PROGRESSIVE CORPORATION I. OVERVIEW
The Progressive Corporation's insurance subsidiaries recognized growth in both premiums and policies in force in the first quarter 2022, compared to the same period last year. During the first quarter 2022, we generated an underwriting profit margin of 5.5%, which exceeded our target profit margin of 4% but was 5.2 points lower than the same period last year. Profitability is our most important financial goal and will take precedence over growth in times when we have to choose. During the quarter, we generated$13.2 billion of net premiums written, which is an increase of$1.5 billion , or 12%, compared to first quarter 2021. We ended the first quarter 2022 with 26.4 million companywide policies in force, which is 0.8 million more policies than were in force atMarch 31, 2021 . Personal Lines policies in force grew 2% year over year, while our Commercial Lines and Property businesses grew policies 16% and 9%, respectively. The lower growth in Personal Lines reflects the significant decrease in new personal auto applications in the first quarter 2022, compared to the same period last year, reflecting the personal auto rate increases taken during the last 12 months and decreased advertising spend on a year-over-year basis, in each of the last 9 months. The lower underwriting profit margin for the first quarter 2022, compared to the first quarter 2021, resulted in a 42% decrease in underwriting profit. During the first quarter last year, we were still experiencing the benefits of lower loss costs as driving patterns had not yet returned to the level we were experiencing prior to the restrictions that were put into place during 2020 to stop or slow the spread of the novel coronavirus, COVID-19. In addition, as states started to lift restrictions and miles driven started to return to pre-pandemic levels after the first quarter 2021, we began to see loss costs rise as frequency and severity patterns began to shift, and inflation began to rise. On a year-over-year basis, for the first quarter 2022, net income and comprehensive income decreased 79% and 218%, respectively. The decrease in net income was primarily driven by the 42% reduction in underwriting income and a 176% reduction in net realized gains/losses during the period, due to the change in equity market valuations. The decrease in comprehensive income was also driven by changes in the value of our portfolio as we recognized unrealized losses on our fixed-maturity securities of$1.4 billion in the first quarter of 2022, compared to unrealized losses of$539.6 million in the prior year, primarily reflecting an increase in interest rates throughout 2021 and into the first quarter 2022. We ended the quarter with$23.4 billion of total capital (debt plus shareholders' equity), an increase of$0.3 billion from year-end 2021. During the quarter, we issued$1.5 billion of senior notes, split evenly between 5-year, 10-year, and 30-year maturities, to be used for general corporate purposes.
A. Insurance Operations
For the first quarter 2022, we experienced a companywide underwriting profit margin of 5.5%, compared to our target profit margin of 4% and an underwriting profit margin of 10.7% for the same period last year. Net premiums written grew 12% over the first quarter last year and policies in force grew 3% on a companywide basis. The distribution of profitability and growth varied by segment during the first quarter 2022 as discussed below. Our Personal Lines, Commercial Lines, and Property businesses generated an underwriting profit of 4.8%, 9.5%, and 1.5%, respectively, during the quarter. Our personal auto incurred accident frequency was up about 2% for the first quarter 2022, compared to the prior year, while severity was up about 16%. The severity in vehicle accidents was higher than the prior year primarily attributable to the increase in the valuation of used vehicles, increasing our total loss and repair costs. On a year-over-year basis, the average wholesale price for used cars increased about 35%. During the quarter, catastrophe losses and actuarial development were fairly consistent on a year-over-year basis in our Personal Lines business. Our Property business recognized 17.8 points of catastrophe losses during the first quarter 2022, primarily due to March storms acrossthe United States , compared to 30.6 points during the prior year period. During the quarter, we continued to take actions to address profitability, in response to the continuing rising loss costs and other factors, and to strive to achieve our target goal of a 96 combined ratio on a calendar year basis. During the first quarter 2022, we implemented personal auto rate increases in 36 states, which represented about 75% of our trailing 12-month written premium. In the aggregate, rate changes for personal auto during the quarter increased rates on a countrywide basis about 7%, which follows a full year increase of about 8% in 2021. Of the rate increases that we elevated in both the second half of 2021 and the first quarter of 2022, we estimate that we have nearly 7 points still to earn in during the remainder of 2022. We currently believe that, with the exception of a few key states, the major personal auto rate increases are behind us. However, management continues to assess used car prices, miles driven, driving patterns, loss severity, weather events, inflation, and other components of expected loss costs on a state-by-state basis for our personal auto business and will file for rate adjustments where deemed necessary. 32 -------------------------------------------------------------------------------- In addition to rate actions, we also continued to tighten underwriting criteria, limit bill plan payment options, and reduce advertising spend during the period where losses indicated rate inadequacy in our personal auto business. We reduced total advertising spend 8%, or 1.1 points, compared to the same period last year, based on performance against our media and underwriting targets in certain types of advertising. Consistent with rate actions, management will continue to assess where additional non-rate actions may be needed. These rate and non-rate measures resulted in fewer new business auto applications during the year and could impact personal auto growth in net premiums written and policies in force in future periods. In our Property business, the targeted rate increases taken during the last 12 months, which averaged about 7%, are continuing to be earned into the book of business. We are continuing to take non-rate actions to reduce volatility in our results, which are primarily attributable to the impact from weather-related catastrophe losses. We plan to focus our growth efforts in states with traditionally less catastrophe exposure and limit growth in the coastal and hail prone states. In the second quarter 2022, we will start non-renewing about 60,000 policies inFlorida and expect that it will take about one year to complete the process. The rate and non-rate actions that began in 2021, and continued into the first quarter 2022, impacted both premium and volume growth on a year-over-year basis. We evaluate growth in terms of both net premiums written and policies in force growth. Our companywide net premiums written grew 12%, with Personal Lines growing 3%, Commercial Lines 63%, and Property 13%, primarily reflecting higher average written premium per policy and policy in force growth. On a companywide basis, policies in force grew 3%, with Personal Lines, Commercial Lines, and Property growing 2%, 16%, and 9%, respectively. Within Personal Lines, our Agency auto policies in force decreased 1% year over year, while the Direct auto and special lines policies increased 2% and 6%, respectively. The decrease in our auto policy in force growth is primarily attributable to the decrease in the growth of new applications compared to the first quarter last year as discussed below. The significant increase in our Commercial Lines business in net premiums written primarily reflected growth in our transportation network company (TNC) business and the acquisition ofProtective Insurance Corporation and subsidiaries (Protective Insurance ) inJune 2021 . Our TNC business contributed nearly half of the growth in Commercial Lines, whileProtective Insurance contributed about 7 points. Of the TNC growth, the increase is attributable to the renewal of certain policies for 12-month terms, compared to 6-month terms last year, an increase in projected mileage, which is the basis for computing premiums, rate increases taken to address profitability challenges, and a reduction in the amount of premiums ceded to external reinsurers. In addition, all of our business market targets had strong premium growth, although we experienced higher growth in our for-hire transportation business, driven by continued heightened demand for shipping services. See Item 1A - Risk Factors Section III. Operating Risks - We compete in property and casualty insurance markets that are highly competitive, in our Form 10-K for the year endedDecember 31, 2021 , for a further discussion of some of the factors that might impact our Commercial Lines business and results. AtMarch 31, 2022 , on a year-over-year basis, average written premiums grew 6% in personal auto, 19% in commercial auto (excluding TNC, business owners policy (BOP), andProtective Insurance products), and 5% in Property, reflecting rate increases taken beginning in 2021 in response to rising loss costs. Growth in our personal auto business continued to be impacted by the actions we are taking to address profitability in response to rising loss costs and increasing frequency and severity trends. Given that our Property policies are 12-month terms, compared to primarily 6-month policies in our personal auto business, these rate actions will take longer to earn in. The rate and non-rate measures we started taking during 2021, and that continued into the first quarter 2022, resulted in fewer new business personal auto applications. During the first quarter 2022, new applications (i.e., issued policies) decreased 24% in our Personal Lines segment, with total new personal auto applications decreasing 26%. Agency auto new applications decreased 28% and Direct auto decreased 25%. New applications for our special lines products were down 9% during the first quarter 2022, primarily reflecting the significant new application growth during the first quarter last year, due to growth in RV, boat, and motorcycle demand. On a year-over-year basis for the first quarter 2022, renewal applications increased 5% in Personal Lines, with total personal auto renewal applications up 4% over the first quarter last year. On a year-over-year basis for the first quarter 2022, new and renewal applications increased 8% and 13% in our Commercial Lines business (excluding our TNC, BOP, andProtective Insurance products). In our Property business, new applications decreased 6% and renewal applications increased 12% on a year-over-year basis. While the rate and non-rate actions resulted in fewer new business personal auto applications during the quarter, we strongly believe that achieving our target profit margin takes precedence over growing premiums and the actions discussed above are necessary to position us well for the future. Nevertheless, we remain focused on growth and realize that to grow policies in force, it is critical that we retain our customers for longer periods. Consequently, increasing retention continues to be one of our most important priorities. Our efforts to increase our share of multi-product households remains a key initiative and we will continue to make investments to improve the customer experience in order to support that goal. Policy life expectancy, which is 33 -------------------------------------------------------------------------------- our actuarial estimate of the average length of time that a policy will remain in force before cancellation or lapse in coverage, is our primary measure of customer retention in our Personal Lines, Commercial Lines, and Property businesses. We evaluate total auto retention using a trailing 12-month and a trailing 3-month policy life expectancy. The latter does not address seasonality and can reflect more volatility. As of the end of the first quarter 2022, our trailing 12-month total personal auto policy life expectancy decreased 5%, compared to last year, with both the Agency and Direct channels down 6% and 4%, respectively. Our trailing 3-month policy life expectancy for personal auto was down 15% compared to last year. The decreases in policy life expectancy reflect the impact of the rate actions we have taken over the last year. Our Commercial Lines and special lines trailing 12-month policy life expectancy increased 7% and 4%, respectively, year over year, and Property decreased 7%.
