PROGRESSIVE CORP/OH/ (Form: 10-K, Received: 02/27/2019 08:27:33)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)



ý	Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2018



¨	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)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class		Name of each exchange on which registered
Common Shares, $1.00 Par Value		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ý Yes ¨ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes ý No

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. ý Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). ý Yes ¨ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

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.

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 ý No

The aggregate market value of the voting common shares held by non-affiliates of the registrant at June 30, 2018 : $34,057,145,532

The number of the registrant’s Common Shares, $1.00 par value, outstanding as of January 31, 2019 : 583,896,232

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held on May 10 , 2019 , and the Annual Report to Shareholders of The Progressive Corporation and subsidiaries for the year ended December 31, 2018 , included as Exhibit 13 to this Form 10-K, are incorporated by reference in Parts I, II, III, and IV hereof.

PART I

ITEM 1. BUSINESS

General Development of Business

The Progressive insurance organization began business in 1937. The Progressive Corporation, an insurance holding company formed in 1965, currently has insurance and non-insurance subsidiaries and affiliates. Our insurance subsidiaries and affiliates provide personal and commercial auto insurance, residential property insurance, and other specialty property-casualty insurance and related services. Our vehicle insurance products protect our customers against losses due to physical damage to their motor vehicles, uninsured and underinsured bodily injury, and liability to others for personal injury or property damage arising out of the use of those vehicles. Our residential property insurance products protect our customers against losses due to damages to their structure or possessions within the structure, as well as liability for accidents occurring in the structure or on the property. Our non-insurance subsidiaries and affiliates generally support our insurance and investment operations. We operate our vehicle businesses throughout the United States and our Property business in most U.S. jurisdictions.

The Progressive Corporation acquired a controlling interest in ARX Holding Corp. (“ARX”), the parent company of insurance subsidiaries and affiliates, in April 2015. The Progressive Corporation and the other ARX stockholders and stock option holders are parties to a stockholders’ agreement, which addresses the parties’ respective rights and obligations. Among other provisions, the stockholders’ agreement allows, and in certain circumstances requires, The Progressive Corporation to acquire 100% of the outstanding equity of ARX by the second quarter of 2021. These provisions are described in Note 15 – Redeemable Noncontrolling Interest to our financial statements included in our 2018 Annual Report to Shareholders, which is filed as Exhibit 13 to this Form 10-K (the “Annual Report”). Until The Progressive Corporation owns 100% of the outstanding equity of ARX, the interests of the minority stockholders in ARX’s income and assets are reflected in our financial statements as noncontrolling interest.

Narrative Description of Business

Organization

Our operations are run by our executive team, which consists of our Chief Executive Officer and the heads of our major business areas that report to the CEO, including a Chief Financial Officer, Chief Investment Officer, Chief Legal Officer, Chief Information Officer, Chief Human Resource Officer, Chief Marketing Officer, and Chief Strategy Officer, along with the Presidents of Personal Lines, Commercial Lines, Claims, and Customer Relationship Management. Our Property business is headed by a Property General Manager, who reports to our Chief Financial Officer.

Our insurance and claims organizations are generally managed on a state-by-state basis due to the nature of insurance, legal and regulatory requirements, and other local factors, and are supplemented by national operations and supported by our corporate functions. State-specific organizations typically report to a regional general manager, who then reports to the applicable group president. In California, we operate separate agency auto organizations with their own management.

Personal Lines

Our Personal Lines segment writes insurance for personal autos and recreational and other vehicles, which we refer to as our special lines products. This business generally offers more than one program in a single state, with each program targeted to a specific distribution channel, market, or customer group. As of December 31, 2018 , we wrote personal auto insurance in all 50 states and the District of Columbia, and we write the majority of our special lines products in all 50 states. The Personal Lines business accounted for 83% of total net premiums written in 2018 , compared to 85% in both 2017 and 2016 .

