) The following table details the
credit quality rating and fair value of our RMBSs, along with the loan
classification and a comparison of the fair value at March 31, 2020 , to our
original investment value (adjusted for returns of principal, amortization, and
write-downs):
Residential Mortgage-Backed Securities (at March 31, 2020)
($ in millions)
Rating1 Non-Agency Government/GSE2 Total % of Total
AAA $ 389.6 $ 1.9 $ 391.5 70.3 %
AA 59.8 0.6 60.4 10.8
A 25.4 0 25.4 4.6
BBB 12.1 0 12.1 2.2
Non-investment
grade/non-rated:
BB 15.9 0 15.9 2.9
B 5.1 0 5.1 0.9
CCC and lower 12.2 0 12.2 2.2
Non-rated 34.0 0 34.0 6.1
Total fair value $ 554.1 $ 2.5 $ 556.6 100.0 %
Increase (decrease) in
value (3.1 )% 0.7 % (3.1 )%
1The credit quality ratings in the table above are assigned by NRSROs; when we
assign the NAIC ratings for our RMBSs, $59.2 million of our non-investment-grade
securities are rated investment-grade and classified as Group II, and $8.0
million , or 1.4% of our total RMBSs, are not rated by the NAIC and are
classified as Group I.
2The securities in this category are insured by a Government Sponsored Entity
(GSE) and/or collateralized by mortgage loans insured by the Federal Housing
Administration (FHA) or the U.S. Department of Veteran Affairs (VA).
In the residential mortgage-backed sector, we see solid fundamentals, such as
high credit quality borrowers and strong structural protections through
underlying loan collateralization; however, its risk/reward potential is lower
relative to other comparable investments. We did relatively small additions in
the residential mortgage-backed sector in the first quarter 2020. As of March
31, 2020 , our portfolio is comprised of seasoned, stabilized, short duration
legacy bonds with high credit protection and post-crisis jumbo bonds that are
backed by high-quality borrowers.
Commercial Mortgage-Backed Securities (CMBS) The following table details the
credit quality rating and fair value of our CMBSs, along with a comparison of
the fair value at March 31, 2020 , to our original investment value (adjusted for
returns of principal, amortization, and write-downs):
Commercial Mortgage-Backed Securities (at March 31, 2020)
($ in millions)
Rating1 Multi-Borrower Single-Borrower Total % of Total
AAA $ 372.4 $ 2,524.7 $ 2,897.1 51.2 %
AA 146.4 1,310.1 1,456.5 25.7
A 145.0 699.7 844.7 14.9
BBB 31.6 395.8 427.4 7.5
Non-investment grade/non-rated:
BB 0 38.1 38.1 0.7
B 0.5 0 0.5 0
Total fair value $ 695.9 $ 4,968.4 $ 5,664.3 100.0 %
Increase (decrease) in value (0.2 )% (3.1 )% (2.7 )%
1The credit quality ratings in the table above are assigned by NRSROs; when we
assign the NAIC ratings for our CMBSs, $19.7 million of our investment-grade
securities are rated non-investment-grade and classified as Group I, resulting
in $58.3 million , or 1.0% of our total CMBSs, being classified as Group I.
During the quarter, we focused our purchases on both primary and secondary
acquisitions of single asset single borrower securities. Early in the quarter,
we added a select number of new issue bonds in addition to selectively adding
bonds in the secondary market. As credit markets became more volatile, and
primary issuance slowed down, toward the last half of February
49
--------------------------------------------------------------------------------
and during March, we focused more on secondary acquisitions of both fixed- and
floating-rate bonds. In our fixed-rate purchases, we acquired longer duration
securities which we believe will have a more attractive return profile than
comparable shorter duration securities at current market spreads.
