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 September 30, 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: 583,144,753 outstanding at September 30, 2018
 

1


PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
The Progressive Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(unaudited)
 
Three Months
 
Nine Months
Periods Ended September 30,
2018

 
2017

 
% Change
 
2018

 
2017

 
% Change
(millions — except per share amounts)
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
 
 
 
Net premiums earned
$
7,930.5

 
$
6,544.0

 
21
 
$
22,738.7

 
$
18,884.0

 
20
Investment income
218.1

 
142.9

 
53
 
576.5

 
410.9

 
40
Net realized gains (losses) on securities:
 
 
 
 
 
 
 
 
 
 
 
Net realized gains (losses) on security sales
108.4

 
19.2

 
465
 
205.8

 
116.8

 
76
Net holding period gains (losses) on securities
95.8

 
(0.9
)
 
NM
 
(5.9
)
 
0.3

 
NM
Net impairment losses recognized in earnings
(22.1
)
 
(43.0
)
 
(49)
 
(33.2
)
 
(57.8
)
 
(43)
Total net realized gains (losses) on securities
182.1

 
(24.7
)
 
NM
 
166.7

 
59.3

 
181
Fees and other revenues
122.6

 
96.3

 
27
 
342.4

 
270.3

 
27
Service revenues
42.5

 
33.3

 
28
 
119.6

 
94.5

 
27
Other gains (losses)
0

 
0

 
NM
 
0

 
0.2

 
(100)
Total revenues
8,495.8

 
6,791.8

 
25
 
23,943.9

 
19,719.2

 
21
Expenses
 
 
 
 

 
 
 
 
 
 
Losses and loss adjustment expenses
5,523.1

 
5,050.5

 
9
 
15,769.2

 
13,928.8

 
13
Policy acquisition costs
662.7

 
540.1

 
23
 
1,889.7

 
1,557.2

 
21
Other underwriting expenses
1,095.9

 
877.7

 
25
 
3,123.0

 
2,568.3

 
22
Investment expenses
5.8

 
5.8

 
0
 
18.0

 
18.0

 
0
Service expenses
35.8

 
28.9

 
24
 
102.1

 
81.8

 
25
Interest expense
42.0

 
37.4

 
12
 
120.5

 
117.6

 
2
Total expenses
7,365.3

 
6,540.4

 
13
 
21,022.5

 
18,271.7

 
15
Net Income
 
 
 
 

 
 
 
 
 
 
Income before income taxes
1,130.5

 
251.4

 
350
 
2,921.4

 
1,447.5

 
102
Provision for income taxes
200.3

 
36.6

 
447
 
560.2

 
429.7

 
30
Net income
930.2

 
214.8

 
333
 
2,361.2

 
1,017.8

 
132
Net (income) loss attributable to noncontrolling interest (NCI)
(1.8
)
 
9.2

 
(120)
 
(10.6
)
 
(1.9
)
 
458
Net income attributable to Progressive
$
928.4


$
224.0

 
314
 
$
2,350.6

 
$
1,015.9

 
131
Other Comprehensive Income (Loss)
 
 
 
 

 
 
 
 
 
 
Changes in:
 
 
 
 
 
 
 
 
 
 
 
Total net unrealized gains (losses) on securities
$
(39.0
)
 
$
75.5

 
(152)
 
$
(243.6
)
 
$
300.5

 
(181)
Net unrealized losses on forecasted transactions
0.2

 
0.1

 
100
 
0.6

 
(5.6
)
 
(111)
Foreign currency translation adjustment
0

 
0.6

 
(100)
 
0

 
0.8

 
(100)
Other comprehensive income (loss)
(38.8
)
 
76.2

 
(151)
 
(243.0
)
 
295.7

 
(182)
Other comprehensive (income) loss attributable to NCI
0.4

 
(0.7
)
 
(157)
 
5.0

 
(2.9
)
 
(272)
Comprehensive income attributable to Progressive
$
890.0

 
$
299.5

 
197
 
$
2,112.6

 
$
1,308.7

 
61
Computation of Per Share Earnings Available to Progressive Common Shareholders
 
 
 