The Personal Lines segment consists of:

•

Personal auto insurance, which represented approximately 94% of our total Personal Lines net premiums written in 2018 , compared to 93% in 2017 , and 92% in 2016 . We ranked third in market share in the U.S. private passenger auto market for 2017 based on premiums written, and we believe that we continued to hold that position for 2018. There are approximately 290 competitors in this market. Progressive and the other leading 14 private passenger auto insurers, each of which writes over $2.5 billion of premiums annually, comprise about 80% of this market. All industry data, including ranking and market share, was obtained directly from data reported by either SNL Financial or A.M. Best Company, Inc. (“A.M. Best”), or was estimated using A.M. Best data as the primary source; and

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•

Special lines products, which include insurance for motorcycles, ATVs, RVs, watercraft, snowmobiles, and similar items, represented about 6% of our Personal Lines net premiums written for 2018 , compared to 7% in 2017 , and 8% in 2016 . Due to the nature of these products, we typically experience higher losses during the warmer weather months. Our competitors are specialty companies and large multi-line insurance carriers. Although industry figures are not available, based on our analysis of this market, we believe that we have been the market share leader for the motorcycle product since 1998 and that we are one of the largest providers of specialty RV and boat insurance.

Our Personal Lines products are sold through both the Agency and Direct channels.

•

The Agency business includes business written by our network of more than 35,000 independent insurance agencies located throughout the United States, including brokerages in New York and California. T hese independent insurance agents and brokers have the ability to place business with Progressive for specified insurance coverages within prescribed underwriting guidelines, subject to compliance with our mandated procedures. The agents and brokers do not have authority to establish underwriting guidelines, develop rates, settle or adjust claims, or enter into other transactions or commitments. The Agency business also writes insurance through strategic alliance business relationships with other insurance companies, financial institutions, and national agencies. The total net premiums written through the Agency channel represented 50% of our Personal Lines volume in 2018 , compared to 51% in both 2017 and 2016 .


•	The Direct business includes business written directly by us on the Internet, through mobile devices, and over the phone. The total net premiums written by the Direct business represented 50% of our Personal Lines volume in 2018 , compared to 49% in both 2017 and 2016 .

Our Personal Lines strategy is to be a competitively priced provider of a broad range of personal auto and special lines insurance products with distinctive service, distributed through whichever channel the customer prefers, and combined with property insurance and other products when appropriate to match our customers’ needs. Volume potential is driven by our price competitiveness, brand recognition, quality service, and the actions of our competitors, among other factors. See “Competitive Factors” below for further discussion.

We seek to refine our personal auto segmentation, underwriting models, and pricing over time. During 2018, we began to roll out our next generation auto product. This product version continues to improve the accuracy of matching rate to risk and introduces new rating variables that improve our competitiveness, especially in more preferred segments.

We also continue to invest to bring Snapshot ^® , our usage-based insurance program, to more customers. Snapshot provides customers in both the Agency and Direct channels the opportunity to improve their auto insurance rates based on their personal driving behavior. We offer Snapshot through our traditional hardware-based version, which is available nationwide except for California and North Carolina due to the regulatory environment, as well as through our mobile-app version, which is available in 42 states and the District of Columbia. This mobile app improves the user experience while also reducing monitoring costs. In addition to the personal benefits for our customers, the data collected via the mobile app affords us a unique perspective on mobile device usage, vehicle operations, and accidents. During 2018, we introduced a new algorithm for mobile app Snapshot consumer pricing. The algorithm, which is currently available in 10 states, is expected to provide more accurate pricing through a wider range of rates and new segmentation, based on mobile device usage while driving, and we offered larger participation discounts intended to drive greater adoption among customers.

In addition, our Personal Lines business is focused on efforts to form deeper and longer-term relationships with our customers through our Destination Era strategy. In this program, we seek to leverage our Property business, as well as insurance and non-insurance products offered by unaffiliated third parties, to provide our customers access to a range of products addressing their diverse needs and, if the customer chooses, to “bundle” certain of the products together. Bundled products are an integral part of our consumer offerings and an important part of our strategic agenda. Customers who prefer to bundle represent a sizable segment of the insurance market, and our experience is that they tend to stay with us longer and generally have lower claims costs. Our Destination Era strategy involves a number of initiatives, including:


•	In our Agency channel, we offer customers the opportunity to bundle Progressive auto and property insurance provided exclusively through the Progressive brand.

•

To further drive bundling in the Agency channel, we offer the Platinum program to those select agents who have the appropriate customers and who believe our bundled offering is a “must have” for their agency. This program combines our auto and home insurance with compensation, coordinated policy periods, single event deductible, and other features that meet the needs and desires that our agents have expressed. There are currently just over 3,300 Platinum agents.

