Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
(Mark One)
ý
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2018
or
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                     to                     
Commission File Number: 1-9518
 
 
THE PROGRESSIVE CORPORATION
(Exact name of registrant as specified in its charter)
 
Ohio
 
34-0963169
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
6300 Wilson Mills Road, Mayfield Village, Ohio
 
44143
(Address of principal executive offices)
 
(Zip Code)
(440) 461-5000
(Registrant’s telephone number, including area code)
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Shares, $1.00 par value: 582,376,344 outstanding at March 31, 2018
 

1


PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
The Progressive Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(unaudited)
Three Months Ended March 31,
2018

 
2017

 
%
Change
(millions — except per share amounts)
 
 
 
 
 
Revenues
 
 
 
 
 
Net premiums earned
$
7,174.0

 
$
6,026.7

 
19
Investment income
166.3

 
129.2

 
29
Net realized gains (losses) on securities:
 
 
 
 
 
Net realized gains (losses) on security sales
107.0

 
52.1

 
105
Net holding period gains (losses) on securities
(155.2
)
 
0.8

 
NM
Net impairment losses recognized in earnings
0

 
(1.0
)
 
(100)
Total net realized gains (losses) on securities
(48.2
)
 
51.9

 
(193)
Fees and other revenues
103.8

 
85.2

 
22
Service revenues
34.2

 
28.5

 
20
Other gains (losses)
0

 
0.2

 
(100)
Total revenues
7,430.1

 
6,321.7

 
18
Expenses
 
 
 
 

Losses and loss adjustment expenses
4,870.8

 
4,263.4

 
14
Policy acquisition costs
596.2

 
502.9

 
19
Other underwriting expenses
980.2

 
845.6

 
16
Investment expenses
6.0

 
5.6

 
7
Service expenses
29.3

 
25.9

 
13
Interest expense
36.8

 
36.8

 
0
Total expenses
6,519.3

 
5,680.2

 
15
Net Income
 
 
 
 

Income before income taxes
910.8

 
641.5

 
42
Provision for income taxes
181.0

 
211.2

 
(14)
Net income
729.8

 
430.3

 
70
Net (income) loss attributable to noncontrolling interest (NCI)
(11.8
)
 
(6.0
)
 
97
Net income attributable to Progressive
$
718.0


$
424.3

 
69
Other Comprehensive Income (Loss)
 
 
 
 

Changes in:
 
 
 
 
 
Total net unrealized gains (losses) on securities
$
(154.5
)
 
$
132.4

 
(217)
Net unrealized losses on forecasted transactions
0.2

 
2.3

 
(91)
Foreign currency translation adjustment
0

 
0.3

 
(100)
Other comprehensive income (loss)
(154.3
)
 
135.0

 
(214)
Other comprehensive (income) loss attributable to NCI
4.0

 
(0.9
)
 
NM
Comprehensive income attributable to Progressive
$
567.7

 
$
558.4

 
2
Computation of Per Share Earnings Available to Progressive Common Shareholders
 
 
 
 

Net income attributable to Progressive
$
718.0

 
$
424.3

 
69
Less: Preferred share dividends
1.2

 
0

 
NM
Net income available to common shareholders
$
716.8

 
$
424.3

 
69
Average common shares outstanding - Basic
582.0

 
580.3

 
0
Net effect of dilutive stock-based compensation
3.6

 
3.0

 
20
Total average equivalent common shares - Diluted
585.6

 
583.3

 
0
Basic: Earnings per common share
$
1.23

 
$
0.73

 
68
Diluted: Earnings per common share
$
1.22

 
$
0.73

 
68
Dividends declared per common share1
$
0

 
$
0

 
 
NM = Not Meaningful
1 Progressive maintains an annual dividend program. See Note 9 – Dividends for further discussion.
See notes to consolidated financial statements.

2


The Progressive Corporation and Subsidiaries
Consolidated Balance Sheets
(unaudited)
 
March 31,
 
December 31,
2017
(millions)
2018

 
2017

 
Assets
 
 
 
 
 
Available-for-sale securities, at fair value:
 
 
 
 
 
Fixed maturities (amortized cost: $22,627.2, $17,444.8, and $20,209.9)
$
22,420.1

 
$
17,474.3

 
$
20,201.7

Short-term investments (amortized cost: $3,052.4, $3,040.8, and $2,869.4)
3,052.4

 
3,040.8

 
2,869.4

Total available-for-sale securities
25,472.5

 
20,515.1

 
23,071.1

Equity securities, at fair value:
 
 
 
 
 
Nonredeemable preferred stocks (cost: $659.6, $710.3, and $698.6)
745.9

 
809.8

 
803.8

Common equities (cost: $1,265.5, $1,451.5, and $1,499.0)
3,033.2

 
2,978.1

 
3,399.8

Total equity securities
3,779.1

 
3,787.9

 
4,203.6

Total investments
29,251.6

 
24,303.0

 
27,274.7

Cash and cash equivalents
190.1

 
214.5

 
265.0

Restricted cash
6.5

 
0.5

 
10.3

Total cash, cash equivalents, and restricted cash
196.6

 
215.0

 
275.3

Accrued investment income
139.2

 
110.1

 
119.7

Premiums receivable, net of allowance for doubtful accounts of $205.4, $174.5, and $210.9
6,043.8

 
4,850.7

 
5,422.5

Reinsurance recoverables, including $102.1, $88.6, and $103.3 on paid losses and loss adjustment expenses
2,239.1

