UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
(Mark One)
ý
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2017
or
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                      to                      
Commission File Number: 1-9518
 
 
THE PROGRESSIVE CORPORATION
(Exact name of registrant as specified in its charter)
 
Ohio
 
34-0963169
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
6300 Wilson Mills Road, Mayfield Village, Ohio
 
44143
(Address of principal executive offices)
 
(Zip Code)
(440) 461-5000
(Registrant’s telephone number, including area code)
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ý     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ý     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Shares, $1.00 par value: 581,634,009 outstanding at September 30, 2017
 

1



PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
The Progressive Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(unaudited)
 
Three Months
 
Nine Months
Periods Ended September 30,
2017

 
2016

 
%
Change
 
2017

 
2016

 
%
Change
(millions—except per share amounts)
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
 
 
 
Net premiums earned
$
6,544.0

 
$
5,723.4

 
14
 
$
18,884.0

 
$
16,602.6

 
14
Investment income
142.9

 
119.3

 
20
 
410.9

 
352.7

 
17
Net realized gains (losses) on securities:
 
 
 
 
 
 
 
 
 
 
 
Net impairment losses recognized in earnings
(43.0
)
 
(61.6
)
 
(30)
 
(57.8
)
 
(61.8
)
 
(6)
Net realized gains (losses) on securities
18.3

 
40.9

 
(55)
 
117.1

 
90.8

 
29
Total net realized gains (losses) on securities
(24.7
)
 
(20.7
)
 
19
 
59.3

 
29.0

 
104
Fees and other revenues
96.3

 
86.8

 
11
 
270.3

 
248.2

 
9
Service revenues
33.3

 
26.2

 
27
 
94.5

 
77.7

 
22
Gains on extinguishment of debt
0

 
0

 
NM
 
0.2

 
1.6

 
(88)
Total revenues
6,791.8

 
5,935.0

 
14
 
19,719.2

 
17,311.8

 
14
Expenses
 
 
 
 

 
 
 
 
 
 
Losses and loss adjustment expenses
5,050.5

 
4,398.2

 
15
 
13,928.8

 
12,554.6

 
11
Policy acquisition costs
540.1

 
475.4

 
14
 
1,557.2

 
1,374.6

 
13
Other underwriting expenses
877.7

 
739.6

 
19
 
2,568.3

 
2,262.2

 
14
Investment expenses
5.8

 
4.8

 
21
 
18.0

 
14.9

 
21
Service expenses
28.9

 
23.2

 
25
 
81.8

 
68.5

 
19
Interest expense
37.4

 
35.3

 
6
 
117.6

 
103.8

 
13
Total expenses
6,540.4

 
5,676.5

 
15
 
18,271.7

 
16,378.6

 
12
Net Income
 
 
 
 

 
 
 
 
 
 
Income before income taxes
251.4

 
258.5

 
(3)
 
1,447.5

 
933.2

 
55
Provision for income taxes
36.6

 
53.0

 
(31)
 
429.7

 
274.1

 
57
Net income
214.8

 
205.5

 
5
 
1,017.8

 
659.1

 
54
Net (income) loss attributable to noncontrolling interest (NCI)
9.2

 
(6.8
)
 
(235)
 
(1.9
)
 
(11.3
)
 
(83)
Net income attributable to Progressive
$
224.0

 
$
198.7

 
13
 
$
1,015.9

 
$
647.8

 
57
Other Comprehensive Income (Loss)
 
 
 
 

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

 
$
87.1

 
(13)
 
$
300.5

 
$
248.2

 
21
Net unrealized losses on forecasted transactions
0.1

 
(0.3
)
 
(133)
 
(5.6
)
 
(0.9
)
 
NM
Foreign currency translation adjustment
0.6

 
0.3

 
100
 
0.8

 
0.7

 
14
Other comprehensive income
76.2

 
87.1

 
(13)
 
295.7

 
248.0

 
19
Other comprehensive (income) loss attributable to NCI
(0.7
)
 
1.2

 
(158)
 
(2.9
)
 
(2.3
)
 
26
Comprehensive income attributable to Progressive
$
299.5

 
$
287.0

 
4
 
$
1,308.7

 
$
893.5

 
46
Computation of Per Share Earnings Attributable to Progressive
 
 
 
 

 
 
 
 
 
 
Average shares outstanding - Basic
581.3

 
581.5

 
0
 
580.7

 
582.4

 
0
Net effect of dilutive stock-based compensation
4.3

 
3.1

 
39
 
5.0

 
3.2

 
56
Total average equivalent shares - Diluted
585.6

 
584.6

 
0
 
585.7

 
585.6

 
0
Basic: Earnings per share
$
0.39

 
$
0.34

 
13
 
$
1.75

 
$
1.11

 
57
Diluted: Earnings per share
$
0.38

 
$
0.34

 
13
 
$
1.73

 
$
1.11

 
57
Dividends declared per share 1
$
0

 
$
0

 
 
 
$
0

 
$
0

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

2



The Progressive Corporation and Subsidiaries
Consolidated Balance Sheets
(unaudited)
 
September 30,
 
December 31,
2016
(millions)
2017

 
2016

 
Assets
 
 
 
 
 
Investments - Available-for-sale, at fair value:
 
 
 
 
 
Fixed maturities (amortized cost: $18,583.1, $13,708.0, and $16,287.1)
$
18,660.0

 
$
13,916.9

 
$
16,243.8

Equity securities:
 
 
 
 
 
  Nonredeemable preferred stocks (cost: $700.6, $726.6, and $734.2)
813.7

 
860.1

 
853.5

  Common equities (cost: $1,485.5, $1,576.1, and $1,437.5)
3,209.5

 
2,868.0

 
2,812.4

Short-term investments (amortized cost: $4,311.5, $5,876.2, and $3,572.9)
4,311.5

 
5,876.2

 
3,572.9

Total investments
26,994.7

 
23,521.2

 
23,482.6

Cash
224.9

 
143.4

 
211.5

Restricted cash 1
31.4

 
22.3

 
14.9

Accrued investment income
113.0

 
97.3

 
103.9

Premiums receivable, net of allowance for doubtful accounts of $189.3, $176.8, and $186.8
5,519.9

 
4,743.6

 
4,509.2

Reinsurance recoverables, including $76.4, $67.5, and $83.8 on paid losses and loss adjustment expenses
2,701.1

 
1,901.7

 
1,884.8

Prepaid reinsurance premiums
211.7

 
174.4

 
170.5

Deferred acquisition costs
782.6

 
675.4

 
651.2

Property and equipment, net of accumulated depreciation of $908.4, $830.1, and $845.8
1,129.4

 
1,115.0

 
1,177.1

Goodwill
452.7

 
449.4

 
449.4

Intangible assets, net of accumulated amortization of $157.7, $94.0, and $109.5
384.6

 
448.3

 
432.8

Other assets
386.6

 
328.8

 
339.6

Total assets
$
38,932.6

 
$
33,620.8

 
$
33,427.5

Liabilities
 
 
 
 
 
Unearned premiums
$
9,005.3

 
$
7,792.4

 
$
7,468.3

Loss and loss adjustment expense reserves
13,353.3

 
11,228.2

 
11,368.0

Net deferred income taxes
201.5

 
156.9

 
111.3

Dividends payable
0

 
0

 
395.4

Accounts payable, accrued expenses, and other liabilities
3,272.7

 
2,722.2

 
2,495.5

Debt 2
3,312.2

 
3,153.9

 
3,148.2

Total liabilities
29,145.0

 
25,053.6

 
24,986.7

Redeemable noncontrolling interest (NCI) 3
498.2

 
472.5

 
483.7

Shareholders  Equity
 
 
 
 
 
Common shares, $1.00 par value (authorized 900.0; issued 797.5, including treasury shares of 215.9, 216.7, and 217.6)
581.6


580.8


579.9

Paid-in capital
1,365.1


1,284.7


1,303.4

Retained earnings
6,116.5


5,183.1


5,140.4

Accumulated other comprehensive income:





Net unrealized gains (losses) on securities
1,240.1

 
1,057.2

 
939.6

Net unrealized losses on forecasted transactions
(15.0
)
 
(9.1
)
 
(9.4
)
Foreign currency translation adjustment
(0.3
)
 
(0.8
)
 
(1.1
)
Accumulated other comprehensive (income) loss attributable to NCI
1.4

 
(1.2
)
 
4.3

Total accumulated other comprehensive income attributable to Progressive
1,226.2

 
1,046.1

 
933.4

Total shareholders’ equity
9,289.4

 
8,094.7

 
7,957.1

Total liabilities, redeemable NCI, and shareholders’ equity
$
38,932.6

 
$
33,620.8

 
$
33,427.5

1 See Note 7 – Supplemental Cash Flow Information for further discussion .
2 Consists of both short-term and long-term debt. See Note 4 – Debt for further discussion.
3 See Note 12 – Redeemable Noncontrolling Interest for further discussion .
See notes to consolidated financial statements.

3



The Progressive Corporation and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
(unaudited)
 
Nine Months Ended September 30,
 
 
 
(millions — except per share amounts)
2017

 
2016

Common Shares, $1.00 Par Value
 
 
 
Balance, Beginning of period
$
579.9

 
$
583.6

Treasury shares purchased
(1.5
)
 
(5.2
)
Net restricted equity awards issued/vested
3.2

 
2.4

Balance, End of period
$
581.6

 
$
580.8

Paid-In Capital
 
 
 
Balance, Beginning of period
$
1,303.4

 
$
1,218.8

Tax benefit from vesting of equity-based compensation
0

 
8.0

Treasury shares purchased
(3.4
)
 
(11.4
)
Net restricted equity awards issued/vested
(3.2
)
 
(2.4
)
Amortization of equity-based compensation
74.3

 
64.6

Reinvested dividends on restricted stock units
0.3

 
1.1

Adjustment to carrying amount of redeemable noncontrolling interest
(6.3
)
 
6.0

Balance, End of period
$
1,365.1

 
$
1,284.7

Retained Earnings
 
 
 
Balance, Beginning of period
$
5,140.4

 
$
4,686.6

Net income attributable to Progressive
1,015.9

 
647.8

Treasury shares purchased
(57.2
)
 
(147.0
)
Cash dividends declared on common shares
0

 
0.2

Reinvested dividends on restricted stock units
(0.3
)
 
(1.1
)
Other, net
17.7

 
(3.4
)
Balance, End of period
$
6,116.5

 
$
5,183.1

Accumulated Other Comprehensive Income Attributable to Progressive
 
 
 
Balance, Beginning of period
$
933.4

 
$
800.4

Attributable to noncontrolling interest
(2.9
)
 
(2.3
)
Other comprehensive income
295.7

 
248.0

Balance, End of period
$
1,226.2

 
$
1,046.1

Total Shareholders’ Equity
$
9,289.4

 
$
8,094.7

There are 20.0 million Serial Preferred Shares authorized; no such shares are issued or outstanding.
There are 5.0 million Voting Preference Shares authorized; no such shares have been issued.
See notes to consolidated financial statements.










4



The Progressive Corporation and Subsidiaries
Consolidated Statements of Cash Flows        
(unaudited) (millions)
Nine Months Ended September 30,
2017

 
2016

Cash Flows From Operating Activities
 
 
 
Net income
$
1,017.8

 
$
659.1

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
126.7

 
94.6

         Amortization of intangible assets
48.2

 
46.6

Net amortization of fixed-income securities
67.5

 
57.1

Amortization of equity-based compensation
76.6

 
64.6

Net realized (gains) losses on securities
(59.3
)
 
(29.0
)
Net (gains) losses on disposition of property and equipment
5.3

 
4.1

(Gains) losses on extinguishment of debt
(0.2
)
 
(1.6
)
Net loss on exchange transaction
0

 
4.5

Changes in:
 
 
 
Premiums receivable
(1,010.3
)
 
(752.8
)
Reinsurance recoverables
(816.1
)
 
(405.1
)
Prepaid reinsurance premiums
(41.2
)
 
44.9

Deferred acquisition costs
(131.4
)
 
(128.0
)
Income taxes
(111.2
)
 
(121.2
)
Unearned premiums
1,536.7

 
1,154.6

Loss and loss adjustment expense reserves
1,985.1

 
1,183.2

Accounts payable, accrued expenses, and other liabilities
622.1

 
464.8

Restricted cash
(16.5
)
 
(22.0
)
Other, net
(93.2
)
 
(42.6
)
Net cash provided by operating activities
3,206.6

 
2,275.8

Cash Flows From Investing Activities
 
 
 
Purchases:
 
 
 
Fixed maturities
(9,623.6
)
 
(7,364.6
)
Equity securities
(155.2
)
 
(367.1
)
Sales:
 
 
 
Fixed maturities
3,431.7

 
4,746.1

Equity securities
150.6

 
278.2

Maturities, paydowns, calls, and other:
 
 
 
Fixed maturities
3,872.5

 
4,189.0

Equity securities
50.0

 
0

Net sales (purchases) of short-term investments
(721.8
)
 
(3,665.2
)
Net unsettled security transactions
210.5

 
208.4

Purchases of property and equipment
(109.7
)
 
(162.1
)
Sales of property and equipment
13.8

 
4.5

Net cash disposed in exchange transaction 1
0

 
(7.7
)
Acquisition of an insurance company, net of cash acquired
(18.1
)
 
0

Net cash used in investing activities
(2,899.3
)
 
(2,140.5
)
Cash Flows From Financing Activities
 
 
 
Proceeds from exercise of equity options
0.5

 
0

Tax benefit from vesting of equity-based compensation
0

 
8.0

Net proceeds from debt issuance
841.1

 
495.6

Payments of debt
(42.8
)
 
(19.2
)
Redemption/reacquisition of subordinated debt
(635.6
)
 
(18.2
)
Dividends paid to shareholders
(395.4
)
 
(519.0
)
Acquisition of treasury shares for restricted stock tax liabilities
(57.2
)
 
(24.7
)
Acquisition of treasury shares acquired in open market
(4.9
)
 
(138.9
)
Net cash used in financing activities
(294.3
)
 
(216.4
)
Effect of exchange rate changes on cash
0.4

 
0.4

Increase (decrease) in cash
13.4

 
(80.7
)
Cash, January 1
211.5

 
224.1

Cash, September 30
$
224.9

 
$
143.4

1 See Note 7 – Supplemental Cash Flow Information for further discussion .
See notes to consolidated financial statements.

5



The Progressive Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
Note 1 Basis of Presentation — The accompanying consolidated financial statements include the accounts of The Progressive Corporation and ARX Holding Corp. (ARX), and their respective wholly owned insurance and non-insurance subsidiaries and affiliates in which Progressive or ARX has a controlling financial interest. The Progressive Corporation owned 69.0% of the outstanding capital stock of ARX at September 30, 2017 and 69.2% at September 30, 2016 and December 31, 2016 . The decrease reflects ARX employee stock options that were exercised during the first quarter 2017. All intercompany accounts and transactions are eliminated in consolidation.
The consolidated financial statements reflect all normal recurring adjustments that, in the opinion of management, were necessary for a fair statement of the results for the interim periods presented. The results of operations for the period ended September 30, 2017 , are not necessarily indicative of the results expected for the full year. These consolidated financial statements and the notes thereto should be read in conjunction with Progressive’s audited financial statements and accompanying notes included in Exhibit 13 to our Annual Report on Form 10-K for the year ended December 31, 2016 ( 2016 Annual Report to Shareholders ).
Other assets on the consolidated balance sheets include properties that are considered held for sale, if any. The fair value of these properties, less the estimated cost to sell them, was $5.3 million at September 30, 2017 , and $8.7 million at both September 30, 2016 and December 31, 2016.
Note 2 Investments — Our securities are reported at fair value, with the changes in fair value of these securities (other than hybrid securities and derivative instruments) reported as a component of accumulated other comprehensive income, net of deferred income taxes. The changes in fair value of the hybrid securities and derivative instruments are recorded as a component of net realized gains (losses) on securities.
The following tables present the composition of our investment portfolio by major security type, consistent with our classification of how we manage, monitor, and measure the portfolio. The net holding period gains (losses) represent the amounts realized on our hybrid securities only.
 
($ in millions)
Cost

 
Gross
Unrealized Gains

 
Gross
Unrealized
Losses

 
Net
Holding Period Gains
(Losses)

 
Fair
Value

 
% of
Total
Fair
Value

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

 
$
3.0

 
$
(20.2
)
 
$
0

 
$
4,595.0

 
17.0
%
State and local government obligations
2,332.2

 
35.0

 
(3.1
)
 
0.1

 
2,364.2

 
8.7

Foreign government obligations
24.2

 
0

 
0

 
0

 
24.2

 
0.1

Corporate debt securities
5,195.7

 
32.7

 
(4.2
)
 
1.4

 
5,225.6

 
19.4

Residential mortgage-backed securities
911.3

 
12.2

 
(3.2
)
 
0

 
920.3

 
3.4

Agency residential pass-through obligations
35.7

 
0

 
(0.4
)
 
0

 
35.3

 
0.1

Commercial mortgage-backed securities
2,763.7

 
17.0

 
(12.8
)
 
0

 
2,767.9

 
10.3

Other asset-backed securities
2,485.6

 
6.4

 
(2.0
)
 
0.2

 
2,490.2

 
9.2

Redeemable preferred stocks
222.5

 
16.4

 
(2.0
)
 
0.4

 
237.3

 
0.9

Total fixed maturities
18,583.1

 
122.7

 
(47.9
)
 
2.1

 
18,660.0

 
69.1

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks
700.6

 
120.4

 
(7.3
)
 
0

 
813.7

 
3.0

Common equities
1,485.5

 
1,729.5

 
(5.5
)
 
0

 
3,209.5

 
11.9

Short-term investments
4,311.5

 
0

 
0

 
0

 
4,311.5

 
16.0

Total portfolio 1,2
$
25,080.7

 
$
1,972.6

 
$
(60.7
)
 
$
2.1

 
$
26,994.7

 
100.0
%


6



($ in millions)
Cost

 
Gross
Unrealized Gains

 
Gross
Unrealized
Losses

 
Net
Holding Period Gains
(Losses)

 
Fair
Value

 
% of
Total
Fair
Value

September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
$
726.0

 
$
8.9

 
$
(0.3
)
 
$
0

 
$
734.6

 
3.1
%
State and local government obligations
2,508.9

 
58.7

 
(1.6
)
 
0

 
2,566.0

 
10.9

Foreign government obligations
25.4

 
0

 
0

 
0

 
25.4

 
0.1

Corporate debt securities
4,327.5

 
76.9

 
(1.8
)
 
0.7

 
4,403.3

 
18.7

Residential mortgage-backed securities
1,582.6

 
25.3

 
(15.5
)
 
1.8

 
1,594.2

 
6.8

Agency residential pass-through obligations
43.6

 
0.5

 
0

 
0

 
44.1

 
0.2

Commercial mortgage-backed securities
2,249.4

 
35.1

 
(6.1
)
 
0

 
2,278.4

 
9.7

Other asset-backed securities
2,037.5

 
7.9

 
(0.3
)
 
0.3

 
2,045.4

 
8.7

Redeemable preferred stocks
207.1

 
19.6

 
(1.2
)
 
0

 
225.5

 
1.0

Total fixed maturities
13,708.0

 
232.9

 
(26.8
)
 
2.8

 
13,916.9

 
59.2

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks
726.6

 
146.2

 
(13.9
)
 
1.2

 
860.1

 
3.6

Common equities
1,576.1

 
1,296.3

 
(4.4
)
 
0

 
2,868.0

 
12.2

Short-term investments
5,876.2

 
0

 
0

 
0

 
5,876.2

 
25.0

Total portfolio 1,2
$
21,886.9

 
$
1,675.4

 
$
(45.1
)
 
$
4.0

 
$
23,521.2

 
100.0
%
 
($ in millions)
Cost

 
Gross
Unrealized Gains

 
Gross
Unrealized
Losses

 
Net
Holding Period Gains
(Losses)

 
Fair
Value

 
% of
Total
Fair
Value

December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
$
2,899.2

 
$
0

 
$
(29.1
)
 
$
0

 
$
2,870.1

 
12.2
%
State and local government obligations
2,509.5

 
13.8

 
(20.7
)
 
0

 
2,502.6

 
10.7

Foreign government obligations
24.5

 
0

 
0

 
0

 
24.5

 
0.1

Corporate debt securities
4,557.8

 
17.3

 
(24.3
)
 
0.1

 
4,550.9

 
19.4

Residential mortgage-backed securities
1,448.5

 
23.7

 
(15.0
)
 
1.5

 
1,458.7

 
6.2

Agency residential pass-through obligations
41.2

 
0

 
(0.6
)
 
0

 
40.6

 
0.2

Commercial mortgage-backed securities
2,266.9

 
12.0

 
(25.5
)
 
0

 
2,253.4

 
9.6

Other asset-backed securities
2,350.7

 
4.6

 
(4.4
)
 
0.2

 
2,351.1

 
10.0

Redeemable preferred stocks
188.8

 
5.1

 
(2.0
)
 
0

 
191.9

 
0.8

Total fixed maturities
16,287.1

 
76.5

 
(121.6
)
 
1.8

 
16,243.8

 
69.2

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks
734.2

 
135.4

 
(16.1
)
 
0

 
853.5

 
3.6

Common equities
1,437.5

 
1,377.0

 
(2.1
)
 
0

 
2,812.4

 
12.0

Short-term investments
3,572.9

 
0

 
0

 
0

 
3,572.9

 
15.2

Total portfolio 1,2
$
22,031.7

 
$
1,588.9

 
$
(139.8
)
 
$
1.8

 
$
23,482.6

 
100.0
%
1 Our portfolio reflects the effect of unsettled security transactions and collateral on open derivative positions; at September 30, 2017 and 2016 , and December 31, 2016 , we had $238.3 million , $185.3 million , and $27.8 million , respectively, included in “other liabilities.”
2 The total fair value of the portfolio at September 30, 2017 and 2016 , and December 31, 2016 , included $1.1 billion , $1.0 billion , and $1.3 billion , respectively, of securities held in a consolidated, non-insurance subsidiary of the holding company, net of any unsettled security transactions.


7



Short-Term Investments Our short-term investments may include commercial paper and other investments that are expected to mature within one year. We did not enter into any repurchase commitment transactions during the first nine months of 2017 or 2016 , and we had no open repurchase commitments at September 30, 2017 and 2016, or December 31, 2016 .
Also included in short-term investments are reverse repurchase commitment transactions, where we loan cash to approved counterparties and receive U.S. Treasury Notes pledged as collateral against the cash borrowed. Our exposure to credit risk is limited due to the nature of the collateral (i.e., U.S. Treasury Notes) received. We have counterparty exposure on these trades in the event of a counterparty default to the extent the collateral security’s value is below the amount of cash we delivered to acquire the collateral. The short-term duration of the transactions (primarily overnight) reduces that exposure.

We had no open reverse repurchase commitments at September 30, 2017 or December 31, 2016 , compared to $68.0 million open at September 30, 2016. We did not enter into any reverse repurchase commitments for the nine months ended September 30, 2017 . During the nine months ended September 30, 2016, our largest outstanding balance of reverse repurchase commitments was $265.0 million , which was open for one day. For the 28 days we invested in these transactions, the average daily balance of reverse repurchase commitments was $ 122.6 million .

To the extent we enter into repurchase or reverse repurchase transactions, and consistent with past practice, we would elect not to offset these transactions and would report them on a gross basis on our balance sheets despite the option to elect to offset these transactions as long as they were with the same counterparty and subject to an enforceable master netting arrangement.

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

 
September 30,
 
December 31,
2016

(millions)
2017

 
2016

 
Fixed maturities:
 
 
 
 
 
State and local government obligations
$
2.4

 
$
0

 
$
0

Corporate debt securities
114.9

 
31.2

 
40.1

Residential mortgage-backed securities
0

 
175.3

 
170.5

Other asset-backed securities
7.1

 
9.5

 
8.9

Redeemable preferred stocks
35.5

 
0

 
0

Total fixed maturities
159.9

 
216.0

 
219.5

Equity securities:
 
 
 
 
 
Nonredeemable preferred stocks
0

 
13.6

 
0

Total hybrid securities
$
159.9

 
$
229.6

 
$
219.5

The state and local government obligations in the table above were acquired at a premium and contain a contingently exercisable call feature that allows the issuer, at its discretion, to call the securities at par based on a provision that is unrelated to the economic characteristics of the issuer.
Certain corporate debt securities are accounted for as hybrid securities since they were acquired at a premium and contain a change-in-control put option (derivative) that permits the investor, at its sole option if and when a change in control is triggered, to put the security back to the issuer at a 1% premium to par. Due to this change-in-control put option and the substantial market premium paid to acquire these securities, there is the potential that the election to put, upon the change in control, would result in an acceleration of the recognition of the remaining premium paid on these securities in our results of operations. The put feature limits the potential loss in value that could be experienced in the event a corporate action occurs that results in a change in control that materially diminishes the credit quality of the issuer. Exercises of the puts would result in a loss of $9.6 million as of September 30, 2017 , if all of the bonds experienced a simultaneous change in control and we elected to exercise all of our put options. We are under no obligation to exercise the put option we hold if a change in control occurs.
The residential mortgage-backed securities accounted for as hybrid securities are obligations of the issuer with payments of principal based on the performance of a reference pool of loans. This embedded derivative results in the securities incorporating the risk of default from both the issuer and the related loan pool. These securities were sold during 2017.
The other asset-backed security in the table above represents one hybrid security that was acquired at a deep discount to par due to a failing auction, and contains a put option that allows the investor to put that security back to the auction at par if the auction is restored. This embedded derivative had the potential to more than double our initial investment yield at acquisition.

8



The redeemable preferred stock in the table above represents one hybrid security acquired in 2017 with a provision that requires the issuer, in the event of bankruptcy, to convert the security into an equivalent number of shares of a newly-issued perpetual preferred stock. This embedded derivative has the potential to result in the security converting from a debt instrument to an equity instrument.
During 2016, we sold the nonredeemable preferred stocks referred to in the table above. These securities were perpetual preferred stocks with fixed-rate coupons that have call features, whereby the change in value of the call features was a component of the overall change in value of the preferred stocks.
Fixed Maturities The composition of fixed maturities by maturity at September 30, 2017 , was:
 
(millions)
Cost

 
Fair Value

Less than one year
$
4,088.1

 
$
4,105.7

One to five years
11,476.9

 
11,508.8

Five to ten years
2,873.9

 
2,901.3

Ten years or greater
144.2

 
144.2

Total
$
18,583.1

 
$
18,660.0

 
Asset-backed securities are classified in the maturity distribution table based upon their projected cash flows. All other securities which do not have a single maturity date are reported based upon expected average maturity. Contractual maturities may differ from expected maturities because the issuers of the securities may have the right to call or prepay obligations.
Gross Unrealized Losses As of September 30, 2017 , we had $55.2 million of gross unrealized losses in our fixed-income securities (i.e., fixed-maturity securities and nonredeemable preferred stocks) and $5.5 million in our common equities. We currently do not intend to sell the fixed-income securities and determined that it is more likely that we will not be required to sell these securities for the period of time necessary to recover their cost bases. A review of our fixed-income securities indicated that the issuers were current with respect to their interest obligations and that there was no evidence of any deterioration of the current cash flow projections that would indicate we would not receive the remaining principal at maturity.
For common equities, 95% of our common stock portfolio was indexed to the Russell 1000; as such, this portfolio may contain securities in a loss position for an extended period of time, subject to possible write-downs, as described below. We may retain these securities as long as the portfolio and index correlation remain similar. To the extent there is issuer-specific deterioration, we may write down the securities of that issuer. The remaining 5% of our common stocks were part of a managed equity strategy selected and administered by an external investment advisor. If our review of loss position securities were to indicate there was a fundamental, or market, impairment on these securities that was determined to be other-than-temporary, we would recognize a write-down in accordance with our stated policy.













9



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

Total
Fair
Value

Gross Unrealized Losses

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

Fair
Value

Unrealized Losses

 
No. of Sec.

Fair
Value

Unrealized Losses

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

$
3,804.0

$
(20.2
)
31

$
2,302.2

$
(7.1
)
 
23

$
1,501.8

$
(13.1
)
State and local government obligations
169

610.4

(3.1
)
40

141.0

(0.7
)
 
129

469.4

(2.4
)
Corporate debt securities
113

1,523.8

(4.2
)
59

636.0

(1.1
)
 
54

887.8

(3.1
)
Residential mortgage-backed securities
126

308.8

(3.2
)
14

37.4

(0.1
)
 
112

271.4

(3.1
)
Agency residential pass-through obligations
65

32.7

(0.4
)
12

1.8

0

 
53

30.9

(0.4
)
Commercial mortgage-backed securities
105

1,588.9

(12.8
)
61

1,073.5

(4.6
)
 
44

515.4

(8.2
)
Other asset-backed securities
148

1,393.2

(2.0
)
103

920.8

(1.0
)
 
45

472.4

(1.0
)
Redeemable preferred stocks
2

21.4

(2.0
)
1

10.9

0

 
1

10.5

(2.0
)
Total fixed maturities
782

9,283.2

(47.9
)
321

5,123.6

(14.6
)
 
461

4,159.6

(33.3
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks
3

72.4

(7.3
)
0

0

0

 
3

72.4

(7.3
)
Common equities
67

52.0

(5.5
)
62

49.3

(4.9
)
 
5

2.7

(0.6
)
Total equity securities
70

124.4

(12.8
)
62

49.3

(4.9
)
 
8

75.1

(7.9
)
Total portfolio
852

$
9,407.6

$
(60.7
)
383

$
5,172.9

$
(19.5
)
 
469

$
4,234.7

$
(41.2
)
 
 
Total No. of Sec.

Total
Fair
Value

Gross Unrealized Losses

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

Fair
Value

Unrealized Losses

 
No. of Sec.

Fair
Value

Unrealized Losses

September 30, 2016
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
4

$
104.8

$
(0.3
)
4

$
104.8

$
(0.3
)
 
0

$
0

$
0

State and local government obligations
151

512.0

(1.6
)
117

409.6

(1.0
)
 
34

102.4

(0.6
)
Corporate debt securities
52

598.3

(1.8
)
42

541.5

(0.8
)
 
10

56.8

(1.0
)
Residential mortgage-backed securities
138

915.8

(15.5
)
26

108.8

(0.4
)
 
112

807.0

(15.1
)
Agency residential pass-through obligations
15

4.2

0

7

1.9

0

 
8

2.3

0

Commercial mortgage-backed securities
56

610.6

(6.1
)
17

194.7

(1.7
)
 
39

415.9

(4.4
)
Other asset-backed securities
43

488.7

(0.3
)
16

219.5

(0.1
)
 
27

269.2

(0.2
)
Redeemable preferred stocks
2

31.8

(1.2
)
0

0

0

 
2

31.8

(1.2
)
Total fixed maturities
461

3,266.2

(26.8
)
229

1,580.8

(4.3
)
 
232

1,685.4

(22.5
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks
7

187.5

(13.9
)
1

9.9

(0.2
)
 
6

177.6

(13.7
)
Common equities
86

53.4

(4.4
)
83

49.5

(4.2
)
 
3

3.9

(0.2
)
Total equity securities
93

240.9

(18.3
)
84

59.4

(4.4
)
 
9

181.5

(13.9
)
Total portfolio
554

$
3,507.1

$
(45.1
)
313

$
1,640.2

$
(8.7
)
 
241

$
1,866.9

$
(36.4
)

10



 
Total No. of Sec.

Total
Fair
Value

Gross Unrealized Losses

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

Fair
Value

Unrealized Losses

 
No. of Sec.

Fair
Value

Unrealized Losses

December 31, 2016
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
U.S. government obligations
30

$
2,774.0

$
(29.1
)
30

$
2,774.0

$
(29.1
)
 
0

$
0

$
0

State and local government obligations
618

1,497.9

(20.7
)
584

1,404.3

(19.6
)
 
34

93.6

(1.1
)
Corporate debt securities
184

2,615.1

(24.3
)
175

2,559.9

(24.0
)
 
9

55.2

(0.3
)
Residential mortgage-backed securities
178

917.7

(15.0
)
69

175.8

(1.1
)
 
109

741.9

(13.9
)
Agency residential pass-through obligations
55

36.0

(0.6
)
48

33.9

(0.6
)
 
7

2.1

0

Commercial mortgage-backed securities
111

1,347.3

(25.5
)
85

1,061.2

(22.9
)
 
26

286.1

(2.6
)
Other asset-backed securities
103

1,605.2

(4.4
)
89

1,423.3

(3.9
)
 
14

181.9

(0.5
)
Redeemable preferred stocks
2

31.0

(2.0
)
0

0

0

 
2

31.0

(2.0
)
Total fixed maturities
1,281

10,824.2

(121.6
)
1,080

9,432.4

(101.2
)
 
201

1,391.8

(20.4
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks
13

329.6

(16.1
)
8

175.2

(3.8
)
 
5

154.4

(12.3
)
Common equities
75

22.1

(2.1
)
69

19.7

(1.7
)
 
6

2.4

(0.4
)
Total equity securities
88

351.7

(18.2
)
77

194.9

(5.5
)
 
11

156.8

(12.7
)
Total portfolio
1,369

$
11,175.9

$
(139.8
)
1,157

$
9,627.3

$
(106.7
)
 
212

$
1,548.6

$
(33.1
)

Since September 30, 2016 , the number of securities in our fixed-maturity portfolio with unrealized losses increased, primarily the result of rising interest rates during the latter part of 2016 . A narrowing of credit spreads for the first nine months of 2017 resulted in a decrease in the number of fixed-maturity securities with unrealized losses since December 31, 2016 . We had no material decreases in valuation as a result of credit rating downgrades on our fixed-maturity securities. All of the fixed-maturity securities in an unrealized loss position at September 30, 2017 in the table above are current with respect to required principal and interest payments.

