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MarketScreener Homepage  >  Equities  >  Nyse  >  Progressive Corporation    PGR

PROGRESSIVE CORPORATION

(PGR)
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PROGRESSIVE COR : OH/ Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

08/04/2020 | 10:18am EST
I. OVERVIEW
The Progressive Corporation's insurance subsidiaries recognized strong growth in
both premiums and policies in force in the second quarter 2020, compared to the
same period last year. During the quarter, we generated $10.1 billion of net
premiums written, which is an increase of $1.0 billion, or 11%, compared to the
second quarter 2019. We had 23.8 million companywide policies in force at June
30, 2020, which is 2.1 million more policies than were in force at June 30,
2019. Our underwriting profit margin of 12.3% for the second quarter 2020 was
2.7 points better than the same period last year.
On a year-over-year basis, net income attributable to Progressive increased 83%
for the second quarter and 21% for the first six months of 2020, and
comprehensive income increased 88% and 19%, respectively. Underwriting income
increased 40% for the quarter and 35% for the first six months of 2020, compared
to the same periods last year. The increased underwriting profitability reflects
a significant decrease in loss and loss adjustment expenses due to lower auto
accident frequency, as a result of fewer vehicle miles driven following the
restrictions put in place to stop or slow the spread of the novel coronavirus,
COVID-19, which began in March 2020 and lasted into mid-second quarter before
the restrictions slowly started to be lifted. Partially offsetting the favorable
loss experience were higher expenses reflecting credits issued to personal auto
policyholders during the second quarter 2020 and additional bad debt expense
related to the billing leniencies and moratoriums that were in place through the
middle of May 2020. In addition to strong underwriting results, we recognized
significant realized and unrealized gains on our equity securities and
fixed-maturity securities, respectively, during the second quarter, as the
portfolios' valuation rebounded following the decline experienced at the end of
the first quarter when the COVID-19 restrictions were first put in place.
During the second quarter 2020, our total capital (debt plus shareholders'
equity) increased $2.4 billion, to $22.1 billion, primarily reflecting
comprehensive income earned during the quarter.
A. COVID-19
Our results for the first quarter 2020 were significantly impacted by the spread
of the COVID-19 and federal, state, and local social distancing and
shelter-in-place restrictions ("COVID-19 restrictions") that were enacted. As
the COVID-19 restrictions remained in place during the first part of the second
quarter, we continued to experience a decrease in new business volume, which
began to rebound as the COVID-19 restrictions started to be lifted in May 2020.
In April 2020, on a year-over-year basis for the month, new applications
decreased 14% and 26% for our Personal Lines and Commercial Lines businesses,
respectively. In total for the second quarter 2020, Personal Lines new
applications increased 2% and Commercial Lines decreased 10%. The increase in
Personal Lines new applications was due to growth in our Direct auto business,
as well as 22% new applications growth in our special lines products.
Our companywide underwriting margin for the second quarter 2020 was strong at
12.3%, which was 2.7 points better than the same period last year and only 0.8
points higher than the first quarter 2020. Vehicle accidents were significantly
lower than the prior year as COVID-related restrictions remained in effect, and
remained lower even after many of the restrictions were lifted. Our personal
auto incurred accident frequency, which continued to moderate as the quarter
progressed, was down about 39% for the second quarter 2020, as compared to the
prior year.
On the other hand, our expense ratio was adversely impacted 10.7 points due to
the $1 billion of credits we issued to our personal auto policyholders in
response to the expected reduction in auto accident frequency and the financial
hardships imposed by the impact of COVID-19 restrictions throughout the United
States. These credits or payments represented 20% of monthly premiums for
customers with a policy in force on each of April 30 and May 31, 2020. In
addition to the credits, during the second quarter 2020 we recorded a $120.0
million increase in the allowance for doubtful accounts relating to our billing
leniency efforts, such as suspending cancellations and non-renewals for
non-payment and pausing collection activities that we put in place through May
15, 2020, to help policyholders who were experiencing financial hardships. There
still remains state mandated moratoriums in several states.
Our non-U.S.Treasury fixed-income and equity investment portfolios valuations
rebounded throughout the second quarter 2020. The combination of strong fiscal
and monetary stimulus provided a positive backdrop to the financial markets
throughout the quarter. Nevertheless, we currently view the market environment
as very uncertain and believe the relatively conservative position of our
investment portfolio continues to remain appropriate.
From an operations perspective, we continue to institute work-from-home
measures, which we believe will be largely in place throughout the remainder of
2020. In this challenging environment, we continue to believe that we are
effectively maintaining our insurance and investment operations, our financial
reporting systems, and our internal controls over financial reporting. For those
employees whose jobs require them to remain in the office, we continue to
practice enhanced social distancing, cleaning, and other protocols to promote
employee health and safety. To help employees other than senior leaders, we paid
a portion of

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their annual bonus in April and July. We continue to make investments in our
infrastructure and are currently maintaining our staffing levels, as we are
returning to more normal insurance markets and economic conditions.
We are continuing to investigate the impact of the Coronavirus Aid, Relief, and
Economic Security Act, known as the CARES Act, and monitor related guidance.
Based on current guidance, we do not expect the CARES Act to materially impact
us. We are, however, electing to defer the payment of our portion of Social
Security payroll taxes, as permitted under the CARES Act. We estimate that we
will defer about $130 million of payments in 2020, with half of that amount
being paid by the end of each of 2021 and 2022. As of June 30, 2020, we deferred
approximately $50 million of payments related to our portion of Social Security
payroll taxes.
Even after the current COVID-19 restrictions were lifted, there remains
significant uncertainty regarding the potential for and timing of any economic
recovery, whether and when driving and insurance shopping patterns will return
to historical patterns, and the near-term and longer-term impacts on insurance
markets, small businesses, our critical vendors and counterparties, the
investment markets, and the regulatory environment, among many other issues and,
ultimately, how our businesses and financial results will be impacted during
these recovery periods. Although the nature of these impacts may change over
time, we cannot predict the likely duration or extent of these impacts.
B. Insurance Operations
We evaluate growth in terms of both net premiums written and policy in force
growth. All three of our operating segments contributed to our solid premium and
policy in force growth during the second quarter on a year-over-year basis. Our
companywide net premiums written grew 11%, with Personal Lines growing 13%,
Commercial Lines 1%, and Property 12%, primarily reflecting an increase in
volume. The Commercial Lines premiums growth was negatively impacted as a result
of reducing our transportation network company business' premiums $29.0 million
and $139.5 million, during the three and six months ended June 30, 2020,
respectively, as we continued to revise estimated miles to be driven during the
remainder of the policy terms. On a policy-by-policy basis, we determine the
premiums on these policies monthly based on actual miles driven and an estimate
of miles to be driven during the remaining policy terms. Due to COVID-19
restrictions, the estimate of miles driven was reduced. Changes in actual and
estimated miles driven will continue to impact our net premiums written in
future periods. Policies in force grew 10% companywide, with Personal Lines,
Commercial Lines, and Property growing 10%, 6%, and 13%, respectively.
During the quarter, total new personal auto applications (i.e., issued policies)
decreased 4% on a year-over-year basis, with Agency new applications decreasing
13% and Direct increasing 4%. In light of social distancing requirements, many
independent agents are still working to get their operations back to pre-COVID
levels, which contributed to the slower pace of recovery in the Agency channel.
By the end of the second quarter we saw overall shopping return to pre-COVID
levels, contributing to the 6% increase in Direct auto quotes, compared to the
same period last year. Total personal auto renewal applications increased 13%
over the second quarter last year, in part driven by our billing leniency
efforts during the period. New applications for our special lines products were
up 22% during the second quarter 2020, primarily due to overall industry growth
as consumers habits shifted toward focusing on new ways to enjoy the summer and
take vacations while maintaining social distance.
For the Commercial Lines business, new applications, which also continued to be
impacted by COVID-19 restrictions, decreased 10% on a year-over-year basis
during the second quarter 2020, with renewal applications increasing 7%. The
Property business saw new homeowner and condo policy sales decline during April
and May, due to the shelter-in-place restrictions, but sales activity recovered
in June. Property new applications increased 4% and renewal applications
increased 15% during the second quarter 2020.
We realize the importance of retaining customers to grow policies in force and
this remains one of our most important priorities. We remain focused on
increasing our share of multi-product households and will continue to make
investments to improve the customer experience to continue to support that goal.
We also will continue to monitor policy life expectancy, which is our actuarial
estimate of the average length of time that a policy will remain in force before
cancellation or lapse in coverage, and report it as our primary measure of
customer retention in our Personal Lines and Commercial Lines auto business. Due
to insurance market volatility brought on by the COVID-19 virus, it may be
difficult to assess the progress we are making against our retention goals. As
of the end of the second quarter 2020, our trailing 12-month total personal auto
policy life expectancy increased 7% compared to last year, as a portion of
policy cancellations were suppressed by the billing leniency and state
moratoriums enacted in March 2020 and remained in place through May 15, 2020.
Our Agency auto trailing 12-month policy life expectancy was up 9%, and Direct
auto was up 5%. Our Commercial Lines trailing 12-month policy life expectancy
increased 6% year over year and special lines was up 7%.
Our Personal and Commercial Lines operating segments were profitable during the
second quarter 2020, while our Property business generated an underwriting loss,
primarily due to catastrophe losses incurred during the quarter. Our Personal
Lines segment generated an underwriting profit margin of 14.8% for the second
quarter 2020. Although our special lines products

