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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)

11/03/2020 | 09:55am EST
I. OVERVIEW
The Progressive Corporation's insurance subsidiaries recognized strong growth in
both premiums and policies in force in the third quarter 2020, compared to the
same period last year. During the quarter, we generated $11.0 billion of net
premiums written, which is an increase of $1.4 billion, or 14%, compared to the
third quarter 2019. We had 24.4 million companywide policies in force at
September 30, 2020, which is 2.4 million more policies than were in force at
September 30, 2019. Our underwriting profit margin of 12.2% for the third
quarter 2020 was 4.1 points better than the same period last year.
On a year-over-year basis, net income increased 82% for the third quarter and
39% for the first nine months of 2020, and comprehensive income increased 68%
and 31%, respectively. Underwriting profit increased 66% for the quarter and 44%
for the first nine months of 2020, compared to the same periods last year. The
increased underwriting profitability primarily reflected a decrease in the loss
and loss adjustment expense ratio due to lower auto accident frequency on a
year-over-year basis. Through the third quarter 2020, we continued to experience
driving patterns that differ from levels historically experienced, which began
in March 2020, when federal, state, and local social distancing and
shelter-in-place restrictions were put in place to stop or slow the spread of
the novel coronavirus COVID-19 ("COVID-19 restrictions"). In addition to strong
underwriting results, we recognized significant realized gains in our
fixed-income and equity portfolios during the third quarter. We saw large
realized gains in our treasury, corporate, and municipal portfolios and equity
valuations continued to rebound following the decline experienced at the end of
the first quarter 2020 when the COVID-19 restrictions were first put in place.
During the third quarter 2020, our total capital (debt plus shareholders'
equity) increased $1.4 billion, to $23.5 billion, primarily reflecting
comprehensive income earned during the quarter.
A. 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 third quarter on a year-over-year basis. Our
companywide net premiums written grew 14%, with Personal Lines growing 12%,
Commercial Lines 34%, and Property 13%, primarily reflecting an increase in
volume. The substantial Commercial Lines premiums growth was driven by growth in
our for-hire transportation business market target, reflecting greater demand
for shipping services in light of the pandemic. In addition, Commercial Lines
generated $185.1 million of net premiums written on new and renewal
transportation network company (TNC) policies in the third quarter 2020,
compared to $87.4 million in the same period last year, primarily driven by
state expansion. At September 30, 2020, on a year-over-year basis, policies in
force grew 11% companywide, with Personal Lines, Commercial Lines, and Property
growing 11%, 7%, and 13%, respectively.
During the third quarter 2020, new applications (i.e., issued policies)
increased 11%, 19%, and 17% in our Personal Lines, Commercial Lines, and
Property segments, respectively. During the third quarter, total new personal
auto applications increased 9% on a year-over-year basis, with Agency new
applications increasing 4% and Direct increasing 13%. New applications for our
special lines products were up 21% during the third quarter 2020, primarily due
to overall growth in the RV and boat industries.
On a year-over-year basis for the third quarter 2020, our Personal Lines renewal
applications increased 12%, Commercial Lines increased 9%, and Property
increased 14%. Total personal auto renewal applications increased 14% over the
third quarter last year.
We realize the importance of retaining customers to grow policies in force and
this remains one of our most important priorities. We remain focused on
increasing our share of multi-product households and will continue to make
investments to improve the customer experience to continue to support that goal.
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. 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 third quarter 2020, our trailing
12-month total personal auto policy life expectancy increased 9% compared to
last year, as a portion of policy cancellations were suppressed by the billing
leniency and state moratoriums put in place between mid-March and mid-May 2020.
Our Agency auto trailing 12-month policy life expectancy was up 10% and Direct
auto was up 7%. Our Commercial Lines trailing 12-month policy life expectancy
increased 4% year over year and special lines was up 5%.
Our companywide underwriting margin for the third quarter 2020 was strong at
12.2%, which was 4.1 points better than the same period last year. Vehicle
accidents were significantly lower than the prior year as vehicle miles driven
are down and driving patterns have not returned to their historical levels since
COVID-19 restrictions were put in place. Our personal auto incurred accident
frequency was down about 19% for the third quarter 2020, as compared to the
prior year, while severity was up about 8%. In response to the decline in
frequency, we continue to adjust premiums to reflect the underlying risk and
lowered countrywide personal auto rates on average 1% during the third quarter
2020 and 3% from April through September 2020.
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Our Personal and Commercial Lines operating segments were profitable during the
third 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 13.4% for the third
quarter 2020. Our special lines products had a 1.5 point unfavorable impact on
our Personal Lines combined ratio, due to the seasonal nature of these products.
Our Commercial Lines underwriting profit margin for the second quarter was
12.8%. Our Property segment had an underwriting loss margin of 11.8% for the
third quarter. On a net basis (i.e., after reinsurance), our Property business
incurred catastrophe losses during the third quarter of $115.1 million, or 25.7
points on their combined ratio. During the third quarter 2020, we exceeded the
$375 million annual retention threshold under our catastrophe aggregate excess
of loss reinsurance program and recorded a reinsurance recoverable of $135.3
million.
B. Investments
The fair value of our investment portfolio was $45.8 billion at September 30,
2020, compared to $39.3 billion at December 31, 2019. The increase from year-end
2019, primarily reflected comprehensive income of $4.6 billion, the $1.0 billion
of proceeds from the debt issued during March, and a change in net unsettled
purchased securities of $0.5 billion, offset by $1.8 billion related to the
payment of shareholder dividends and the purchase of the remaining equity
interest in ARX Holding Corp. (ARX) 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 both September 30, 2020 and December 31, 2019, 12%
of our portfolio was allocated to Group I securities and 88% to Group II
securities.
The valuations of our non-U.S.Treasury fixed-income and equity investment
portfolios continued to rebound throughout the third 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.
Our recurring investment income generated a pretax book yield of 2.3% for the
third quarter 2020, compared to 3.0% 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 1.7% and 1.2% for the third
quarter 2020 and 2019, respectively. Our fixed-income and common stock
portfolios had FTE total returns of 1.1% and 9.6%, respectively, for the third
quarter 2020, compared to 1.2% and 1.4%, respectively, last year. A significant
reduction in interest rates and narrowing of credit spreads during the first
nine months of 2020 resulted in a 5.8% FTE total return on our fixed-income
securities. Our indexed common stock portfolio's FTE total return was 5.8% for
the first nine months of 2020, showing an improvement from earlier in the year.
At September 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 2.9 years and AA
and 3.0 years at September 30, 2019 and December 31, 2019, respectively. While
we have slightly 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 $5.4 billion and $5.1 billion for the first
nine months of 2020 and 2019, respectively.
We did not experience a significant change in our liquidity needs during the
third quarter 2020. During the third quarter 2020, we saw premium growth in all
three of our operating segments. Beginning in March, when COVID-19 restrictions
were put in place, we experienced a significant decrease in accident claim
frequency and, as a result, the amount of cash required to pay claims also
decreased. In response to the reduction in auto accident frequency, during the
second and third quarters of 2020, we issued a total of $1.1 billion of credits
to our personal auto policyholders and began taking rate decreases countrywide.
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 $23.5 billion, at book
value, at September 30, 2020, compared to $18.5 billion at September 30, 2019,
and $18.1 billion at December 31, 2019. The increase since year end primarily
reflects 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 23.0% at September 30, 2020, 23.8% at September 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 nine months of 2020, we returned capital to shareholders
primarily through dividends. Our Board of Directors declared a $0.10 per common
share dividend in the first, second, and third quarters of 2020. These
dividends, which were $58.5 million, $58.5 million, and $58.6 million,
respectively, in the aggregate, were paid in April 2020, July 2020, and October
2020. In addition to the common share dividends, in March 2020 and September
2020, we paid Series B Preferred Share dividends in the aggregate amount of
$26.8 million. In January 2020, we also paid common share dividends in the
aggregate amount of $1.4 billion, or $2.35 per share (see Note 9 - Dividends for
further discussion). During the third quarter 2020, we resumed repurchasing
common shares in the open market. To neutralize dilution from equity-based
compensation in the year of issuance, through September 2020, we repurchased 0.9
million common shares, at a total cost of $74.5 million, either in the open
market or to satisfy tax withholding obligations as permitted under our equity
compensation plans. We will continue to make decisions on returning capital to
shareholders based on the strength of our capital position and the potential
capital needs to expand our business operations.
In April 2020, The Progressive Corporation acquired the remaining outstanding
stock of ARX, for an aggregate cost of $243.0 million, which included shares
from exercised 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 nine 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. 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 nine 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 September 30,             Nine Months Ended September 30,
                                                       2020                   2019                  2020                   2019
Personal Lines
Agency                                                       39  %                40  %                   40  %                41  %
Direct                                                       42                   43                      43                   42
Total Personal Lines1                                        81                   83                      83                   83
Commercial Lines                                             14                   12                      13                   13
Property                                                      5                    5                       4                    4
Total underwriting operations                               100  %               100  %                  100  %               100  %