 

 
 
 
 
 

Net income attributable to Progressive
$
928.4

 
$
224.0

 
314
 
$
2,350.6

 
$
1,015.9

 
131
Less: Preferred share dividends
6.7

 
0

 
NM
 
14.6

 
0

 
NM
Net income available to common shareholders
$
921.7

 
$
224.0

 
311
 
$
2,336.0

 
$
1,015.9

 
130
Average common shares outstanding - Basic
582.7

 
581.3

 
0
 
582.2

 
580.7

 
0
Net effect of dilutive stock-based compensation
3.9

 
4.3

 
(9)
 
4.5

 
5.0

 
(10)
Total average equivalent common shares - Diluted
586.6

 
585.6

 
0
 
586.7

 
585.7

 
0
Basic: Earnings per common share
$
1.58

 
$
0.39

 
310
 
$
4.01

 
$
1.75

 
129
Diluted: Earnings per common share
$
1.57

 
$
0.38

 
311
 
$
3.98

 
$
1.73

 
130
Dividends declared per common share1
$
0

 
$
0

 
NM
 
$
0

 
$
0

 
NM
NM = Not Meaningful
1 Progressive maintains an annual variable common share 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)
 
September 30,
 
December 31,
(millions)
2018

 
2017

 
2017

Assets
 
 
 
 
 
Available-for-sale securities, at fair value:
 
 
 
 
 
Fixed maturities (amortized cost: $25,963.4, $18,583.1, and $20,209.9)
$
25,642.7

 
$
18,660.0

 
$
20,201.7

Short-term investments (amortized cost: $2,809.7, $4,311.5, and $2,869.4)
2,809.7

 
4,311.5

 
2,869.4

Total available-for-sale securities
28,452.4

 
22,971.5

 
23,071.1

Equity securities, at fair value:
 
 
 
 
 
Nonredeemable preferred stocks (cost: $758.9, $700.6, and $698.6)
840.9

 
813.7

 
803.8

Common equities (cost: $1,135.0, $1,485.5, and $1,499.0)
3,057.3

 
3,209.5

 
3,399.8

Total equity securities
3,898.2

 
4,023.2

 
4,203.6

Total investments
32,350.6

 
26,994.7

 
27,274.7

Cash and cash equivalents
121.9

 
224.9

 
265.0

Restricted cash
0.8

 
31.4

 
10.3

Total cash, cash equivalents, and restricted cash
122.7

 
256.3

 
275.3

Accrued investment income
159.5

 
113.0

 
119.7

Premiums receivable, net of allowance for doubtful accounts of $230.1, $189.3, and $210.9
6,776.6

 
5,519.9

 
5,422.5

Reinsurance recoverables, including $114.1, $76.4, and $103.3 on paid losses and loss adjustment expenses
2,490.5

 
2,701.1

 
2,273.4

Prepaid reinsurance premiums
379.6

 
211.7

 
203.3

Deferred acquisition costs
962.7

 
782.6

 
780.5

Property and equipment, net of accumulated depreciation of $1,004.6, $908.4, and $940.6
1,139.3

 
1,129.4

 
1,119.6

Goodwill
452.7

 
452.7

 
452.7

Intangible assets, net of accumulated amortization of $229.7, $157.7, and $175.7
312.6

 
384.6

 
366.6

Other assets
396.9

 
386.6

 
412.9

Total assets
$
45,543.7

 
$
38,932.6

 
$
38,701.2

Liabilities
 
 
 
 
 
Unearned premiums
$
11,009.2

 
$
9,005.3

 
$
8,903.5

Loss and loss adjustment expense reserves
14,620.8

 
13,353.3

 
13,086.9

Net deferred income taxes
53.5

 
201.5

 
135.0

Accounts payable, accrued expenses, and other liabilities
3,924.1

 
3,272.7

 
3,481.0

Debt1
3,859.9

 
3,312.2

 
3,306.3

Total liabilities
33,467.5

 
29,145.0

 
28,912.7

Redeemable noncontrolling interest (NCI)2
217.4

 
498.2

 
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 214.4, 215.9, and 215.8)
583.1