B. Investments
The fair value of our investment portfolio was$53.2 billion atMarch 31, 2022 , compared to$51.5 billion atDecember 31, 2021 . The$1.7 billion increase from year-end 2021 reflects the proceeds of the$1.5 billion debt offering in March and solid cash flows from operations, partially offset by negative investment results. 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, 2022 , 16% of our portfolio was allocated to Group I securities and 84% to Group II securities, compared to 17% and 83%, respectively, atDecember 31, 2021 . Our recurring investment income generated a pretax book yield of 2.0% for the first quarter 2022, compared to 2.1% for the same period in 2021. Our investment portfolio produced a fully taxable equivalent (FTE) total return of (3.8)% and 0.3% for the first quarter 2022 and 2021, respectively, due to valuation declines in both our fixed-income and equity portfolios on a year-over-year basis. Our fixed-income and common stock portfolios had FTE total returns of (3.6)% and (4.9)%, respectively, for the first quarter 2022, compared to (0.9)% and 12.5%, respectively, last year. The fixed-income return variance was due to the upward shift in interest rates that we have seen throughout the past twelve months. The equity valuation changes reflect general market conditions. At bothMarch 31, 2022 and 2021, the fixed-income portfolio had a weighted average credit quality of AA- and a duration of 3.1 years, compared to AA- and 3.0 years atDecember 31, 2021 . Our portfolio duration has remained relatively consistent over the previous twelve months and it remains below the midpoint of our 1.5-year to 5-year range. 34
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II. FINANCIAL CONDITION
A. Liquidity and Capital Resources
Progressive's insurance operations create liquidity by collecting and investing premiums from new and renewal business in advance of paying claims. As primarily an auto insurer, our claims liabilities generally have a short-term duration. Operations generated positive cash flows of$2.5 billion and$2.6 billion for the three months endedMarch 31, 2022 and 2021, respectively. We believe cash flows are expected to remain positive in the reasonably foreseeable future and do not expect we will have a need to raise capital to support our operations in that time, although changes in market or regulatory conditions affecting the insurance industry, or other unforeseen events, may necessitate otherwise. Our total capital (debt plus shareholders' equity) was$23.4 billion , at book value, atMarch 31, 2022 , compared to$23.2 billion atMarch 31, 2021 , and$23.1 billion atDecember 31, 2021 . Our debt-to-total capital ratio, which reflects debt as a percent of debt plus shareholders' equity, remained below 30% during all reported periods, consistent with our financial policy. Our debt-to-total capital ratio was 27.2% atMarch 31, 2022 , 23.2% atMarch 31, 2021 , and 21.2% atDecember 31, 2021 . The increase from the prior periods reflects the issuance inMarch 2022 of$500 million of 2.50% Senior Notes due 2027,$500 million of 3.00% Senior Notes due 2032, and$500 million of 3.70% Senior Notes due 2052, in part offset by the maturity of our 3.75% Senior Notes during the third quarter 2021. None of the covenants on our outstanding debt securities include rating or credit triggers that would require an adjustment of interest rates or an acceleration of principal payments in the event that our debt securities are downgraded by a rating agency. InApril 2022 , we renewed the unsecured discretionary line of credit (the "Line of Credit") withPNC Bank, National Association , in the maximum principal amount of$250 million . We did not engage in short-term borrowings, including any borrowings under our Line of Credit, to fund our operations or for liquidity purposes during the reported periods. During the first three months of 2022, we returned capital to shareholders primarily through common share dividends. InMarch 2022 , our Board of Directors declared a$0.10 per common share dividend, or$58.5 million in the aggregate, which was paid inApril 2022 . InJanuary 2022 , we also paid common share dividends in the aggregate amount of$58.5 million , or$0.10 per share (see Note 9 - Dividends for further discussion). In addition to the common share dividends, inMarch 2022 , we paid Series B Preferred Share dividends in the aggregate amount of$13.4 million . Consistent with our financial policies, we will repurchase common shares to neutralize dilution from equity-based compensation granted during the year and opportunistically when we believe our shares are trading below our determination of long-term fair value. During the first quarter 2022, we repurchased 0.3 million common shares, at a total cost of$28.7 million , to satisfy tax withholding obligations in connection with the vesting of equity awards under our equity compensation plans. We will continue to make decisions on returning capital to shareholders based on the strength of our capital position and the potential capital needs to expand our business operations. We seek to deploy capital in a prudent manner and use multiple data sources and modeling tools to estimate the frequency, severity, and correlation of identified exposures, including, but not limited to, catastrophic and other insured losses, natural disasters, and other significant business interruptions, to estimate our potential capital needs. Based upon our capital planning and forecasting efforts, we believe we have sufficient capital resources and cash flows from operations to support our current business, scheduled principal and interest payments on our debt, anticipated quarterly dividends on our common shares and Series B Preferred Shares, our contractual obligations, and other expected capital requirements for the foreseeable future. We did not experience a significant change in our liquidity needs during the first quarter 2022. At all times measured during the first three months of 2022 and during 2021, which at a minimum occurs at the end of each month, our total capital exceeded the sum of our regulatory capital layer plus our self-constructed extreme contingency layer, as described in Exhibit 13 to our Annual Report on Form 10-K for the year endedDecember 31, 2021 (2021 Annual Report to Shareholders). As ofMarch 31, 2022 , our estimated consolidated statutory surplus was$16.8 billion . During the first three months of 2022, our contractual obligations and critical accounting policies have not changed materially from those discussed in our 2021 Annual Report to Shareholders. There have not been any material changes in off-balance-sheet leverage, which includes purchase obligations and catastrophe excess of loss reinsurance contracts, from those discussed in our 2021 Annual Report to Shareholders. 35
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III. RESULTS OF OPERATIONS - UNDERWRITING
A. Segment Overview
We report our underwriting operations in three segments: Personal Lines, Commercial Lines, and Property. As a component of our Personal Lines segment, we report our Agency and Direct business results to provide further understanding of our products by distribution channel.