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•

We designed and released an all-new agency quoting system that makes it easier for agents to bundle multiple policies with us. For Agents Only Portfolio quoting (commonly referred to as Portfolio) reduces data entry, displays all available products eligible for bundled quotes, simplifies the comparative rater experience, and provides Agents and their customers an overview of premium, bundle savings, and applied discounts to allow them to add or remove products with one click. Portfolio is currently available for all agents appointed to write new business in three states with plans to roll out to agents countrywide by mid-2020.


•	In the Direct channel, we bundle Progressive auto with our property products, as well as homeowners and renters products provided by unaffiliated insurance carriers. We offer these bundles by providing a single destination to which consumers may come for both their auto and property insurance needs. In many cases, we may offer discounts to incentivize or reward this bundling.


•	HomeQuote Explorer ^® (HQX) is our multi-carrier, direct-to-consumers online property offering. Through HQX, consumers are able to quickly and easily quote and compare homeowners insurance online from Progressive and other carriers. During 2018, we introduced online buying for Progressive Home shoppers in four states and plan to expand more broadly in 2019.

•

As we increase our penetration of the more complex, multi-product customers who are critical to our Destination Era success, we are further expanding the roster of products provided by unaffiliated companies that we make available through online and telephonic referrals and for which we receive commission. During 2018, we added home security, home warranty, and auto financing to our existing list of unaffiliated company products that already included life, health, and travel insurance.


•	Our special lines products and umbrella insurance can be combined with any of the auto, home, or renters coverages that we offer, in either the Direct or Agency channel.

Commercial Lines

The Commercial Lines segment writes primary liability, physical damage, and other auto-related insurance for automobiles and trucks owned and/or operated predominately by small businesses as a part of the commercial auto market. We offer these products in 50 states; we do not currently write Commercial Lines products in the District of Columbia. This business represented 12% of our total net premiums written in 2018 , compared to 11% in both 2017 and 2016 . Our Commercial Lines customers on average insure approximately two vehicles. Even though we continue to write about 90% of our Commercial Lines business through the Agency channel, we are seeing more small business owners purchasing their insurance on a direct basis.

There are approximately 330 competitors in the total U.S. commercial auto market. We primarily compete with about 50 other large companies/groups, each with over $150 million of commercial auto premiums written annually. These leading commercial auto insurers comprise about 80% of this market. Our Commercial Lines business ranked number one in the commercial auto insurance market for 2017 based on premiums written, and we believe that we continued to hold that position for 2018.

The Commercial Lines business operates in the following commercial auto business market targets:


•	Business auto – autos, vans, and pick-up trucks used by small businesses, such as retailing, farming, services, and private trucking,


•	For-hire transportation – tractors, trailers, and straight trucks primarily used by regional general freight and expeditor-type businesses and non-fleet long-haul operators,


•	Contractor – vans, pick-up trucks, and dump trucks used by small businesses, such as artisans, heavy construction, and landscapers/snowplowers,


•	For-hire specialty – dump trucks, log trucks, and garbage trucks used by dirt, sand and gravel, logging, and coal-type businesses,


•	Tow – tow trucks and wreckers used in towing services and gas/service station businesses, and


•	For-hire livery – non-fleet (i.e., five or fewer vehicles) taxis, black-car services, and airport taxis .

Just as in the Personal Lines business, we also want to be the destination for small business owners’ insurance needs. To do this, we act as an agent for business customers to place general liability and business owners’ policies and workers’ compensation coverage written by unaffiliated insurers. We also refer some customers to other unaffiliated providers of such insurance, and are compensated for this. The products are offered throughout most of the United States. During 2018, we also launched BusinessQuote Explorer ^® , a digital application that allows small business owners to obtain quotes for these products from a select group of unaffiliated partner carriers.

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Similar to Snapshot in the personal auto business, the Commercial Lines business continues to invest in Smart Haul ^® , a usage-based insurance program for motor carriers. Smart Haul allows owner operators to earn discounts for agreeing to share their electronic logging device (ELD) generated data with us. In 2018, we entered into a cooperative marketing agreement with the leading provider of ELDs to owner/operator and small fleet trucking businesses, which we believe will help drive future demand and continue to grow the Smart Haul program. Smart Haul is currently available in 46 states.

At December 31, 2018, we provided commercial auto and claims service to an Uber Technologies subsidiary in four states and expect to expand into additional markets in 2019.