Since December 31, 2016 , our nonredeemable preferred stocks with unrealized losses decreased to three securities, averaging approximately 9% of their total cost. The decrease in the number of securities is the result of valuation increases in the portfolio. We reviewed these securities and concluded that the unrealized losses are market-related adjustments to the values, which we determined not to be other-than-temporary; we expect to recover our initial investments on these securities. The number of issuers with unrealized losses in our common stock portfolio decreased during the first nine months of 2017. A review of the securities in a loss position did not uncover fundamental issues with the issuers that would indicate other-than-temporary impairments existed. Additionally, market expectations for recovery in the next 12 months would put the fair values at or above our current book values. Lastly, we determined, as of the balance sheet date, that it was not likely these securities would be sold prior to that recovery.

Other-Than-Temporary Impairment (OTTI) The following table shows the total non-credit portion of the OTTI recorded in accumulated other comprehensive income, reflecting the original non-credit loss at the time the credit impairment was determined (i.e., unadjusted for valuation changes subsequent to the original write-down):
 
 
September 30,
 
December 31,
2016

(millions)
2017

 
2016

 
Fixed maturities:
 
 
 
 
 
Residential mortgage-backed securities
$
(19.7
)
 
$
(43.3
)
 
$
(43.3
)
Commercial mortgage-backed securities
(0.4
)
 
(0.6
)
 
(0.6
)
Total fixed maturities
$
(20.1
)
 
$
(43.9
)
 
$
(43.9
)


11



The following tables provide rollforwards of the amounts related to credit losses recognized in earnings for the periods ended September 30, 2017 and 2016 , for which a portion of the OTTI losses were also recognized in accumulated other comprehensive income at the time the credit impairments were determined and recognized:  
 
Three Months Ended September 30, 2017
 
Mortgage-Backed
 
 
(millions)
Residential 

 
Commercial 

 
Total

Balance at June 30, 2017
$
0.2

 
$
0.1

 
$
0.3

Credit losses for which an OTTI was not previously recognized
0

 
0.4

 
0.4

Reductions for securities sold/matured
0

 
0

 
0

Change in recoveries of future cash flows expected to be collected 1
0

 
0

 
0

Balance at September 30, 2017
$
0.2

 
$
0.5

 
$
0.7

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

 
Commercial 

 
Total

Balance at December 31, 2016
$
11.1

 
$
0.4

 
$
11.5

Credit losses for which an OTTI was not previously recognized
0

 
0.4

 
0.4

Reductions for securities sold/matured
(10.9
)
 
(0.3
)
 
(11.2
)
Change in recoveries of future cash flows expected to be collected 1
0

 
0

 
0

Balance at September 30, 2017
$
0.2

 
$
0.5

 
$
0.7

 
Three Months Ended September 30, 2016
 
Mortgage-Backed
 
 
(millions)
Residential 

 
Commercial 

 
Total

Balance at June 30, 2016
$
11.8

 
$
0.4

 
$
12.2

Credit losses for which an OTTI was not previously recognized
0

 
0

 
0

Reductions for securities sold/matured
0

 
0

 
0

Change in recoveries of future cash flows expected to be collected 1
(0.3
)
 
0

 
(0.3
)
Balance at September 30, 2016
$
11.5

 
$
0.4

 
$
11.9

 
 
 
 
 
 
 
Nine Months Ended September 30, 2016
 
Mortgage-Backed
 
 
(millions)
Residential 

 
Commercial 

 
Total

Balance at December 31, 2015
$
12.4

 
$
0.4

 
$
12.8

Credit losses for which an OTTI was not previously recognized
0

 
0

 
0

Reductions for securities sold/matured
0

 
0

 
0

Change in recoveries of future cash flows expected to be collected 1
(0.9
)
 
0

 
(0.9
)
Balance at September 30, 2016
$
11.5

 
$
0.4

 
$
11.9

1 Reflects the current period change in the expected recovery of prior impairments that will be accreted into income over the remaining life of the security.
Although we determined it is more likely that we will not be required to sell the securities prior to the recovery of their respective cost bases (which could be maturity), we are required to measure the amount of potential credit losses on the securities that were in an unrealized loss position. In that process, we considered a number of factors and inputs related to the individual securities. The methodology and significant inputs used to measure the amount of credit losses in our portfolio included: current performance indicators on the business model or underlying assets (e.g., delinquency rates, foreclosure rates, and default rates); credit support (via current levels of subordination); historical credit ratings; and updated cash flow expectations based upon these performance indicators. In order to determine the amount of credit loss, if any, the net present value of the cash flows expected (i.e., expected recovery value) was calculated using the current book yield for each security, and was compared to its current amortized value. In the event that the net present value was below the amortized value, a credit loss would be deemed to exist, and the security would be written down. We did not have any credit impairment write-downs for the nine months ended September 30, 2016 .

12




Realized Gains (Losses) The components of net realized gains (losses) for the three and nine months ended September 30, were:
 
Three Months
 
Nine Months
(millions)
2017

 
2016

 
2017

 
2016

Gross realized gains on security sales
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
U.S. government obligations
$
0.9

 
$
6.4

 
$
5.8

 
$
24.1

State and local government obligations
4.0

 
0.6

 
7.1

 
16.0

Corporate and other debt securities
5.1

 
15.6

 
16.5

 
38.1

Residential mortgage-backed securities
2.8

 
0.2

 
23.8

 
1.9

Agency residential pass-through obligations
0

 
0

 
0

 
0.1

Commercial mortgage-backed securities
0

 
5.5

 
2.4

 
12.0

Other asset-backed securities
0

 
0

 
0.3

 
0

Redeemable preferred stocks
7.7

 
0

 
8.0

 
0

Total fixed maturities
20.5

 
28.3

 
63.9

 
92.2

Equity securities:
 
 
 
 
 
 
 
Nonredeemable preferred stocks
3.0

 
4.9

 
54.6

 
11.9

Common equities
5.7

 
14.4

 
23.0

 
43.3

Short-term investments
0

 
0.1

 
0

 
0.1

   Subtotal gross realized gains on security sales
29.2

 
47.7

 
141.5


147.5

Gross realized losses on security sales
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
U.S. government obligations
(1.0
)
 
(0.8
)
 
(4.6
)
 
(1.2
)
State and local government obligations
0

 
0

 
(0.1
)
 
(1.6
)
Corporate and other debt securities
(1.8
)
 
(0.2
)
 
(4.6
)
 
(1.9
)
Residential mortgage-backed securities
(0.1
)
 
0

 
(0.4
)
 
0

Agency residential pass-through obligations
0

 
0

 
0

 
(0.2
)
Commercial mortgage-backed securities
(0.5
)
 
0

 
(3.6
)
 
(4.1
)
Redeemable preferred stocks
(6.4
)
 
(6.5
)
 
(6.4
)
 
(6.5
)
Total fixed maturities
(9.8
)
 
(7.5
)
 
(19.7
)
 
(15.5
)
Equity securities:
 
 
 
 
 
 
 
Nonredeemable preferred stocks
(0.1
)
 
(0.4
)
 
(5.9
)
 
(3.1
)
Common equities
(0.2
)
 
(0.3
)
 
(0.3
)
 
(5.3
)
   Subtotal gross realized losses on security sales
(10.1
)
 
(8.2
)
 
(25.9
)
 
(23.9
)
Net realized gains (losses) on security sales
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
U.S. government obligations
(0.1
)
 
5.6

 
1.2

 
22.9

State and local government obligations
4.0

 
0.6

 
7.0

 
14.4

Corporate and other debt securities
3.3

 
15.4

 
11.9

 
36.2

Residential mortgage-backed securities
2.7

 
0.2

 
23.4

 
1.9

Agency residential pass-through obligations
0

 
0

 
0

 
(0.1
)
Commercial mortgage-backed securities
(0.5
)
 
5.5

 
(1.2
)
 
7.9

Other asset-backed securities
0

 
0

 
0.3

 
0

Redeemable preferred stocks
1.3

 
(6.5
)
 
1.6

 
(6.5
)
Total fixed maturities
10.7

 
20.8

 
44.2

 
76.7

Equity securities:
 
 
 
 
 
 
 
Nonredeemable preferred stocks
2.9

 
4.5

 
48.7

 
8.8

Common equities
5.5

 
14.1

 
22.7

 
38.0

Short-term investments
0

 
0.1

 
0

 
0.1

  Subtotal net realized gains (losses) on security sales
19.1

 
39.5

 
115.6

 
123.6

Other-than-temporary impairment losses
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Commercial mortgage-backed securities
(0.4
)
 
0

 
(0.4
)
 
0

Redeemable preferred stocks
0

 
(25.4
)
 
0

 
(25.4
)
Total fixed maturities
(0.4
)
 
(25.4
)
 
(0.4
)
 
(25.4
)
Equity securities:
 
 
 
 
 
 
 
Common equities
(8.9
)
 
(1.4
)
 
(12.5
)
 
(1.6
)
Subtotal investment other-than-temporary impairment losses
(9.3
)
 
(26.8
)
 
(12.9
)
 
(27.0
)
Other asset impairment
(33.7
)
 
(34.8
)
 
(44.9
)
 
(34.8
)
  Subtotal other-than-temporary impairment losses
(43.0
)
 
(61.6
)
 
(57.8
)
 
(61.8
)
Other gains (losses)
 
 
 
 
 
 
 
Hybrid securities
(0.9
)
 
0.6

 
0.3

 
2.9

Derivative instruments
0

 
0.7

 
0

 
(35.8
)
Litigation settlements
0.1

 
0.1

 
1.2

 
0.1

    Subtotal other gains (losses)
(0.8
)
 
1.4

 
1.5

 
(32.8
)
     Total net realized gains (losses) on securities
$
(24.7
)
 
$
(20.7
)
 
$
59.3

 
$
29.0


13



Gross realized gains and losses were predominantly the result of sales transactions in our fixed-income portfolio related to movements in credit spreads and interest rates and sales from our equity portfolios. Our preferred stock portfolio reflects a large realized gain due primarily to one issue called by the issuer at par. This security was held at a deep discount due to previous other-than-temporary impairment write-downs taken during the market crisis of 2008. Subsequent to the write-down, the security experienced significant recovery and was trading near its anticipated call price. Upon call, we recognized the difference between the consideration received and our book value as a realized gain.
In addition, gains and losses reflect recoveries from litigation settlements related to investments and holding period valuation changes on hybrids and derivatives. Also included are write-downs for securities determined to be other-than-temporarily impaired. The other asset impairment relates to renewable energy investments, which are reflected in “other assets” on the balance sheet, under which the future pretax cash flows are expected to be less than the carrying value of the assets.
Net Investment Income   The components of net investment income for the three and nine months ended September 30, were:  
 
Three Months
 
Nine Months
(millions)
2017

2016

 
2017

2016

Fixed maturities:
 
 
 
 
 
U.S. government obligations
$
18.4

$
3.3

 
$
48.1

$
12.4

State and local government obligations
12.9

12.6

 
39.3

39.3

Foreign government obligations
0.1

0.1

 
0.3

0.3

Corporate debt securities
32.2

27.3

 
93.1

81.9

Residential mortgage-backed securities
7.8

11.1

 
27.3

34.9

Agency residential pass-through obligations
0.2

0.3

 
0.6

0.9

Commercial mortgage-backed securities
20.0

22.4

 
57.1

62.6

Other asset-backed securities
12.1

6.8

 
33.8

18.7

Redeemable preferred stocks
2.8

3.8

 
9.1

11.5

Total fixed maturities
106.5

87.7

 
308.7

262.5

Equity securities:
 
 
 
 
 
Nonredeemable preferred stocks
10.9

12.4

 
33.0

36.8

Common equities
14.9

13.9

 
42.8

42.0

Short-term investments
10.6

5.3

 
26.4

11.4

Investment income
142.9

119.3

 
410.9

352.7

Investment expenses
(5.8
)
(4.8
)
 
(18.0
)
(14.9
)
Net investment income
$
137.1

$
114.5

 
$
392.9

$
337.8


The amount of investment income (interest and dividends) we recognize varies from year to year based on the average assets held during the year and the book yields of the securities in our portfolio. The increase in income year-over-year for the three and nine months was mainly the result of an increase in assets, as yields remained relatively consistent.

Trading Securities At September 30, 2017 and 2016 , and December 31, 2016 , we did not hold any trading securities and did not have any net realized gains (losses) on trading securities for the three and nine months ended September 30, 2017 and 2016 .

14



Derivative Instruments The following table shows the status of our derivative instruments at September 30, 2017 and 2016 , and December 31, 2016 , and for the three and nine months ended September 30, 2017 and 2016 :
 
(millions)
 
 
 
 
Balance Sheet 2
 
Comprehensive Income Statement
 
 
 
 
 
 
 
Assets (Liabilities)
Fair Value
 
Pretax Net Realized
Gains (Losses)
 
Notional Value 1
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
Dec. 31,
 
 
 
 
 
September 30,
 
Dec. 31,
 
September 30,
 
September 30,
Derivatives designated as:
2017

 
2016

 
2016

 
Purpose
 
Classification
 
2017

 
2016

 
2016

 
2017

 
2016

 
2017

 
2016

Hedging instrument
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Closed:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ineffective cash flow hedge
$
31

 
$
370

 
$
370

 
Manage 
interest 
rate risk
 
NA
 
$
0

 
$
0

 
$
0

 
$
0

 
$
(1.4
)
 
$
0

 
$
(1.3
)
Non-hedging instruments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
0

 
315

 
0

 
Manage 
portfolio
duration
 
Other liabilities
 
0

 
(13.0
)
 
0

 
0

 
1.7

 
0

 
(17.8
)
Closed:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
0

 
435

 
750

 
Manage 
portfolio
duration
 
NA
 
0

 
0

 
0

 
0

 
0.3

 
0

 
(17.0
)
U.S. Treasury Note futures
0

 
135

 
135

 
Manage 
portfolio
duration
 
NA
 
0

 
0

 
0

 
0

 
0.1

 
0

 
0.3

Total
NA

 
NA

 
NA

 
 
 
 
 
$
0

 
$
(13.0
)
 
$
0

 
$
0

 
$
0.7

 
$
0

 
$
(35.8
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NA= Not applicable
1 The amounts represent the value held at quarter and year end for open positions and the maximum amount held during the period for closed positions.
2 To the extent we hold both derivative assets and liabilities with the same counterparty that are subject to an enforceable master netting arrangement, we reported them on a gross basis on our balance sheets, consistent with our historical presentation.
CASH FLOW HEDGES
During March 2017 , we entered into a forecasted debt issuance hedge, against a possible rise in interest rates, in conjunction with the $850 million of 4.125% Senior Notes due 2047 issued in April 2017 . Upon issuance, we closed the hedge and recognized, as part of accumulated other comprehensive income, a pretax loss of $8.0 million in April 2017 .

During the third quarter 2016, we entered into a $350 million forecasted transaction to hedge against a possible rise in interest rates in anticipation of a debt offering under which we issued $500 million of 2.45% Senior Notes due 2027. When the contract was closed, the $1.4 million loss on the derivative was immediately recognized as a realized loss. The $31 million in 2017 and the remaining $20 million in 2016 of our ineffective cash flow hedge resulted from the repurchase of a portion of our 6.70% Fixed-to-Floating Rate Junior Subordinated Debentures due 2067, and we reclassified the unrealized gain on forecasted transactions to net realized gains on securities. The portion repurchased in 2017 resulted in an immaterial gain.
See Note 4 – Debt for further discussion.
INTEREST RATE SWAPS and U.S. TREASURY FUTURES
We use interest rate swaps and treasury futures contracts from time to time to manage the fixed-income portfolio duration. We did not hold any interest rate swap positions at September 30, 2017 or December 31, 2016 . At September 30, 2016 , we held interest rate swap positions for which we were paying a fixed rate and receiving a variable rate, effectively shortening the duration of our fixed-income portfolio. As of September 30, 2016 , the balance of the cash collateral that we delivered to the applicable counterparties on the then open interest rate swaps was $15.1 million . We did not open any U.S. treasury futures during 2017 . During 2016 , we opened and closed treasury futures; no positions were outstanding at the end of the third quarter or year end.

15



Note 3 Fair Value — We have categorized our financial instruments, based on the degree of subjectivity inherent in the method by which they are valued, into a fair value hierarchy of three levels, as follows:
Level 1 : Inputs are unadjusted quoted prices in active markets for identical instruments at the measurement date (e.g., U.S. government obligations, active exchange-traded equity securities, and certain short-term securities).

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

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

16



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

 
Level 2

 
Level 3

 
Total

 
Cost

September 30, 2017
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
U.S. government obligations
$
4,595.0

 
$
0

 
$
0

 
$
4,595.0

 
$
4,612.2

State and local government obligations
0

 
2,364.2

 
0

 
2,364.2

 
2,332.2

Foreign government obligations
24.2

 
0

 
0

 
24.2

 
24.2

Corporate debt securities
0

 
5,225.6

 
0

 
5,225.6

 
5,195.7

Subtotal
4,619.2

 
7,589.8

 
0

 
12,209.0

 
12,164.3

Asset-backed securities:
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
0

 
920.3

 
0

 
920.3

 
911.3

Agency residential pass-through obligations
0

 
35.3

 
0

 
35.3

 
35.7

Commercial mortgage-backed
0

 
2,767.9

 
0

 
2,767.9

 
2,763.7

Other asset-backed
0

 
2,490.2

 
0

 
2,490.2

 
2,485.6

Subtotal asset-backed securities
0

 
6,213.7

 
0

 
6,213.7

 
6,196.3

Redeemable preferred stocks:
 
 
 
 
 
 
 
 
 
Financials
0

 
63.8

 
0

 
63.8

 
61.4

Utilities
0

 
31.9

 
0

 
31.9

 
30.5

Industrials
0

 
141.6

 
0

 
141.6

 
130.6

Subtotal redeemable preferred stocks
0

 
237.3

 
0

 
237.3

 
222.5

Total fixed maturities
4,619.2

 
14,040.8

 
0

 
18,660.0

 
18,583.1

Equity securities:
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks:
 
 
 
 
 
 
 
 
 
Financials
82.2

 
726.5

 
0

 
808.7

 
695.6

Industrials
0

 
0

 
5.0

 
5.0

 
5.0

Subtotal nonredeemable preferred stocks
82.2

 
726.5

 
5.0

 
813.7

 
700.6

Common equities:
 
 
 
 
 
 
 
 
 
Common stocks
3,209.2

 
0

 
0

 
3,209.2

 
1,485.2

Other risk investments
0

 
0

 
0.3

 
0.3

 
0.3

Subtotal common equities
3,209.2

 
0

 
0.3

 
3,209.5

 
1,485.5

Total fixed maturities and equity securities
7,910.6

 
14,767.3

 
5.3

 
22,683.2

 
20,769.2

Short-term investments
3,175.4

 
1,136.1

 
0

 
4,311.5

 
4,311.5

Total portfolio
$
11,086.0

 
$
15,903.4

 
$
5.3

 
$
26,994.7

 
$
25,080.7

Debt
$
0

 
$
3,574.6

 
$
43.3

 
$
3,617.9

 
$
3,312.2


17



 
Fair Value
 
 
(millions)
Level 1

 
Level 2

 
Level 3

 
Total

 
Cost

September 30, 2016
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 

 
 
U.S. government obligations
$
734.6

 
$
0

 
$
0

 
$
734.6

 
$
726.0

State and local government obligations
0

 
2,566.0

 
0

 
2,566.0

 
2,508.9

Foreign government obligations
25.4

 
0

 
0

 
25.4

 
25.4

Corporate debt securities
0

 
4,403.3

 
0

 
4,403.3

 
4,327.5

Subtotal
760.0

 
6,969.3

 
0

 
7,729.3

 
7,587.8

Asset-backed securities:
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
0

 
1,594.2

 
0

 
1,594.2

 
1,582.6

Agency residential pass-through obligations
0

 
44.1

 
0

 
44.1

 
43.6

Commercial mortgage-backed
0

 
2,277.8

 
0.6

 
2,278.4

 
2,249.4

Other asset-backed
0

 
2,045.4

 
0

 
2,045.4

 
2,037.5

Subtotal asset-backed securities
0

 
5,961.5

 
0.6

 
5,962.1

 
5,913.1

Redeemable preferred stocks:
 
 
 
 
 
 
 
 
 
Financials
0

 
95.7

 
0

 
95.7

 
77.1

Utilities
0

 
30.4

 
0

 
30.4

 
30.6

Industrials
0

 
99.4

 
0

 
99.4

 
99.4

Subtotal redeemable preferred stocks
0

 
225.5

 
0

 
225.5

 
207.1

Total fixed maturities
760.0

 
13,156.3

 
0.6

 
13,916.9

 
13,708.0

Equity securities:
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks:
 
 
 
 
 
 
 
 
 
Financials
154.6

 
705.5

 
0

 
860.1

 
726.6

Industrials
0

 
0

 
0

 
0

 
0

Subtotal nonredeemable preferred stocks
154.6

 
705.5

 
0

 
860.1

 
726.6

Common equities:
 
 
 
 
 
 
 
 
 
Common stocks
2,867.6

 
0

 
0

 
2,867.6

 
1,575.7

Other risk investments
0

 
0

 
0.4

 
0.4

 
0.4

Subtotal common equities
2,867.6

 
0

 
0.4

 
2,868.0

 
1,576.1

Total fixed maturities and equity securities
3,782.2

 
13,861.8

 
1.0

 
17,645.0

 
16,010.7

Short-term investments
5,051.5

 
824.7

 
0

 
5,876.2

 
5,876.2

Total portfolio
$
8,833.7

 
$
14,686.5

 
$
1.0

 
$
23,521.2

 
$
21,886.9

Debt
$
0

 
$
3,371.6

 
$
133.6

 
$
3,505.2

 
$
3,153.9


18



 
Fair Value
 
 
(millions)
Level 1

 
Level 2

 
Level 3

 
Total

 
Cost

December 31, 2016
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
U.S. government obligations
$
2,870.1

 
$
0

 
$
0

 
$
2,870.1

 
$
2,899.2

State and local government obligations
0

 
2,502.6

 
0

 
2,502.6

 
2,509.5

Foreign government obligations
24.5

 
0

 
0

 
24.5

 
24.5

Corporate debt securities
0

 
4,550.9

 
0

 
4,550.9

 
4,557.8

Subtotal
2,894.6

 
7,053.5

 
0

 
9,948.1

 
9,991.0

Asset-backed securities:
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
0

 
1,458.7

 
0

 
1,458.7

 
1,448.5

Agency residential pass-through obligations
0

 
40.6

 
0

 
40.6

 
41.2

Commercial mortgage-backed
0

 
2,253.1

 
0.3

 
2,253.4

 
2,266.9

Other asset-backed
0

 
2,351.1

 
0

 
2,351.1

 
2,350.7

Subtotal asset-backed securities
0

 
6,103.5

 
0.3

 
6,103.8

 
6,107.3

Redeemable preferred stocks:
 
 
 
 
 
 
 
 
 
Financials
0

 
59.5

 
0

 
59.5

 
59.8

Utilities
0

 
30.9

 
0

 
30.9

 
30.5

Industrials
0

 
101.5

 
0

 
101.5

 
98.5

Subtotal redeemable preferred stocks
0

 
191.9

 
0

 
191.9

 
188.8

Total fixed maturities
2,894.6

 
13,348.9

 
0.3

 
16,243.8

 
16,287.1

Equity securities:
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks:
 
 
 
 
 
 
 
 
 
Financials
138.1

 
715.4

 
0

 
853.5

 
734.2

Industrials
0

 
0

 
0

 
0

 
0

Subtotal nonredeemable preferred stocks
138.1

 
715.4

 
0

 
853.5

 
734.2

Common equities:
 
 
 
 
 
 
 
 
 
Common stocks
2,812.0

 
0

 
0

 
2,812.0

 
1,437.1

Other risk investments
0

 
0

 
0.4

 
0.4

 
0.4

Subtotal common equities
2,812.0

 
0

 
0.4

 
2,812.4

 
1,437.5

Total fixed maturities and equity securities
5,844.7

 
14,064.3

 
0.7

 
19,909.7

 
18,458.8

Short-term investments
3,009.3

 
563.6

 
0

 
3,572.9

 
3,572.9

Total portfolio
$
8,854.0

 
$
14,627.9

 
$
0.7

 
$
23,482.6

 
$
22,031.7

Debt
$
0

 
$
3,188.5

 
$
127.3

 
$
3,315.8

 
$
3,148.2

Our portfolio valuations, excluding short-term investments, classified as either Level 1 or Level 2 in the above tables are priced exclusively by external sources, including: pricing vendors, dealers/market makers, and exchange-quoted prices. We did not have any transfers between Level 1 and Level 2 during 2017 or 2016 . We recognize transfers between levels at the end of the reporting period.
Our short-term security holdings classified as Level 1 are highly liquid, actively marketed, and have a very short duration, primarily 30 days or less to redemption. These securities are held at their original cost, adjusted for any accretion of discount, since that value very closely approximates what an active market participant would be willing to pay for such securities. The remainder of our short-term securities are classified as Level 2 and are not priced externally since these securities continually trade at par value. These securities are classified as Level 2 since they are primarily longer-dated auction securities issued by municipalities that contain a redemption put feature back to the auction pool with a redemption period typically less than seven days. The auction pool is created by a liquidity provider and if the auction is not available at the end of the seven days, we have the right to put the security back to the issuer at par.

19



At September 30, 2017 , vendor-quoted prices represented 59% of our Level 1 classifications (excluding short-term investments), compared to 24% and 52% at September 30, 2016 and December 31, 2016 , respectively. The securities quoted by vendors in Level 1 primarily represent our holdings in U.S. Treasury Notes, which are frequently traded, and the quotes are considered similar to exchange-traded quotes. The balance of our Level 1 pricing comes from quotes obtained directly from trades made on active exchanges.
At September 30, 2017 and 2016 , and December 31, 2016 , vendor-quoted prices comprised 98% , 99% , and 99% , respectively, of our Level 2 classifications (excluding short-term investments), while dealer-quoted prices represented 2% , 1% , and 1% , respectively. In our process for selecting a source (e.g., dealer, pricing service) to provide pricing for securities in our portfolio, we reviewed documentation from the sources that detailed the pricing techniques and methodologies used by these sources and determined if their policies adequately considered market activity, either based on specific transactions for the particular security type or based on modeling of securities with similar credit quality, duration, yield, and structure that were recently transacted. Once a source is chosen, we continue to monitor any changes or modifications to their processes by reviewing their documentation on internal controls for pricing and market reviews. We review quality control measures of our sources as they become available to determine if any significant changes have occurred from period to period that might indicate issues or concerns regarding their evaluation or market coverage.
As part of our pricing procedures, we obtain quotes from more than one source to help us fully evaluate the market price of securities. However, our internal pricing policy is to use a consistent source for individual securities in order to maintain the integrity of our valuation process. Quotes obtained from the sources are not considered binding offers to transact. Under our policy, when a review of the valuation received from our selected source appears to be outside of what is considered market level activity (which is defined as trading at spreads or yields significantly different than those of comparable securities or outside the general sector level movement without a reasonable explanation), we may use an alternate source’s price. To the extent we determine that it may be prudent to substitute one source’s price for another, we will contact the initial source to obtain an understanding of the factors that may be contributing to the significant price variance, which often leads the source to adjust their pricing input data for future pricing.
To allow us to determine if our initial source is providing a price that is outside of a reasonable range, we review our portfolio pricing on a weekly basis. When necessary, we challenge prices from our sources when a price provided does not match our expectations based on our evaluation of market trends and activity. Initially, we perform a review of our portfolio by sector to identify securities whose prices appear outside of a reasonable range. We then perform a more detailed review of fair values for securities disclosed as Level 2. We review dealer bids and quotes for these and/or similar securities to determine the market level context for our valuations. We then evaluate inputs relevant for each class of securities disclosed in the preceding hierarchy tables.
For our structured debt securities, including commercial, residential, and asset-backed securities, we evaluate available market-related data for these and similar securities related to collateral, delinquencies, and defaults for historical trends and reasonably estimable projections, as well as historical prepayment rates and current prepayment assumptions and cash flow estimates. We further stratify each class of our structured debt securities into more finite sectors (e.g., planned amortization class, first pay, second pay, senior, subordinated, etc.) and use duration, credit quality, and coupon to determine if the fair value is appropriate.

For our corporate debt and preferred stock (redeemable and nonredeemable) portfolios, as well as the notes and debentures issued by The Progressive Corporation (see Note 4 Debt ), we review securities by duration, coupon, and credit quality, as well as changes in interest rate and credit spread movements within that stratification. The review also includes recent trades, including: volume traded at various levels that establish a market, issuer specific fundamentals, and industry specific economic news as it comes to light.
For our municipal securities (e.g., general obligations, revenue, and housing), we stratify the portfolio to evaluate securities by type, coupon, credit quality, and duration to review price changes relative to credit spread and interest rate changes. Additionally, we look to economic data as it relates to geographic location as an indication of price-to-call or maturity predictors. For municipal housing securities, we look to changes in cash flow projections, both historical and reasonably estimable projections, to understand yield changes and their effect on valuation.
Lastly, for our short-term securities, we look at acquisition price relative to the coupon or yield. Since our short-term securities are typically 90 days or less to maturity, with the majority listed in Level 2 being seven days or less to redemption, we believe that acquisition price is the best estimate of fair value.


20



We also review data assumptions as supplied by our sources to determine if that data is relevant to current market conditions. In addition, we independently review each sector for transaction volumes, new issuances, and changes in spreads, as well as the overall movement of interest rates along the yield curve to determine if sufficient activity and liquidity exists to provide a credible source for our market valuations.
During each valuation period, we create internal estimations of portfolio valuation (performance returns), based on current market-related activity (i.e., interest rate and credit spread movements and other credit-related factors) within each major sector of our portfolio. We compare our internally generated portfolio results with those generated based on quotes we receive externally and research material valuation differences. We compare our results to index returns for each major sector adjusting for duration and credit quality differences to better understand our portfolio’s results. Additionally, we review on a monthly basis our external sales transactions and compare the actual final market sales prices to previous market valuation prices. This review provides us further validation that our pricing sources are providing market level prices, since we are able to explain significant price changes (i.e., greater than 2%) as known events occur in the marketplace and affect a particular security’s price at sale.
This analysis provides us with additional comfort regarding the source’s process, the quality of its review, and its willingness to improve its analysis based on feedback from clients. We believe this effort helps ensure that we are reporting the most representative fair values for our securities.
Except as described below, our Level 3 securities are also priced externally; however, due to several factors (e.g., nature of the securities, level of activity, and lack of similar securities trading to obtain observable market level inputs), these valuations are more subjective in nature. Certain private equity investments and fixed-income investments included in the Level 3 category are valued using external pricing supplemented by internal review and analysis.
After all the valuations are received and our review is complete, if the inputs used by vendors are determined to not contain sufficient observable market information, we will reclassify the affected security valuations to Level 3. At September 30, 2017 and 2016 , and December 31, 2016 , securities in our fixed-maturity portfolio listed as Level 3 were comprised substantially of securities that were either: (i) private placements, (ii) thinly held and/or traded securities, or (iii) non-investment-grade or non-rated securities with little liquidity. Based on these factors, it was difficult to independently verify observable market inputs that were used to generate the external valuations we received. Despite the lack of sufficient observable market information for our Level 3 securities, we believe the valuations received in conjunction with our procedures for evaluating third-party prices support the fair values reported in the financial statements.
At September 30, 2017 , we held one private nonredeemable preferred security with a value of $5.0 million that was priced internally. The security was purchased during the third quarter 2017 and the value at September 30, 2017 equals the cost at acquisition. We did not hold any internally-priced securities at September 30, 2016 or December 31, 2016 .
We review the prices from our external sources for reasonableness using internally developed assumptions to derive prices for the securities, which are then compared to the prices we received. During 2017 or 2016 , there were no material assets or liabilities measured at fair value on a nonrecurring basis. Based on our review, all prices received from external sources remained unadjusted.