1 Personal auto insurance accounted for 94% of the total Personal Lines segment
net premiums written during the three months and 93% during the nine months
ended September 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
product (not special lines products) in the District of Columbia. Our personal
auto policies are primarily written for 6-month terms, although we write
12-month personal auto policies mainly through our Platinum agents who are
focused on selling bundled auto and home policies. At September 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 general 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 9% of premiums written for the
third quarter 2020, excluding our TNC business, compared to 8% 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 19% of premiums written for the third quarter
of 2020, compared to 17% for the same period last year. Property policies are
written for 12-month terms. We write residential property and flood insurance in
45 states and renters insurance in 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 policyholder 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 September 30,                                                           Nine Months Ended September 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                               $           596.5                 14.9  %       $      380.2                 10.3  %       $       1,748.7                 14.9  %       $     1,267.9                 11.7  %
Direct                                           517.6                 12.0                 291.7                  7.7                  1,637.8                 13.1                  940.2                  8.5
Total Personal Lines                           1,114.1                 13.4                 671.9                  9.0                  3,386.5                 14.0                2,208.1                 10.1
Commercial Lines                                 155.9                 12.8                  69.7                  6.3                    448.2                 12.7                  360.7                 11.3
Property1                                        (52.9)               (11.8)                 (9.1)                (2.3)                  (192.4)               (14.8)                 (35.8)                (3.1)

Total underwriting operations        $         1,217.1                 12.2  %       $      732.5                  8.1  %       $       3,642.3                 12.5  %       $     2,533.0                  9.6  %


1 For the three and nine months ended September 30, 2020, pretax profit (loss)
includes $14.2 million and $42.8 million, respectively, of amortization expense
predominately associated with the acquisition of a controlling interest in ARX,
and $15.8 million and $51.7 million for the respective periods last year; the
decrease in amortization expense reflects intangible assets that were fully
amortized.
The increases in the companywide underwriting profit margins during the three
and nine months ended September 30, 2020, compared to the same periods last
year, were driven by lower accident frequency experienced during the periods,
partially offset by policyholder credits issued to personal auto customers and
an increase in advertising spend.
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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 September 30,                                       Nine Months Ended September 30,
Underwriting Performance1                                2020                       2019                Change                 2020                       2019                Change
Personal Lines-Agency
Loss & loss adjustment expense ratio                67.0                       71.0                   (4.0)               61.6                       69.2                   (7.6)
Underwriting expense ratio                          18.1                       18.7                   (0.6)               23.5                       19.1                    4.4
Combined ratio                                      85.1                       89.7                   (4.6)               85.1                       88.3                   (3.2)
Personal Lines-Direct
Loss & loss adjustment expense ratio                66.4                       71.3                   (4.9)               60.8                       70.4                   (9.6)
Underwriting expense ratio                          21.6                       21.0                    0.6                26.1                       21.1                    5.0
Combined ratio                                      88.0                       92.3                   (4.3)               86.9                       91.5                   (4.6)
Total Personal Lines
Loss & loss adjustment expense ratio                66.7                       71.1                   (4.4)               61.2                       69.8                   (8.6)
Underwriting expense ratio                          19.9                       19.9                      0                24.8                       20.1                    4.7
Combined ratio                                      86.6                       91.0                   (4.4)               86.0                       89.9                   (3.9)
Commercial Lines
Loss & loss adjustment expense ratio                66.6                       72.2                   (5.6)               64.1                       67.5                   (3.4)
Underwriting expense ratio                          20.6                       21.5                   (0.9)               23.2                       21.2                    2.0
Combined ratio                                      87.2                       93.7                   (6.5)               87.3                       88.7                   (1.4)
Property
Loss & loss adjustment expense ratio                81.2                       71.4                    9.8                84.7                       72.4                   12.3
Underwriting expense ratio2                         30.6                       30.9                   (0.3)               30.1                       30.7                   (0.6)
Combined ratio2                                    111.8                      102.3                    9.5               114.8                      103.1                   11.7
Total Underwriting Operations
Loss & loss adjustment expense ratio                67.3                       71.3                   (4.0)               62.6                       69.7                   (7.1)
Underwriting expense ratio                          20.5                       20.6                   (0.1)               24.9                       20.7                    4.2
Combined ratio                                      87.8                       91.9                   (4.1)               87.5                       90.4                   (2.9)
Accident year - Loss & loss adjustment expense
ratio3                                              67.3                       71.2                   (3.9)               62.2                       68.9                   (6.7)