581.6


581.7

Paid-in capital
1,443.4


1,365.1


1,389.2

Retained earnings
9,602.1


6,116.5


6,031.7

Accumulated other comprehensive income (loss):





Net unrealized gains (losses) on securities
(249.9
)
 
1,240.1

 
1,295.0

Net unrealized losses on forecasted transactions
(17.4
)
 
(15.0
)
 
(14.8
)
Foreign currency translation adjustment
0

 
(0.3
)
 
0

Accumulated other comprehensive (income) loss attributable to NCI
3.6

 
1.4

 
2.0

Total accumulated other comprehensive income (loss) attributable to Progressive
(263.7
)
 
1,226.2

 
1,282.2

Total shareholders’ equity
11,858.8

 
9,289.4

 
9,284.8

Total liabilities, redeemable NCI, and shareholders’ equity
$
45,543.7

 
$
38,932.6

 
$
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)
 
Nine Months Ended September 30,
 
 
 
(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
(1.4
)
 
(1.5
)
Net restricted equity awards issued/vested
2.8

 
3.2

Balance, End of period
$
583.1

 
$
581.6

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

 
$
1,303.4

Treasury shares purchased
(3.3
)
 
(3.4
)
Net restricted equity awards issued/vested
(2.8
)
 
(3.2
)
Amortization of equity-based compensation
53.3

 
74.3

Reinvested dividends on restricted stock units
(0.8
)
 
0.3

Adjustment to carrying amount of redeemable noncontrolling interest
7.8

 
(6.3
)
Balance, End of period
$
1,443.4

 
$
1,365.1

Retained Earnings
 
 
 
Balance, Beginning of period
$
6,031.7

 
$
5,140.4

Net income attributable to Progressive
2,350.6

 
1,015.9

Treasury shares purchased
(74.0
)
 
(57.2
)
Cash dividends declared on Serial Preferred Shares, Series B ($27.024 per share and $0)
(13.5
)
 
0

Reinvested dividends on restricted stock units
0.8

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

 
0

Reclassification of disproportionate tax effects1 
4.3

 
0

Other, net
2.0

 
17.7

Balance, End of period
$
9,602.1

 
$
6,116.5

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

 
$
933.4

Attributable to noncontrolling interest
1.6

 
(2.9
)
Other comprehensive income
(243.0
)
 
295.7

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

Reclassification of disproportionate tax effects1 
(4.3
)
 
0

Balance, End of period
$
(263.7
)
 
$
1,226.2

Total Shareholders’ Equity
$
11,858.8

 
$
9,289.4

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)
Nine Months Ended September 30,
2018

 
2017

(millions)
 
 
 
Cash Flows From Operating Activities
 
 
 
Net income
$
2,361.2

 
$
1,017.8

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
137.8

 
126.7

         Amortization of intangible assets
54.0

 
48.2

Net amortization of fixed-income securities
29.7

 
67.5

Amortization of equity-based compensation
54.0

 
76.6

Net realized (gains) losses on securities
(166.7
)
 
(59.3
)
Net (gains) losses on disposition of property and equipment
7.4

 
5.3

Other (gains) losses
0

 
(0.2
)
Changes in:
 
 
 
Premiums receivable
(1,354.1
)
 
(1,010.3
)
Reinsurance recoverables
(217.1
)
 
(816.1
)
Prepaid reinsurance premiums
(176.3
)
 
(41.2
)
Deferred acquisition costs
(182.2
)
 
(131.4
)
Income taxes
25.0

 
(111.2
)
Unearned premiums
2,105.7

 
1,536.7

Loss and loss adjustment expense reserves
1,533.9

 
1,985.1

Accounts payable, accrued expenses, and other liabilities
1,032.8

 
622.1

Other, net
(43.6
)
 
(93.2
)
Net cash provided by operating activities
5,201.5

 
3,223.1

Cash Flows From Investing Activities
 
 
 
Purchases:
 
 
 
Fixed maturities
(14,430.6
)
 
(9,623.6
)
Equity securities
(234.9
)
 