21



The following tables provide a summary of changes in fair value associated with Level 3 assets for the three and nine months ended September 30, 2017 and 2016 :
 
 
Level 3 Fair Value
 
Three Months Ended September 30, 2017
(millions)
Fair Value at June 30, 2017

 
Calls/
Maturities/
Paydowns

 
Purchases

 
Sales

 
Net Realized (Gain) Loss on Sales

 
Change in Valuation

 
Net
Transfers
In (Out)

 
Fair Value at September 30, 2017

Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial mortgage-backed
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

Total fixed maturities
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Industrials
0

 
0

 
5.0

 
0

 
0

 
0

 
0

 
5.0

Common equities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other risk investments
0.3

 
0

 
0

 
0

 
0

 
0

 
0

 
0.3

Total Level 3 securities
$
0.3

 
$
0

 
$
5.0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
5.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 3 Fair Value
 
Nine months ended September 30, 2017
(millions)
Fair Value at Dec. 31, 2016

 
Calls/
Maturities/
Paydowns

 
Purchases

 
Sales

 
Net Realized (Gain) Loss on Sales

 
Change in Valuation

 
Net
Transfers
In (Out)

 
Fair Value at September 30, 2017

Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial mortgage-backed
$
0.3

 
$
(0.3
)
 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

Total fixed maturities
0.3

 
(0.3
)
 
0

 
0

 
0

 
0

 
0

 
0

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Industrials
0

 
0

 
5.0

 
0

 
0

 
0

 
0

 
5.0

Common equities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other risk investments
0.4

 
(0.1
)
 
0

 
0

 
0

 
0

 
0

 
0.3

Total Level 3 securities
$
0.7

 
$
(0.4
)
 
$
5.0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
5.3


 


22



 
Level 3 Fair Value
 
Three Months Ended September 30, 2016
(millions)
Fair Value at June 30, 2016

 
Calls/
Maturities/
Paydowns

 
Purchases

 
Sales

 
Net Realized (Gain) Loss on Sales

 
Change in
Valuation

 
Net
Transfers
In (Out)

 
Fair Value at September 30, 2016

Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial mortgage-backed
$
9.2

 
$
(8.7
)
 
$
0

 
$
0

 
$
0

 
$
0.1

 
$
0

 
$
0.6

Total fixed maturities
9.2

 
(8.7
)
 
0

 
0

 
0

 
0.1

 
0

 
0.6

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Industrials
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

Common equities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other risk investments
0.3

 
0

 
0

 
0

 
0

 
0.1

 
0

 
0.4

Total Level 3 securities
$
9.5

 
$
(8.7
)
 
$
0

 
$
0

 
$
0

 
$
0.2

 
$
0

 
$
1.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 3 Fair Value
 
Nine months ended September 30, 2016
(millions)
Fair Value at Dec. 31, 2015

 
Calls/
Maturities/
Paydowns

 
Purchases

 
Sales

 
Net Realized (Gain) Loss on Sales

 
Change in
Valuation

 
Net
Transfers
In (Out)

 
Fair Value at September 30, 2016

Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial mortgage-backed
$
9.9

 
$
(9.3
)
 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
0.6

Total fixed maturities
9.9

 
(9.3
)
 
0

 
0

 
0

 
0

 
0

 
0.6

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonredeemable preferred stocks:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Industrials
0

 
0

 
0

 
0

 
0

 
0

 
0

 
0

Common equities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other risk investments
0.3

 
0

 
0

 
0

 
0

 
0.1

 
0

 
0.4

Total Level 3 securities
$
10.2

 
$
(9.3
)
 
$
0

 
$
0

 
$
0

 
$
0.1

 
$
0

 
$
1.0


The following tables provide a summary of the quantitative information about Level 3 fair value measurements for our applicable securities at September 30, 2017 and 2016 , and December 31, 2016 :
 
 
Quantitative Information about Level 3 Fair Value Measurements
($ in millions)
Fair Value at September 30, 2017

 
Valuation Technique
 
Unobservable Input
 
Unobservable
Input Assumption

Fixed maturities:
 
 
 
 
 
 
 
Asset-backed securities:
 
 
 
 
 
 
 
Commercial mortgage-backed
$
0

 
NA
 
NA
 
NA

Total fixed maturities
0

 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
Nonredeemable preferred stocks:
 
 
 
 
 
 
 
Industrials 1
5.0

 
Internal price
 
Purchase price
 
3.9

Subtotal Level 3 securities
5.0

 
 
 
 
 
 
Pricing exemption securities 2
0.3

 
 
 
 
 
 
Total Level 3 securities
$
5.3

 
 
 
 
 
 
NA= Not applicable, since we did not hold any commercial mortgage-backed Level 3 securities at September 30, 2017 .
1 The security was internally-priced since it is privately held and it was valued at September 30, 2017 using the purchase price.
2 The fair values for these securities were determined with unobservable inputs not reasonably available to us.


23



 
Quantitative Information about Level 3 Fair Value Measurements
($ in millions)
Fair Value at September 30, 2016

 
Valuation Technique
 
Unobservable Input
 
Unobservable
Input Assumption

Fixed maturities:
 
 
 
 
 
 
 
Asset-backed securities:
 
 
 
 
 
 
 
Commercial mortgage-backed
$
0.6

 
External vendor
 
Prepayment rate 1
 
0
%
Total fixed maturities
0.6

 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
Nonredeemable preferred stocks:
 
 
 
 
 
 
 
Industrials
0

 
NA
 
NA
 
NA

Subtotal Level 3 securities
0.6

 
 
 
 
 
 
Pricing exemption securities 2
0.4

 
 
 
 
 
 
Total Level 3 securities
$
1.0

 
 
 
 
 
 
NA= Not applicable, since we did not hold any nonredeemable preferred stock Level 3 securities at September 30, 2016 .
1 Assumes that one security has 0% of the principal amount of the underlying loans that will be paid off prematurely in each year.
2 The fair values for these securities were determined with unobservable inputs not reasonably available to us.
 
 
Quantitative Information about Level 3 Fair Value Measurements
($ in millions)
Fair Value at Dec. 31, 2016

 
Valuation Technique
 
Unobservable Input
 
Unobservable
Input Assumption

Fixed maturities:
 
 
 
 
 
 
 
Asset-backed securities:
 
 
 
 
 
 
 
Commercial mortgage-backed
$
0.3

 
External vendor
 
Prepayment rate 1
 
0
%
Total fixed maturities
0.3

 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
Nonredeemable preferred stocks:
 
 
 
 
 
 
 
Industrials
0

 
NA
 
NA
 
NA

Subtotal Level 3 securities
0.3

 
 
 
 
 
 
Pricing exemption securities 2
0.4

 
 
 
 
 
 
Total Level 3 securities
$
0.7

 
 
 
 
 
 
NA= Not applicable, since we did not hold any nonredeemable preferred stock Level 3 securities at December 31, 2016 .
1 Assumes that one security has 0% of the principal amount of the underlying loans that will be paid off prematurely in each year.
2 The fair values for these securities were determined with unobservable inputs not reasonably available to us.
Due to the relative size of the Level 3 securities’ fair values compared to the total portfolio’s fair value, any changes in pricing methodology would not have a significant change in valuation that would materially impact net or comprehensive income.

24



Note 4 Debt — Debt at each of the balance sheet periods consisted of:
 
 
September 30, 2017
 
September 30, 2016
 
December 31, 2016
(millions)
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
3.75% Senior Notes due 2021
$
498.7

 
$
525.7

 
$
498.4

 
$
544.2

 
$
498.4

 
$
528.8

2.45% Senior Notes due 2027
496.0

 
475.3

 
495.6

 
497.5

 
495.8

 
464.6

6 5/8% Senior Notes due 2029
296.0

 
388.3

 
295.8

 
402.6

 
295.9

 
380.1

6.25% Senior Notes due 2032
395.3

 
518.7

 
395.1

 
533.3

 
395.2

 
499.0

4.35% Senior Notes due 2044
346.5

 
379.8

 
346.4

 
403.0

 
346.4

 
362.3

3.70% Senior Notes due 2045
395.2

 
392.6

 
395.1

 
418.7

 
395.1

 
372.5

4.125% Senior Notes due 2047
841.2

 
894.2

 
0

 
0

 
0

 
0

6.70% Fixed-to-Floating Rate Junior Subordinated Debentures due 2067
0

 
0

 
593.9

 
572.3

 
594.1

 
581.2

Other debt instruments
43.3

 
43.3

 
133.6

 
133.6

 
127.3

 
127.3

Total
$
3,312.2

 
$
3,617.9

 
$
3,153.9

 
$
3,505.2

 
$
3,148.2

 
$
3,315.8

 
The other debt instruments reported in the table above represent ARX indebtedness and consist of:
 
September 30, 2017
 
September 30, 2016
 
December 31, 2016
 
($ in millions)
Type of debt instrument
Number of Instruments

 
Carrying
Value

 
Number of Instruments

 
Carrying
Value

 
Number of Instruments

 
Carrying
Value

Stated Maturity Date(s)
Term loans
2

 
$
43.3

 
2

 
$
68.4

 
2

 
$
62.1

December 2018 and 2019
Junior subordinated notes 1
0

 
0

 
2

 
41.2

 
2

 
41.2

June 2036 and 2037
Senior notes 1
0

 
0

 
4

 
24.0

 
4

 
24.0

Various 2
Total
 
 
$
43.3

 
 
 
$
133.6

 
 
 
$
127.3

 
1 The notes were redeemed during the third quarter 2017 (discussed below).
2 The senior notes original maturity dates were May 2033, April 2034, December 2034, and June 2035.
The Progressive Corporation Debt
During the second quarter of 2017, we issued $850 million of 4.125% Senior Notes due 2047 (the “ 4.125% Senior Notes”) in an underwritten public offering. We received proceeds, after deducting underwriter’s discounts, commissions and other issuance costs, of approximately $841.1 million . In addition, upon issuance of the 4.125% Senior Notes, we closed a forecasted debt issuance hedge, which was entered into to hedge against a possible rise in interest rates, and recognized an $8.0 million pretax loss as part of accumulated other comprehensive income (loss); the loss will be recognized as an adjustment to interest expense and amortized over the life of the 4.125% Senior Notes.
During the second quarter 2017, we redeemed our 6.70% Fixed-to-Floating Rate Junior Subordinated Debentures due 2067 (the 6.70% Debentures”), at par, in the aggregate principal amount of $563.7 million . During the first quarter of 2017 and the full year 2016, we repurchased, in the open market, $30.9 million and $19.8 million , respectively, in aggregate principal amount of our 6.70% Debentures. Since the carrying value of the debt we repurchased differed from the amount paid to extinguish the debt, we recognized a gain of $0.2 million during the first quarter 2017 and $1.6 million in 2016.
During the third quarter 2016, we issued $500 million of our 2.45% Senior Notes due 2027 in an underwritten public offering. We received proceeds, after deducting underwriter’s discounts, commissions, and other issuance costs, of approximately $495.6 million .
Consistent with the other senior notes issued by Progressive, interest on the 4.125% Senior Notes and the 2.45% Senior Notes is payable semiannually and both notes are redeemable, in whole or in part, at any time.
ARX Debt (i.e., Other debt instruments)
The other debt instruments were issued by ARX, prior to The Progressive Corporation acquiring a controlling interest in 2015. ARX, not The Progressive Corporation or any of its other subsidiaries, is responsible for the other debt, which includes amounts that were borrowed and contributed to the capital of ARX’s insurance subsidiaries or used, or made available for use, for other business purposes.

25



In estimating the fair values of the other debt instruments, it was determined that the fair values of these notes are substantially equal to their carrying values, based on the current rates offered for debt of similar maturities and interest rates.

During the third quarter 2017, ARX redeemed their junior subordinated notes and senior notes, in their entirety, in the aggregate principal amount of $65.2 million , with proceeds from a 5 -year, fixed-rate loan made by The Progressive Corporation to fund the redemptions; this intercompany transaction was eliminated in consolidation.
The Progressive Corporation Line of Credit
During the second quarter 2017, The Progressive Corporation entered into a new line of credit with PNC Bank, National Association (PNC) in the maximum principal amount of $250 million . This line of credit replaced a previous line of credit with a maximum principal amount of $100 million that expired in the second quarter 2017. Subject to the terms and conditions of the line of credit documents, advances under the line of credit (if any) will bear interest at a variable rate equal to the higher of PNC’s Prime Rate or the sum of the Federal Funds Open Rate plus 50 basis points. Each advance must be repaid on the 30 th day after the advance or, if earlier, on April 30, 2018, the expiration date of the line of credit. Prepayments are permitted without penalty. All advances under the line of credit are subject to PNC’s discretion. We had no borrowings under either line of credit during the first nine months of 2017 or throughout 2016.
Note 5 Income Taxes — At September 30, 2017 and 2016 , and December 31, 2016 , we determined that we did not need a valuation allowance on our gross deferred tax assets. Although realization of the deferred tax assets is not assured, management believes that it is more likely than not that the deferred tax assets will be realized based on our expectation that we will be able to fully utilize the deductions that are ultimately recognized for tax purposes. For the nine months ended September 30, 2017 , there have been no material changes in our uncertain tax positions.

The effective tax rates for the three and nine months ended September 30, 2017, were 14.6% and 29.7% , respectively, compared to 20.5% and 29.4% for the same periods in 2016. On January 1, 2017, we began recording the excess tax benefits from stock-based compensation to the tax provision in accordance with the adoption of the new accounting standard update (see Note 14 – New Accounting Standards for additional discussion). Previously these benefits were recorded directly to paid-in capital. In addition, during the third quarter of both 2017 and 2016, we recorded the ratable portion of the tax benefits related to federal renewable energy tax credit fund investments that were entered into during the periods.


26



Note 6 Loss and Loss Adjustment Expense Reserves — Activity in the loss and loss adjustment expense reserves during the nine month periods is summarized as follows:
 
 
September 30,
(millions)
2017
 
2016
Balance, Beginning of period
$
11,368.0

 
$
10,039.0

Less reinsurance recoverables on unpaid losses
1,801.0

 
1,442.7

Net balance, Beginning of period
9,567.0

 
8,596.3

Net loss and loss adjustment expense reserves disposed 1
0

 
(2.5
)
Total beginning reserves
9,567.0

 
8,593.8

Incurred related to:
 
 
 
Current year
13,886.3

 
12,577.5

Prior years
42.5

 
(22.9
)
Total incurred
13,928.8

 
12,554.6

Paid related to:
 
 
 
Current year
8,379.4

 
7,768.2

Prior years
4,387.8

 
3,986.2

Total paid
12,767.2

 
11,754.4

Net balance, End of period
10,728.6

 
9,394.0

Plus reinsurance recoverables on unpaid losses
2,624.7

 
1,834.2

Balance, End of period
$
13,353.3

 
$
11,228.2

1 During 2016, $2.5 million net reserves were disposed by ARX in an exchange transaction.

We experienced unfavorable reserve development of $42.5 million and favorable reserve development of $22.9 million for the first nine months of 2017 and 2016, respectively, which is reflected as “Incurred related to prior years in the table above.
Year-to-date 2017
Approximately $51 million of unfavorable prior year reserve development was attributable to accident years 2016 and 2015. This unfavorable development was partially offset by $8 million of favorable development attributable to accident year 2014 and prior accident years.
Our personal auto businesses incurred $76 million of unfavorable loss and loss adjustment expense (LAE) reserve development for the first nine months of 2017, primarily in the Agency business, in part reflecting an increase in costs related to property damage and higher LAE costs.
Our Property business experienced $24 million in favorable development primarily due to the identification of prior year losses eligible to be ceded under our catastrophe bond reinsurance program and lower severity and frequency than anticipated for accident year 2016.
The remaining favorable development for the first nine months was attributable to both our special lines and commercial auto products.
Year-to-date 2016
Approximately $30 million of the favorable prior year reserve development was attributable to accident year 2015, partially offset by $26 million of unfavorable development attributable to accident year 2014; we had favorable development for 2013 and prior accident years.
Our Personal Lines and Property businesses incurred $9 million and $46 million , respectively, of favorable loss and LAE reserve development for the first nine months of 2016, partially offset by the unfavorable loss and LAE reserve development in our Commercial Lines business of $31 million . In our Property business, both the severity and frequency of late reported claims was less than anticipated.
Our personal auto product favorable development was in our Direct auto businesses.
Our personal auto and Commercial Lines businesses incurred unfavorable IBNR loss reserve development, primarily due to a higher severity and frequency of late reported claims than anticipated for accident year 2015, driven in part by storms in late December 2015, resulting in a greater number of claims being reported in January 2016 than anticipated.
In addition, our Commercial Lines business experienced unfavorable case reserve development for accident year 2014 primarily due to a higher severity than anticipated on our largest limits, while case reserve development for accident years 2015 and 2013 and prior was favorable.


27



Note 7 Supplemental Cash Flow Information — Cash includes only bank demand deposits. We paid the following in the respective periods:  
 
Nine Months Ended September 30,
(millions)
2017

 
2016

Income taxes
$
538.7

 
$
380.8

Interest
107.4

 
98.0


Restricted cash on our consolidated balance sheets represents cash that is restricted to pay flood claims under the National Flood Insurance Program’s “Write Your Own program, for which American Strategic Insurance and other subsidiaries of ARX (ASI) are administrators.

The cash transferred in the exchange transaction, which occurred in June 2016, was revised to correct the reclassification of a non-cash transaction; there was no overall impact on the decrease in cash that was reported in our consolidated statement of cash flows for the nine months ended September 30, 2016.
Note 8 Segment Information — Our Personal Lines segment writes insurance for personal autos and recreational vehicles (our special lines products). Our Commercial Lines segment writes primary liability and physical damage insurance for automobiles and trucks owned and/or operated predominantly by small businesses in the business auto, for-hire transportation, contractor, for-hire specialty, tow, and for-hire livery markets. Our Property segment writes residential property insurance for homeowners, other property owners, and renters. Our other indemnity businesses manage our run-off businesses. Our service businesses provide insurance-related services, including processing Commercial Automobile Insurance Procedures/Plans (CAIP) business and serving as an agent for homeowners, general liability, and workers’ compensation insurance through our programs with ASI and unaffiliated insurance companies. All segment revenues are generated from external customers; all intercompany transactions, including those between Progressive and ASI, are eliminated in consolidation.

Following are the operating results for the respective periods:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
(millions)
Revenues
 
Pretax
Profit
(Loss)
 
Revenues
 
Pretax
Profit
(Loss)
 
Revenues
 
Pretax
Profit
(Loss)
 
Revenues
 
Pretax
Profit
(Loss)
Personal Lines
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency
$
2,840.0

 
$
69.5

 
$
2,474.3

 
$
98.6

 
$
8,224.0

 
$
524.7

 
$
7,245.5

 
$
354.5

Direct
2,734.8

 
128.7

 
2,391.2

 
84.4

 
7,908.5

 
466.7

 
6,946.7

 
237.5

Total Personal Lines 1
5,574.8

 
198.2

 
4,865.5

 
183.0

 
16,132.5

 
991.4

 
14,192.2

 
592.0

Commercial Lines
714.0

 
42.8

 
630.2

 
4.4

 
2,031.2

 
166.4

 
1,772.4

 
96.7

Property 2
255.2

 
(69.0
)
 
227.7

 
10.4

 
720.3

 
(57.5
)
 
638.0

 
(27.7
)
Other indemnity
0

 
0

 
0

 
(0.8
)
 
0

 
(0.3
)
 
0

 
(1.6
)
Total underwriting operations
6,544.0

 
172.0

 
5,723.4

 
197.0

 
18,884.0

 
1,100.0

 
16,602.6

 
659.4

Fees and other revenues 3
96.3

 
NA

 
86.8

 
NA

 
270.3

 
NA

 
248.2

 
NA

Service businesses
33.3

 
4.4

 
26.2

 
3.0

 
94.5

 
12.7

 
77.7

 
9.2

Investments 4
118.2

 
112.4

 
98.6

 
93.8

 
470.2

 
452.2

 
381.7

 
366.8

Gains on extinguishment of debt
0

 
0

 
0

 
0

 
0.2

 
0.2

 
1.6

 
1.6

Interest expense
NA

 
(37.4
)
 
NA

 
(35.3
)
 
NA

 
(117.6
)
 
NA

 
(103.8
)
Consolidated total
$
6,791.8

 
$
251.4

 
$
5,935.0

 
$
258.5

 
$
19,719.2

 
$
1,447.5

 
$
17,311.8

 
$
933.2

NA = Not applicable
1 Personal auto insurance accounted for 93% of the total Personal Lines segment net premiums earned in the three and nine months ended September 30, 2017 , and 92% for the same periods in 2016 ; insurance for our special lines products (e.g., motorcycles, watercraft, and RVs) accounted for the balance of the Personal Lines net premiums earned.
2 For the three and nine months ended September 30, 2017 , pretax profit (loss) includes $17.2 million and $48.2 million , respectively, of amortization expense predominately associated with the acquisition of a controlling interest in ARX and $15.5 million and $46.6 million for the same periods in 2016.
3 Pretax profit (loss) for fees and other revenues are attributable to operating segments.
4 Revenues represent recurring investment income and total net realized gains (losses) on securities; pretax profit is net of investment expenses.


28



Our management uses underwriting margin and combined ratio as primary measures of underwriting profitability. Underwriting profitability is calculated by subtracting losses and loss adjustment expenses, policy acquisition costs, and other underwriting expenses from the total of net premiums earned and fees and other revenues. The underwriting margin is the pretax underwriting profit (loss) expressed as a percentage of net premiums earned (i.e., revenues from underwriting operations). Combined ratio is the complement of the underwriting margin. Following are the underwriting margins and combined ratios for our underwriting operations for the respective periods:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
Under-writing
Margin
 
Combined
Ratio
 
Under-writing
Margin
 
Combined
Ratio
 
Under-writing
Margin
 
Combined
Ratio
 
Under-writing
Margin
 
Combined
Ratio
Personal Lines
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency
2.4
 %
 
97.6
 
4.0
%
 
96.0
 
6.4
 %
 
93.6
 
4.9
 %
 
95.1
Direct
4.7

 
95.3
 
3.5

 
96.5
 
5.9

 
94.1
 
3.4

 
96.6
Total Personal Lines
3.6

 
96.4
 
3.8

 
96.2
 
6.1

 
93.9
 
4.2

 
95.8
Commercial Lines
6.0

 
94.0
 
0.7

 
99.3
 
8.2

 
91.8
 
5.5

 
94.5
Property 1
(27.0
)
 
127.0
 
4.6
 
 
95.4
 
(8.0
)
 
108.0
 
(4.3
)
 
104.3
Other indemnity 2
NM

 
NM
 
NM

 
NM
 
 NM

 
NM
 
 NM
 
NM
Total underwriting operations
2.6

 
97.4
 
3.4

 
96.6
 
5.8

 
94.2
 
4.0

 
96.0
1 Included in both the three and nine months ended September 30, 2017 are 6.7 points of amortization expense predominately associated with the acquisition of a controlling interest in ARX and 6.8 points and 7.3 points, respectively, for the three and nine months ended September 30, 2016. The nine months ended September 30, 2016, also include 0.7 points of expense related to the loss on the exchange transaction that occurred in 2016.
2 Underwriting margins and combined ratios are not meaningful (NM) for our other indemnity businesses due to the low level of premiums earned by, and the variability of loss costs in, such businesses.
Note 9 Dividends — We maintain a policy of paying an annual variable dividend that, if declared, would be payable shortly after the close of the year. This annual variable dividend is based on a target percentage of after-tax underwriting income multiplied by a performance factor (Gainshare factor), which, beginning in 2017, is determined by reference to the Agency auto, Direct auto, special lines, Commercial Lines, and Property business units, with minor exclusions and subject to the limitations discussed below. The target percentage is determined by our Board of Directors on an annual basis and announced to shareholders and the public. In December 2016 , the Board determined the target percentage for 2017 to be 33-1/3 % of annual after-tax underwriting income, which is unchanged from the 2016 target percentage.
The Gainshare factor can range from zero to two and is determined by comparing our operating performance for the specified business units for the year to certain predetermined profitability and growth objectives approved by the Compensation Committee of the Board. This Gainshare factor is also used in the annual cash bonus program currently in place for our employees (our “Gainsharing program”). On a year-to-date basis, as of September 30, 2017 , the Gainshare factor was 1.67 . Since the final factor will be determined based on our results for the full year, the final factor may vary from the current factor.
Our annual dividend program will result in a variable payment to shareholders each year, subject to certain limitations. If the Gainshare factor is zero or if our comprehensive income is less than after-tax underwriting income, no dividend would be payable under our annual variable dividend policy. In addition, the ultimate decision on whether or not a dividend will be paid is in the discretion of the Board of Directors. The Board could decide to alter our policy, or not to pay the annual variable dividend, at any time prior to the declaration of the dividend for the year. Such an action by the Board could result from, among other reasons, changes in the insurance marketplace, changes in our performance or capital needs, changes in federal income tax laws, disruptions of national or international capital markets, or other events affecting our business, liquidity, or financial position.
Following is a summary of our shareholder dividends that were declared in the last two years:
(millions, except per share amounts)
 
Amount
Dividend Type
Declared
Paid
Per Share

Total 1

Annual – Variable
December 2016
February 2017
$
0.6808

$
395.4

Annual – Variable
December 2015
February 2016
$
0.8882

$
519.2

1 Based on an estimate of shares outstanding as of the record date. For the dividends declared in December 2016 and 2015, we paid $ 395.4 million and $519.0 million , respectively.

29



Note 10 Other Comprehensive Income (Loss) The components of other comprehensive income (loss), including reclassification adjustments by income statement line item, were as follows:
 
 
 
 
 
 
 
Components of Changes in
Accumulated Other
Comprehensive Income (after tax)
(millions)
Pretax total
accumulated
other
comprehensive
income

 
Total tax
(provision)
benefit

 
After tax total
accumulated
other
comprehensive
income

 
Total net
unrealized
gains
 (losses)
on securities

 
Net
unrealized
gains on
forecasted
transactions

 
Foreign
currency
translation
adjustment

 
(Income)loss attributable to NCI

Balance at June 30, 2017
$
1,774.1

 
$
(623.4
)
 
$
1,150.7

 
$
1,164.6

 
$
(15.1
)
 
$
(0.9
)
 
$
2.1

Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities
122.7

 
(43.0
)
 
79.7

 
79.7

 
0

 
0

 
0

Net non-credit related OTTI losses, adjusted for valuation changes
0

 
0

 
0

 
0

 
0

 
0

 
0

Forecasted transactions
0

 
0

 
0

 
0

 
0

 
0

 
0

Foreign currency translation adjustment
0.9

 
(0.3
)
 
0.6

 
0

 
0

 
0.6

 
0

Loss attributable to noncontrolling interest (NCI)
(1.1
)
 
0.4

 
(0.7
)
 
0

 
0

 
0

 
(0.7
)
Total other comprehensive income (loss) before reclassifications
122.5

 
(42.9
)
 
79.6

 
79.7

 
0

 
0.6

 
(0.7
)
Less: Reclassification adjustment for amounts realized in net income by income statement line item:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net impairment losses recognized in earnings
(9.3
)
 
3.3

 
(6.0
)
 
(6.0
)
 
0

 
0

 
0

Net realized gains (losses) on securities
15.7

 
(5.5
)
 
10.2

 
10.2

 
0

 
0

 
0

Interest expense
(0.2
)
 
0.1

 
(0.1
)
 
0

 
(0.1
)
 
0

 
0

Total reclassification adjustment for amounts realized in net income
6.2

 
(2.1
)
 
4.1

 
4.2

 
(0.1
)
 
0

 
0

Total other comprehensive income (loss)
116.3

 
(40.8
)
 
75.5

 
75.5

 
0.1

 
0.6

 
(0.7
)
Balance at September 30, 2017
$
1,890.4

 
$
(664.2
)
 
$
1,226.2

 
$
1,240.1

 
$
(15.0
)
 
$
(0.3
)
 
$
1.4


30



 
 
 
 
 
 
 
 
Components of Changes in
Accumulated Other
Comprehensive Income (after tax)
(millions)
Pretax total
accumulated
other
comprehensive
income

 
Total tax
(provision)
benefit

 
After tax total
accumulated
other
comprehensive
income

 
Total net
unrealized
gains
 (losses)
on securities

 
Net
unrealized
gains on
forecasted
transactions

 
Foreign
currency
translation
adjustment

 
(Income)loss attributable to NCI

Balance at December 31, 2016
$
1,439.5

 
$
(506.1
)
 
$
933.4

 
$
939.6

 
$
(9.4
)
 
$
(1.1
)
 
$
4.3

Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities
554.4

 
(194.3
)
 
360.1

 
360.1

 
0

 
0

 
0

Net non-credit related OTTI losses, adjusted for valuation changes
0

 
0

 
0

 
0

 
0

 
0

 
0

Forecasted transactions
(8.0
)
 
2.8

 
(5.2
)
 
0

 
(5.2
)
 
0

 
0

Foreign currency translation adjustment
1.2

 
(0.4
)
 
0.8

 
0

 
0

 
0.8

 
0

Loss attributable to noncontrolling interest (NCI)
(4.5
)
 
1.6

 
(2.9
)
 
0

 
0

 
0

 
(2.9
)
Total other comprehensive income (loss) before reclassifications
543.1

 
(190.3
)
 
352.8

 
360.1

 
(5.2
)
 
0.8

 
(2.9
)
Less: Reclassification adjustment for amounts realized in net income by income statement line item:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net impairment losses recognized in earnings
(12.9
)
 
4.6

 
(8.3
)
 
(8.3
)
 
0

 
0

 
0

Net realized gains (losses) on securities
104.5

 
(36.6
)
 
67.9

 
67.9

 
0

 
0

 
0

Interest expense
0.6

 
(0.2
)
 
0.4

 
0

 
0.4

 
0

 
0

Total reclassification adjustment for amounts realized in net income
92.2

 
(32.2
)
 
60.0

 
59.6

 
0.4

 
0

 
0

Total other comprehensive income (loss)
450.9

 
(158.1
)
 
292.8

 
300.5

 
(5.6
)
 
0.8

 
(2.9
)
Balance at September 30, 2017
$
1,890.4

 
$
(664.2
)
 
$
1,226.2

 
$
1,240.1

 
$
(15.0
)
 
$
(0.3
)
 
$
1.4




31



 
 
 
 
 
 
 
Components of Changes in
Accumulated Other
Comprehensive Income (after tax)
(millions)
Pretax total
accumulated
other
comprehensive
income

 
Total tax
(provision)
benefit

 
After tax total
accumulated
other
comprehensive
income

 
Total net
unrealized
gains
 (losses)
on securities

 
Net
unrealized
gains on
forecasted
transactions

 
Foreign
currency
translation
adjustment

 
(Income)loss attributable to NCI

Balance at June 30, 2016
$
1,477.0

 
$
(519.2
)
 
$
957.8

 
$
970.1

 
$
(8.8
)
 
$
(1.1
)
 
$
(2.4
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities
146.8

 
(51.4
)
 
95.4

 
95.4

 
0

 
0

 
0

Net non-credit related OTTI losses, adjusted for valuation changes
0

 
0

 
0

 
0

 
0

 
0

 
0

Forecasted transactions
0

 
0

 
0

 
0

 
0

 
0

 
0

Foreign currency translation adjustment
0.4

 
(0.1
)
 
0.3

 
0

 
0

 
0.3

 
0

Loss attributable to noncontrolling interest (NCI)
1.8

 
(0.6
)
 
1.2

 
0

 
0

 
0

 
1.2

Total other comprehensive income (loss) before reclassifications
149.0

 
(52.1
)
 
96.9

 
95.4

 
0

 
0.3

 
1.2

Less: Reclassification adjustment for amounts realized in net income by income statement line item:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net impairment losses recognized in earnings
(26.8
)
 
9.4

 
(17.4
)
 
(17.4
)
 
0

 
0

 
0

Net realized gains (losses) on securities
39.6

 
(13.9
)
 
25.7

 
25.7

 
0

 
0

 
0

Interest expense
0.5

 
(0.2
)
 
0.3

 
0

 
0.3

 
0

 
0

Total reclassification adjustment for amounts realized in net income
13.3

 
(4.7
)
 
8.6

 
8.3

 
0.3

 
0

 
0

Total other comprehensive income (loss)
135.7

 
(47.4
)
 
88.3

 
87.1

 
(0.3
)
 
0.3

 
1.2

Balance at September 30, 2016
$
1,612.7

 
$
(566.6
)
 
$
1,046.1

 
$
1,057.2

 
$
(9.1
)
 
$
(0.8
)
 
$
(1.2
)

32



 
 
 
 
 
 
 
Components of Changes in
Accumulated Other
Comprehensive Income (after tax)
(millions)
Pretax total
accumulated
other
comprehensive
income

 
Total tax
(provision)
benefit

 
After tax total
accumulated
other
comprehensive
income

 
Total net
unrealized
gains
 (losses)
on securities

 
Net
unrealized
gains on
forecasted
transactions

 
Foreign
currency
translation
adjustment

 
(Income)loss attributable to NCI

Balance at December 31, 2015
$
1,234.5

 
$
(434.1
)
 
$
800.4

 
$
809.0

 
$
(8.2
)
 
$
(1.5
)
 
$
1.1

Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities
470.4

 
(165.2
)
 
305.2

 
305.2

 
0

 
0

 
0

Net non-credit related OTTI losses, adjusted for valuation changes
(0.1
)
 
0.1

 
0

 
0

 
0

 
0

 
0

Forecasted transactions
0

 
0

 
0

 
0

 
0

 
0

 
0

Foreign currency translation adjustment
1.0

 
(0.3
)
 
0.7

 
0

 
0

 
0.7

 
0

Loss attributable to noncontrolling interest (NCI)
(3.7
)
 
1.4

 
(2.3
)
 
0

 
0

 
0

 
(2.3
)
Total other comprehensive income (loss) before reclassifications
467.6

 
(164.0
)
 
303.6

 
305.2

 
0

 
0.7

 
(2.3
)
Less: Reclassification adjustment for amounts realized in net income by income statement line item:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net impairment losses recognized in earnings
(27.0
)
 
9.5

 
(17.5
)
 
(17.5
)
 
0

 
0

 
0

Net realized gains (losses) on securities
114.9

 
(40.4
)
 
74.5

 
74.5

 
0

 
0

 
0

Interest expense
1.5

 
(0.6
)
 
0.9

 
0

 
0.9

 
0

 
0

Total reclassification adjustment for amounts realized in net income
89.4

 
(31.5
)
 
57.9

 
57.0

 
0.9

 
0

 
0

Total other comprehensive income (loss)
378.2

 
(132.5
)
 
245.7

 
248.2

 
(0.9
)
 
0.7

 
(2.3
)
Balance at September 30, 2016
$
1,612.7

 
$
(566.6
)
 
$
1,046.1

 
$
1,057.2

 
$
(9.1
)
 
$
(0.8
)
 
$
(1.2
)
In an effort to manage interest rate risk, we entered into forecasted transactions on each of Progressive’s outstanding debt issuances. Upon issuing the debt, the gains (losses) recognized on the effective cash flow hedges are recorded as unrealized gains (losses) in accumulated other comprehensive income and amortized into interest expense over the term of the related debt issuance. We expect to reclassify $1.0 million (pretax) into interest expense during the next 12 months, related to net unrealized losses on forecasted transactions.
For the three and nine months ended September 30, 2016, the net impairment losses recognized in earnings were revised to reflect a decrease in a reclassification adjustment rather than an increase as previously disclosed. The offset was to other comprehensive income before reclassifications-investment securities.The impacts to classification within the table are immaterial. Overall, this revision had no impact on the total other comprehensive income (loss) reported for these periods.
Note 11 Litigation — The Progressive Corporation and/or its insurance subsidiaries are named as defendants in various lawsuits arising out of claims made under insurance policies written by our insurance subsidiaries in the ordinary course of business. We consider all legal actions relating to such claims in establishing our loss and loss adjustment expense reserves. In addition, The Progressive Corporation and/or its insurance subsidiaries are named as defendants in a number of class action or individual lawsuits that challenge certain of the operations of the insurance subsidiaries.
These cases include those alleging damages as a result of our subsidiaries’ practices in evaluating or paying medical or injury claims or benefits, including, but not limited to, personal injury protection, medical payments, and bodily injury benefits; the utilization, content, or appearance of policy documents; labor rates paid to auto body repair shops; wage and hour issues; and cases challenging other aspects of our subsidiaries’ claims or marketing practices or other business operations. Other insurance companies face many of these same issues.
The nature and volume of litigation to which The Progressive Corporation is subject is similar to that which was disclosed in Note 12 Litigation in our 2016 Annual Report to Shareholders.
We plan to contest the pending lawsuits vigorously, but may pursue settlement negotiations in some cases, if appropriate. The outcomes of pending cases are uncertain at this time. We establish accruals for these lawsuits when it is probable that a loss has been or will be incurred and we can reasonably estimate potential loss exposure, which may include a range of loss. As to lawsuits for which the loss is considered neither probable or estimable, or is considered probable but not estimable, we do not establish an accrual. Nevertheless, we continue to evaluate this pending litigation to determine if any losses not deemed

33



probable and estimable become so, at which point we would establish an accrual at our best estimate of the loss or range of loss.
With respect to our pending lawsuits that are not related to claims under insurance policies, the accruals that we have established, if any, were not material at September 30, 2017 or 2016, and there were no material settlements during the first nine months of 2017 or 2016. For most of these lawsuits, we do not consider any losses to be both probable and estimable, and we are unable to estimate a meaningful range of loss, if any, at this time, due to the factors discussed in Note 12 Litigation in our 2016 Annual Report to Shareholders. In the event that any one or more of these lawsuits results in a substantial judgment against or settlement by us, or if our accruals (if any) prove to be inadequate by a significant amount, the resulting liability could have a material adverse effect on our consolidated financial condition, cash flows, and/or results of operations. For a further discussion on our pending litigation and related reserving policies, see Note 12 Litigation in our 2016 Annual Report to Shareholders.
Note 12 Redeemable Noncontrolling Interest — In connection with the April 2015 acquisition of a controlling interest in ARX, The Progressive Corporation entered into a stockholders’ agreement with the other ARX stockholders. As part of the stockholders’ agreement, the minority ARX shareholders have the right to “put” their ARX shares to Progressive in two installments, one in early 2018 and one in early 2021, and Progressive has the ability to “call a portion of the outstanding shares shortly thereafter. If these rights are exercised in full when available, our ownership stake in ARX capital stock will exceed 80% in 2018 and will reach 100% in 2021. See Note 15 – Redeemable Noncontrolling Interest in our 2016 Annual Report to Shareholders for a discussion of the purchase prices for shares to be purchased by Progressive pursuant to these put or call rights.
Since these securities are redeemable upon the occurrence of an event that is not solely within the control of Progressive, we have recorded the redeemable noncontrolling interest (NCI) as mezzanine equity on our consolidated balance sheets, which represents the minority shares at the current estimated purchase price pursuant to the put and call provisions of the stockholders’ agreement. The estimated purchase price is based, in part, on the change in tangible net book value of ARX from December 31, 2014 to the balance sheet dates.
In addition to these minority shares, at September 30, 2017 , ARX employees hold options to purchase 22,550 ARX shares. These options and any shares issued upon exercise are subject to the stockholders’ agreement, including the right to “put these shares to Progressive, as described above. Until the options are exercised, the underlying obligation of approximately $32.2 million is not recorded as part of redeemable NCI.
The changes in the components of redeemable NCI during the nine months ended September 30, 2017 and 2016 , and the year ended December 31, 2016 , were:
(millions)
September 30, 2017

 
September 30, 2016

 
December 31, 2016

Balance, Beginning of period
$
483.7

 
$
464.9

 
$
464.9

Net income attributable to NCI
1.9

 
11.3

 
26.2

Other comprehensive income (loss) attributable to NCI
2.9

 
2.3

 
(3.2
)
Exercise of employee stock options
3.4

 
0

 
0

Change in redemption value of NCI
6.3

 
(6.0
)
 
(4.2
)
Balance, End of period
$
498.2

 
$
472.5

 
$
483.7

Note 13 Goodwill and Intangible Assets
Goodwill
The carrying amount of goodwill increased $3.3 million as a result of the acquisition of a small excess and surplus lines insurance company during the second quarter 2017, which will provide us flexibility in our Commercial Lines business going forward. Goodwill recorded at September 30, 2017 , was $452.7 million . No accumulated goodwill impairment losses exist.

