filings.toolsItem 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
143K characters. Original on sec.gov · Markdown
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
I. OVERVIEW
During the second quarter 2023, The Progressive Corporation’s insurance subsidiaries recognized strong growth in both premiums written and policies in force, compared to the same period last year, but the underwriting margin fell short of our goal to earn 4% on an aggregate calendar-year basis.
Our combined ratio of 100.4 for the second quarter 2023 was 4.8 points higher than the same period last year. The variance from the prior year was primarily due to unfavorable prior accident years reserve development and higher catastrophe losses, which were, in part, offset by a reduction in expenses, mainly due to a decrease in advertising spend during the quarter, as discussed below.
During the second quarter 2023, we experienced unfavorable prior accident years reserve development of 3.4 points, compared to favorable development of 0.4 points during the second quarter last year. As discussed in more detail below, about 90% of the second quarter and 80% of the year-to-date unfavorable prior year development was in our personal auto products. In addition to prior accident years development, we implemented current accident year actuarial adjustments that added 2.0 points to the second quarter combined ratio, also predominately in our personal auto products.
During the second quarter 2023, we experienced 19 catastrophic weather events that contributed 7.1 points to the underwriting loss, compared to 4.3 points of catastrophe losses for the second quarter last year. These storms were broad-based and impacted 35 states during the quarter. Nearly 60% of the catastrophe losses were in our vehicle businesses while the remaining was in our Property segment. During the first half of 2023, only six states were not affected by catastrophic events.
First quarter 2023 profitability failed to meet our stated calendar-year goal of a 96 combined ratio, so we entered the second quarter focused on expense management. Our expense ratio was 1.7 points lower in the second quarter 2023, compared to the same period last year. During the second quarter 2023, we decreased our advertising spend 34%. The reduction in advertising spend in concert with premium growth reduced the contribution of advertising to our combined ratio by 2.0 points. We currently plan to continue to manage our expenses and discretionary spend to further our goal of achieving our target profitability.
During the second quarter 2023, companywide net premiums written grew 18% over the second quarter last year, with all operating segments contributing to the growth. We generated $14.7 billion of net premiums written, which was an increase of $2.3 billion, compared to second quarter 2022. We ended the quarter with 29.6
million policies in force, which was an increase of 3.1 million policies, or 12%, over June 30, 2022, and nearly 790,000 more policies than were in force at the end of the first quarter 2023, and 2.2 million more than year-end 2022. The increase in policies in force reflected both strong new application growth and improved retention in our personal auto products as competitors also continued to raise rates.
In addition to policy growth, the year-over-year growth for the quarter reflected rate increases that continue to earn in across all of our operating segments. While growth is an important objective, achieving our target profit margin takes precedence over growing premiums. During the second quarter 2023, we continued to take rate and non-rate actions that we believe are necessary to allow us to achieve our calendar-year underwriting profitability goal of 4%. As discussed below, we plan to continue to take actions, which could result in less premium and policy growth.
On a year-over-year basis, for the second quarter 2023, net income increased 164% and comprehensive loss decreased 92%. The year-over-year increase in net income primarily reflected net realized gains on securities during the second quarter 2023, compared to net realized losses for the same period last year. We recognized less holding period losses on securities in the second quarter 2023, compared to last year, reflecting less volatility in equity market valuations. In addition, the increase in net income benefited from a 55% increase in recurring investment income, primarily due to an increase in interest rates on floating-rate securities in our portfolio, an increase in average assets resulting from premium growth, and investing new cash and cash from maturities in higher interest rate securities given the rising interest rate environment. In addition, in the second quarter of 2022, we recorded a $224.8 million one-time, non-cash, goodwill impairment charge. See Note 12 – Goodwill and Intangible Assets for further discussion.
The quarter-over-prior-year quarter decrease in comprehensive loss reflected both the increase in net income and a lower amount of net unrealized losses on our fixed-maturity securities, which experienced a loss of $455.6 million in the second quarter 2023, compared to a loss of $822.8 million in the prior year, with both periods being primarily driven by the then-current interest rate environment, with a significant rise in interest rates during the first half of last year.
Total capital (debt plus shareholders’ equity) at June 30, 2023, was $23.6 billion, which was up $1.3 billion from year-end 2022, primarily due to our comprehensive income earned in the first half of 2023 and the May 2023 issuance
of $500 million of 4.95% senior notes, for which the funds are intended to be used for general corporate purposes.
A. Insurance Operations
Our Personal Lines and Commercial Lines businesses generated an underwriting profit margin of 0.5% and 3.6%, respectively, during the second quarter 2023. Our Property operating segment recognized a 33.2% underwriting loss margin during the quarter, which included 66.7 points due to the significant losses incurred from catastrophic weather events. The special lines products generated an underwriting profit during the second quarter 2023, which had a minimal impact on the Personal Lines underwriting margin for the quarter.
We experienced companywide unfavorable prior accident year reserve development of $489.3 million and $1,110.5 million, or 3.4 and 4.0 points, for the three and six months ended June 30, 2023, respectively. Approximately 90% of the development for the second quarter and 80% year to date was in our personal auto products. Approximately half of the personal auto product development for both periods related to property and physical damage claims, reflecting unprecedented increases in severity trends on previously closed claims, relative to comparable periods last year. The contributors to the increased trends came from a variety of sources, including longer vehicle repair times, longer periods for providing rental vehicles, and increases in the price for parts and labor rates. Florida injury and medical claims also contributed significantly to prior accident year development, as did late reported injury claims countrywide, but to a lesser extent.
These factors impacted the second quarter prior accident year development in a similar manner. Throughout the quarter, we continued to see elevating severity trends as the average costs to settle a claim increased over the same period last year. For the second quarter 2023, our personal auto incurred severity was up about 12% and accident frequency was up about 1% on a year-over-year basis.
While it is difficult to quantify the direct impact of recent insurance legislation in Florida, for all coverages Florida contributed approximately 40% to the prior accident year reserve development year to date across all personal auto product lines. We continue to believe that the Florida tort reform will likely have a positive impact on the insurance industry in Florida over the long term. We will continue to monitor the ever-changing legislative and regulatory environment and will respond as necessary.
In addition to prior accident year development, we made actuarial adjustments to expected loss costs for current year claims, primarily due to higher physical damage severity. Florida litigation is a relatively small part of the current year actuarial adjustments since the increase in attorney represented claims largely affected claims that occurred prior to March 2023.
Our Commercial Lines business represented about 15% of the aggregate unfavorable development for the second quarter and about 20% for the first half of 2023, and was mainly due to late reported claims from prior accident periods and changes in reserve estimates (e.g., aging of the reserves, changes to estimates by adjusters, and inflation factors). The Personal Lines and Commercial Lines unfavorable development was partially offset by favorable development in our Property business.
We employ a team of highly experienced individuals to support our goal of establishing loss and loss adjustment expense reserves as accurately as possible, with minimal variation after the reserves are established. The recent environment has presented challenges to our reserving practices. While we believe our reserves are adequate at the end of the second quarter 2023, we will continue to monitor loss trends across all states and coverages.
During the second quarter 2023, we increased personal auto rates in 27 states, with an aggregate countrywide net increase of about 7%, which follows an increase of about 4% in the first quarter 2023 and an aggregate countrywide net increase of 13% in 2022. We also increased rates in our commercial auto products 7% through the first half of 2023 (excluding our transportation network company (TNC) business).
As stated above, we strongly believe that achieving our target profit margin takes precedence over growing premiums. With focus on achieving our calendar-year underwriting profitability goal of 4% and the fact that we have continued to see volatility in our severity trends as inflation continued to influence higher vehicle prices and costs to repair vehicles, we are re-evaluating our rate plans and intend to continue to raise rates over the remainder of the year, with planned increases of about 6% in our personal auto products and about 9% in our commercial auto products. Some of these rate increases will be subject to regulatory approval. We will also continue to monitor the factors that could impact our loss costs for both our vehicle and Property businesses, which may include new and used car prices, miles driven, driving patterns, loss severity, weather events, building materials, construction costs, inflation, and other components, on a state-by-state basis, and these factors could change our current plans for rate increases.
In addition to rate action, we routinely monitor our advertising spend and, during the second quarter 2023, reduced these costs 34%, compared to the same period last year. In addition to these steps, during the second quarter 2023, we started to take additional measures to support our goal of achieving our target profit margin that included slowing new business growth through verification activities, bill plan offerings, and through continued general operational expense discipline. In addition to potentially slowing growth in premiums and new business applications, some of these actions could reduce our retention.
Returning to profitability in our Property business continues to remain a priority for us. In addition to our focus on shifting our concentration mix between states, we continued to adjust rates to address profitability concerns. In the second quarter 2023, in our Property product lines, we increased rates by about 4% on average, following a rate increase of about 3% in the first quarter 2023 and an increase of about 19% during 2022. Similar to our personal and commercial auto products, we intend to continue to raise rates in our Property products in an effort to achieve our calendar-year underwriting profitability goal, with a planned aggregate countrywide increase of about 7% over the remainder of the year. Some of these rate increases will be subject to regulatory approval.
For the second quarter 2023, net premiums written grew 18% on a companywide basis over the same period last year, primarily driven by policy growth and rate increases that continued through the second quarter 2023. Personal Lines grew 22%, Commercial Lines 2%, and Property 17%. Changes in net premiums written are a function of new business applications (i.e., policies sold), premium per policy, and retention. While we had significant new business application growth at the beginning of the second quarter, we experienced a decline in the rate of growth by the end of the quarter, which we believe, in part, resulted from actions taken to address profitability as discussed above.
The Personal Lines increase reflected growth in both our Agency and Direct businesses. On a year-over-year basis, new personal auto applications grew 37% for the second quarter 2023, compared to the same period last year. Despite the rate increases that we are taking, we believe that we are continuing to benefit from competitor rate increases.
The increase in net premiums written in our Commercial Lines business reflected growth in all of our business market targets (BMTs), except our for-hire transportation BMT, which continued to be impacted by a slowdown in the rate of economic activity and deteriorating freight market conditions. The most significant growth was in our business auto and contractor BMTs. We believe the increase in our contractor BMT is influenced by construction employment and spending trends.
During the second quarter 2023, we also experienced a net premiums written decrease in our TNC business, primarily due to a decrease in projected mileage (which is the basis for determining premiums written for this business), compared to the estimated mileage adjustments during the same period last year. Excluding the decrease from the TNC business, our Commercial Lines net premiums written growth was 6% for the second quarter 2023, compared to the second quarter 2022.
For our Property business, we have continued to manage our overall exposure through measures that helped accelerate growth in markets that are less susceptible to catastrophic weather events and lower our exposure to
coastal and hail-prone states for all products excluding renters and umbrella. New applications in the states where we are focused on growth were up about 50% over the second quarter last year. In regions where our appetite to write new business is limited, we are prioritizing Progressive auto bundles, as well as lower risk properties, such as new construction or homes with newer roofs. New applications were down about 30% in these more volatile weather states. In addition, the Property business benefited from growth in Robinsons, our bundled auto and home policies. In total, Property new applications were up 12% over the second quarter 2022.
During the quarter, the number of quotes increased in the Agency auto channel and decreased in the Direct auto channel, with an increase in the rate of conversion in both channels, which contributed to the 37% increase in total personal auto new business applications on a year-over-year basis. We believe that the growth in the conversion rates reflects that our competitors also continued to raise rates to address their underwriting profitability issues. During the second quarter 2023, we reduced advertising spend, resulting in the decrease in quotes in our Direct auto channel.
We believe a key element in improving the accuracy of our rating is Snapshot®, our usage-based insurance offering. During the second quarter 2023, the adoption rates for consumers enrolling in the program increased about 40% in Agency auto and nearly 10% in Direct auto, compared to the second quarter 2022. Snapshot is available in all states, other than California, and our latest segmentation model was available in states that represented about 45% of our countrywide personal auto premium at June 30, 2023. We continue to invest in our mobile application, with mobile devices being chosen for Snapshot monitoring for the majority of new enrollments.
During the second quarter 2023, on a year-over-year basis, average written premiums per policy grew 7% in personal auto and 12% in Property, while average written premiums per policy were flat in commercial auto. The personal auto and Property growth primarily reflected rate increases taken throughout 2022 that continued into the first half 2023, in response to rising loss costs. The rate increases taken in commercial auto were, in part, offset by a shift in the mix of business, primarily driven by a decreased demand in our for-hire transportation product. Given that our commercial auto and Property policies are predominately written for 12-month terms, compared to primarily 6-month policies in our personal auto business, rate actions take longer to earn in for these products.