 
1,939.0

 
2,273.4

Prepaid reinsurance premiums
342.8

 
182.7

 
203.3

Deferred acquisition costs
842.3

 
679.5

 
780.5

Property and equipment, net of accumulated depreciation of $973.8, $881.7, and $940.6
1,112.0

 
1,166.0

 
1,119.6

Goodwill
452.7

 
449.4

 
452.7

Intangible assets, net of accumulated amortization of $193.7, $125.0, and $175.7
348.6

 
417.3

 
366.6

Other assets
362.2

 
497.8

 
412.9

Total assets
$
41,330.9

 
$
34,810.5

 
$
38,701.2

Liabilities
 
 
 
 
 
Unearned premiums
$
9,837.8

 
$
7,945.0

 
$
8,903.5

Loss and loss adjustment expense reserves
13,329.0

 
11,628.9

 
13,086.9

Net deferred income taxes
53.2

 
168.4

 
135.0

Accounts payable, accrued expenses, and other liabilities
3,414.3

 
2,939.4

 
3,481.0

Debt1
3,859.2

 
3,111.7

 
3,306.3

Total liabilities
30,493.5

 
25,793.4

 
28,912.7

Redeemable noncontrolling interest (NCI)2
514.2

 
494.2

 
503.7

Shareholders’ Equity
 
 
 
 
 
Serial Preferred Shares (authorized 20.0)
 
 
 
 
 
Serial Preferred Shares, Series B, no par value (cumulative, liquidation preference $1,000 per share) (authorized, issued, and outstanding 0.5, 0, and 0)
493.9

 
0

 
0

Common shares, $1.00 par value (authorized 900.0; issued 797.5, including treasury shares of 215.1, 216.6, and 215.8)
582.4


580.9


581.7

Paid-in capital
1,401.6


1,331.1


1,389.2

Retained earnings
8,017.9


5,543.4


6,031.7

Accumulated other comprehensive income:





Net unrealized gains (losses) on securities
(160.8
)
 
1,072.0

 
1,295.0

Net unrealized losses on forecasted transactions
(17.8
)
 
(7.1
)
 
(14.8
)
Foreign currency translation adjustment
0

 
(0.8
)
 
0

Accumulated other comprehensive (income) loss attributable to NCI
6.0

 
3.4

 
2.0

Total accumulated other comprehensive income attributable to Progressive
(172.6
)
 
1,067.5

 
1,282.2

Total shareholders’ equity
10,323.2

 
8,522.9

 
9,284.8

Total liabilities, redeemable NCI, and shareholders’ equity
$
41,330.9

 
$
34,810.5

 
$
38,701.2

1 Consists of long-term debt. See Note 4 – Debt for further discussion.
2 See Note 12 – Redeemable Noncontrolling Interest for further discussion.
See notes to consolidated financial statements.

3


The Progressive Corporation and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
(unaudited)
 
Three Months Ended March 31,
 
 
 
(millions — except per share amounts)
2018

 
2017

Serial Preferred Shares, No Par Value
 
 
 
Balance, Beginning of period
$
0

 
$
0

Issuance of Serial Preferred Shares, Series B
493.9

 
0

Balance, End of period
$
493.9

 
$
0

Common Shares, $1.00 Par Value
 
 
 
Balance, Beginning of period
$
581.7

 
$
579.9

Treasury shares purchased
(0.7
)
 
(0.6
)
Net restricted equity awards issued/vested
1.4

 
1.6

Balance, End of period
$
582.4

 
$
580.9

Paid-In Capital
 
 
 
Balance, Beginning of period
$
1,389.2

 
$
1,303.4

Treasury shares purchased
(1.6
)
 
(1.3
)
Net restricted equity awards issued/vested
(1.4
)
 
(1.6
)
Amortization of equity-based compensation
17.2

 
30.5

Reinvested dividends on restricted stock units
(0.5
)
 
0.3

Adjustment to carrying amount of redeemable noncontrolling interest
(1.3
)
 
(0.2
)
Balance, End of period
$
1,401.6

 
$
1,331.1

Retained Earnings
 
 
 
Balance, Beginning of period
$
6,031.7

 
$
5,140.4

Net income attributable to Progressive
718.0

 
424.3

Treasury shares purchased
(34.9
)
 
(19.5
)
Reinvested dividends on restricted stock units
0.5

 
(0.3
)
Cumulative effect of change in accounting principle1 
1,300.2

 
0

Reclassification of disproportionate tax effects1 
4.3

 
0

Other, net
(1.9
)
 
(1.5
)
Balance, End of period
$
8,017.9

 
$
5,543.4

Accumulated Other Comprehensive Income Attributable to Progressive
 
 
 
Balance, Beginning of period
$
1,282.2

 
$
933.4

Attributable to noncontrolling interest
4.0

 
(0.9
)
Other comprehensive income
(154.3
)
 
135.0

Cumulative effect of change in accounting principle1 
(1,300.2
)
 
0

Reclassification of disproportionate tax effects1 
(4.3
)
 
0

Balance, End of period
$
(172.6
)
 
$
1,067.5

Total Shareholders’ Equity
$
10,323.2

 
$
8,522.9

1 See Note 14 – New Accounting Standards for further discussion.
There are 5.0 million Voting Preference Shares authorized; no such shares have been issued.
See notes to consolidated financial statements.