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generated an underwriting profit during the second quarter, the seasonal nature
of these products unfavorably impacted our total Personal Lines combined ratio
by about 0.5 points. Our Commercial Lines underwriting profit margin for the
second quarter was 15.9%. Our Property segment had an underwriting loss margin
of 43.6% for the second quarter. On a net basis (i.e., after reinsurance), our
Property business incurred catastrophe losses during the second quarter of
$234.8 million, or 54.3 points on their combined ratio. As of June 30, 2020, we
have retained approximately $330 million of catastrophe losses and associated
allocated loss adjustment expenses (ALAE) in the Property business, which has
not exceeded the $375 million annual retention threshold under our catastrophe
aggregate excess of loss reinsurance program and, therefore, we have not
recorded a reinsurance recoverable related to these losses and ALAE.
C. Investments
The fair value of our investment portfolio was $43.8 billion at June 30, 2020,
compared to $39.3 billion at December 31, 2019. The increase from year-end 2019,
primarily reflects the $1.0 billion of proceeds from the debt issued during
March, comprehensive income of $3.1 billion, and $0.3 billion of unsettled
security transactions at the end of the second quarter, offset by $1.6 billion
related to the payment of shareholder dividends and the purchase of ARX Holding
Corp. during the period.
Our asset allocation strategy is to maintain 0%-25% of our portfolio in Group I
securities, with the balance (75%-100%) of our portfolio in Group II securities
(the securities allocated to Group I and II are defined below under Results of
Operations - Investments). At June 30, 2020, 11% of our portfolio was allocated
to Group I securities and 89% to Group II securities, compared to 12% and 88%,
respectively, at December 31, 2019. The allocation to Group I securities
declined slightly year over year as available cash was invested in Group II
securities and Group I valuations declined while Group II valuations increased
during the period.
Our recurring investment income generated a pretax book yield of 2.5% for the
second quarter 2020, compared to 3.2% for the same period in 2019, primarily due
to investing new cash at lower interest rates. Our investment portfolio produced
a fully taxable equivalent (FTE) total return of 4.5% and 2.2% for the second
quarter 2020 and 2019, respectively. Our fixed-income and common stock
portfolios had FTE total returns of 3.4% and 21.5%, respectively, for the second
quarter 2020, compared to 2.1% and 4.0%, respectively, last year. There was a
significant narrowing of credit spreads, which resulted in a 4.6% FTE total
return on our fixed-income securities for the first six months of 2020. Our
common stock portfolio's FTE total return was a (3.4)% for the first six months
of 2020 and, while still negative, is a significant increase from the first
quarter 2020.
At June 30, 2020, the fixed-income portfolio had a weighted average credit
quality of AA- and a duration of 3.0 years, compared to AA- and 2.7 years and AA
and 3.0 years at June 30, 2019 and December 31, 2019, respectively. During the
quarter, with valuations improving in several market sectors, we were able to
add some attractive investments to our portfolio. While we have lengthened our
portfolio duration over the previous twelve months, it remains slightly below
the midpoint of our 1.5 year to 5 year range, which we believe provides some
protection against an increase in interest rates.


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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. Operations
generated positive cash flows of $3.9 billion and $3.4 billion for the first six
months of 2020 and 2019, respectively.
We did not experience a significant change in our liquidity needs during the
second quarter 2020. When COVID-19 restrictions remained in place during the
first half of the second quarter, we saw a continued decrease in new
applications, which, along with the suspending collections and cancellations for
non-payments, reduced the amount of cash we would have collected from customers.
However, we also saw a significant decrease in accident claim frequency and, as
a result, the amount of cash required to pay claims also decreased. We continue
to believe that we have sufficient liquidity from our current operations and in
our investment portfolio to meet all of our near-term operating cash needs.
Our total capital (debt plus shareholders' equity) was $22.1 billion, at book
value, at June 30, 2020, compared to $17.7 billion at June 30, 2019, and $18.1
billion at December 31, 2019. The increase since year end reflects the increase
in comprehensive income during that period as well as the issuance of $500
million of 3.20% Senior Notes due 2030 and $500 million of 3.95% Senior Notes
due 2050, in underwritten public offerings during the first quarter 2020.
Our debt-to-total capital ratio remained below 30% during all reported periods,
consistent with our financial policy. This ratio, which reflects debt as a
percent of debt plus shareholders' equity and excludes redeemable noncontrolling
interest, if any, was 24.4% at June 30, 2020, 24.8% at June 30, 2019, and 24.4%
at December 31, 2019. None of our outstanding senior notes have restrictive
financial covenants or credit rating triggers.
We seek to deploy capital in a prudent manner and use multiple data sources and
modeling tools to estimate the frequency, severity, and correlation of
identified exposures, including, but not limited to, catastrophic and other
insured losses, natural disasters, and other significant business interruptions,
to estimate our potential capital needs.
During the first six months of 2020, we returned capital to shareholders
primarily through dividends. Our Board of Directors declared a $0.10 per common
share dividend in both the first and second quarters 2020. These dividends,
which were each $58.5 million in the aggregate, were paid in April 2020 and July
2020, respectively. In addition to the common share dividends, in February 2020,
the Board also declared a Series B Preferred Share dividend of $13.4 million,
which was paid March 2020. In January 2020, we also paid the $2.25 and $0.10
common share dividends declared in December 2019, in the aggregate amount of
$1.4 billion (see Note 9 - Dividends for further discussion). During the year,
we also repurchased 0.4 million common shares, at a total cost of $29.1 million,
to satisfy tax withholding obligations, as permitted under our equity
compensation plans.
In April 2020, The Progressive Corporation acquired the remaining outstanding
stock of ARX Holding Corp., for an aggregate cost of $243.0 million, which
included the acquisition of vested stock options, making ARX a wholly owned
subsidiary of Progressive. While this acquisition was originally expected to
occur in April 2021, we believe that completing it a year earlier will benefit
our continued efforts to expand our reach and grow our bundled home and auto
customers.
During the first six months of 2020 and at all times during 2019, our total
capital exceeded the sum of our regulatory capital layer plus our
self-constructed extreme contingency layer, as described in our Annual Report on
Form 10-K for the year ended December 31, 2019. Based upon our capital planning
and forecasting efforts, we believe that we have sufficient capital resources
and cash flows from operations to support our current business, scheduled
principal and interest payments on our debt, dividends on common shares and
Series B Preferred Shares, our contractual obligations, and other expected
capital requirements for the foreseeable future.
In April 2020, we renewed the unsecured discretionary line of credit (the "Line
of Credit") with PNC Bank, National Association, in the maximum principal amount
of $250 million, that expired in April 2020. Subject to the terms and conditions
of the line of credit documents, advances under the line of credit (if any) will
bear interest at a variable rate equal to the higher of PNC's Prime Rate or the
sum of the Federal Funds Open Rate plus 175 basis points. Each advance must be
repaid on the 30th day after the advance or, if earlier, on April 30, 2021, the
expiration date of the line of credit. We did not engage in short-term
borrowings, including any borrowings under our discretionary Line of Credit, to
fund our operations or for liquidity purposes during the reported periods.

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B. Commitments and Contingencies
Contractual Obligations
During the first six months of 2020, our contractual obligations have not
changed materially from those discussed in our Annual Report on Form 10-K for
the year ended December 31, 2019. We are not aware of any significant changes to
our contractual obligations that are likely to occur as a result of COVID-19.
Off-Balance-Sheet Arrangements
Our off-balance-sheet leverage includes purchase obligations and catastrophe
excess of loss reinsurance contracts. There have not been any material changes
in off-balance-sheet items from those discussed in our Annual Report on Form
10-K for the year ended December 31, 2019.
III. RESULTS OF OPERATIONS - UNDERWRITING
A. Segment Overview
We report our underwriting operations in three segments: Personal Lines,
Commercial Lines, and Property. As a component of our Personal Lines segment, we
report our Agency and Direct business results to provide further understanding
of our products by distribution channel.
The following table shows the composition of our companywide net premiums
written, by segment, for the respective periods:
                                       Three Months Ended June 30,       Six Months Ended June 30,
                                         2020              2019            2020             2019
Personal Lines
Agency                                      40 %              41 %            41 %              41 %
Direct                                      43                41              43                42
Total Personal Lines1                       83                82              84                83
Commercial Lines                            12                13              12                13
Property                                     5                 5               4                 4
Total underwriting operations              100 %             100 %           100 %             100 %


1 Personal auto insurance accounted for 91% of the total Personal Lines segment
net premiums written during the three months and 93% during the six months ended
June 30, 2020 and 2019; insurance for our special lines products accounted for
the balance.
Our Personal Lines business writes insurance for personal autos and special
lines products (e.g., motorcycles, watercraft, and RVs). We currently write our
Personal Lines products in all 50 states. We also offer our personal auto
products (not special lines products) in the District of Columbia. Our personal
auto policies are primarily written for 6-month terms, although we do write
12-month personal auto policies mainly through our Platinum agents who are
focused on selling bundled auto and home policies. At June 30, 2020, 11% of our
Agency auto policies in force were 12-month policies, compared to 9% a year
earlier. Our special lines products are written for 12-month terms.
Our Commercial Lines business writes auto-related primary liability and physical
damage insurance, and other liability and property insurance, predominately for
small businesses. The majority of our Commercial Lines business is written
through the independent agency channel. The amount of commercial auto business
written through the direct channel represented 8% of premiums written for the
second quarter 2020, excluding our transportation network company business,
compared to 7% for the same period last year. We write Commercial Lines business
in all 50 states and our policies are primarily written for 12-month terms.
Our Property business writes residential property insurance for single family
homes, condominium unit owners, renters, etc. We write the majority of our
Property business through the independent agency channel; however, we continue
to expand the distribution of our Property product offerings in the direct
channel, which represented about 17% of premiums written for the second quarter
of 2020, compared to 15% for the same period last year. Property policies are
written for 12-month terms. During the second quarter 2020, we began writing
residential property and renters insurance in New Hampshire, bringing the total
number of states where we write residential property and flood insurance to 45
states and renters insurance to 46 states; we also write all of these products
in the District of Columbia. Our flood insurance is written primarily through
the National Flood Insurance Program and is 100% reinsured.

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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, other
underwriting expenses, and policy holder credits. 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 June 30,                       Six Months Ended June 30,
                                 2020                    2019                    2020                     2019
                             Underwriting            Underwriting            Underwriting             Underwriting
                            Profit (Loss)           Profit (Loss)           Profit (Loss)            Profit (Loss)
($ in millions)              $        Margin         $       Margin          $        Margin          $        Margin
Personal Lines
Agency                  $   550.6      14.0  %   $ 434.7      11.9  %   $ 1,152.2      14.9  %   $   887.7      12.4  %
Direct                      647.2      15.5        326.6       8.7        1,120.2      13.7          648.5       8.9
Total Personal Lines      1,197.8      14.8        761.3      10.3        2,272.4      14.3        1,536.2      10.6
Commercial Lines            179.8      15.9        124.4      11.6          292.3      12.6          291.0      14.0
Property1                  (188.7 )   (43.6 )      (34.4 )    (9.0 )       (139.5 )   (16.3 )        (26.7 )    (3.6 )
Total underwriting
operations              $ 1,188.9      12.3  %   $ 851.3       9.6  %   $ 2,425.2      12.7  %   $ 1,800.5      10.4  %


1 For the three and six months ended June 30, 2020, pretax profit (loss)
includes $14.1 million and $28.6 million, respectively, of amortization expense
predominately associated with the acquisition of a controlling interest in ARX,
and $18.0 million and $35.9 million for the respective periods last year; the
decrease in amortization expense reflects intangible assets that were fully
amortized subsequent to second quarter 2019.
The increases in the companywide underwriting profit margins during three and
six months ended June 30, 2020, compared to the same periods last year, were
driven primarily by lower accident frequency experienced as a result of COVID-19
restrictions, partially offset by the policyholder credits issued to personal
auto customers and additional bad debt expense recognized as part of the billing
leniency and moratoriums in the second quarter of 2020.