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 nine months ended September 30, 2020, are 3.2 points
and 3.3 points, respectively, of amortization expense predominately associated
with the acquisition of a controlling interest in ARX, and 4.0 points and 4.5
points for the respective periods last year. Excluding these additional
expenses, for the three months ended September 30, 2020 and 2019, the Property
business would have reported expense ratios of 27.4 and 26.9, respectively, and
a combined ratio of 108.6 and 98.3. For the nine months ended September 30, 2020
and 2019, excluding these additional expenses, the Property business would have
reported expense ratios of 26.8 and 26.2, respectively, and combined ratios of
111.5 and 98.6.
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 September 30,           Nine Months Ended September 30,
(millions)                                               2020               2019                      2020                2019
Increase (decrease) in net loss and LAE
reserves                                        $    775.6          $   

571.3 $ 891.7 $ 1,396.8 Paid losses and LAE

                                5,937.5            5,855.0                  17,298.0            16,926.6
Total incurred losses and LAE                   $  6,713.1          $ 

6,426.3 $ 18,189.7$ 18,323.4



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 4.0 points for the third quarter 2020,
compared to the same period last year, and 7.1 points on a year-to-date basis,
primarily due to lower auto frequency, partially offset by higher accident
severity and catastrophe losses, as discussed below.
The following table shows our consolidated catastrophe losses, excluding loss
adjustment expenses, incurred during the periods:
                                                     Three Months Ended September 30,                 Nine Months Ended September 30,
($ in millions)                                         2020                    2019                    2020                    2019
Personal Lines                                   $    163.1$  122.0$    365.0$  291.8
Commercial Lines                                        3.4                     3.4                    11.0                     9.7
Property
Property business, net of reinsurance (excluding
ASL)                                                  117.8                    65.0                   407.5                   258.0
Reinsurance recoverable on ASL1                        (2.7)                  (31.6)                  (15.7)                 (117.1)
Property business, net                                115.1                    33.4                   391.8                   140.9
   Total net catastrophe losses incurred         $    281.6$  158.8$    767.8$  442.4
Combined ratio effect                                   2.8     pts.            1.8   pts.              2.6     pts.            1.7   pts.


1 Represents the reinsurance recoverable recorded on the losses from accident
years 2017 to 2019 under our aggregate stop-loss agreements (ASL); see table
below for further information.
During the third quarter 2020, the majority of catastrophe losses were due to
hurricanes, west coast wildfires, and 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.

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We have aggregate stop-loss reinsurance agreements (ASL) in place, which are in
effect for accident years from 2017 to 2019. The following table shows the total
reinsurance recoverables activity under the ASL agreements by accident year, for
the respective periods:
                                                   Three Months Ended September 30,             Nine Months Ended September 30,
($ in millions)                                        2020                   2019                  2020                  2019
Reinsurance recoverable on ASL, beginning of
period                                          $           84.3          $   105.9          $          69.7          $    12.5
Reinsurance recoverables recognized on losses
Accident year:
2019                                                         1.9               40.5                     12.8              113.9
2018                                                           0                  0                        0                  0
2017                                                         0.8               (8.9)                     2.9                3.2
 Total                                                       2.7               31.6                     15.7              117.1
Reinsurance recoverables recognized on ALAE
Accident year:
2019                                                         0.2                4.2                      1.6               12.3
2018                                                           0                  0                        0                  0
2017                                                         0.1               (1.2)                     0.3               (1.4)
 Total                                                       0.3                3.0                      1.9               10.9
Total reinsurance recoverables recognized
Accident year:
2019                                                         2.1               44.7                     14.4              126.2
2018                                                           0                  0                        0                  0
2017                                                         0.9              (10.1)                     3.2                1.8
 Total                                                       3.0               34.6                     17.6              128.0
Reinsurance recoverable on ASL, end of period   $           87.3          $ 