We realize that to grow policies in force, it is critical that we retain our customers for longer periods. Consequently, increasing retention continues to be one of our most important priorities. Our efforts to increase our share of multi-product households remains a key initiative and we will continue to make investments to improve the customer experience in order to support that goal. Policy life expectancy, which is our actuarial estimate of the average
length of time that a policy will remain in force before cancellation or lapse in coverage, is our primary measure of customer retention in our Personal Lines, Commercial Lines, and Property businesses.
We evaluate total auto retention using a trailing 12-month and a trailing 3-month policy life expectancy. The latter can reflect more volatility and is more sensitive to seasonality. As of the end of the second quarter 2023, our trailing 12-month total personal auto policy life expectancy increased 1%, compared to last year, which marks the first time the trailing 12-month measure has been positive since the beginning of 2022. The Direct channel trailing 12-month measure was up 2% and the Agency channel was flat. We have seen improvement in our trailing 12-month policy life expectancy on a month-over-prior month basis for the last several months, although future rate increases could also adversely impact our retention. Our trailing 3-month policy life expectancy for total personal auto was up 40%, compared to the same period last year. We believe that the improved retention on a trailing 3-month basis reflects our continued competitiveness in the marketplace despite our rate increases.
At the end of the second quarter 2023, trailing 12-month policy life expectancy increased 4% in special lines, 7% in Property, and decreased 11% in Commercial Lines, compared to the same period last year. The decrease in Commercial Lines was across all BMTs, except for our business auto market, with the decrease in for-hire transportation BMT demand providing the largest contribution to the overall decrease. Commercial auto retention is being negatively impacted by our rate and underwriting actions, unfavorable trucking market conditions, and the general weakening of the economy, which we believe are driving increased shopping and causing motor carriers to exit the industry.
B. Investments
The fair value of our investment portfolio was $59.3 billion at June 30, 2023, compared to $53.5 billion at December 31, 2022. The increase from year-end 2022 primarily reflected solid cash flows from operations and the $0.5 billion of proceeds from debt issued in May 2023, as discussed further below, as well as valuation increases in nearly all portfolio sectors.
Our asset allocation strategy is to maintain 0%-25% of our portfolio in Group I securities, with the balance
(75%-100%) of our portfolio in Group II securities (the securities allocated to Group I and II are defined below under Results of Operations – Investments). At June 30, 2023, 8% of our portfolio was allocated to Group I securities and 92% to Group II securities, compared to 10% and 90%, respectively, at December 31, 2022.
Our recurring investment income generated a pretax book yield of 3.1% for the second quarter 2023, compared to 2.3% for the same period in 2022, due to the increase in interest rates on our floating-rate securities and the investment of cash and maturities at relatively higher interest rates. Our investment portfolio produced a fully taxable equivalent (FTE) total return of 0% and (3.6)% for the second quarter 2023 and 2022, respectively. Our fixed-income and common stock portfolios had FTE total returns of (0.4)% and 9.0%, respectively, for the second quarter 2023, compared to (2.4)% and (16.3)%, respectively, last year. The increase in the fixed-income return reflected lower portfolio valuation decreases in second quarter 2023, compared to second quarter 2022, as the Federal Reserve increased interest rates 25 basis points in second quarter 2023, compared to 125 basis points in second quarter 2022. The common stock return increase reflected general market conditions.
At both June 30, 2023 and December 31, 2022, the fixed-income portfolio had a weighted average credit quality of AA and a duration of 2.9 years, compared to AA- and 2.8 years at June 30, 2022.
The London Interbank Offered Rate (LIBOR) ceased as an official reference rate on June 30, 2023. The Federal Reserve Board identified the Secured Overnight Financing Rate (SOFR) as the recommended replacement to U.S. LIBOR. As of June 30, 2023, we owned 144 unique securities with an aggregate par value of $2.9 billion that were still based on LIBOR, with our other asset-backed securities, mainly collateralized loan obligations, making up the majority of these securities. Due to provisions in the terms of the securities, which allow a change in the underlying rate if a rate is discontinued, we do not expect the cessation of LIBOR to have a material effect on our portfolio.
II. FINANCIAL CONDITION
A. Liquidity and Capital Resources
Progressive’s insurance operations create liquidity by collecting and investing premiums from new and renewal business in advance of paying claims. As primarily an auto insurer, our claims liabilities generally have a short-term duration. Operations generated positive cash flows of $4.8 billion and $3.9 billion for the six months ended June 30,
2023 and 2022, respectively. We believe cash flows will remain positive in the reasonably foreseeable future and do not expect we will have a need to raise capital to support our operations in that timeframe, although changes in market or regulatory conditions affecting the insurance
industry, or other unforeseen events, may necessitate otherwise.
As of June 30, 2023, we held $33.1 billion in short-term investments and U.S. Treasury securities, which represented about 55% of our total portfolio. Based on our portfolio allocation and investment strategies, we believe that we have sufficient readily available marketable securities to cover our claims payments and short-term obligations in the event our cash flow from operations were to be negative. See Item 1A, Risk Factors in our Form 10-K filed with the U.S. Securities and Exchange Commission for the year ended December 31, 2022 for a discussion of certain matters that may affect our portfolio and capital position.
Our total capital (debt plus shareholders’ equity) was $23.6 billion, based on book value, at June 30, 2023, compared to $22.0 billion at June 30, 2022, and $22.3 billion at December 31, 2022. The increase from December reflected the comprehensive income recognized during the first half of 2023, primarily driven by the market impact on the valuation of our investment portfolio, and the issuance in May 2023 of $500.0 million of 4.95% Senior Notes due 2033. Our debt-to-total capital ratio was 29.2% at June 30, 2023, 29.0% at June 30, 2022, and 28.7% at December 31, 2022, and, in each case, consistent with our financial policy of maintaining a ratio of less than 30%.
While our financial policies include a goal of maintaining debt below 30% of total capital at book value, we recognize that various factors, including rising interest rates, widening credit spreads, declines in the equity markets, or erosion in operating results, may result in that ratio exceeding 30% at times. In such a situation, as we did during 2022, we may choose to remain above 30% for some time, dependent upon market conditions and the capital needs of our operating businesses. We will continue to monitor this ratio, market conditions, and our capital needs going forward.
None of the covenants on our outstanding debt securities include rating or credit triggers that would require an adjustment of interest rates or an acceleration of principal payments in the event that our debt securities are downgraded by a rating agency. In April 2023, we amended the unsecured discretionary line of credit (the Line of Credit) with PNC Bank, National Association, and raised the maximum principal amount to $300 million from the previous amount of $250 million, with a new interest rate of 1-month term SOFR plus 1.10%. We did not engage in short-term borrowings, including any borrowings under our Line of Credit, to fund our operations or for liquidity purposes during the reported periods.
During the first six months of 2023, we returned capital to shareholders primarily through common share dividends and common share repurchases. Our Board of Directors declared a $0.10 per common share dividend in both the first and second quarters of 2023. These dividends, which
were each $58.5 million in the aggregate, were paid in April 2023 and July 2023, respectively. In January 2023, we also paid common share dividends declared in the fourth quarter 2022, in the aggregate amount of $58.5 million, or $0.10 per share (see Note 9 – Dividends for further discussion).
In addition to the common share dividends, in March 2023 and June 2023, we paid Series B Preferred Share dividends in the aggregate amount of $13.4 million and $9.5 million, respectively. Beginning March 15, 2023, the annual dividend rate for our Series B Preferred Shares switched to a floating rate equal to the three-month LIBOR plus a spread of 2.539% applied to the stated amount per share. We, as calculation agent under our Series B Preferred Shares, determined that, in accordance with the successor base rate provisions of the Series B Preferred Shares and the Adjustable Interest Rate (LIBOR) Act and the regulation issued by the Board of Governors of the Federal Reserve System on December 16, 2022, implementing the LIBOR Act, the reference rate for the Series B Preferred Shares for any determination date after June 30, 2023, shall be the sum of (i) 3-Month CME Term SOFR plus (ii) a tenor spread adjustment of 0.26161%. The new reference rate will apply beginning with the determination date applicable to the dividend period commencing September 15, 2023. During the floating rate period, dividends on the Series B Preferred Shares will be payable quarterly, if and when declared by the Board of Directors.
Consistent with our financial policies, we repurchase common shares to neutralize dilution from equity-based compensation granted during the year and opportunistically when we believe our shares are trading below our determination of long-term fair value. During the first six months of 2023, we repurchased 0.3 million common shares, at a total cost of $40.1 million, including 0.1 million shares in the second quarter 2023, both in the open market and to satisfy tax withholding obligations in connection with the vesting of equity awards under our equity compensation plans. We will continue to make decisions on returning capital to shareholders based on the strength of our overall capital position, the capital strength of our subsidiaries, and potential capital needs to expand our business operations.
We seek to deploy capital in a prudent manner and use multiple data sources and modeling tools to estimate the frequency, severity, and correlation of identified exposures, including, but not limited to, catastrophic and other insured losses, natural disasters, and other significant business interruptions, to estimate our potential capital needs.
Based upon our capital planning and forecasting efforts, we believe we have sufficient capital resources and cash flows from operations to support our current business, scheduled principal and interest payments on our debt, anticipated quarterly dividends on our common shares and dividends on our Series B Preferred Shares, our contractual
obligations, and other expected capital requirements for the foreseeable future. At June 30, 2023, we had $4.3 billion in a consolidated, non-insurance subsidiary of the holding company that can be used to fund corporate obligations and provide additional capital to the insurance subsidiaries to fund potential future growth. As of June 30, 2023, our estimated consolidated statutory surplus was $19.0 billion.
During the first six months of 2023, our contractual obligations and critical accounting policies have not changed materially from those discussed in our 2022 Annual Report to Shareholders. During the second quarter 2023, we renewed our catastrophe excess of loss per occurrence reinsurance contract, which increased our noncancellable purchase obligation commitments about $139.5 million, bringing our total commitments related to the excess of loss contracts to $466.8 million at June 30, 2023. We placed 100% of the requested reinsurance
coverage for the June 1 renewal. There have not been any other material changes in off-balance-sheet leverage, which includes purchase obligations and catastrophe excess of loss reinsurance contracts, from those disclosed in our 2022 Annual Report to Shareholders.
In May 2023, we decided to raise additional capital to take advantage of attractive terms in the market and to provide additional financial flexibility, and we may do so in the future. We have an effective shelf registration with the U.S. Securities and Exchange Commission so that we may periodically offer and sell an indeterminate aggregate amount of senior or subordinated debt securities, preferred stock, depository shares, common stock, purchase contracts, warrants, and units. The shelf registration enables us to raise funds from the offering of any securities covered by the shelf registration as well as any combination thereof, subject to market conditions.
III. RESULTS OF OPERATIONS – UNDERWRITING
A. Segment Overview
We report our underwriting operations in three segments: Personal Lines, Commercial Lines, and Property. As a component of our Personal Lines segment, we report our Agency and Direct business results to provide further understanding of our products by distribution channel.
The following table shows the composition of our companywide net premiums written, by segment, for the respective periods:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Personal Lines | |||||||||||||||||||||||
| Agency | 38 | % | 36 | % | 36 | % | 35 | % | |||||||||||||||
| Direct | 41 | 40 | 41 | 40 | |||||||||||||||||||
| Total Personal Lines1 | 79 | 76 | 77 | 75 | |||||||||||||||||||
| Commercial Lines | 16 | 19 | 19 | 20 | |||||||||||||||||||
| Property | 5 | 5 | 4 | 5 | |||||||||||||||||||
| Total underwriting operations | 100 | % | 100 | % | 100 | % | 100 | % |
1 Personal auto products accounted for 92% and 91% of the total Personal Lines segment net premiums written during the three months ended June 30, 2023 and 2022, respectively, and 93% during the six months ended June 30, 2023 and 2022; our special lines products accounted for the balance.
Our Personal Lines business writes insurance for personal autos and special lines products (e.g., motorcycles, RVs, watercraft, and snowmobiles). Within Personal Lines, we often refer to our four consumer segments, which we refer to as:
-
Sam - inconsistently insured;
-
Diane - consistently insured and maybe a renter;
-
Wrights - homeowners who do not bundle auto and home; and
-
Robinsons - homeowners who bundle auto and home.
While our personal auto policies are primarily written for 6-month terms, we write 12-month auto policies in our Platinum agencies to promote bundled auto and home growth. At June 30, 2023 and 2022, 14% of our Agency auto policies in force were 12-month policies. To the extent our Agency application mix of annual policies grows, the shift in policy term could increase our written premium mix by channel as 12-month policies have about twice the amount of net premiums written compared to 6-month policies. Our special lines products are written for 12-month terms.