34



Intangible Assets
The following table is a summary of the net carrying amount of other intangible assets as of September 30, 2017 and 2016 , and December 31, 2016 :
(millions)
September 30, 2017

 
September 30, 2016

 
December 31, 2016

Intangible assets subject to amortization
$
372.2

 
$
435.9

 
$
420.4

Indefinite-lived intangible assets 1
12.4

 
12.4

 
12.4

Total
$
384.6

 
$
448.3

 
$
432.8

1 Indefinite-lived intangible assets are comprised of state insurance and agent licenses. State insurance licenses were previously subject to amortization under superseded accounting guidance and have $0.6 million of accumulated amortization for all periods presented.

Intangible assets subject to amortization consisted of the following:
(millions)
September 30, 2017
 
September 30, 2016
 
December 31, 2016
Category
Gross Carrying Amount

Accumulated Amortization

Net Carrying Amount

 
Gross Carrying Amount

Accumulated Amortization

Net Carrying Amount

 
Gross Carrying Amount

Accumulated Amortization

Net Carrying Amount

Policies in force
$
256.2

$
91.5

$
164.7

 
$
256.2

$
55.0

$
201.2

 
$
256.2

$
64.1

$
192.1

Agency relationships
159.2

28.4

130.8

 
159.2

17.1

142.1

 
159.2

19.9

139.3

Software rights
79.1

26.8

52.3

 
79.1

16.1

63.0

 
79.1

18.8

60.3

Trade name
34.8

10.4

24.4

 
34.8

5.2

29.6

 
34.8

6.1

28.7

Total
$
529.3

$
157.1

$
372.2

 
$
529.3

$
93.4

$
435.9

 
$
529.3

$
108.9

$
420.4


Amortization expense was $17.2 million and $48.2 million for the three and nine months ended September 30, 2017 , respectively, compared to $15.5 million and $46.6 million during the same period last year.
During the third quarter 2017, we revised our estimate of the economic useful life of our trade name intangible asset from an original life of 10 years to a remaining life of 2 years . The decrease in the useful life represents the estimated length of time that it is expected to take to transition the branding of our Property business from the ASI trade name to “Progressive Home.” As of September 30, 2017, the remaining average life of all of our intangible assets is 5.2 years .
Note 14 New Accounting Standards
Issued

In March 2017, the Financial Accounting Standards Boards (FASB) issued an accounting standards update (ASU) related to premium amortization on purchased callable debt securities. The intent of the standard is to shorten the amortization period for certain purchased callable debt securities held at a premium. Under the ASU, the premium is required to be amortized to the earliest call date. The ASU more closely aligns interest income recorded on bonds held at a premium with the economics of the underlying instrument. The ASU, which is required to be applied on a modified retrospective basis, is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Since we have historically used a yield-to-worst scenario for our securities that were purchased at a premium, and the first call on a premium security most often produces the lowest and most conservative yield, we do not expect this standard to have a significant impact on our financial condition, cash flows, or results of operations.
Adopted
On January 1, 2017, we adopted the ASU to simplify the accounting for employee share-based payment transactions. There were several provisions that could be adopted under this ASU. We did not elect to make any changes to our method of recording forfeitures and are continuing to withhold taxes at the minimum statutory tax rate. We did elect, on a retrospective basis, to disclose the payment of cash to a taxing authority for which we withheld shares for this purpose as a financing activity. Lastly, during the first nine months of 2017, we recognized $23.1 million of excess tax benefits as an income tax benefit in our consolidated statements of comprehensive income; this provision was adopted on a prospective basis.

35



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

I. OVERVIEW
The Progressive Corporation’s insurance subsidiaries recognized growth in both premiums and policies in force in the third quarter 2017, compared to the same period last year. During the third quarter 2017, companywide net premiums written and earned increased 18% and 14%, respectively, and policies in force grew 9%. Pretax income was down 3% on a quarter-over-prior-year quarter basis with underwriting income down 13% and investment income up 20%. During the third quarter 2017, we incurred significant catastrophe losses, primarily from Hurricanes Harvey and Irma. For the third quarter 2017, catastrophe losses, net of reinsurance, were $431.1 million, or 6.6 points on the companywide combined ratio, compared to $158.7 million, or 2.8 points, in the same period last year. The increase in investment income primarily reflects an increase in average assets. Even though pretax income decreased, net income attributable to Progressive increased 13% for the third quarter compared to last year, reflecting primarily the excess tax benefit we recognized in the third quarter 2017 on our employee share-based transactions as a result of a new accounting standard adopted in 2017; previously this benefit was booked directly to paid-in capital instead of the tax provision. During the third quarter 2017, our total capital (debt plus shareholders’ equity) increased $227 million, to $12.6 billion.
A. Insurance Operations
Our Personal Lines and Commercial Lines operating segments were profitable during the third quarter 2017, while our Property operating segment generated an underwriting loss during the quarter. Our Personal Lines underwriting margin was 3.6% and Commercial Lines was 6.0%. During the third quarter 2017, in addition to the normal seasonality, the special lines products were significantly affected by the hurricanes. As a result, the special lines products unfavorably impacted our total Personal Lines combined ratio by 2.7 points for the third quarter 2017. Our Property business combined ratio was 127.0 for the quarter. On a net basis (i.e., after reinsurance), our Property business incurred catastrophe losses during the third quarter 2017 of $96.9 million, or 38.0 points on their combined ratio.
During the third quarter 2017, our Personal Lines, Commercial Lines, and Property segments each contributed to our premium growth and each had solid increases in policies in force.
During the quarter, total new personal auto applications (i.e., issued policies) increased 25% on a quarter-over-prior-year quarter basis, with both our Agency and Direct auto businesses increasing 25%. The personal auto businesses continued to benefit from our advertising campaigns, competitive product offerings, and position in the marketplace. We continued to generate strong new business application growth in our “Robinsons (bundled home and auto) customers through our Platinum agents and, in our Direct business, through our in-house agency as well as through HomeQuote Explorer, our online quoting platform for home insurance. New applications for our special lines products were up 4% during the third quarter 2017, compared to the same period last year. During the third quarter 2017, we completed the roll out, to our currently eligible states (41 states and the District of Columbia), of our new Snapshot ® mobile app that we introduced in late 2016. The introduction of the mobile app, which is in addition to the plug-in device, is increasing consumer adoption of Snapshot.
For the Commercial Lines business, new applications increased 5% on a quarter-over-prior-year quarter basis during the third quarter 2017. During the quarter, we experienced substantial improvement over the first half of 2017. During the second half of 2016, we imposed underwriting restrictions, which we began to lift at the end of the first quarter of 2017. For the first nine months of 2017, Commercial Lines new applications decreased 6%, compared to the same period in 2016.
The Property business had a 46% increase in new applications for the third quarter 2017, compared to the same period last year. The growth is largely attributable to state expansion that occurred throughout 2016 and 2017 in business written by both ARX and Progressive (i.e., renters business), more competitive product offerings, as well as growth in the Platinum agency offerings.
During the quarter, on a quarter-over-prior-year quarter basis, our written premium per policy for our personal auto businesses increased 5%, primarily reflecting the rate increases taken during the last 12 months. Written premium per policy increased 4% for our special lines products and increased 13% for our Commercial Lines business. The Commercial Lines increase reflects rate actions taken in late 2016 and early 2017. The written premium per policy for our Property business decreased 1%, reflecting an increase in the renters business, which has lower premiums per policy.
We ended the third quarter 2017 with 11.4 million auto policies in force, with both Agent and Direct auto growing 11% over the the same period last year. Our special lines products policies in force grew 2% over the end of the third quarter last year and Commercial Lines grew 4%. On a year-over-year basis, total Personal Lines increased policies in force by about 1.2 million policies and Commercial Lines increased policies by nearly 26,000. Our Property segment reported nearly 1.4 million policies in force, a 16% increase over the end of the third quarter last year.
To further grow policies in force, it is critical that we retain our customers for longer periods. Consequently, increasing retention is one of our most important priorities, and we continue to focus on having a very competitive and preferred product

36



available and, through our service philosophy, to make sure to give our customers a reason to stay. 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 one measure of customer retention in our vehicle businesses. Our trailing 12-month total auto policy life expectancy increased 5% over last year with strength across both the Agent and Direct auto businesses.
B. Investments

The fair value of our investment portfolio was $ 27.0 billion at September 30, 2017 . 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 September 30, 2017 , 17 % of our portfolio was allocated to Group I securities and 83% to Group II securities, compared to 18 % and 82%, respectively, at December 31, 2016 .
Our recurring investment income generated a pretax book yield of 2.3% for the third quarter 2017 , compared to 2.2% for the same period in 2016 . Our investment portfolio produced a fully taxable equivalent (FTE) total return of 1.1% for the third quarter 2017 , compared to 1.3% for the same period in 2016 . Our fixed-income and common stock portfolios had FTE total returns of 0.7% and 4.3% , respectively, for the third quarter 2017 , compared to 0.9% and 4.1% last year.
At September 30, 2017 , the fixed-income portfolio had a weighted average credit quality of A+ and a duration of 2.2 years, which was unchanged from December 31, 2016 . We maintain our fixed-income portfolio strategy of investing in high-quality, liquid securities. We remain confident in our preference for shorter duration positioning during times of low interest rates as a means to limit any decline in portfolio value from an increase in rates.
II. FINANCIAL CONDITION
A. Liquidity and Capital Resources
Progressive’s insurance operations create liquidity by collecting and investing premiums from new and renewal business in advance of paying claims. Operations generated positive cash flows of about $ 3.2 billion and $ 2.3 billion for the first nine months of 2017 and 2016 , respectively. We continue to hold a sufficient amount of short-term and U.S. Treasury securities to provide ample liquidity to pay claims, including claims from Hurricanes Harvey and Irma, without disrupting our portfolio allocation or investment strategies.
Our total capital (debt plus shareholders’ equity) was $12.6 billion, at book value, at September 30, 2017 , compared to $11.2 billion at September 30, 2016 and $11.1 billion at December 31, 2016 . Our interest expense increased 6% on quarter-over-prior-year quarter basis, primarily from the following debt transactions. We issued $850 million of 4.125% Senior Notes due 2047 in April 2017, and $500 million of 2.45% Senior Notes due 2027 in August 2016. In June 2017, we redeemed our 6.70% Fixed-to-Floating Rate Junior Subordinated Debentures, at par, in the aggregate principal amount of $563.7 million. During the third quarter 2017, ARX redeemed their junior subordinated notes and senior notes in aggregate principal amount of $65.2 million. Our debt-to-total capital ratio, which reflects debt as a percent of debt plus shareholders’ equity and excludes redeemable noncontrolling interest, was 26.3% at September 30, 2017 , 28.0% at September 30, 2016, and 28.3% at December 31, 2016 .
As part of the stockholders’ agreement related to the ARX Holding Corp. acquisition, Progressive has the ability to achieve 100% ownership of ARX by the end of the second quarter of 2021. In addition, the minority ARX shareholders have the right to “put” their ARX shares to Progressive, at various times and in varying amounts, prior to that date. The estimated cost to acquire the additional ARX shares is represented by the redeemable noncontrolling interest reflected on our consolidated balance sheets (see Note 12 Redeemable Noncontrolling Interest ).
Based upon our capital planning and forecasting efforts, we believe that we have sufficient capital resources, cash flows from operations, and borrowing capacity to support our current and anticipated business needs, scheduled principal and interest payments on our debt, payment obligations under the ARX stockholders’ agreement, any declared dividends, and other expected capital requirements. The covenants on The Progressive Corporation’s existing debt securities do not include any rating or credit triggers that would require an adjustment of the interest rate or an acceleration of principal payments in the event our securities are downgraded by a rating agency.
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, and other significant business interruptions, to estimate our potential capital needs.

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During the first nine months of 2017 and at all times during 2016 , our total capital exceeded the sum of our regulatory capital layer plus our self-constructed extreme contingency layer, as described in our Annual Report to Shareholders for the year ended December 31, 2016.
Our available capital allowed us to take actions to deploy underleveraged capital, including:

Repurchases of our common shares. In accordance with our financial policies, we will repurchase our common shares when it is prudent to do so. As of September 30, 2017 , we had 24.2 million shares remaining under our 2017 Board repurchase authorization. The following table shows our share repurchase activity during the respective periods:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(millions, except per share amounts)
2017

 
2016

 
2017

 
2016

Total number of shares purchased
0.8

 
1.6

 
1.5

 
5.2

Total cost
$
38.0

 
$
51.5

 
$
62.1

 
$
163.6

Average price paid per share
$
45.77

 
$
31.70

 
$
41.57

 
$
31.58

 
Dividends. As part of our capital management activities, in February 2017 and 2016 , we paid annual variable dividends of $0.6808 per share and $0.8882 per share, respectively, which were each declared in December of the prior year.

We have an outstanding line of credit with PNC Bank, National Association (PNC) in the maximum principal amount of $250 million. Subject to the terms and conditions of the line of credit documents, advances under the line of credit (if any) will bear interest at a variable rate equal to the higher of PNC’s Prime Rate or the sum of the Federal Funds Open Rate plus 50 basis points. Each advance must be repaid on the 30th day after the advance or, if earlier, on April 30, 2018, the expiration date of the line of credit. Prepayments are permitted without penalty. All advances under the line of credit are subject to PNC’s discretion.
        
Short-Term Borrowings
We did not engage in short-term borrowings, including any borrowings under our discretionary line of credit, to fund our operations or for liquidity purposes during the nine months ended September 30, 2017 or at any point in 2016 . As discussed above, our insurance operations create liquidity by collecting and investing insurance premiums in advance of paying claims. Information concerning our insurance operations can be found below under Results of Operations Underwriting , and details about our investment portfolio can be found below under Results of Operations Investments .
We did not enter into any repurchase commitment transactions during the first nine months of 2017 or 2016 , and we had no open repurchase commitments at September 30, 2017 or 2016 , or December 31, 2016 .
B. Commitments and Contingencies
Contractual Obligations
During the first nine months of 2017 , our contractual obligations have not changed materially from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2016 , other than the debt transactions described above.
Off-Balance-Sheet Arrangements
Our off-balance-sheet leverage includes derivative positions, operating leases, and purchase obligations. See the “Derivative Instruments” section of Note 2 Investments and of this Management’s Discussion and Analysis for a summary of our derivative activity since year-end 2016 . There have been no material changes in the other off-balance-sheet items since the discussion in the notes to the financial statements in Progressive’s Annual Report on Form 10-K for the year ended December 31, 2016 .

38



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. Our other indemnity business represents our run-off businesses.

Our Personal Lines business writes insurance for personal autos and special lines products (e.g., motorcycles, watercraft, and RVs) and represented about 84% and 85% of our total net premiums written in the third quarter and first nine months of 2017, respectively, compared to 85% and 84% for the same periods last year. We currently write our Personal Lines products in all 50 states. We also offer our personal auto product (not special lines products) in the District of Columbia.

Personal auto represented 93% and 92% of our total Personal Lines net premiums written in the third quarter and first nine months of 2017, respectively, compared to 92% and 91% for the same periods last year. These auto policies are primarily written for 6-month terms. The remaining Personal Lines business is comprised of special lines products, which are written for 12-month terms.

Our Commercial Lines business writes primary liability, physical damage, and other auto-related insurance for automobiles and trucks owned and/or operated predominantly by small businesses. Our Commercial Lines business represented 12% and 11% of our total net premiums written in the third quarter and first nine months of 2017, respectively, compared to 11% and 12% for the same periods last year. We write Commercial Lines business in all 50 states and the majority of our policies are written for 12-month terms.

Our Property business writes residential property insurance (e.g., single family homes, condominium unit owners, rental coverage) for homeowners, other property owners, and renters. Our Property business represented 4% of our total net premiums written in both the third quarter and first nine months of 2017, and during the same periods last year. Our Property business primarily consists of the operations of the ARX organization. ARX wholly owns or controls the insurance companies that we refer to in the aggregate as “ASI.” ASI, principally in the Agency channel, writes residential property in 40 states and the District of Columbia and flood insurance in 43 states and the District of Columbia. Progressive also writes renters insurance in 40 states and the District of Columbia. Florida and Texas represented nearly half of the year-to-date premium volume in the Property business. Property policies are generally written on a 12-month term.
B. Profitability
Profitability for our underwriting operations is defined by pretax underwriting profit, which is calculated as net premiums earned plus fees and other revenues less losses and loss adjustment expenses, policy acquisition costs, and other underwriting expenses. We also use underwriting profit margin, which is underwriting profit expressed as a percentage of net premiums earned, to analyze our results. For the respective periods, our underwriting profitability results were as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
Underwriting
Profit (Loss)
 
Underwriting
Profit (Loss)
 
Underwriting
Profit (Loss)
 
Underwriting
Profit (Loss)
($ in millions)
$
 
Margin  
 
$
 
Margin  
 
$
 
Margin  
 
$
 
Margin  
Personal Lines
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency
$
69.5

 
2.4
 %
 
$
98.6

 
4.0
%
 
$
524.7

 
6.4
 %
 
$
354.5

 
4.9
 %
Direct
128.7

 
4.7

 
84.4

 
3.5

 
466.7

 
5.9

 
237.5

 
3.4

Total Personal Lines
198.2

 
3.6

 
183.0

 
3.8

 
991.4

 
6.1

 
592.0

 
4.2

Commercial Lines
42.8

 
6.0

 
4.4

 
0.7

 
166.4

 
8.2

 
96.7

 
5.5

Property 1
(69.0
)
 
(27.0
)
 
10.4

 
4.6

 
(57.5
)
 
(8.0
)
 
(27.7
)
 
(4.3
)
Other indemnity 2
0

 
NM

 
(0.8
)
 
NM

 
(0.3
)
 
 NM

 
(1.6
)
 
 NM

Total underwriting operations
$
172.0

 
2.6
 %
 
$
197.0

 
3.4
%
 
$
1,100.0

 
5.8
 %
 
$
659.4

 
4.0
 %
1 For the three and nine months ended September 30, 2017 , amounts include $17.2 million and $48.2 million, respectively, of amortization expense predominately associated with the acquisition of a controlling interest in ARX, and $15.5 million and $46.6 million for the respective periods last year. The increase in amortization expense reflects a change in the economic useful life life of the trade name intangible asset; see Note 13 – Goodwill and Intangible Assets for further discussion.
2 Underwriting margins for our other indemnity businesses are not meaningful (NM) due to the lack of premiums earned by, and the variability of loss costs in, such businesses.

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Our underwriting profit for the third quarter 2017 was adversely impacted by significant catastrophe losses, primarily from Hurricanes Harvey and Irma. Even after adjustments for amortization expense, Property operated at a loss for the quarter. Our underwriting profit for the nine months ended September 30, 2017 was favorably impacted by lower than anticipated frequency throughout the year, compared to last year, as well as higher earned premium per policy on both our personal and commercial auto products, on a year-over-year basis, reflecting rate increases taken during 2016 and into 2017. This favorable benefit was offset somewhat by the catastrophe losses during the year. For the current nine month period, our aggregate underwriting profit met our 4% or better profitability goal, despite the fact that Property operated at a loss for the period.
Further underwriting results for our Personal Lines business, including results by distribution channel, the Commercial Lines business, the Property business, and our underwriting operations in total, were as follows:
 
Three Months Ended September 30,
Nine Months Ended September 30,
Underwriting Performance 1
2017

 
2016

 
Change

2017

 
2016

 
Change

Personal Lines—Agency
 
 
 
 
 
 
 
 
 
 
Loss & loss adjustment expense ratio
78.3

 
76.4

 
1.9
 pts.
74.1

 
75.5

 
(1.4
) pts.
Underwriting expense ratio
19.3

 
19.6

 
(0.3
) pts.
19.5

 
19.6

 
(0.1
) pts.
Combined ratio
97.6

 
96.0

 
1.6
 pts.
93.6

 
95.1

 
(1.5
) pts.
Personal Lines—Direct
 
 
 
 
 
 
 
 
 
 
Loss & loss adjustment expense ratio
75.7

 
78.1

 
(2.4
) pts.
74.4

 
77.0

 
(2.6
) pts.
Underwriting expense ratio
19.6

 
18.4

 
1.2
 pts.
19.7

 
19.6

 
0.1
 pts.
Combined ratio
95.3

 
96.5

 
(1.2
) pts.
94.1

 
96.6

 
(2.5
) pts.
Total Personal Lines
 
 
 
 
 
 
 
 
 
 
Loss & loss adjustment expense ratio
76.9

 
77.2

 
(0.3
) pts.
74.3

 
76.2

 
(1.9
) pts.
Underwriting expense ratio
19.5

 
19.0

 
0.5
 pts.
19.6

 
19.6

 
0
 pts.
Combined ratio
96.4

 
96.2

 
0.2
 pts.
93.9

 
95.8

 
(1.9
) pts.
Commercial Lines
 
 
 
 
 
 
 
 
 
 
Loss & loss adjustment expense ratio
72.2

 
78.2

 
(6.0
) pts.
69.8

 
72.4

 
(2.6
) pts.
Underwriting expense ratio
21.8

 
21.1

 
0.7
 pts.
22.0

 
22.1

 
(0.1
) pts.
Combined ratio
94.0

 
99.3

 
(5.3
) pts.
91.8

 
94.5

 
(2.7
) pts.
Property
 
 
 
 
 
 
 

 
 
Loss & loss adjustment expense ratio
95.0

 
63.8

 
31.2
 pts.
73.4

 
70.7

 
2.7
 pts.
Underwriting expense ratio 2
32.0

 
31.6

 
0.4
 pts.
34.6

 
33.6

 
1.0
 pts.
Combined ratio 2
127.0

 
95.4

 
31.6
 pts.
108.0

 
104.3

 
3.7
 pts.
Total Underwriting Operations 3
 
 
 
 
 
 
 
 
 
 
Loss & loss adjustment expense ratio
77.2

 
76.9

 
0.3
 pts.
73.8

 
75.6

 
(1.8
) pts.
Underwriting expense ratio
20.2

 
19.7

 
0.5
 pts.
20.4

 
20.4

 
0
 pts.
Combined ratio
97.4

 
96.6

 
0.8
 pts.
94.2

 
96.0

 
(1.8
) pts.
Accident year loss & loss adjustment expense ratio 4
77.7

 
77.8

 
(0.1
) pts.
73.6

 
75.7

 
(2.1
) pts.
1 Ratios are expressed as a percentage of net premiums earned; fees and other revenues are netted with underwriting expenses in the ratio calculations.
2 Underwriting expense and combined ratios include amortization expense predominately associated with the acquisition of a controlling interest in ARX of 6.7 points for both the three and nine months ended September 30, 2017 and 6.8 points and 7.3 points for the three and nine months ended September 30, 2016 , respectively. In addition, for the nine months ended September 30, 2016, results include 0.7 points of expense related to a loss on an exchange transaction. Excluding the amortization expense, for the three months ended September 30, 2017 and 2016, the Property business would have reported an expense ratio of 25.3 and 24.8, respectively, and combined ratios of 120.3 and 88.6, respectively. For the nine months ended September 30, 2017 and 2016, excluding the amortization expense and the loss on the exchange, the expense ratio would have been 27.9 and 25.6, respectively, and the combined ratio would have been 101.3 and 96.3, respectively.
3 Combined ratios for the other indemnity businesses are not presented separately due to the low level of premiums earned by, and the variability of loss costs in, such businesses. These businesses generated no underwriting profit or loss for the three months ended September 30, 2017 , compared to an underwriting loss of $0.8 million for the same period in 2016. For the nine months ended September 30, 2017 and 2016, the other indemnity businesses generated an underwriting loss of $0.3 million and $1.6 million, respectively.
4 The accident year ratios include only the losses that occurred during the period noted. As a result, accident period results will change over time, either favorably or unfavorably, as we revise our estimates of loss costs when payments are made or reserves for that accident period are reviewed.

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Losses and Loss Adjustment Expenses (LAE)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(millions)
2017

 
2016

 
2017

 
2016

Change in net loss and LAE reserves
$
616.1

 
$
320.9

 
$
1,161.6

 
$
806.0

Paid losses and LAE
4,434.4

 
4,077.3

 
12,767.2

 
11,748.6

Total incurred losses and LAE
$
5,050.5

 
$
4,398.2

 
$
13,928.8

 
$
12,554.6

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, claim 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 0.3 points for the third quarter 2017, compared to the third quarter 2016. The increase in catastrophe losses on a quarter-over-prior-year quarter basis were partially offset by lower auto frequency. For the first nine months, the loss and LAE ratio decreased 1.8 points, compared to the same period in 2016, primarily due to lower auto frequency.
The following table shows our consolidated catastrophe losses, excluding loss adjustment expenses, incurred during the periods:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
($ in millions)
2017
 
2016
 
2017
 
2016
Vehicle businesses
$
334.2

 
$
124.9

 
$
557.6

 
$
330.4

Property business, net of reinsurance (excluding ASL)
81.2

 
33.8

 
306.3

 
147.2

Reinsurance (recoverable)/reversal on ASL 1
15.7

 

 
(86.2
)
 

Property business, net
96.9

 
33.8

 
220.1

 
147.2

     Total net catastrophe losses incurred
$
431.1

 
$
158.7

 
$
777.7

 
$
477.6

Increase to combined ratio
6.6
 pts.
 
2.8
 pts.
 
4.1
 pts.
 
2.9
 pts.
1 Represents the reinsurance recoverable recorded, or the change in the reinsurance recoverable, on the losses under our aggregate stop-loss agreement (ASL); including LAE costs, the balance in our reinsurance recoverable on the ASL at September 30, 2017, was $95.5 million, a decrease of $17.4 million during the third quarter 2017.
The catastrophe losses in the third quarter 2017 were primarily due to Hurricane Harvey in Texas and Hurricane Irma, primarily in Florida. In our Property business, we maintain catastrophe reinsurance, which limited our losses from Hurricane Irma to $50 million. On a gross basis, including losses and LAE, the Property business had losses from Hurricane Irma of $330.0 million.
As shown in the table above, during the third quarter 2017, we recorded a partial reversal of our reinsurance recoverable on our losses under our aggregate stop-loss agreement in our Property business for the three months ended September 30, 2017. This agreement, which became effective on January 1, 2017, covers all current accident year losses, except those from named storms and liability claims, and a portion of the LAE associated with those losses and provides $200 million of coverage if ASI’s applicable loss and LAE ratio for the full year exceeds 63%. The current $95.5 million recoverable is based on our year-to-date results through September 30, 2017. To the extent our year-to-date loss and LAE ratio falls below 63%, we would reverse a portion of the reinsurance recoverable, which would result in the reported catastrophe losses on our Property business being greater than the actual amount of incurred losses in applicable periods. As a result, due to the structure of the agreement, the amount of the reinsurance recoverable will fluctuate from period-to-period until the end of 2017, when full year results are known.
At September 30, 2017, the balance in reinsurance recoverables, including recoverables on both paid and unpaid losses, was $2.7 billion, an increase of about $800 million when compared to both September 30, 2016 and December 31, 2016. As of the end of the third quarter 2017, our Property business had $280.0 million of recoverables under our catastrophe reinsurance programs, due to losses incurred from Hurricane Irma, and $95.5 million under the aggregate stop-loss agreement, as discussed above; we did not have any recoverables from these reinsurance programs in 2016. In addition, at September 30, 2017, the Property business had $344.2 million from the National Flood Insurance Program (NFIP) for losses primarily related to Hurricanes Harvey and Irma, which is an increase of $115.2 million from September 30, 2016 and $265.7 million from

41



December 31, 2016. The remainder of the reinsurance recoverables is primarily attributable to the state-provided reinsurance facilities (e.g., Michigan Catastrophic Claims Association). See Note 7 Reinsurance in our 2016 Annual Report to Shareholders for a further discussion of our reinsurance.
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. Comprehensive coverage insures against damage to a customer’s vehicle due to various causes other than collision, such as windstorms, hail, theft, falling objects, and glass breakage.
Total personal auto incurred severity (i.e., average cost per claim, including both paid losses and the change in case reserves) on a calendar-year basis increased about 1% and 3% for the three and nine months ended September 30, 2017, respectively, compared to the same periods last year. Following are the changes we experienced in severity in our auto coverages on a year-over-year basis:
Bodily injury increased about 2% for the third quarter and 3% for the first nine months of 2017.
Auto property damage increased about 6% for both periods.
Personal injury protection (PIP) decreased 10% for the third quarter, partially due to the timing of adjuster set reserves and unusually high severity during the third quarter of 2016. PIP severity increased about 3% year to date.
It is a challenge to estimate future severity, especially for bodily injury and PIP claims, but we continue to monitor changes in the underlying costs, such as medical costs, health care reform, and jury verdicts, along with regulatory changes and other factors that may affect severity.
Our incurred frequency of auto accidents, on a calendar-year basis, decreased about 5% and 4% for the three and nine months ended September 30, 2017, respectively, compared to the same periods last year. Following are our frequency changes by coverage on a year-over-year basis:
Bodily injury decreased about 3% for the third quarter and 2% for the first nine months of 2017.
Auto property damage decreased about 5% for the third quarter and 3% for the first nine months of 2017.
Collision decreased about 6% for the third quarter and 4% for the first nine months of 2017.
PIP decreased about 7% for the third quarter and 6% for the first nine months of 2017.