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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 June 30,          Six Months Ended June 30,
Underwriting Performance1                 2020      2019     Change        2020           2019     Change

Personal Lines-Agency Loss & loss adjustment expense ratio 53.2 68.9 (15.7 ) 58.8

           68.3       (9.5 )
Underwriting expense ratio                32.8      19.2       13.6        26.3           19.3        7.0
Combined ratio                            86.0      88.1       (2.1 )      85.1           87.6       (2.5 )

Personal Lines-Direct Loss & loss adjustment expense ratio 50.3 70.1 (19.8 ) 57.9

           70.0      (12.1 )
Underwriting expense ratio                34.2      21.2       13.0        28.4           21.1        7.3
Combined ratio                            84.5      91.3       (6.8 )      86.3           91.1       (4.8 )

Total Personal Lines Loss & loss adjustment expense ratio 51.7 69.5 (17.8 ) 58.3

           69.2      (10.9 )
Underwriting expense ratio                33.5      20.2       13.3        27.4           20.2        7.2
Combined ratio                            85.2      89.7       (4.5 )      85.7           89.4       (3.7 )

Commercial Lines Loss & loss adjustment expense ratio 57.3 67.3 (10.0 ) 62.9

           65.0       (2.1 )
Underwriting expense ratio                26.8      21.1        5.7        24.5           21.0        3.5
Combined ratio                            84.1      88.4       (4.3 )      87.4           86.0        1.4

Property

Loss & loss adjustment expense ratio 114.0 77.7 36.3 86.5

           73.0       13.5
Underwriting expense ratio2               29.6      31.3       (1.7 )      29.8           30.6       (0.8 )
Combined ratio2                          143.6     109.0       34.6       116.3          103.6       12.7
Total Underwriting Operations
Loss & loss adjustment expense ratio      55.2      69.6      (14.4 )      60.2           68.8       (8.6 )
Underwriting expense ratio                32.5      20.8       11.7        27.1           20.8        6.3
Combined ratio                            87.7      90.4       (2.7 )      87.3           89.6       (2.3 )
Accident year - Loss & loss
adjustment expense ratio3                 55.5      68.8      (13.3 )      59.6           67.6       (8.0 )


1 Ratios are expressed as a percentage of net premiums earned; fees and other
revenues are netted with underwriting expenses in the ratio calculations.
2 Included in the three and six months ended June 30, 2020, are 3.3 points and
3.4 points, respectively, of amortization expense predominately associated with
our acquisition of a controlling interest in ARX, and 4.7 points and 4.8 points
for the respective periods last year. Excluding these additional expenses, for
the three months ended June 30, 2020 and 2019, the Property business would have
reported expense ratios of 26.3 and 26.6, respectively, and a combined ratio of
140.3 and 104.3. For the six months ended June 30, 2020 and 2019, excluding
these additional expenses, the Property business would have reported expense
ratios of 26.4 and 25.8, respectively, and combined ratios of 112.9 and 98.8.
3 The accident year ratios include only the losses that occurred during the
period noted. As a result, accident period results will change over time, either
favorably or unfavorably, as we revise our estimates of loss costs when payments
are made or reserves for that accident period are reviewed.

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Losses and Loss Adjustment Expenses (LAE)

                                         Three Months Ended June 30,           Six Months Ended June 30,
(millions)                                        2020           2019               2020                2019
Increase (decrease) in net loss and
LAE reserves                           $         146.5     $    485.4$        116.1$    825.5
Paid losses and LAE                            5,174.9        5,652.7           11,360.5            11,071.6

Total incurred losses and LAE $ 5,321.4$ 6,138.1 $

11,476.6 $ 11,897.1



Claims costs, our most significant expense, represent payments made, and
estimated future payments to be made, to or on behalf of our policyholders,
including expenses related to the adjustment or settlement of claims. Claims
costs are a function of loss severity and frequency and, for our vehicle
businesses, are influenced by inflation and driving patterns, among other
factors, some of which are discussed below. In our Property business, severity
is primarily a function of construction costs and the age of the structure.
Accordingly, anticipated changes in these factors are taken into account when we
establish premium rates and loss reserves. Loss reserves are estimates of future
costs and our reserves are adjusted as underlying assumptions change and
information develops.
Our total loss and LAE ratio decreased 14.4 points for the second quarter 2020,
compared to the same period last year, and 8.6 points on a year-to-date basis,
primarily due to lower auto frequency, partially offset by higher severity as
discussed below.
The following table shows our consolidated catastrophe losses, excluding loss
adjustment expenses, incurred during the periods:
                                            Three Months Ended June 30,              Six Months Ended June 30,
($ in millions)                               2020                 2019               2020                2019
Personal Lines                         $     164.7$    125.0$     201.9$    169.8
Commercial Lines                               6.3                  4.8                 7.6                6.3
Property
Property business, net of reinsurance
(excluding ASL)                              247.9                131.4               289.7              193.0
Reinsurance recoverable on ASL1              (13.1 )              (49.5 )             (13.0 )            (85.5 )
Property business, net                       234.8                 81.9               276.7              107.5
   Total net catastrophe losses
incurred                               $     405.8$    211.7$     486.2$    283.6
Combined ratio effect                          4.2  pts.            2.4  pts.           2.5  pts.          1.6  pts.


1 Represents the reinsurance recoverable recorded on the losses from prior
accident years under our aggregate stop-loss agreements (ASL); see table below
for further information.
During the second quarter 2020, the majority of catastrophe losses were due to
wind, hail, and tornadoes throughout the United States. We have responded, and
plan to continue to respond, promptly to catastrophic events when they occur in
order to provide high-quality claims service to our customers.
We do not have catastrophe-specific reinsurance for our Personal Lines or
Commercial Lines businesses, but we reinsure portions of our Property business
against various risks, including, but not limited to, catastrophic losses
through excess of loss reinsurance.
We have aggregate stop-loss reinsurance agreements (ASL) in place, which are in
effect for accident years 2019, 2018, and 2017. We did not renew our ASL program
for accident year 2020. Instead, we entered into a property catastrophe
aggregate excess of loss program in January 2020. Both the ASL and the aggregate
excess of loss (XOL) programs cover accident year Property catastrophe losses
and a portion of LAE, known as allocated loss adjustment expenses (ALAE). See
Item 1 - Description of Business-Reinsurance in our Annual Report on Form 10-K
for the year ended December 31, 2019 for further discussion. Through June 30,
2020, we have retained approximately $330 million of catastrophe losses and ALAE
for the current accident year under the aggregate XOL program, which has not
exceeded our retention threshold of $375 million.

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The following table shows the total reinsurance recoverables activity under the
aggregate stop-loss agreements by accident year, for the respective periods:
                                      Three Months Ended June 30,      Six Months Ended June 30,
($ in millions)                           2020             2019           2020            2019
Reinsurance recoverable on ASL,
beginning of period                  $        69.7$     52.2$      69.7$     12.5
Reinsurance recoverables recognized
on losses
Accident year:
2019                                          11.8           37.1            10.9     $     73.4
2018                                             0              0               0              0
2017                                           1.3           12.4             2.1           12.1
 Total                                        13.1           49.5            13.0           85.5
Reinsurance recoverables recognized
on ALAE
Accident year:
2019                                           1.3            4.9             1.4            8.1
2018                                             0              0               0              0
2017                                           0.2           (0.7 )           0.2           (0.2 )
 Total                                         1.5            4.2             1.6            7.9
Total reinsurance recoverables
recognized
Accident year:
2019                                          13.1           42.0            12.3           81.5
2018                                             0              0               0              0
2017                                           1.5           11.7             2.3           11.9
 Total                                        14.6           53.7            14.6           93.4
Reinsurance recoverable on ASL, end
of period                            $        84.3$    105.9     $     

84.3 $ 105.9



In addition to the aggregate XOL program, during the second quarter 2020, our
Property business renewed its multi-year catastrophe reinsurance contracts.The
renewed insurance policies carry retention thresholds for losses and ALAE from a
single catastrophic event of $80 million, an increase from the retention
threshold on the prior contracts of $60 million, as well as $200 million of
additional coverage, due to the growth of the Property business (see Item 1 -
Description of Business-Reinsurance in our Annual Report on Form 10-K for the
year ended December 31, 2019 for further discussion). We have not had a
catastrophe event during the first six months of 2020 that exceeded our
retention threshold.
During the first quarter 2020, relative to our Property business, we closed a
$200 million catastrophe bond transaction. This bond replaces a similar $200
million bond that expired on December 31, 2019. The bond will provide
reinsurance coverage in the unlikely event that a single catastrophe event
exceeds the $1.6 billion in coverage provided by our traditional catastrophe
reinsurance program.
The following discussion of our severity and frequency trends in our personal
auto businesses excludes comprehensive coverage because of its inherent
volatility, as it is typically linked to catastrophic losses generally resulting
from adverse weather. For our commercial auto products, the reported frequency
and severity trends include comprehensive coverage. Comprehensive coverage
insures against damage to a customer's vehicle due to various causes other than
collision, such as windstorm, hail, theft, falling objects, and glass breakage.
Total personal auto incurred severity (i.e., average cost per claim, including
both paid losses and the change in case reserves) on a calendar-year basis
increased about 8% and 10% for the three and six months ended June 30, 2020,
respectively, compared to the same periods last year. These increases reflect a
reduction in incoming new claims, which led to an older aged mix of inventory,
which increases incurred losses. In addition, we have seen an increase in the
number of claims that were reopened, and required an additional payment, during
the second quarter 2020, compared to a year ago. These supplemental payments are
related to prior accident periods and were not impacted by COVID-19
restrictions.
Following are the changes we experienced in severity in our auto coverages on a
year-over-year basis:
•            Primarily due to an older aged mix of claims inventory and an
             increase in the number of claims reopened during the first six
             months of 2020 personal injury protection (PIP) increased about 30%
             and 20% for the second quarter and first six months of 2020,
             respectively, bodily injury increased about 11% and 10%, and auto
             property damage increased about 13% and 14%.