140.5 $ 87.3 $ 140.5




We did not renew our ASL program for accident year 2020. Instead, we entered
into a property catastrophe aggregate excess of loss (XOL) program in January
2020. Both the ASL and XOL programs cover accident year Property catastrophe
losses and 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. During the third quarter 2020, we
exceeded the $375 million annual retention threshold under our catastrophe
aggregate XOL program and recorded a reinsurance recoverable of $135.3 million.
In addition to the aggregate XOL program, during the second quarter 2020, our
Property business renewed its catastrophe reinsurance program with a
continuation of multi-year contracts and new single-year 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). During the third quarter 2020, we
recorded a $10 million reinsurance recoverable under our catastrophe reinsurance
program as the Property losses and ALAE incurred from Hurricane Laura exceeded
the $80 million single storm retention threshold under this program.
During the first quarter 2020, relative to our Property business, we closed a
$200 million catastrophe bond transaction. This bond replaced a similar $200
million bond that expired on December 31, 2019. The bond will provide
reinsurance coverage in the 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.
                                       38
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Total personal auto incurred severity (i.e., average cost per claim, including
both paid losses and the change in case reserves) on a calendar-year basis
increased about 8% and 9% for the three and nine months ended September 30,
2020, respectively, compared to the same periods last year. These increases
partly reflect a reduction in new claims, which led to an older aged mix of
inventory, which increases incurred losses. In addition, during 2020 we saw an
increase in the number of claims that were reopened, and required an additional
payment. 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 a shift in the mix of claims inventory and an increase in the
number of claims reopened, personal injury protection (PIP) increased about 12%
and 17% during the third quarter and first nine months of 2020, respectively,
and auto property damage increased about 4% and 10%.
•Bodily injury increased about 12% for the third quarter 2020, due in part to a
shift in the mix to more severe accidents compared to last year, and 11% for the
first nine months of 2020, due in part to an older mix of claims inventory and
more severe accidents compared to last year.
•Collision increased about 6% and 2% during the third quarter and first nine
months of 2020, respectively, 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, and 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
19% and 25% for the three and nine months ended September 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:
•Auto property damage decreased about 24% for the third quarter and 28% for the
first nine months of 2020, respectively.
•PIP decreased about 19% and 28% for the quarter and first nine months.
•Bodily injury decreased about 22% for the quarter and 26% for the first nine
months.
•Collision decreased about 15% for the quarter and 25% for the first nine
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
degree of confidence, 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,
we saw vehicle miles traveled increase, however, they remained lower than during
the third 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 or changes in driving patterns, 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 use a trailing 12-month period and exclude our
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 excluding
that business is more indicative of our overall experience for the majority of
our commercial auto products.
On a year-over-year basis, incurred severity in our commercial auto products
increased 15% and frequency decreased 14%. In addition to general trends in the
marketplace, the increase in severity reflected increased medical costs and
actuarially determined reserves due to accelerating paid loss trends and shifts
in the mix of business to for-hire transportation, which has higher average
severity than the business auto and contractor business market targets. 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.
                                       39
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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 September 30,                  Nine Months Ended September 30,
($ in millions)                                    2020                     2019                  2020                          2019
ACTUARIAL ADJUSTMENTS
Reserve decrease (increase)
Prior accident years                               $    10.0$    5.1$      (2.2)$  (57.4)
Current accident year                                   20.0                   (61.0)                    50.2                      (64.0)
Calendar year actuarial adjustment                 $    30.0$  (55.9)$      48.0$ (121.4)
PRIOR ACCIDENT YEARS DEVELOPMENT
Favorable (unfavorable)
Actuarial adjustment                               $    10.0$    5.1$      (2.2)$  (57.4)
All other development                                  (10.0)                  (10.3)                  (113.9)                    (157.8)
Total development                                  $       0$   (5.2)$    (116.1)$ (215.2)
(Increase) decrease to calendar year combined
ratio                                                      0     pts.           (0.1)  pts.              (0.4)   pts.               (0.8)  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 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
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) decreased 0.1 points
and increased 4.2 points for the three and nine months ended September 30, 2020,
respectively, compared to the same periods last year. During the third quarter
and first nine months of 2020, we incurred 0.3 points and 3.7 points,
respectively, of policyholder credits issued to personal auto customers. 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 year, which contributed to a 0.9 point increase
in the Commercial Lines expense ratio for the nine months ended September 30,
2020.
Progressive's other underwriting expenses, which excludes the policyholder
credits, increased 7% for the third quarter and 15% for the first nine months of
2020, compared to the same periods last year, primarily reflecting increased
advertising spend in both periods. During the third quarter and first nine
months of 2020, our advertising expenditures increased 29% and 20%,
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.
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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 September 30,                                  Nine Months Ended September 30,
($ in millions)                               2020                2019              % Growth                  2020                   2019               % Growth
NET PREMIUMS WRITTEN
Personal Lines
Agency                                   $   4,251.7$ 3,876.3                    10  %       $       12,382.9$ 11,418.2                     8  %
Direct                                       4,633.0            4,080.2                    14                  13,257.2            11,746.1                    13
Total Personal Lines                         8,884.7            7,956.5                    12                  25,640.1            23,164.3                    11
Commercial Lines                             1,609.9            1,204.6                    34                   3,949.1             3,552.5                    11
Property                                       520.5              460.1                    13                   1,437.2             1,270.8                    13
Total underwriting operations            $  11,015.1$ 9,621.2                    14  %       $       31,026.4$ 27,987.6                    11  %
NET PREMIUMS EARNED
Personal Lines
Agency                                   $   4,001.6$ 3,703.4                     8  %       $       11,749.3$ 10,851.5                     8  %
Direct                                       4,309.8            3,804.0                    13                  12,470.1            11,113.7                    12
Total Personal Lines                         8,311.4            7,507.4                    11                  24,219.4            21,965.2                    10
Commercial Lines                             1,214.8            1,106.9                    10                   3,532.8             3,190.4                    11
Property                                       447.3              397.9                    12                   1,300.6             1,141.1                    14
Total underwriting operations            $   9,973.5$ 9,012.2                    11  %       $       29,052.8$ 26,296.7                    10  %

                                                                                                                               September 30,
(thousands)                                                                                                   2020                   2019               % Growth
POLICIES IN FORCE
Agency auto                                                                                                     7,527.1             6,903.8                       9%
Direct auto                                                                                                     8,774.3             7,716.0                    14
Total auto                                                                                                     16,301.4            14,619.8                    12
Special lines1                                                                                                  4,905.8             4,567.6                     7
Personal Lines - total                                                                                         21,207.2            19,187.4                    11
Commercial Lines                                                                                                     803.9               748.7                  7
Property                                                                                                           2,421.0             2,144.3                 13
Companywide total                                                                                                 24,432.1            22,080.4                   11%


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 September 30, 2020, the growth in our auto trailing 12-month policy life
expectancy is artificially high due to suspending cancellations of policies for
nonpayment, which impacted renewal activity during the second quarter 2020. We
continue to disclose our changes in policy life expectancy using both a trailing
3-month and 12-month period; however, we believe that the trailing 12-month
measure will be positively impacted by the factor discussed above through the
second quarter 2021.
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                                                 11  %   5  %             5  %   6  %
    Renewal                                             12     11               11     11
    Written premium per policy - Auto                   (2)     2                0      2
    Policy life expectancy - Auto
    Trailing 3-months                                    7      1
    Trailing 12-months                                   9     (1)