Our Commercial Lines business writes auto-related liability and physical damage insurance, business-related general liability and property insurance predominately for small businesses, and workers’ compensation insurance primarily for the transportation industry. The majority of our Commercial Lines business is written through the independent agency channel although we continue to focus on growing our direct business. To serve our direct channel customers, we continue to expand our product offerings, including adding states where we offer our business owners policy (BOP) product, as well as adding these product offerings to our digital platform that serves direct small business consumers (BusinessQuote Explorer®). The direct commercial auto business, excluding our TNC, BOP, and Protective Insurance Corporation and subsidiaries (Protective Insurance) products, represented 10% of our commercial auto premiums written for the six months ended June 30, 2023 and 2022. We write about 90% of Commercial Lines policies for 12-month terms.
Our Property business writes residential property insurance for homeowners, other property owners, and renters, and writes umbrella insurance. We write the majority of our Property business through the independent agency channel. We continue to expand the direct distribution of our Property product offerings, and, for both the six months ended June 30, 2023 and 2022, nearly a quarter of our Property business premiums were written in the direct channel. All of our Property policies are written for 12-month terms.
B. Profitability
Profitability for our underwriting operations is defined by pretax underwriting profit or loss, which is calculated as net premiums earned plus fees and other revenues less losses and loss adjustment expenses, policy acquisition costs, and other underwriting expenses. We also use underwriting margin, which is underwriting profit or loss expressed as a percentage of net premiums earned, to analyze our results. For the respective periods, our underwriting profitability results were as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| Underwriting Profit (Loss) | Underwriting Profit (Loss) | Underwriting Profit (Loss) | Underwriting Profit (Loss) | ||||||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | $ | Margin | $ | Margin | $ | Margin | $ | Margin | |||||||||||||||||||||||||||||||||||||||
| Personal Lines | |||||||||||||||||||||||||||||||||||||||||||||||
| Agency | $ | (71.2) | (1.4) | % | $ | 260.3 | 6.0 | % | $ | 91.4 | 0.9 | % | $ | 548.9 | 6.3 | % | |||||||||||||||||||||||||||||||
| Direct | 126.5 | 2.0 | 198.4 | 4.0 | 104.4 | 0.9 | 348.8 | 3.6 | |||||||||||||||||||||||||||||||||||||||
| Total Personal Lines | 55.3 | 0.5 | 458.7 | 4.9 | 195.8 | 0.9 | 897.7 | 4.9 | |||||||||||||||||||||||||||||||||||||||
| Commercial Lines | 87.2 | 3.6 | 243.0 | 10.5 | 124.4 | 2.6 | 445.4 | 10.1 | |||||||||||||||||||||||||||||||||||||||
| Property1 | (206.8) | (33.2) | (156.9) | (27.5) | (239.5) | (19.6) | (148.6) | (13.2) | |||||||||||||||||||||||||||||||||||||||
| Other indemnity2 | 0 | NM | (6.3) | NM | (3.4) | NM... | (7.2) | NM... | |||||||||||||||||||||||||||||||||||||||
| Total underwriting operations | $ | (64.3) | (0.4) | % | $ | 538.5 | 4.4 | % | $ | 77.3 | 0.3 | % | $ | 1,187.3 | 5.0 | % |
1 For the three and six months ended June 30, 2023, pretax profit (loss) includes $2.8 million and $7.8 million, respectively, of amortization expense associated with acquisition-related intangible assets attributable to our Property segment, compared to $5.0 million and $19.1 million for the respective periods last year. The year-over-year decrease in amortization expense reflects intangible assets that were fully amortized during the first quarter 2023 and 2022.
2 Underwriting margins for our other indemnity businesses are not meaningful (NM) due to the low level of premiums earned by, and the variability of loss costs in, such businesses.
For the three and six months ended June 30, 2023, the lower pretax underwriting profit (loss), compared to the same period last year, primarily reflects the impact from unfavorable prior accident years reserve development and catastrophe losses incurred. During the second quarter and first six months of 2023, we experienced unfavorable prior accident years reserve development of 3.4 points and 4.0 points, respectively, compared to favorable development of 0.4 points for the second quarter last year and 0.6 points of unfavorable development for the first six months of 2022. We have continued to see volatility in our severity trends
as inflation continued to influence higher vehicle prices and costs to repair vehicles. Our catastrophe losses reduced our underwriting profitability 7.1 points for the quarter and 4.5 points for the first six months of 2023, compared to 4.3 points and 2.8 points for the same periods last year.
See the Losses and Loss Adjustment Expenses (LAE) section below for further discussion of our frequency and severity trends, reserve development, and catastrophe losses incurred during the periods.
Further underwriting results for our Personal Lines business, including results by distribution channel, the Commercial Lines business, the Property business, and our underwriting operations in total, were as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| Underwriting Performance****1 | 2023 | 2022 | Change | 2023 | 2022 | Change | |||||||||||||||||||||||||||||
| Personal Lines – Agency | |||||||||||||||||||||||||||||||||||
| Loss & loss adjustment expense ratio | 83.5 | 77.3 | 6.2 | 80.8 | 76.3 | 4.5 | |||||||||||||||||||||||||||||
| Underwriting expense ratio | 17.9 | 16.7 | 1.2 | 18.3 | 17.4 | 0.9 | |||||||||||||||||||||||||||||
| Combined ratio | 101.4 | 94.0 | 7.4 | 99.1 | 93.7 | 5.4 | |||||||||||||||||||||||||||||
| Personal Lines – Direct | |||||||||||||||||||||||||||||||||||
| Loss & loss adjustment expense ratio | 84.9 | 77.9 | 7.0 | 82.4 | 77.5 | 4.9 | |||||||||||||||||||||||||||||
| Underwriting expense ratio | 13.1 | 18.1 | (5.0) | 16.7 | 18.9 | (2.2) | |||||||||||||||||||||||||||||
| Combined ratio | 98.0 | 96.0 | 2.0 | 99.1 | 96.4 | 2.7 | |||||||||||||||||||||||||||||
| Total Personal Lines | |||||||||||||||||||||||||||||||||||
| Loss & loss adjustment expense ratio | 84.2 | 77.7 | 6.5 | 81.7 | 76.9 | 4.8 | |||||||||||||||||||||||||||||
| Underwriting expense ratio | 15.3 | 17.4 | (2.1) | 17.4 | 18.2 | (0.8) | |||||||||||||||||||||||||||||
| Combined ratio | 99.5 | 95.1 | 4.4 | 99.1 | 95.1 | 4.0 | |||||||||||||||||||||||||||||
| Commercial Lines | |||||||||||||||||||||||||||||||||||
| Loss & loss adjustment expense ratio | 77.2 | 70.4 | 6.8 | 76.8 | 70.6 | 6.2 | |||||||||||||||||||||||||||||
| Underwriting expense ratio | 19.2 | 19.1 | 0.1 | 20.6 | 19.3 | 1.3 | |||||||||||||||||||||||||||||
| Combined ratio | 96.4 | 89.5 | 6.9 | 97.4 | 89.9 | 7.5 | |||||||||||||||||||||||||||||
| Property | |||||||||||||||||||||||||||||||||||
| Loss & loss adjustment expense ratio | 105.6 | 101.7 | 3.9 | 90.8 | 86.4 | 4.4 | |||||||||||||||||||||||||||||
| Underwriting expense ratio2 | 27.6 | 25.8 | 1.8 | 28.8 | 26.8 | 2.0 | |||||||||||||||||||||||||||||
| Combined ratio2 | 133.2 | 127.5 | 5.7 | 119.6 | 113.2 | 6.4 | |||||||||||||||||||||||||||||
| Total Underwriting Operations | |||||||||||||||||||||||||||||||||||
| Loss & loss adjustment expense ratio | 83.9 | 77.4 | 6.5 | 81.2 | 76.2 | 5.0 | |||||||||||||||||||||||||||||
| Underwriting expense ratio | 16.5 | 18.2 | (1.7) | 18.5 | 18.8 | (0.3) | |||||||||||||||||||||||||||||
| Combined ratio | 100.4 | 95.6 | 4.8 | 99.7 | 95.0 | 4.7 | |||||||||||||||||||||||||||||
| Accident year – Loss & loss adjustment expense ratio3 | 80.5 | 77.8 | 2.7 | 77.2 | 75.6 | 1.6 |
1 Ratios are expressed as a percentage of net premiums earned. The portion of fees and other revenues related to our loss adjustment activities are netted against loss adjustment expenses and the portion of fees and other revenues related to our underwriting operations are netted against underwriting expenses in the ratio calculations.
2 Included in the three and six months ended June 30, 2023, are 0.4 points and 0.6 points, respectively, of amortization expense on acquisition-related intangible assets attributable to our Property segment, and 0.9 points and 1.7 points for the respective periods last year.
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.
Losses and Loss Adjustment Expenses (LAE)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| (millions) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Change in net loss and LAE reserves | $ | 1,963.6 | $ | 1,131.6 | $ | 2,888.8 | $ | 1,696.9 | |||||||||||||||
| Paid losses and LAE | 10,206.5 | 8,289.5 | 19,905.3 | 16,582.6 | |||||||||||||||||||
| Total incurred losses and LAE | $ | 12,170.1 | $ | 9,421.1 | $ | 22,794.1 | $ | 18,279.5 |
Claims costs, our most significant expense, represent payments made and estimated future payments to be made, to or on behalf of our policyholders, including expenses needed to adjust or settle claims. Claims costs are a function of loss severity and frequency and, for our vehicle businesses, are influenced by inflation and driving patterns, among other factors, some of which are discussed below. In our Property business, severity is primarily a function of construction costs and the age of the structure. Accordingly, anticipated changes in these factors are taken into account when we establish premium rates and loss reserves. Loss reserves are estimates of future costs and
our reserves are adjusted as underlying assumptions change and information develops.
Our total loss and LAE ratio increased 6.5 points for the second quarter 2023, compared to the same period last year, and 5.0 points on a year-to-date basis, primarily due to increased severity, unfavorable prior and current accident years reserve development, and higher catastrophe losses, in all of our operating segments, partially offset by the higher premium per policy due to rate increases. On an accident year basis, our second quarter loss and LAE ratio was 2.7 points higher than the second quarter 2022, and 1.6 points higher on a year-to-date basis.
The following table shows our consolidated catastrophe losses and related combined ratio point impact, excluding loss adjustment expenses, incurred during the periods:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | $ | Point****1 | $ | Point****1 | $ | Point****1 | $ | Point****1 | |||||||||||||||||||||||||||||||||||||||
| Personal Lines | $ | 590.7 | 5.2 | $ | 285.2 | 3.1 | $ | 682.8 | 3.1 | $ | 329.7 | 1.8 | |||||||||||||||||||||||||||||||||||
| Commercial Lines | 18.9 | 0.8 | 9.6 | 0.4 | 22.4 | 0.5 | 12.4 | 0.3 | |||||||||||||||||||||||||||||||||||||||
| Property | 415.0 | 66.7 | 233.5 | 40.9 | 560.3 | 45.9 | 332.8 | 29.5 | |||||||||||||||||||||||||||||||||||||||
| Total net catastrophe losses incurred | $ | 1,024.6 | 7.1 | $ | 528.3 | 4.3 | $ | 1,265.5 | 4.5 | $ | 674.9 | 2.8 |
1 Represents catastrophe losses incurred during the period, including the impact of reinsurance, as a percent of net premiums earned for each segment.
In the three and six months ended June 30, 2023, we were affected by 19 and 43 catastrophic weather events, respectively, compared to 23 and 34 events in the same periods last year. During the second quarter 2023, our catastrophe losses reflected severe weather events throughout the United States, with Texas, Florida, and Colorado contributing to just over half of the losses although 35 states were affected for the quarter and 44 states for the first six months. We have responded, and plan to continue to respond, promptly to catastrophic events when they occur in order to provide exemplary claims service to our customers.
Changes in our estimate of our ultimate losses on current catastrophes along with potential future catastrophes could have a material impact on our financial condition, cash flows, or results of operations. We reinsure various risks including, but not limited to, catastrophic losses. We do not have catastrophe-specific reinsurance for our Personal Lines or commercial auto businesses, but we reinsure portions of our Property business. The Property business reinsurance programs include catastrophe occurrence excess of loss contracts and aggregate excess of loss contracts. We also purchase non-weather-related catastrophe reinsurance on our Protective Insurance workers’ compensation insurance.
We evaluate our reinsurance programs during the renewal process, if not more frequently, to ensure our programs continue to effectively address the company’s risk tolerance. During the second quarter 2023, we entered into new reinsurance contracts under our per occurrence excess of loss program for our Property business. The reinsurance program has retention thresholds for losses and allocated loss adjustment expense (ALAE) from a single catastrophic event of $200 million, which is unchanged from the retention threshold on prior contracts. In general, our program includes coverage for $2.0 billion in damages with additional substantial coverage for a second or third hurricane. When including the Florida Hurricane Catastrophe Fund and the Reinsurance Assistance to Policyholder programs that are specific to Florida, this coverage reaches $2.4 billion. While the cost of our reinsurance program increased considerably over the prior year due to market conditions, we were able to successfully place 100% of the requested coverage with our reinsurers.