(155.2
)
Sales:
 
 
 
Fixed maturities
4,659.6

 
3,431.7

Equity securities
773.5

 
150.6

Maturities, paydowns, calls, and other:
 
 
 
Fixed maturities
3,911.5

 
3,872.5

Equity securities
15.0

 
50.0

Net sales (purchases) of short-term investments
91.9

 
(721.8
)
Net unsettled security transactions
11.0

 
210.5

Purchases of property and equipment
(164.8
)
 
(109.7
)
Sales of property and equipment
8.1

 
13.8

Acquisition of additional shares of ARX Holding Corp.
(296.9
)
 
0

Acquisition of an insurance company, net of cash acquired
0

 
(18.1
)
Net cash used in investing activities
(5,656.6
)
 
(2,899.3
)
Cash Flows From Financing Activities
 
 
 
Net proceeds from issuance of Serial Preferred Shares, Series B
493.9

 
0

Net proceeds from debt issuances
589.5

 
841.1

Payments of debt
(37.1
)
 
(42.8
)
Redemption/reacquisition of subordinated debt
0

 
(635.6
)
Dividends paid to common shareholders
(654.9
)
 
(395.4
)
Dividends paid to preferred shareholders
(13.5
)
 
0

Proceeds from exercise of equity options
3.3

 
0.5

Acquisition of treasury shares for restricted stock tax liabilities
(78.3
)
 
(57.2
)
Acquisition of treasury shares acquired in open market
(0.4
)
 
(4.9
)
Net cash provided by (used in) financing activities
302.5

 
(294.3
)
Effect of exchange rate changes on cash
0

 
0.4

Increase (decrease) in cash, cash equivalents, and restricted cash
(152.6
)
 
29.9

Cash, cash equivalents, and restricted cash – January 1
275.3

 
226.4

Cash, cash equivalents, and restricted cash – September 30
$
122.7

 
$
256.3

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 86.8% of the outstanding capital stock of ARX at September 30, 2018 and 69.0% at September 30, 2017 and December 31, 2017. The increase in Progressive’s ownership of ARX at September 30, 2018, is primarily due to the "put" by minority ARX shareholders of 204,527 of their ARX shares during the second quarter 2018, including exercised stock options, to Progressive pursuant to the stockholders’ agreement. 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 September 30, 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 $20.5 million at September 30, 2018, and $5.3 million at both September 30, 2017 and December 31, 2017.

6


Note 2 Investments — 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. Our securities are reported in our Consolidated Balance Sheets at fair value. The changes in fair value for our fixed-maturity securities (other than hybrid securities) are reported as a component of accumulated other comprehensive income, net of deferred income taxes, in our Consolidated Balance Sheets.
The net holding period gains (losses) reported below represent the inception-to-date changes in fair value. The changes in the net holding period gains (losses) between periods for the hybrid securities and, beginning in 2018, equity securities are recorded as a component of net realized gains (losses) on securities in our Consolidated Statements of Comprehensive Income. Prior to 2018, the change in fair value of our equity securities was part of accumulated other comprehensive income (see Note 14 – New Accounting Standards for further discussion).

($ in millions)
Cost

 
Gross
Unrealized Gains

 
Gross
Unrealized
Losses

 
Net
Holding Period Gains
(Losses)

 
Fair
Value

 
% of
Total
Fair
Value

September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
$
9,942.0

 
$
0

 
$
(189.5
)
 
$
0

 
$
9,752.5

 
30.2
%
State and local government obligations
1,610.1

 
1.9

 
(23.2
)
 
0

 
1,588.8

 
4.9

Foreign government obligations
0

 
0

 
0

 
0

 
0

 
0

Corporate debt securities
7,229.1

 
4.9

 
(85.2
)
 
(2.0
)
 
7,146.8

 
22.1

Residential mortgage-backed securities
767.8

 
7.6

 
(5.6
)
 
0

 
769.8

 
2.4

Commercial mortgage-backed securities
2,986.5

 
3.3

 
(30.5
)
 