The following table shows the composition of our companywide net premiums written, by segment, for the respective periods:
Three Months Ended March 31,
2022 2021
Personal Lines
Agency 34 % 38 %
Direct 40 43
Total Personal Lines1 74 81
Commercial Lines 22 15
Property 4 4
Total underwriting operations 100 % 100 %
1 Personal auto products accounted for 95% of the total Personal Lines segment net premiums written during the three months endedMarch 31, 2022 and 2021, and our special lines products accounted for the balance. The shift between our Personal Lines and Commercial Lines segments during the first quarter 2022, compared to the same period last year, reflects Commercial Lines growing at a faster rate than Personal Lines. Our Personal Lines business writes insurance for personal autos and special lines products (e.g., motorcycles, watercraft, and RVs). Within Personal Lines we often refer to our four consumer segments, which include: •Sam - inconsistently insured; •Diane - consistently insured and maybe a renter; •Wrights - homeowners who do not bundle auto and home; and •Robinsons - homeowners who bundle auto and home. While our personal auto policies are primarily written for 6-month terms, we write 12-month auto policies in our Platinum agencies to promote bundled auto and home growth. AtMarch 31, 2022 , 14% of our Agency auto policies in force were 12-month policies, compared to 12% a year earlier. While the shift to 12-month policies is slow, to the extent our Agency application mix of annual policies grows, that shift in policy term could increase our written premium mix by channel as 12-month policies have about twice the amount of net premiums written compared to 6-month policies. Our special lines products are written for 12-month terms. Our Commercial Lines business writes auto-related liability and physical damage insurance, workers' compensation insurance primarily for the transportation industry, and business-related general liability and property insurance, predominately for small businesses. The majority of our Commercial Lines business is written through the independent agency channel, although our direct business is growing. The amount of commercial auto business written through the direct channel, excluding our TNC business, grew 31% on a quarter-over-prior-year-quarter basis. For both the first quarter 2022 and 2021, we wrote 10% of our commercial auto premiums through the direct channel. To serve our direct channel customers, we continued to expand our product offerings, including adding states where we offer BOP and include the product on our digital platform serving direct small business consumers (BusinessQuote Explorer®). We write about 90% of Commercial Lines policies for 12-month terms. Our Property business writes residential property insurance for homeowners, other property owners, and renters. We write the majority of our Property business through the independent agency channel; however, we continue to expand the distribution of our Property product offerings in the direct channel, which represented about 24% of premiums written for the first quarter 2022, compared to 21% for the same period last year. Property policies are written for 12-month terms. 36 --------------------------------------------------------------------------------
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,
2022 2021
Underwriting Underwriting
Profit (Loss) Profit (Loss)
($ in millions) $ Margin $ Margin
Personal Lines
Agency $ 288.6 6.7 % $ 547.5 13.4 %
Direct 150.4 3.1 414.6 9.4
Total Personal Lines 439.0 4.8 962.1 11.3
Commercial Lines 202.4 9.5 228.5 16.1
Property1 8.3 1.5 (70.7) (15.0)
Other indemnity2 (0.9) NM 0 NM
Total underwriting operations $ 648.8 5.5 % $ 1,119.9 10.7 %
1 For the three months endedMarch 31, 2022 and 2021, pretax profit (loss) includes$14.1 million and$14.2 million , respectively, of amortization expense associated with acquisition-related intangible assets attributable to our Property segment. 2 Underwriting margins for our other indemnity business are not meaningful (NM) due to the low level of premiums earned by, and the variability of loss costs in, such business.
The decrease in the companywide underwriting profit margin during the three
months ended
The pandemic has shifted consumer behavior and impacted general economic
conditions. We have seen volatility in our severity trends as inflation
continued to influence higher vehicle prices and costs to repair vehicles. We
have responded, and will continue to respond, to these market changes through
rate increases, underwriting restrictions, and other non-rate actions.
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Further underwriting results for our Personal Lines business, including results
by distribution channel, the Commercial Lines business, the Property business,
and our underwriting operations in total, were as follows:
Three Months Ended March 31,
Underwriting Performance1 2022 2021 Change
Personal Lines - Agency Loss & loss adjustment expense ratio 75.1 67.8 7.3 Underwriting expense ratio 18.2 18.8 (0.6) Combined ratio 93.3 86.6 6.7 Personal Lines - Direct Loss & loss adjustment expense ratio 77.2 68.4 8.8 Underwriting expense ratio 19.7 22.2 (2.5) Combined ratio 96.9 90.6 6.3 Total Personal Lines Loss & loss adjustment expense ratio 76.2 68.1 8.1 Underwriting expense ratio 19.0 20.6 (1.6) Combined ratio 95.2 88.7 6.5 Commercial Lines Loss & loss adjustment expense ratio 71.0 63.5 7.5 Underwriting expense ratio 19.5 20.4 (0.9) Combined ratio 90.5 83.9 6.6 Property Loss & loss adjustment expense ratio 70.6 84.9 (14.3) Underwriting expense ratio2 27.9 30.1 (2.2) Combined ratio2 98.5 115.0 (16.5) Total Underwriting Operations Loss & loss adjustment expense ratio 75.0 68.3 6.7 Underwriting expense ratio 19.5 21.0 (1.5) Combined ratio 94.5 89.3 5.2 Accident year - Loss & loss adjustment expense ratio3 73.4 67.1 6.3 1 Ratios are expressed as a percentage of net premiums earned. The portion of fees and other revenues related to our loss adjustment activities are netted against loss adjustment expenses and the portion of fees and other revenues related to our underwriting operations are netted against underwriting expenses in the ratio calculations. 2 Included in the three months endedMarch 31, 2022 and 2021, are 2.5 points and 3.0 points, respectively, of amortization expense on acquisition-related intangible assets attributable to our Property segment. Excluding this expense, the Property business would have reported expense ratios of 25.4 and 27.1 and combined ratios of 96.0 and 112.0, 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. 38 --------------------------------------------------------------------------------
Losses and Loss Adjustment Expenses (LAE)
Three Months Ended March 31,
(millions) 2022 2021 Change in net loss and LAE reserves$ 565.3 $ 627.5 Paid losses and LAE 8,293.1 6,483.0 Total incurred losses and LAE$ 8,858.4 $ 7,110.5 Claims costs, our most significant expense, represent payments made and estimated future payments to be made, to or on behalf of our policyholders, including expenses needed to adjust or settle claims. Claims costs are a function of loss severity and frequency and, for our vehicle businesses, are influenced by inflation and driving patterns, among other factors, some of which are discussed below. In our Property business, severity is primarily a function of construction costs and the age of the structure. Accordingly, anticipated changes in these factors are taken into account when we establish premium rates and loss reserves. Loss reserves are estimates of future costs and our reserves are adjusted as underlying assumptions change and information develops.
Our total loss and LAE ratio increased 6.7 points for the first quarter 2022, compared to the same period last year, primarily due to higher accident severity, partially offset by lower catastrophe losses.
The following table shows our consolidated catastrophe losses, excluding loss adjustment expenses, incurred during the periods:
Three Months Ended
March 31,
($ in millions) 2022 2021
Personal Lines $ 44.5 $ 65.1
Commercial Lines 2.8 1.8
Property 99.3 144.6
Total net catastrophe losses incurred $ 146.6 $ 211.5
Combined ratio effect 1.2 pts. 2.0 pts.
During the three months ended March 31, 2022 , the majority of catastrophe losses
were due to thunderstorms, hail, tornadoes, and winter storms throughout the
United States . We have responded, and plan to continue to respond, promptly to
catastrophic events when they occur in order to provide exemplary claims service
to our customers.
Future catastrophes could have a material impact on our financial condition,
cash flows, or results of operations. As a result, we reinsure various risks
including, but not limited to, catastrophic losses. We do not have
catastrophe-specific reinsurance for our Personal Lines or Commercial Lines
businesses, but we reinsure portions of our Property business. The Property
business reinsurance programs include multi-year catastrophe excess of loss and
aggregate excess of loss contracts.
We evaluate our reinsurance programs during the renewal process, if not more
frequently, to ensure our programs continue to effectively respond to the
company's risk tolerance. As a result, during 2022, we entered into a new
aggregate excess of loss program that increased our retention from $475 million
to $575 million and reduced aggregate potential coverage by $50 million , to a
total of $175 million , compared to our 2021 program. In our view, our capital
position and growing balance sheet enabled us to assume more of these risks via
higher retention levels. We did not experience a significant lack of
availability of any of the types of reinsurance that we typically purchase.
While the costs of reinsurance has increased in the marketplace, raising our
retention levels resulted in slightly lower aggregate premiums ceded for this
coverage upon renewal. See Item 1 - Description of Business-Reinsurance in our
Annual Report on Form 10-K for the year ended December 31, 2021 , for a
discussion of our various reinsurance programs. During the first quarter 2022,
we did not experience significant excess of loss reinsurance activity and we
have not exceeded the annual retention thresholds under our 2022 catastrophe
aggregate excess of loss program.
The following discussion of our severity and frequency trends in our personal
auto business excludes comprehensive coverage because of its inherent
volatility, as it is typically linked to catastrophic losses generally resulting
from adverse weather. For our commercial auto products, the reported frequency
and severity trends include comprehensive coverage. Comprehensive coverage
insures against damage to a customer's vehicle due to various causes other than
collision, such as windstorm, hail, theft, falling objects, and glass breakage.
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Total personal auto incurred severity (i.e., average cost per claim, including
both paid losses and the change in case reserves) on a calendar-year basis
increased about 16% for the first quarter, compared to the same period last
year. These increases reflect the increase in the valuation of used vehicles,
increasing our total loss and repair costs.
Following are the changes we experienced in severity in our auto coverages on a
year-over-year basis:
•Collision increased 28% for the first quarter 2022 and auto property damage
increased about 21%, in part due to increased used car prices.
•Bodily injury increased about 7% for the first quarter 2022, due in part to
increasing nonmedical losses.
•Personal injury protection (PIP) decreased about 6% during the first quarter
2022, due in part to coverage reform in Michigan .