In our Personal Lines business, the increase in both new and renewal
applications during both periods in 2020 resulted from increases in both our
personal auto and special lines products. In the auto businesses, the increase
in new applications was primarily attributable to our competitive product
offerings and position in the marketplace, as well as our increase in
advertising spend and rate decreases taken on auto business policies during
2020. During the three and nine months ended September 30, 2020, our personal
auto new application growth was up 9% and 2%, respectively. Our special lines
products saw new applications increase 21% and 19% during the quarter and
year-to-date periods, respectively, driven by high demand due to the overall
growth in the RV and boat industries. During both periods, we continued to see
strong renewal personal auto application growth, which may have been aided, in
part, by our countrywide billing leniency efforts and the moratoriums that were
put in place from mid-March through mid-May 2020, which suspended cancellations
of policies for non-payment.
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                                                  4  %   4  %            (4) %   6  %
Renewal                                             12     10               10     11
Written premium per policy - Auto                   (1)     2                0      3
Policy life expectancy - Auto
Trailing 3-months                                    6      5
Trailing 12-months                                  10      2


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 third quarter 2020, the Agency auto business
experienced an increase in new application growth, following a 13% decrease in
new applications during the second quarter 2020. During the third quarter, we
generated new auto application growth in 23 states, including seven of our top
10 largest Agency states. While new application growth during the third quarter
2020 was driven by our competitive product offerings and position in the
marketplace, year-to-date new application growth is down compared to last year,
as COVID-19 restrictions significantly impacted agents and their ability to get
their operations back to pre-COVID levels.
During both the third quarter and nine months ended September 30, 2020, we
experienced a decrease in Agency auto quote volume of 1% and 2%, respectively.
The rate of conversion (i.e., converting a quote to a sale) increased 5% for the
quarter and decreased 2% year-to-date, compared to the same periods last year.
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 third
quarter 2020, each of our segments experienced positive new application and
policy in force growth, with the largest percentage of new application growth
from our non-bundled homeowner consumer segment (i.e., Wrights).
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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 third 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                                                 13  %   6  %             8  %   6  %
    Renewal                                             15     14               14     15
    Written premium per policy - Auto                   (2)     1               (1)     2
    Policy life expectancy - Auto
    Trailing 3-months                                    8     (2)
    Trailing 12-months                                   7     (3)


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 third quarter
and the first nine months of 2020. During the year, we generated new auto
application growth in 32 states, including nine of our top 10 largest Direct
states. During the third quarter and nine months ended September 30, 2020, we
experienced an increase in Direct auto quote volume of 8% and 6%, respectively,
and our rate of conversion increased 5% and 1%, compared to the same periods
last year.
During the third quarter, we grew our new Direct auto applications and policies
in force across all consumer segments, with the largest percentage of new
application growth generated from our bundled auto and home consumer segment
(i.e., Robinsons).
E. Commercial Lines
                                                                                  Growth Over Prior Year
                                                                      Quarter                           Year-to-date
                                                                      2020         2019                      2020         2019
Applications - Auto
New                                                                  18  %         8  %                      4  %        10  %
Renewal                                                               9            7                         8            8
Written premium per policy - Auto                                     4            4                         2            9
Policy life expectancy - Auto - trailing 12-months                    4     

(5)

Note: Table excludes our TNC and business owners policy products.



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.
Commercial Lines experienced solid year-over-year new application growth in the
third quarter and first nine months of 2020, reflecting continued improvement in
the economy and our competitiveness in the marketplace. The significant new
application growth during the third quarter was primarily driven by growth in
our for-hire transportation business market target, due to greater demand for
shipping services in light of the pandemic.
During the third quarter 2020, we experienced improvement in new consumer
shopping, reflecting a 10% increase in quote volume, compared to the same period
last year. For the nine months ended September 30, 2020, we experienced a 2%
decrease in quote volume due to the impact of the COVID-19 restrictions that
were in place during March 2020 through 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. During the third quarter and nine months
ended September 30, 2020, we experienced an 8% and 6% rate of conversion
increase, compared to the same periods last year.
                                       43
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Volume in our TNC business more than doubled with net premiums written
increasing 112%, compared to the third quarter last year, due to renewing our
existing TNC policies and state expansion. On a year-to-date basis, TNC premiums
are 4% lower than the same period last year due to a reduction in the miles
driven under these policies as a result of the COVID-19 restrictions that were
put in place in mid-March 2020, and the social distancing guidelines that
remain; partially offset by state expansion. Changes in actual and estimated
miles driven will continue to impact our net premiums written under these
policies.
F. Property
                                            Growth Over Prior Year

                                       Quarter                   Year-to-date
                                              2020   2019             2020   2019
Applications
New                                          17  %  (1) %            10  %  (1) %
Renewal                                      14     22               15     23
Written premium per policy                   (1)     2                0     

2



Our Property business writes residential property insurance for homeowners,
other property owners, and renters, in the agency and direct channels. During
the third 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 continued rebound in the housing
market for new home sales. 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.
Our Property segment was not significantly impacted by COVID-19 restrictions
during the year.
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 September 30, 2020 and 2019, and December
31, 2019, we reported net deferred tax liabilities. At September 30, 2020 and
2019, and December 31, 2019, we had net current income taxes payable of $197.1
million, $186.6 million, and $195.5 million, respectively, which were reported
as part of other liabilities.
Our effective tax rate for the three and nine months ended September 30, 2020,
were 20.4% and 20.7%, respectively, compared to 16.5% and 24.0% for the same
periods last year. For the three months ended September 30, 2019, the lower
effective rate was due primarily to renewable energy investment tax credits and
the vesting of employee stock based compensation awards. For the nine months
ended September 30, 2019, the higher effective rate was due primarily to the
reversal of certain tax credits, unrelated to those impacting the quarter, 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
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
September 30:
                                                                        Three Months                            Nine Months
                                                                       2020              2019                   2020               2019
Pretax recurring investment book yield (annualized)                  2.3  %            3.0  %                 2.5  %             3.1  %
Weighted average FTE book yield (annualized)                         2.3               3.1                    2.5                3.2
FTE total return:
Fixed-income securities                                              1.1               1.2                    5.8                5.6
Common stocks                                                        9.6               1.4                    5.8               19.5
Total portfolio                                                      1.7               1.2                    5.7                6.7



Third quarter results were strong as the economy continued to improve as
re-openings started late spring and continued throughout most of the summer. Our
fixed-income portfolio duration was 3.0 years and 2.9 years at September 30,
2020 and 2019, respectively. Both the fixed-income and indexed equity portfolios
generated positive returns for the quarter as supportive monetary policy
encouraged investors to increase their allocation to risk assets.