                                       39
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•            Collision decreased about 8% during the second quarter and was flat
             during the first six months of 2020, in part due to a mix in the
             timing of salvage and subrogation collections.


It is a challenge to estimate future severity, especially for bodily injury and
PIP claims, but we continue to monitor changes in the underlying costs, such as
medical costs, health care reform, and jury verdicts, along with regulatory
changes and other factors that may affect severity.
Our personal auto incurred frequency, on a calendar-year basis, decreased about
39% and 29% for the three and six months ended June 30, 2020, respectively,
compared to the same periods last year. Following are the frequency changes we
experienced by coverage on a year-over-year basis:
•            PIP decreased about 45% and 33% for the second quarter and 

first six

             months of 2020, respectively.


•            Auto property damage decreased about 42% for the quarter and 30% for
             the first six months.


•            Bodily injury decreased about 42% for the quarter and 28% for the
             first six months.


•            Collision decreased about 36% for the quarter and 30% for

the first

             six months.


We closely monitor the changes in frequency, but the degree or direction of
near-term frequency change is not something that we are able to predict with any
certainty, given the uncertainty of the current environment. We saw the number
of vehicle miles driven decrease dramatically when the COVID-19 restrictions
were first put in place. Once the restrictions began to be lifted during the
quarter, we did see the vehicle miles traveled increase, however, they were
still lower than during the second quarter last year. 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, gasoline
prices, advances in vehicle safety, and unemployment rates, versus those
resulting from shifts in the mix of our business, to allow us to reserve more
accurately for our loss exposures.
The changes we are disclosing in the paragraph below for our commercial auto
products severity and frequency uses a trailing 12-month period and excludes our
transportation network company (TNC) business. Using a trailing 12-month period
addresses inherent seasonality trends in the commercial auto products and
mitigates the effects of month-to-month variability, which includes the impact
of COVID-19 restrictions. Since the loss patterns in the TNC business are not
indicative of our other commercial auto products, disclosing severity and
frequency trends without that business is more indicative of our overall
experience for the majority of our commercial auto products.
On a year-over-year basis, our commercial auto products incurred severity
increased 21% and frequency decreased 12%. In addition to general trends in the
marketplace, the increase in our commercial auto products severity reflects
increased medical costs and actuarially determined reserves due to accelerating
paid loss trends and shifts in the mix of business to for-hire trucking, which
has higher average severity than the business auto and contractor market tiers.
The frequency decrease was in part due to COVID-19 restrictions and continued
product segmentation and underwriting, which created a mix shift toward more
preferred, lower-frequency, business.
The table below presents the actuarial adjustments implemented and the loss
reserve development experienced in the following periods on a companywide basis:
                                              Three Months Ended June 30,             Six Months Ended June 30,
($ in millions)                          2020                 2019               2020               2019
ACTUARIAL ADJUSTMENTS
Reserve decrease (increase)
Prior accident years                     $     (2.7 )$   (45.8 )$   (12.2 )$   (62.5 )
Current accident year                          28.6               (16.3 )             30.2               (3.0 )
Calendar year actuarial adjustment       $     25.9$   (62.1 )$    18.0$   (65.5 )
PRIOR ACCIDENT YEARS DEVELOPMENT
Favorable (unfavorable)
Actuarial adjustment                     $     (2.7 )$   (45.8 )$   (12.2 )$   (62.5 )
All other development                          30.7               (21.6 )           (103.9 )           (147.5 )
Total development                        $     28.0$   (67.4 )$  (116.1 )$  (210.0 )
(Increase) decrease to calendar year
combined ratio                                  0.3  pts.          (0.8 ) 

pts. (0.6 ) pts. (1.2 ) pts.



Total development consists of both actuarial adjustments and "all other
development." The actuarial adjustments represent the net changes made by our
actuarial staff to both current and prior accident year reserves based on
regularly scheduled reviews. Through these reviews, our actuaries identify and
measure variances in the projected frequency and severity trends, which allow
them to adjust the reserves to reflect the current cost trends. For our Property
business, 100% of catastrophe losses are reviewed monthly, and any development
on catastrophe reserves are included as part of the actuarial adjustments. For
the Personal Lines and Commercial Lines businesses, development for catastrophe
losses for the vehicle businesses would be

                                       40
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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,
excluding the impact from COVID-19 restrictions, we are unable to quantify the
portion of the reserve development that might be applicable to any one or more
of those underlying factors.
Our objective is to establish case and IBNR reserves that are adequate to cover
all loss costs, while incurring minimal variation from the date the reserves are
initially established until losses are fully developed. See Note 6 - Loss and
Loss Adjustment Expense Reserves, for a more detailed discussion of our prior
accident years development. We continue to focus on our loss reserve analysis,
attempting to enhance accuracy and to further our understanding of our loss
costs.
Underwriting Expenses
Progressive's other underwriting expenses, which excludes the policyholder
credits, increased 17% for the second quarter and 19% for the first six months
of 2020, compared to the same periods last year, primarily reflecting the
increase of $120.0 million and $191.0 million, respectively, in our allowance
for uncollectable accounts, due to the billing leniencies that we put in place
following COVID-19 restrictions, and increased advertising spend in both
periods. During the second quarter and first six months of 2020, our advertising
expenditures increased 12% and 15%, respectively, compared to the same periods
last year. We will continue to invest in advertising as long as we generate
sales at a cost below the maximum amount we are willing to spend to acquire a
new customer.
The companywide underwriting expense ratio (i.e., policy acquisition costs,
other underwriting expenses and policyholder credits, net of fees and other
revenues, expressed as a percentage of net premiums earned) increased 11.7
points and 6.3 points for the three and six months ended June 30, 2020, compared
to the same periods last year, primarily reflecting 10.7 points and 5.4 points,
respectively, of policyholder credits issued to personal auto customers in the
second quarter 2020. In addition to the credits issued to personal auto
customers, our Commercial Lines business worked directly with their
policyholders and agents to provide premium and billing credits during the
quarter, which, along with bad debt exposure, contributed to a 4.0 point and 2.1
point increase in the Commercial Lines expense ratio for the three and six
months end June 30, 2020, respectively.

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C. Growth
For our underwriting operations, we analyze growth in terms of both premiums and
policies. Net premiums written represent the premiums from policies written
during the period, less any premiums ceded to reinsurers. Net premiums earned,
which are a function of the premiums written in the current and prior periods,
are earned as revenue over the life of the policy using a daily earnings
convention. Policies in force, our preferred measure of growth since it removes
the variability due to rate changes or mix shifts, represents all policies under
which coverage was in effect as of the end of the period specified.
                                       Three Months Ended June 30,                     Six Months Ended June 30,
($ in millions)                      2020              2019        % Growth        2020            2019        % Growth
NET PREMIUMS WRITTEN
Personal Lines
Agency                        $     4,104.7$ 3,775.5          9 %     $   8,131.2$  7,541.9          8  %
Direct                              4,326.8           3,709.8         17           8,624.2        7,665.9         13
Total Personal Lines                8,431.5           7,485.3         13          16,755.4       15,207.8         10
Commercial Lines                    1,195.1           1,182.7          1           2,339.2        2,347.9          0
Property                              513.4             458.5         12             916.7          810.7         13
Total underwriting operations $    10,140.0$ 9,126.5         11 %     $  20,011.3$ 18,366.4          9  %
NET PREMIUMS EARNED
Personal Lines
Agency                        $     3,919.0$ 3,639.6          8 %     $   7,747.7$  7,148.1          8  %
Direct                              4,167.9           3,733.4         12           8,160.3        7,309.7         12
Total Personal Lines                8,086.9           7,373.0         10          15,908.0       14,457.8         10
Commercial Lines                    1,129.0           1,070.5          5           2,318.0        2,083.5         11
Property                              432.7             381.2         14             853.3          743.2         15
Total underwriting operations $     9,648.6$ 8,824.7          9 %     $  19,079.3$ 17,284.5         10  %

                                                                                                June 30,
(thousands)                                                                        2020            2019        % Growth
POLICIES IN FORCE
Agency auto                                                                        7,362.5        6,783.7          9  %
Direct auto                                                                        8,507.6        7,528.4         13
Total auto                                                                        15,870.1       14,312.1         11
Special lines1                                                                     4,790.5        4,510.2          6
Personal Lines - total                                                            20,660.6       18,822.3         10
Commercial Lines                                                                     775.8          734.2          6
Property                                                                           2,336.1        2,071.6         13
Companywide total                                                                 23,772.5       21,628.1         10  %


1 Includes insurance for motorcycles, watercraft, RVs, and similar items.
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. 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. As of June 30, 2020, however, the growth in our auto trailing 3-month
policy life expectancy is artificially high due to suspending cancellations of
policies for non-payment, which impacted renewal activity during the second
quarter 2020. Due to these unusual circumstances, we have chosen not to disclose
the year-over-year increase in the trailing 3-month measure in the tables below,
as we do not believe the growth is meaningful. We continue to disclose our
changes in policy life expectancy using a trailing 12-month period. We believe
that the trailing 12-month measure is indicative of recent experience, mitigates
the effects of month-to-month variability, and addresses seasonality. While this
measure was also positively impacted by the inclusion of the items discussed
above, it was to a much lesser extent.
To analyze growth, we review new policies, rate levels, and the retention
characteristics of our segments.