4


The Progressive Corporation and Subsidiaries
Consolidated Statements of Cash Flows        
(unaudited) (millions)
Three Months Ended March 31,
2018

 
2017

Cash Flows From Operating Activities
 
 
 
Net income
$
729.8

 
$
430.3

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
40.9

 
41.0

         Amortization of intangible assets
18.0

 
15.5

Net amortization of fixed-income securities
15.0

 
22.1

Amortization of equity-based compensation
17.4

 
30.9

Net realized (gains) losses on securities
48.2

 
(51.9
)
Net (gains) losses on disposition of property and equipment
1.2

 
1.3

Other (gains) losses
0

 
(0.2
)
Changes in:
 
 
 
Premiums receivable
(621.3
)
 
(341.4
)
Reinsurance recoverables
34.3

 
(54.2
)
Prepaid reinsurance premiums
(139.5
)
 
(12.2
)
Deferred acquisition costs
(61.8
)
 
(28.3
)
Income taxes
181.1

 
212.7

Unearned premiums
934.3

 
476.3

Loss and loss adjustment expense reserves
242.1

 
260.8

Accounts payable, accrued expenses, and other liabilities
283.2

 
137.4

Other, net
24.2

 
(35.7
)
Net cash provided by operating activities
1,747.1

 
1,104.4

Cash Flows From Investing Activities
 
 
 
Purchases:
 
 
 
Fixed maturities
(5,563.0
)
 
(3,203.9
)
Equity securities
(39.9
)
 
(52.5
)
Sales:
 
 
 
Fixed maturities
1,692.4

 
1,014.1

Equity securities
428.0

 
86.5

Maturities, paydowns, calls, and other:
 
 
 
Fixed maturities
1,422.6

 
1,006.5

Equity securities
0

 
26.6

Net sales (purchases) of short-term investments
(175.8
)
 
536.8

Net unsettled security transactions
89.4

 
83.2

Collateral on derivative positions
0

 
(136.1
)
Purchases of property and equipment
(35.8
)
 
(35.0
)
Sales of property and equipment
1.5

 
11.2

Net cash used in investing activities
(2,180.6
)
 
(662.6
)
Cash Flows From Financing Activities
 
 
 
Proceeds from exercise of equity options
0.6

 
0.5

Net proceeds from issuance of Serial Preferred Shares, Series B
493.9

 
0

Net proceeds from debt issuance
589.5

 
0

Payments of debt
(37.1
)
 
(6.2
)
Redemption/reacquisition of subordinated debt
0

 
(30.7
)
Dividends paid to common shareholders
(654.9
)
 
(395.4
)
Acquisition of treasury shares for restricted stock tax liabilities
(36.8
)
 
(21.4
)
Acquisition of treasury shares acquired in open market
(0.4
)
 
0

Net cash provided by (used in) financing activities
354.8

 
(453.2
)
Decrease in cash, cash equivalents, and restricted cash
(78.7
)
 
(11.4
)
Cash, cash equivalents, and restricted cash - January 1
275.3

 
226.4

Cash, cash equivalents, and restricted cash - March 31
$
196.6

 
$
215.0

See notes to consolidated financial statements.

5


The Progressive Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
Note 1 Basis of Presentation — The accompanying consolidated financial statements include the accounts of The Progressive Corporation and ARX Holding Corp. (ARX), and their respective wholly owned insurance and non-insurance subsidiaries and affiliates in which Progressive or ARX has a controlling financial interest. The Progressive Corporation owned 68.9% of the outstanding capital stock of ARX at March 31, 2018 and 69.0% at March 31, 2017 and December 31, 2017. The decrease reflects ARX employee stock options that were exercised during the first quarter 2018. In April 2018, the minority ARX shareholders “put” 204,527 of their ARX shares, including exercised stock options, to Progressive pursuant to the stockholders' agreement, bringing Progressive's ownership interest in ARX to 86.7%. See Note 12 – Redeemable Noncontrolling Interest for additional information. All intercompany accounts and transactions are eliminated in consolidation.
The consolidated financial statements reflect all normal recurring adjustments that, in the opinion of management, were necessary for a fair statement of the results for the interim periods presented. The results of operations for the period ended March 31, 2018, are not necessarily indicative of the results expected for the full year. These consolidated financial statements and the notes thereto should be read in conjunction with Progressive’s audited financial statements and accompanying notes included in Exhibit 13 to our Annual Report on Form 10-K for the year ended December 31, 2017 (“2017 Annual Report to Shareholders”).
Other assets on the consolidated balance sheets include properties that are considered “held for sale,” if any. The fair value of these properties, less the estimated cost to sell them, was $5.3 million at both March 31, 2018 and December 31, 2017. No properties were held for sale at March 31, 2017.

6


Note 2 Investments — Our securities are reported at fair value, with the changes in fair value of these securities (other than hybrid securities, derivative instruments, and, in 2018, equity securities) reported as a component of accumulated other comprehensive income, net of deferred income taxes in our Consolidated Balance Sheets. The changes in fair value of the hybrid securities, derivative instruments, and, in 2018, equity securities are recorded as a component of net realized gains (losses) on securities in our Consolidated Statements of Comprehensive Income.
The following tables present the composition of our investment portfolio by major security type, consistent with our classification of how we manage, monitor, and measure the portfolio. The net holding period gains (losses) on our equity securities represent the change in fair value recorded as realized gains (losses); all of our equity securities have a readily determinable fair value. The net holding period gains (losses) on our fixed-maturity securities represent the amounts realized on our hybrid securities only.
 