To address inherent seasonality trends and lessen the effects of month-to-month
variability, in the commercial auto products we use a trailing 12-month period
in assessing severity. In the first quarter 2022, our commercial auto products'
incurred severity, excluding our TNC business, increased 17% compared to the
same period last year. In addition to general trends in the marketplace, the
increase in our commercial auto products' severity primarily reflects shifts in
the mix of business to for-hire transportation, which has higher average
severity than the business auto and contractor business market targets. Since
the loss patterns in the TNC business are not indicative of our other commercial
auto products, disclosing severity and frequency trends excluding that business
is more representative of our overall experience for the majority of our
commercial auto products.
It is a challenge to estimate future severity, but we continue to monitor
changes in the underlying costs, such as general inflation, used car prices,
vehicle repair costs, medical costs, health care reform, court decisions, and
jury verdicts, along with regulatory changes and other factors that may affect
severity.
Our personal auto incurred frequency, on a year-over-year basis, increased about
2% for the first quarter 2022, compared to the same period last year. Following
are the frequency changes we experienced by coverage:
•Auto property damage and PIP increased about 3% and 2%, respectively, for the
first quarter 2022.
•Bodily injury decreased about 1% and collision was flat for the first quarter
2022.
On a trailing 12-month basis, our commercial auto products' incurred frequency,
excluding our TNC business, increased 10% during the first quarter 2022,
compared to the same period last year. The frequency increase was in part due to
miles driven not yet returning to pre-pandemic levels during the first quarter
2021, on a trailing 12-month basis.
We closely monitor the changes in frequency, but the degree or direction of
near-term frequency change is not something that we are able to predict with any
degree of confidence, and this challenge is exacerbated by the uncertainty of
the current environment. We will continue to analyze trends to distinguish
changes in our experience from other external factors, such as changes in the
number of vehicles per household, miles driven, vehicle usage, gasoline prices,
advances in vehicle safety, and unemployment rates, versus those resulting from
shifts in the mix of our business or changes in driving patterns, to allow us to
react quickly to price for these trends and to reserve more accurately for our
loss exposures.
The table below presents the actuarial adjustments implemented and the loss
reserve development experienced on a companywide basis in the following periods:
Three Months Ended
March 31,
($ in millions) 2022 2021
ACTUARIAL ADJUSTMENTS
Reserve decrease (increase)
Prior accident years $ 15.1 $ (22.1)
Current accident year (38.8) 2.9
Calendar year actuarial adjustments $ (23.7) $ (19.2)
PRIOR ACCIDENT YEARS DEVELOPMENT
Favorable (unfavorable)
Actuarial adjustments $ 15.1 $ (22.1)
All other development (205.9) (102.3)
Total development $ (190.8) $ (124.4)
(Increase) decrease to calendar year combined ratio (1.6) pts. (1.2) pts.
40-------------------------------------------------------------------------------- Total development consists of both actuarial adjustments and "all other development" on prior accident years. The actuarial adjustments represent the net changes made by our actuarial staff to both current and prior accident year reserves based on regularly scheduled reviews. Through these reviews, our actuaries identify and measure variances in the projected frequency and severity trends, which allow them to adjust the reserves to reflect the current cost trends. For our Property business, 100% of catastrophe losses are reviewed monthly, and any development on catastrophe reserves are included as part of the actuarial adjustments. For the Personal Lines and Commercial Lines businesses, development for catastrophe losses for the vehicle businesses would be reflected in "all other development," discussed below, to the extent they relate to prior year reserves. We report these actuarial adjustments separately for the current and prior accident years to reflect these adjustments as part of the total prior accident years development. "All other development" represents claims settling for more or less than reserved, emergence of unrecorded claims at rates different than anticipated in our incurred but not recorded (IBNR) reserves, and changes in reserve estimates on specific claims. Although we believe the development from both the actuarial adjustments and "all other development" generally results from the same factors, we are unable to quantify the portion of the reserve development that might be applicable to any one or more of those underlying factors. Our objective is to establish case and IBNR reserves that are adequate to cover all loss costs, while incurring minimal variation from the date the reserves are initially established until losses are fully developed. Our ability to meet this objective is impacted by many factors. Changes in case law, particularly related to PIP, can make it difficult to estimate reserves timely and with minimal variation. See Note 6 - Loss and Loss Adjustment Expense Reserves, for a more detailed discussion of our prior accident years development.
Underwriting Expenses
The companywide underwriting expense ratio (i.e., policy acquisition costs and
other underwriting expenses, net of certain fees and other revenues, expressed
as a percentage of net premiums earned) decreased 1.5 points for the first
quarter 2022, compared to the same period last year, primarily reflecting a
decrease in our advertising spend in an effort to improve profitability to reach
our 96 combined ratio goal. In total, our advertising spend decreased 8% and had
a 1.1 point impact on our companywide expense ratio.
To analyze underwriting expenses, we also review our non-acquisition expense
ratio (NAER), which excludes costs related to policy acquisition, including
advertising and agency commissions, from our underwriting expense ratio. By
excluding acquisition costs from our underwriting expense ratio, we are able to
understand costs other than those necessary to acquire new policies and grow the
business. During the first quarter 2022, our NAER decreased 0.1 points, 0.2
points, and 0.6 points in our Personal Lines, Commercial Lines, and Property
businesses, respectively, compared to the same period last year.
41
--------------------------------------------------------------------------------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) 2022 2021 % Growth
NET PREMIUMS WRITTEN
Personal Lines
Agency $ 4,516.4 $ 4,458.7 1 %
Direct 5,202.5 5,002.7 4
Total Personal Lines 9,718.9 9,461.4 3
Commercial Lines 2,925.7 1,794.1 63
Property 536.1 473.6 13
Other indemnity1 0.3 0 NM
Total underwriting operations $ 13,181.0 $ 11,729.1 12 %
NET PREMIUMS EARNED
Personal Lines
Agency $ 4,323.3 $ 4,098.2 5 %
Direct 4,793.6 4,431.7 8
Total Personal Lines 9,116.9 8,529.9 7
Commercial Lines 2,127.2 1,417.8 50
Property 558.1 472.5 18
Other indemnity1 0.7 0 NM
Total underwriting operations $ 11,802.9 $ 10,420.2 13 %
NM = Not meaningful
1 Represents Protective Insurance's run-off business.
March 31,
(thousands) 2022 2021 % Growth
POLICIES IN FORCE
Personal Lines
Agency auto 7,758.4 7,863.5 (1) %
Direct auto 9,541.3 9,338.8 2
Total auto 17,299.7 17,202.3 1
Special lines1 5,345.9 5,026.7 6
Personal Lines - total 22,645.6 22,229.0 2
Commercial Lines 999.8 858.9 16
Property 2,802.2 2,566.3 9
Companywide total 26,447.6 25,654.2 3 %
1 Includes insurance for motorcycles, watercraft, RVs, and similar items.
AtMarch 31, 2022 , we had about 0.8 million more policies in force compared to the same period last year. To analyze growth, we review new policies, rate levels, and the retention characteristics of our segments. Although new policies are necessary to maintain a growing book of business, we recognize the importance of retaining our current customers as a critical component of our continued growth. As shown in the tables below, we measure retention by policy life expectancy. We review our customer retention for our personal auto products using both a trailing 3-month and a trailing 12-month period. We believe changes in policy life expectancy using a trailing 12-month period measure is indicative of recent experience, mitigates the effects of month-to-month variability, and addresses seasonality. Although using a trailing 3-month measure does not address seasonality and can reflect more volatility, this measure is more responsive to current experience and generally can be an indicator of how our retention rates are moving. 42 --------------------------------------------------------------------------------
D. Personal Lines
The following table shows our year-over-year changes for our Personal Lines
business:
Growth Over Prior Year Quarter
2022 2021
Applications
New (24) % 14 %
Renewal 5 14
Written premium per policy - Auto 6 (3)
Policy life expectancy - Auto
Trailing 3 months (15) 12
Trailing 12 months (5) 13
New application growth in our Personal Lines products was down 24% during the
first quarter 2022, with our personal auto new application growth down 26% and
our special lines new application growth down 9% during the first quarter. The
decrease in personal auto new applications is primarily attributable to the rate
actions and underwriting restrictions that began in the second quarter of 2021
and continued through the first quarter 2022. The decrease in special lines new
applications primarily reflects a decrease in demand for RV, boat, and
motorcycle products, as compared to the first quarter 2021 when sales of these
products was strong. We continued to see personal auto and special lines renewal
application growth.