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D. Personal Lines
The following table shows our year-over-year changes for our Personal Lines
business:
                                       Growth Over Prior Year
                                     Quarter        Year-to-date
                                  2020   2019       2020    2019
Applications
New                                  2 %    5  %       2 %     6 %
Renewal                             12     11         11      11
Written premium per policy - Auto    0      2          0       3
Policy life expectancy - Auto
Trailing 3-months                   NM      1
Trailing 12-months                   7     (2 )

NM = Not meaningful


In our Personal Lines business, the increase in new applications during both
periods in 2020 was driven by high demand in our special lines products, due to
overall industry growth, as consumers placed higher focus on engaging in
recreational activities that promote maintaining social distance. Our special
lines products saw new applications increase 22% and 18% during the quarter and
year-to-date period, respectively. During the three and six months ended June
30, 2020, our personal auto new application growth was down 4% and 1%,
respectively, primarily driven by a decrease in auto quote volume and conversion
in our Agency auto business. During both periods, we continued to see strong
renewal personal auto application growth, which may have been aided, in part, by
our billing leniency efforts and the moratoriums that were put in place during
the first quarter 2020, which suspended cancellations of policies for
non-payment. The moratoriums were lifted in May of 2020 in all but eleven states
and the District of Columbia, and by June 30, 2020, moratoriums remained in
eight states and the District of Columbia.
We report our Agency and Direct business results separately as components of our
Personal Lines segment to provide further understanding of our products by
distribution channel.
The Agency Business
                                       Growth Over Prior Year
                                     Quarter        Year-to-date
                                  2020    2019      2020    2019
Applications - Auto
New                                (13 )%    6 %      (8 )%    7 %
Renewal                             11      11        10      11
Written premium per policy - Auto    1       3         1       3
Policy life expectancy - Auto
Trailing 3-months                   NM       4
Trailing 12-months                   9       0

NM = Not meaningful


The Agency business includes business written by more than 35,000 independent
insurance agencies that represent Progressive, as well as brokerages in New York
and California. During the second quarter and the first six months of 2020, the
Agency business experienced a decline in new application growth and an increase
renewal application growth. During the year, we generated new auto application
growth in only twelve states, including only one of our top 10 largest Agency
states. While application growth during the quarter in the renewal business was
in part driven by our billing leniency efforts, new applications growth
decreased significantly as it is taking longer for agents to get their
operations back to pre-COVID levels.
During both the second quarter and six months ended June 30, 2020, we continued
to experience a decrease in Agency auto quote volume of 4% and 2%, respectively,
with rate of conversion (i.e., converting a quote to a sale) decreasing 9% and
6%, compared to the same periods last year.

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We analyze growth in each of our four consumers segments (e.g., inconsistently
insured, consistently insured and maybe a renter, homeowners who do not bundle
auto and home, and homeowners who bundle auto and home). During the second
quarter, while each of our segments experienced negative new application growth,
our inconsistently insured (i.e., Sams) and consistently insured non-homeowners
segments (i.e., Diane) experienced a double digit decline; however, all consumer
segments experienced year-over-year policy in force growth, with double digit
increases from both our non-bundled homeowner (i.e., Wrights) and bundled auto
and home consumer segments (i.e., Robinsons), albeit on a smaller base.
During the trailing 12-month period, we experienced an increase in the
percentage of bundled Agency auto policies written for 12-month terms, which
have about twice the amount of net premiums written compared to 6-month
policies. At the end of the second quarter 2020, 11% of our Agency auto policies
in force were 12-month policies, compared to about 9% a year earlier.
The Direct Business
                                       Growth Over Prior Year
                                     Quarter        Year-to-date
                                  2020   2019       2020    2019
Applications - Auto
New                                  4 %    6  %       5 %     7 %
Renewal                             15     15         13      16
Written premium per policy - Auto    0      2          0       2
Policy life expectancy - Auto
Trailing 3-months                   NM     (2 )
Trailing 12-months                   5     (4 )

NM = Not meaningful


The Direct business includes business written directly by Progressive on the
Internet, through mobile devices, and over the phone. The Direct business
experienced solid new and renewal application growth during the second quarter
and the first six months of 2020. During the year, we generated new auto
application growth in 31 states, including six of our top 10 largest Direct
states. By the end of the second quarter 2020, we continued to see overall
shopping volume return to pre-COVID levels. During both the second quarter and
six months ended June 30, 2020, we continued to experience an increase in Direct
auto quote volume of 6% and 5%, respectively, with rate of conversion decreasing
2% and 1%, compared to the same periods last year.
During the second quarter, our Diane and Wrights consumer segments experienced
negative new application growth, with Sams and Robinsons experiencing double
digit new application growth, while all consumer segments experienced strong
year-over-year policy in force growth.
E. Commercial Lines
                                                          Growth Over Prior Year
                                                      Quarter              Year-to-date
                                                  2020       2019         2020       2019
Applications - Auto
New                                                (10 )%      11  %        (3 )%      11 %
Renewal                                              7          7            8          8
Written premium per policy - Auto                   (1 )       10            2         12
Policy life expectancy - Auto - trailing
12-months                                            6         (7 )

Note: Table excludes our transportation
network company business.


Our Commercial Lines business operates in five traditional business markets,
which include business auto, for-hire transportation, contractor, for-hire
specialty, and tow markets and is primarily written through the agency channel.
Similar to our experience in our Personal Lines Agency business, the quarterly
results of our Commercial Lines business were negatively impacted by COVID-19
restrictions that were in place during the first half of the second quarter
2020, which influenced the demands and general consumer habits for goods and
services provided by our Commercial Lines customers and required that certain
businesses undergo temporary closure.

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While our renewal business was not significantly impacted, we continued to experience a significant decline in new consumer shopping during the second quarter 2020, reflecting a 13% and 8% quote volume decrease during the three and six month period ended June 30, 2020, respectively, and a 3% and 5% rate of conversion increase, compared to the same periods last year. F. Property

                                Growth Over Prior Year
                              Quarter        Year-to-date
                           2020   2019       2020   2019
Applications
New                           4 %   (6 )%       5 %   (2 )%
Renewal                      15     23         16     24

Written premium per policy 0 3 0 2



Our Property business writes residential property insurance for homeowners,
other property owners, and renters, in the agency and direct channels. During
the second quarter 2020, our Property business experienced an increase in new
applications, primarily driven by growth in our direct channel and our Robinsons
consumer segment, as discussed above, and a rebound to the housing market for
new home sales in June 2020. During 2020, our written premium per policy
increased for our homeowners' policies, on a year-over-year basis, but was
offset by a larger share of renters policies, which have lower written premiums
per policy.
While COVID-19 restrictions had a negative impact our Personal Lines and
Commercial Lines segments, our Property segment was not as significantly
impacted during the second quarter or six months ended June 30, 2020.
G. Income Taxes
A deferred tax asset or liability is a tax benefit or expense that is expected
to be realized in a future period. At June 30, 2020 and 2019, and December 31,
2019, we reported net deferred tax liabilities. At June 30, 2020 and 2019, and
December 31, 2019, we had net current income taxes payable of $889.0 million,
$150.3 million, and $195.5 million, respectively, which were reported as part of
other liabilities. During the six months ended June 30, 2020, we deferred making
estimated federal tax payments. In response to the impact on businesses caused
by COVID-19 restrictions, the Internal Revenue Service postponed the due date of
federal income tax payments that would have otherwise been due between April 1,
2020, and July 15, 2020. On July 15, 2020, we paid $700.0 million of estimated
federal taxes that would have otherwise been paid in the first half of 2020.
Our effective tax rate for the three and six months ended June 30, 2020, were
21.1% and 20.8%, respectively, compared to 21.3% and 26.7% for the same periods
last year. The higher effective rate for the first six months of 2019 was due
primarily to the reversal of tax credits and other tax benefits previously
recognized from certain renewable energy investments, where the sponsor pled
guilty to fraud through these investments and the tax credits and other benefits
related to those investments were not valid. See Note 5 - Income Taxes in our
2019 Annual Report to Shareholders for a further discussion.


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IV. RESULTS OF OPERATIONS - INVESTMENTS
A. Investment Results
Our management philosophy governing the portfolio is to evaluate investment
results on a total return basis. The fully taxable equivalent (FTE) total return
includes recurring investment income, adjusted to a fully taxable amount for
certain securities that receive preferential tax treatment (e.g., municipal
securities), and total net realized, and changes in total net unrealized, gains
(losses) on securities.

The following table summarizes investment results for the periods ended June 30:
                                                      Three Months        Six Months
                                                     2020     2019     2020      2019

Pretax recurring investment book yield (annualized) 2.5 % 3.2 % 2.6

  %    3.1 %
Weighted average FTE book yield (annualized)          2.6      3.2      2.6       3.2
FTE total return:
Fixed-income securities                               3.4      2.1      4.6       4.4
Common stocks                                        21.5      4.0     (3.4 )    17.9
Total portfolio                                       4.5      2.2      3.9       5.5



A combination of strong fiscal and monetary stimulus efforts provided a positive
backdrop to the financial market improvements throughout the second quarter
2020. Our fixed-income portfolio duration was 3.0 years and 2.7 years at
June 30, 2020 and 2019, respectively. The fixed-income portfolio generated a
positive return for the year based on declining interest rates and narrowing
credit spreads during the second quarter. Our indexed portfolio generated a
positive return for the quarter as the equity market recovered from the initial
effects of COVID-19, and investors moved back towards instruments that contained
credit risk.

A further break-down of our FTE total returns for our portfolio for the periods
ended June 30, follows:
                                         Three Months        Six Months
                                        2020     2019     2020      2019
Fixed-income securities:
U.S. Treasury Notes                      0.7 %    2.3 %    7.0  %    3.9 %
Municipal bonds                          3.8      1.8      6.6       3.7
Corporate bonds                          6.3      2.6      5.5       6.3

Residential mortgage-backed securities 4.3 1.1 1.4 2.0 Commercial mortgage-backed securities 4.0 2.2 1.0 4.7 Other asset-backed securities

            2.3      1.1      1.8       2.1
Preferred stocks                         9.2      2.1     (4.1 )     8.5
Short-term investments                   0.4      0.6      0.8       1.3
Common stocks:
Indexed                                 21.5      4.0     (3.4 )    17.9
Actively managed                          NA      5.0       NA      17.6

NA= Not applicable since we no longer maintain an actively managed portfolio.