($ in millions)
Cost

 
Gross
Unrealized Gains

 
Gross
Unrealized
Losses

 
Net
Holding Period Gains
(Losses)

 
Fair
Value

 
% of
Total
Fair
Value

March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
$
9,081.6

 
$
3.9

 
$
(127.4
)
 
$
0

 
$
8,958.1

 
30.6
%
State and local government obligations
1,732.3

 
4.3

 
(16.4
)
 
(0.1
)
 
1,720.1

 
5.9

Foreign government obligations
0

 
0

 
0

 
0

 
0

 
0

Corporate debt securities
6,102.6

 
4.8

 
(64.8
)
 
(1.5
)
 
6,041.1

 
20.7

Residential mortgage-backed securities
746.7

 
9.9

 
(4.8
)
 
0

 
751.8

 
2.6

Commercial mortgage-backed securities
2,289.8

 
4.5

 
(24.8
)
 
0

 
2,269.5

 
7.8

Other asset-backed securities
2,472.4

 
2.4

 
(12.9
)
 
0.2

 
2,462.1

 
8.4

Redeemable preferred stocks
201.8

 
18.6

 
(1.4
)
 
(1.6
)
 
217.4

 
0.7

Total fixed maturities
22,627.2

 
48.4

 
(252.5
)
 
(3.0
)
 
22,420.1

 
76.7

Short-term investments
3,052.4

 
0

 
0

 
0

 
3,052.4

 
10.4

       Total available-for-sale securities
25,679.6

 
48.4

 
(252.5
)
 
(3.0
)
 
25,472.5

 
87.1

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks
659.6

 
0

 
0

 
86.3

 
745.9

 
2.5

Common equities
1,265.5

 
0

 
0

 
1,767.7

 
3,033.2

 
10.4

       Total equity securities
1,925.1

 
0

 
0

 
1,854.0

 
3,779.1

 
12.9

  Total portfolio1,2
$
27,604.7

 
$
48.4

 
$
(252.5
)
 
$
1,851.0

 
$
29,251.6

 
100.0
%


7


($ in millions)
Cost

 
Gross
Unrealized Gains

 
Gross
Unrealized
Losses

 
Net
Holding Period Gains
(Losses)

 
Fair
Value

 
% of
Total
Fair
Value

March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
$
3,345.5

 
$
0.9

 
$
(20.6
)
 
$
0

 
$
3,325.8

 
13.7
%
State and local government obligations
2,475.8

 
23.3

 
(10.7
)
 
0

 
2,488.4

 
10.2

Foreign government obligations
22.9

 
0

 
0

 
0

 
22.9

 
0.1

Corporate debt securities
5,199.6

 
23.1

 
(15.0
)
 
0.3

 
5,208.0

 
21.4

Residential mortgage-backed securities
1,433.0

 
24.7

 
(11.7
)
 
2.1

 
1,448.1

 
6.0

Commercial mortgage-backed securities
2,216.1

 
13.7

 
(16.3
)
 
0

 
2,213.5

 
9.1

Other asset-backed securities
2,562.4

 
5.4

 
(3.1
)
 
0.2

 
2,564.9

 
10.6

Redeemable preferred stocks
189.5

 
14.3

 
(1.1
)
 
0

 
202.7

 
0.8

Total fixed maturities
17,444.8

 
105.4

 
(78.5
)
 
2.6

 
17,474.3

 
71.9

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks
710.3

 
111.3

 
(11.8
)
 
0

 
809.8

 
3.3

Common equities
1,451.5

 
1,531.4

 
(4.8
)
 
0

 
2,978.1

 
12.3

Short-term investments
3,040.8

 
0

 
0

 
0

 
3,040.8

 
12.5

Total portfolio1,2
$
22,647.4

 
$
1,748.1

 
$
(95.1
)
 
$
2.6

 
$
24,303.0

 
100.0
%
 
($ in millions)
Cost

 
Gross
Unrealized Gains

 
Gross
Unrealized
Losses

 
Net
Holding Period Gains
(Losses)

 
Fair
Value

 
% of
Total
Fair
Value

December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
$
6,688.8

 
$
1.1

 
$
(44.0
)
 
$
0

 
$
6,645.9

 
24.4
%
State and local government obligations
2,285.6

 
20.7

 
(9.3
)
 
0.1

 
2,297.1

 
8.4

Foreign government obligations
0

 
0

 
0

 
0

 
0

 
0

Corporate debt securities
4,997.2

 
14.8

 
(14.4
)
 
0.1

 
4,997.7

 
18.3

Residential mortgage-backed securities
828.8

 
11.3

 
(3.4
)
 
0

 
836.7

 
3.1

Commercial mortgage-backed securities
2,760.1

 
11.8

 
(13.3
)
 
0

 
2,758.6

 
10.1

Other asset-backed securities
2,454.5

 
4.5

 
(4.5
)
 
0.2

 
2,454.7

 
9.0

Redeemable preferred stocks
194.9

 
17.8

 
(1.5
)
 
(0.2
)
 
211.0

 
0.8

Total fixed maturities
20,209.9

 
82.0

 
(90.4
)
 
0.2

 
20,201.7

 
74.1

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks
698.6

 
114.0

 
(8.8
)
 
0

 
803.8

 
2.9

Common equities
1,499.0

 
1,901.0

 
(0.2
)
 
0

 
3,399.8

 
12.5

Short-term investments
2,869.4

 
0

 
0

 
0

 
2,869.4

 
10.5

Total portfolio1,2
$
25,276.9

 
$
2,097.0

 
$
(99.4
)
 
$
0.2

 
$
27,274.7

 
100.0
%
1Our portfolio reflects the effect of unsettled security transactions and collateral on open derivative positions; at March 31, 2018 and 2017, we had $83.6 million and $111.0 million, respectively, included in “other liabilities”, compared to $5.8 million included in “other assets” at December 31, 2017.
2The total fair value of the portfolio at March 31, 2018 and 2017, and December 31, 2017, included $2.1 billion, $0.7 billion, and $1.6 billion, respectively, of securities held in a consolidated, non-insurance subsidiary of the holding company, net of any unsettled security transactions.