0

 
2,959.3

 
9.1

Other asset-backed securities
3,205.0

 
1.4

 
(13.6
)
 
0.1

 
3,192.9

 
9.9

Redeemable preferred stocks
222.9

 
13.2

 
(1.4
)
 
(2.1
)
 
232.6

 
0.7

Total fixed maturities
25,963.4

 
32.3

 
(349.0
)
 
(4.0
)
 
25,642.7

 
79.3

Short-term investments
2,809.7

 
0

 
0

 
0

 
2,809.7

 
8.7

       Total available-for-sale securities
28,773.1

 
32.3

 
(349.0
)
 
(4.0
)
 
28,452.4

 
88.0

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks
758.9

 
0

 
0

 
82.0

 
840.9

 
2.6

Common equities
1,135.0

 
0

 
0

 
1,922.3

 
3,057.3

 
9.4

       Total equity securities
1,893.9

 
0

 
0

 
2,004.3

 
3,898.2

 
12.0

  Total portfolio1,2
$
30,667.0

 
$
32.3

 
$
(349.0
)
 
$
2,000.3

 
$
32,350.6

 
100.0
%


7


($ in millions)
Cost

 
Gross
Unrealized Gains

 
Gross
Unrealized
Losses

 
Net
Holding Period Gains
(Losses)

 
Fair
Value

 
% of
Total
Fair
Value

September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
$
4,612.2

 
$
3.0

 
$
(20.2
)
 
$
0

 
$
4,595.0

 
17.0
%
State and local government obligations
2,332.2

 
35.0

 
(3.1
)
 
0.1

 
2,364.2

 
8.7

Foreign government obligations
24.2

 
0

 
0

 
0

 
24.2

 
0.1

Corporate debt securities
5,195.7

 
32.7

 
(4.2
)
 
1.4

 
5,225.6

 
19.4

Residential mortgage-backed securities
947.0

 
12.2

 
(3.6
)
 
0

 
955.6

 
3.5

Commercial mortgage-backed securities
2,763.7

 
17.0

 
(12.8
)
 
0

 
2,767.9

 
10.3

Other asset-backed securities
2,485.6

 
6.4

 
(2.0
)
 
0.2

 
2,490.2

 
9.2

Redeemable preferred stocks
222.5

 
16.4

 
(2.0
)
 
0.4

 
237.3

 
0.9

Total fixed maturities
18,583.1

 
122.7

 
(47.9
)
 
2.1

 
18,660.0

 
69.1

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks
700.6

 
120.4

 
(7.3
)
 
0

 
813.7

 
3.0

Common equities
1,485.5

 
1,729.5

 
(5.5
)
 
0

 
3,209.5

 
11.9

Short-term investments
4,311.5

 
0

 
0

 
0

 
4,311.5

 
16.0

Total portfolio1,2
$
25,080.7

 
$
1,972.6

 
$
(60.7
)
 
$
2.1

 
$
26,994.7

 
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; at September 30, 2018 and 2017, we had $5.2 million and $238.3 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 September 30, 2018 and 2017, and December 31, 2017, included $1.8 billion, $1.1 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 September 30, 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 securities are hybrid securities, which are reported at fair value:

 
September 30,
 
 
(millions)
2018

 
2017

 
December 31, 2017

Fixed maturities:
 
 
 
 
 
State and local government obligations
$
3.6

 
$
2.4

 
$
6.1

Corporate debt securities
159.7

 
114.9

 
99.8

Other asset-backed securities
5.0

 
7.1

 
6.7

Redeemable preferred stocks
72.0

 
35.5

 
30.3

Total hybrid securities
$
240.3

 
$
159.9

 
$
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 derivatives (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) do not have observable intrinsic values, we have elected to record the changes in fair value of these securities through income as realized gains or losses.
Fixed Maturities The composition of fixed maturities by maturity at September 30, 2018, was:
 
(millions)
Cost

 
Fair Value

Less than one year
$
4,192.3

 
$
4,196.4

One to five years
16,545.0

 
16,315.6

Five to ten years
5,123.1

 
5,028.3

Ten years or greater
103.0

 
102.4

Total
$
25,963.4

 
$
25,642.7

 
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 September 30, 2018, we had $349.0 million of gross unrealized losses in our fixed-maturity securities. 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 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