During 2023, we also entered into a new aggregate excess of loss reinsurance contract that has multiple layers of coverage, with the first retention layer threshold ranging from $500 million to $575 million, excluding named tropical storms and hurricanes, and the second retention layer threshold of $600 million, including named tropical storms and hurricanes. The first and second layers provide
coverage up to $100 million and $85 million, respectively. While the total coverage limit and per-event retention will evolve to fit the growth of our business, we expect to remain a consistent purchaser of reinsurance coverage. See Item 1 – Description of Business-Reinsurance in our Annual Report on Form 10-K for the year ended December 31, 2022, for a discussion of our various reinsurance programs.
As of the end of the second quarter 2023, we were about $40 million to $50 million below the annual retention thresholds under our 2023 catastrophe aggregate excess of loss program, based on the layer. We will likely exceed a portion of our retention threshold during the third quarter 2023. Once the retention thresholds are exceeded, we have reinsurance coverage up to $100 million for non-named storm property catastrophe losses.
The following discussion of our severity and frequency trends in our personal auto business excludes comprehensive coverage because of its inherent volatility, as it is typically linked to catastrophic losses generally resulting from adverse weather. For our commercial auto products, the reported frequency and severity trends include comprehensive coverage. Comprehensive coverage insures against damage to a customer’s vehicle due to various causes other than collision, such as windstorm, hail, theft, falling objects, and glass breakage.
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, over the prior-year periods was as follows:
| Growth Over Prior Year | ||||||||
| Quarter | Year-to-date | |||||||
| Coverage Type | 2023 | 2023 | ||||||
| Bodily injury | 13 | % | 11 | % | ||||
| Collision | 8 | 7 | ||||||
| Personal injury protection | 5 | 5 | ||||||
| Property damage | 11 | 13 | ||||||
| Total | 12 | 11 |
The year-over-year increase in severity, in part, reflects the impact of inflation, which continues to increase the valuation of used vehicles and total loss, repair, and medical costs.
To address inherent seasonality trends and lessen the effects of month-to-month variability in the commercial auto products, we use a trailing 12-month period in
assessing severity. In the second quarter 2023, our commercial auto products’ incurred severity, excluding our TNC, BOP, and Protective Insurance products, increased 7%, compared to the same period last year. Since the loss patterns in the TNC, BOP, and Protective Insurance businesses are not indicative of our other commercial auto products, disclosing severity and frequency trends excluding those businesses is more representative of our overall experience for the majority of our commercial auto products.
It is a challenge to estimate future severity, but we continue to monitor changes in the underlying costs, such as general inflation, used car prices, vehicle repair costs, medical costs, health care reform, court decisions, and jury verdicts, along with regulatory changes and other factors that may affect severity.
Our personal auto incurred frequency, on a calendar-year basis, over the prior-year periods, was as follows:
| Growth Over Prior Year | ||||||||
| Quarter | Year-to-date | |||||||
| Coverage Type | 2023 | 2023 | ||||||
| Bodily injury | 6 | % | 6 | % | ||||
| Collision | (3) | (4) | ||||||
| Personal injury protection | 9 | 7 | ||||||
| Property damage | 1 | 2 | ||||||
| Total | 1 | 0 |
On a trailing 12-month basis, our commercial auto products’ incurred frequency, excluding Protective Insurance and our TNC business, increased 2% during the second quarter 2023, compared to the same period last year.
We closely monitor the changes in frequency, but the degree or direction of near-term frequency change is not something that we are able to predict with any certainty. We will continue to analyze trends to distinguish changes in our experience from other external factors, such as changes in the number of vehicles per household, miles driven, vehicle usage, gasoline prices, advances in vehicle safety, and unemployment rates, versus those resulting from shifts in the mix of our business or changes in driving patterns, to allow us to react quickly to price for these trends and to reserve more accurately for our loss exposures.
The table below presents the actuarial adjustments implemented and the loss reserve development experienced on a companywide basis in the following periods:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| ($ in millions) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| ACTUARIAL ADJUSTMENTS | |||||||||||||||||||||||
| Reserve decrease (increase) | |||||||||||||||||||||||
| Prior accident years | $ | (206.9) | $ | (65.5) | $ | (206.6) | $ | (50.4) | |||||||||||||||
| Current accident year | (283.5) | (14.4) | (424.3) | (53.2) | |||||||||||||||||||
| Calendar-year actuarial adjustments | $ | (490.4) | $ | (79.9) | $ | (630.9) | $ | (103.6) | |||||||||||||||
| PRIOR ACCIDENT YEARS DEVELOPMENT | |||||||||||||||||||||||
| Favorable (unfavorable) | |||||||||||||||||||||||
| Actuarial adjustments | $ | (206.9) | $ | (65.5) | $ | (206.6) | $ | (50.4) | |||||||||||||||
| All other development | (282.4) | 111.4 | (903.9) | (94.5) | |||||||||||||||||||
| Total development | $ | (489.3) | $ | 45.9 | $ | (1,110.5) | $ | (144.9) | |||||||||||||||
| (Increase) decrease to calendar-year combined ratio | (3.4) | pts. | 0.4 | pts. | (4.0) | pts. | (0.6) | pts. |
Total development consists of both actuarial adjustments and “all other development” on prior accident years. The actuarial adjustments represent the net changes made by our actuarial staff to both current and prior accident year reserves based on regularly scheduled reviews. Through these reviews, our actuaries identify and measure variances in the projected frequency and severity trends, which allow them to adjust the reserves to reflect 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 in the vehicle businesses would be reflected in “all other development,” discussed below, to the extent they relate to prior year reserves. We report these actuarial adjustments separately for the current and prior accident years to reflect these adjustments as part of the total prior accident years development.
“All other development” represents claims settling for more or less than reserved, emergence of unrecorded claims at rates different than anticipated in our incurred but not recorded (IBNR) reserves, and changes in reserve estimates on specific claims. Although we believe the development from both the actuarial adjustments and “all other development” generally results from the same factors, we are unable to quantify the portion of the reserve development that might be applicable to any one or more of those underlying factors.
About 80% of the total unfavorable development for the first half of 2023 was in our personal auto products. About half of the personal auto unfavorable development was attributable to higher than anticipated severity in auto property and physical damage coverages, while the remaining unfavorable development was primarily due to increased loss costs in Florida injury and medical coverages and, to a lesser extent, higher than anticipated late reported injury claims.
While it is difficult to quantify the direct impact of recent insurance legislation in Florida, for all coverages Florida contributed approximately 40% to the prior accident year reserve development year to date across all personal auto product lines. We continue to believe that the Florida tort reform will likely have a positive impact on the insurance industry in Florida over the long term. We will continue to monitor the ever-changing legislative and regulatory environment and will respond as necessary.
In the property damage coverage, the exposure relates to the costs associated with fixing vehicles. Coverages related to fixing vehicles have seen unprecedented increases in severity trends on previously closed claims, relative to comparable periods last year, and continued to be the major driver of prior year unfavorable development countrywide. The contributors to the increased trends came from a variety of sources, including longer vehicle repair times, longer rental times, and higher parts prices and labor rates. Fixing vehicle coverages are short-tailed, which explains why over 80% of the total year-to-date prior year development is from the 2022 accident year. In fact, excluding Florida, accident years prior to 2022 have developed slightly favorably.
Our current year actuarial adjustments are also primarily due to higher physical damage severity. Since fixing vehicle coverages are short-tailed, most of the claims that are affected by emerging trends have happened in the recent past. As we have moved deeper into the year, the new, steeper trends in fixing vehicle coverages have increasingly affected claims that occurred in the current accident year. Florida litigation has been a relatively small part of current year actuarial adjustments since the increase in litigation largely affected claims that occurred before March 2023. We continue to monitor loss trends across all states and coverages and will remain vigilant to adjust reserves to reflect those trends.
Our Commercial Lines business represented about 20% of the unfavorable development for the first six months of
2023, mainly due to higher than anticipated severity and frequency of late reported injury claims. The trend in loss costs has been steep, as costs for medical care, vehicle repair labor, and parts continue to climb. We believe these inflationary environmental trends will continue for the foreseeable future.
Our objective is to establish case and IBNR reserves that are adequate to cover all loss costs, while incurring minimal variation from the date the reserves are initially established until losses are fully developed. Our ability to meet this objective is impacted by many factors. Changes in case law, particularly in case law related to personal injury protection, can make it difficult to estimate reserves timely and with minimal variation. See Note 6 – Loss and Loss Adjustment Expense Reserves, for a more detailed discussion of our prior accident years development and Critical Accounting Policies in our 2022 Annual Report to Shareholders for discussion of the application of estimates and assumptions in the establishment of our loss reserves.
Underwriting Expenses
Underwriting expenses include policy acquisition costs and other underwriting expenses. The underwriting expense ratio is our underwriting expenses, net of certain fees and other revenues, expressed as a percentage of net premiums earned. For the second quarter 2023, our underwriting
expense ratio was down 1.7 points, compared to the same period last year, and 0.3 points on a year-to-date basis, primarily reflecting decreases in our advertising spend. In total, our companywide advertising spend decreased 34%, compared to the second quarter 2022, and 4% on a year-to-date basis. The reduction in advertising spend in concert with premium growth reduced the contribution of advertising to our combined ratio by 2.0 points and 0.8 points for the three and six months ended June 30, 2023, respectively, compared to the same periods last year. As we continue to focus on profitability, we plan to continue to manage our expenses and discretionary spend to further our goal of achieving our target profitability.
To analyze underwriting expenses, we also review our non-acquisition expense ratio (NAER), which excludes costs related to policy acquisition, including advertising and agency commissions, from our underwriting expense ratio. During the second quarter 2023, our NAER increased 0.4 points and 0.7 points in our Commercial Lines and Property businesses, respectively, and was flat in Personal Lines, compared to the same period last year. On a year-to-date basis, our NAER increased 0.2 points, 1.1 points, and 1.0 points, in our Personal Lines, Commercial Lines, and Property businesses, respectively, compared to the same period last year.
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 for which coverage was in effect as of the end of the period specified.
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
| ($ in millions) | 2023 | 2022 | % Growth | 2023 | 2022 | % Growth | |||||||||||||||||||||||||||||
| NET PREMIUMS WRITTEN | |||||||||||||||||||||||||||||||||||
| Personal Lines | |||||||||||||||||||||||||||||||||||
| Agency | $ | 5,533.7 | $ | 4,493.6 | 23 | % | $ | 10,948.1 | $ | 9,010.0 | 22 | % | |||||||||||||||||||||||
| Direct | 6,066.4 | 4,978.9 | 22 | 12,765.2 | 10,181.4 | 25 | |||||||||||||||||||||||||||||
| Total Personal Lines | 11,600.1 | 9,472.5 | 22 | 23,713.3 | 19,191.4 | 24 | |||||||||||||||||||||||||||||
| Commercial Lines | 2,366.4 | 2,308.8 | 2 | 5,733.3 | 5,234.5 | 10 | |||||||||||||||||||||||||||||
| Property | 750.3 | 639.6 | 17 | 1,379.7 | 1,175.7 | 17 | |||||||||||||||||||||||||||||
| Other indemnity1 | 0.1 | 1.2 | (92) | 0.3 | 1.5 | (80) | |||||||||||||||||||||||||||||
| Total underwriting operations | $ | 14,716.9 | $ | 12,422.1 | 18 | % | $ | 30,826.6 | $ | 25,603.1 | 20 | % | |||||||||||||||||||||||
| NET PREMIUMS EARNED | |||||||||||||||||||||||||||||||||||
| Personal Lines | |||||||||||||||||||||||||||||||||||
| Agency | $ | 5,207.2 | $ | 4,366.5 | 19 | % | $ | 10,067.4 | $ | 8,689.8 | 16 | % | |||||||||||||||||||||||
| Direct | 6,180.7 | 4,905.9 | 26 | 11,898.1 | 9,699.5 | 23 | |||||||||||||||||||||||||||||
| Total Personal Lines | 11,387.9 | 9,272.4 | 23 | 21,965.5 | 18,389.3 | 19 | |||||||||||||||||||||||||||||
| Commercial Lines | 2,454.1 | 2,304.4 | 6 | 4,810.2 | 4,431.6 | 9 | |||||||||||||||||||||||||||||
| Property | 622.3 | 570.5 | 9 | 1,221.0 | 1,128.6 | 8 | |||||||||||||||||||||||||||||
| Other indemnity1 | 0.1 | 0.6 | (83) | 0.8 | 1.3 | (38) | |||||||||||||||||||||||||||||
| Total underwriting operations | $ | 14,464.4 | $ | 12,147.9 | 19 | % | $ | 27,997.5 | $ | 23,950.8 | 17 | % | |||||||||||||||||||||||
| 1 Includes other underwriting business and run-off operations. | |||||||||||||||||||||||||||||||||||
| June 30, | |||||||||||||||||||||||||||||||||||
| (thousands) | 2023 | 2022 | % Growth | ||||||||||||||||||||||||||||||||
| POLICIES IN FORCE | |||||||||||||||||||||||||||||||||||
| Personal Lines | |||||||||||||||||||||||||||||||||||
| Agency auto | 8,437.8 | 7,619.5 | 11 | % | |||||||||||||||||||||||||||||||
| Direct auto | 11,220.5 | 9,557.0 | 17 | ||||||||||||||||||||||||||||||||
| Total auto | 19,658.3 | 17,176.5 | 14 | ||||||||||||||||||||||||||||||||
| Special lines1 | 5,843.1 | 5,485.0 | 7 | ||||||||||||||||||||||||||||||||
| Personal Lines — total | 25,501.4 | 22,661.5 | 13 | ||||||||||||||||||||||||||||||||
| Commercial Lines | 1,101.1 | 1,024.6 | 7 | ||||||||||||||||||||||||||||||||
| Property | 2,974.3 | 2,823.0 | 5 | ||||||||||||||||||||||||||||||||
| Companywide total | 29,576.8 | 26,509.1 | 12 | % | |||||||||||||||||||||||||||||||
| 1 Includes insurance for motorcycles, RVs, watercraft, and similar items. |
To analyze growth, we review new policies, rate levels, and the retention characteristics of our segments. Although new policies are necessary to maintain a growing book of business, we recognize the importance of retaining our current customers as a critical component of our continued growth.