8


Short-Term Investments Our short-term investments may include commercial paper and other investments that are expected to mature or are redeemable within one year.

We did not have any open repurchase or reverse repurchase transactions in our short-term investment portfolio at March 31, 2018 and 2017, or December 31, 2017. To the extent we enter into repurchase or reverse repurchase transactions, and consistent with past practice, we would elect not to offset these transactions and would report them on a gross basis on our balance sheets despite the option to elect to offset these transactions as long as they were with the same counterparty and subject to an enforceable master netting arrangement.

Hybrid Securities Included in our fixed-maturity and equity securities are hybrid securities, which are reported at fair value:

 
March 31,
 
December 31,
2017

(millions)
2018

 
2017

 
Fixed maturities:
 
 
 
 
 
State and local government obligations
$
3.7

 
$
0

 
$
6.1

Corporate debt securities
86.4

 
44.5

 
99.8

Residential mortgage-backed securities
0

 
186.6

 
0

Other asset-backed securities
6.1

 
8.3

 
6.7

Redeemable preferred stocks
37.8

 
0

 
30.3

Total hybrid securities
$
134.0

 
$
239.4

 
$
142.9


Certain securities in our portfolio are accounted for as hybrid securities because they contain embedded derivatives that are
not deemed to be clearly and closely related to the host investments. Since the embedded derivative (e.g., change-in-control put option, debt-to-equity conversion, or any other feature unrelated to the credit quality or risk of default of the issuer that could impact the amount or timing of our expected future cash flows) does not have an observable intrinsic value, we have elected to record the change in fair value of the entire security through income as a realized gain or loss.
Fixed Maturities The composition of fixed maturities by maturity at March 31, 2018, was:
 
(millions)
Cost

 
Fair Value

Less than one year
$
3,757.9

 
$
3,767.7

One to five years
14,498.9

 
14,337.4

Five to ten years
4,327.3

 
4,272.2

Ten years or greater
43.1

 
42.8

Total
$
22,627.2

 
$
22,420.1

 
Asset-backed securities are classified in the maturity distribution table based upon their projected cash flows. All other securities which do not have a single maturity date are reported based upon expected average maturity. Contractual maturities may differ from expected maturities because the issuers of the securities may have the right to call or prepay obligations.
Gross Unrealized Losses As of March 31, 2018, we had $252.5 million of gross unrealized losses in our fixed-maturity securities. We currently do not intend to sell the fixed-maturity securities and determined that it is more likely that we will not be required to sell these securities for the period of time necessary to recover their cost bases. A review of our fixed-maturity securities indicated that the issuers were current with respect to their interest obligations and that there was no evidence of any deterioration of the current cash flow projections that would indicate we would not receive the remaining principal at maturity.







9


The following tables show the composition of gross unrealized losses by major security type and by the length of time that individual securities have been in a continuous unrealized loss position:
 
Total No. of Sec.

Total
Fair
Value

Gross Unrealized Losses

Less than 12 Months
 
12 Months or Greater
($ in millions)
No. of Sec.

Fair
Value

Unrealized Losses

 
No. of Sec.

Fair
Value

Unrealized Losses

March 31, 2018
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
64

$
7,933.8

$
(127.4
)
37

$
5,954.6

$
(90.7
)
 
27

$
1,979.2

$
(36.7
)
State and local government obligations
426

1,263.7

(16.4
)
301

890.2

(9.5
)
 
125

373.5

(6.9
)
Corporate debt securities
348

5,082.9

(64.8
)
290

4,515.1

(56.1
)
 
58

567.8

(8.7
)
Residential mortgage-backed securities
211

329.3

(4.8
)
36

112.8

(0.5
)
 
175

216.5

(4.3
)
Commercial mortgage-backed securities
131

1,974.8

(24.8
)
89

1,510.5

(16.2
)
 
42

464.3

(8.6
)
Other asset-backed securities
208

1,958.5

(12.9
)
129

1,439.1

(8.7
)
 
79

519.4

(4.2
)
Redeemable preferred stocks
3

26.8

(1.4
)
2

15.3

(0.4
)
 
1

11.5

(1.0
)
Total fixed maturities
1,391

$
18,569.8

$
(252.5
)
884

$
14,437.6

$
(182.1
)
 
507

$
4,132.2

$
(70.4
)
 
Total No. of Sec.

Total
Fair
Value

Gross Unrealized Losses

Less than 12 Months
 
12 Months or Greater
($ in millions)
No. of Sec.

Fair
Value

Unrealized Losses

 
No. of Sec.