Property

We began reporting Property as a segment in 2015 after we acquired a majority interest in ARX. Property business written prior to 2015 was negligible.

As one of the 15 largest homeowners carriers in the United States, we specialize in property insurance for homes, condos, manufactured homes, and renters, as well as personal umbrella insurance and primary and excess flood insurance. There are approximately 380 competitors in the homeowners insurance market nationwide and we compete with a predominance of these companies. The top 15 carriers comprise about 70% of the market.

Our Property segment writes residential property insurance in 43 states and the District of Columbia, and renters insurance in 44 states and the District of Columbia primarily in the independent agency channel. We also act as a participant in the “Write Your Own” program for the National Flood Insurance Program under which we write flood insurance in 44 states and the District of Columbia.

Our Property business represented about 5% of our total net premiums written in 2018 , compared to 4% in both 2017 and 2016 . We tend to see more business written during the second and third quarters based on the cyclical nature of property sales. Losses also tend to be higher during the warmer weather months when storms are more prevalent. For 2018 , Texas and Florida comprised 46% of our Property business based on direct premiums written. As a property writer, we have exposure to losses from catastrophes, including hurricanes, and other severe storms. To help mitigate these risks, we enter into reinsurance arrangements. See the “Reinsurance” section below for further discussion of our reinsurance programs.

As discussed above, our Property business is an important component of our Destination Era strategy.

Other Indemnity

Our other indemnity businesses consist of managing our run-off businesses.

Service Businesses

Our service businesses, which represent less than 1% of our total revenues and do not have a material effect on our overall operations, primarily include:

•

Commercial Automobile Insurance Procedures/Plans (CAIP) – We are the only servicing carrier on a nationwide basis for CAIP plans, which are state-supervised plans servicing the involuntary market in 43 states and the District of Columbia. As a service provider, we provide policy issuance and claims adjusting services and collect fee revenue. Reimbursements to us from the CAIP plans are required by state laws and regulations, subject to contractual service standards. Any changes in our participation as a CAIP service provider would not materially affect our financial condition, results of operations, or cash flows.


•	Commission-based businesses – We act as an agent for other insurance companies, as follows:

In our Direct business, we offer home, condominium, and renters insurance, among other products, written by us as well as unaffiliated insurance companies in the continental United States. We receive commissions for policies written under this program, all of which are used to offset the expenses associated with maintaining this program.

In our Commercial Lines business, we offer our customers the ability to package their auto coverage with other commercial coverages that are written by unaffiliated insurance companies or placed with additional companies through unaffiliated insurance agencies. This program offers general liability and business owners policies throughout most of the United States and workers’ compensation coverage in 44 states as of December 31, 2018 . We receive commissions for the policies written under this program, all of which are used to offset the expenses associated with maintaining this program.

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Reinsurance

We cede a portion of our direct premiums written to reinsurance plans. We participate in several mandatory state pools, including the Michigan Catastrophic Claims Association, Florida Hurricane Catastrophe Fund, and North Carolina Reinsurance Facility. We also act as servicing agent for state-mandated involuntary plans for commercial vehicles (CAIP plans) and as a participant in the “Write Your Own” program for federally regulated plans for flood (National Flood Insurance Program). All of these programs are governed by insurance regulations.

We also have voluntary contractual arrangements that primarily relate to our transportation network company business written by our Commercial Lines segment and the Property business. The reinsurance program in our Property business is designed to reduce overall risk while, to the extent of coverage purchased, protecting capital from the costs associated with catastrophes and severe storms. The largest parts of this reinsurance program are an occurrence excess of loss program and aggregate stop-loss agreements, from unaffiliated reinsurance companies, most of which are rated “A” or better by A.M. Best.