Other Asset-Backed Securities (OABS) The following table details the credit
quality rating and fair value of our OABSs, along with a comparison of the fair
value at March 31, 2020 , to our original investment value (adjusted for returns
of principal, amortization, and write-downs):
Other Asset-Backed Securities (at March 31, 2020)
($ in millions) Whole Business % of
Rating Automobile Credit Card Student Loan Securitizations Equipment Other Total Total
AAA $ 1,962.8 $ 662.3 $ 251.2 $ 0 $ 1,065.6 $ 89.5 $ 4,031.4 86.9 %
AA 49.2 0 34.0 0 55.0 0 138.2 3.0
A 31.6 0 20.8 0 100.2 35.9 188.5 4.1
BBB 0 0 0 281.0 0 0 281.0 6.0
Total fair
value $ 2,043.6 $ 662.3 $ 306.0 $ 281.0 $ 1,220.8 $ 125.4 $ 4,639.1 100.0 %
Increase
(decrease) in
value (0.2 )% (0.4 )% 0.3 % (4.6 )% (1.1 )% (3.0 )% (0.8 )%
As valuations across financial markets were less attractive in the early part of
the first quarter 2020, asset-backed securities offered better relative
value. Given our views on where we were in the economic cycle, we added in AAA
rated securitizations. We added across the spectrum to our other asset-backed
securities portfolio, but we primarily focused on auto, equipment, and credit
card backed loans. In the last half of February and during March, we slowed down
purchases as we determined other sectors offered better total return
opportunities.
MUNICIPAL SECURITIES
The following table details the credit quality rating of our municipal
securities at March 31, 2020 , without the benefit of credit or bond insurance:
Municipal Securities (at March 31, 2020 )
(millions) General Revenue
Rating Obligations Bonds Total
AAA $ 627.9 $ 377.8 $ 1,005.7
AA 482.2 619.9 1,102.1
A 0 187.8 187.8
BBB 2.8 5.8 8.6
Total $ 1,112.9 $ 1,191.3 $ 2,304.2
Included in revenue bonds were $615.0 million of single-family housing revenue
bonds issued by state housing finance agencies, of which $433.7 million were
supported by individual mortgages held by the state housing finance agencies and
$181.3 million were supported by mortgage-backed securities. Of the programs
supported by mortgage-backed securities, approximately 25% were collateralized
by Fannie Mae and Freddie Mac mortgages; the remaining 75% were collateralized
by Ginnie Mae mortgages, which are fully guaranteed by the U.S. government. 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 FHA, VA , or private mortgage insurance providers.
As market spreads became more attractive in March, we added some high quality
state General Obligations, Water & Sewer, Airport, and Higher Education Revenue
bonds. Our focus was on longer duration securities which we believe will have a
more attractive return profile than comparable shorter duration securities.
50
--------------------------------------------------------------------------------
CORPORATE SECURITIES
The following table details the credit quality rating of our corporate
securities at March 31, 2020 :
Corporate Securities (at March 31, 2020)
(millions) Financial
Rating Consumer Industrial Communication Services Technology Basic Materials Energy Total
AAA $ 0 $ 0 $ 0 $ 31.9 $ 0 $ 0 $ 0 $ 31.9
AA 153.0 0 0 213.1 59.4 0 11.0 436.5
A 775.7 266.9 281.2 1,207.3 250.1 4.1 22.0 2,807.3
BBB 2,385.7 1,203.3 180.0 1,189.5 355.7 41.7 569.2 5,925.1Non-investment grade/non-rated: BB 26.2 61.1 63.1 0 43.8 0 27.2 221.4 B 59.7 0 0 0 0 0 10.0 69.7
Total fair value
45.8 $ 639.4 $ 9,491.9
During March 2020 , as credit spreads widened significantly and many issuers were
looking to strengthen their balance sheets and improve their liquidity
positions, we selectively increased our allocation to corporate bonds. We
focused on adding investment-grade securities that are less vulnerable to the
current economic environment while our high yield allocation remained small.