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B. Portfolio Allocation
The composition of the investment portfolio was:
                                                          % of
                                             Fair        Total     Duration
($ in millions)                             Value    Portfolio      (years)    Rating1
June 30, 2020
U.S. government obligations            $  9,277.8         21.2 %        3.8        AAA

State and local government obligations 3,574.3 8.2 4.5

AA+

Corporate debt securities                11,062.5         25.3          4.0 

BBB+

Residential mortgage-backed securities 543.0 1.2 0.8

AA

Commercial mortgage-backed securities 5,761.8 13.2 2.7

        AA
Other asset-backed securities             4,354.9          9.9          1.0       AAA-
Preferred stocks                          1,332.7          3.0          3.2       BBB-
Short-term investments                    4,700.5         10.8          0.1       BBB+
Total fixed-income securities            40,607.5         92.8          3.0        AA-
Common equities                           3,170.4          7.2           na         na
Total portfolio2,3                     $ 43,777.9        100.0 %        3.0        AA-
June 30, 2019
U.S. government obligations            $ 12,379.4         33.6 %        3.7        AAA

State and local government obligations 1,589.7 4.3 2.9

AA+

Corporate debt securities                 7,385.7         20.1          3.0 

BBB

Residential mortgage-backed securities 665.2 1.8 1.1

AA-

Commercial mortgage-backed securities 4,441.9 12.1 2.5

       AA-
Other asset-backed securities             4,497.2         12.2          0.9       AAA-
Preferred stocks                          1,359.1          3.7          2.5       BBB-
Short-term investments                    1,360.9          3.7          0.1        AA-
Total fixed-income securities            33,679.1         91.5          2.7        AA-
Common equities                           3,135.5          8.5           na         na
Total portfolio2,3                     $ 36,814.6        100.0 %        2.7        AA-
December 31, 2019
U.S. government obligations            $ 13,251.1         33.7 %        4.9        AAA

State and local government obligations 1,713.3 4.4 3.1

AA+

Corporate debt securities                 7,067.7         18.0          2.7 

BBB

Residential mortgage-backed securities 627.5 1.6 0.9

AA

Commercial mortgage-backed securities 5,076.2 12.9 2.0

AA

Other asset-backed securities             5,179.5         13.2          0.8       AAA-
Preferred stocks                          1,233.9          3.2          2.6       BBB-
Short-term investments                    1,798.8          4.6          0.1        AA-
Total fixed-income securities            35,948.0         91.6          3.0         AA
Common equities                           3,306.3          8.4           na         na
Total portfolio2,3                     $ 39,254.3        100.0 %        3.0         AA
na = not applicable


1Represents ratings at period end. Credit quality ratings are assigned by
nationally recognized statistical rating organizations. To calculate the
weighted average credit quality ratings, we weight individual securities based
on fair value and assign a numeric score of 0-5, with non-investment-grade and
non-rated securities assigned a score of 0-1. To the extent the weighted average
of the ratings falls between AAA and AA+, we assign an internal rating of AAA-.
2Our portfolio reflects the effect of net unsettled security transactions; at
June 30, 2020, we had $277.9 million in other liabilities, compared to $303.5
million and $11.9 million at June 30, 2019 and December 31, 2019, respectively.
3The total fair value of the portfolio at June 30, 2020 and 2019, and
December 31, 2019, included $2.3 billion, $1.2 billion, and $3.2 billion,
respectively, of securities held in a consolidated, non-insurance subsidiary of
the holding company, net of any unsettled security transactions.


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Our asset allocation strategy is to maintain 0%-25% of our portfolio in Group I securities, with the balance (75%-100%) of our portfolio in Group II securities.


We define Group I securities to include:
• common equities


• nonredeemable preferred stocks



•            redeemable preferred stocks, except for 50% of 

investment-grade

             redeemable preferred stocks with cumulative dividends, which are
             included in Group II, and

• all other non-investment-grade fixed-maturity securities.



Group II securities include:
• short-term securities, and


•            all other fixed-maturity securities, including 50% of the
             investment-grade redeemable preferred stocks with cumulative
             dividends.



We believe this asset allocation strategy allows us to appropriately assess the
risks associated with these securities for capital purposes and is in line with
the treatment by our regulators.

The following table shows the composition of our Group I and Group II
securities:
                                     June 30, 2020               June 30, 2019             December 31, 2019
                                     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                     $    368.6          0.8 %   $    489.5          1.3 %   $    327.2          0.8 %
Redeemable preferred stocks1         76.0          0.2          133.7          0.4          117.6          0.3
Nonredeemable preferred stocks    1,180.6          2.7        1,130.0          3.1        1,038.9          2.7
Common equities                   3,170.4          7.2        3,135.5          8.5        3,306.3          8.4
Total Group I securities          4,795.6         10.9        4,888.7         13.3        4,790.0         12.2
Group II securities:
Other fixed maturities           34,281.8         78.3       30,565.0         83.0       32,665.5         83.2
Short-term investments            4,700.5         10.8        1,360.9          3.7        1,798.8          4.6
Total Group II securities        38,982.3         89.1       31,925.9         86.7       34,464.3         87.8
Total portfolio                $ 43,777.9        100.0 %   $ 36,814.6        100.0 %   $ 39,254.3        100.0 %


1Includes non-investment-grade redeemable preferred stocks of $38.3 million and
$40.2 million at June 30, 2019 and December 31, 2019, respectively; we held no
non-investment-grade redeemable preferred stocks at June 30, 2020.
To determine the allocation between Group I and Group II, we use the credit
ratings from models provided by the National 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 of June 30, 2020, our fixed-maturity portfolio had pretax net unrealized
gains, recorded as part of accumulated other comprehensive income, of $1,257.1
million, compared to $598.1 million and $459.4 million at June 30, 2019 and
December 31, 2019, respectively. The changes from both June and December 2019,
reflect decreasing interest rates, which resulted in valuation increases in all
fixed-maturity sectors.
See Note 2 - Investments for a further break-out of our gross unrealized gains
and losses.


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Holding Period Gains and Losses

The following table provides the gross and net holding period gain (loss) balance and activity during the six months ended June 30, 2020:

                                                                                      Net Holding
                                                Gross Holding     Gross Holding      Period Gains
(millions)                                       Period Gains     Period Losses          (Losses)
Beginning of period
Hybrid fixed-maturity securities               $          7.8   $             0   $           7.8
Equity securities                                     2,263.9             (15.5 )         2,248.4
Balance at December 31, 2019                          2,271.7             (15.5 )         2,256.2
Year-to-date change in fair value
Hybrid fixed-maturity securities                         (4.6 )            (1.8 )            (6.4 )
Equity securities                                      (186.5 )           (45.1 )          (231.6 )
Total holding period gains (losses) during the
period                                                 (191.1 )           (46.9 )          (238.0 )
End of period
Hybrid fixed-maturity securities                          3.2              (1.8 )             1.4
Equity securities                                     2,077.4             (60.6 )         2,016.8
Balance at June 30, 2020                       $      2,080.6   $         (62.4 ) $       2,018.2



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.
Credit Allowance and Uncollectible Losses
Valuations in all fixed-maturity sectors have improved following the heightened
volatility at the end of the first quarter. At the end of the second quarter, we
continued to expect that all securities in our portfolio will pay their
principal and interest obligations. In determining not to record any allowance
or write-off, we considered our expectation as well as how the market has
improved during the quarter. See Critical Accounting Policies for additional
discussion.
Fixed-Income Securities
The fixed-income portfolio is managed internally and includes fixed-maturity
securities, short-term investments, and nonredeemable preferred stocks.
Following are the primary exposures for our fixed-income portfolio. Details of
our policies related to these exposures can be found in the Management's
Discussion and Analysis included in our 2019 Annual Report to Shareholders.
•      Interest rate risk - our duration of 3.0 years at June 30, 2020, fell
       within our acceptable range.


•            The duration distribution of our fixed-income portfolio, excluding
             short-term investments, represented by the interest rate sensitivity
             of the comparable benchmark U.S. Treasury Notes, was:


Duration Distribution        June 30, 2020     June 30, 2019     December 31, 2019
1 year                                25.5 %            24.1 %                23.9 %
2 years                               14.1              20.6                  11.8
3 years                               21.3              20.1                  20.6
5 years                               20.1              19.8                  23.1
7 years                               10.4              12.3                  15.1
10 years                               8.6               3.1                   5.5
Total fixed-income portfolio         100.0 %           100.0 %               100.0 %




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• Credit risk - our credit quality rating was above our minimum threshold

during the second quarter 2020.

• The credit quality distribution of the fixed-income portfolio was:


Rating                          June 30, 2020     June 30, 2019     December 31, 2019
AAA                                      45.6 %            58.0 %                60.8 %
AA                                        8.9              10.4                   9.9
A                                        14.5               8.4                   7.9
BBB                                      29.4              20.4                  19.5
Non-investment grade/non-rated1
BB                                        1.2               1.9                   1.4
B                                         0.2               0.6                   0.3
CCC and lower                               0               0.1                     0
Non-rated                                 0.2               0.2                   0.2
  Total fixed-income portfolio          100.0 %           100.0 %               100.0 %


1The ratings in the table above are assigned by NRSROs. The non-investment-grade
fixed-income securities based upon our Group I classification represented 1.5%
of the total fixed-income portfolio at June 30, 2020, compared to 2.5% at
June 30, 2019 and 1.7% at December 31, 2019.

• Concentration risk - we did not have any investments in a single issuer,

either overall or in the context of individual assets classes and sectors,

that exceeded our thresholds during the second quarter 2020.

• Prepayment and extension risk - we did not experience significant adverse

       prepayment or extension of principal relative to our cash flow
       expectations in the portfolio during the second quarter 2020.

• Liquidity risk - our overall portfolio remains very liquid and we believe

that it is sufficient to meet expected near-term liquidity requirements.


•            The short-to-intermediate duration of our portfolio provides a
             source of liquidity, as we expect approximately $3.1 billion, or
             11.5%, of principal repayment from our fixed-income portfolio,
             excluding U.S. Treasury Notes and short-term investments, during the
             remainder of 2020. Cash from interest and dividend payments provides
             an additional source of recurring liquidity.


•            The duration of our U.S. government obligations, which are included
             in the fixed-income portfolio, was comprised of the following at
             June 30, 2020:


                               Fair    Duration
($ in millions)               Value     (years)
U.S. Treasury Notes
Less than one year        $   442.3         0.8
One to two years            1,350.0         1.6
Two to three years          2,424.1         2.6
Three to five years         2,461.0         4.1
Five to seven years         1,940.7         5.7
Seven to ten years            659.7         8.3

Total U.S. Treasury Notes $ 9,277.8 3.8

We currently view the market environment as very uncertain and believe the relatively conservative position of our investment portfolio continued to be appropriate.