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 certainty. We analyze trends to distinguish changes in our experience from external factors, such as changes in the number of vehicles per household, miles driven, gasoline prices, greater vehicle safety, and unemployment rates, versus those resulting from shifts in the mix of our business, to allow us to reserve more accurately for our loss exposure.
The table below presents the actuarial adjustments implemented and the loss reserve development experienced in the following periods on a companywide basis:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
($ in millions)
2017
 
2016
 
2017
 
2016
ACTUARIAL ADJUSTMENTS
 
 
 
 
 
 
 
Reserve decrease (increase)
 
 
 
 
 
 
 
Prior accident years
$
21.9

 
$
27.3

 
$
92.8

 
$
75.0

Current accident year
3.0

 
(19.9
)
 
(13.4
)
 
(22.6
)
Calendar year actuarial adjustment
$
24.9

 
$
7.4

 
$
79.4

 
$
52.4

PRIOR ACCIDENT YEARS DEVELOPMENT
 
 
 
 
 
 
 
Favorable (unfavorable)
 
 
 
 
 
 
 
Actuarial adjustment
$
21.9

 
$
27.3

 
$
92.8

 
$
75.0

All other development
9.8

 
25.2

 
(135.3
)
 
(52.1
)
Total development
$
31.7

 
$
52.5

 
$
(42.5
)
 
$
22.9

(Increase) decrease to calendar year combined ratio
0.5
 pts.
 
0.9
 pts.
 
(0.2
) pts.
 
0.1
 pts.
Total development consists of both actuarial adjustments and “all other development.” The actuarial adjustments represent the net changes made by our actuarial staff to both current and prior accident year reserves based on regularly scheduled reviews. Through these reviews, our actuaries identify and measure variances in projected frequency and severity trends, which allow them to adjust reserves to reflect current cost expectations. For our Property business, 100% of the outstanding reserves are

42



reviewed monthly and, as such, include any development on catastrophe losses as part of the actuarial adjustments. For the vehicle businesses, only a subset of our reserves is reviewed monthly as part of the actuarial adjustment process. Catastrophe losses for the vehicle businesses would be reflected in the all other development, discussed below, to the extent they related 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.
Our objective is to establish case and IBNR reserves that are adequate to cover all loss costs, while incurring minimal variation from the date that the reserves are initially established until the losses are fully developed. As reflected in the table above, we experienced favorable development during the third quarter of 2017 and 2016, and the first nine months of 2016. We experienced unfavorable development in the first nine months of 2017. See Note 6 Loss and Loss Adjustment Expense Reserves , for a more detailed discussion of our prior accident year development.

We continue to focus on our loss reserve analysis, attempting to enhance accuracy and to further our understanding of our loss costs.
Underwriting Expenses
Progressive’s underwriting expense ratio (i.e., policy acquisition costs and other underwriting expenses, net of fees and other revenues, expressed as a percentage of net premiums earned) was 0.5 points higher for the third quarter of 2017 and flat for the first nine months of 2017, compared to the same periods last year. Our advertising spend on a quarter-over-prior-year quarter basis increased significantly, reflecting the reduction of our advertising in the third quarter 2016 as part of our cost-cutting actions initiated last year to help meet our profitability goal. For both the three and nine months ended September 30, 2017, other than our advertising, our underwriting expenses are growing at a slower rate than net premiums earned, due in part to an increase in earned premium per policy as a result of rate increases taken over the last 12 months.

43




C. Growth

For our underwriting operations, we analyze growth in terms of both premiums and policies. Net premiums written represent the premiums from policies written during the period, less any premiums ceded to reinsurers. Net premiums earned, which are a function of the premiums written in the current and prior periods, are earned as revenue over the life of the policy using a daily earnings convention. Policies in force, our preferred measure of growth since it removes the variability due to rate changes or mix shifts, represents all policies under which coverage was in effect as of the end of the period specified.

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
($ in millions)
2017
 
2016
 
% Growth
 
2017
 
2016
 
% Growth
NET PREMIUMS WRITTEN
 
 
 
 
 
 
 
 
 
 
 
Personal Lines
 
 
 
 
 
 
 
 
 
 
 
Agency
$
3,028.8

 
$
2,590.3

 
17
%
 
$
8,765.9

 
$
7,628.4

 
15
%
Direct
2,987.2

 
2,545.8

 
17

 
8,461.5

 
7,401.6

 
14

Total Personal Lines
6,016.0

 
5,136.1

 
17

 
17,227.4

 
15,030.0

 
15

Commercial Lines
825.7

 
669.9

 
23

 
2,343.7

 
2,055.5

 
14

Property 1
300.7

 
243.0

 
24

 
808.4

 
716.5

 
13

Total underwriting operations
$
7,142.4

 
$
6,049.0

 
18
%
 
$
20,379.5

 
$
17,802.0

 
14
%
NET PREMIUMS EARNED
 
 
 
 
 
 
 
 
 
 
 
Personal Lines
 
 
 
 
 
 
 
 
 
 
 
Agency
$
2,840.0

 
$
2,474.3

 
15
%
 
$
8,224.0

 
$
7,245.5

 
14
%
Direct
2,734.8

 
2,391.2

 
14

 
7,908.5

 
6,946.7

 
14

Total Personal Lines
5,574.8

 
4,865.5

 
15

 
16,132.5


14,192.2

 
14

Commercial Lines
714.0

 
630.2

 
13

 
2,031.2

 
1,772.4

 
15

Property
255.2

 
227.7

 
12

 
720.3

 
638.0

 
13

Total underwriting operations
$
6,544.0

 
$
5,723.4

 
14
%
 
$
18,884.0


$
16,602.6

 
14
%
1 Adjusting for the termination of a 10% quota share reinsurance contract in June 2016, net premiums written growth would have been 25% for the nine months ended September 30, 2017, compared to the same period last year.
 
 
 
 
 
 
 
September 30,
(thousands)
 
 
 
 
 
 
2017
 
2016
 
% Growth
POLICIES IN FORCE
 
 
 
 
 
 
 
 
 
 
 
Agency auto
 
 
 
 
 
 
5,515.3

 
4,980.1

 
11
%
Direct auto
 
 
 
 
 
 
5,889.6

 
5,324.0

 
11

Total auto
 
 
 
 
 
 
11,404.9

 
10,304.1

 
11

Special lines 1
 
 
 
 
 
 
4,396.1

 
4,291.1

 
2

Personal Lines - total
 
 
 
 
 
 
15,801.0

 
14,595.2

 
8
%
Commercial Lines
 
 
 
 
 
 
638.6

 
612.7

 
4
%
Property
 
 
 
 
 
 
1,375.6

 
1,184.7

 
16
%
1 Includes insurance for motorcycles, watercraft, RVs, and similar items.

At September 30, 2017, we had approximately 1.4 million more policies in force than in the comparable period last year. The increase reflects both an increase in new applications and lengthening retention.

Although new policies are necessary to maintain a growing book of business, we continue to 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 and the renewal ratio (i.e., the percent of policies that came up for renewal during the year that actually renewed). We disclose our changes in policy life expectancy using a trailing 12-month period, since we believe this measure is indicative of recent experience, mitigates the effects of month-to-month variability, and addresses seasonality. We also review our customer retention for our personal auto products using a trailing 3-month period. Although using a trailing 3-month measure does not address seasonality and can reflect more volatility, this measure is more responsive to current experience and can be an indicator of how our retention rates are moving.

To analyze growth, we review new policies, rate levels, and the retention characteristics of our segments.

44



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
 
2017

2016

 
2017

2016

APPLICATIONS
 
 
 
 
 
New
20
 %
9
%
 
11
%
13
%
Renewal
7
 %
5
%
 
7
%
4
%
WRITTEN PREMIUM PER POLICY - AUTO
5
 %
5
%
 
6
%
4
%
RETENTION MEASURES - AUTO
 
 
 
 
 
Policy life expectancy
 
 
 
 
 
Trailing 3-months
10
 %
7
%
 
 
 
Trailing 12-months
5
 %
6
%
 
 
 
Renewal ratio
(0.1
)%
0.1
%
 
 
 

In our Personal Lines business, the increase in both new and renewal applications primarily reflected increases in our personal auto products. In the auto businesses, the increase in new applications was primarily attributed to our competitive product offerings and position in the marketplace, which, in part, reflects our increase in advertising spend during 2017. Rate increases taken in our auto businesses during 2016 and into 2017 contributed to the increase we experienced in written premium per policy. For both the third quarter and the nine months ended September 30, 2017, written premium per policy increased about 4% for new auto business and 6% for renewal auto business, compared to the same periods last year.

We report our Agency and Direct business results separately as components of our Personal Lines segment to provide further understanding of our products by distribution channel.
The Agency Business
 
Growth Over Prior Year
  
Quarter
 
Year-to-date
 
2017

2016

 
2017

2016

Auto: new applications
25
 %
16
%
 
19
%
17
%
renewal applications
8
 %
1
%
 
7
%
0
%
written premium per policy
5
 %
5
%
 
6
%
5
%
Auto retention measures:
 
 
 
 
 
policy life expectancy - trailing 3-months
10
 %
10
%
 
 
 
                                                trailing 12-months
6
 %
7
%
 
 
 
renewal ratio
(0.1
)%
0.2
%
 
 
 
The Agency business includes business written by more than 35,000 independent insurance agencies that represent Progressive, as well as brokerages in New York and California. New and renewal applications increased on a year-over-year basis during the third quarter 2017, primarily reflecting our competitiveness in the marketplace as a result of many of our competitors taking higher rate increases than we have during the year. During the third quarter 2017, we continued to experience new business application growth and strong policy in force growth in our bundled home and auto product (i.e., Robinsons), primarily driven by our Platinum agents. During the year, we generated new Agency auto application growth in 37 states, including eight of our top 10 largest Agency states.
Our Agency auto rate of conversion (i.e., converting a quote to a sale) increased about 15% for the third quarter and 8% for the nine months ended September 30, 2017, compared to last year. Written premium per policy for new and renewal Agency auto business increased 4% and 6%, respectively, for both the third quarter and the first nine months of 2017, as compared to the same periods last year, primarily reflecting rate increases taken during 2016 and 2017.

45



The Direct Business
 
Growth Over Prior Year
  
Quarter
 
Year-to-date
 
2017

2016

 
2017

2016

Auto: new applications
25
 %
4
 %
 
10
%
13
%
renewal applications
9
 %
9
 %
 
9
%
9
%
written premium per policy
5
 %
5
 %
 
5
%
4
%
Auto retention measures:
 
 
 
 
 
policy life expectancy - trailing 3-months
8
 %
5
 %
 
 
 
                                                trailing 12-months
2
 %
6
 %
 
 
 
renewal ratio
(0.1
)%
(0.1
)%
 
 
 

The Direct business includes business written directly by Progressive on the Internet, through mobile devices, and over the phone. New and renewal applications increased during the third quarter and the nine months ended September 30, 2017, compared to last year, primarily reflecting our competitiveness in the marketplace and an increase in advertising spend on a year-over-year basis, primarily in the third quarter. We reduced advertising spend in the second half of 2016 to help meet our profitability goal. During the current year, we generated new Direct auto application growth in 38 states, including nine of our top 10 largest Direct states.
Our Direct auto rate of conversion increased about 4% for the third quarter and the nine months ended September 30, 2017, compared to last year. Written premium per policy for new and renewal Direct auto business increased 3% and 5%, respectively, for the third quarter 2017, and 4% and 6% for the first nine months, as compared to the same periods last year, primarily reflecting rate increases taken during the last 12 months.
E. Commercial Lines
 
Growth Over Prior Year
  
Quarter
 
Year-to-date
 
2017

2016

 
2017

2016

New applications
5
 %
8
%
 
(6
)%
17
%
Renewal applications
8
 %
8
%
 
9
 %
6
%
Written premium per policy
13
 %
12
%
 
10
 %
12
%
Policy life expectancy - trailing 12-months
(3
)%
7
%
 
 
 
Our Commercial Lines business operates in the business auto, for-hire transportation, contractor, for-hire specialty, tow, and for-hire livery markets and is primarily written in the agency channel. Commercial Lines experienced positive year-over-year new application growth in the third quarter of 2017. This change was driven by the lifting of underwriting restrictions beginning at the end of the first quarter of 2017. These restrictions were imposed during the second half of 2016 to address business markets not meeting profitability targets. In addition to the underwriting restrictions, we increased rates during the second half of 2016 and into 2017, which contributed to the increase in our written premium per policy during the quarter and the year.
The strong new business application growth we generated in 2016 led to solid growth in renewal applications during the third quarter and first nine months of 2017. These applications primarily consisted of 12-month policies that have started to renew in 2017.

46



F. Property
 
Growth Over Prior Year
 
Quarter
 
Year-to-date 1
 
2017

2016

 
2017

New applications
46
 %
19
 %
 
38
 %
Renewal applications
11
 %
8
 %
 
17
 %
Written premium per policy
(1
)%
(7
)%
 
(5
)%
1 We are not reporting results for 2016 since the year-over-year results are not comparable to the same period in 2015 due to the fact that we only began reporting our Property business as a segment on April 1, 2015, and, therefore, the nine months ended September 30, 2015 only includes six months of results.
Our Property business writes residential property insurance for homeowners, other property owners, and renters primarily in the Agency channel. While the significant growth in new applications wa s aided by the exchange transaction in June of last year, it is largely attributable to state expansion that occurred during the last 12 months in both Property business written by ARX and Progressive’s renters business, more competitive product offerings, as well as momentum in growing Robinsons through our Platinum agency offering. As a result of the exchange, ARX s insurance subsidiaries started writing more residential property insurance in June 2016, which has significantly more applications and lower premiums per policy than the commercial property insurance it stopped writing.
G. Income Taxes
A deferred tax asset or liability is a tax benefit or expense that is expected to be realized in a future tax year. At September 30, 2017 and 2016, and December 31, 2016 , we reported net deferred tax liabilities. At September 30, 2017 and 2016, we had net current income taxes receivable of $12.1 million and $6.2 million, respectively, which were reported as part of other assets. At December 31, 2016, we had current income taxes payable of $41.2 million, which are reported as part of other liabilities.
In January 2017, we adopted a new accounting standard, which requires us to book the excess tax benefits related to employee share-based transactions directly as a benefit to the tax provision instead of to paid-in capital as previously required. As a result of this change, we will experience more volatility in our effective tax rates, especially in the quarters where we typically have applicable employee share-based transactions, which historically have been in the first and third quarters. The effective tax rates for the three and nine months ended September 30, 2017, were 14.6% and 29.7%, respectively, compared to 20.5% and 29.4% for the same periods in 2016. 
There were no material changes in our uncertain tax positions during the nine months ended September 30, 2017 .


47



IV. RESULTS OF OPERATIONS – INVESTMENTS
A. Investment Results
We report total return to reflect our management philosophy governing the portfolio and our evaluation of investment results. 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), net realized gains (losses) on securities, and changes in net unrealized gains (losses) on investments.

Our investment portfolio produced an FTE total return of 1.1% for the three months ended September 30, 2017 , compared to 1.3% for the same period in 2016 . Our fixed-income and common stock portfolios had FTE total returns of 0.7% and 4.3% , respectively, for the three months ended September 30, 2017 , and 0.9% and 4.1% , for the same period in 2016 . During the third quarter of 2017, the U.S. treasury yield curve flattened, pushing short rates up and longer rates a little lower, while credit spread compression generated the majority of the increase in the valuation of our securities. Additionally, the higher yields on short-term securities also added to our returns for the quarter. Strong returns in common stocks during the first nine months of 2017, compared to the first nine months of 2016, provided the increase in our total portfolio return for the year.

The following summarizes investment results for the periods ended September 30 :
 
Three Months
 
Nine Months
 
2017

 
2016

 
2017
 
2016
Pretax recurring investment book yield (annualized)
2.3
%
 
2.2
%
 
2.3
%
 
2.3
%
Weighted average FTE book yield (annualized)
2.5
%
 
2.5
%
 
2.6
%
 
2.6
%
FTE total return:
 
 
 
 
 
 
 
Fixed-income securities
0.7
%
 
0.9
%
 
2.8
%
 
3.3
%
Common stocks
4.3
%
 
4.1
%
 
14.6
%
 
8.4
%
Total portfolio
1.1
%
 
1.3
%
 
4.2
%
 
4.0
%

A further break-down of our FTE total returns for our portfolio, including any net gains (losses) on our derivative positions, for the periods ended September 30, follows: 
 
Three Months
 
Nine Months
 
2017

 
2016

 
2017
 
2016
Fixed-income securities:
 
 
 
 
 
 
 
U.S. Treasury Notes
0.3
%
 
0
 %
 
1.7
%
 
0.5
%
Municipal bonds
1.3
%
 
0.3
 %
 
4.7
%
 
3.8
%
Corporate bonds
0.8
%
 
1.0
 %
 
2.8
%
 
5.7
%
Commercial mortgage-backed securities
0.6
%
 
1.1
 %
 
3.4
%
 
4.9
%
Collateralized mortgage obligations
1.0
%
 
0.8
 %
 
3.4
%
 
2.2
%
Other asset-backed securities and home-equity bonds
0.6
%
 
1.0
 %
 
2.0
%
 
2.3
%
Agency residential pass-through obligations
0.9
%
 
0.4
 %
 
2.2
%
 
3.5
%
Agency debt
0.2
%
 
0.1
 %
 
1.3
%
 
0.1
%
Preferred stocks
1.5
%
 
5.6
 %
 
11.2
%
 
10.0
%
Common stock portfolios:
 
 
 
 
 
 
 
Indexed
4.6
%
 
4.2
 %
 
15.0
%
 
8.1
%
Actively managed
0.2
%
 
3.4
 %
 
7.7
%
 
13.6
%


48



B. Portfolio Allocation
The composition of the investment portfolio at September 30, 2017 and 2016 , and December 31, 2016 was:  
($ in millions)
Fair
Value

 
% of
Total
Portfolio

 
Duration
(years)

 
Rating 1
September 30, 2017
 
 
 
 
 
 
 
Fixed maturities
$
18,660.0

 
69.1
%
 
2.6

 
A+
Nonredeemable preferred stocks
813.7

 
3.0

 
3.5

 
BBB-
Short-term investments
4,311.5

 
16.0

 
0.1

 
AA
Total fixed-income securities
23,785.2

 
88.1

 
2.2

 
A+
Common equities
3,209.5

 
11.9

 
na

 
na
Total portfolio 2,3
$
26,994.7

 
100.0
%
 
2.2

 
A+
September 30, 2016
 
 
 
 
 
 
 
Fixed maturities
$
13,916.9

 
59.2
%
 
2.4

 
A
Nonredeemable preferred stocks
860.1

 
3.6

 
3.1

 
BBB-
Short-term investments
5,876.2

 
25.0

 
0.1

 
 AA+
Total fixed-income securities
20,653.2

 
87.8

 
1.8

 
 A+
Common equities
2,868.0

 
12.2

 
na

 
na
Total portfolio 2,3
$
23,521.2

 
100.0
%
 
1.8

 
 A+
December 31, 2016
 
 
 
 
 
 
 
Fixed maturities
$
16,243.8

 
69.2
%
 
2.6

 
A+
Nonredeemable preferred stocks
853.5

 
3.6

 
3.1

 
BBB-
Short-term investments
3,572.9

 
15.2

 
0.2

 
AA-
Total fixed-income securities
20,670.2

 
88.0

 
2.2

 
A+
Common equities
2,812.4

 
12.0

 
na

 
na
Total portfolio 2,3
$
23,482.6

 
100.0
%
 
2.2

 
A+
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 would assign an internal rating of AAA-.
2 Our portfolio reflects the effect of unsettled security transactions and collateral on open derivative positions; at September 30, 2017 and 2016 , and December 31, 2016 , we had $238.3 million , $185.3 million , and $27.8 million , respectively, included in other liabilities.”
3 The total fair value of the portfolio at September 30, 2017 and 2016 , and December 31, 2016 , included $1.1 billion , $1.0 billion , and $1.3 billion , respectively, of securities held in a consolidated, non-insurance subsidiary of the holding company, net of any 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.


49



The following table shows the composition of our Group I and Group II securities at September 30, 2017 and 2016 , and December 31, 2016 :  
($ in millions)
Fair
Value

 
% of
Total
Portfolio

September 30, 2017
 
 
 
Group I securities:
 
 
 
Non-investment-grade fixed maturities
$
445.5

 
1.6
%
Redeemable preferred stocks 1
159.5

 
0.6

Nonredeemable preferred stocks
813.7

 
3.0

Common equities
3,209.5

 
11.9

Total Group I securities
4,628.2

 
17.1

Group II securities:
 
 
 
Other fixed maturities 2
18,055.0

 
66.9

Short-term investments
4,311.5

 
16.0

Total Group II securities
22,366.5

 
82.9

Total portfolio
$
26,994.7

 
100.0
%
September 30, 2016
 
 
 
Group I securities:
 
 
 
Non-investment-grade fixed maturities
$
427.1

 
1.8
%
Redeemable preferred stocks 1
151.6

 
0.7

Nonredeemable preferred stocks
860.1

 
3.6

Common equities
2,868.0

 
12.2

Total Group I securities
4,306.8

 
18.3

Group II securities:
 
 
 
Other fixed maturities 2
13,338.2

 
56.7

Short-term investments
5,876.2

 
25.0

Total Group II securities
19,214.4

 
81.7

Total portfolio
$
23,521.2

 
100.0
%
December 31, 2016
 
 
 
Group I securities:
 
 
 
Non-investment-grade fixed maturities
$
356.2

 
1.5
%
Redeemable preferred stocks 1
135.3

 
0.6

Nonredeemable preferred stocks
853.5

 
3.6

Common equities
2,812.4

 
12.0

Total Group I securities
4,157.4

 
17.7

Group II securities:
 
 
 
Other fixed maturities 2
15,752.3

 
67.1

Short-term investments
3,572.9

 
15.2

Total Group II securities
19,325.2

 
82.3

Total portfolio
$
23,482.6

 
100.0
%
1 Includes non-investment-grade redeemable preferred stocks of $81.7 million, $77.7 million, and $78.7 million at September 30, 2017 and 2016 , and December 31, 2016 , respectively.
2 Includes investment-grade redeemable preferred stocks, with cumulative dividends, of $77.8 million, $73.9 million, and $56.6 million at September 30, 2017 and 2016 , and December 31, 2016 , respectively.
To determine the allocation between Group I and Group II, we use the credit ratings from models provided by the National Association of Insurance Commissioners (NAIC) for classifying our residential and commercial mortgage-backed securities, excluding interest-only securities, and the credit ratings from nationally recognized statistical rating organizations (NRSRO) for all other debt securities. NAIC ratings are based on a model that considers the book price of our securities when assessing the probability of future losses in assigning a credit rating. As a result, NAIC ratings can vary from credit ratings issued by NRSROs. Management believes NAIC ratings more accurately reflect our risk profile when determining the asset allocation between Group I and Group II securities.

50




Unrealized Gains and Losses
As of September 30, 2017 , our portfolio had pretax net unrealized gains, recorded as part of accumulated other comprehensive income, of $ 1,911.9 million , compared to $ 1,630.3 million and $ 1,449.1 million at September 30, 2016 and December 31, 2016 , respectively.
The net unrealized gains in our fixed-income portfolio decreased $ 150.5 million since September 30, 2016 and increased $ 113.7 million since December 31, 2016 . The change since September 30, 2016 was affected by sales of securities with net realized gains (most notably in redeemable and nonredeemable preferred stocks of $68.9 million, residential mortgage-backed securities of $23.9 million, and corporate debt securities of $16.5 million), as well as valuation declines in our U.S. Treasury, municipal, corporate, and commercial mortgage-backed portfolios. The increase in our fixed-income portfolio since December 31, 2016 was primarily the result of a tightening in credit spreads in our non-treasury securities, partially offset by sales of securities with net realized gains in our nonredeemable preferred stock, residential mortgage-backed, and corporate portfolios. The net unrealized gains in our common stock portfolio increased $ 432.1 million and $ 349.1 million since September 30, 2016 and December 31, 2016 , respectively, reflecting changes in the broad equity market over these periods, adjusting for net gains recognized on security sales.
See Note 2 – Investments for a further break-out of our gross unrealized gains and losses.
Other-Than-Temporary Impairment (OTTI)
Net realized gains (losses) may include write-downs of securities determined to have had other-than-temporary declines in fair value. We routinely monitor our portfolio for pricing changes that might indicate potential impairments and perform detailed reviews of securities with unrealized losses. In such cases, changes in fair value are evaluated to determine the extent to which such changes are attributable to: (i) fundamental factors specific to the issuer, such as financial conditions, business prospects, or other factors, (ii) market-related factors, such as interest rates or equity market declines (e.g., negative return at either a sector index level or at the broader market level), or (iii) credit-related losses, where the present value of cash flows expected to be collected is lower than the amortized cost basis of the security.
Fixed-income securities and common equities with declines attributable to issuer-specific fundamentals are reviewed to identify available evidence, circumstances, and influences to estimate the potential for, and timing of, recovery of the investment’s impairment. An other-than-temporary impairment loss is deemed to have occurred when the potential for recovery does not satisfy the criteria set forth in the current accounting guidance.
When a security in our fixed-maturity portfolio has an unrealized loss and we intend to sell the security, or it is more likely than not that we will be required to sell the security, we write-down the security to its current fair value and recognize the entire unrealized loss through the comprehensive income statement as a realized loss. If a fixed-maturity security has an unrealized loss and it is more likely than not that we will hold the debt security until recovery (which could be maturity), then we determine if any of the decline in value is due to a credit loss (i.e., where the present value of cash flows expected to be collected is lower than the amortized cost basis of the security) and, if so, we will recognize that portion of the impairment in net income as part of the comprehensive income statement as a realized loss; any remaining unrealized loss on the security is considered to be due to other factors (e.g., interest rate and credit spread movements) and is reflected in other comprehensive income as part of shareholders’ equity, along with unrealized gains or losses on securities that are not deemed to be other-than-temporarily impaired.
In general, our policy for common equity securities with market- or sector-related declines is to recognize impairment losses on individual securities with losses we cannot reasonably conclude will recover in the near term under historical conditions when: (i) we are able to objectively determine that the loss is other-than-temporary, or (ii) the security has been in such a loss position for three consecutive quarters.


51



The write-down activity recorded in the comprehensive income statements was as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(millions)
Total
Write-downs

 
Write-downs
on Securities
Sold

 
Write-downs
on Securities
Held at
Period End

 
Total
Write-downs

 
Write-downs
on Securities
Sold

 
Write-downs
on Securities
Held at
Period End

2017
 
 
 
 
 
 
 
 
 
 
 
Commercial mortgage-backed securities
$
0.4

 
$
0

 
$
0.4

 
$
0.4

 
$
0

 
$
0.4

Redeemable preferred stocks
0

 
0

 
0

 
0

 
0

 
0

Total fixed-income
0.4

 
0

 
0.4

 
0.4

 
0

 
0.4

Common equities
8.9

 
0

 
8.9

 
12.5

 
0

 
12.5

Total investment portfolio
9.3

 
0

 
9.3

 
12.9

 
0

 
12.9

Other assets 1
33.7

 
0

 
33.7

 
44.9

 
0

 
44.9

Total write-downs
$
43.0

 
$
0

 
$
43.0

 
$
57.8

 
$
0

 
$
57.8

2016
 
 
 
 
 
 
 
 
 
 
 
Commercial mortgage-backed securities
$
0

 
$
0

 
$
0

 
$
0

 
$
0

 
$
0

Redeemable preferred stocks 2
25.4

 
0

 
25.4

 
25.4

 
0

 
25.4

Total fixed-income
25.4

 
0

 
25.4

 
25.4

 
0

 
25.4

Common equities
1.4

 
0

 
1.4

 
1.6

 
0

 
1.6

Total investment portfolio
26.8

 
0

 
26.8

 
27.0

 
0

 
27.0

Other assets 1
34.8

 
0

 
34.8

 
34.8

 
0

 
34.8

Total write-downs
$
61.6

 
$
0

 
$
61.6

 
$
61.8

 
$
0

 
$
61.8

1 Reflects impairments of renewable energy investments under which the future pretax cash flows are expected to be less than the carrying value of the assets.
2 Reflects a change in our intent to hold the securities to a recovery of their respective cost bases.
The following table stratifies the gross unrealized losses in our fixed-income and common equity portfolios at September 30, 2017 , by duration in a loss position and magnitude of the loss as a percentage of the cost of the security.
 
 
 

 
Total Gross
Unrealized
Losses

 
Decline of Investment Value
(millions)
Fair
Value

 
>15%

 
>25%

 
>35%

 
>45%

Fixed Income:
 
 
 
 
 
 
 
 
 
 
 
Unrealized loss for less than 12 months
$
5,123.6

 
$
14.6

 
$
0

 
$
0

 
$
0

 
$
0

Unrealized loss for 12 months or greater
4,232.0

 
40.6

 
2.0

 
0

 
0

 
0

Total
$
9,355.6

 
$
55.2

 
$
2.0

 
$
0

 
$
0

 
$
0

Common Equity:
 
 
 
 
 
 
 
 
 
 
 
Unrealized loss for less than 12 months
$
49.3

 
$
4.9

 
$
1.4

 
$
0.5

 
$
0.5

 
$
0

Unrealized loss for 12 months or greater
2.7

 
0.6

 
0.3

 
0.3

 
0.3

 
0.3

Total
$
52.0

 
$
5.5

 
$
1.7

 
$
0.8

 
$
0.8

 
$
0.3

We completed a thorough review of the existing securities in these loss categories and determined that, applying the procedures and criteria discussed above, these securities were not other-than-temporarily impaired. We do not intend to sell these securities. We also determined that it is more likely that we will not be required to sell these securities, for the periods of time necessary to recover the respective cost bases of these securities, and that there are no additional credit-related impairments on our debt securities.
Since total unrealized losses are already a component of other comprehensive income and included in shareholders’ equity, any recognition of these losses as additional OTTI losses would have no effect on our comprehensive income, book value, or reported investment total return.

52



Fixed-Income Securities
The fixed-income portfolio is managed internally and includes fixed-maturity securities, short-term investments, and nonredeemable preferred stocks. The fixed-maturity securities and short-term investments, as reported on the balance sheets, were comprised of the following:
 
September 30, 2017
 
September 30, 2016
 
December 31, 2016
($ in millions)
Fair
Value

 
% of
Total

 
Fair
Value

 
% of
Total

 
Fair
Value

 
% of
Total

Investment-grade fixed maturities: 1
 
 
 
 
 
 
 
 
 
 
 
Short/intermediate term
$
21,850.3

 
95.1
%
 
$
18,710.0

 
94.5
%
 
$
18,883.7

 
95.3
%
Long term
139.5

 
0.6

 
118.2

 
0.6

 
49.6

 
0.2

Non-investment-grade fixed maturities: 1,2
 
 


 
 
 


 
 
 


Short/intermediate term
977.0

 
4.3

 
948.3

 
4.8

 
866.8

 
4.4

Long term
4.7

 
0

 
16.6

 
0.1

 
16.6

 
0.1

Total
$
22,971.5

 
100.0
%
 
$
19,793.1

 
100.0
%
 
$
19,816.7

 
100.0
%
1 Long term includes securities with expected liquidation dates of 10 years or greater. Asset-backed securities are reported at their weighted average maturity based upon their projected cash flows, with the cash flows expected in periods of 10 years or greater reported as part of the long-term category. All other securities that do not have a single expected maturity date are reported at average maturity.
2 Non-investment-grade fixed-maturity securities are non-rated or have a credit quality rating of an equivalent BB+ or lower, classified by ratings from NRSROs. The non-investment-grade securities based upon NAIC ratings and our Group I modeling were $527.2 million, $504.8 million, and $434.9 million at September 30, 2017 and 2016 , and December 31, 2016 , respectively.
A primary exposure for the fixed-income portfolio is interest rate risk, which includes the change in value resulting from movements in the underlying market rates of debt securities held. We manage this risk by maintaining the portfolio’s duration (a measure of the portfolio’s exposure to changes in interest rates) between 1.5 and 5 years. The duration of the fixed-income portfolio was 2.2 years at September 30, 2017 , compared to 1.8 years at September 30, 2016 and 2.2 years at December 31, 2016 , reflecting our preference for shorter duration positioning during times of low interest rates. The distribution of duration and convexity (i.e., a measure of the speed at which the duration of a security is expected to change based on a rise or fall in interest rates) is monitored on a regular basis.
The duration distribution of our fixed-income portfolio, excluding short-term investments, represented by the interest rate sensitivity of the comparable benchmark U.S. Treasury Notes, was:
Duration Distribution
September 30, 2017

 
September 30, 2016

 
December 31, 2016

1 year
22.3
%
 
28.9
 %
 
25.9
 %
2 years
15.9

 
15.6

 
13.4

3 years
26.8

 
22.6

 
24.2

5 years
26.1

 
22.8

 
25.8

10 years
8.9

 
9.9

 
10.9

20 years
0

 
(0.1
)
 
(0.2
)
30 years
0

 
0.3

 
0

Total fixed-income portfolio
100.0
%
 
100.0
 %
 
100.0
 %

The negative duration in the 20-year category at September 30, 2016 and December 31, 2016 arose from the variable rate nature of the dividends on some of our preferred stocks. If not called at their call dates, the dividends on these securities would reset from a fixed rate to a lower floating rate, which could cause these securities to trade at a discount and, therefore, with a negative duration as the securities’ valuation would likely rise if the floating rate moves higher.
Another primary exposure related to the fixed-income portfolio is credit risk. This risk is managed by maintaining an A+ minimum weighted average portfolio credit quality rating, as defined by NRSROs, which was successfully maintained during the first nine months of 2017 and all of 2016.