A further break-down of our FTE total returns for our portfolio for the periods
ended September 30, follows:
                                               Three Months                 Nine Months
                                                  2020        2019            2020        2019
Fixed-income securities:
U.S. Treasury Notes                             0.3  %      1.1  %          7.4  %      5.1  %
Municipal bonds                                 1.6         1.2             8.3         4.9
Corporate bonds                                 1.3         1.5             6.9         7.9
Residential mortgage-backed securities          0.8         0.7             2.3         2.7
Commercial mortgage-backed securities           1.6         1.0             2.7         5.8
Other asset-backed securities                   0.6         0.7             2.5         2.9
Preferred stocks                                4.9         2.3             0.6        11.1
Short-term investments                          0.1         0.6             1.0         1.9
Common stocks:
Indexed                                         9.6         1.6             5.8        19.8
Actively managed                              NA           (2.7)           NA          14.5

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
September 30, 2020
U.S. government obligations               $ 10,203.8          22.3  %            3.5            AAA
State and local government obligations       4,529.8           9.9               4.6             AA
Corporate debt securities                   10,612.0          23.2               3.9            BBB
Residential mortgage-backed securities         531.0           1.2               0.9             AA

Commercial mortgage-backed securities 6,053.6 13.2

     2.9             AA
Other asset-backed securities                4,200.3           9.2               1.0            AA+
Preferred stocks                             1,506.2           3.3               3.4           BBB-
Short-term investments                       4,667.8          10.2               0.1            AA+
Total fixed-income securities               42,304.5          92.5               3.0            AA-
Common equities                              3,459.8           7.5                na             na
Total portfolio2,3                        $ 45,764.3         100.0  %            3.0            AA-
September 30, 2019
U.S. government obligations               $ 13,678.7          35.4  %            4.1            AAA
State and local government obligations       1,683.7           4.4               3.1            AA+
Corporate debt securities                    7,281.1          18.9               2.9            BBB
Residential mortgage-backed securities         681.5           1.8               0.9             AA

Commercial mortgage-backed securities 4,639.0 12.0

     2.2             AA
Other asset-backed securities                4,621.9          12.0               0.9           AAA-
Preferred stocks                             1,355.3           3.5               2.5           BBB-
Short-term investments                       1,467.4           3.8              <0.1             AA
Total fixed-income securities               35,408.6          91.8               2.9             AA
Common equities                              3,165.1           8.2                na             na
Total portfolio2,3                        $ 38,573.7         100.0  %            2.9             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
September 30, 2020, we had $469.2 million in other liabilities, compared to
$286.5 million and $11.9 million at September 30, 2019 and December 31, 2019,
respectively.
3The total fair value of the portfolio at September 30, 2020 and 2019, and
December 31, 2019, included $2.8 billion, $1.5 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.
                                       46
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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:
                                                        September 30, 2020                      September 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            $     617.8                1.4  %       $     334.8                0.9  %       $          327.2                0.8  %
Redeemable preferred stocks1                            91.5                0.2                132.1                0.3                     117.6                0.3
Nonredeemable preferred stocks                       1,323.2                2.9              1,128.5                2.9                   1,038.9                2.7
Common equities                                      3,459.8                7.5              3,165.1                8.2                   3,306.3                8.4
Total Group I securities                             5,492.3               12.0              4,760.5               12.3                   4,790.0               12.2
Group II securities:
Other fixed maturities                              35,604.2               77.8             32,345.8               83.9                  32,665.5               83.2
Short-term investments                               4,667.8               10.2              1,467.4                3.8                   1,798.8                4.6
Total Group II securities                           40,272.0               88.0             33,813.2               87.7                  34,464.3               87.8
Total portfolio                                  $  45,764.3              100.0  %       $  38,573.7              100.0  %       $       39,254.3              100.0  %


1Includes non-investment-grade redeemable preferred stocks of $37.4 million and
$40.2 million at September 30, 2019 and December 31, 2019, respectively; we held
no non-investment-grade redeemable preferred stocks at September 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 September 30, 2020, our fixed-maturity portfolio had pretax net unrealized
gains, recorded as part of accumulated other comprehensive income, of $1,226.1
million, compared to $671.7 million and $459.4 million at September 30, 2019 and
December 31, 2019, respectively. The changes from both September and December
2019, reflect decreasing interest rates, which resulted in valuation increases
in all fixed-maturity sectors, most prominently in the U.S. Government,
Municipal, and Corporate portfolios.
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 nine months ended September 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                                  (1.7)             (1.5)             (3.2)
Equity securities                                                129.4             (27.5)            101.9
Total holding period gains (losses) during the period            127.7             (29.0)             98.7
End of period
Hybrid fixed-maturity securities                                   6.1              (1.5)              4.6
Equity securities                                              2,393.3             (43.0)          2,350.3
Balance at September 30, 2020                           $      2,399.4    $ 

(44.5) $ 2,354.9




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 continued to improve following the
heightened volatility at the end of the first quarter. At the end of the third
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 since the end of the first 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 September 30, 2020, fell
within our acceptable range of 1.5 to 5 years. The duration distribution of our
fixed-income portfolio, excluding short-term investments, represented by the
interest rate sensitivity of the comparable benchmark U.S. Treasury Notes, was:
Duration Distribution                     September 30, 2020               September 30, 2019               December 31, 2019
1 year                                               26.5  %                          24.3  %                         23.9  %
2 years                                              15.1                             16.9                            11.8
3 years                                              21.4                             21.1                            20.6
5 years                                              18.4                             21.4                            23.1
7 years                                              10.8                             12.3                            15.1
10 years                                              7.8                              4.0                             5.5