Overall, our corporate securities are a larger percentage of the fixed-income
portfolio when compared to the end of 2019. At March 31, 2020 , the portfolio was
approximately 25% of our fixed-income portfolio, compared to approximately 20%
at December 31, 2019 . In addition, we lengthened duration during the year and
ended the first quarter of 2020 at 3.6 years, compared to 2.7 years at the end
of 2019. This extension is primarily the result of our assessment that more
attractive opportunities and wider spread levels existed in the corporate
sector.
PREFERRED STOCKS - REDEEMABLE AND NONREDEEMABLE
The table below shows the exposure break-down by sector and rating at March 31,
2020 :
Preferred Stocks (at March 31, 2020)
Financial Services
(millions)
Rating U.S. Banks Foreign Banks Insurance Other Industrials Utilities Total
A $ 45.8 $ 0 $ 0 $ 8.6 $ 0 $ 0 $ 54.4
BBB 555.0 0 92.6 54.7 68.4 9.2 779.9
Non-investment
grade/non-rated:
BB 66.0 77.3 0 0 15.3 32.0 190.6
B 0 0 0 5.0 0 0 5.0
Non-rated 0 0 0 13.1 15.2 0 28.3
Total fair value $ 666.8 $ 77.3 $ 92.6 $ 81.4 $ 98.9 $ 41.2 $ 1,058.2
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
primarily with issuers that maintain investment-grade senior debt ratings.
We also face the risk that dividend payments on our preferred stock holdings
could be deferred for one or more periods or skipped entirely. As of March 31,
2020 , all of our preferred securities continued to pay their dividends in full
and on time. Approximately 79% of our preferred stock securities pay dividends
that have tax preferential characteristics, while the balance pay dividends that
are fully taxable.
51-------------------------------------------------------------------------------- The value of our preferred stock portfolio decreased duringMarch 2020 , as equities dropped, credit spreads widened, and treasury yields moved lower due to investor sentiment to reduce risk investments as a result of the economic impact of COVID-19 restrictions. The losses on our securities peaked during mid-to-late March, with improvements at quarter-end.Common Equities Common equities, as reported on the balance sheets, were comprised of the following: ($ in millions) March 31, 2020 March 31, 2019 December 31, 2019 Indexed common stocks$ 2,607.8 100.0 %$ 2,844.4 94.5 %$ 3,306.0 100.0 % Managed common stocks 0 0 165.8 5.5 0 0 Total common stocks 2,607.8 100.0 3,010.2 100.0 3,306.0 100.0 Other risk investments 0.3 0 0.3 0 0.3 0
Total common equities
3,306.3 100.0 %
In our indexed common stock portfolio, our individual holdings are selected based on their contribution to the correlation with the Russell 1000 Index. We held 856 out of 998, or 86%, of the common stocks comprising the index atMarch 31, 2020 , which made up 95% of the total market capitalization of the index. AtMarch 31, 2020 , the year-to-date total return, based on GAAP income, was within our contractual tracking error, which is +/- 50 basis points. By the middle of the first quarter 2020, we completed the 2019 planned exit of our managed equity portfolio, receiving the final distribution of remaining cash. The common equity markets were volatile during the quarter, especially since the onset of the COVID-19 pandemic, and our common stock portfolio reflected that market volatility. During February, as the COVID-19 issue became more global, stock valuations declined and our portfolio ended February with a year-to-date loss of 8.1%. As the pandemic issues increased during March, the common stock portfolio continued to decline, ending the month of March down 13.4% and year-to-date through the first quarter, down 20.5%. 52 -------------------------------------------------------------------------------- V. CRITICAL ACCOUNTING POLICIES Progressive is required to make certain estimates and assumptions when preparing its financial statements and accompanying notes in conformity with accounting principles generally accepted inthe United States of America . Actual results could differ from those estimates in a variety of areas. The two areas we view as most critical with respect to the application of estimates and assumptions is the establishment of our loss reserves and the methods for measuring expected credit losses on financial instruments. Below is a discussion of the expected credit losses on financial instruments. See Management's Discussion and Analysis; Critical Accounting Policies in our 2019 Annual Report to Shareholders for further information on the estimates and assumptions related to the establishment of our loss reserves. A. Credit Losses on Financial Instruments An allowance for credit losses is established when the ultimate realization of a financial instrument is determined to be impaired due to a credit event. Measurement of expected credit losses is based on judgment when considering relevant information about past events, including historical loss experience, current conditions, and forecasts of the collectability of the reported financial instrument. The allowance for expected