The occurrence excess of loss program supports the goal of maintaining adequate capital while sustaining at least two one-in-one hundred year events in a single contract period. It contains several layers: privately-placed reinsurance, a catastrophe bond, and coverage obtained through the Florida Hurricane Catastrophe Fund, among other arrangements. The program includes layers that are purchased for multi-year periods, and layers as to which we have prepaid premiums for reinstatement of coverage after the first covered event to ensure coverage for the second event. We are responsible for all losses and allocated loss adjustment expenses (ALAE) that do not reach the reinsurance threshold of $60 million, and for the first $60 million in losses and ALAE from each of the first and second events in the same contract period that exceed the threshold. Under certain circumstances, and if coverage has not been exhausted by the first two events, the reinsurance threshold for a third event may be reduced to $25 million. We may be responsible for additional losses if we experience more than two such events or if claims incurred exceed the maximum limits of the reinsurance coverage that is then in place. Coverage limits for a first event in Florida would be $1.6 billion, while coverage for a first event outside of Florida would be $1.2 billion; coverage for a second event (and, potentially, for subsequent covered events), would depend on a number of factors, including the severity and location of the earlier events in the contract period.

We also have aggregate stop-loss reinsurance agreements (ASL), which were in effect during 2017 and 2018, with substantially the same terms. These ASL agreements cover Property losses and ALAE except those from named storms (both hurricanes and tropical storms) and liability claims, for business written by ARX subsidiaries that write Property business. As such, it provides protection for losses and ALAE incurred by our Property business in the ordinary course, including those resulting from other significant severe weather events, such as hail, tornadoes, etc. This agreement provides $200 million of coverage to the extent that the net loss and LAE ratio for the full accident year exceeds 63%. The ASL reduces the likelihood that we will experience a net underwriting loss for reasons other than named storms and liability claims. In 2019, we renewed the ASL agreement under substantially the same terms as the prior agreements with the exception that the 2019 ASL agreement also covers an additional $100 million of retained losses and ALAE from named storms.

See Note 7 – Reinsurance in our Annual Report for further discussion.

Claims

We manage our vehicle claims handling on a companywide basis through approximately 260 stand-alone claims offices and nearly 3,000 network shops located throughout the United States. During 2018, we ceased using our Service Center model as part of our claims processing and transitioned to an expanded network shop model, with the goal of improving our operating efficiency without any loss to claims accuracy or customer service.

For our Property business, we handle property claims separately through a network of primarily independent claims adjusters.

Competitive Factors

The insurance markets in which we operate are highly competitive. Property-casualty insurers generally compete on the basis of price, agent commission rates, consumer recognition and confidence, coverages offered and other product features, claims handling, financial stability, customer service, and geographic coverage. Vigorous competition is provided by large, well-capitalized national companies in both the Agency and Direct channels, and by smaller regional insurers. In the Agency channel, some of our competitors have broad distribution networks of employed or captive agents. With widely available comparative rating services, consumers can easily compare prices among competitors. Many competitors invest heavily in advertising and marketing efforts and/or expanding their online or mobile service offerings. Over the past decade, these changes have further intensified the competitive nature of the property-casualty insurance markets in which we operate.

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We rely heavily on technology to operate our business and on extensive data gathering and analysis to segment markets and price accurately according to risk. We have remained competitive by refining our risk measurement and price segmentation skills, closely managing expenses, and achieving operating efficiencies. High-quality customer service, fair and accurate claims adjusting, and strong brand recognition are also important factors in our competitive strategy. Competition in our insurance markets is affected by the pace of technological developments. An insurer’s ability to adapt to change, innovate, develop, and implement new applications and other technologies can affect its competitive position. In addition, our competitive position could be adversely impacted if we sustain security breaches or other “cyber attacks” on our systems or are unable to maintain uninterrupted access to our systems, business functions, and the systems of certain third-party providers. See Item 1A, Risk Factors , for more information.

In addition, there has been a proliferation of patents related to new ways in which technologies can affect competitive positions in the insurance industry. Some of our competitors have many more patents than we do. Some of the patents we currently hold include two patents related to our online policy self-service technology (expiring mid-2019), a usage-based insurance patent (expiring in 2024), two patents for the system we use for securing our e-signature transactions (expiring in 2025), two U.S. patents on the Name Your Price ^® functionality on our website (expiring in 2028), two multi-product quoting patents (expiring in 2032), a patent for our implementation of a mobile insurance platform and architecture (expiring in 2032), a patent on our system of providing customized insurance quotes based on user’s price and/or coverage preferences (expiring in 2033), two patents for our loyalty call routing system (expiring in 2033), and a patent for the implementation of a chatbot in online quoting and buying (expiring in 2038).

We have a substantial amount of “know-how” developed from years of experience with usage-based insurance, and from analyzing the data from over 27 billion driving miles derived from our usage-based devices and our mobile app. We believe this intellectual property provides us with a competitive advantage in the usage-based insurance market.