Total fixed-income portfolio                        100.0  %                         100.0  %                        100.0  %



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•Credit risk - our credit quality rating of AA- was above our minimum threshold
during the third quarter 2020. The credit quality distribution of the
fixed-income portfolio was:
Rating                                                  September 30, 2020               September 30, 2019               December 31, 2019
AAA                                                                53.3  %                          60.9  %                         60.8  %
AA                                                                 10.4                              9.2                             9.9
A                                                                  11.8                              7.7                             7.9
BBB                                                                22.4                             20.1                            19.5
Non-investment grade/non-rated1
BB                                                                  1.6                              1.5                             1.4
B                                                                   0.3                              0.4                             0.3
CCC and lower                                                         0                                0                               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 2.1%
of the total fixed-income portfolio at September 30, 2020, compared to 1.8% at
September 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 third 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 third 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 $6.4 billion, or 23.5%, of principal
repayment from our fixed-income portfolio, excluding U.S. Treasury Notes and
short-term investments, during the remainder of 2020 and all of 2021. Cash from
interest and dividend payments provides an additional source of recurring
liquidity.
•The duration of our U.S. government obligations, which are included in the
fixed-income portfolio, was comprised of the following at September 30, 2020:
                                                      Fair       Duration
                  ($ in millions)                    Value        (years)
                  U.S. Treasury Notes
                  Less than one year          $    721.6         0.6
                  One to two years               2,228.8         1.7
                  Two to three years             2,570.6         2.6
                  Three to five years            2,579.7         4.1
                  Five to seven years            1,264.3         5.6
                  Seven to ten years               838.8         8.4
                  Total U.S. Treasury Notes   $ 10,203.8         3.5


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 (ABS), 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
September 30, 2020
Residential mortgage-backed securities   $    531.0          $          5.6                       4.9  %           0.9                                 

AA

Commercial mortgage-backed securities       6,053.6                    89.2                      56.1              2.9                                 AA
Other asset-backed securities               4,200.3                    44.5                      39.0              1.0                                AA+
Total asset-backed securities            $ 10,784.9$        139.3                     100.0  %           2.1                                 AA
September 30, 2019
Residential mortgage-backed securities   $    681.5          $          4.0                       6.8  %           0.9                                 

AA

Commercial mortgage-backed securities       4,639.0                    91.1                      46.7              2.2                                 AA
Other asset-backed securities               4,621.9                    20.9                      46.5              0.9                               AAA-
Total asset-backed securities            $  9,942.4$        116.0                     100.0  %           1.5                                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 September 30, 2020, to our
original investment value (adjusted for returns of principal, amortization, and
write-downs):
                                    Residential Mortgage-Backed Securities (at September 30, 2020)
($ in millions)
Rating1                                             Non-Agency          Government/GSE2            Total                    % of Total
AAA                                             $     362.2          $           1.9          $ 364.1                          68.6  %
AA                                                     67.9                      0.6             68.5                          12.9
A                                                      32.0                        0             32.0                           6.0
BBB                                                    11.6                        0             11.6                           2.2
Non-investment grade/non-rated:
BB                                                      1.2                        0              1.2                           0.2
B                                                      14.6                        0             14.6                           2.7
CCC and lower                                          10.9                        0             10.9                           2.1
Non-rated                                              28.1                        0             28.1                           5.3
Total fair value                                $     528.5          $           2.5          $ 531.0                         100.0  %
Increase (decrease) in value                         1.0%                   8.2%                 1.1%


1The credit quality ratings in the table above are assigned by NRSROs; when we
assign the NAIC ratings for our RMBSs, $48.2 million of our non-investment-grade
securities are rated investment-grade and classified as Group II, and $6.6
million, or 1.2% 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 third 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 September 30, 2020, to our original investment value (adjusted
for returns of principal, amortization, and write-downs):
                                        Commercial Mortgage-Backed Securities (at September 30, 2020)
($ in millions)
Rating1                                                   Multi-Borrower           Single-Borrower            Total                 % of Total
AAA                                                    $        433.4$        2,502.7$ 2,936.1                     48.5  %
AA                                                               27.7                   1,548.4            1,576.1                     26.0
A                                                                32.1                     814.4              846.5                     14.0
BBB                                                              33.9                     630.5              664.4                     11.0
Non-investment grade/non-rated:
BB                                                                  0                      30.1               30.1                      0.5
B                                                                 0.4                         0                0.4                        0

Total fair value                                       $        527.5$        5,526.1$ 6,053.6                    100.0  %
Increase (decrease) in value                                 2.8%                     1.4%                   1.5%


1The credit quality ratings in the table above are assigned by NRSROs; when we
assign the NAIC ratings for our CMBSs, $1.2 million of our non-investment-grade
securities are rated investment-grade and classified as Group II, and $29.3
million, or 0.5% of our total CMBSs are rated non-investment-grade and
classified as Group I.

During the third quarter 2020, we were active in purchasing Single Asset/Single
Borrower securities in both new issue and secondary markets, with a focus on new
issue in the second half of the quarter as that market opened back up. Spreads
generally tightened during the quarter, and we sold some of our AAA-rated
floating securities into this market strength. Dispositions of assets were
primarily composed of securities with lower coupons at par or near-par prices in
contrast with the second quarter 2020, in which we focused on reviewing and
disposing of securities that we believed had unique credits risks that were
exacerbated during the pandemic and related downturn. We focused on adding
assets in the high-quality office, industrial, and life sciences industries
during the third quarter 2020.
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 September 30, 2020, to our original investment value (adjusted for
returns of principal, amortization, and write-downs):
                                               Other Asset-Backed Securities (at September 30, 2020)
($ in millions)                                                               Whole Business                                                    % of
Rating                     Automobile     Credit Card     Student Loan       Securitizations     Equipment       Other        Total            Total
AAA                     $  1,606.0$      364.3$       247.9    $                0    $    927.7$  207.8$ 3,353.7             79.8  %
AA                           132.1               0             29.7                     0         101.4        10.0        273.2              6.5
A                             37.8               0             10.2                     0         118.4        54.7        221.1              5.3
BBB                            2.5               0                0                 349.8             0           0        352.3              8.4
    Total fair value    $  1,778.4$      364.3$       287.8    $            349.8    $     1,147.5$  272.5$ 4,200.3            100.0  %
Increase (decrease) in
value                       0.7%           0.8%             1.4%               1.7%              1.5%         0.8%         1.1%