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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
June 30, 2020
Residential mortgage-backed securities $    543.0     $            2.0             5.1 %        0.8                   AA
Commercial mortgage-backed securities     5,761.8                 33.3            54.0          2.7                   AA
Other asset-backed securities             4,354.9                 41.6            40.9          1.0                 AAA-
Total asset-backed securities          $ 10,659.7     $           76.9           100.0 %        1.9                  AA+
June 30, 2019
Residential mortgage-backed securities $    665.2     $            4.8             6.9 %        1.1                  AA-
Commercial mortgage-backed securities     4,441.9                 80.7            46.3          2.5                  AA-
Other asset-backed securities             4,497.2                 18.9            46.8          0.9                 AAA-
Total asset-backed securities          $  9,604.3     $          104.4           100.0 %        1.6                   AA
December 31, 2019
Residential mortgage-backed securities $    627.5     $            2.5             5.8 %        0.9                   AA
Commercial mortgage-backed securities     5,076.2                 55.5            46.6          2.0                   AA
Other asset-backed securities             5,179.5                 14.8            47.6          0.8                 AAA-
Total asset-backed securities          $ 10,883.2     $           72.8           100.0 %        1.4                  AA+

1 The credit quality ratings in the table above are assigned by NRSROs.


Residential Mortgage-Backed Securities (RMBS) The following table details the
credit quality rating and fair value of our RMBSs, along with the loan
classification and a comparison of the fair value at June 30, 2020, to our
original investment value (adjusted for returns of principal, amortization, and
write-downs):
                     Residential Mortgage-Backed Securities (at June 30, 2020)
($ in millions)
Rating1                      Non-Agency       Government/GSE2           Total          % of Total
AAA                     $         378.2     $             2.0     $        380.2             70.0 %
AA                                 65.8                   0.6               66.4             12.2
A                                  24.0                     0               24.0              4.4
BBB                                12.3                     0               12.3              2.3
Non-investment
grade/non-rated:
BB                                  0.5                     0                0.5              0.1
B                                  16.4                     0               16.4              3.0
CCC and lower                      11.9                     0               11.9              2.2
Non-rated                          31.3                     0               31.3              5.8
Total fair value        $         540.4     $             2.6     $        543.0            100.0 %
Increase (decrease) in
value                               0.3 %                 8.0 %              0.4 %


1The credit quality ratings in the table above are assigned by NRSROs; when we
assign the NAIC ratings for our RMBSs, $52.7 million of our non-investment-grade
securities are rated investment-grade and classified as Group II, and $7.4
million, or 1.4% of our total RMBSs, are not rated by the NAIC and are
classified as Group I.
2The securities in this category are insured by a Government Sponsored Entity
(GSE) and/or collateralized by mortgage loans insured by the Federal Housing
Administration (FHA) or the U.S. Department of Veteran Affairs (VA).

In the residential mortgage-backed sector, our portfolio consists of deals that
are backed by high credit quality borrowers or have strong structural
protections through underlying loan collateralization. In our view, the
risk/reward potential is currently lower in this portfolio relative to other
comparable investments. We made some relatively small additions in the
residential mortgage-backed sector in the second quarter of 2020.

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Commercial Mortgage-Backed Securities (CMBS) The following table details the
credit quality rating and fair value of our CMBSs, along with a comparison of
the fair value at June 30, 2020, to our original investment value (adjusted for
returns of principal, amortization, and write-downs):
                             Commercial Mortgage-Backed Securities (at June 30, 2020)
($ in millions)
Rating1                                         Multi-Borrower       Single-Borrower         Total     % of Total
AAA                                           $          312.4     $         2,789.7     $ 3,102.1           53.9 %
AA                                                         3.4               1,366.9       1,370.3           23.8
A                                                            0                 783.4         783.4           13.6
BBB                                                       33.2                 447.7         480.9            8.3
Non-investment grade/non-rated:
BB                                                           0                  24.6          24.6            0.4
B                                                          0.5                     0           0.5              0
Total fair value                              $          349.5     $         5,412.3     $ 5,761.8          100.0 %
Increase (decrease) in value                               1.3 %                 0.5 %         0.6 %


1The credit quality ratings in the table above are assigned by NRSROs; when we
assign the NAIC ratings for our CMBSs, $8.2 million of our non-investment-grade
securities are rated investment-grade and classified as Group II, and $16.9
million, or 0.3% of our total CMBSs are rated non-investment-grade and
classified as Group I.

During the quarter, we focused our purchases exclusively on secondary
acquisitions of single asset, single borrower securities because primary markets
were virtually shut down. In April, we purchased primarily long-duration,
fixed-rate, AAA-rated securities given the relative attractiveness of spreads.
As spreads narrowed in May and June, we continued to add attractive single
asset, single borrower securities, and we also focused on reducing securities
with higher levels of unique credit risk, primarily in our conduit and Freddie
Mac Class K multi-family holdings. As of the end of the quarter, we had
substantially disposed of our remaining conduit securities.
Other Asset-Backed Securities (OABS) The following table details the credit
quality rating and fair value of our OABSs, along with a comparison of the fair
value at June 30, 2020, to our original investment value (adjusted for returns
of principal, amortization, and write-downs):

                                         Other Asset-Backed Securities (at June 30, 2020)
($ in millions)                                                     Whole Business                                           % of
Rating            Automobile     Credit Card    Student Loan       Securitizations    Equipment      Other        Total     Total
AAA             $    1,745.0$       400.7$       284.6   $                 0   $  1,100.2$  134.0$ 3,664.5      84.2 %
AA                      64.4               0            36.3                     0         77.6       10.0        188.3       4.3
A                       32.2               0            10.3                     0        113.0       37.0        192.5       4.4
BBB                        0               0               0                 309.6            0          0        309.6       7.1
    Total fair
value           $    1,841.6$       400.7$       331.2   $             309.6   $  1,290.8$  181.0$ 4,354.9     100.0 %
Increase
(decrease) in
value                    0.9 %           0.9 %           1.0 %                 2.1 %        1.1 %     (0.8 )%       1.0 %



As valuations across other asset classes were more attractive in the second
quarter of 2020, asset-backed securities offered less relative value. Due to
amortization and scheduled paydowns, our ABS portfolio decreased throughout the
quarter. We selectively added across the spectrum to our other asset-backed
securities portfolio, but we primarily focused on auto, equipment, student
loans, and credit card backed loans.

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MUNICIPAL SECURITIES The following table details the credit quality rating of our municipal securities at June 30, 2020, without the benefit of credit or bond insurance:

      Municipal Securities (at June 30, 2020)
(millions)       General      Revenue
Rating       Obligations        Bonds        Total
AAA         $      775.0$   690.9$ 1,465.9
AA                 559.1      1,169.7      1,728.8
A                      0        375.1        375.1
BBB                  2.9          1.6          4.5
Total       $    1,337.0$ 2,237.3$ 3,574.3



Included in revenue bonds were $605.7 million of single-family housing revenue
bonds issued by state housing finance agencies, of which $431.8 million were
supported by individual mortgages held by the state housing finance agencies and
$173.9 million were supported by mortgage-backed securities. Of the programs
supported by mortgage-backed securities, approximately 25% were collateralized
by Fannie Mae and Freddie Mac mortgages; the remaining 75% were collateralized
by Ginnie Mae mortgages, which are fully guaranteed by the U.S. government. Of
the programs supported by individual mortgages held by the state housing finance
agencies, the overall credit quality rating was AA+. Most of these mortgages
were supported by FHA, VA, or private mortgage insurance providers.

During the second quarter, we continued to add high credit quality rated state
general obligations, water and sewer, airport, and higher education revenue
bonds. Our focus was on longer duration securities, which we believe will have a
more attractive return profile than comparable shorter duration securities. We
also increased our focus on the taxable portion of the municipal market, based
on our view that this sector also would provide attractive returns to us, on a
relative basis.
CORPORATE SECURITIES
The following table details the credit quality rating of our corporate
securities at June 30, 2020:
                                                  Corporate Securities (at June 30, 2020)
(millions)                                                            Financial
Rating                  Consumer     Industrial     Communication      Services     Technology     Basic Materials    Energy        Total
AAA                    $       0   $          0   $             0   $      30.1   $          0   $               0   $     0$     30.1
AA                         159.1              0                 0         278.2           61.0                   0      11.5        509.8
A                        1,000.3          179.0             317.6       1,125.6          319.3               107.3      93.5      3,142.6
BBB                      2,885.3        1,486.0             149.6       1,345.6          410.7                43.9     714.6      7,035.7
Non-investment
grade/non-rated:
BB                          45.1           98.9              65.0          11.8           46.3                   0      27.5        294.6
B                           49.7              0                 0             0              0                   0         0         49.7

Total fair value $ 4,139.5$ 1,763.9 $ 532.2 $ 2,791.3$ 837.3 $

           151.2   $ 847.1$ 11,062.5



During the second quarter 2020, credit spreads remained attractive and we
continued to selectively increase our allocation to corporate bonds. We focused
on adding investment-grade securities that are less vulnerable to the current
economic environment, while our allocation to high yield securities remained
small.

Overall, our corporate securities are a larger percentage of the fixed-income
portfolio when compared to the end of 2019. At June 30, 2020, the portfolio was
approximately 27% of our fixed-income portfolio, compared to approximately 20%
at December 31, 2019. In addition, we lengthened duration during 2020, and ended
the second quarter at 4.0 years, compared to 2.7 years at the end of 2019. This
extension is primarily the result of our assessment that more attractive
opportunities and wider spread levels existed in the corporate sector.