September 30, 2018
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
91

$
9,752.5

$
(189.5
)
39

$
5,025.0

$
(67.2
)
 
52

$
4,727.5

$
(122.3
)
State and local government obligations
459

1,394.3

(23.2
)
227

680.5

(6.4
)
 
232

713.8

(16.8
)
Corporate debt securities
369

5,959.2

(85.2
)
221

3,963.9

(45.3
)
 
148

1,995.3

(39.9
)
Residential mortgage-backed securities
234

521.7

(5.6
)
44

325.0

(0.6
)
 
190

196.7

(5.0
)
Commercial mortgage-backed securities
151

2,392.7

(30.5
)
80

1,164.2

(8.3
)
 
71

1,228.5

(22.2
)
Other asset-backed securities
219

2,828.6

(13.6
)
111

1,821.8

(4.0
)
 
108

1,006.8

(9.6
)
Redeemable preferred stocks
3

30.8

(1.4
)
1

4.7

(0.1
)
 
2

26.1

(1.3
)
Total fixed maturities
1,526

$
22,879.8

$
(349.0
)
723

$
12,985.1

$
(131.9
)
 
803

$
9,894.7

$
(217.1
)
 
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

September 30, 2017
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
54

$
3,804.0

$
(20.2
)
31

$
2,302.2

$
(7.1
)
 
23

$
1,501.8

$
(13.1
)
State and local government obligations
169

610.4

(3.1
)
40

141.0

(0.7
)
 
129

469.4

(2.4
)
Corporate debt securities
113

1,523.8

(4.2
)
59

636.0

(1.1
)
 
54

887.8

(3.1
)
Residential mortgage-backed securities
191

341.5

(3.6
)
26

39.2

(0.1
)
 
165

302.3

(3.5
)
Commercial mortgage-backed securities
105

1,588.9

(12.8
)
61

1,073.5

(4.6
)
 
44

515.4

(8.2
)
Other asset-backed securities
148

1,393.2

(2.0
)
103

920.8

(1.0
)
 
45

472.4

(1.0
)
Redeemable preferred stocks
2

21.4

(2.0
)
1

10.9

0

 
1

10.5

(2.0
)
Total fixed maturities
782

9,283.2

(47.9
)
321

5,123.6

(14.6
)
 
461

4,159.6

(33.3
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks
3

72.4

(7.3
)
0

0

0

 
3

72.4

(7.3
)
Common equities
67

52.0

(5.5
)
62

49.3

(4.9
)
 
5

2.7

(0.6
)
Total equity securities
70

124.4

(12.8
)
62

49.3

(4.9
)
 
8

75.1

(7.9
)
Total portfolio
852

$
9,407.6

$
(60.7
)
383

$
5,172.9

$
(19.5
)
 
469

$
4,234.7

$
(41.2
)
 
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 September 30, 2017 and December 31, 2017, the number of securities in our fixed-maturity portfolio with unrealized losses increased as a result of rising interest rates. We had no material decreases in valuation as a result of credit rating downgrades and all of the securities 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):
 
 
September 30,
 
December 31,
2017

(millions)
2018

 
2017

 
Fixed maturities:
 
 
 
 
 
Residential mortgage-backed securities
$
(19.7
)
 
$
(19.7
)
 
$
(19.7
)
Commercial mortgage-backed securities
(0.1
)
 
(0.4
)
 
(0.3
)
Total fixed maturities
$
(19.8
)
 
$
(20.1
)
 
$
(20.0
)

The following tables provide rollforwards of the amounts related to credit losses recognized in earnings for the periods ended September 30, 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 September 30, 2018
 
Mortgage-Backed
 
 
(millions)
Residential 

 
Commercial 

 
Total

Balance at June 30, 2018
$
0.3

 
$
0.5

 
$
0.8

Credit losses for which an OTTI was not previously recognized
0

 
0

 
0

Reductions for securities sold/matured
0

 
0

 
0

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

 
0

 
0

Balance at September 30, 2018
$
0.3

 
$
0.5

 
$
0.8

 
 