53



The credit quality distribution of the fixed-income portfolio was:  
Rating
September 30, 2017

 
September 30, 2016

 
December 31, 2016

AAA
41.9
%
 
37.1
%
 
35.7
%
AA
15.5

 
18.1

 
19.1

A
12.7

 
14.8

 
15.3

BBB
24.6

 
23.9

 
24.3

Non-investment grade/non-rated 1
5.3

 
6.1

 
5.6

Total fixed-income portfolio
100.0
%
 
100.0
%
 
100.0
%
1 The ratings in the table above are assigned by NRSROs. The non-investment-grade fixed-income securities based upon our Group I classification represented 3.0% of the total fixed-income portfolio at September 30, 2017 , compared to 3.9% at September 30, 2016 and 3.4% at December 31, 2016 .

The changes in credit quality profile from September 30, 2016 were the result of transactions in our portfolio that shifted the mix within the various credit categories.

Our portfolio is also exposed to concentration risk. Our investment constraints limit investment in a single issuer, other than U.S. Treasury Notes or a state’s general obligation bonds, to 2.5% of shareholders’ equity, while the single issuer guideline on preferred stocks and/or non-investment-grade debt is 1.25% of shareholders’ equity. Additionally, the guideline applicable to any state’s general obligation bonds is 6% of shareholders’ equity. We also consider sector concentration a risk, and we frequently evaluate the portfolio’s sector allocation with regard to internal requirements and external market factors. We consider concentration risk both overall and in the context of individual asset classes, including but not limited to common equities, residential and commercial mortgage-backed securities, municipal bonds, and high-yield bonds. We were within all of the constraints described above during the first nine months of 2017 and all of 2016.
We monitor prepayment and extension risk, especially in our structured product and preferred stock portfolios. Prepayment risk includes the risk of early redemption of security principal that may need to be reinvested at less attractive rates. Extension risk includes the risk that a security will not be redeemed when anticipated, and that the security that is extended will have a lower yield than a security we might be able to obtain by reinvesting the expected redemption principal. Our holdings of different types of structured debt and preferred securities help manage this risk. During the first nine months of 2017 and all of 2016, we did not experience significant prepayment or extension of principal relative to our cash flow expectations in the portfolio.
Liquidity risk is another risk factor we monitor. 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 $4.8 billion, or 32%, of principal repayment from our fixed-income portfolio, excluding U.S. Treasury Notes and short-term investments, during the remainder of 2017 and all of 2018. Cash from interest and dividend payments provides an additional source of recurring liquidity.

The duration of our U.S. government obligations, which are included in the fixed-income portfolio, was comprised of the following at September 30, 2017 :
($ in millions)
Fair
Value

 
Duration
(years)

U.S. Treasury Notes
 
 
 
Less than two years
$
270.6

 
1.3

Two to five years
3,626.1

 
3.5

Five to ten years
698.3

 
6.3

Total U.S. Treasury Notes
$
4,595.0

 
3.8

As of September 30, 2017 , we had no interest rate swaps or treasury futures.

54



ASSET-BACKED SECURITIES
Included in the fixed-income portfolio are asset-backed securities, which were comprised of the following at the balance sheet dates listed:  
($ in millions)
Fair
Value

 
Net Unrealized
Gains (Losses)

 
% of Asset-
Backed
Securities

 
Duration
(years)

 
Rating
(at period end)
September 30, 2017
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Prime collateralized mortgage obligations
$
290.9

 
$
(0.7
)
 
4.7
%
 
0.9

 
 AA
Alt-A collateralized mortgage obligations 1
117.6

 
0.6

 
1.9

 
0.8

 
 BBB-
Collateralized mortgage obligations
408.5

 
(0.1
)
 
6.6

 
0.9

 
 A+
Home equity (sub-prime bonds)
511.8

 
9.1

 
8.2

 
0.5

 
 BBB
Residential mortgage-backed securities
920.3

 
9.0

 
14.8

 
0.7

 
 A-
Agency residential pass-through obligations
35.3

 
(0.4
)
 
0.6

 
3.4

 
 AAA
Commercial mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Commercial mortgage-backed securities
2,636.6

 
2.0

 
42.4

 
2.9

 
 A-
Commercial mortgage-backed securities: interest only
131.3

 
2.2

 
2.1

 
2.2

 
 AAA-
Commercial mortgage-backed securities
2,767.9

 
4.2

 
44.5

 
2.9

 
 A-
Other asset-backed securities:
 
 
 
 
 
 
 
 
 
Automobile
1,212.2

 
(0.2
)
 
19.5

 
0.6

 
 AAA-
Credit card
72.1

 
0

 
1.2

 
0.9

 
 AAA
Student loan
583.7

 
4.8

 
9.4

 
1.2

 
 AA-
Other 2
622.2

 
(0.2
)
 
10.0

 
2.4

 
 A+
Other asset-backed securities
2,490.2

 
4.4

 
40.1

 
1.2

 
 AA+
Total asset-backed securities
$
6,213.7

 
$
17.2

 
100.0
%
 
1.9

 
 A+

($ in millions)
Fair
Value

 
Net Unrealized
Gains (Losses)

 
% of Asset-
Backed
Securities

 
Duration
(years)

 
Rating
(at period end)
September 30, 2016
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Prime collateralized mortgage obligations
$
641.5

 
$
(2.8
)
 
10.8
%
 
0.7

 
 A
Alt-A collateralized mortgage obligations 1
191.5

 
(0.5
)
 
3.2

 
1.4

 
 BBB
Collateralized mortgage obligations
833.0

 
(3.3
)
 
14.0

 
0.8

 
 A-
Home equity (sub-prime bonds)
761.2

 
13.1

 
12.7

 
 <0.1

 
 BBB
Residential mortgage-backed securities
1,594.2

 
9.8

 
26.7

 
0.4

 
 BBB+
Agency residential pass-through obligations
44.1

 
0.5

 
0.7

 
2.6

 
 AAA
Commercial mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Commercial mortgage-backed securities
2,128.9

 
26.4

 
35.7

 
3.8

 
 A-
Commercial mortgage-backed securities: interest only
149.5

 
2.6

 
2.5

 
2.6

 
 AAA-
Commercial mortgage-backed securities
2,278.4

 
29.0

 
38.2

 
3.7

 
 A
Other asset-backed securities:
 
 
 
 
 
 
 
 
 
Automobile
1,029.0

 
2.1

 
17.3

 
1.0

 
 AAA-
Credit card
236.5

 
0

 
4.0

 
0.6

 
 AAA
Student loan
426.3

 
5.3

 
7.2

 
1.1

 
AA-
Other 2
353.6

 
0.2

 
5.9

 
1.3

 
AAA-
Other asset-backed securities
2,045.4

 
7.6

 
34.4

 
1.0

 
 AAA-
Total asset-backed securities
$
5,962.1

 
$
46.9

 
100.0
%
 
1.9

 
 A+
 

55



($ in millions)
Fair
Value

 
Net Unrealized
Gains (Losses)

 
% of Asset-
Backed
Securities

 
Duration
(years)

 
Rating
(at period end)
December 31, 2016
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Prime collateralized mortgage obligations
$
609.9

 
$
(3.9
)
 
10.0
%
 
0.9

 
 A
Alt-A collateralized mortgage obligations 1
170.8

 
(0.4
)
 
2.8

 
1.0

 
 BBB-
Collateralized mortgage obligations
780.7

 
(4.3
)
 
12.8

 
0.9

 
 A-
Home equity (sub-prime bonds)
678.0

 
13.0

 
11.1

 
 <0.1

 
 BBB
Residential mortgage-backed securities
1,458.7

 
8.7

 
23.9

 
0.4

 
 BBB+
Agency residential pass-through obligations
40.6

 
(0.6
)
 
0.7

 
4.1

 
 AAA
Commercial mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Commercial mortgage-backed securities
2,115.2

 
(13.7
)
 
34.6

 
3.7

 
 A-
Commercial mortgage-backed securities: interest only
138.2

 
0.2

 
2.3

 
2.4

 
 AAA-
Commercial mortgage-backed securities
2,253.4

 
(13.5
)
 
36.9

 
3.7

 
 A
Other asset-backed securities:
 
 
 
 
 
 
 
 
 
Automobile
1,074.9

 
(0.4
)
 
17.6

 
0.8

 
 AAA-
Credit card
435.3

 
(0.4
)
 
7.1

 
0.5

 
 AAA
Student loan
526.4

 
2.4

 
8.6

 
1.0

 
AA-
Other 2
314.5

 
(1.4
)
 
5.2

 
1.5

 
AA+
Other asset-backed securities
2,351.1

 
0.2

 
38.5

 
0.9

 
 AAA-
Total asset-backed securities
$
6,103.8

 
$
(5.2
)
 
100.0
%
 
1.8

 
 A+
1 Represents structured securities with primary residential loans as collateral for which documentation standards for loan approval were less stringent than conventional loans; the collateral loans are often referred to as low documentation or no documentation loans.
2 Includes equipment leases, manufactured housing, and other types of structured debt.

Collateralized Mortgage Obligations (CMO) The following table details the credit quality rating and fair value of our CMOs, along with the loan classification and a comparison of the fair value at September 30, 2017 , to our original investment value (adjusted for returns of principal, amortization, and write-downs):
Collateralized Mortgage Obligations (at September 30, 2017)
($ in millions)
Rating
1
 Non-Agency Prime
 
       Alt-A
 
Government/GSE 2

 
    Total
 
% of Total

AAA
$
116.9

 
$
6.0

 
$
61.5

 
$
184.4

 
45.2
%
AA
35.2

 
32.0

 
1.0

 
68.2

 
16.7

A
20.4

 
16.0

 
0

 
36.4

 
8.9

BBB
16.0

 
0

 
0

 
16.0

 
3.9

Non-investment grade
39.9

 
63.6

 
0

 
103.5

 
25.3

Total
$
228.4

 
$
117.6

 
$
62.5

 
$
408.5

 
100.0
%
Increase (decrease) in value 3
(0.1
)%
 
0.5
%
 
(0.7
)%
 
0
%
 
 
1 The credit quality ratings in the table above are assigned by NRSROs; when we assign the NAIC ratings for our CMOs, $79.8 million of our non-investment-grade securities are rated investment-grade and classified as Group II and $23.7 million, or 5.8% of our total CMOs, are not rated by the NAIC and are classified as Group I.
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).
3 Excludes net holding period gains and losses on certain hybrid securities.

The majority of our CMO portfolio is composed of non-GSE/FHA/VA mortgage securities. In the largest part of this portfolio, we took advantage of the securitization structure to have an underlying bond split into senior and subordinated classes. We own the senior classes, which provide extra credit support to our position. During the third quarter 2017, we exited our agency credit risk transfer positions as, in our view, the spreads on offer did not adequately compensate for the risks.

56



Home-Equity Securities The following table shows the credit quality rating of our home-equity securities, along with a comparison of the fair value at September 30, 2017 , to our original investment value (adjusted for returns of principal, amortization, and write-downs):
Home-Equity Securities (at September 30, 2017)
($ in millions)
Rating 1
 Total
 
% of Total

AAA
$
40.1

 
7.8
%
AA
20.0

 
3.9

A
187.3

 
36.6

BBB
46.4

 
9.1

Non-investment grade
218.0

 
42.6

Total
$
511.8

 
100.0
%
Increase (decrease) in value
1.8
%
 
 
1 The credit quality ratings in the table above are assigned by NRSROs; when we assign the NAIC ratings for our home-equity securities, $182.3 million of our non-investment-grade securities are rated investment-grade and classified as Group II and $35.7 million, or 7.0% of our total home-equity securities, are not rated by the NAIC and are classified as Group I.

Our home-equity loan-backed security portfolio decreased in value during the quarter due to returns of principal. We have not been adding to this portfolio as current pricing is not offering meaningful potential returns.

Commercial Mortgage-Backed Securities (CMBS) The following table details the credit quality rating and fair value of our CMBS bond and interest only (IO) portfolios:
Commercial Mortgage-Backed Securities (at September 30, 2017) 1
($ in millions)
Category
       AAA
 
         AA
 
            A
 
      BBB
 
Non-Investment
Grade

 
      Total
 
% of Total

Multi-borrower
$
97.3

 
$
0

 
$
0

 
$
0

 
$
10.4

 
$
107.7

 
3.9
%
Single-borrower
379.5

 
416.3

 
600.5

 
846.4

 
286.2

 
2,528.9

 
91.4

     Total CMBS bonds
476.8

 
416.3

 
600.5

 
846.4

 
296.6

 
2,636.6

 
95.3

IO
129.3

 
0.9

 
0

 
0

 
1.1

 
131.3

 
4.7

   Total fair value
$
606.1

 
$
417.2

 
$
600.5

 
$
846.4

 
$
297.7

 
$
2,767.9

 
100.0
%
   % of Total fair value
21.9
%
 
15.1
%
 
21.7
%
 
30.6
%
 
10.7
%
 
100.0
%
 
 
1 The credit quality ratings in the table above are assigned by NRSROs; when we assign the NAIC ratings, $192.4 million of our non-investment-grade CMBS securities are rated investment-grade and classified as Group II and $104.2 million, or 4.0% of our total CMBS bonds, are not rated by the NAIC and are classified as Group I, and all non-investment-grade IO securities are classified as Group I.

We continue to focus on single-borrower CMBS because we believe these transactions provide an opportunity to select investments based on real estate and underwriting criteria that fit our preferred credit risk and duration profile. Our multi-borrower, fixed-rate CMBS portfolio is concentrated in vintages with conservative underwriting. During the quarter, we increased our CMBS bond portfolio by $394.0 million in cost, which increased our allocation of single-borrower CMBS from 89.6% to 91.4% and reduced our allocation of multi-borrower CMBS from 5.1% to 3.9%. At September 30, 2017 , the duration was 2.9 years and the weighted average credit quality was A-, compared to 3.6 years and A-, respectively, at June 30, 2017 .

With the exception of $128.2 million in Freddie Mac senior multi-family IOs, we have no multi-borrower deal IOs originated after 2006.

57



MUNICIPAL SECURITIES
Included in the fixed-income portfolio at September 30, 2017 and 2016 , and December 31, 2016 , were $ 2,364.2 million , $ 2,566.0 million , and $ 2,502.6 million , respectively, of state and local government obligations. These securities had a duration of 2.9 years at September 30, 2017 , compared to 3.1 years at September 30, 2016 and 3.0 years at December 31, 2016 ; the weighted average credit quality rating (excluding the benefit of credit support from bond insurance) was AA for all three periods. These securities had net unrealized gains of $ 31.9 million at September 30, 2017 , compared to net unrealized gains of $ 57.1 million at September 30, 2016 and net unrealized losses of $ 6.9 million at December 31, 2016 .

The following table details the credit quality rating of our municipal securities at September 30, 2017 , without the benefit of credit or bond insurance:
Municipal Securities (at September 30, 2017)
(millions)
Rating
General
Obligations

 
Revenue
Bonds

 
Total

AAA
$
269.4

 
$
528.7

 
$
798.1

AA
370.8

 
845.4

 
1,216.2

A
2.1

 
306.3

 
308.4

BBB
38.7

 
2.8

 
41.5

Total
$
681.0

 
$
1,683.2

 
$
2,364.2


Included in revenue bonds were $934.8 million of single family housing revenue bonds issued by state housing finance agencies, of which $660.3 million were supported by individual mortgages held by the state housing finance agencies and $274.5 million were supported by mortgage-backed securities. Of the programs supported by mortgage-backed securities, approximately 25% were collateralized by Fannie Mae and Freddie Mac mortgages; the remaining 75% were collateralized by Ginnie Mae loans, which are fully guaranteed by the U.S. government. Of the programs supported by individual mortgages held by the state housing finance agencies, the weighted average credit quality rating was AA+. Most of these mortgages were supported by FHA, VA, or private mortgage insurance providers.
CORPORATE SECURITIES
Included in our fixed-income securities at September 30, 2017 and 2016 , and December 31, 2016 , were $ 5,225.6 million , $ 4,403.3 million , and $ 4,550.9 million , respectively, of corporate securities. These securities had a duration of 2.5 years at September 30, 2017 , compared to 3.2 years at September 30, 2016 and 2.7 years at December 31, 2016 , and a weighted average credit quality rating of BBB at September 30, 2017 and 2016 , and December 31, 2016 . These securities had net unrealized gains of $ 28.5 million and $ 75.1 million at September 30, 2017 and 2016 , respectively, and net unrealized losses of $7.0 million at December 31, 2016 .

Our allocation to corporate bonds increased during the third quarter of 2017 as we were able to find some attractive opportunities in certain new issues in the high-grade bond market, especially in the communications sector.


58



The table below shows the exposure break-down by sector and rating: 
Corporate Securities (at September 30, 2017)
(millions)
Sector
AAA

 
AA    

 
A    

 
BBB    

 
Non-Investment
Grade/Non-Rated

 
Total

Consumer
$
0

 
$
0

 
$
327.9

 
$
1,814.2

 
$
67.5

 
$
2,209.6

Industrial
0

 
0

 
143.9

 
908.9

 
67.1

 
1,119.9

Communications
0

 
0

 
48.5

 
434.7

 
55.9

 
539.1

Financial Services
64.4

 
75.3

 
319.0

 
316.8

 
38.0

 
813.5

Agency
0.5

 
1.2

 
0

 
0

 
0

 
1.7

Technology
0.1

 
0.1

 
5.2

 
183.0

 
1.0

 
189.4

Basic Materials
0

 
0

 
31.8

 
106.9

 
9.6

 
148.3

Energy
0

 
33.1

 
43.1

 
125.9

 
2.0

 
204.1

Total
$
65.0

 
$
109.7

 
$
919.4

 
$
3,890.4

 
$
241.1

 
$
5,225.6

At September 30, 2017 , we held $972.2 million of U.S. dollar-denominated corporate bonds issued by companies that are domiciled, or whose parent companies are domiciled, in the U.K. ($189.8 million) and other European countries ($782.4 million), primarily in the consumer, financial, and communications industries. We had no direct exposure to southern European-domiciled companies at September 30, 2017 .
PREFERRED STOCKS – REDEEMABLE AND NONREDEEMABLE
We hold both redeemable (i.e., mandatory redemption dates) and nonredeemable (i.e., perpetual with call dates) preferred stocks. At September 30, 2017 , we held $ 237.3 million in redeemable preferred stocks and $ 813.7 million in nonredeemable preferred stocks, compared to $ 225.5 million and $ 860.1 million , respectively, at September 30, 2016 , and $ 191.9 million and $ 853.5 million at December 31, 2016 .
Our preferred stock portfolio had net unrealized gains of $ 127.5 million , $ 150.7 million , and $ 122.4 million , at September 30, 2017 and 2016 , and December 31, 2016 , respectively.

Our preferred stock securities continued to produce strong returns in the third quarter of 2017 due to a combination of solid dividend yields and a small increase in price. Although we continue to view preferred stocks as a relatively attractive sector, the increase in prices this year has diminished the attractiveness somewhat. We were able to find a few opportunities to add to the portfolio this quarter, but we are being very selective in this environment.

Approximately 70% of our preferred stock securities are fixed-rate securities, and 30% are floating-rate securities. All of our preferred securities have call or mandatory redemption features. All of our fixed-rate securities will convert to floating-rate dividend payments if not called at their initial call date, providing some interest rate protection against extension risk in the event the issuer elects not to call such securities at their initial call date.

59



Our preferred stock portfolio had a duration of 2.9 years at September 30, 2017 , compared to 2.2 years at September 30, 2016 , and 2.4 years at December 31, 2016 . The interest rate duration of our preferred securities is calculated to reflect the call, floor, and floating rate features. Although a preferred security will remain outstanding if not called, its interest rate duration will reflect the variable nature of the dividend. The weighted average credit quality rating was BBB- at September 30, 2017 , September 30, 2016 , and December 31, 2016 . Our non-investment-grade preferred stocks were primarily with issuers that maintain investment-grade senior debt ratings.
The table below shows the exposure break-down by sector and rating at quarter end:
Preferred Stocks (at September 30, 2017)
(millions)
Sector
A

BBB

 
Non-Investment
Grade/Non-Rated

 
Total

Financial Services
 
 
 
 
 
 
U.S. banks
$
48.3

$
329.0

 
$
236.0

 
$
613.3

Insurance holdings
0

63.5

 
41.8

 
105.3

Other financial institutions
59.8

57.1

 
37.0

 
153.9

Total financial services
108.1

449.6

 
314.8

 
872.5

Industrials
0

101.7

 
44.9

 
146.6

Utilities
0

31.9

 
0

 
31.9

Total
$
108.1

$
583.2

 
$
359.7

 
$
1,051.0

We also face the risk that dividend payments on our preferred stock holdings could be deferred for one or more periods or skipped entirely. As of September 30, 2017 , all of our preferred securities continued to pay their dividends in full and on time. Approximately 81% of our preferred stock securities pay dividends that have tax preferential characteristics, while the balance pay dividends that are fully taxable.
At September 30, 2017 , we held $77.4 million of U.S. dollar-denominated redeemable preferred stocks issued by financial institutions that are domiciled, or whose parent companies are domiciled, in foreign countries. We had no direct exposure to U.K. or southern European-domiciled companies at September 30, 2017 .
Common Equities
Common equities, as reported on the balance sheets, were comprised of the following:
 
($ in millions)
September 30, 2017
 
September 30, 2016
 
December 31, 2016
Indexed common stocks
$
3,061.9

 
95.4
%
 
$
2,736.9

 
95.4
%
 
$
2,676.2

 
95.1
%
Managed common stocks
147.3

 
4.5

 
130.7

 
4.5

 
135.8

 
4.8

        Total common stocks
3,209.2

 
99.9

 
2,867.6

 
99.9

 
2,812.0

 
99.9

Other risk investments
0.3

 
0.1

 
0.4

 
0.1

 
0.4

 
0.1

          Total common equities
$
3,209.5

 
100.0
%
 
$
2,868.0

 
100.0
%
 
$
2,812.4

 
100.0
%
In our indexed common stock portfolio, our individual holdings are selected based on their contribution to the correlation with the index. For all three periods reported in the table above, the GAAP basis total return was within the desired tracking error of +/- 50 basis points when compared to the Russell 1000 Index. We held 858 out of 981, or 87%, of the common stocks comprising the Russell 1000 Index at September 30, 2017 , which made up 94% of the total market capitalization of the index.
The actively managed common stock portfolio is currently managed by one external investment manager. At September 30, 2017 , the fair value of the actively managed portfolio was $147.3 million , compared to an adjusted cost basis of $98.7 million.
Other risk investments include private equity investments and limited partnership interests in private equity and mezzanine investment funds, which have no off-balance-sheet exposure or contingent obligations.

60



Derivative Instruments
We use interest rate swaps and treasury futures to manage the fixed-income portfolio. We did not have any interest rate swaps or treasury futures at September 30, 2017 or December 31, 2016 , that were used to manage duration. At September 30, 2016 , we held $315 million notional value swaps and we did not hold any treasury futures. We closed swaps with a notional value of $435 million and treasury futures with a notional value of $135 million during the first nine months of 2016.
During March 2017 , we entered into a forecasted debt issuance hedge, against a possible rise in interest rates, in conjunction with the $850 million of 4.125% Senior Notes due 2047 issued in April 2017 . Upon issuance, we closed the hedge and recognized, as part of accumulated other comprehensive income, a pretax loss of $8.0 million in April 2017 .

See Note 2 Investments for further discussion on our derivative instruments.


61



Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995: Investors are cautioned that certain statements in this report not based upon historical fact are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements often use words such as “estimate,” “expect,” “intend,” “plan,” “believe,” and other words and terms of similar meaning, or are tied to future periods, in connection with a discussion of future operating or financial performance. Forward-looking statements are based on current expectations and projections about future events, and are subject to certain risks, assumptions and uncertainties that could cause actual events and results to differ materially from those discussed herein. These risks and uncertainties include, without limitation, uncertainties related to estimates, assumptions, and projections generally; inflation and changes in general economic conditions (including changes in interest rates and financial markets); the possible failure of one or more governmental, corporate, or other entities to make scheduled debt payments or satisfy other obligations; the potential or actual downgrading by one or more rating agencies of our securities or governmental, corporate, or other securities we hold; the financial condition of, and other issues relating to the strength of and liquidity available to, issuers of securities held in our investment portfolios and other companies with which we have ongoing business relationships, including reinsurers and other counterparties to certain financial transactions; the accuracy and adequacy of our pricing, loss reserving, and claims methodologies; the competitiveness of our pricing and the effectiveness of our initiatives to attract and retain more customers; initiatives by competitors and the effectiveness of our response; our ability to obtain regulatory approval for the introduction of products to new jurisdictions, for requested rate changes and the timing thereof and for any proposed acquisitions; the effectiveness of our brand strategy and advertising campaigns relative to those of competitors; legislative and regulatory developments at the state and federal levels, including, but not limited to, matters relating to vehicle and homeowners insurance, health care reform and tax law changes; the outcome of disputes relating to intellectual property rights; the outcome of litigation or governmental investigations that may be pending or filed against us; severe weather conditions and other catastrophe events; the effectiveness of our reinsurance programs; changes in vehicle usage and driving patterns, which may be influenced by oil and gas prices; changes in residential occupancy patterns and the effects of the emerging “sharing economy”; advancements in vehicle or home technology or safety features, such as accident and loss prevention technologies or the development of autonomous or partially autonomous vehicles; our ability to accurately recognize and appropriately respond in a timely manner to changes in loss frequency and severity trends; technological advances; acts of war and terrorist activities; our ability to maintain the uninterrupted operation of our facilities, systems (including information technology systems), and business functions, and safeguard personal and sensitive information in our possession; our continued access to and functionality of third-party systems that are critical to our business; restrictions on our subsidiaries ability to pay dividends to The Progressive Corporation; possible impairment of our goodwill or intangible assets if future results do not adequately support either, or both, of these items; court decisions, new theories of insurer liability or interpretations of insurance policy provisions and other trends in litigation; changes in health care and auto and property repair costs; 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. In addition, investors should be aware that generally accepted accounting principles prescribe when a company may reserve for particular risks, including litigation exposures. Accordingly, results for a given reporting period could be significantly affected if and when a reserve is established 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.




62



Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The duration of the financial instruments held in our portfolio that are subject to interest rate risk was 2.2 years at September 30, 2017 and December 31, 2016 . The weighted average beta of the equity portfolio was 1.04 at September 30, 2017 , compared to 1.02 at December 31, 2016 . Although components of the portfolio have changed, no material changes have occurred in the total interest rate or market risk compared to the tabular presentations of our interest rate and market risk sensitive instruments in our Annual Report on Form 10-K for the year ended December 31, 2016 .
Item 4. Controls and Procedures.
Progressive, under the direction of our Chief Executive Officer and our Chief Financial Officer, has established disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. The disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Our Chief Executive Officer and our Chief Financial Officer reviewed and evaluated Progressive’s disclosure controls and procedures as of the end of the period covered by this report. Based on that review and evaluation, the Chief Executive Officer and Chief Financial Officer concluded that Progressive’s disclosure controls and procedures are effectively serving the stated purposes as of the end of the period covered by this report.
We are not aware of any material change in Progressive’s internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

63






PART II—OTHER INFORMATION

Item 1A. Risk Factors.

The risk factors affecting our business are discussed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016. There have been no material changes in the risk factors that were discussed in that report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(c) Share Repurchases
 
ISSUER PURCHASES OF EQUITY SECURITIES
2017
Calendar
Month
Total
Number of
Shares
Purchased

 
Average
Price
Paid
Per Share

 
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs

 
Maximum Number of
Shares That May Yet be
Purchased Under the
Plans or Programs

July
596,845

 
$
45.58

 
614,789

 
24,385,211

August
2,936

 
47.15

 
617,725

 
24,382,275

September
229,171

 
46.25

 
846,896

 
24,153,104

Total
828,952

 
$
45.77

 
 
 
 
In May 2017, the Board approved an authorization to repurchase up to 25 million common shares; this Board authorization does not have an expiration date. Share repurchases under this authorization may be accomplished through open market purchases, through privately negotiated transactions, pursuant to our equity incentive plans, or otherwise, and may include trading plans entered into with one or more brokerage firms in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934. During the third quarter 2017 , all repurchases were accomplished through the open market or in conjunction with our incentive compensation plans at the then-current market prices. Progressive’s financial policies state that we will repurchase shares to neutralize dilution from equity-based compensation in the year of issuance and as an option to effectively use underleveraged capital.




64



Item 5. Other Information.
I. OTHER
President and CEO Susan Patricia Griffith’s letter to shareholders with respect to our third quarter 2017 results is included as Exhibit 99 to this Quarterly Report on Form 10-Q. The letter is also posted on Progressive’s website at progressive.com/annualreport.
Item 6. Exhibits.
See exhibit index on page 67.

65



SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

                                
 
 
 
 
THE PROGRESSIVE CORPORATION
 
 
 
 
(Registrant)
 
 
 
 
 
Date:
November 2, 2017
 
 
By: /s/ John P. Sauerland
 
 
 
 
John P. Sauerland
 
 
 
 
Vice President and Chief Financial Officer
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


66




 
EXHIBIT INDEX

Exhibit No.
Under
Reg. S-K,
Item 601
 
Form  10-Q
Exhibit
Number
 
Description of Exhibit
 
If Incorporated by Reference,
Documents with Which Exhibit was
Previously Filed with SEC
 
 
 
 
 
 
 
3(ii)
 
3
 
 
Filed herewith
 
 
 
 
 
 
 
10(iii)
 
10
 
 
Filed herewith
 
 
 
 
 
 
 
31
 
31.1
 
 
Filed herewith
 
 
 
 
 
 
 
31
 
31.2
 
 
Filed herewith
 
 
 
 
 
 
 
32
 
32.1
 
 
Furnished herewith
 
 
 
 
 
 
 
32
 
32.2
 
 
Furnished herewith
 
 
 
 
 
 
 
99
 
99
 
 
Furnished herewith
 
 
 
 
 
 
 
101
 
101.INS
 
XBRL Instance Document
 
Filed herewith
 
 
 
 
 
 
 
101
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
Filed herewith
 
 
 
 
 
 
 
101
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
Filed herewith
 
 
 
 
 
 
 
101
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
Filed herewith
 
 
 
 
 
 
 
101
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
Filed herewith
 
 
 
 
 
 
 
101
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
Filed herewith


67


Exhibit 3

CODE OF REGULATIONS

OF

THE PROGRESSIVE CORPORATION
(as amended on August 3, 2017)


ARTICLE I

Meetings of Shareholders

Section 1. Annual Meetings. The annual meeting of shareholders shall be held at such time and on such date on or before June 30 th of each year as may be fixed by the board of directors and stated in the notice of the meeting, for the election of directors, the consideration of reports to be laid before such meeting and the transaction of such other business as may properly come before the meeting.

Section 2. Special Meetings. Special meetings of the shareholders shall be called upon the written request of the president, the directors by action at a meeting, a majority of the directors acting without a meeting, or of the holders of shares entitling them to exercise twenty-five percent (25%) of the voting power of the corporation entitled to vote thereat. Calls for such meetings shall specify the purposes thereof. No business other than that specified in the call shall be considered at any special meeting. Special meetings so called shall be held on such date and at such time as may be fixed by the board of directors and stated in the notice of the meeting; provided, however, that in the case of a special meeting called by shareholders in accordance herewith, the date of such special meeting shall not be more than ninety (90) days after the date the president or secretary of the corporation receives the call for such meeting.
    
Section 3. Notices of Meetings. Unless waived, written notice of each annual or special meeting stating the time, place, and the purposes thereof, and the means, if any, by which shareholders can be present and vote at the meeting through the use of communications equipment, shall be given by the president or the secretary of the corporation, by personal delivery, by mail, by overnight delivery service or by any other means of communication authorized by the shareholder to whom the notice is given, to each shareholder of record entitled to vote at or entitled to notice of the meeting, not more than sixty (60) days nor less than seven (7) days before any such meeting. If mailed or sent by overnight delivery service, such notice shall be directed to the shareholder at his address as the same appears upon the records of the corporation. If sent by any other means of communication authorized by the shareholder, the notice shall be sent to the address furnished by the shareholder for those transmissions. Any shareholder, either before or after any meeting, may waive any notice required to be given by law or under these Regulations.

Section 4. Place of Meetings. Meetings of shareholders shall be held at the principal office of the corporation unless the board of directors determines that a meeting shall be held at some





other place within or without the State of Ohio and causes the notice thereof to so state. Notwithstanding the foregoing, the board of directors may determine that a meeting of shareholders shall not be held at any physical place, but instead may be held solely by means of communications equipment as authorized in the following paragraph.

If authorized by the board of directors, the shareholders and proxyholders who are not physically present at a meeting of shareholders may attend a meeting of shareholders by use of communications equipment that enables the shareholder or proxyholder an opportunity to participate in the meeting and to vote on matters submitted to the shareholders, including an opportunity to read or hear the proceedings of the meeting and to speak or otherwise participate in the proceedings contemporaneously with those physically present. Any shareholder using communications equipment will be deemed present in person at the meeting, whether the meeting is to be held at a designated place or solely by means of communications equipment. The directors may adopt guidelines and procedures for the use of communications equipment in connection with a meeting of shareholders to permit the corporation to verify that a person is a shareholder or proxyholder and to maintain a record of any vote or other action.