credit losses is measured and recorded at the point ultimate recoverability of the financial instrument is expected to be impaired, including upon the initial recognition of the financial instrument, where warranted. We evaluate financial instrument credit losses related to our available-for-sale securities, reinsurance recoverables, and premiums receivables.Available-For-Sale Securities We routinely monitor our fixed-maturity portfolio for pricing changes that might indicate potential losses exist and perform detailed reviews of securities with unrealized losses to determine if an allowance for credit losses, a change to an existing allowance (recovery or additional loss), or a write-off for an amount deemed uncollectible needs to be recorded. In such cases, changes in fair value are evaluated to determine the extent to which such changes are attributable to: (i) credit related losses, which are specific to the issuer (e.g., financial conditions, business prospects) where the present value of cash flows expected to be collected is lower than the amortized cost basis of the security or (ii) market related factors, such as interest rates or credit spreads. If we determine that the unrealized loss is related to credit, and we do not expect to hold the security to allow for a potential recovery of those expected losses, we will write-off the security to fair value and recognize a realized loss in the comprehensive income statements. For securities whose losses are credit related losses, and for which we do not intend to sell in the near term, we will review the non-market components to determine if a potential future credit loss exists, based on existing financial data available related to the fixed-maturity securities. If we anticipate that a credit loss exists, we will record an allowance for the credit loss and recognize a realized loss in the comprehensive income statement. For all securities for which an allowance for credit losses has been established, we will re-evaluate the securities, at least quarterly, to determine if further deterioration has occurred or if we project a subsequent recovery in the expected losses, which would require an adjustment to the allowance for credit losses. If subsequent to establishing an allowance for credit losses we determine that the security is likely to be sold prior to the recovery of the credit loss or if the loss is deemed uncollectible, we will reverse the allowance for credit losses and write-off the security to its fair value. For an unrealized loss that is determined to be related to current market conditions, we will not record an allowance for credit losses or a write-off of the fair value. We will continue to monitor these securities to determine if underlying factors other than the current market conditions are contributing to the loss in value. Based on an analysis of our fixed-maturity portfolio, we have determined our allowance for credit losses related to available-for-sale securities was not material to our financial condition or results of operations for the period endingMarch 31, 2020 . Reinsurance Recoverables We routinely monitor changes in the credit quality and concentration risks of the reinsurers who are counter parties to our reinsurance recoverables. AtMarch 31, 2020 , approximately 80% of our reinsurance recoverables were held in several mandatory state pools, including theMichigan Catastrophic Claims Association ,Florida Hurricane Catastrophe Fund , and North Carolina Reinsurance Facility, and in plans where we act as a servicing agent to state-mandated involuntary plans for commercial vehicles (Commercial Automobile Insurance Procedures/Plans) and as a participant in the "Write Your Own" program for federally regulated plans for flood (National Flood Insurance Program). All of these programs are governed by insurance regulations. The remaining balance of our recoverables are composed of voluntary external contractual arrangements that primarily relate to the Property business and to our transportation network company (TNC) business written by our Commercial Lines business. For these privately placed reinsurance arrangements, we regularly monitor reinsurer credit strength and analyze our reinsurance recoverable balances for expected credit losses at least quarterly, or more frequently if indicators of reinsurer credit deterioration, either individually or in aggregate, exists. For at-risk uncollateralized recoverable balances, we evaluate a number of reinsurer specific factors, including reinsurer credit quality rating, credit rating outlook, historical 53 -------------------------------------------------------------------------------- experience, reinsurer surplus, recoverable duration, and collateralization composition in respect to our net exposure (i.e., the reinsurance recoverable amount less premiums payable to the reinsurer, where the right to offset exists). Based on this assessment, reinsurers with credit risks will be individually subject to a credit default