Results varied by consumer segment. At the end of the first quarter 2022,
Robinsons saw low double-digit personal auto policy in force growth, compared to
the first quarter last year, while Sams saw a nearly double-digit decline in
policy in force growth. New auto applications experienced a double-digit
decrease across all four consumer segments year over year. Quote volume in our
Robinsons and Dianes consumer segments increased on a year-over-year basis,
while quote volume in Sams and Wrights decreased, with all consumer segments
seeing a decreased rate of conversion.
During the first quarter 2022, we implemented rate increases in 36 states. In
the aggregate, on a countrywide basis, personal auto net rate increases were
about 7% for the quarter. During the first quarter 2022, we also reduced
advertising spend and tightened underwriting criteria in consumer segments where
losses indicated rate inadequacy. These actions had and may continue to have a
negative impact on our policy life expectancy in the near term, as indicated by
the decline in the trailing 3-month and trailing 12-month policy life
expectancy.
Overall, our written premium per policy increased 6% during the first quarter
2022, compared to the same period last year. The rate increases, which started
in the second quarter 2021 and continued throughout the first quarter 2022, are
reflected in our year-over-year comparisons for the first quarter 2022.
Our focus on achieving our target underwriting profitability takes precedence
over growth. We will continue to manage growth and profitability in accordance
with our long-standing goal of growing as fast as we can as long as we can
provide good customer service at or below a companywide 96 combined ratio on a
calendar-year basis.
We report our Agency and Direct business results separately as components of our
Personal Lines segment to provide further understanding of our products by
distribution channel. The channel discussions below are focused on personal auto
insurance since this product accounted for 95% of the Personal Lines segment net
premiums written during the first quarter 2022.
43
--------------------------------------------------------------------------------
The Agency Business
Growth Over Prior Year Quarter
2022 2021
Applications - Auto
New (28) % 5 %
Renewal 1 12
Written premium per policy - Auto 8 (2)
Policy life expectancy - Auto
Trailing 3 months (17) 12
Trailing 12 months (6) 13
The Agency business includes business written by more than 40,000 independent
insurance agencies that represent Progressive, as well as brokerages in New York
and California . During the first quarter 2022, only two states generated new
Agency auto application growth, including only one of our top 10 largest Agency
states. Each of our consumer segments experienced a reduction in new
applications, however, policies in force grew in all segments except Sams and
Dianes, compared to the same period last year.
During the first quarter 2022, we experienced an increase in Agency auto quote
volume of 5% and a 31% decrease in the rate of conversion (i.e., converting a
quote to a sale). For the first quarter, each consumer segment, other than Sams,
saw increases in quote volume, compared to last year. The rate of conversion was
down significantly in the first quarter 2022, compared to the same period last
year, reflecting rate increases and the impact from tightening underwriting
criteria. Written premium per policy for new and renewal Agency auto business
increased 5% and 9%, respectively, compared to the first quarter 2021. The
decreases in policy life expectancy were expected given the rate actions taken
over the last year, and policy life expectancy may continue to be negatively
impacted by our current rate actions.
The Direct Business
Growth Over Prior Year Quarter
2022 2021
Applications - Auto
New (25) % 17 %
Renewal 7 18
Written premium per policy - Auto 5 (4)
Policy life expectancy - Auto
Trailing 3 months (12) 13
Trailing 12 months (4) 14
The Direct business includes business written directly by Progressive online,
through mobile devices, and over the phone. During the quarter, only four states
generated new auto application growth, with no growth in any of our top 10
largest Direct states. During the first quarter 2022, total applications were
flat due to growth in policy renewals. During the first quarter, although new
applications decreased in our Direct auto business, policies in force grew
across all consumer segments except Sams, compared to last year.
During the first quarter 2022, we experienced a decrease in Direct auto quote
volume of 14% and a rate of conversion decrease of 13%, compared to the same
period last year. The decrease we experienced in our quote volume primarily
reflected the decrease in advertising spending during the first quarter 2022.
All consumer segments saw a decrease in quotes during the quarter, with Sams
showing the largest decrease on a year-over-year basis.
During the first quarter 2022, written premium per policy for new and renewal
Direct auto business increased 3% and 5%, respectively, compared to the same
period last year, primarily driven by rate increases. Consistent with our Agency
business, the Direct business decrease in policy life expectancy reflects the
rate actions taken over the last year.
44
--------------------------------------------------------------------------------E. Commercial Lines
The following table shows our year-over-year changes for our Commercial Lines
business, excluding our TNC, BOP, and
Growth Over Prior Year Quarter
2022 2021
Applications
New 8 % 28 %
Renewal 13 13
Written premium per policy 19 12
Policy life expectancy - Trailing 12 months 7 7
Our Commercial Lines business operates in five traditional business markets, which include business auto, for-hire transportation, contractor, for-hire specialty, and tow markets, primarily written through the agency channel. We also write TNC business and BOP insurance. In the second quarter 2021, we acquiredProtective Insurance , which expanded our portfolio of offerings to larger fleet, workers' compensation insurance for trucking and public transportation fleets, along with trucking industry independent contractors, and affinity programs; these products are excluded from the table above. During the first quarter 2022, Commercial Lines continued to experience strong new application growth, reflecting continued improvement in the economy and our competitiveness in the marketplace. The new application growth during the first quarter was primarily driven by continued growth in our for-hire transportation business market target. During the first quarter 2022, demand in the for-hire transportation market drove new customer shopping, which resulted in a 10% increase in quote volume and a 2% decrease in the rate of conversion, compared to the same period last year. During the first quarter 2022, written premium per policy for new commercial auto business increased 18% and renewal business increased 20%, compared to the same period last year. The increases were due to more vehicles per policy and a shift in the mix of business toward higher premium coverages. Our policy life expectancy increased compared to 2021, primarily due to shifts in the mix of business and product model enhancements.
F. Property
The following table shows our year-over-year changes for our Property business:
Growth Over Prior Year Quarter
2022 2021
Applications
New (6) % 26 %
Renewal 12 12
Written premium per policy 5 1
Policy life expectancy - Trailing 12 months (7) (3)
Our Property business writes residential property insurance for homeowners, other property owners, and renters, in the agency and direct channels. During the first quarter 2022, our Property business experienced a decrease in new applications, primarily due to the rate and other actions taken to address the profitability concerns and to reduce our geographic concentration. During 2022, we continued to make underwriting changes to reduce our concentration risks by focusing our growth efforts in states with traditionally less catastrophe exposure and limit growth in the coastal and hail prone states. In the second quarter of 2022, we will start non-renewing about 60,000 policies inFlorida and expect that it will take about one year to complete the process. The targeted rate increases taken during the last 12 months, which were taken to align this business more closely with our profitability targets in hail prone and more volatile weather states, are beginning to be earned into the book of business. In addition to rate increases, as part of the underwriting changes discussed above, during the first quarter 2022 our written premium per policy was higher due to providing higher premium coverages, compared to the same period last year. The written premium per policy impact from rate increases and underwriting changes were partially offset by a shift in the mix of business to a larger share of renters policies, which have lower written premiums per policy. Our policy life expectancy decreased from the same period last year, primarily due to the targeted underwriting changes being made in states where losses indicated rate inadequacy. 45 --------------------------------------------------------------------------------
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. AtMarch 31, 2022 , we reported a net federal deferred tax asset, compared to net federal deferred tax liabilities atMarch 31, 2021 andDecember 31, 2021 . The change to a deferred asset from a deferred liability was primarily due to unrealized losses on securities in the fixed-income portfolio. AtMarch 31, 2022 and 2021, we had net current income taxes payable of$201.1 million and$372.4 million , respectively, which were reported as part of accounts payable, accrued expenses, and other liabilities in our consolidated balance sheets, partially due to the fact that estimated tax payments are not due until the second quarter of the year. AtDecember 31, 2021 , we reported recoverable income taxes of$19.2 million , which was reflected as part of other assets. The effective tax rate for the three months endedMarch 31, 2022 , was 19.6%, compared to 20.8% for the same period last year, in part due to our permanent tax differences having a greater impact on the effective rate given our lower pre-tax income in the first quarter 2022, compared to the same period last year. 46 --------------------------------------------------------------------------------
IV. RESULTS OF OPERATIONS - INVESTMENTS
A. Investment Results
Our management philosophy governing the portfolio is to evaluate investment results on a total return basis. The fully taxable equivalent (FTE) total return includes recurring investment income, adjusted to a fully taxable amount for certain securities that receive preferential tax treatment (e.g., municipal securities), and total net realized, and changes in total net unrealized, gains (losses) on securities. The following table summarizes investment results for the periods endedMarch 31 : Three Months 2022 2021 Pretax recurring investment book yield (annualized) 2.0 % 2.1 % FTE total return: Fixed-income securities (3.6) (0.9) Common stocks (4.9) 12.5 Total portfolio (3.8) 0.3 The decrease in the fixed-income total return, compared to last year, reflects the impact of rising interest rates during the last twelve months. The decrease in the book yield, compared to last year, reflects investing new cash from operations and portfolio turnover during last year in securities with relatively lower interest rates than the securities that matured or were sold. The total return on the equity securities reflect general market conditions.