As shown in the tables below, we measure retention by policy life expectancy. We review our customer retention for our personal auto products using both a trailing 3-month and a trailing 12-month period. We believe changes in policy life expectancy using a trailing 12-month period measure is indicative of recent experience, mitigates the effects of month-to-month variability, and addresses seasonality. Although using a trailing 3-month measure is sensitive to 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.
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 | ||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||
| Applications | |||||||||||||||||
| New | 31 | % | (13) | % | 49 | % | (18) | % | |||||||||
| Renewal | 7 | 2 | 4 | 4 | |||||||||||||
| Written premium per policy - Auto | 7 | 11 | 8 | 8 | |||||||||||||
| Policy life expectancy - Auto | |||||||||||||||||
| Trailing 3 months | 40 | (32) | |||||||||||||||
| Trailing 12 months | 1 | (11) |
In our Personal Lines business, we experienced significant new application growth in the second quarter and first six months of 2023, which we believe was, in part, driven by our competitiveness in the marketplace. The increase in new applications during the second quarter and first six months of 2023 were primarily attributable to our personal auto products across all four consumer segments, although our special lines products also experienced new application growth in both periods.
Personal auto policies in force grew between 10% and 17% across all consumer segments as of the second quarter 2023, compared to the same period last year.
During the second quarter 2023, on a countrywide basis, we implemented personal auto rate increases in 27 states that, in the aggregate, increased rates about 7%, following rate increases of 4% during the first quarter 2023 and 13% during 2022. We believe that our prior-year rate increases had a negative impact on our renewal business applications and policy life expectancy, and as competitors also raised rates, our retention started to lengthen as evidenced by the growth in our trailing 3- and 12-month policy life expectancy.
Our written premium per policy increased during the second quarter and first six months of 2023, primarily due to the rate increases taken in 2022 and 2023, as previously discussed. Our focus on achieving our target underwriting profitability takes precedence over growth. We will continue to manage growth and profitability in accordance with our long-standing goal of growing as fast as we can, as long as we can provide high-quality customer service, at or below a companywide 96 combined ratio on a calendar-year basis. During the second quarter 2023, we started to take additional measures to achieve our target profit margin that included slowing new business growth through verification activities, bill plan offerings, and through continued general operational expense discipline. In addition to potentially slowing growth, some of these actions could reduce our retention.
We report our Agency and Direct business results separately as components of our Personal Lines segment to provide further understanding of our products by distribution channel. The channel discussions below are focused on personal auto insurance since this product accounted for 92% and 93% of the Personal Lines segment net premiums written during the second quarter and first six months of 2023, respectively.
The Agency Business
| Growth Over Prior Year | |||||||||||||||||
| Quarter | Year-to-date | ||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||
| Applications - Auto | |||||||||||||||||
| New | 52 | % | (20) | % | 60 | % | (24) | % | |||||||||
| Renewal | 4 | (2) | 0 | (1) | |||||||||||||
| Written premium per policy - Auto | 9 | 12 | 9 | 10 | |||||||||||||
| Policy life expectancy - Auto | |||||||||||||||||
| Trailing 3 months | 44 | (34) | |||||||||||||||
| Trailing 12 months | 0 | (13) |
The Agency business includes business written by more than 40,000 independent insurance agencies that represent Progressive, as well as brokerages in New York and California. During the second quarter 2023, 48 states and the District of Columbia generated new Agency auto application growth, including all of our top 10 largest Agency states. During the second quarter and first six months of 2023, total Agency auto applications increased 12% and 10%, respectively, primarily due to growth in new applications. During the second quarter and first six months of 2023, each of our consumer segments experienced a significant increase in new applications year over year. Policies in force grew by low double digit percentages in each consumer segment, except Sams who saw a single digit increase, compared to the same period last year.
During the second quarter and first six months of 2023, we experienced an increase in Agency auto quote volume of 16% and 15%, respectively, with a rate of conversion (i.e.,
converting a quote to a sale) increase of 29% and 39%, compared to the same periods last year. For the second quarter and year-to-date periods, each consumer segment saw increases in quote volume and conversion.
Written premium per policy for new and renewal Agency auto business increased 11% and 8%, respectively, compared to the second quarter 2022, and 12% and 9%, respectively, for the first six months of 2023 on a year-over-year basis.
The Direct Business
| Growth Over Prior Year | |||||||||||||||||
| Quarter | Year-to-date | ||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||
| Applications - Auto | |||||||||||||||||
| New | 29 | % | (11) | % | 60 | % | (19) | % | |||||||||
| Renewal | 10 | 4 | 7 | 6 | |||||||||||||
| Written premium per policy - Auto | 6 | 10 | 7 | 7 | |||||||||||||
| Policy life expectancy - Auto | |||||||||||||||||
| Trailing 3 months | 35 | (29) | |||||||||||||||
| Trailing 12 months | 2 | (9) |
The Direct business includes business written directly by Progressive online, through our Progressive mobile app, and over the phone. During the second quarter 2023, 47 states and the District of Columbia generated new auto application growth, including eight of our top 10 largest Direct states. During the second quarter and first six months of 2023, total auto applications increased 14% and 16%, respectively, due to growth in both new and renewal applications. During the quarter, each of our consumer segments experienced a significant increase in new applications year over year, except Sams who experienced a low double digit increase. On a year-to-date basis, each consumer segment experienced a significant increase in new applications from the prior year. Policies in force grew between 13% and 21% in each consumer segment, compared to the same period last year.
During the second quarter and first six months of 2023, Direct auto quote volume decreased 7% and increased 32%, respectively, while conversion increased 35% and 21%, compared to the same periods last year. All consumer segments saw a decrease in quotes during the quarter, except for Robinsons, with all consumer segments experiencing increased quote volume during the first six months of 2023. All consumer segments saw an increase in conversion for both the second quarter and first six months of 2023. The decrease we experienced in our quote volume during the second quarter 2023 primarily reflected decreased advertising spend, compared to the second quarter 2022, along with the other actions taken to slow growth to focus on profitability.
Written premium per policy for new and renewal Direct auto business increased 5% and 7%, respectively, compared to the second quarter 2022, and 6% and 8%,
respectively, for the first six months of 2023 on a year-over-year basis, primarily driven by rate increases.
E. Commercial Lines
Our Commercial Lines business operates in five traditional business markets, which include business auto, for-hire transportation, contractor, for-hire specialty, and tow markets, primarily written through the agency channel. We also write TNC business, BOP insurance, and, through Protective Insurance, larger fleet and workers’ compensation insurance for trucking, along with trucking industry independent contractors, and affinity programs.
The following table and discussion shows our commercial auto product, excluding our TNC, BOP, and Protective Insurance products. Year-over-year changes in our commercial auto product were as follows:
| Growth Over Prior Year | |||||||||||||||||
| Quarter | Year-to-date | ||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||
| Applications | |||||||||||||||||
| New | 7 | % | (6) | % | 4 | % | 1 | % | |||||||||
| Renewal | 6 | 15 | 6 | 14 | |||||||||||||
| Written premium per policy | 0 | 14 | 1 | 17 | |||||||||||||
| Policy life expectancy Trailing 12 months | (11) | 1 |
During the second quarter and first six months of 2023, commercial auto new application growth was positive in each of our business market targets, except for the for-hire transportation market, which reflects the continued slowdown in the rate of economic activity and deteriorating freight market conditions. During the second quarter and first six months of 2023, quote volume increased 8% and 5%, respectively, while conversion decreased 1% for both periods, compared to the same periods last year.
Written premium per policy for new commercial auto business decreased 4% and 5% for the second quarter and first six months of 2023, respectively, compared to the same periods last year. Shifts in the mix of business to lower premium products more than offset the rate increases we took in commercial auto on our new business. Written premium per policy on renewal business increased 3% for the second quarter and 4% for the first six months, compared to the prior year periods, reflecting rate increases. Our policy life expectancy decreased in all business market targets, except for our business auto market. Given the rise in costs to operate a trucking business, many independent owner/operators, who were our core customers in the for-hire transportation business market, have begun to migrate back to leasing with larger motor carriers. In addition, we believe unfavorable trucking market conditions and the general weakening of the economy are driving increased shopping and causing motor carriers to exit the industry.
F. Property
The following table shows our year-over-year changes for our Property business:
| Growth Over Prior Year | |||||||||||||||||
| Quarter | Year-to-date | ||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||
| Applications | |||||||||||||||||
| New | 12 | % | (5) | % | 12 | % | (6) | % | |||||||||
| Renewal | 5 | 8 | 6 | 9 | |||||||||||||
| Written premium per policy | 12 | 4 | 11 | 4 | |||||||||||||
| Policy life expectancy Trailing 12 months | 7 | (8) |
Our Property business writes residential property insurance for homeowners, other property owners, and renters, and umbrella insurance in the agency and direct channels. During the second quarter and first six months of 2023, the increase in new applications experienced in our Property business was primarily due to underwriting changes made in an effort to promote growth in less volatile weather states.
Improving profitability and reducing concentration exposure continued to be the top priority for our Property business during the first half of 2023. We have concentrated our growth in the Property business in markets that are less susceptible to catastrophes and have lower exposure to coastal and hail-prone states for all products excluding renters and umbrella. New applications in these growth-oriented states were up about 50% in both the second quarter and first six months of 2023, compared to the same periods last year. In regions where our appetite to write new business is limited, we are continuing to prioritize Progressive auto bundles, as well as lower risk properties, such as new construction or homes with newer roofs. New applications were down about 30% in these more volatile weather states for both periods. In addition, we increased rates an average of about 4% in our Property segment during the second quarter 2023 and 7% on a year-to-date basis.
The increase in our written premium per policy, compared to the second quarter and first six months of 2022, was primarily due to rate increases taken over the last 12 months and providing higher premium coverages to account for inflation. The written premium per policy increase was partially offset by a shift in the mix of business to a larger share of renters policies, which have lower written premiums per policy, and less homeowners growth in volatile states that have higher average premiums. We intend to continue to make targeted rate increases in states where we believe it is necessary to achieve our profitability targets.
G. Income Taxes
At June 30, 2023, we had recoverable income taxes of $44.0 million, which were reported in other assets, compared to net current income taxes payable of $114.0 million and $10.9 million at June 30, 2022 and December 31, 2022, respectively, which were reported in accounts payable, accrued expenses, and other liabilities in our consolidated balance sheets. This balance may fluctuate between an asset and a liability from period to period due to normal timing differences.
A deferred tax asset or liability is a tax benefit or expense, respectively, that is expected to be realized in a future tax return. At June 30, 2023 and 2022, and December 31, 2022, we reported net federal deferred tax assets of $1.2 billion, $1.0 billion, and $1.1 billion, respectively.
We are required to assess our deferred tax assets for recoverability and, based on our analysis, determined that we did not need a valuation allowance on our gross deferred tax assets in each period. Although realization of the gross deferred tax assets is not assured, management believes it is more likely than not that the gross deferred tax assets will be realized based on our expectation we will be able to fully utilize the deductions that are ultimately recognized for tax purposes. We believe our deferred tax assets related to net unrealized losses on fixed-maturity securities will be realized based on the existence of prior-year capital gains, current temporary differences related to unrealized gains in our equity portfolio, and other tax planning strategies.