Fair
Value

Unrealized Losses

March 31, 2017
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
34

$
2,747.0

$
(20.6
)
34

$
2,747.0

$
(20.6
)
 
0

$
0

$
0

State and local government obligations
340

986.3

(10.7
)
310

906.5

(9.5
)
 
30

79.8

(1.2
)
Corporate debt securities
147

2,494.7

(15.0
)
139

2,415.1

(14.9
)
 
8

79.6

(0.1
)
Residential mortgage-backed securities
247

916.3

(11.7
)
138

297.1

(1.7
)
 
109

619.2

(10.0
)
Commercial mortgage-backed securities
92

1,131.9

(16.3
)
73

985.7

(14.2
)
 
19

146.2

(2.1
)
Other asset-backed securities
118

1,601.6

(3.1
)
112

1,521.4

(2.8
)
 
6

80.2

(0.3
)
Redeemable preferred stocks
1

11.4

(1.1
)
0

0

0

 
1

11.4

(1.1
)
Total fixed maturities
979

9,889.2

(78.5
)
806

8,872.8

(63.7
)
 
173

1,016.4

(14.8
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks
9

197.0

(11.8
)
5

78.5

(0.7
)
 
4

118.5

(11.1
)
Common equities
68

49.2

(4.8
)
61

48.3

(4.8
)
 
7

0.9

0

Total equity securities
77

246.2

(16.6
)
66

126.8

(5.5
)
 
11

119.4

(11.1
)
Total portfolio
1,056

$
10,135.4

$
(95.1
)
872

$
8,999.6

$
(69.2
)
 
184

$
1,135.8

$
(25.9
)
 
Total No. of Sec.

Total
Fair
Value

Gross Unrealized Losses

Less than 12 Months
 
12 Months or Greater
($ in millions)
No. of Sec.

Fair
Value

Unrealized Losses

 
No. of Sec.

Fair
Value

Unrealized Losses

December 31, 2017
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
58

$
5,817.0

$
(44.0
)
41

$
4,869.3

$
(34.6
)
 
17

$
947.7

$
(9.4
)
State and local government obligations
358

1,200.3

(9.3
)
230

737.6

(4.4
)
 
128

462.7

(4.9
)
Corporate debt securities
222

2,979.4

(14.4
)
171

2,072.9

(9.1
)
 
51

906.5

(5.3
)
Residential mortgage-backed securities
201

300.9

(3.4
)
30

75.1

(0.2
)
 
171

225.8

(3.2
)
Commercial mortgage-backed securities
105

1,682.3

(13.3
)
63

1,221.2

(5.9
)
 
42

461.1

(7.4
)
Other asset-backed securities
197

1,837.3

(4.5
)
134

1,377.8

(3.3
)
 
63

459.5

(1.2
)
Redeemable preferred stocks
2

21.8

(1.5
)
1

10.8

(0.1
)
 
1

11.0

(1.4
)
Total fixed maturities
1,143

13,839.0

(90.4
)
670

10,364.7

(57.6
)
 
473

3,474.3

(32.8
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks
4

127.8

(8.8
)
1

56.5

(0.5
)
 
3

71.3

(8.3
)
Common equities
19

13.4

(0.2
)
18

13.4

(0.2
)
 
1

0

0

Total equity securities
23

141.2

(9.0
)
19

69.9

(0.7
)
 
4

71.3

(8.3
)
Total portfolio
1,166

$
13,980.2

$
(99.4
)
689

$
10,434.6

$
(58.3
)
 
477

$
3,545.6

$
(41.1
)


10


Since both March 31, 2017 and December 31, 2017, the number of securities in our fixed-maturity portfolio with unrealized losses increased, primarily the result of rising interest rates during the latter part of 2017 and early 2018. We had no material decreases in valuation as a result of credit rating downgrades on our fixed-maturity securities. All of the fixed-maturity securities in an unrealized loss position at March 31, 2018 in the table above are current with respect to required principal and interest payments.

Other-Than-Temporary Impairment (OTTI) The following table shows the total non-credit portion of the OTTI recorded in accumulated other comprehensive income, reflecting the original non-credit loss at the time the credit impairment was determined (i.e., unadjusted for valuation changes subsequent to the original write-down):
 
 
March 31,
 
December 31,
2017

(millions)
2018

 
2017

 
Fixed maturities:
 
 
 
 
 
Residential mortgage-backed securities
$
(19.7
)
 
$
(43.3
)
 
$
(19.7
)
Commercial mortgage-backed securities
(0.3
)
 
(0.5
)
 
(0.3
)
Total fixed maturities
$
(20.0
)
 
$
(43.8
)
 
$
(20.0
)

The following tables provide rollforwards of the amounts related to credit losses recognized in earnings for the periods ended March 31, 2018 and 2017, for which a portion of the OTTI losses were also recognized in accumulated other comprehensive income at the time the credit impairments were determined and recognized: 
 
 
 
 
 
 
 
Three Months Ended March 31, 2018
 
Mortgage-Backed
 
 
(millions)
Residential 

 
Commercial 

 
Total

Balance at December 31, 2017
$
0

 
$
0.5

 
$
0.5

Reductions for securities sold/matured
0

 
0

 
0

Change in recoveries of future cash flows expected to be collected1
0

 
0

 
0

Balance at March 31, 2018
$
0

 
$
0.5

 
$
0.5

 
 
 
 
 
 
 
Three Months Ended March 31, 2017
 
Mortgage-Backed
 
 
(millions)
Residential 

 
Commercial 

 
Total

Balance at December 31, 2016
$
11.1

 
$
0.4

 
$
11.5

Reductions for securities sold/matured
0

 
(0.3
)
 