A further break-down of our FTE total returns for our fixed-income portfolio for
the periods ended
Three Months
2022 2021
Fixed-income securities:
U.S. Treasury Notes (4.1) % (1.1) %
Municipal bonds (4.9) (1.1)
Corporate bonds (3.6) (1.5)
Residential mortgage-backed securities (0.9) 0.4
Commercial mortgage-backed securities (4.3) (0.8)
Other asset-backed securities (1.5) 0.2
Preferred stocks (3.1) (0.1)
Short-term investments < 0.1 < 0.1
47--------------------------------------------------------------------------------
B. Portfolio Allocation
The composition of the investment portfolio was:
Fair % of Total Duration
($ in millions) Value Portfolio (years) Rating1
March 31, 2022
U.S. government obligations $ 19,528.8 36.7 % 3.9 AAA
State and local government obligations 2,144.2 4.0 3.4 AA+
Foreign government obligations 17.4 0.1 4.3 AAA
Corporate debt securities 11,280.0 21.2 3.1 BBB
Residential mortgage-backed securities 951.1 1.8 0.3 A-
Commercial mortgage-backed securities 6,918.5 13.0 2.7 A+
Other asset-backed securities 5,255.9 9.9 1.2 AA
Preferred stocks 1,748.0 3.3 3.5 BBB-
Short-term investments 529.9 1.0 0.2 A-
Total fixed-income securities 48,373.8 91.0 3.1 AA-
Common equities 4,812.6 9.0 na na
Total portfolio2 $ 53,186.4 100.0 % 3.1 AA-
March 31, 2021
U.S. government obligations $ 16,073.4 33.9 % 3.3 AAA
State and local government obligations 2,624.1 5.6 4.2 AA
Corporate debt securities 10,436.2 22.0 3.7 BBB
Residential mortgage-backed securities 553.2 1.2 1.0 AA
Commercial mortgage-backed securities 5,892.0 12.4 3.2 AA-
Other asset-backed securities 3,323.4 7.0 1.0 AA+
Preferred stocks 1,671.7 3.5 3.7 BBB-
Short-term investments 2,243.1 4.7 0.1 A
Total fixed-income securities 42,817.1 90.3 3.1 AA-
Common equities 4,583.5 9.7 na na
Total portfolio2 $ 47,400.6 100.0 % 3.1 AA-
December 31, 2021
U.S. government obligations $ 18,488.2 35.9 % 3.6 AAA
State and local government obligations 2,185.3 4.2 3.6 AA+
Foreign government obligations 17.9 0.1 4.5 AAA
Corporate debt securities 10,692.1 20.7 2.9 BBB
Residential mortgage-backed securities 790.0 1.5 0.4 A-
Commercial mortgage-backed securities 6,535.6 12.7 3.2 A+
Other asset-backed securities 4,982.3 9.7 1.2 AA
Preferred stocks 1,821.6 3.6 3.6 BBB-
Short-term investments 942.6 1.8 0.2 AA
Total fixed-income securities 46,455.6 90.2 3.0 AA-
Common equities 5,058.5 9.8 na na
Total portfolio2 $ 51,514.1 100.0 % 3.0 AA-
na = not applicable
1 Represents ratings at period end. Credit quality ratings are assigned by
nationally recognized statistical rating organizations. To calculate the
weighted average credit quality ratings, we weight individual securities based
on fair value and assign a numeric score of 0-5, with non-investment-grade and
non-rated securities assigned a score of 0-1. To the extent the weighted average
of the ratings falls between AAA and AA+, we assign an internal rating of AAA -.
2 Includes $356.0 million , $363.1 million , and $143.4 million of net unsettled
security purchase transactions at March 31, 2022 and 2021, and December 31,
2021 , respectively, with the offsetting payable included in other liabilities.
The total fair value of the portfolio at March 31, 2022 and 2021, and
December 31, 2021 , included $5.1 billion , $3.7 billion , and $4.2 billion ,
respectively, of securities held in a consolidated, non-insurance subsidiary of
the holding company, net of unsettled security transactions.
48
--------------------------------------------------------------------------------Our asset allocation strategy is to maintain 0%-25% of our portfolio in Group I securities, with the balance (75%-100%) of our portfolio in Group II securities.
We define Group I securities to include:
•common equities,
•nonredeemable preferred stocks,
•redeemable preferred stocks, except for 50% of investment-grade redeemable
preferred stocks with cumulative dividends, which are included in Group II, and
•all other non-investment-grade fixed-maturity securities.
Group II securities include:
•short-term securities, and
•all other fixed-maturity securities, including 50% of the investment-grade
redeemable preferred stocks with cumulative dividends.
We believe this asset allocation strategy allows us to appropriately assess the
risks associated with these securities for capital purposes and is in line with
the treatment by our regulators.
The following table shows the composition of our Group I and Group II
securities:
March 31, 2022 March 31, 2021 December 31, 2021
Fair % of Total Fair % of Total Fair % of Total
($ in millions) Value Portfolio Value Portfolio Value Portfolio
Group I securities:
Non-investment-grade fixed maturities $ 2,265.0 4.3 % $ 1,254.6 2.6 % $ 2,032.4 3.9 %
Redeemable preferred stocks1 110.2 0.2 94.8 0.2 90.9 0.2
Nonredeemable preferred stocks 1,527.5 2.9 1,482.2 3.1 1,639.9 3.2
Common equities 4,812.6 9.0 4,583.5 9.7 5,058.5 9.8
Total Group I securities 8,715.3 16.4 7,415.1 15.6 8,821.7 17.1
Group II securities:
Other fixed maturities 43,941.2 82.6 37,742.4 79.7 41,749.8 81.1
Short-term investments 529.9 1.0 2,243.1 4.7 942.6 1.8
Total Group II securities 44,471.1 83.6 39,985.5 84.4 42,692.4 82.9
Total portfolio $ 53,186.4 100.0 % $ 47,400.6 100.0 % $ 51,514.1 100.0 %
1 We did not hold any non-investment-grade redeemable preferred stocks at
To determine the allocation between Group I and Group II, we use the credit ratings from models provided by theNational Association of Insurance Commissioners (NAIC) 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, 2022 , our fixed-maturity portfolio had pretax net unrealized losses, recorded as part of accumulated other comprehensive income, of$1,734.8 million , compared to net unrealized gains of$523.5 million and$71.4 million atMarch 31, 2021 andDecember 31, 2021 , respectively. The decreases from both periods in 2021 were mainly due to increasing interest rates, which resulted in valuation declines in all fixed-maturity sectors, primarily in theU.S. government, corporate debt, and commercial mortgage-backed portfolios.
See Note 2 - Investments for a further break-out of our gross unrealized gains (losses).
49
--------------------------------------------------------------------------------Holding Period Gains and Losses
The following table provides the balance and activity for both the gross and net
holding period gains (losses) for the three months ended
Net Holding
Gross Holding Gross Holding Period Gains
(millions) Period Gains Period Losses (Losses)
Balance at December 31, 2021
Hybrid fixed-maturity securities $ 13.0 $ (5.5) $ 7.5
Equity securities 3,877.2 (14.7) 3,862.5
Total holding period securities 3,890.2 (20.2) 3,870.0
Current year change in holding period securities
Hybrid fixed-maturity securities (9.4) (29.6) (39.0)
Equity securities (284.2) (65.4) (349.6)
Total changes in holding period securities (293.6) (95.0) (388.6)
Balance at March 31, 2022
Hybrid fixed-maturity securities 3.6 (35.1) (31.5)
Equity securities 3,593.0 (80.1) 3,512.9
Total holding period securities $ 3,596.6 $
(115.2)
Changes in holding period gains (losses), similar to unrealized gains (losses) in our fixed-maturity portfolio, are the result of changes in market performance as well as sales of securities based on various portfolio management decisions.
The fixed-income portfolio is managed internally and includes fixed-maturity securities, short-term investments, and nonredeemable preferred stocks.