Our effective tax rate for the three and six months ended June 30, 2023, was 20.7% and 19.9%, respectively, compared to 14.6% and 6.8% for the same periods last year. The lower effective tax rates for the three and six months ended June 30, 2022, were in part due to the goodwill impairment charge, partially offset by our permanent tax differences having a greater impact on the effective rate given our pretax loss for the periods.
Consistent with prior years, we had no uncertain tax positions. See Note 5 – Income Taxes for further information.
IV. RESULTS OF OPERATIONS – INVESTMENTS
A. Investment Results
Our management philosophy governing the portfolio is to evaluate investment results on a total return basis. The fully taxable equivalent (FTE) total return includes recurring investment income, adjusted to a fully taxable amount for certain securities that receive preferential tax treatment (e.g., municipal securities), and total net realized, and changes in total net unrealized, gains (losses) on securities.
The following table summarizes investment results for the periods ended June 30:
| Three Months | Six Months | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Pretax recurring investment book yield (annualized) | 3.1 | % | 2.3 | % | 3.0 | % | 2.1 | % | |||||||||||||||
| FTE total return: | |||||||||||||||||||||||
| Fixed-income securities | (0.4) | (2.4) | 1.7 | (5.9) | |||||||||||||||||||
| Common stocks | 9.0 | (16.3) | 16.9 | (20.4) | |||||||||||||||||||
| Total portfolio | 0 | (3.6) | 2.3 | (7.2) |
The increase in the book yield for both periods, compared to last year, primarily reflected investing new cash from operations and proceeds from maturing bonds at higher interest rates, and an increase in interest rates on our floating-rate securities. The increase in the fixed-income total return for both periods, compared to last year, primarily reflected interest rate movement and only a moderate increase in interest rates during second quarter 2023. The increase in common stocks reflected general market conditions.
A further break-down of our FTE total returns for our fixed-income portfolio for the periods ended June 30, follows:
| Three Months | Six Months | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Fixed-income securities: | |||||||||||||||||||||||
| U.S. Treasury Notes | (1.1) | % | (1.7) | % | 1.3 | % | (5.8) | % | |||||||||||||||
| Municipal bonds | (0.4) | (1.9) | 2.3 | (6.7) | |||||||||||||||||||
| Corporate bonds | 0.1 | (3.1) | 2.6 | (6.7) | |||||||||||||||||||
| Residential mortgage-backed securities | 2.1 | (0.6) | 4.2 | (1.5) | |||||||||||||||||||
| Commercial mortgage-backed securities | 0.8 | (3.6) | 1.8 | (7.7) | |||||||||||||||||||
| Other asset-backed securities | 1.1 | (1.2) | 2.9 | (2.7) | |||||||||||||||||||
| Preferred stocks | 0.7 | (8.1) | (3.4) | (10.9) | |||||||||||||||||||
| Short-term investments | 1.2 | 0.1 | 2.3 | 0.2 |
B. Portfolio Allocation
The composition of the investment portfolio was:
| ($ in millions) | Fair Value | % of Total Portfolio | Duration (years) | Average Rating****1 | |||||||||||||||||||
| June 30, 2023 | |||||||||||||||||||||||
| U.S. government obligations | $ | 31,600.5 | 53.3 | % | 3.4 | AAA | |||||||||||||||||
| State and local government obligations | 2,154.7 | 3.6 | 3.2 | AA+ | |||||||||||||||||||
| Foreign government obligations | 15.8 | 0.1 | 3.0 | AAA | |||||||||||||||||||
| Corporate debt securities | 10,304.6 | 17.4 | 2.9 | BBB | |||||||||||||||||||
| Residential mortgage-backed securities | 562.7 | 0.9 | 0.4 | A | |||||||||||||||||||
| Commercial mortgage-backed securities | 4,265.5 | 7.2 | 2.3 | A | |||||||||||||||||||
| Other asset-backed securities | 5,017.6 | 8.5 | 1.1 | AA | |||||||||||||||||||
| Preferred stocks | 1,141.8 | 1.9 | 2.5 | BBB- | |||||||||||||||||||
| Short-term investments | 1,494.3 | 2.5 | 0.1 | AA+ | |||||||||||||||||||
| Total fixed-income securities | 56,557.5 | 95.4 | 2.9 | AA | |||||||||||||||||||
| Common equities | 2,708.1 | 4.6 | na | na | |||||||||||||||||||
| Total portfolio2 | $ | 59,265.6 | 100.0 | % | 2.9 | AA | |||||||||||||||||
| June 30, 2022 | |||||||||||||||||||||||
| U.S. government obligations | $ | 18,719.2 | 36.0 | % | 3.7 | AAA | |||||||||||||||||
| State and local government obligations | 2,135.4 | 4.1 | 3.7 | AA+ | |||||||||||||||||||
| Foreign government obligations | 16.4 | 0.1 | 4.0 | AAA | |||||||||||||||||||
| Corporate debt securities | 10,167.8 | 19.6 | 3.0 | BBB | |||||||||||||||||||
| Residential mortgage-backed securities | 799.3 | 1.5 | 0.4 | A | |||||||||||||||||||
| Commercial mortgage-backed securities | 6,094.6 | 11.7 | 2.7 | A+ | |||||||||||||||||||
| Other asset-backed securities | 5,036.0 | 9.7 | 1.1 | AA | |||||||||||||||||||
| Preferred stocks | 1,564.3 | 3.0 | 3.0 | BBB- | |||||||||||||||||||
| Short-term investments | 4,611.8 | 8.9 | <0.1 | AA | |||||||||||||||||||
| Total fixed-income securities | 49,144.8 | 94.6 | 2.8 | AA- | |||||||||||||||||||
| Common equities | 2,784.7 | 5.4 | na | na | |||||||||||||||||||
| Total portfolio2 | $ | 51,929.5 | 100.0 | % | 2.8 | AA- | |||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||
| U.S. government obligations | $ | 25,167.4 | 47.0 | % | 3.7 | AAA | |||||||||||||||||
| State and local government obligations | 1,977.1 | 3.7 | 3.5 | AA+ | |||||||||||||||||||
| Foreign government obligations | 15.5 | 0.1 | 3.5 | AAA | |||||||||||||||||||
| Corporate debt securities | 9,412.7 | 17.6 | 2.8 | BBB | |||||||||||||||||||
| Residential mortgage-backed securities | 666.8 | 1.2 | 0.4 | A | |||||||||||||||||||
| Commercial mortgage-backed securities | 4,663.5 | 8.7 | 2.7 | A+ | |||||||||||||||||||
| Other asset-backed securities | 4,564.6 | 8.5 | 1.1 | AA+ | |||||||||||||||||||
| Preferred stocks | 1,397.5 | 2.6 | 2.8 | BBB- | |||||||||||||||||||
| Short-term investments | 2,861.7 | 5.4 | 0.1 | AAA- | |||||||||||||||||||
| Total fixed-income securities | 50,726.8 | 94.8 | 2.9 | AA | |||||||||||||||||||
| Common equities | 2,821.5 | 5.2 | na | na | |||||||||||||||||||
| Total portfolio2 | $ | 53,548.3 | 100.0 | % | 2.9 | AA | |||||||||||||||||
| na = not applicable |
1 Represents ratings at period end. Credit quality ratings are assigned by nationally recognized statistical rating organizations. To calculate the weighted average credit quality ratings, we weight individual securities based on fair value and assign a numeric score of 0-5, with non-investment-grade and non-rated securities assigned a score of 0-1. To the extent the weighted average of the ratings falls between AAA and AA+, we assign an internal rating of AAA-.
2 At June 30, 2023, we had $248.0 million of net unsettled security purchase transactions included in other liabilities, compared to $34.4 million included in other assets at December 31, 2022. At June 30, 2022, our net unsettled security transactions were $0.
The total fair value of the portfolio at June 30, 2023 and 2022, and December 31, 2022, included $4.3 billion, $4.9 billion, and $4.4 billion, respectively, of securities held in a consolidated, non-insurance subsidiary of the holding company, net of unsettled security transactions.
Our asset allocation strategy is to maintain 0%-25% of our portfolio in Group I securities, with the balance (75%-100%) of our portfolio in Group II securities.
We define Group I securities to include:
-
common equities,
-
nonredeemable preferred stocks,
-
redeemable preferred stocks, except for 50% of investment-grade redeemable preferred stocks with cumulative dividends, which are included in Group II, and
-
all other non-investment-grade fixed-maturity securities.
Group II securities include:
-
short-term securities, and
-
all other fixed-maturity securities, including 50% of the investment-grade redeemable preferred stocks with cumulative dividends.
We believe this asset allocation strategy allows us to appropriately assess the risks associated with these securities for capital purposes and is in line with the treatment by our regulators.
The following table shows the composition of our Group I and Group II securities:
| June 30, 2023 | June 30, 2022 | December 31, 2022 | ||||||||||||||||||||||||
| ($ in millions) | Fair Value | % of Total Portfolio | Fair Value | % of Total Portfolio | Fair Value | % of Total Portfolio | ||||||||||||||||||||
| Group I securities: | ||||||||||||||||||||||||||
| Non-investment-grade fixed maturities | $ | 752.3 | 1.3 | % | $ | 1,648.7 | 3.2 | % | $ | 1,249.2 | 2.3 | % | ||||||||||||||
| Redeemable preferred stocks1 | 78.3 | 0.1 | 101.9 | 0.2 | 92.1 | 0.2 | ||||||||||||||||||||
| Nonredeemable preferred stocks | 985.1 | 1.6 | 1,360.5 | 2.6 | 1,213.2 | 2.3 | ||||||||||||||||||||
| Common equities | 2,708.1 | 4.6 | 2,784.7 | 5.4 | 2,821.5 | 5.2 | ||||||||||||||||||||
| Total Group I securities | 4,523.8 | 7.6 | 5,895.8 | 11.4 | 5,376.0 | 10.0 | ||||||||||||||||||||
| Group II securities: | ||||||||||||||||||||||||||
| Other fixed maturities | 53,247.5 | 89.9 | 41,421.9 | 79.7 | 45,310.6 | 84.6 | ||||||||||||||||||||
| Short-term investments | 1,494.3 | 2.5 | 4,611.8 | 8.9 | 2,861.7 | 5.4 | ||||||||||||||||||||
| Total Group II securities | 54,741.8 | 92.4 | 46,033.7 | 88.6 | 48,172.3 | 90.0 | ||||||||||||||||||||
| Total portfolio | $ | 59,265.6 | 100.0 | % | $ | 51,929.5 | 100.0 | % | $ | 53,548.3 | 100.0 | % |
1 We did not hold any non-investment-grade redeemable preferred stocks at June 30, 2023 and 2022, or December 31, 2022.
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) to classify our residential and commercial mortgage-backed securities, excluding interest-only (IO) securities, and the credit ratings from nationally recognized statistical rating organizations (NRSRO) to classify all other debt securities. NAIC ratings are based on a model that considers the book price of our securities when assessing the probability of future losses in assigning a credit rating. As a result, NAIC ratings can vary from credit ratings issued by NRSROs. Management believes NAIC ratings more accurately reflect our risk profile when determining the asset allocation between Group I and Group II securities.
Unrealized Gains and Losses
As of June 30, 2023, our fixed-maturity portfolio had total after-tax net unrealized losses, which are recorded as part of accumulated other comprehensive income (loss) on the consolidated balance sheets, of $2.6 billion, compared to $2.2 billion and $2.8 billion at June 30, 2022 and December 31, 2022, respectively. The increase in net unrealized losses from June 30, 2022, was primarily due to a lower valuation on our U.S. Treasury portfolio as interest rates have increased. The decrease in our fixed-maturity net unrealized loss from December 31, 2022 through June 30, 2023, was primarily due to higher valuations on our corporate debt and other asset-backed portfolios.
See Note 2 – Investments for a further break-out of our gross unrealized gains (losses).
Holding Period Gains and Losses
The following table provides the balance and activity for both the gross and net holding period gains (losses) for the six months ended June 30, 2023:
| (millions) | Gross Holding Period Gains | Gross Holding Period Losses | Net Holding Period Gains (Losses) | ||||||||
| Balance at December 31, 2022 | |||||||||||
| Hybrid fixed-maturity securities | $ | 1.3 | $ | (75.8) | $ | (74.5) | |||||
| Equity securities1 | 2,026.6 | (182.2) | 1,844.4 | ||||||||
| Total holding period securities | 2,027.9 | (258.0) | 1,769.9 | ||||||||
| Current year change in holding period securities | |||||||||||
| Hybrid fixed-maturity securities | (0.5) | 19.2 | 18.7 | ||||||||
| Equity securities1 | 30.9 | 48.8 | 79.7 | ||||||||
| Total changes in holding period securities | 30.4 | 68.0 | 98.4 | ||||||||
| Balance at June 30, 2023 | |||||||||||
| Hybrid fixed-maturity securities | 0.8 | (56.6) | (55.8) | ||||||||
| Equity securities1 | 2,057.5 | (133.4) | 1,924.1 | ||||||||
| Total holding period securities | $ | 2,058.3 | $ | (190.0) | $ | 1,868.3 |
1Equity securities include common equities and nonredeemable preferred stocks.