State Insurance Licenses

Our insurance subsidiaries operate under licenses issued by various state insurance authorities. These licenses may be of perpetual duration or renewable periodically, provided the holder continues to meet applicable regulatory requirements. Our licenses govern the kinds of insurance coverages that may be written by our insurance subsidiaries in the issuing state. Such licenses are normally issued only after the filing of an appropriate application and the satisfaction of prescribed criteria. All licenses that are material to our subsidiaries’ businesses are in good standing.

Insurance Regulation

Our insurance subsidiaries are generally subject to regulation and supervision by insurance departments of the jurisdictions in which they are domiciled or licensed to transact business. At least one of our insurance subsidiaries is licensed and subject to regulation in each of the 50 states and the District of Columbia. The nature and extent of such regulation and supervision varies from jurisdiction to jurisdiction. Generally, an insurance company is subject to a higher degree of regulation and supervision in its state of domicile. Our insurance subsidiaries, mutual insurance company, and Lloyds company are domiciled in the states of California, Delaware, Florida, Illinois, Indiana, Louisiana, Michigan, New Jersey, New York, Ohio, Texas, and Wisconsin. In addition, California and Florida treat certain of our subsidiaries as domestic insurers for certain purposes under their “commercial domicile” laws.

State insurance laws impose numerous requirements, conditions, and limitations on the operations of insurance companies. Insurance departments have broad regulatory powers relating to those operations. Regulated areas include, among others:


•	Licensing of insurers and agents,


•	Capital and surplus requirements,


•	Statutory accounting principles specific to insurance companies and the content of required financial and other reports,


•	Requirements for establishing insurance reserves,


•	Investments,


•	Acquisitions of insurers and transactions between insurers and their affiliates,


•	Limitations on rates of return or profitability,


•	Rating criteria, rate levels, and rate changes,


•	Insolvencies of insurance companies,


•	Assigned risk programs,


•	Authority to exit a business, and

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•	Numerous requirements relating to other areas of insurance operations, including: required coverages, policy forms, underwriting standards, and claims handling.

Insurance departments are authorized to conduct periodic and other examinations of regulated insurers’ financial condition and operations to monitor the financial stability of the insurers and to ensure adherence to statutory accounting principles and compliance with state insurance laws and regulations. In addition, in some states, the attorney general’s office may exercise certain supervisory authority over insurance companies and, from time to time, may investigate certain insurance company practices.

Insurance departments establish and monitor compliance with capital and surplus requirements. Although the ratio of written premiums to surplus that the regulators will allow is a function of a number of factors (including applicable law, the type of business being written, the adequacy of the insurer’s reserves, and the quality of the insurer’s assets), the annual net premiums that an insurer may write historically have been perceived to be limited to a specified multiple of the insurer’s total surplus, generally 3 to 1 for property and casualty insurance, which is the target for our vehicle businesses; our Property business maintains a lower premiums-to-surplus ratio. Thus, the amount of an insurer’s statutory surplus, in certain cases, may limit its ability to grow its business. At year-end 2018 , we had net premiums written of $ 32.6 billion and statutory surplus of $11.7 billion . The combined premiums-to-surplus ratio for all of our insurance companies was 2.8 to 1. In addition, as of December 31, 2018 , we had access to $2.9 billion of securities held in a non-insurance subsidiary, portions of which could be contributed to the capital of our insurance subsidiaries to support growth or for other purposes. In February 2019, we used $1.5 billion of these securities to pay our common share dividends.

The National Association of Insurance Commissioners (NAIC) also has developed a risk-based capital (RBC) program to enable regulators to identify and take appropriate and timely regulatory actions relating to insurers that show signs of weak or deteriorating financial condition. RBC is determined by a series of dynamic surplus-related formulas that contain a variety of factors that are applied to financial balances based on the degree of certain risks, such as asset, credit, and underwriting risks. At December 31, 2018 , our RBC ratios were in excess of minimum requirements.

Insurance companies are generally required to file detailed annual and other reports with the insurance department of each jurisdiction in which they conduct business. These reports include:


•	the insurer’s financial statements under statutory accounting principles,


•	details concerning claims reserves held by the insurer,


•	specific investments held by the insurer, and


•	numerous other disclosures about the insurer’s financial condition and operations.