model, and an allowance for credit loss will be established, where warranted. Based on the analysis of reinsurers, we have determined our allowance for credit losses related to our reinsurance recoverables was not material to our financial condition or results of operations for the period endingMarch 31, 2020 . Premium Receivables We routinely monitor historical premium collections data for our premiums receivable balances, through actuarial analyses, to project the future recoverability of currently recorded receivables. As part of these analyses, we determine historical collectability rates and modify those rates based on current economic assumptions, to establish estimates on default. These rates are applied to the stratified subsets of our consumer receivable balances, to establish an allowance for doubtful accounts. Progressive's premiums receivable are short-term in nature and, generally, premiums are collected prior to providing risk coverage, minimizing our exposure to credit risk. See Note 1 - Basis of Presentation for a change in the allowance account during the three months endedMarch 31, 2020 . 54
-------------------------------------------------------------------------------- Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995: Investors are cautioned that certain statements in this report not based upon historical fact are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements often use words such as "estimate," "expect," "intend," "plan," "believe," and other words and terms of similar meaning, or are tied to future periods, in connection with a discussion of future operating or financial performance. Forward-looking statements are based on current expectations and projections about future events, and are subject to certain risks, assumptions and uncertainties that could cause actual events and results to differ materially from those discussed herein. These risks and uncertainties include, without limitation, uncertainties related to:
• our ability to underwrite and price risks accurately and to charge
adequate rates to policyholders;
• our ability to establish accurate loss reserves;
• the impact of severe weather, other catastrophe events and climate change;
• the effectiveness of our reinsurance programs;
• the highly competitive nature of property-casualty insurance markets;
• whether we innovate effectively and respond to our competitors' initiatives;
• whether we effectively manage complexity as we develop and deliver
products and customer experiences;
• how intellectual property rights could affect our competitiveness and our
business operations;
• whether we adjust claims accurately;
• our ability to maintain a recognized and trusted brand;
• our ability to attract, develop and retain talent and maintain appropriate
staffing levels;
• compliance with complex laws and regulations;
• litigation challenging our business practices, and those of our
competitors and other companies;
• the impacts of a security breach or other attack involving our computer
systems or the systems of one or more of our vendors;
• the secure and uninterrupted operation of the facilities, systems, and
business functions that are critical to our business;
• the success of our efforts to develop new products or enter into new areas
of business and navigate related risks;
• our continued ability to send and accept electronic payments;
• the possible impairment of our goodwill or intangible assets;
• the performance of our fixed-income and equity investment portfolios;
• the potential elimination of, or change in, the London Interbank Offered Rate;
• our continued ability to access our cash accounts and/or convert
securities into cash on favorable terms;
• the impact if one or more parties with which we enter into significant
contracts or transact business fail to perform;
• legal restrictions on our insurance subsidiaries' ability to pay dividends
to
• limitations on our ability to pay dividends on our common shares under the
terms of our outstanding preferred shares;
• our ability to obtain capital when necessary to support our business and
potential growth;
• evaluations by credit rating and other rating agencies;
• the variable nature of our common share dividend policy;
• whether our investments in certain tax-advantaged projects generate the
anticipated returns;
• the impact from not managing to short-term earnings expectations in light
of our goal to maximize the long-term value of the enterprise;
• impacts from the outbreak of the novel coronavirus, or COVID-19, and the
restrictions put in place to help slow and/or stop the spread of the
virus; and
• other matters described from time to time in our releases and
publications, and in our periodic reports and other documents filed with
the
limitation, the Risk Factors section of our Annual Report on Form 10-K for
the year ending
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.
55--------------------------------------------------------------------------------
© Edgar Online, source