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.
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.
Interest Rate Risk Our duration of 2.9 years at both June 30, 2023 and December 31, 2022, and 2.8 years at June 30, 2022 fell within our acceptable range of 1.5 to 5 years. The duration distribution of our fixed-income portfolio, excluding short-term investments, represented by the interest rate sensitivity of the comparable benchmark U.S. Treasury Notes, was:
| Duration Distribution (excluding short-term securities) | June 30, 2023 | June 30, 2022 | December 31, 2022 | ||||||||||||||
| 1 year | 19.8 | % | 18.4 | % | 17.5 | % | |||||||||||
| 2 years | 14.9 | 17.9 | 16.9 | ||||||||||||||
| 3 years | 23.2 | 23.6 | 21.3 | ||||||||||||||
| 5 years | 26.9 | 20.8 | 25.1 | ||||||||||||||
| 7 years | 11.6 | 14.3 | 14.0 | ||||||||||||||
| 10 years | 3.6 | 5.0 | 5.2 | ||||||||||||||
| Total fixed-income portfolio | 100.0 | % | 100.0 | % | 100.0 | % |
Credit Risk This exposure is managed by maintaining an A+ minimum average portfolio credit quality rating, as defined by NRSROs. At both June 30, 2023 and December 31, 2022, our credit quality rating was AA and at June 30, 2022 it was AA-. The credit quality distribution of the fixed-income portfolio was:
| Average Rating****1 | June 30, 2023 | June 30, 2022 | December 31, 2022 | ||||||||||||||
| AAA | 68.4 | % | 57.7 | % | 65.5 | % | |||||||||||
| AA | 5.7 | 8.5 | 6.4 | ||||||||||||||
| A | 7.4 | 8.4 | 7.6 | ||||||||||||||
| BBB | 16.7 | 21.0 | 17.2 | ||||||||||||||
| Non-investment grade/non-rated | |||||||||||||||||
| BB | 1.4 | 3.5 | 2.5 | ||||||||||||||
| B | 0.2 | 0.6 | 0.5 | ||||||||||||||
| CCC and lower | 0.1 | 0.1 | 0.1 | ||||||||||||||
| Non-rated | 0.1 | 0.2 | 0.2 | ||||||||||||||
| Total fixed-income portfolio | 100.0 | % | 100.0 | % | 100.0 | % |
1 The ratings in the table above are assigned by NRSROs.
Concentration Risk We did not have any investments in a single issuer, either overall or in the context of individual asset classes and sectors, that exceeded our thresholds during the second quarter 2023.
Prepayment and Extension Risk We did not experience significant adverse prepayment or extension of principal relative to our cash flow expectations in the portfolio during the second quarter 2023.
Liquidity Risk Our overall portfolio remains very liquid and we believe that it is sufficient to meet expected near-term liquidity requirements. The short-to-intermediate duration of our portfolio provides a source of liquidity, as we expect approximately $3.1 billion, or 13%, of principal repayment from our fixed-income portfolio, excluding U.S. Treasury Notes and short-term investments, during the remainder of 2023. Cash from interest and dividend payments and our short-term portfolio provide additional sources of recurring liquidity.
The duration of our U.S. government obligations, which are included in the fixed-income portfolio, was comprised of the following at June 30, 2023:
| ($ in millions) | Fair Value | Duration (years) | |||||||||
| U.S. Treasury Notes | |||||||||||
| Less than one year | $ | 2,986.5 | 0.7 | ||||||||
| One to two years | 6,322.0 | 1.6 | |||||||||
| Two to three years | 3,833.7 | 2.5 | |||||||||
| Three to five years | 12,176.5 | 4.0 | |||||||||
| Five to seven years | 4,486.2 | 5.5 | |||||||||
| Seven to ten years | 1,795.6 | 7.6 | |||||||||
| Total U.S. Treasury Notes | $ | 31,600.5 | 3.4 | ||||||||
ASSET-BACKED SECURITIES
Included in our fixed-income portfolio are asset-backed securities, which were comprised of the following at the balance sheet dates listed:
| ($ in millions) | Fair Value | Net Unrealized Gains (Losses) | % of Asset- Backed Securities | Duration (years) | **Average Rating (at period end)**1 | ||||||||||||||||||||||||
| June 30, 2023 | |||||||||||||||||||||||||||||
| Residential mortgage-backed securities | $ | 562.7 | $ | (12.8) | 5.7 | % | 0.4 | A | |||||||||||||||||||||
| Commercial mortgage-backed securities | 4,265.5 | (716.7) | 43.3 | 2.3 | A | ||||||||||||||||||||||||
| Other asset-backed securities | 5,017.6 | (232.0) | 51.0 | 1.1 | AA | ||||||||||||||||||||||||
| Total asset-backed securities | $ | 9,845.8 | $ | (961.5) | 100.0 | % | 1.6 | AA- | |||||||||||||||||||||
| June 30, 2022 | |||||||||||||||||||||||||||||
| Residential mortgage-backed securities | $ | 799.3 | $ | (10.2) | 6.7 | % | 0.4 | A | |||||||||||||||||||||
| Commercial mortgage-backed securities | 6,094.6 | (644.8) | 51.1 | 2.7 | A+ | ||||||||||||||||||||||||
| Other asset-backed securities | 5,036.0 | (201.6) | 42.2 | 1.1 | AA | ||||||||||||||||||||||||
| Total asset-backed securities | $ | 11,929.9 | $ | (856.6) | 100.0 | % | 1.9 | AA- | |||||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||||||||
| Residential mortgage-backed securities | $ | 666.8 | $ | (17.2) | 6.7 | % | 0.4 | A | |||||||||||||||||||||
| Commercial mortgage-backed securities | 4,663.5 | (782.5) | 47.1 | 2.7 | A+ | ||||||||||||||||||||||||
| Other asset-backed securities | 4,564.6 | (259.6) | 46.2 | 1.1 | AA+ | ||||||||||||||||||||||||
| Total asset-backed securities | $ | 9,894.9 | $ | (1,059.3) | 100.0 | % | 1.8 | AA- | |||||||||||||||||||||
1 The credit quality ratings in the table above are assigned by NRSROs.
Residential Mortgage-Backed Securities (RMBS) The following table details the credit quality rating and fair value of our RMBS, along with the loan classification and a comparison of the fair value at June 30, 2023, to our original investment value (adjusted for returns of principal, amortization, and write-downs):
| Residential Mortgage-Backed Securities (at June 30, 2023) | |||||||||||||||||||||||||||||
| ($ in millions) Average Rating****1 | Non-Agency | Government/GSE****2 | Total | % of Total | |||||||||||||||||||||||||
| AAA | $ | 83.7 | $ | 1.1 | $ | 84.8 | 15.1 | % | |||||||||||||||||||||
| AA | 33.4 | 0.4 | 33.8 | 6.0 | |||||||||||||||||||||||||
| A | 342.9 | 0 | 342.9 | 60.9 | |||||||||||||||||||||||||
| BBB | 94.6 | 0 | 94.6 | 16.8 | |||||||||||||||||||||||||
| Non-investment grade/non-rated: | |||||||||||||||||||||||||||||
| BB | 0.3 | 0 | 0.3 | 0.1 | |||||||||||||||||||||||||
| CCC and lower | 1.5 | 0 | 1.5 | 0.3 | |||||||||||||||||||||||||
| Non-rated | 4.8 | 0 | 4.8 | 0.8 | |||||||||||||||||||||||||
| Total fair value | $ | 561.2 | $ | 1.5 | $ | 562.7 | 100.0 | % | |||||||||||||||||||||
| Increase (decrease) in value | (3.1) | % | (5.4) | % | (3.1) | % |
1 The credit quality ratings are assigned by NRSROs; when we assigned the NAIC ratings for our RMBS, 100% of our non-investment-grade securities were rated investment grade and reported as Group II securities.
2 The 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. During the second quarter 2023, the portfolio decreased as a result of maturities on securities and we did not have any purchase or sales activity.
Commercial Mortgage-Backed Securities (CMBS) The following table details the credit quality rating and fair value of our CMBS, along with a comparison of the fair value at June 30, 2023, to our original investment value (adjusted for returns of principal, amortization, and write-downs):
| Commercial Mortgage-Backed Securities (at June 30, 2023) | |||||||||||||||||||||||
| ($ in millions) Average Rating****1 | Multi-Borrower | Single-Borrower | Total | % of Total | |||||||||||||||||||
| AAA | $ | 198.7 | $ | 1,027.7 | $ | 1,226.4 | 28.8 | % | |||||||||||||||
| AA | 0 | 977.1 | 977.1 | 22.9 | |||||||||||||||||||
| A | 0 | 900.9 | 900.9 | 21.1 | |||||||||||||||||||
| BBB | 0 | 801.5 | 801.5 | 18.8 | |||||||||||||||||||
| Non-investment grade/non-rated: | |||||||||||||||||||||||
| BB | 0 | 359.6 | 359.6 | 8.4 | |||||||||||||||||||
| Total fair value | $ | 198.7 | $ | 4,066.8 | $ | 4,265.5 | 100.0 | % | |||||||||||||||
| Increase (decrease) in value | (5.7) | % | (14.8) | % | (14.4) | % |
1 The credit quality ratings are assigned by NRSROs; when we assigned the NAIC ratings for our CMBS, 30% of our non-investment-grade securities were rated investment grade and reported as Group II securities, with the remainder classified as Group I.
The CMBS portfolio continued to experience heightened volatility in the second quarter 2023 due to ongoing concerns around the commercial real estate market. In general, delinquencies have increased in the CMBS market as some loans that reached their maturity date have had difficulty refinancing. New issuance has remained slow in the single-asset single-borrower (SASB) market and liquidity has continued to be challenged. Given continued uncertainty about the future trajectory of the economy and its impact on real estate, we continued to reduce certain positions during the quarter that we believed would be sensitive to potential future economic weakness. As of the end of the second quarter 2023, we had no delinquencies in our CMBS portfolio.
With renewed focus on the commercial real estate sector, the following table shows the composition of our CMBS portfolio by maturity year and sector:
| Commercial Mortgage-Backed Securities Sector Details (at June 30, 2023) | ||||||||||||||||||||||||||||||||||||||
| ($ in millions) Maturity****1 | Office | Lab Office | Multi-family | Multi-family IO | Retail | Industrial | Self- Storage | Casino | Defeased | Total | Average Original LTV | Average Current DSCR | ||||||||||||||||||||||||||
| 2023 | $ | 96.0 | $ | 0 | $ | 0 | $ | 22.0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 22.7 | $ | 140.7 | 53.7 | % | 3.7 | |||||||||||||||
| 2024 | 118.5 | 24.4 | 22.1 | 40.6 | 35.8 | 178.6 | 0 | 0 | 157.9 | 577.9 | 60.6 | 2.1 | ||||||||||||||||||||||||||
| 2025 | 0 | 41.5 | 0 | 36.6 | 62.7 | 43.3 | 0 | 0 | 0 | 184.1 | 65.7 | 1.9 | ||||||||||||||||||||||||||
| 2026 | 483.5 | 81.5 | 335.5 | 32.9 | 0 | 118.6 | 78.2 | 109.1 | 0 | 1,239.3 | 62.6 | 1.9 | ||||||||||||||||||||||||||
| 2027 | 387.5 | 0 | 53.1 | 29.7 | 0 | 119.1 | 260.6 | 0 | 0 | 850.0 | 60.7 | 1.8 | ||||||||||||||||||||||||||
| 2028 | 243.3 | 0 | 0 | 22.5 | 0 | 0 | 0 | 0 | 0 | 265.8 | 51.9 | 3.3 | ||||||||||||||||||||||||||
| 2029 | 417.8 | 0 | 0 | 10.7 | 0 | 0 | 0 | 63.4 | 0 | 491.9 | 57.6 | 3.1 | ||||||||||||||||||||||||||
| 2030 | 68.3 | 56.9 | 0 | 3.7 | 0 | 0 | 0 | 85.9 | 0 | 214.8 | 55.5 | 3.0 | ||||||||||||||||||||||||||
| 2031 | 213.5 | 87.5 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 301.0 | 66.5 | 1.9 | ||||||||||||||||||||||||||
| Total fair value | $ | 2,028.4 | $ | 291.8 | $ | 410.7 | $ | 198.7 | $ | 98.5 | $ | 459.6 | $ | 338.8 | $ | 258.4 | $ | 180.6 | $ | 4,265.5 | ||||||||||||||||||
| LTV= loan to value | ||||||||||||||||||||||||||||||||||||||
| DSCR= debt service coverage ratio |
1The floating-rate securities were extended to their full maturity and fixed-rate securities are shown to their anticipated repayment date (if applicable) or otherwise, their maturity date.