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PREFERRED STOCKS - REDEEMABLE AND NONREDEEMABLE
The table below shows the exposure break-down by sector and rating at June 30,
2020:
                                            Preferred Stocks (at June 30, 2020)
                                            Financial Services
(millions)
Rating                     U.S. Banks     Foreign Banks     Insurance      Other     Industrials     Utilities       Total
A                        $       47.5   $             0   $         0   $    8.9   $           0   $         0   $    56.4
BBB                             825.4                 0          98.2       24.9            90.2          10.8     1,049.5
Non-investment
grade/non-rated:
BB                               20.3              87.5             0          0            22.1          38.7       168.6
B                                   0                 0             0        4.9               0             0         4.9
Non-rated                           0                 0             0       38.1            15.2             0        53.3
Total fair value         $      893.2   $          87.5   $      98.2$   76.8$       127.5$      49.5$ 1,332.7


The majority of our preferred securities have fixed-rate dividends until a call
date and then, if not called, generally convert to floating-rate dividends. The
interest rate duration of our preferred securities is calculated to reflect the
call, floor, and floating-rate features. Although a preferred security will
remain outstanding if not called, its interest rate duration will reflect the
variable nature of the dividend. Our non-investment-grade preferred stocks were
primarily with issuers that maintain investment-grade senior debt ratings.
We also face the risk that dividend payments on our preferred stock holdings
could be deferred for one or more periods or skipped entirely. As of June 30,
2020, all of our preferred securities continued to pay their dividends in full
and on time. Approximately 80% of our preferred stock securities pay dividends
that have tax preferential characteristics, while the balance pay dividends that
are fully taxable.

The value of our preferred stock portfolio increased during second quarter 2020,
as equities increased and credit spreads tightened.
Common Equities
Common equities, as reported on the balance sheets, were comprised of the
following:

($ in millions)               June 30, 2020          June 30, 2019         December 31, 2019
Indexed common stocks      $ 3,170.1    100.0 %   $ 2,958.4     94.4 %   $   3,306.0    100.0 %
Managed common stocks              0        0         176.8      5.6               0        0
    Total common stocks      3,170.1    100.0       3,135.2    100.0         3,306.0    100.0
Other risk investments           0.3        0           0.3        0             0.3        0

Total common equities $ 3,170.4 100.0 % $ 3,135.5 100.0 % $

3,306.3 100.0 %



In our indexed common stock portfolio, our individual holdings are selected
based on their contribution to the correlation with the Russell 1000 Index. We
held 928 out of 1,004, or 92%, of the common stocks comprising the index at
June 30, 2020, which made up 96% of the total market capitalization of the
index. At June 30, 2020, the year-to-date total return, based on GAAP income,
was not within our targeted tracking error, which is +/- 50 basis points. The
portfolio was rebalanced during the second quarter 2020, in an effort to reduce
the expected tracking error.

The common equity markets continued to be volatile during the second quarter,
and our common stock portfolio reflected that market volatility. During the
second quarter, stock valuations increased and we ended the quarter with a FTE
total return on our common equity portfolio of (3.4%), which was an improvement
from the (20.5)% return at March 31, 2020.



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V. CRITICAL ACCOUNTING POLICIES
Progressive is required to make certain estimates and assumptions when preparing
its financial statements and accompanying notes in conformity with accounting
principles generally accepted in the United States of America. Actual results
could differ from those estimates in a variety of areas. The two areas we view
as most critical with respect to the application of estimates and assumptions is
the establishment of our loss reserves and the methods for measuring expected
credit losses on financial instruments. Below is a discussion of the expected
credit losses on financial instruments. See Management's Discussion and
Analysis; Critical Accounting Policies in our 2019 Annual Report to Shareholders
for further information on the estimates and assumptions related to the
establishment of our loss reserves.
A. Credit Losses on Financial Instruments
An allowance for credit losses is established when the ultimate realization of a
financial instrument is determined to be impaired due to a credit event.
Measurement of expected credit losses is based on judgment when considering
relevant information about past events, including historical loss experience,
current conditions, and forecasts of the collectability of the reported
financial instrument. The allowance for expected credit losses is measured and
recorded at the point ultimate recoverability of the financial instrument is
expected to be impaired, including upon the initial recognition of the financial
instrument, where warranted. We evaluate financial instrument credit losses
related to our available-for-sale securities, reinsurance recoverables, and
premiums receivables.
Available-For-Sale Securities
We routinely monitor our fixed-maturity portfolio for pricing changes that might
indicate potential losses exist and perform detailed reviews of securities with
unrealized losses to determine if an allowance for credit losses, a change to an
existing allowance (recovery or additional loss), or a write-off for an amount
deemed uncollectible needs to be recorded. In such cases, changes in fair value
are evaluated to determine the extent to which such changes are attributable to:
(i) credit related losses, which are specific to the issuer (e.g., financial
conditions, business prospects) where the present value of cash flows expected
to be collected is lower than the amortized cost basis of the security or (ii)
market related factors, such as interest rates or credit spreads.
If we do not expect to hold the security to allow for a potential recovery of
those expected losses, we will write-off the security to fair value and
recognize a realized loss in the comprehensive income statements.
For securities whose losses are credit related losses, and for which we do not
intend to sell in the near term, we will review the non-market components to
determine if a potential future credit loss exists, based on existing financial
data available related to the fixed-maturity securities. If we anticipate that a
credit loss exists, we will record an allowance for the credit loss and
recognize a realized loss in the comprehensive income statement. For all
securities for which an allowance for credit losses has been established, we
will re-evaluate the securities, at least quarterly, to determine if further
deterioration has occurred or if we project a subsequent recovery in the
expected losses, which would require an adjustment to the allowance for credit
losses. If subsequent to establishing an allowance for credit losses we
determine that the security is likely to be sold prior to the recovery of the
credit loss or if the loss is deemed uncollectible, we will reverse the
allowance for credit losses and write-off the security to its fair value.
For an unrealized loss that is determined to be related to current market
conditions, we will not record an allowance for credit losses or a write-off of
the fair value. We will continue to monitor these securities to determine if
underlying factors other than the current market conditions are contributing to
the loss in value.
Based on an analysis of our fixed-maturity portfolio, we have determined our
allowance for credit losses related to available-for-sale securities was not
material to our financial condition or results of operations for the period
ending June 30, 2020.
Reinsurance Recoverables
We routinely monitor changes in the credit quality and concentration risks of
the reinsurers who are counter parties to our reinsurance recoverables. At
June 30, 2020, approximately 80% of our reinsurance recoverables were held in
several mandatory state pools, including the Michigan Catastrophic Claims
Association, Florida Hurricane Catastrophe Fund, and North Carolina Reinsurance
Facility, and in plans where we act as a servicing agent to state-mandated
involuntary plans for commercial vehicles (Commercial Automobile Insurance
Procedures/Plans) and as a participant in the "Write Your Own" program for
federally regulated plans for flood (National Flood Insurance Program). All of
these programs are governed by insurance regulations. The remaining balance of
our recoverables are composed of voluntary external contractual arrangements
that primarily relate to the Property business and to our transportation network
company (TNC) business written by our Commercial Lines business. For these
privately placed reinsurance arrangements, we regularly monitor reinsurer credit
strength and analyze our reinsurance recoverable balances for expected credit
losses at least quarterly, or more frequently if indicators of reinsurer credit
deterioration, either individually or in aggregate, exists. For at-risk
uncollateralized recoverable balances, we evaluate a number of reinsurer
specific factors, including reinsurer credit quality rating, credit rating
outlook, historical experience, reinsurer surplus, recoverable duration, and
collateralization composition in respect to our net exposure (i.e., the

                                       55
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reinsurance recoverable amount less premiums payable to the reinsurer, where the
right to offset exists). Based on this assessment, reinsurers with credit risks
will be individually subject to a credit default model, and an allowance for
credit loss will be established, where warranted.
Based on the analysis of reinsurers, we have determined our allowance for credit
losses related to our reinsurance recoverables was not material to our financial
condition or results of operations for the period ending June 30, 2020.
Premium Receivables
We routinely monitor historical premium collections data for our premiums
receivable balances, through actuarial analyses, to project the future
recoverability of currently recorded receivables. See Note 1 - Basis of
Presentation for a description of our process and a rollforward in the allowance
account during the three and six months ended June 30, 2020.


                                       56
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Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995: Investors are cautioned that certain statements in this report not based
upon historical fact are forward-looking statements as defined in the Private
Securities Litigation Reform Act of 1995. These statements often use words such
as "estimate," "expect," "intend," "plan," "believe," and other words and terms
of similar meaning, or are tied to future periods, in connection with a
discussion of future operating or financial performance. Forward-looking
statements are based on current expectations and projections about future
events, and are subject to certain risks, assumptions and uncertainties that
could cause actual events and results to differ materially from those discussed
herein. These risks and uncertainties include, without limitation, uncertainties
related to:

• our ability to underwrite and price risks accurately and to charge

adequate rates to policyholders;

• our ability to establish accurate loss reserves;

• the impact of severe weather, other catastrophe events and climate change;

• the effectiveness of our reinsurance programs;

• the highly competitive nature of property-casualty insurance markets;

• whether we innovate effectively and respond to our competitors' initiatives;


•      whether we effectively manage complexity as we develop and deliver
       products and customer experiences;

• how intellectual property rights could affect our competitiveness and our

business operations;

• whether we adjust claims accurately;

• our ability to maintain a recognized and trusted brand;

• our ability to attract, develop and retain talent and maintain appropriate

staffing levels;

• compliance with complex laws and regulations;


•      litigation challenging our business practices, and those of our
       competitors and other companies;

• the impacts of a security breach or other attack involving our computer

       systems or the systems of one or more of our vendors;


•      the secure and uninterrupted operation of the facilities, systems, and
       business functions that are critical to our business;

• the success of our efforts to develop new products or enter into new areas

of business and navigate related risks;

• our continued ability to send and accept electronic payments;

• the possible impairment of our goodwill or intangible assets;

• the performance of our fixed-income and equity investment portfolios;

• the potential elimination of, or change in, the London Interbank Offered Rate;


•      our continued ability to access our cash accounts and/or convert
       securities into cash on favorable terms;

• the impact if one or more parties with which we enter into significant

contracts or transact business fail to perform;

• legal restrictions on our insurance subsidiaries' ability to pay dividends

to The 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;

• impacts from the outbreak of the novel coronavirus, or COVID-19, and the

       restrictions put in place to help slow and/or stop the spread of the
       virus; and


•      other matters described from time to time in our releases and
       publications, and in our periodic reports and other documents filed with

the United States Securities and Exchange Commission, including, without

limitation, the Risk Factors section of our Annual Report on Form 10-K for

       the year ending December 31, 2019, and our Quarterly Report on Form 10-Q
       for the period ending March 31, 2020.



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.

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