Section 5. Quorum. The holders of shares entitling them to exercise a majority of the voting power of the corporation entitled to vote at any meeting, present in person or by proxy, shall constitute a quorum for the transaction of business to be considered at such meeting; provided, however, that no action required by law or by the Articles of Incorporation or these Regulations to be authorized or taken by the holders of a designated proportion of the shares of any particular class or of each class may be authorized or taken by a lesser proportion. The holders of a majority of the voting shares represented at a meeting, whether or not a quorum is present, may adjourn such meeting from time to time, until a quorum shall be present.

Section 6. Record Date. The board of directors may fix a record date for any lawful purpose, including, without limiting the generality of the foregoing, the determination of shareholders entitled to (i) receive notice of or to vote at any meeting, (ii) receive payment of any dividend or distribution, (iii) receive or exercise rights of purchase of or subscription for, or exchange or conversion of, shares or other securities, subject to any contract right with respect thereto, or (iv) participate in the execution of written consents, waivers or releases. Said record date, which shall not be a date earlier than the date on which the record date is fixed, shall not be more than sixty (60) days preceding the date of such meeting, the date fixed for the payment of any dividend or distribution or the date fixed for the receipt or the exercise of rights, as the case may be.

If a record date shall not be fixed, the record date for the determination of shareholders who are entitled to notice of, or who are entitled to vote at, a meeting of shareholders, shall be the close of business on the date next preceding the day on which notice is given, or the close of business on the date next preceding the day on which the meeting is held, as the case may be.

Section 7. Proxies. A person who is entitled to attend a shareholders' meeting, to vote thereat, or to execute consents, waivers or releases, may be represented at such meeting or vote thereat, and execute consents, waivers and releases, and exercise any of his other rights, by proxy or proxies appointed by a writing signed by such person or appointed by a verifiable communication





authorized by the person.

Section 8. Procedures for Shareholder Proposals . A shareholder (or a legal representative of the shareholder) must be present at the meeting of shareholders in order to make a proposal at such meeting and must also comply with the appropriate section of these Regulations related to such proposal (or Rule 14a-8 under the Securities Exchange Act of 1934). This Section 8 sets forth certain procedures required for shareholders to make proposals at the corporation’s meetings of shareholders (other than nominations for the election of directors, the means for which are set forth in Sections 13 and 14 of Article II), including, without limitation, the exclusive means by which a shareholder may make a proposal for business to be considered at an annual meeting of shareholders, if the proposal is not made pursuant to Rule 14a-8 under the Securities Exchange Act of 1934.

A shareholder may submit a proposal for consideration at an annual meeting of shareholders only if: (i) the shareholder is a Record Shareholder or Beneficial Owner (as those terms are defined below) (x) at the time of giving of the notice as described in this Section 8, (y) as of the record date for such meeting of shareholders, and (z) as of the date of such meeting; (ii) the business is a proper matter for shareholder action; (iii) written notice of such shareholder’s intent to propose such business complying with the requirements of this Section 8 has been given, either by personal delivery, overnight courier, or United States mail, postage prepaid, to the secretary of the corporation, and has been received by the secretary of the corporation, not less than ninety (90) days, nor more than one hundred twenty (120) days, in advance of the first anniversary of the immediately preceding year’s annual meeting of shareholders (provided, however, that if the date of the annual meeting is more than thirty (30) days before or more than sixty (60) days after such anniversary date, notice by the shareholder to be timely must be so given and received, not later than the ninetieth (90 th ) day prior to the current year’s annual meeting or, if later, the tenth (10 th ) day following the day on which public disclosure of the date of the current year’s annual meeting is first given to shareholders); and (iv) updates and supplements by such shareholder as required in this Section 8 have been delivered to the secretary of the corporation in the forms and within the time frames set forth in this Section. For purposes of this Section 8, public disclosure of a meeting date shall be deemed to be first given to shareholders when disclosure of the applicable meeting date is first made in a press release reported by the Dow Jones News Services, Associated Press or comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) of the Securities Exchange Act of 1934, as amended.

Each such notice shall set forth the following information, together with a representation as to the accuracy of the information, as to (i) each shareholder making the proposal that holds of record shares of the corporation (a “Record Shareholder”) ,and (ii) each shareholder making the proposal that holds shares of the corporation through a bank, brokerage or other financial institution (a “Beneficial Owner”) (Record Shareholders and Beneficial Owners are hereinafter referred to as “Holders”):

(a)    the name (as it appears on the corporation’s stock records, if applicable) and current address of each Record Shareholder and each Beneficial Owner that is making the proposal;







(b)    a representation that each proposing shareholder is a holder of record of shares of the corporation, or holds shares of the corporation through a bank, brokerage or other financial institution, and is entitled to vote at such meeting, and that such proposing shareholder intends to (i) appear in person or by proxy at the meeting, and (ii) submit the proposal specified in the notice at the meeting in person or through a representative;

(c)    a description of all types of each such Holder’s economic and voting interests in the corporation, including a description of:

(i) the class or series and number of shares of the corporation that, directly or indirectly, are owned of record or beneficially owned (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended) by such Holder, together with, in the case of any shares that are not owned of record, proof of such Holder’s beneficial ownership of such shares in one of the ways permitted by Rule 14a-8(b)(2)(i) or (ii) under the Securities Exchange Act of 1934; and, in addition thereto, the number of shares (if any) of any class or series of the corporation as to which such Holder has a right, at that time or at any time in the future, to own or acquire record or beneficial ownership;

(ii) any derivative, swap or other transaction or series of transactions engaged in, directly or indirectly, by such Holder, the purpose or effect of which is to give such Holder, at that time or at any time in the future, economic risk corresponding or similar to ownership of, or voting power with respect to, any class or series of shares of the corporation, and any other security with a value derived from or related to the value of any class or series of shares of the corporation;

(iii) any proxy, agreement, arrangement, understanding or relationship pursuant to which such Holder has or shares a right to vote any shares of any class or series of the corporation;

(iv) any agreement, arrangement, understanding or relationship, including without limitation any repurchase or similar so-called “stock borrowing” agreement or arrangement, engaged in, directly or indirectly, by such Holder, the purpose or effect of which is to mitigate loss to, reduce the economic risk (of ownership or otherwise) of shares of any class or series of the corporation to, manage the risk of share price changes for, or increase or decrease the voting power of, such Holder with respect to the shares of any class or series of the corporation, or which provides, directly or indirectly, the opportunity to profit from any decrease in the price or value of the shares of any class or series of the corporation;

(v) any rights to dividends on the shares of any class or series of the corporation owned beneficially by such Holder that are separated or separable from the underlying shares of the corporation;

(vi) any performance-related fees (other than an asset-based fee) to which





such Holder, or any such Holder’s immediate family member or affiliate, is or would be entitled, based on any increase or decrease in the price or value of shares of any class or series of the corporation or any interest described in subsections (ii) and (iv) of this Section 8(c); and

(vii) the aggregate number of voting shares of the corporation held or beneficially owned by all Holders that are subject to or referred to in this Section 8;

(d)    a description of all arrangements or understandings between each Holder and any other person(s) or entity(ies) (naming each such person or entity) pursuant to which the proposal or proposals are to be made or pursuant to which any shares of the corporation are to be voted on such proposal or proposals;

(e)    any proportionate interest in shares of the corporation or any interest described in subsection (ii) of Section 8(c) that is held, directly or indirectly, by a general or limited partnership, limited liability company or other entity in, or with respect to, which any Holder: is a general or limited partner; beneficially owns, directly or indirectly, an interest in a general or any limited partner of such general or limited partnership; or is a member or manager of, or beneficially owns, directly or indirectly, an interest in a member or manager of, such limited liability company or other entity;

(f)    any shares of the corporation, and any arrangements, rights or other interests described in Sections 8(c) through 8(e), held by each Holder’s immediate family members or affiliates;

(g)    a representation regarding whether each Holder intends or is part of a group that intends to deliver a proxy statement and/or form of proxy to one or more other holders of the corporation’s outstanding capital stock, and/or to solicit proxies from other shareholders, in support of such proposal;

(h)    any other information relating to each Holder that would be required to be disclosed by such Holder in a proxy statement or other filings required to be made in connection with solicitations by such Holder of proxies for such proposal pursuant to Section 14 of the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder;

(i)    any other information reasonably requested by the corporation; and

(j)    a reasonably brief statement of the course of action proposed for the corporation, its management or its board of directors to follow, stated as clearly and specifically as possible; the text of the proposal or business (including the text of any resolutions proposed for consideration and, in the event that such business includes a proposal to amend the Articles of Incorporation or Code of Regulations of the corporation, the language of the proposed amendment); the reasons for making such proposal; and any material interest in such business of each Holder (including any anticipated benefit to each Holder, or any of such Holder’s affiliates or immediate family members, therefrom);







provided, however, that no information with respect to the ordinary course business activities of a Holder need be given under paragraphs (c)(ii) through (c)(vii), (d), (e) or (f) with respect to any Record Shareholder that is a broker, dealer, commercial bank, trust company or other nominee holding shares on behalf of a Beneficial Owner submitting a proposal under this Section 8.

The foregoing information shall be provided initially as of the date of the notice and, thereafter, shall be updated and supplemented by the shareholder making the proposal (i) as of the record date for the meeting and (ii) as of each date that is ten (10) business days prior to the date of the meeting or any adjournment or postponement thereof. Each such update and supplement shall be given, either by personal delivery, overnight courier, or United States mail, postage prepaid, to the secretary of the corporation, and shall be received by the secretary of the corporation, as follows: as to the update and supplement required as of the record date for the meeting, not later than five (5) business days after such record date; and as to each update or supplement required as of ten (10) business days prior to the date of the meeting or any adjournment or postponement thereof, not later than five (5) business days prior to the date of the meeting and, if applicable and if practicable, any adjournment or postponement thereof (and if not practicable, on the first practicable date prior to the date to which the meeting has been adjourned or postponed).

The presiding officer at the meeting may refuse to acknowledge the submission of any proposal not made in accordance with the provisions hereof and may declare at such meeting that any such proposal was not properly brought before the meeting and shall not be considered.

This Section 8 shall constitute an “advance notice provision” for annual meetings of shareholders for the purposes of Rule 14a-4(c)(1) under the Securities Exchange Act of 1934.

If any shareholder includes, or a group of shareholders include, a shareholder proposal in the call for a special meeting given pursuant to Section 2 of this Article I, the corporation shall have the right to request that such shareholder(s) provide to the corporation some or all of the information set forth in this Section 8. In such event, each such shareholder shall provide the requested information by the date specified by the corporation in such request and, if so requested by the corporation, shall provide updated information in advance of the special meeting on or before a date specified by the corporation in such request.

For the purpose of this Section 8, “immediate family members” shall include a person’s spouse, parents, stepparents, children, stepchildren, grandchildren, siblings, stepsiblings, mothers- and fathers-in-law, sons- and daughters-in-law, brothers- and sisters-in-law, anyone (other than domestic employees) who shares such person’s home, and shall include adoptive relationships; and “affiliates” shall include any corporation or organization of which such person is an officer, director, partner, manager or member or is, directly or indirectly, the beneficial owner of 10 percent or more of any class of equity securities or other equity interest, any trust or estate in which such person has a substantial beneficial interest or as to which such person serves as trustee or in a similar fiduciary capacity, and any other entity that controls, is controlled by, or is under common control with, the Holder or any of the Holder’s immediate family members. For the purposes hereof, “control” shall mean the right or power, alone or with others, to direct the management or policies of such other entity.





ARTICLE II

Directors
    
Section 1.   Number of Directors.   The number of directors of the corporation, none of whom need to be a shareholder or resident of the State of Ohio, shall be eleven. All of the directors shall comprise a single class, although the terms of individual directors may vary on an interim basis as provided at Section 3 hereof. The shareholders, acting by the affirmative vote of the holders of record of shares representing a majority of the voting power of the corporation on such proposal, or a majority of the board of directors, may, from time to time, increase or decrease the number of directors, but in no case shall the number of directors be fewer than five or more than thirteen, nor shall any decrease in the number of directors shorten the term of any director then in office.

Section 2.   Election of Directors.   Directors shall be elected at the annual meeting of shareholders, but when the annual meeting is not held or directors are not elected thereat, they may be elected at a special meeting called and held for that purpose. Such election shall be by ballot whenever requested by any shareholder entitled to vote at such election; but, unless such request is made, the election may be conducted in any manner approved at such meeting.
 
Article TENTH of the corporation’s Amended Articles of Incorporation, as amended, sets forth voting standards applicable in the election of directors at each meeting of shareholders to elect directors.

Section 3.   Term of Office.   Subject to the following sentences, the term of office for each director elected or re-elected at or any time after the corporation’s 2013 Annual Meeting of Shareholders shall be one year. Directors elected for multi-year terms prior to the corporation’s 2013 Annual Meeting of Shareholders shall serve for the terms for which they were previously elected. Any director elected to fill a vacancy pursuant to Section 5 of this Article shall serve for the term specified therein. Each director shall hold office until the date of the annual meeting of shareholders coinciding with the termination of the term for which he or she was elected, or until the termination of the period specified in Section 5 of this Article (if applicable), (“End-of-Term Date”) and until his or her successor shall be elected or until his or her earlier resignation, removal from office or death; provided that:
 
(a)       a director that has not been nominated by the board of directors for re-election in an election of directors at an annual meeting of shareholders coinciding with his or her End-of-Term Date (“End-of-Term Election”) shall hold office only until such End-of-Term Date; and
 
(b)       a director that has been nominated for re-election by the board of directors in an End-of-Term Election in which a majority vote is required for his or her re-election by the Amended Articles of Incorporation, as amended, but such director fails to achieve a majority of votes cast with respect to his or her nomination and fails to tender his or her resignation to the board of directors or an appropriate committee thereof, in accordance with applicable procedures adopted by the board of directors or a committee thereof, within 10 days after the results of the vote have been certified, shall





hold office only until the earlier of (i) the date that his or her successor shall be elected or (ii) the expiration of such 10 day period.

Section 4. Removal . All directors, or any individual director, may be removed from office, without assigning any cause, by the affirmative vote of the holders of record of shares representing a majority of the voting power of the corporation with respect to the election of directors, provided that unless all the directors are removed, no individual director shall be removed if the votes of a sufficient number of shares are cast against his or her removal which, if cumulatively voted at an election of all the directors would be sufficient to elect at least one director. In case of any such removal, a new director may be elected at the same meeting for the unexpired term of each director removed.

Section 5. Vacancies . Vacancies in the board of directors may be filled by a majority vote of the remaining directors. Any director so elected by the remaining directors to fill a vacancy shall have a term of office ending on the earlier of the next annual meeting of shareholders or the next special meeting of shareholders held to elect directors. At the expiration of such term, each such director shall then be subject to election by shareholders in accordance with this Article.
    
Section 6. Quorum and Transaction of Business. A majority of the whole authorized number of directors shall constitute a quorum for the transaction of business, except that a majority of the directors in office shall constitute a quorum for filling a vacancy on the board. Whenever less than a quorum is present at the time and place appointed for any meeting of the board, a majority of those present may adjourn the meeting from time to time, until a quorum shall be present. The act of a majority of the directors present at a meeting at which a quorum is present shall be the act of the board.

Section 7. Annual Meeting. Annual meetings of the board of directors shall be held immediately following annual meetings of the shareholders, or as soon thereafter as is practicable. If no annual meeting of the shareholders is held, or if directors are not elected thereat, then the annual meeting of the board of directors shall be held immediately following any special meeting of the shareholders at which directors are elected, or as soon thereafter as is practicable. If such annual meeting of directors is held immediately following a meeting of the shareholders, it shall be held at the same place at which such meeting of shareholders was held.

Section 8. Regular Meetings. Regular meetings of the board of directors shall be held at such times and places, within or without the State of Ohio, as the board of directors may, by resolution or by-law, from time to time, determine. The secretary shall give notice of each such resolution or bylaw to any director who was not present at the time the same was adopted, but no further notice of such regular meeting need be given.

Section 9. Special Meetings. Special meetings of the board of directors may be called by the chairman of the board, the lead independent director (if one is designated by the independent directors), or the president to be held at such times and places within or without the State of Ohio as the person calling such meeting shall specify. In addition, any two members of the board of directors may call special meetings of the board of directors to be held at the principal office of the





corporation at such times as they may specify.

Section 10. Notice of Annual or Special Meetings. Notice of the time and place of each annual or special meeting of the board of directors shall be given to each director by the secretary or by the person or persons calling such meeting. Such notice need not specify the purpose or purposes of the meeting and may be given in any manner or method and at such time so that the director receiving it may have reasonable opportunity to attend the meeting. Such notice shall, in all events, be deemed to have been properly and duly given to a director (i) if delivered personally or by phone, or if sent by fax, e-mail or other electronic communication to the contact number or other address of such director as then shown upon the secretary’s records, at least twenty-four (24) hours prior to the meeting, or (ii) if sent by U.S. mail or overnight courier to the address of such director as shown upon the secretary’s records, at least forty-eight (48) hours prior to the meeting. The giving of notice shall be deemed to have been waived by any director who shall attend and participate in such meeting and may be waived, in a writing or by electronic communication, by any director either before or after such meeting.

Section 11. Compensation. The directors, as such, shall be entitled to receive such reasonable compensation for their services as may be fixed from time to time by resolution of the board, and expenses of attendance, if any, may be allowed for attendance of each annual, regular or special meeting of the board. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of the executive committee or of any standing or special committee may by resolution of the board be allowed such compensation for their services as the board may deem reasonable, and additional compensation may be allowed to directors for special services rendered.

Section 12. By-laws. For the government of its actions, the board of directors may adopt by-laws consistent with the Articles of Incorporation and these Regulations.

Section 13. Procedures for Shareholder Nominations . Subject to the rights of the holders of any class or series of stock of the corporation having a preference over the Common Shares as to dividends or upon liquidation to elect directors under specified circumstances, nominations for the election of directors may be made only by the board of directors or a committee of the board of directors or, subject to this Section 13 and Section 14, by any shareholder entitled to vote in the election of directors generally. A shareholder (or a legal representative of the shareholder) must be present at the meeting of shareholders in order to nominate an individual for election at a meeting of shareholders and must also comply with the appropriate section of these Regulations related to such nomination. This Section 13 sets forth certain procedures required for shareholders to nominate directors if the shareholder does not wish the nomination to be included in the corporation’s proxy statement for the annual meeting of shareholders. Section 14 sets forth certain procedures required for shareholders to nominate directors and to have the nomination included in the corporation’s proxy statement for the annual meeting of shareholders.

A shareholder may nominate one or more persons for election as directors at a meeting of shareholders only if: (i) the shareholder is a Record Shareholder or Beneficial Owner (x) at the time of giving of the notice as described in this Section 13, (y) as of the record date for such meeting of





shareholders, and (z) as of the date of such meeting; (ii) if the nomination relates to a special meeting of shareholders called in accordance with Section 2 of Article I hereof, the election of directors is a matter specified in such call and in the corporation’s notice of such meeting; (iii) written notice of such shareholder’s intent to make such nomination(s) has been given, either by personal delivery, overnight courier, or United States mail, postage prepaid, to the secretary of the corporation and has been received by the secretary of the corporation as follows: (A) with respect to an election to be held at an annual meeting of shareholders, the notice required by this Section 13 shall be received not less than ninety (90) days, nor more than one hundred twenty (120) days, in advance of the first anniversary of the immediately preceding year’s annual meeting (provided, however, that if the date of the annual meeting is more than thirty (30) days before or more than sixty (60) days after such anniversary date, notice by the shareholder to be timely must be so given and received not later than the ninetieth (90 th ) day prior to the current year’s annual meeting or, if later, the tenth (10 th ) day following the day on which public disclosure of the date of the current year’s annual meeting is first given to shareholders), or (B) with respect to a special meeting as to which the election of directors is included in the corporation’s notice of such meeting, the notice required by this Section 13 shall be received on or before the tenth (10 th ) day following the date on which public disclosure of the date of such meeting is first given to shareholders; and (iv) updates and supplements by such shareholder as required in this Section 13 have been delivered to the secretary of the corporation in the forms and within the time frames set forth in this Section. For purposes of this Section 13, public disclosure of a meeting date shall be deemed to be first given to shareholders when disclosure of the applicable meeting date is first made in a press release reported by the Dow Jones News Services, Associated Press or comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) of the Securities Exchange Act of 1934, as amended.

Each such notice shall set forth the following information, together with a representation as to the accuracy of the information, as to each Holder who is making the nomination(s):

(a)      the name (as it appears on the corporation’s stock records, if applicable) and current address of each Record Shareholder and each Beneficial Owner that is making the nomination(s);

(b)       a representation that each proposing shareholder is a holder of record of shares of the corporation, or holds shares of the corporation through a bank, brokerage or other financial institution, and is entitled to vote at such meeting, and that such proposing shareholder intends to (i) appear in person or by proxy at the meeting, and (ii) submit the nomination(s) specified in the notice at the meeting in person or through a representative;

(c)       the name, address and principal occupation or employment of each person to be so nominated;

(d)       a description of all arrangements or understandings between the nominating shareholder and each nominee and any other person(s) or entity(ies) (naming each such person or entity) pursuant to which the nomination(s) are to be made by the shareholder or pursuant to which any shares of the corporation are to be voted on such nomination(s);






(e)       such other information regarding each nominee proposed by such nominating shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission, as then in effect, had the nominee been nominated, or intended to be nominated, by the board of directors;

(f)      a description of all types of each such Holder’s economic and voting interests in the corporation, including a description of:

(i)      the class or series and number of shares of the corporation that, directly or indirectly, are owned of record or beneficially owned (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended) by such Holder, together with, in the case of any shares that are not owned of record, proof of such Holder’s beneficial ownership of such shares in one of the ways permitted by Rule 14a-8(b)(2)(i) or (ii) under the Securities Exchange Act of 1934; and, in addition thereto, the number of shares (if any) of any class or series of the corporation as to which such Holder has a right, at that time or at any time in the future, to own or acquire record or beneficial ownership;

(ii)      any derivative, swap or other transaction or series of transactions engaged in, directly or indirectly, by such Holder, the purpose or effect of which is to give such Holder, at that time or at any time in the future, economic risk corresponding or similar to ownership of, or voting power with respect to, any class or series of shares of the corporation, and any other security with a value derived from or related to the value of any class or series of shares of the corporation;

(iii)      any proxy, agreement, arrangement, understanding or relationship pursuant to which such Holder has or shares a right to vote any shares of any class or series of the corporation;

(iv)      any agreement, arrangement, understanding or relationship, including without limitation any repurchase or similar so-called “stock borrowing” agreement or arrangement, engaged in, directly or indirectly, by such Holder, the purpose or effect of which is to mitigate loss to, reduce the economic risk (of ownership or otherwise) of shares of any class or series of the corporation to, manage the risk of share price changes for, or increase or decrease the voting power of, such Holder with respect to the shares of any class or series of the corporation, or which provides, directly or indirectly, the opportunity to profit from any decrease in the price or value of the shares of any class or series of the corporation;

(v)      any rights to dividends on the shares of any class or series of the corporation owned beneficially by such Holder that are separated or separable from the underlying shares of the corporation;

(vi)      any performance-related fees (other than an asset-based fee) to which such Holder, or any such Holder’s immediate family member or affiliate, is or would






be entitled, based on any increase or decrease in the price or value of shares of any class or series of the corporation or any interest described in subsections (ii) and (iv) of this Section 13(f);

(vii)      the aggregate number of voting shares of the corporation held or beneficially owned by all Holders that are subject to or referred to in this Section 13;

(viii)      any proportionate interest in shares of the corporation or any interest described in subsection (ii) of this Section 13(f) that is held, directly or indirectly, by a general or limited partnership, limited liability company or other entity in, or with respect to, which any Holder: is a general or limited partner; beneficially owns, directly or indirectly, an interest in a general or any limited partner of such general or limited partnership; or is a member or manager of, or beneficially owns, directly or indirectly, an interest in a member or manager of, such limited liability company or other entity; and

(ix)      any shares of the corporation, and any arrangements, rights or other interests described in Sections 13(f)(i) through 13(f)(viii) held by each Holder’s immediate family members or affiliates;

(g)    a representation regarding whether each Holder intends or is part of a group that intends to deliver a proxy statement and/or form of proxy to one or more other holders of the corporation’s outstanding capital stock, and/or to solicit proxies from other shareholders, in support of such nomination(s);

(h)    any other information relating to each Holder that would be required to be disclosed by such Holder in a proxy statement or other filings required to be made in connection with solicitations by such Holder of proxies for such nomination(s) pursuant to Section 14 of the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder; and

(i)    any other information reasonably requested by the corporation;

provided, however, that no information with respect to the ordinary course business activities of a Holder need be given under paragraphs (c)(ii) through (c)(vii), (d), (e) or (f) with respect to any Record Shareholder that is a broker, dealer, commercial bank, trust company or other nominee holding shares on behalf of a Beneficial Owner submitting a proposal under this Section 13.

The foregoing information shall be provided initially as of the date of the notice and, thereafter, shall be updated and supplemented by each shareholder making the nomination(s) (i) as of the record date for the meeting and (ii) as of each date that is ten (10) business days prior to the date of the meeting or any adjournment or postponement thereof. Each such update and supplement shall be given, either by personal delivery, overnight courier, or United States mail, postage prepaid, to the secretary of the corporation, and shall be received by the secretary of the corporation, as follows: as to the update and supplement required as of the record date for the meeting, not later than five (5) business days after such record date; and as to each update or supplement required as of ten (10)





business days prior to the date of the meeting or any adjournment or postponement thereof, not later than five (5) business days prior to the date of the meeting and, if applicable and if practicable, any adjournment or postponement thereof (and if not practicable, on the first practicable date prior to the date to which the meeting has been adjourned or postponed).

For the purpose of this Section 13, the terms “immediate family members,” “affiliates” and “control” shall be the same as set forth in Section 8 of Article I hereof.

To be effective, each notice of intent to make a nomination given hereunder must be accompanied by the written consent of each such nominee to serve as a director of the corporation if elected.

The presiding officer at the meeting may refuse to acknowledge the nomination of any person or persons not made in compliance with the provisions hereof and may declare at such meeting that any such nomination was not properly brought before the meeting and shall not be considered.

This Section 13 shall constitute an “advance notice provision” for annual meetings of shareholders for the purposes of Rule 14a-4(c)(1) under the Securities Exchange Act of 1934.

Section 14. Inclusion of Shareholder Director Nominations in the Corporation’s Proxy Materials .
(A)    Subject to the terms and conditions set forth in this Section 14, the corporation shall include in its proxy statement for an annual meeting of shareholders the name, together with the Required Information (defined below), of any person nominated for election (the “Shareholder Nominee”) to the board of directors by one or more Holders that satisfy the requirements of this Section 14 (such person or group, the “Eligible Shareholder”), and that expressly elects at the time of providing the written notice required by this Section 14 (a “Proxy Access Notice”) to have its Shareholder Nominee included in the corporation’s proxy materials pursuant to this Section 14. For the purposes of this Section 14:

(1) “Voting Shares” shall mean outstanding shares of capital stock of the corporation entitled to vote generally for the election of directors;

(2) The terms affiliates” and “control” shall be the same as set forth in Section 8 of Article I hereof; and

(3) a Record Shareholder or Beneficial Owner shall be deemed to “own” only those outstanding shares of Voting Shares of the Corporation as to which the Holder (or any shareholder, fund comprising a Qualifying Fund (as defined below) or beneficial owner whose share ownership is counted for the purposes of qualifying as being an Eligible Shareholder (in Section 14(E)) and possesses both (a) the full voting and investment rights pertaining to the shares and (b) the full economic interest in (including the opportunity for profit and risk of loss on) such shares; provided that the number of shares calculated in accordance with clauses (a) and (b) shall not include any shares (x) sold by such Holder or any of its affiliates in any transaction that has not been settled or closed,





including any short sale, (y) borrowed by such Holder or any of its affiliates for any purposes or purchased by such Holder or any of its affiliates pursuant to an agreement to resell, or (z) subject to any option, warrant, forward contract, swap, contract of sale, other derivative or similar agreement entered into by such Holder or any of its affiliates, whether any such instrument or agreement is to be settled with shares or with cash based on the notional amount or value of shares of outstanding capital stock of the corporation, in any such case which instrument or agreement has, or is intended to have, or if exercised by either party thereto would have, the purpose or effect of (i) reducing in any manner, to any extent or at any time in the future, such Holder's or affiliates' full right to vote or direct the voting of any such shares, and/or (ii) hedging, offsetting or altering to any degree gain or loss arising from the full economic ownership of such shares by such Holder or affiliate, other than any such arrangements solely involving a national or multi-national multi-industry market index. A Holder shall “own” shares held in the name of a nominee or other intermediary so long as the Holder retains the right to instruct how the shares are voted with respect to the election of directors and possesses the full economic interest in the shares. A Holder’s ownership of shares shall be deemed to continue during any period in which the Holder has loaned such shares or delegated any voting power over such shares by means of a proxy, power of attorney or other instrument or arrangement which in either case is revocable at any time by the Shareholder; provided, however, in the event of a loan, such shares are actually recalled prior to the end of the period in question. The terms “owned,” “owning” and other variations of the word “own” shall have correlative meanings.

(B)    For purposes of this Section 14, the “Required Information” that the corporation will include in its proxy statement is (1) the information concerning the Shareholder Nominee and the Eligible Shareholder that the corporation determines is required to be disclosed in the corporation’s proxy statement by the regulations promulgated under the Securities Exchange Act of 1934; and (2) if the Eligible Shareholder so elects, a Statement (defined below). Nothing in these Regulations shall limit the corporation’s ability to solicit against and include in the proxy statement its own statement relating to any Shareholder Nominee.

(C)    To be timely, a Shareholder’s Proxy Access Notice must be delivered to or mailed and received at the principal executive offices of the corporation not less than 120 calendar days before the date of the company’s proxy statement released to shareholders in connection with the previous year’s annual meeting; provided, however, that if the date of the annual meeting is more than thirty (30) days before or more than sixty (60) days after such anniversary date, notice must be given and received not later than the 120 th day prior to the current year’s annual meeting or, if later, the tenth (10 th ) day following the day on which public disclosure of the date of the current year’s annual meeting is first given to shareholders. In no event shall any adjournment or postponement of an annual meeting, the date of which has been announced by the corporation, commence a new time period for the giving of a Proxy Access Notice.

(D)    The number of Shareholder Nominees (including Shareholder Nominees that were submitted by an Eligible Shareholder for inclusion in the corporation’s proxy materials pursuant to this Section 14 but either are subsequently withdrawn or that the board of directors





decides to nominate as board of director nominees) appearing in the corporation’s proxy materials with respect to an annual meeting of shareholders shall be the greater of (x) one and (y) a number that does not exceed 20% of the number of directors in office as of the last day on which a Proxy Access Notice may be delivered in accordance with the procedures set forth in this Section 14, or if such amount is not a whole number, the closest whole number below 20% (such number that is the greater of that set forth in clause (x) or (y), the “Permitted Number”); provided , however , that the Permitted Number shall be reduced, but not below zero, by (1) the number of such director candidates for which the corporation shall have received one or more valid shareholder notices nominating director candidates pursuant to Section 13 of Article II of these Regulations, (2) the number of directors in office or director candidates that in either case will be included in the corporation’s proxy materials with respect to such annual meeting as an unopposed (by the corporation) nominee pursuant to any agreement, arrangement or other understanding with any shareholder or group of shareholders (other than any such agreement, arrangement or understanding entered into in connection with an acquisition of capital stock, by such shareholder or group of shareholders, from the corporation) and (3) the number of directors in office that will be included in the corporation’s proxy materials with respect to such annual meeting for whom access to the corporation’s proxy materials was previously provided pursuant to this Section 14, other than any such director referred to in clause (2) or this clause (3) who at the time of such annual meeting will have served as a director continuously, as a nominee of the board, for at least two annual terms; provided , further , that in the event that one or more vacancies for any reason occurs on the board of directors at any time before the date of the annual meeting and the board of directors resolves to reduce the size of the board of directors in connection therewith, the Permitted Number shall be calculated based on the number of directors in office as so reduced. In the event that the number of Shareholder Nominees submitted by Eligible Shareholders pursuant to this Section 14 exceeds the Permitted Number, each Eligible Shareholder will select one Shareholder Nominee for inclusion in the Corporation’s proxy materials until the Permitted Number is reached, going in order of the amount (largest to smallest) of common shares of the corporation each Eligible Shareholder disclosed as owned in its Proxy Access Notice submitted to the corporation. If the Permitted Number is not reached after each Eligible Shareholder has selected one Shareholder Nominee, this selection process will continue as many times as necessary, following the same order each time, until the Permitted Number is reached.

(E)    An “Eligible Shareholder” is one or more Record Shareholders who owns and has owned, or is acting on behalf of one or more Beneficial Owners who own and have owned (in each case as defined above), continuously for at least three years as of both the date that the Proxy Access Notice is received by the Corporation pursuant to this Section 14, and the record date for determining shareholders eligible to vote at the annual meeting, capital stock of the Corporation representing at least 3% of the Voting Shares (the “Proxy Access Request Required Shares”), and who continue to own the Proxy Access Request Required Shares at all times between the date such Proxy Access Notice is received by the corporation and the date of the applicable annual meeting of shareholders, provided that the aggregate number of Record Shareholders, and, if and to the extent that a Record Shareholder is acting on behalf of one or more Beneficial Owners, of such Beneficial Owners, whose share ownership is counted for the purpose of satisfying the foregoing ownership requirement shall not exceed twenty. Two or more





funds that are part of the same family of funds or sponsored by the same employer (a “Qualifying Fund”) shall be treated as one Holder for the purpose of determining the aggregate number of Holders in this Section 14, provided that each fund comprising a Qualifying Fund otherwise meets the requirements set forth in this Section 14. No Holder may be a member of more than one group constituting an Eligible Shareholder under this Section 14 for purposes of any applicable annual meeting of shareholders. A Record Shareholder acting on behalf of a Beneficial Owner will be counted as a Holder only with respect to the shares owned by Beneficial Owners on whose behalf such Record Shareholder has been directed in writing to act, and, with respect to the shares covered by such directions, will be deemed to be the same shareholder as the Beneficial Owner for purposes of determining the number of shareholders whose holdings may be considered as part of an Eligible Shareholder’s holdings.