We show the average loan to value (LTV) of each maturity year when the loans were originated. The LTV ratio that management uses, which is commonly expressed as a percentage, compares the size of the entire mortgage loan to the appraised value of the underlying property collateralizing the loan at issuance. A LTV ratio less than 100% indicates excess collateral value over the loan amount. LTV ratios greater than 100% indicate that the loan amount exceeds the collateral value. We believe this ratio provides a conservative view of our actual risk of loss, as this number displays the entire mortgage LTV, while our ownership is only a portion of the structure of the mortgage loan-backed security. For many of the mortgage loans in our portfolio, our exposure is in a more senior part of the structure, which means that the LTV on our actual exposure is even lower than the ratios presented.
In addition to the LTV ratio, we also examine the credit of our CMBS portfolio by reviewing the debt service coverage ratio (DSCR) of the securities. The DSCR ratio compares the underlying property’s annual net operating income to its annual debt service payments. DSCR ratios less than 1.0 times indicate that property operations do not generate enough income over the debt service payments, while a DSCR ratio greater than 1.0 times indicates that there is an excess of operating income over the debt service payments. A number above 1.0 generally indicates that there would not be an incentive for the borrower to default in light of the borrower’s excess income. The DSCR calculation reported in the table is calculated based on the most currently available net operating income and mortgage payments for the borrower, which, for most securities, is full year 2022 data.
Other Asset-Backed Securities (OABS) The following table details the credit quality rating and fair value of our OABS, along with a comparison of the fair value at June 30, 2023, to our original investment value (adjusted for returns of principal, amortization, and write-downs):
| Other Asset-Backed Securities (at June 30, 2023) | ||||||||||||||||||||||||||
| ($ in millions) Average Rating | Automobile | Collateralized Loan Obligations | Student Loan | Whole Business Securitizations | Equipment | Other | Total | % of Total | ||||||||||||||||||
| AAA | $ | 1,403.5 | $ | 1,029.7 | $ | 39.0 | $ | 0 | $ | 553.1 | $ | 171.0 | $ | 3,196.3 | 63.7 | % | ||||||||||
| AA | 60.4 | 566.9 | 9.0 | 0 | 110.8 | 10.7 | 757.8 | 15.1 | ||||||||||||||||||
| A | 10.7 | 0 | 0 | 0 | 156.9 | 137.7 | 305.3 | 6.1 | ||||||||||||||||||
| BBB | 6.7 | 0 | 0 | 685.0 | 0 | 35.1 | 726.8 | 14.5 | ||||||||||||||||||
| Non-investment grade/non-rated: | ||||||||||||||||||||||||||
| BB | 0 | 0 | 0 | 0 | 0 | 31.4 | 31.4 | 0.6 | ||||||||||||||||||
| Total fair value | $ | 1,481.3 | $ | 1,596.6 | $ | 48.0 | $ | 685.0 | $ | 820.8 | $ | 385.9 | $ | 5,017.6 | 100.0 | % | ||||||||||
| Increase (decrease) in value | (0.7) | % | (5.0) | % | (11.2) | % | (10.8) | % | (1.4) | % | (8.8) | % | (4.4) | % |
During the second quarter 2023, we selectively added to our automobile and equipment categories as we viewed spreads, and potential returns, across this sector to be attractive. Our automobile and equipment additions were mainly through new issue purchases, primarily focusing on higher credit tranche securities in the capital structure.
MUNICIPAL SECURITIES
The following table details the credit quality rating of our municipal securities at June 30, 2023, without the benefit of credit or bond insurance:
| Municipal Securities (at June 30, 2023) | |||||||||||
| (millions) Average Rating | General Obligations | Revenue Bonds | Total | ||||||||
| AAA | $ | 686.4 | $ | 317.1 | $ | 1,003.5 | |||||
| AA | 438.9 | 665.6 | 1,104.5 | ||||||||
| A | 0 | 46.2 | 46.2 | ||||||||
| BBB | 0 | 0.3 | 0.3 | ||||||||
| Non-rated | 0 | 0.2 | 0.2 | ||||||||
| Total | $ | 1,125.3 | $ | 1,029.4 | $ | 2,154.7 |
Included in revenue bonds were $472.2 million of single-family housing revenue bonds issued by state housing finance agencies, of which $290.0 million were supported by individual mortgages held by the state housing finance agencies and $182.2 million were supported by mortgage-backed securities.
Of the revenue bonds 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. Of the revenue bonds supported by mortgage-backed securities, 84% were collateralized by Ginnie Mae mortgages, which are fully guaranteed by the U.S. government; the remaining 16% were collateralized by Fannie Mae and Freddie Mac mortgages.
Credit spreads of both tax-exempt and taxable municipal bonds tightened during the second quarter 2023. We added short, high-quality state general obligation and housing bonds, resulting in a modest increase in the size of the portfolio.
CORPORATE DEBT SECURITIES
The following table details the credit quality rating of our corporate debt securities at June 30, 2023:
| Corporate Securities (at June 30, 2023) | |||||||||||||||||||||||||||||
| (millions) Average Rating | Consumer | Industrial | Communication | Financial Services | Technology | Basic Materials | Energy | Total | |||||||||||||||||||||
| AAA | $ | 0 | $ | 0 | $ | 0 | $ | 79.3 | $ | 0 | $ | 0 | $ | 0 | $ | 79.3 | |||||||||||||
| AA | 63.3 | 0 | 0 | 404.5 | 0 | 0 | 60.9 | 528.7 | |||||||||||||||||||||
| A | 527.0 | 240.2 | 146.4 | 1,100.6 | 67.8 | 114.9 | 333.9 | 2,530.8 | |||||||||||||||||||||
| BBB | 2,448.7 | 1,283.3 | 284.2 | 1,022.8 | 531.8 | 12.6 | 1,112.5 | 6,695.9 | |||||||||||||||||||||
| Non-investment grade/non-rated: | |||||||||||||||||||||||||||||
| BB | 165.0 | 38.1 | 59.5 | 1.3 | 17.6 | 0 | 29.2 | 310.7 | |||||||||||||||||||||
| B | 135.0 | 0 | 0 | 0 | 0 | 24.2 | 0 | 159.2 | |||||||||||||||||||||
| Total fair value | $ | 3,339.0 | $ | 1,561.6 | $ | 490.1 | $ | 2,608.5 | $ | 617.2 | $ | 151.7 | $ | 1,536.5 | $ | 10,304.6 |
The size of our corporate debt portfolio decreased to $10.3 billion at June 30, 2023 from $10.7 billion at March 31, 2023 as some of the bonds in our portfolio matured. We also continued to reduce our exposure to high-yield securities given a less certain macro environment and less attractive risk/reward profile of these securities. At June 30, 2023, our corporate debt securities made up approximately 18% of the fixed-income portfolio, compared to approximately 20% at March 31, 2023.
PREFERRED STOCKS – REDEEMABLE AND NONREDEEMABLE
The table below shows the exposure break-down by sector and rating at June 30, 2023:
| Preferred Stocks (at June 30, 2023) | |||||||||||||||||||||||
| Financial Services | |||||||||||||||||||||||
| (millions) Average Rating | U.S. Banks | Foreign Banks | Insurance | Other Financial | Industrials | Utilities | Total | ||||||||||||||||
| BBB | $ | 665.3 | $ | 30.9 | $ | 71.8 | $ | 25.6 | $ | 125.4 | $ | 43.2 | $ | 962.2 | |||||||||
| Non-investment grade/non-rated: | |||||||||||||||||||||||
| BB | 48.5 | 20.4 | 0 | 0 | 0 | 38.8 | 107.7 | ||||||||||||||||
| Non-rated | 0 | 0 | 39.9 | 16.2 | 15.8 | 0 | 71.9 | ||||||||||||||||
| Total fair value | $ | 713.8 | $ | 51.3 | $ | 111.7 | $ | 41.8 | $ | 141.2 | $ | 82.0 | $ | 1,141.8 |
The majority of our preferred stocks 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 stocks is calculated to reflect the call, floor, and floating rate features. Although a preferred stock will remain outstanding if not called, its interest rate duration will reflect the variable nature of the dividend. Our non-investment-grade preferred stocks were all with issuers that maintain investment-grade senior debt ratings.
We also face the risk that dividend payments on any of these securities could be deferred for one or more periods or skipped entirely. As of June 30, 2023, we expect all of these securities to pay their dividends in full and on time. During the second quarter, our preferred portfolio declined to $1.1 billion at June 30, 2023 from $1.3 billion at March 31, 2023. This decline was primarily due to preferred stocks that were called or sold because they had less attractive risk/reward profiles. Approximately 82% of our preferred stocks pay dividends that have tax preferential characteristics, while the balance pay dividends that are fully taxable.
Common Equities
Common equities, as reported on the balance sheets, were comprised of the following:
| ($ in millions) | June 30, 2023 | June 30, 2022 | December 31, 2022 | ||||||||||||||||||||||||||||||||
| Common stocks | $ | 2,686.2 | 99.2 | % | $ | 2,766.2 | 99.3 | % | $ | 2,801.7 | 99.3 | % | |||||||||||||||||||||||
| Other risk investments1 | 21.9 | 0.8 | 18.5 | 0.7 | 19.8 | 0.7 | |||||||||||||||||||||||||||||
| Total common equities | $ | 2,708.1 | 100.0 | % | $ | 2,784.7 | 100.0 | % | $ | 2,821.5 | 100.0 | % | |||||||||||||||||||||||
1The other risk investments consist of limited partnership interests.
The majority of our common stock portfolio consists of individual holdings selected based on their contribution to the correlation with the Russell 1000 Index. We held 762 out of 1,008, or 76%, of the common stocks comprising the index at June 30, 2023, which made up 95% of the total market capitalization of the index. At June 30, 2023 and 2022, and December 31, 2022, the year-to-date total return, based on GAAP income, was within our targeted tracking error, which is +/- 50 basis points.
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,” “goal,” “target,” “anticipate,” “will,” “could,” “likely,” “may,” “should,” 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 not guarantees of future performance, are based on current expectations and projections about future events, and are subject to certain risks, assumptions and uncertainties that could cause actual events and results to differ materially from those discussed herein. These risks and uncertainties include, without limitation, uncertainties related to:
*•*our ability to underwrite and price risks accurately and to charge adequate rates to policyholders;
*•*our ability to establish accurate loss reserves;
*•*the impact of severe weather, other catastrophe events and climate change;
*•*the effectiveness of our reinsurance programs and the continued availability of reinsurance and performance by reinsurers;
*•*the secure and uninterrupted operation of the systems, facilities and business functions and the operation of various third-party systems that are critical to our business;
*•*the impacts of a security breach or other attack involving our technology systems or the systems of one or more of our vendors;
*•*our ability to maintain a recognized and trusted brand and reputation;
*•*whether we innovate effectively and respond to our competitors’ initiatives;
*•*whether we effectively manage complexity as we develop and deliver products and customer experiences;
*•*our ability to attract, develop and retain talent and maintain appropriate staffing levels;
*•*the impact of misconduct or fraudulent acts by employees, agents, and third parties to our business and/or exposure to regulatory assessments;
*•*the highly competitive nature of property-casualty insurance markets;
*•*whether we adjust claims accurately;
*•*compliance with complex and changing laws and regulations;
*•*litigation challenging our business practices, and those of our competitors and other companies;
*•*the success of our business strategy and efforts to acquire or develop new products or enter into new areas of business and navigate related risks;
*•*how intellectual property rights affect our competitiveness and our business operations;
*•*the performance of our fixed-income and equity investment portfolios;
*•*the impact on our investment returns and strategies from regulations and societal pressures relating to environmental, social, governance and other public policy matters;
*•*the elimination of the London Interbank Offered Rate;
*•*our continued ability to access our cash accounts and/or convert investments 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;
*•*the impacts of epidemics, pandemics or other widespread health risks; 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, 2022.
Any forward-looking statements are made only as of the date presented. Except as required by applicable law, we undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or developments or otherwise.
In addition, investors should be aware that accounting principles generally accepted in the United States 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.
Previous: Item 1. Financial Statements. · Next: Item 3. Quantitative and Qualitative Disclosures About Market Risk.