Following are the primary exposures for our fixed-income portfolio. Details of our policies related to these exposures can be found in the Management's Discussion and Analysis included in our 2021 Annual Report to Shareholders. •Interest rate risk - our duration of 3.1 years atMarch 31, 2022 , fell within our acceptable range of 1.5 to 5 years. The duration distribution of our fixed-income portfolio, excluding short-term investments, represented by the interest rate sensitivity of the comparable benchmarkU.S. Treasury Notes, was: Duration Distribution March 31, 2022 March 31, 2021 December 31, 2021 1 year 16.2 % 20.2 % 22.0 % 2 years 18.5 17.9 18.8 3 years 24.9 25.7 23.5 5 years 20.0 18.1 17.6 7 years 14.8 11.7 13.1 10 years 5.6 6.4 5.0 Total fixed-income portfolio 100.0 % 100.0 % 100.0 % 50
-------------------------------------------------------------------------------- •Credit risk - our credit quality rating of AA- was above our minimum threshold during the first quarter 2022. The credit quality distribution of the fixed-income portfolio was: Rating March 31, 2022 March 31, 2021 December 31, 2021 AAA 54.2 % 52.6 % 54.7 % AA 8.8 8.1 8.7 A 8.8 10.6 8.6 BBB 22.2 24.7 21.7
Non-investment grade/non-rated1
BB 4.7 3.4 4.8 B 1.0 0.3 1.1 CCC and lower 0.1 0.1 0.1 Non-rated 0.2 0.2 0.3 Total fixed-income portfolio 100.0 % 100.0 % 100.0 %
1 The ratings in the table above are assigned by NRSROs.
•Concentration risk - we did not have any investments in a single issuer, either overall or in the context of individual asset classes and sectors, that exceeded our thresholds during the first quarter 2022. •Prepayment and extension risk - we did not experience significant adverse prepayment or extension of principal relative to our cash flow expectations in the portfolio during the first quarter 2022. •Liquidity risk - our overall portfolio remains very liquid and we believe that it is sufficient to meet expected near-term liquidity requirements. •The short-to-intermediate duration of our portfolio provides a source of liquidity, as we expect approximately$3.7 billion , or 13.1%, of principal repayment from our fixed-income portfolio, excludingU.S. Treasury Notes and short-term investments, during 2022. Cash from interest and dividend payments provides an additional source of recurring liquidity. •The duration of ourU.S. government obligations, which are included in the fixed-income portfolio, was comprised of the following atMarch 31, 2022 : Fair Duration ($ in millions) Value (years) U.S. Treasury Notes Less than one year$ 434.4 0.6 One to two years 3,797.1 1.8 Two to three years 4,514.1 2.5 Three to five years 5,425.2 4.1 Five to seven years 4,119.9 6.1 Seven to ten years 1,238.1 8.6 Total U.S. Treasury Notes$ 19,528.8 3.9 51
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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, 2022
Residential mortgage-backed securities $ 951.1 $ (4.0) 7.3 % 0.3 A-
Commercial mortgage-backed securities 6,918.5 (377.9) 52.7 2.7
A+
Other asset-backed securities 5,255.9 (102.5) 40.0 1.2
AA
Total asset-backed securities$ 13,125.5 $ (484.4) 100.0 % 1.9
AA-
5.7 % 1.0 AA
Commercial mortgage-backed securities 5,892.0 23.7 60.3 3.2
AA-
Other asset-backed securities 3,323.4 29.9 34.0 1.0
AA+
Total asset-backed securities$ 9,768.6 $ 58.5 100.0 % 2.4
AA-
6.4 % 0.4 A-
Commercial mortgage-backed securities 6,535.6 (25.4) 53.1 3.2 A+ Other asset-backed securities 4,982.3 0.9 40.5 1.2 AA Total asset-backed securities$ 12,307.9 $ (22.8) 100.0 % 2.2
AA-
1 The credit quality ratings in the table above are assigned by NRSROs.
Residential Mortgage-Backed Securities (RMBS) The following table details the credit quality rating and fair value of our RMBS, along with the loan classification and a comparison of the fair value atMarch 31, 2022 , to our original investment value (adjusted for returns of principal, amortization, and write-downs): Residential Mortgage-Backed Securities (at March 31, 2022) ($ in millions) Rating1 Non-Agency Agency Government/GSE2 Total % of Total AAA$ 166.8 $ 0.1 $ 1.4$ 168.3 17.7 % AA 36.2 0 0.5 36.7 3.8 A 374.6 0 0 374.6 39.4 BBB 337.3 0 0 337.3 35.5 Non-investment grade/non-rated: BB 8.3 0 0 8.3 0.9 B 12.4 0 0 12.4 1.3 CCC and lower 4.3 0 0 4.3 0.4 Non-rated 9.2 0 0 9.2 1.0 Total fair value$ 949.1 $ 0.1 $ 1.9$ 951.1 100.0 % Increase (decrease) in value (1.2) % (2.4) % 2.4 % (1.2) % 1 The credit quality ratings are assigned by NRSROs; when we assigned the NAIC ratings for our RMBS, 60% of our non-investment-grade securities were rated investment grade and reported as Group II securities, with the remainder classified as Group I. 2 The securities in this category are insured by a Government Sponsored Entity (GSE) and/or collateralized by mortgage loans insured by theFederal Housing Administration (FHA) or the U.S.Department of Veteran Affairs (VA). . In the residential mortgage-backed sector, our portfolio consists of deals that are backed by high-credit quality borrowers or have strong structural protections through underlying loan collateralization. During the first three months of 2022, we selectively added to this sector. 52 --------------------------------------------------------------------------------Commercial Mortgage-Backed Securities (CMBS) The following table details the credit quality rating and fair value of our CMBS, along with a comparison of the fair value atMarch 31, 2022 , to our original investment value (adjusted for returns of principal, amortization, and write-downs): Commercial Mortgage-Backed Securities (at March 31, 2022) ($ in millions) Rating1 Multi-Borrower Single-Borrower Total % of Total AAA$ 261.2 $ 1,787.1 $ 2,048.3 29.6 % AA 0 1,820.5 1,820.5 26.3 A 0 1,170.5 1,170.5 16.9 BBB 0 1,216.6 1,216.6 17.6 Non-investment grade/non-rated: BB 0 613.3 613.3 8.9 B 0.2 49.1 49.3 0.7 Total fair value$ 261.4 $ 6,657.1 $ 6,918.5 100.0 % Increase (decrease) in value (2.0) % (5.3) % (5.2) %
1 The credit quality ratings are assigned by NRSROs; when we assigned the NAIC ratings for our CMBS, 38% of our non-investment-grade securities were rated investment grade and reported as Group II securities, with the remainder classified as Group I.
The CMBS portfolio experienced wider spreads and higher volatility in the first quarter 2022. New issuance in the single-asset single-borrower (SASB) market was robust and was the primary source of additions to our portfolio, most of which took place early in the quarter. Credit spreads moved significantly wider from the middle through the end of the quarter. As a result, our net purchases slowed as we assessed the more volatile spread environment, the outlook for the real estate market, and the outlook for the economy. Our focus continues to be on SASB with high-quality collateral in the office, self-storage, multi-family, and industrial sectors. Other Asset-Backed Securities (OABS) The following table details the credit quality rating and fair value of our OABS, along with a comparison of the fair value atMarch 31, 2022 , to our original investment value (adjusted for returns of principal, amortization, and write-downs): Other Asset-Backed Securities (at March 31, 2022) ($ in millions) Collateralized Loan Whole Business % of Rating Automobile Obligations Student Loan Securitizations Equipment Other Total Total AAA$ 1,043.8 $ 1,322.5 $ 56.6 $ 0$ 593.2 $ 204.2 $ 3,220.3 61.3 % AA 268.9 587.9 6.3 0 147.6 11.9 1,022.6 19.4 A 20.3 0 8.0 0 109.2 151.6 289.1 5.5 BBB 6.8 0 0 642.5 0 39.0 688.3 13.1 Non-investment grade/non-rated: BB 0 0 0 0 0 35.6 35.6 0.7 Total fair value$ 1,339.8 $ 1,910.4 $ 70.9 $ 642.5$ 850.0 $ 442.3 $ 5,255.9 100.0 % Increase (decrease) in value (1.1) % (0.8) % (2.8) % (6.0) % (1.1) % (4.4) % (1.9) % Our allocation to OABS remained fairly consistent over the last 12 months. As valuations across other asset classes were more attractive, our OABS portfolio offered less relative value. 53 --------------------------------------------------------------------------------
MUNICIPAL SECURITIES
The following table details the credit quality rating of our municipal
securities at
Municipal Securities (atMarch 31, 2022 ) (millions) General Revenue Rating Obligations Bonds Total AAA$ 624.0 $ 256.1 $ 880.1 AA 488.9 728.0 1,216.9 A 0 46.3 46.3 BBB 0 0.6 0.6 Non-rated 0 0.3 0.3 Total$ 1,112.9 $ 1,031.3 $ 2,144.2 Included in revenue bonds were$508.6 million of single-family housing revenue bonds issued by state housing finance agencies, of which$358.3 million were supported by individual mortgages held by the state housing finance agencies and$150.3 million were supported by mortgage-backed securities. Of the programs supported by mortgage-backed securities, 81% were collateralized byGinnie Mae mortgages, which are fully guaranteed by theU.S. government; the remaining 19% were collateralized by Fannie Mae and Freddie Mac mortgages. Of the programs supported by individual mortgages held by the state housing finance agencies, the overall credit quality rating was AA+. Most of these mortgages were supported by theFederal Housing Administration , theU.S. Department of Veterans Affairs , or private mortgage insurance providers. Municipal spreads widened during the first quarter 2022. Despite wider spreads, municipal bonds were less attractive to us on a relative basis compared to other spread sectors. Our allocation to the sector declined modestly during the quarter.