 
 
 
 
 
Nine Months Ended September 30, 2018
 
Mortgage-Backed
 
 
(millions)
Residential 

 
Commercial 

 
Total

Balance at December 31, 2017
$
0

 
$
0.5

 
$
0.5

Credit losses for which an OTTI was not previously recognized
0

 
0

 
0

Reductions for securities sold/matured
0

 
0

 
0

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

 
0

 
0.3

Balance at September 30, 2018
$
0.3

 
$
0.5

 
$
0.8


11


 
Three Months Ended September 30, 2017
 
Mortgage-Backed
 
 
(millions)
Residential 

 
Commercial 

 
Total

Balance at June 30, 2017
$
0.2

 
$
0.1

 
$
0.3

Credit losses for which an OTTI was not previously recognized
0

 
0.4

 
0.4

Reductions for securities sold/matured
0

 
0

 
0

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

 
0

 
0

Balance at September 30, 2017
$
0.2

 
$
0.5

 
$
0.7

 
 
 
 
 
 
 
Nine Months Ended September 30, 2017
 
Mortgage-Backed
 
 
(millions)
Residential 

 
Commercial 

 
Total

Balance at December 31, 2016
$
11.1

 
$
0.4

 
$
11.5

Credit losses for which an OTTI was not previously recognized
0

 
0.4

 
0.4

Reductions for securities sold/matured
(10.9
)
 
(0.3
)
 
(11.2
)
Change in recoveries of future cash flows expected to be collected1
0

 
0

 
0

Balance at September 30, 2017
$
0.2

 
$
0.5

 
$
0.7

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 nine months ended September 30, 2018.

12



Realized Gains (Losses) The components of net realized gains (losses) for the three and nine months ended September 30, were:
 
Three Months
 
Nine Months
(millions)
2018

 
2017

 
2018

 
2017

Gross realized gains on security sales
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
U.S. government obligations
$
0.1

 
$
0.9

 
$
1.8

 
$
5.8

State and local government obligations
0.2

 
4.0

 
9.4

 
7.1

Corporate and other debt securities
1.7

 
5.1

 
2.1

 
16.5

Residential mortgage-backed securities
0

 
2.8

 
0

 
23.8

Commercial mortgage-backed securities
0

 
0

 
2.0

 
2.4

Other asset-backed securities
0

 
0

 
0.1

 
0.3

Redeemable preferred stocks
0.2

 
7.7

 
4.5

 
8.0

Total available-for-sale securities
2.2

 
20.5

 
19.9

 
63.9

Equity securities:
 
 
 
 
 
 
 
Nonredeemable preferred stocks
0.1

 
3.0

 
3.7

 
54.6

Common equities
126.8

 
5.7

 
265.2

 
23.0

Total equity securities
126.9

 
8.7

 
268.9

 
77.6

   Subtotal gross realized gains on security sales
129.1

 
29.2

 
288.8


141.5

Gross realized losses on security sales
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
U.S. government obligations
(7.6
)
 
(1.0
)
 
(46.4
)
 
(4.6
)
State and local government obligations
(0.6
)
 
0

 
(2.5
)
 
(0.1
)
Corporate and other debt securities
(3.2
)
 
(1.8
)
 
(7.3
)
 
(4.6
)
Residential mortgage-backed securities
0

 
(0.1
)
 
0

 
(0.4
)
Commercial mortgage-backed securities
0

 
(0.5
)
 
(6.3
)
 
(3.6
)
Other asset-backed securities
(0.1
)
 
0

 
(1.1
)
 
0

Redeemable preferred stocks
0

 
(6.4
)
 
0

 
(6.4
)
Total available-for-sale securities
(11.5
)
 
(9.8
)
 
(63.6
)
 
(19.7
)
Equity securities:
 
 
 
 
 
 
 
Nonredeemable preferred stocks
0

 
(0.1
)
 
(2.3
)
 
(5.9
)
Common equities
(9.2
)
 
(0.2