(0.3
)
Change in recoveries of future cash flows expected to be collected1
0.3

 
0

 
0.3

Balance at March 31, 2017
$
11.4

 
$
0.1

 
$
11.5

1Reflects the current period change in the expected recovery of prior impairments that will be accreted into income over the remaining life of the security.
Although we determined it is more likely that we will not be required to sell the securities prior to the recovery of their respective cost bases (which could be maturity), we are required to measure the amount of potential credit losses on the securities that were in an unrealized loss position. In that process, we considered a number of factors and inputs related to the individual securities. The methodology and significant inputs used to measure the amount of credit losses in our portfolio included: current performance indicators on the business model or underlying assets (e.g., delinquency rates, foreclosure rates, and default rates); credit support (via current levels of subordination); historical credit ratings; and updated cash flow expectations based upon these performance indicators. In order to determine the amount of credit loss, if any, the net present value of the cash flows expected (i.e., expected recovery value) was calculated using the current book yield for each security, and was compared to its current amortized value. In the event that the net present value was below the amortized value, a credit loss would be deemed to exist, and the security would be written down. We did not have any credit impairment write-downs for the three months ended March 31, 2018 or 2017.

11



Realized Gains (Losses) The components of net realized gains (losses) for the three months ended March 31, were:
 
Three Months
(millions)
2018

 
2017

Gross realized gains on security sales
 
 
 
Available-for-sale securities:
 
 
 
U.S. government obligations
$
0

 
$
0.4

State and local government obligations
8.6

 
0.5

Corporate and other debt securities
0.1

 
4.1

Residential mortgage-backed securities
0

 
0.1

Commercial mortgage-backed securities
1.7

 
1.2

Other asset-backed securities
0

 
0.3

Redeemable preferred stocks
1.1

 
0.3

Total available-for-sale securities
11.5

 
6.9

Equity securities:
 
 
 
Nonredeemable preferred stocks
3.6

 
45.4

Common equities
119.9

 
7.4

Total equity securities
123.5

 
52.8

   Subtotal gross realized gains on security sales
135.0

 
59.7

Gross realized losses on security sales
 
 
 
Available-for-sale securities:
 
 
 
U.S. government obligations
(8.9
)
 
(3.2
)
State and local government obligations
(1.3
)
 
(0.1
)
Corporate and other debt securities
(3.1
)
 
(0.9
)
Commercial mortgage-backed securities
(6.3
)
 
(2.4
)
Other asset-backed securities
(0.1
)
 
0

Total available-for-sale securities
(19.7
)
 
(6.6
)
Equity securities:
 
 
 
Nonredeemable preferred stocks
(0.4
)
 
(1.2
)
Common equities
(7.9
)
 
(0.1
)
Total equity securities
(8.3
)
 
(1.3
)
   Subtotal gross realized losses on security sales
(28.0
)
 
(7.9
)
Net realized gains (losses) on security sales
 
 
 
Available-for-sale securities:
 
 
 
U.S. government obligations
(8.9
)
 
(2.8
)
State and local government obligations
7.3

 
0.4

Corporate and other debt securities
(3.0
)
 
3.2

Residential mortgage-backed securities
0

 
0.1

Commercial mortgage-backed securities
(4.6
)
 
(1.2
)
Other asset-backed securities
(0.1
)
 
0.3

Redeemable preferred stocks
1.1

 
0.3

Total available-for-sale securities
(8.2
)
 
0.3

Equity securities:
 
 
 
Nonredeemable preferred stocks
3.2

 
44.2

Common equities
112.0

 
7.3

Total equity securities
115.2

 
51.5

  Subtotal net realized gains (losses) on security sales
107.0

 
51.8

Net holding period gains (losses)
 
 
 
Hybrid securities
(3.2
)
 
0.8

Equity securities
(152.0
)
 
0

  Subtotal net holding period gains (losses)
(155.2
)
 
0.8

Other-than-temporary impairment losses
 
 
 
Equity securities:
 
 
 
Common equities
0

 
(1.0
)
  Subtotal other-than-temporary impairment losses
0

 
(1.0
)
Litigation settlements and other gains (losses)
0

 
0.3

     Total net realized gains (losses) on securities
$
(48.2
)
 
$
51.9


Gross realized gains were predominantly the result of sales in our indexed common stock portfolio in order to reduce the overall portfolio risk, while gross realized losses were predominantly in our available-for-sale securities and were the result of changes in credit spreads and interest rates. Also included are holding period change in valuation gains and losses on equity securities and hybrid securities, write-downs for securities determined to be other-than-temporarily impaired, and recoveries from litigation settlements related to investments.

12


The following table reflects our holding period realized gains (losses) on equity securities recognized for the three months ended March 31, 2018 for equity securities held at quarter end:
 
Three Months
(millions)
2018

Total net gains (losses) recognized during the period on equity securities


$
(36.8
)
Less: Net gains (losses) recognized on equity securities sold during the period


115.2

Net holding period gains (losses) recognized during the period on equity securities held at period end


$
(152.0
)
Note: Comparative disclosure for the prior year period is not meaningful.
Net Investment Income  The components of net investment income for the three months ended March 31, were: 
 
Three Months
(millions)
2018

2017

Available-for-sale securities:
 
 
   Fixed maturities:
 
 
U.S. government obligations
$
39.8

$
12.7

State and local government obligations
10.0

13.3

Foreign government obligations
0

0.1

Corporate debt securities
36.2

29.6

Residential mortgage-backed securities
6.9

9.6

Commercial mortgage-backed securities
21.2

18.8

Other asset-backed securities
13.6

9.9

Redeemable preferred stocks
2.6

3.4

Total fixed maturities
130.3

97.4

   Short-term investments
10.1

7.0

    Total available-for-sale securities
140.4

104.4

Equity securities:
 