(F)    No later than the final date when a nomination pursuant to this Section 14 may be delivered to the Corporation, an Eligible Shareholder (including each Record Shareholder, fund comprising a Qualifying Fund and/or Beneficial Owner whose share ownership is counted for the purposes of qualifying as an Eligible Shareholder) must provide the following information in writing to the secretary of the corporation: (1) the name and address of, and number of shares of capital stock of the Corporation owned by such person; (2) one or more written statements from the Record Shareholder of the shares (and from each intermediary through which the shares are or have been held during the requisite three-year holding period) verifying that, as of a date within seven calendar days prior to the date the Proxy Access Notice is delivered to or mailed to and received by the Corporation, such person owns, and has owned continuously for the preceding three years, the Proxy Access Request Required Shares, and such person’s agreement to provide, (a) within ten (10) days after the record date for the annual meeting, written statements from the Record Shareholder and intermediaries verifying such person’s continuous ownership of the Proxy Access Request Required Shares through the record date, together with any additional information reasonably requested to verify such person’s ownership of the Proxy Access Request Required Shares, and (b) immediate notice if the Eligible Shareholder ceases to own any of the Proxy Access Request Required Shares prior to the date of the applicable annual meeting of shareholders; (3) any information relating to such Eligible Shareholder (including any Record Shareholder, fund comprising a Qualifying Fund and/or Beneficial Owner whose Share ownership is counted for the purposes of qualifying as an Eligible Shareholder) and their respective affiliates or associates or others acting in concert therewith, and any information relating to such Eligible Shareholder’s Shareholder Nominee(s), in each case that would be required to be disclosed in a proxy statement and form of proxy or other filings required to be made in connection with solicitations of proxies for the election of such Shareholder Nominee(s) in a contested election pursuant to Section 14 of the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder; (4) a description of all direct and indirect compensation and other material monetary agreements, arrangements and understandings during the past three years, and any other material relationships, between or among the Eligible Shareholder (including any Shareholder, fund comprising a Qualifying Fund and/or Beneficial Owner whose share ownership is counted for the purposes of qualifying as an Eligible Shareholder) and its or their respective affiliates and associates, or others acting in concert therewith, on the one hand, and each of such Eligible Shareholder’s Shareholder Nominees, and his or her respective affiliates and associates, or others acting in concert





therewith, on the other hand, including without limitation all information that would be required to be disclosed pursuant to Rule 404 promulgated under Regulation S-K if the Eligible Shareholder (including any Record Shareholder, fund comprising a Qualifying Fund and/or Beneficial Owner whose share ownership is counted for the purposes of qualifying as an Eligible Shareholder), or any affiliate or associate thereof or person acting in concert therewith, were the “registrant” for purposes of such rule and the Shareholder Nominee were a director or executive officer of such registrant; (5) the written consent of each Shareholder Nominee to being named in the corporation’s proxy statement and form of proxy card as a nominee and to serving as a director if elected; (6) the written agreement of the Shareholder Nominee that (a) the Shareholder Nominee agrees, if elected, to adhere to the corporation’s Corporate Governance Guidelines and Code of Conduct and any other publicly available corporation policies and guidelines applicable to directors, and (b) that the Shareholder Nominee is not and will not become a party to any compensatory, payment or other financial agreement, arrangement or understanding with any person or entity in connection with his or her nomination, service or action as a director of the corporation, or any agreement, arrangement or understanding with any person or entity as to how the Shareholder Nominee would vote or act on any issue or question as a director, in each case that has not been disclosed to the corporation on the Proxy Access Notice; (7) a representation that such Holder (a) acquired the Proxy Access Request Required Shares in the ordinary course of business and not with the intent to change or influence control of the corporation, and does not presently have such intent, (b) has not nominated and will not nominate for election to the board of directors at the annual meeting any person other than the Shareholder Nominee(s) being nominated pursuant to this Section 14, (c) has not engaged and will not engage in, and has not and will not be a “participant” in another person’s, “solicitation” within the meaning of Rule 14a- 1(l) under the Securities Exchange Act of 1934 in support of the election of any individual as a director at the annual meeting of shareholders, other than its Shareholder Nominee(s) or a nominee of the board of directors; (d) will not distribute to any shareholder of the corporation any form of proxy for the annual meeting other than the form distributed by the corporation and (e) will provide facts, statements and other information in all communications with the corporation and its shareholders that are or will be true and correct in all material respects and do not and will not omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading and otherwise comply with all applicable laws, rules and regulations in connection with any actions taken pursuant to this Section 14; (8) in the case of a nomination by a group of shareholders that together is such an Eligible Shareholder, the designation by all group members of one group member that is authorized to act on behalf of all members of the nominating shareholder group with respect to the nomination and matters related thereto, including withdrawal of the nomination; and (9) an undertaking that such person agrees to (a) assume all liability stemming from, and indemnify and hold harmless the corporation and each of its directors, officers and employees individually against any liability, loss or damages in connection with any threatened or pending action, suit or proceeding, whether legal, administrative or investigative, against the corporation or any of its directors, officers or employees arising out of any legal or regulatory violation arising out of the Eligible Shareholder’s communications with the shareholders of the corporation or out of the information that the Eligible Shareholder provided to the corporation, and (b) file with the Securities and Exchange Commission any solicitation of the corporation’s shareholders by the Eligible Shareholder relating to the annual meeting at which the Shareholder Nominee will be





nominated. In addition, no later than the final date on which a Proxy Access Notice may be submitted under this Section 14, a Qualifying Fund whose Share ownership is counted for purposes of qualifying as an Eligible Shareholder must provide to the secretary of the corporation documentation reasonably satisfactory to the board of directors that demonstrates that the funds comprising the Qualifying Fund are either part of the same family of funds or sponsored by the same employer. In order to be considered timely, any information required by this Section 14 to be provided to the Corporation must be supplemented (by delivery to the secretary of the corporation) (1) no later than five (5) days following the record date for the applicable annual meeting, to disclose the foregoing information as of such record date, and (2) no later than five (5) days before the annual meeting to disclose the foregoing information as of the date that is ten days prior to such annual meeting. For the avoidance of doubt, the requirement to update and supplement such information shall not permit any Eligible Shareholder or other person to change or add any proposed Shareholder Nominee or to change the identity of any member of a group that together is an Eligible Shareholder.

(G)    The Eligible Shareholder may provide to the secretary of the corporation, at the time the information required by this Section 14 is originally provided, a written statement for inclusion in the corporation’s proxy statement for the annual meeting, not to exceed 500 words, in support of the Eligible Shareholder’s Shareholder Nominee’s candidacy (the “Statement”). Notwithstanding anything to the contrary contained in this Section 14, the corporation may omit from its proxy materials any information or Statement that it, in good faith, believes is materially false or misleading, omits to state any material fact, or would violate any applicable law or regulation.

(H)    At the request of the corporation, each Shareholder Nominee must (1) tender to the corporation an irrevocable resignation, in a form to be provided by the corporation, which resignation shall become effective upon a determination by the board of directors or any committee thereof that (x) the Proxy Access Notice pursuant to which the Shareholder Nominee’s information was included in the corporation’s proxy statement was not filed by shareholders constituting an Eligible Shareholder (or was filed by shareholders that prior to the applicable meeting ceased to be an Eligible Shareholder), or (y) that the Shareholder Nominee breached or failed to comply with the provisions of this Section 14, (2) submit to any background check (including fingerprint analysis) that may be required by any federal or state statute or regulations applicable to, or by any insurance regulatory authority having jurisdiction over, the operations of the corporation or its subsidiaries or affiliates, (3) complete, sign and submit all questionnaires required of the corporation’s directors; and (4) provide such additional information as necessary or appropriate to permit the board of directors to determine (a) if such Shareholder Nominee is independent under the listing standards of each principle U.S. exchange upon which the common shares of the corporation are listed, any applicable rules of the Securities and Exchange Commission and any publicly disclosed standards used by the board of directors in determining and disclosing the independence of the corporation’s directors, (b) if such Shareholder Nominee has any direct or indirect relationship with the corporation other than those relationships that have been deemed categorically immaterial pursuant to the corporation’s Corporate Governance Guidelines, if applicable, and (c) if such Shareholder Nominee is not and has not been subject to any event specified in Item 401(f) of Regulation S-K (or successor rule) of the Securities and Exchange Commission. In the event that any information or





communications provided by the Eligible Shareholder (or any Record Shareholder, fund comprising a Qualifying Fund and/or Beneficial Owner whose share ownership is counted for the purposes of qualifying as an Eligible Shareholder) or the Shareholder Nominee to the corporation or its shareholders ceases to be true and correct in all material respects or omits a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading, each Eligible Shareholder or Shareholder Nominee, as the case may be, shall promptly notify the secretary of the corporation of any defect in such previously provided information and of the information that is required to correct any such defect.

(I)    Any Shareholder Nominee who is included in the Corporation’s proxy materials for a particular annual meeting of shareholders but either (1) withdraws from or becomes ineligible or unavailable for election at that annual meeting, or (2) does not receive at least 25% of the votes cast in favor of the Shareholder Nominee’s election, will be ineligible to be a Shareholder Nominee pursuant to this Section 14 for the next two annual meetings. Any Shareholder Nominee who is included in the corporation’s proxy statement for a particular annual meeting of shareholders, but subsequently is determined not to satisfy the eligibility requirements of this Section 14 or any other provision of the Corporation’s Articles of Incorporation, Code of Regulations or other applicable regulation any time before the annual meeting of shareholders, will not be eligible for election at the relevant annual meeting of shareholders and may not be substituted by the Eligible Shareholder that nominated such Shareholder Nominee. Any Eligible Shareholder (including each Record Shareholder, fund comprising a Qualifying Fund and/or Beneficial Owner whose Share ownership is counted for the purposes of qualifying as an Eligible Shareholder) whose Shareholder Nominee is elected as a director at the annual meeting of Shareholder will not be eligible to nominate or participate in the nomination of a Shareholder Nominee for the following two (2) annual meetings of shareholders other than the nomination of such previously elected Shareholder Nominee.

(J)    The corporation shall not be required to include, pursuant to this Section 14, a Shareholder Nominee in its proxy materials for any meeting of shareholders, or, if the proxy statement already has been filed, to allow the nomination of a Shareholder Nominee, notwithstanding that proxies in respect of such vote may have been received by the Corporation: (1) if the Shareholder Nominee or the Eligible Shareholder (or any Shareholder, fund comprising a Qualifying Fund and/or Beneficial Owner whose share ownership is counted for the purposes of qualifying as an Eligible Shareholder) who has nominated such Shareholder Nominee has engaged in or is currently engaged in, or has been or is a “participant” in another person’s, “solicitation” within the meaning of Rule 14a-1(l) under the Securities Exchange Act of 1934 in support of the election of any individual as a director at the annual meeting other than its Shareholder Nominee(s) or a nominee of the board of directors; (2) who is not independent under the listing standards of each principle U.S. exchange upon which the common shares of the corporation are listed, any applicable rules of the Securities and Exchange Commission and any publicly disclosed standards used by the board of directors in determining and disclosing independence of the corporation’s directors, in each case as determined by the board of directors, (3) whose service as a member of the board of directors would violate or cause the corporation to be in violation of these Regulations, the Articles of Incorporation, the rules and listing standards of the principle U.S. exchanges upon which the common shares of the corporation are traded, or any applicable law, rule or regulation, including those related to the regulation of insurance and





insurance holding companies, (4) who is, at the time of the Proxy Access Notice or at the time of the annual shareholders meeting an officer or director of a competitor of the corporation of one of its subsidiaries or affiliates; (5) if the Eligible Shareholder (or any Record Shareholder, fund comprising a Qualifying Fund and/or Beneficial Owner whose share ownership is counted for the purposes of qualifying as an Eligible Shareholder) or applicable Shareholder Nominee otherwise breaches or fails to comply with its obligations pursuant to this Section 14, or (6) if the Eligible Shareholder ceases to be an Eligible Shareholder for any reason, including but not limited to not owning the Proxy Access Request Required Shares through the date of the applicable annual meeting. For the purposes of this paragraph, clauses (2), (3) and (4) and, to the extent related to a breach or failure by the Shareholder Nominee, clauses (1) and (5) will result in the exclusion from the proxy materials pursuant to this Section 14 of the specific Shareholder Nominee to whom the ineligibility applies, or, if the proxy statement already has been filed, the ineligibility of the Shareholder Nominees to be nominated; however, clauses (6) and, to the extent related to a breach or failure by an Eligible Shareholder (or any Record Shareholder, fund comprising a Qualifying Fund and/or Beneficial Owner whose share ownership is intended to be counted for the purposes of qualifying as an Eligible Shareholder), clauses (1) and (5) will result in the Voting Shares owned by such Eligible Shareholder (or Record Shareholder, fund comprising a Qualifying Fund and/or Beneficial Owner whose Share ownership had intended to be counted for the purposes of qualifying as an Eligible Shareholder) being excluded from the Proxy Access Request Required Shares (and, if as a result the Proxy Access Notice shall no longer have been filed by an Eligible Shareholder the exclusion from the proxy materials pursuant to this Section 14 of all of the applicable shareholder’s Shareholder Nominees from the applicable annual meeting of shareholders or, if the proxy statement has already been filed, the ineligibility of all of such shareholder’s Shareholders Nominees).

ARTICLE III

Committees
    
Section 1. Executive Committee. The board of directors may from time to time, by resolution passed by a majority of the whole board, create an executive committee of three or more directors, the members of which shall be elected by the board of directors to serve during the pleasure of the board. If the board of directors does not designate a chairman of the executive committee, the executive committee shall elect a chairman from its own number. Except as otherwise provided herein and in the resolution creating an executive committee, such committee shall, during the intervals between the meetings of the board of directors, possess and may exercise all of the powers of the board of directors in the management of the business and affairs of the corporation, other than that of filling vacancies among the directors or in any committee of the directors. The executive committee shall keep full records and accounts of its proceedings and transactions. All action by the executive committee shall be reported to the board of directors at its meeting next succeeding such action and shall be subject to control, revision and alteration by the board of directors, provided that no rights of third persons shall be prejudicially affected thereby. Vacancies in the executive committee shall be filled by the directors, and the directors may appoint one or more directors as alternate members of the committee who may take the place of any absent member or members at any meeting.







Section 2. Meetings of Executive Committee. Subject to the provisions of these Regulations, the executive committee shall fix its own rules of procedure and shall meet as provided by such rules or by resolutions of the board of directors, and it shall also meet at the call of the president, the chairman of the executive committee or any two members of the committee. Unless otherwise provided by such rules or by such resolutions, the provisions of Section 10 of Article II relating to the notice required to be given of meetings of the board of directors shall also apply to meetings of the executive committee. A majority of the executive committee shall be necessary to constitute a quorum. The executive committee may act in a writing, or by telephone with written confirmation, without a meeting, but no such action of the executive committee shall be effective unless concurred in by all members of the committee.

Section 3. Other Committees. The board of directors may by resolution provide for such other standing or special committees as it deems desirable, and discontinue the same at pleasure. Each such committee shall have such powers and perform such duties, not inconsistent with law, as may be delegated to it by the board of directors. The provisions of Section 1 and Section 2 of this Article shall govern the appointment and action of such committees so far as consistent, unless otherwise provided by the board of directors. Vacancies in such committees shall be filled by the board of directors or as the board of directors may provide.

ARTICLE IV

Officers

Section 1. General Provisions. The board of directors shall elect a president, such number of vice presidents as the board may from time to time determine, a secretary and a treasurer and, in its discretion, a chairman of the board of directors. The board of directors may from time to time create such offices and appoint such other officers, subordinate officers and assistant officers as it may determine. The chairman of the board shall be, but the other officers need not be, chosen from among the members of the board of directors. Any two of such offices may be held by the same person, but (i) one person may not hold the offices of both president and vice president, and (ii) no officer shall execute, acknowledge or verify any instrument in more than one capacity.

Section 2. Term of Office. The officers of the corporation shall hold office during the pleasure of the board of directors, and, unless sooner removed by the board of directors, until the organization meeting of the board of directors following the date of their election and until their successors are chosen and qualified. The board of directors may remove any officer at any time, with or without cause. A vacancy in any office, however created, shall be filled by the board of directors.


ARTICLE V

Duties of Officers

Section 1. Chairman of the Board. The chairman of the board, if one be elected, shall





preside at all meetings of the board of directors and shall have such other powers and duties as may be prescribed by the board of directors. The chairman of the board, if one be elected, or the president, shall preside at all meetings of shareholders.

Section 2. President. The president shall be the chief executive officer of the corporation and shall exercise supervision over the business of the corporation and over its several officers, subject, however, to the control of the board of directors. The president, or the chairman of the board, if one be elected, shall preside at all meetings of shareholders. If the president is a director, the president shall also preside at any meeting of the board of directors at which the chairman of the board and the lead independent director, if either or both has been elected by the Board, are not present. The president shall have authority to sign all certificates for shares and all deeds, mortgages, bonds, agreements, notes, and other instruments requiring the president’s signature; and shall have all the powers and duties prescribed by Chapter 1701 of the Revised Code of Ohio and such others as the board of directors may from time to time assign to the president.

Section 3. Vice Presidents. The vice presidents shall have such powers and duties as may from time to time be assigned to them by the board of directors or the president. At the request of the president, or in the case of his absence or disability, the vice president designated by the president (or in the absence of such designation, the vice president designated by the board) shall perform all the duties of the president and, when so acting, shall have all the powers of the president. The authority of vice presidents to sign in the name of the corporation certificates for shares and deeds, mortgages, bonds, agreements, notes and other instruments shall be coordinate with like authority of the president.

Section 4. Secretary. The secretary shall keep minutes of all the proceedings of the shareholders and board of directors and shall make proper record of the same, which shall be attested by him; shall have authority to sign all certificates for shares and all deeds, mortgages, bonds, agreements, notes, and other instruments executed by the corporation requiring his signature; shall give notice of meetings of shareholders and directors; shall produce on request at each meeting of shareholders a certified list of shareholders arranged in alphabetical order; shall keep such books as may be required by the board of directors; and shall have such other powers and duties as may from time to time be assigned to him by the board of directors or the president.

Section 5. Treasurer. The treasurer shall have such powers and duties as are customarily incident to the office and as may from time to time be assigned to him by the board of directors, the president or any vice president. The authority of the Treasurer to sign in the name of the corporation certificates for shares and deeds, mortgages, bonds, agreements, notes and other instruments shall be coordinate with like authority of the president.

Section 6. Assistant and Subordinate Officers. The board of directors may appoint such assistant and subordinate officers as it may deem desirable. Each such officer shall hold office during the pleasure of the board of directors, and perform such duties as the board of directors or the president may prescribe.

The board of directors may, from time to time, authorize any officer to appoint and remove





subordinate officers, to prescribe their authority and duties, and to fix their compensation.

Section 7. Duties of Officers May be Delegated. In the absence of any officer of the corporation, or for any other reason the board of directors may deem sufficient, the board of directors may delegate, for the time being, the powers or duties, or any of them, of such officers to any other officer or to any director.







ARTICLE VI

Indemnification and Insurance

Section 1. Indemnification. The corporation shall indemnify each director, officer and employee and each former director, officer and employee of the corporation, and each person who is serving or has served at its request as a director, officer or employee of another corporation, against expenses, judgments, decrees, fines, penalties or amounts paid in settlement in connection with the defense of any past, pending or threatened action, suit or proceeding, criminal or civil, to which he was, is or may be made a party by reason of being or having been such director, officer or employee, provided a determination is made (i) by the directors of the corporation acting at a meeting at which a quorum consisting of directors who neither were nor are parties to or threatened with any such action, suit or proceeding is present, or (ii) by the shareholders of the corporation at a meeting held for such purpose by the affirmative vote of the holders of shares entitling them to exercise a majority of the voting power of the corporation on such proposal or without a meeting by the written consent of the holders of shares entitling them to exercise two-thirds of the voting power on such proposal, that (a) such director, officer or employee was not, and has not been adjudicated to have been, negligent or guilty of misconduct in the performance of his duty to the corporation of which he is or was a director, officer or employee, (b) he acted in good faith in what he reasonably believed to be the best interest of such corporation, and (c) in any matter the subject of a criminal action, suit or proceeding, he had no reasonable cause to believe that his conduct was unlawful.

Expenses of each person indemnified hereunder incurred in defending a civil, criminal, administrative or investigative action, suit or proceeding (including all appeals) or threat thereof, may be paid by the corporation in advance of the final disposition of such action, suit or proceeding as authorized by the board of directors, whether a disinterested quorum exists or not, upon receipt of an undertaking by or on behalf of the director, officer or employee to repay such expenses unless it shall ultimately be determined that he is entitled to be indemnified by the corporation.

The foregoing rights of indemnification shall not be deemed exclusive of, or in any way to limit, any other rights to which any person indemnified may be, or may become, entitled apart from the provisions of this Article VI.

Section 2. Liability Insurance. The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or designated agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or designated agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Article or of Chapter 1701 of the Ohio Revised Code.








ARTICLE VII

Certificates for Shares; Uncertificated Shares

Section 1. Form and Execution. Except as provided in Section 2 hereof, certificates for shares, certifying the number of full-paid shares owned, shall be issued to each shareholder in such form as shall be approved by the board of directors. Such certificates shall be signed by the president or a vice president and by the secretary or an assistant secretary or the treasurer or an assistant treasurer; provided however, that if such certificates are countersigned by a transfer agent and/or registrar the signatures of any of said officers and the seal of the corporation upon such certificates may be facsimiles, which are engraved, stamped or printed thereon. If any officer or officers, who shall have signed, or whose facsimile signature shall have been used, printed, engraved or stamped on any certificate or certificates for shares, shall cease to be such officer or officers, because of death, resignation or otherwise, before such certificate or certificates shall have been delivered by the corporation, such certificate or certificates, if authenticated by the endorsement thereon of the signature of a transfer agent or registrar, shall nevertheless be conclusively deemed to have been adopted by the corporation by the use and delivery thereof and shall be as effective in all respects as though signed by a duly elected, qualified and authorized officer or officers, and as though the person or persons who signed such certificate or certificates, or whose facsimile signature or signatures shall have been used thereon, had not ceased to be an officer or officers of the corporation.

Section 2. Uncertificated Shares . The board of directors, subject to the immediately succeeding paragraph, may provide by resolution that some or all of any or all classes and series of shares of the corporation shall be uncertificated shares, provided that the resolution shall not apply to shares represented by a certificate until the certificate is surrendered to the corporation and the resolution shall not apply to a certificated security issued in exchange for an uncertificated security. Within a reasonable time after the issuance or transfer of uncertificated shares, the corporation shall send to the registered owner of the shares a written notice containing the information required to be set forth or stated on share certificates in accordance with all applicable laws. Except as expressly provided by law, the rights and obligations of the holders of uncertificated shares and the rights and obligations of the holders of certificates representing shares of the same class and series shall be identical.

Notwithstanding the foregoing provisions of this Section 2, a shareholder of record shall at all times have the right to receive one or more certificates for some or all of the shares held of record by such shareholder in accordance with Section 1 hereof by making a written request therefor to the corporation or any transfer agent for the applicable class of shares, accompanied by such assurances as the corporation or such transfer agent may require as to the genuineness of such request; provided, however, that shareholders holding shares of the corporation under one or more of the corporation’s benefit plans for officers, directors and/or employees shall have no such right to have certificates issued unless such a right is provided for under the applicable benefit plan or otherwise ordered by the board of directors or a committee thereof.

Section 3. Registration of Transfer. Any certificate for shares of the corporation shall be transferable in person or by attorney upon the surrender thereof to the corporation or any transfer





agent for the class of shares represented by the certificate surrendered of a certificate, properly endorsed for transfer or accompanied by a duly endorsed stock power, together with such assurances as the corporation or such transfer agent may require as to the genuineness and effectiveness of each necessary endorsement or executed stock power. Any uncertificated shares of the corporation shall be transferable in person or by attorney upon written request in form and substance acceptable to the corporation or any transfer agent for the applicable class of shares, accompanied by a duly endorsed stock power and/or such other assurances as the corporation or such transfer agent may require as to the genuineness and effectiveness thereof.

Section 4. Lost, Destroyed or Stolen Certificates. Subject to the provisions of Section 2 hereof, a new share certificate or certificates may be issued in place of any certificate theretofore issued by the corporation which is alleged to have been lost, destroyed or wrongfully taken upon (i) the execution and delivery to the corporation by the person claiming the certificate to have been lost, destroyed or wrongfully taken of an affidavit of that fact, specifying whether or not, at the time of such alleged loss, destruction or taking, the certificate was endorsed, and (ii) the furnishing to the corporation of indemnity and other assurances satisfactory to the corporation and to all transfer agents and registrars of the class of shares represented by the certificate against any and all losses, damages, costs, expenses or liabilities to which they or any of them may be subjected by reason of the issue and delivery of such new certificate or certificates or in respect of the original certificate.

Section 5. Registered Shareholders. A person in whose name shares are of record on the books of the corporation, whether such shares are evidenced by a certificate or are uncertificated, shall conclusively be deemed the unqualified owner and holder thereof for all purposes and to have capacity to exercise all rights of ownership. Neither the corporation nor any transfer agent of the corporation shall be bound to recognize any equitable interest in or claim to such shares on the part of any other person, whether disclosed upon any such certificate or otherwise, nor shall they be obliged to see to the execution of any trust or obligation.


ARTICLE VIII

Fiscal Year

The fiscal year of the corporation shall end on the 31st day of December in each year, or on such other date as may be fixed from time to time by the board of directors.

ARTICLE IX

Seal

The board of directors may provide a suitable seal containing the name of the corporation. If deemed advisable by the board of directors, duplicate seals may be provided and kept for the purposes of the corporation.








ARTICLE X

Amendments

These Regulations may be amended or repealed: (a) at any meeting of shareholders called for that purpose by the affirmative vote of the holders of record of shares entitling them to exercise a majority of the voting power of the corporation with respect to such proposal; or (b) by the board of directors (to the extent permitted by Ohio law).







Exhibit 10

FOURTH AMENDMENT TO THE PROGRESSIVE CORPORATION EXECUTIVE
DEFERRED COMPENSATION PLAN
(2010 Amendment and Restatement)

WHEREAS, The Progressive Corporation (“Company”) currently maintains The
Progressive Corporation Executive Deferred Compensation Plan (“Plan”) pursuant to the 2010
Amendment and Restatement and three amendments thereto; and

WHEREAS, the Company desires to amend the Plan further;

NOW, THEREFORE, the Plan is hereby amended as follows, effective as of October 5, 2017:

1.
Section 1.1 of Article 1 of the Plan is hereby amended and restated in its entirety to
provide as follows:

" Affiliated Company " means (i) any corporation included in the affiliated
group of corporations as defined in Section 1504 of the Code (determined
without regard to 1504(b)) of which the Company is the common parent
corporation, and (ii) ARX Holding Corp. and its direct or indirect
subsidiaries and other entities in which ARX Holding Corp. has a direct or
indirect controlling equity interest.

IN WITNESS WHEREOF, The Progressive Corporation has hereunto caused this
Amendment to be executed by its duly authorized representative on the 5th day of October, 2017

                        
THE PROGRESSIVE CORPORATION



By: /s/ Daniel P. Mascaro
Title: Vice President







Exhibit 31.1

CERTIFICATION
I, Susan Patricia Griffith, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of The Progressive Corporation;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: November 2, 2017                  
/s/ Susan Patricia Griffith
Susan Patricia Griffith
President and Chief Executive Officer






Exhibit 31.2

CERTIFICATION
I, John P. Sauerland, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of The Progressive Corporation;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.



Date: November 2, 2017
/s/ John P. Sauerland
John P. Sauerland
Vice President and Chief Financial Officer







Exhibit 32.1


SECTION 1350 CERTIFICATION

I, Susan Patricia Griffith, President and Chief Executive Officer of The Progressive Corporation (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

(1) the Quarterly Report on Form 10-Q of the Company for the period ended September 30, 2017 (the “Report”), which this certification accompanies, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

(2) information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



/s/ Susan Patricia Griffith
Susan Patricia Griffith
President and Chief Executive Officer
November 2, 2017




Exhibit 32.2



SECTION 1350 CERTIFICATION

I, John P. Sauerland, Chief Financial Officer of The Progressive Corporation (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:

(1) the Quarterly Report on Form 10-Q of the Company for the period ended September 30, 2017 (the “Report”), which this certification accompanies, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

(2) information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



/s/ John P. Sauerland
John P. Sauerland
Vice President and Chief Financial Officer
November 2, 2017













Exhibit 99
Letter to Shareholders
Third Quarter 2017


Had anyone foreshadowed how the quarter would unfold after our stellar July results, I would have been skeptical. That said, this is the business we are in and I often say that we can’t control the weather, only how we react after it comes our way. More on that in a moment. We grew net premiums written (NPW) 18% over last year and ended the quarter with a 97.4 combined ratio (CR), even with catastrophe losses of $430 million, or 6.6 points, including two of the largest storms in our history hitting two of our largest states. We did benefit from catastrophe reinsurance on our Property business, which limited our homeowners’ losses to $50 million for Hurricane Irma. Our YTD CR is a very healthy 94.2 with NPW growth of 14%. I’m thrilled with these results.

Policies in force growth continues to be strong with both our Agency and Direct auto at 11%, Property at 16%, Commercial Auto at 4%, and special lines at 2%.

There is continued momentum in Robinson (bundled home and auto) growth, with strong new business applications and year-over-year policies in force growth of about 30%. In the Agency channel, we experienced ongoing gains in bundled volume across our Platinum states. In Direct, HomeQuote Explorer (HQX), our online quoting platform for home insurance, continued to improve in overall yield as we rolled out new features, such as improved mobile quote functionality and online buy capabilities. As a reminder, we will do a deep dive into Property during our next Investor Webcast scheduled for Friday, November 3rd from 10-11:30 a.m. As always, that session will be followed with time allotted for questions.  

Our Direct auto new applications grew 25% for the third quarter compared to last year. During the quarter, we kept our advertising costs on pace with the first half of the year. However, on a year-over-year basis, our media spend was up significantly for the quarter, reflecting the cost reduction efforts we put in place for the second half of last year. In any event, I’m pleased with the recent Direct auto growth and the efficiency of our media spend.

The third quarter saw us continue the retention momentum we’ve seen for the past two years, outside of a small decline in the first quarter of this year. We have set a new all-time high for total auto policy life expectancy (PLE). Our trailing 12-month total auto PLE increased 5% over last year with strength across both the Agency and Direct auto businesses. We continue to focus on having a very competitive and preferred product available and, through our service philosophy, to make sure we give our customers a reason to stay. We believe having the right balance of nature and nurture is very positively affecting our retention results.

In Commercial Lines, we continue to feel good about our overall rate level though we continue to make state and coverage adjustments and respond to our most current assessment of trend. New business volume was strong this quarter, especially in September. The great news is that this isn’t primarily a denominator effect as last year’s underwriting restrictions didn’t take complete hold until October and were lifted beginning at the end of the first quarter this year. We closely monitor business that was previously restricted and like what we are seeing. We believe new segmentation and underwriting are helping a lot.

We will be launching our usage-based insurance (UBI) program for Federal Motor Carriers in December, offering discounts from 3-18%. It is essentially a device-agnostic approach designed to work with multiple Electronic Logging Device (ELD) vendors.

During the third quarter, we completed the rollout of the Snapshot ® mobile app that we introduced in late 2016 to all currently eligible states. Direct and Agency shoppers in 41 states and the District of Columbia can now choose either the mobile app or the plug-in device to participate in Snapshot. Consumer adoption continues to increase with more than half of new UBI customers in the Direct channel using the mobile app when it is available. Since the mobile app was introduced, we have collected a little over 11 million trips and 116 million miles driven. We will continue to update our product design and work with regulators with the goal of adding the mobile app in the remaining 9 states.




For the third quarter, our investment portfolio earned a fully taxable equivalent (FTE) total return of 1.1%, with our equity portfolio continuing to lead the way at 4.3% and our fixed-income portfolio at 0.7%. On a year-to-date basis, our FTE total return is 4.2%. The economy continued to grow at a solid pace. T he Federal Open Market Committee of the Federal Reserve announced that they continue to expect to raise rates in December and three more times in 2018, which should have a favorable impact on our portfolio yields over time.

A few weeks ago, I, along with other senior leaders, flew down to Texas and Florida to get a first-hand look at the devastation and get a sense of how both our employees and customers were faring. We have our full-time catastrophe team in full force and deployed almost 1,300 reservists due to the number of losses. As of the writing of this letter, we have closed just over 95% of Harvey vehicle claims and 90% of Irma vehicle claims. Homes generally take longer, but to date, we closed about 95% of Harvey property claims and 70% of Irma claims, which is well ahead of the rest of the industry. We are pleased that we have been able to get the claims resolved quickly so our customers can get back to their lives. 

Though not surprised, I am always amazed at what our employees are able to accomplish for our customers even while many of them are in the same position, replacing their own vehicles and homes from the wind and floods.

One piece of the claims employee engagement definition is Purpose. We define purpose as making sure every claims employee clearly understands how what they do every day fits into the broader Progressive objectives and how what they do makes a difference in our customers’ lives. I was honored to witness this multiple times during my travels.

As I reflect on the entire company and how we have come together over these past few months, the one word that I continue to come back to is Pride. I’m so proud of each and every employee of both Progressive and ASI and honored to work with each of them.

Best,

/s/ Tricia

Tricia Griffith
President and Chief Executive Officer