As valuations across other asset classes were more attractive in the third
quarter of 2020, our OABS portfolio offered less relative value. Due to
amortization and scheduled paydowns, our OABS portfolio decreased throughout the
quarter. We selectively added across the spectrum to our OABS portfolio, but we
primarily focused on auto, equipment, credit card backed, and student loans.
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MUNICIPAL SECURITIES The following table details the credit quality rating of our municipal securities at September 30, 2020, without the benefit of credit or bond insurance:

          Municipal Securities (at September 30, 2020)
(millions)                 General        Revenue
Rating                 Obligations          Bonds          Total
AAA                 $      948.3$   575.4$ 1,523.7
AA                         653.4        1,667.2        2,320.6
A                              0          683.9          683.9
BBB                            0            1.6            1.6

Total               $    1,601.7$ 2,928.1$ 4,529.8



Included in revenue bonds were $569.7 million of single-family housing revenue
bonds issued by state housing finance agencies, of which $404.8 million were
supported by individual mortgages held by the state housing finance agencies and
$164.9 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 the Federal Housing Administration, the U.S. Department of
Veterans Affairs, or private mortgage insurance providers.

During the third quarter 2020, we continued to add high credit quality rated
state general obligations, water and sewer, airport, and higher education
revenue bonds. We also increased our focus on the taxable portion of the
municipal market, based on our view that this sector 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 September 30, 2020:
                                                     Corporate Securities (at September 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                                             217.6             0                 0         203.1              26.2                   0        8.2         455.1
A                                              830.6         169.0             233.2       1,081.4             286.5               102.5       67.3       2,770.5
BBB                                          2,534.5       1,612.9             173.5       1,282.2             364.0                44.0      763.3       6,774.4
Non-investment grade/non-rated:
BB                                              96.6         137.6              78.5           7.0             124.8                   0       35.9         480.4
B                                              101.5             0                 0             0                 0                   0          0         101.5
Total fair value                           $ 3,780.8$  1,919.5$        485.2$  2,603.8$     801.5    $          146.5    $ 874.7$ 10,612.0



During the third quarter 2020, credit spreads became less attractive and we
slightly decreased our allocation to corporate bonds. We sold some investment
grade securities trading at high valuations and at the same time slightly
increased our allocation to high yield bonds with relatively attractive
risk/reward profiles. While our high yield allocation increased, it remained
relatively small.

Overall, our corporate securities are a larger percentage of the fixed-income
portfolio, compared to the end of 2019. At September 30, 2020, the portfolio was
approximately 25% of our fixed-income portfolio, compared to approximately 20%
at December 31, 2019. In addition, we lengthened duration during 2020, and ended
the third quarter 2020 at 3.9 years, compared to 2.7 years at the end of 2019.
This duration 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
September 30, 2020:
                                              Preferred Stocks (at September 30, 2020)
                                                        Financial Services
(millions)                                      U.S.      Foreign
Rating                                         Banks        Banks     Insurance      Other     Industrials     Utilities        Total
A                                        $   50.0$       0$        0$   9.4    $          0    $        0$    59.4
BBB                                         872.9            0         175.1       25.0           122.5          11.3      1,206.8
Non-investment grade/non-rated:
BB                                           21.0         99.5             0          0            20.6          40.7        181.8
B                                               0            0             0        5.0               0             0          5.0
Non-rated                                       0            0             0       38.1            15.1             0         53.2
Total fair value                         $  943.9$    99.5$    175.1$  77.5$      158.2$     52.0$ 1,506.2


The majority of our preferred securities have fixed-rate dividends until a call
date and then, if not called, generally convert to floating-rate dividends. The
interest rate duration of our preferred securities is calculated to reflect the
call, floor, and floating-rate features. Although a preferred security will
remain outstanding if not called, its interest rate duration will reflect the
variable nature of the dividend. Our non-investment-grade preferred stocks were
primarily with issuers that maintain investment-grade senior debt ratings.
We also face the risk that dividend payments on our preferred stock holdings
could be deferred for one or more periods or skipped entirely. As of
September 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.

Our preferred stock portfolio continued to produce positive returns during third
quarter 2020 due to high levels of income and continued credit spread
tightening.
Common Equities
Common equities, as reported on the balance sheets, were comprised of the
following:

($ in millions)                            September 30, 2020                     September 30, 2019                     December 31, 2019
Indexed common stocks               $  3,457.1               99.9  %       $  2,993.3               94.6  %       $  3,306.0              100.0  %
Managed common stocks                        0                  0               171.5                5.4                   0                  0
    Total common stocks                3,457.1               99.9             3,164.8              100.0             3,306.0              100.0
Other risk investments                     2.7                0.1                 0.3                  0                 0.3                  0
     Total common equities          $  3,459.8              100.0  %       $  3,165.1              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 924 out of 1,015, or 91%, of the common stocks comprising the index at
September 30, 2020, which made up 96% of the total market capitalization of the
index. At September 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 variance to the targeted tracking error.

The common equity markets continued to be volatile during the third quarter, and
our common stock portfolio reflected that market volatility. During the third
quarter 2020, stock valuations increased and we ended the quarter with a
year-to-date FTE total return on our common equity portfolio of 5.8%, which was
an improvement from the (3.4)% return at June 30, 2020.

The other risk investments are limited partnership interests. During the third
quarter 2020, we funded $2.4 million on a partnership investment and have an
open funding commitment of $7.6 million at September 30, 2020, on this
investment.
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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 statement.
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 September 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
September 30, 2020, approximately 75% 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
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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 September 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 nine months ended September 30, 2020.

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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.
                                       56

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