 
Nonredeemable preferred stocks
10.9

11.5

Common equities
15.0

13.3

    Total equity securities
25.9

24.8

    Investment income
166.3

129.2

    Investment expenses
(6.0
)
(5.6
)
Net investment income
$
160.3

$
123.6


The amount of investment income (interest and dividends) we recognize varies from year to year based on the average assets held during the year and the book yields of the securities in our portfolio. The increase in net investment income on a year-over-year basis for the three months ended March 31, 2018, was a combination of an increase in average assets, from strong underwriting growth and profitability, as well as the $850 million debt issuance in the second quarter 2017, and an increase in portfolio yields as a result of our decision to increase the portfolio duration from 2.3 years at the end of the first quarter 2017 to 2.6 years at the end of the first quarter 2018.

Trading Securities At March 31, 2018 and 2017, and December 31, 2017, we did not hold any trading securities and did not have any net realized gains (losses) on trading securities for the three months ended March 31, 2018 and 2017.

13


Derivative Instruments
We had no open derivative positions at March 31, 2018 or December 31, 2017. During the first quarter 2017, we entered into a forecasted debt issuance hedge, to hedge against a possible rise in interest rates, with a 30-year interest rate swap for which we were paying a fixed rate and receiving a variable rate, in anticipation of a debt issuance. At March 31, 2017, we recorded a $4.0 million pretax unrealized gain as part of accumulated other comprehensive income and the balance of our margin collateral at the clearinghouse was $136.1 million, which is included in other assets on our Consolidated Balance Sheets. Upon issuance of $850 million of 4.125% Senior Notes due 2047 in April 2017, we closed the hedge and recognized, as part of accumulated other comprehensive income, a pretax unrealized loss of $8.0 million.
See Note 4 – Debt for further discussion.
Note 3 Fair Value — We have categorized our financial instruments, based on the degree of subjectivity inherent in the method by which they are valued, into a fair value hierarchy of three levels, as follows:
•
Level 1: Inputs are unadjusted quoted prices in active markets for identical instruments at the measurement date (e.g., U.S. government obligations, which are continually priced on a daily basis, active exchange-traded equity securities, and certain short-term securities).

•
Level 2: Inputs (other than quoted prices included within Level 1) that are observable for the instrument either directly or indirectly (e.g., certain corporate and municipal bonds and certain preferred stocks). This includes: (i) quoted prices for similar instruments in active markets, (ii) quoted prices for identical or similar instruments in markets that are not active, (iii) inputs other than quoted prices that are observable for the instruments, and (iv) inputs that are derived principally from or corroborated by observable market data by correlation or other means.

•
Level 3: Inputs that are unobservable. Unobservable inputs reflect our subjective evaluation about the assumptions market participants would use in pricing the financial instrument (e.g., certain structured securities and privately held investments).
Determining the fair value of the investment portfolio is the responsibility of management. As part of the responsibility, we evaluate whether a market is distressed or inactive in determining the fair value for our portfolio. We review certain market level inputs to evaluate whether sufficient activity, volume, and new issuances exist to create an active market. Based on this evaluation, we concluded that there was sufficient activity related to the sectors and securities for which we obtained valuations.

14


The composition of the investment portfolio by major security type and our outstanding debt was:
 
Fair Value
 
 
(millions)
Level 1

 
Level 2

 
Level 3

 
Total

 
Cost

March 31, 2018
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
U.S. government obligations
$
8,958.1

 
$
0

 
$
0

 
$
8,958.1

 
$
9,081.6

State and local government obligations
0

 
1,720.1

 
0

 
1,720.1

 
1,732.3

Foreign government obligations
0

 
0

 
0

 
0

 
0

Corporate debt securities
0

 
6,041.1

 
0

 
6,041.1

 
6,102.6

Subtotal
8,958.1

 
7,761.2

 
0

 
16,719.3

 
16,916.5

Asset-backed securities:
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
0

 
751.8

 
0

 
751.8

 
746.7

Commercial mortgage-backed
0

 
2,269.5

 
0

 
2,269.5

 
2,289.8

Other asset-backed
0

 
2,462.1

 
0

 
2,462.1

 
2,472.4

Subtotal asset-backed securities
0

 
5,483.4

 
0

 
5,483.4

 
5,508.9

Redeemable preferred stocks:
 
 
 
 
 
 
 
 
 
Financials
0

 
64.0

 
0

 
64.0

 
61.2

Utilities
0

 
11.6

 
0

 
11.6

 
10.7

Industrials
0

 
141.8

 
0

 
141.8

 
129.9

Subtotal redeemable preferred stocks
0

 
217.4

 
0

 
217.4

 
201.8

Total fixed maturities
8,958.1

 
13,462.0

 
0

 
22,420.1

 
22,627.2

Short-term investments
2,569.5

 
482.9

 
0

 
3,052.4

 
3,052.4

    Total available-for-sale securities
11,527.6

 
13,944.9

 
0

 
25,472.5

 
25,679.6

Equity securities:
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks:
 
 
 
 
 
 
 
 
 
Financials
78.9

 
662.0

 
0

 
740.9

 
654.6

Industrials
0

 
0

 
5.0

 
5.0

 
5.0

Subtotal nonredeemable preferred stocks
78.9

 
662.0

 
5.0

 
745.9

 
659.6