CORPORATE DEBT SECURITIES
The following table details the credit quality rating of our corporate debt
securities at
Corporate Securities (at March 31, 2022)
(millions) Financial
Rating Consumer Industrial Communication Services Technology Basic Materials Energy Total
AA $ 22.6 $ 0 $ 0 $ 219.6 $ 13.8 $ 0 $ 45.7 $ 301.7
A 418.8 234.4 209.7 1,038.1 133.1 117.3 186.3 2,337.7
BBB 2,559.5 1,417.4 147.9 1,089.9 655.7 14.2 948.7 6,833.3
Non-investment grade/non-rated:
BB 526.4 243.2 213.0 162.8 67.9 33.5 107.5 1,354.3
B 347.1 28.2 0 29.0 0 0 0 404.3
CCC and lower 48.7 0 0 0 0 0 0 48.7
Total fair value $ 3,923.1 $ 1,923.2 $ 570.6 $ 2,539.4 $ 870.5 $ 165.0 $ 1,288.2 $ 11,280.0
During the first quarter of 2022, the size of our corporate debt portfolio saw a
modest increase. As credit spreads experienced significant volatility we were
able to sell bonds with less attractive risk reward profiles when the spread
environment was tight and purchase bonds with better risk reward profiles when
spreads significantly widened. In addition, we have entered into agreements to
purchase bank loan investments and have an associated open funding commitment of
$16.0 million at March 31, 2022 .
We slightly lengthened the maturity profile of the corporate portfolio during
the first quarter of 2022. The duration of the corporate portfolio was 3.1 years
at March 31, 2022 , compared to 2.9 years at December 31, 2021 . Overall, our
corporate securities, as a percentage of the fixed-income portfolio, has
remained consistent since the end of 2021 at approximately 23%.
54
--------------------------------------------------------------------------------PREFERRED STOCKS - REDEEMABLE AND NONREDEEMABLE
The table below shows the exposure break-down by sector and rating atMarch 31, 2022 : Preferred Stocks (at March 31, 2022) Financial Services (millions) U.S. Foreign Rating Banks Banks Insurance Other Financial Industrials Utilities Total BBB$ 953.2 $ 43.9 $ 135.1 $ 42.0$ 152.1 $ 45.9 $ 1,372.2 Non-investment grade/non-rated: BB 174.8 41.7 0 0 24.6 39.4 280.5 Non-rated 0 0 35.0 26.4 33.9 0 95.3 Total fair value$ 1,128.0 $ 85.6 $ 170.1 $ 68.4$ 210.6 $ 85.3 $ 1,748.0 The majority of our preferred securities have fixed-rate dividends until a call date and then, if not called, generally convert to floating-rate dividends. The interest rate duration of our preferred securities is calculated to reflect the call, floor, and floating-rate features. Although a preferred security will remain outstanding if not called, its interest rate duration will reflect the variable nature of the dividend. Our non-investment-grade preferred stocks were all with issuers that maintain investment-grade senior debt ratings. We also face the risk that dividend payments on our preferred stock holdings could be deferred for one or more periods or skipped entirely. As ofMarch 31, 2022 , all of our preferred securities continued to pay their dividends in full and on time. Approximately 81% of our preferred stock securities pay dividends that have tax preferential characteristics, while the balance pay dividends that are fully taxable. During the first quarter 2022, we had a small net increase to our preferred stock portfolio. We primarily purchased redeemable preferred securities that we believe had attractive risk/reward profiles. Certain holdings were called and redeemed at par value during the quarter. The portfolio valuation decreased throughout the quarter as credit spreads widened and interest rates increased.
Common equities, as reported on the balance sheets, were comprised of the following: ($ in millions) March 31, 2022 March 31, 2021 December 31, 2021 Common stocks$ 4,792.5 99.6 %$ 4,580.3 99.9 %$ 5,041.6 99.7 % Other risk investments 20.1 0.4 3.2 0.1 16.9 0.3 Total common equities$ 4,812.6 100.0 %$ 4,583.5 100.0 %$ 5,058.5 100.0 % The majority of our common stock portfolio consists of individual holdings selected based on their contribution to the correlation with the Russell 1000 Index. We held 846 out of 1,023, or 83%, of the common stocks comprising the index atMarch 31, 2022 , which made up 96% of the total market capitalization of the index. AtMarch 31, 2022 and 2021, andDecember 31, 2021 , the year-to-date total return, based on GAAP income, was within our targeted tracking error, which is +/- 50 basis points. The other risk investments consist of limited partnership interests. During the first quarter 2022, we funded$1.5 million on partnership investments and have an open funding commitment of$7.3 million atMarch 31, 2022 . 55 -------------------------------------------------------------------------------- Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995: Investors are cautioned that certain statements in this report not based upon historical fact are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements often use words such as "estimate," "expect," "intend," "plan," "believe," and other words and terms of similar meaning, or are tied to future periods, in connection with a discussion of future operating or financial performance. Forward-looking statements are based on current expectations and projections about future events, and are subject to certain risks, assumptions and uncertainties that could cause actual events and results to differ materially from those discussed herein. These risks and uncertainties include, without limitation, uncertainties related to: •our ability to underwrite and price risks accurately and to charge adequate rates to policyholders; •our ability to establish accurate loss reserves; •the impact of severe weather, other catastrophe events and climate change; •the effectiveness of our reinsurance programs and the continued availability of reinsurance and performance by reinsurers; •the highly competitive nature of property-casualty insurance markets; •whether we innovate effectively and respond to our competitors' initiatives; •whether we effectively manage complexity as we develop and deliver products and customer experiences; •how intellectual property rights affect our competitiveness and our business operations; •whether we adjust claims accurately; •our ability to maintain a recognized and trusted brand; •our ability to attract, develop and retain talent and maintain appropriate staffing levels; •compliance with complex and changing laws and regulations; •litigation challenging our business practices, and those of our competitors and other companies; •the impacts of a security breach or other attack involving our computer systems or the systems of one or more of our vendors; •the secure and uninterrupted operation of the facilities, systems, and business functions that are critical to our business; •the success of our efforts to acquire or develop new products or enter into new areas of business and navigate related risks; •our continued ability to send and accept electronic payments; •the possible impairment of our goodwill or intangible assets; •the performance of our fixed-income and equity investment portfolios; •the impact on our investment returns and strategies from regulations and societal pressures relating to environmental, social, and other public policy matters; •the elimination of the London Interbank Offered Rate; •our continued ability to access our cash accounts and/or convert securities into cash on favorable terms; •the impact if one or more parties with which we enter into significant contracts or transact business fail to perform; •legal restrictions on our insurance subsidiaries' ability to pay dividends toThe Progressive Corporation ; •limitations on our ability to pay dividends on our common shares under the terms of our outstanding preferred shares; •our ability to obtain capital when necessary to support our business and potential growth; •evaluations by credit rating and other rating agencies; •the variable nature of our common share dividend policy; •whether our investments in certain tax-advantaged projects generate the anticipated returns; •the impact from not managing to short-term earnings expectations in light of our goal to maximize the long-term value of the enterprise; •the impacts of the COVID-19 pandemic and measures taken in response; and •other matters described from time to time in our releases and publications, and in our periodic reports and other documents filed with theUnited States Securities and Exchange Commission , including, without limitation, the Risk Factors section of our Annual Report on Form 10-K for the year endingDecember 31, 2021 . In addition, investors should be aware that generally accepted accounting principles prescribe when a company may reserve for particular risks, including litigation exposures. Accordingly, results for a given reporting period could be significantly affected if and when we establish reserves for one or more contingencies. Also, our regular reserve reviews may result in adjustments of varying magnitude as additional information regarding claims activity becomes known. Reported results, therefore, may be volatile in certain accounting periods. 56
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