State insurance laws and insurance departments also regulate investments that insurers are permitted to make. Limitations are placed on the amounts an insurer may invest in a particular issuer, as well as the aggregate amount an insurer may invest in certain types of investments. Certain investments are prohibited.

Insurance holding company laws enacted in many jurisdictions authorize insurance departments to regulate acquisitions of insurers and certain other transactions and to require periodic disclosure of specified information. These laws impose prior approval requirements for certain transactions between insurers and their affiliates and generally regulate dividend and other distributions, including loans and cash advances, between insurers and their affiliates. See Note 8 – Statutory Financial Information in our Annual Report for further discussion.

Under state insolvency and guaranty laws, insurers can be assessed or required to contribute to state guaranty funds to cover policyholder losses resulting from the insolvency of other insurers. Insurers are also required by many states, as a condition of doing business in the state, to provide coverage to certain risks that cannot find coverage in the voluntary market. These “assigned risk” plans generally specify the types of insurance and the level of coverage that must be offered to such involuntary risks, as well as the allowable premium. Many states also have involuntary market plans, which hire a limited number of servicing carriers to provide insurance to involuntary risks. These plans, through assessments, pass underwriting and administrative expenses on to insurers that write voluntary coverages in those states.

Many states have laws and regulations that limit an insurer’s ability to exit a market. For example, certain states limit an insurer’s ability to cancel or non-renew policies. Certain states also prohibit an insurer from withdrawing one or more lines of business from the state, except pursuant to a plan that is approved by the state insurance department. The state insurance department may disapprove a plan that may lead to market disruption. Laws and regulations that limit the cancellation or non-renewal of policies, or that subject program withdrawals to prior approval requirements, may restrict an insurer’s ability to exit unprofitable markets or businesses.

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As mentioned above, insurance departments have regulatory authority over many other aspects of an insurer’s insurance operations, including coverages, forms, rating criteria, and rate levels. The ability to implement changes to these items on a timely basis is critical to our ability to compete effectively in the marketplace. Rate regulation varies from “use and file,” to “file and use,” to prior approval.

Regulation of insurance constantly changes as real or perceived issues and developments arise. Some changes may be due to economic developments, such as changes in investment laws made to recognize new investment products or to respond to perceived investment risks, while others reflect concerns about consumer privacy, insurance availability, prices, allegations of discriminatory pricing, underwriting practices, and solvency. In recent years, legislation, regulatory measures, and voter initiatives have been introduced, and in some cases adopted, which deal with use of non-public consumer information, cybersecurity, use of credit information in underwriting and rating, insurance rate development, rate of return limitations, and the ability of insurers to cancel or non-renew insurance policies. In addition, from time to time, the United States Congress and certain federal agencies investigate the current condition of the insurance industry to determine whether federal regulation is necessary. The Federal Insurance Office is required to collect information about the insurance industry and monitor the industry for systemic risk.

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Statutory Accounting Principles

Our results are reported in accordance with accounting principles generally accepted in the United States of America (GAAP), which differ in certain respects from amounts reported under statutory accounting principles (SAP) prescribed by insurance regulatory authorities. Certain significant differences are described below:



Category	GAAP Accounting	SAP Accounting
Acquisition Expenses	Commissions, premium taxes, and other variable costs incurred in connection with the successful acquisition of new and renewal business are capitalized and amortized pro rata over the policy term as premiums are earned.	Commissions, premium taxes, and all other acquisition expenses are expensed as incurred.
Nonadmitted Assets	Premiums receivable are reported net of an allowance for doubtful accounts.	Premiums receivable over 90 days past due are “nonadmitted,” which means they are excluded from surplus. For premiums receivable less than 90 days past due, we also estimate a bad debt reserve.
	Furniture, equipment, application software, leasehold improvements, and prepaid expenses are capitalized and amortized over their useful lives or periods benefited.	Excluding computer equipment and operating software, the value of all other furniture, equipment, application software, leasehold improvements, and prepaid expenses, net of accumulated depreciation or amortization, is nonadmitted against surplus. Computer equipment and operating software are capitalized, subject to statutory limitations based on surplus, and depreciated over three years.
	Deferred tax assets are recorded based on estimated future tax effects attributable to temporary differences. A valuation allowance would be recorded for any tax benefits that are not expected to be realized.	The accounting for deferred tax assets is consistent with GAAP, except for deferred tax assets that do not meet statutory requirements for recognition, which are nonadmitted against surplus.
Reinsurance	Ceded reinsurance balances are shown as an asset on the balance sheet as “prepaid reinsurance premiums” and “reinsurance recoverables.”	Ceded unearned premiums are netted against the “unearned premiums” liability. Ceded unpaid loss and loss adjustment expense (LAE) amounts are netted against “loss and LAE reserves.” Only ceded paid loss and LAE are shown as a “reinsurance recoverables” asset.
Investment Valuation	Fixed-maturity securities, which are classified as available-for-sale, are reported at fair values.	Fixed-maturity securities are reported at amortized cost or the lower of amortized cost or fair value, depending on the NAIC designation of the security.
	Preferred stocks, both redeemable and nonredeemable, are reported at fair values.	Redeemable preferred stocks are reported at amortized cost or the lower of amortized cost or fair value, depending on the NAIC designation of the security. Nonredeemable preferred stocks are reported at fair value, consistent with GAAP.
Operating Leases	Operating leases are reported on the balance sheet as both an asset and liability.	Operating leases are considered off-balance-sheet items.
Federal Income Taxes	The income tax provision includes both current and deferred income taxes.	For income statement reporting, the income tax provision only includes current tax expense. Deferred taxes are recorded directly to surplus. Deferred tax assets are subject to certain limitations on admissibility.
State Income Taxes	The income tax provision includes both current and deferred income taxes.	Current income taxes are recorded as a component of underwriting expenses. Deferred income taxes are not recorded.

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Investments

Our principal investment goals are to manage our portfolio on a total return basis to support all of the insurance premiums that we can profitably write and contribute to our comprehensive income. Our portfolio is invested primarily in short-term and intermediate-term, investment-grade fixed-income securities. Our investment portfolio had a fair value of $33.6 billion at December 31, 2018 , compared to $27.3 billion at December 31, 2017 .

I nvestment income is affected by the variability of cash flows to or from the portfolio, shifts in the type and quality of investments in the portfolio, changes in yield, and other factors. For securities held in our investment portfolios, total investment income includes interest and dividends, net realized gains (losses) on securities sold, net holding period gains (losses) on securities, which for 2018 is composed primarily of valuation changes on equity securities, and write-downs on securities held in our investment portfolio. Total investment income, before expenses and taxes, was $483.3 million in 2018, compared to $662.3 million in 2017, and $589.7 million in 2016. For our investment portfolio, on a pretax total return basis (i.e., total investment income plus changes in net unrealized gains (losses)), investment income was $357.5 million, $1,210.8 million, and $791.0 million for the years ended December 31, 2018, 2017, and 2016, respectively. Outside of our investment portfolio, but reported in impairment losses in the consolidated statements of comprehensive income, were $68.3 million, $49.6 million, and $59.7 million of other-than-temporary impairment losses resulting from renewable energy tax credit investments entered into during 2018, 2017, and 2016, respectively. For more detailed discussion of our investment portfolio, see Note 2 – Investments, Note 3 – Fair Value, and Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Annual Report.

Employees

The number of employees at December 31, 2018 was 37,346, all of whom were employed by subsidiaries of The Progressive Corporation.

Liability for Property-Casualty Losses and Loss Adjustment Expenses

The consolidated financial statements include the estimated liability for unpaid losses and loss adjustment expenses (LAE) of our insurance subsidiaries. Our objective is to ensure that total reserves (i.e., case reserves and incurred but not recorded reserves, or IBNR) are adequate to cover all loss costs, while sustaining minimal variation from the time reserves are initially established until losses are fully developed. The liabilities for losses and LAE are determined using actuarial and statistical procedures and represent undiscounted estimates of the ultimate net cost of all unpaid losses and LAE incurred through December 31 of each year. These estimates are subject to the effect of future trends on claims settlement, among other factors.

These estimates are continually reviewed and adjusted as experience develops and new information becomes known. Adjustments, if any, relating to accidents that occurred in prior years are reflected in the current year results of operations and are referred to as “development” of the prior year estimates. In establishing loss reserves, we take into account projected changes in claim severity caused by anticipated inflation and a number of factors that vary with the individual type of policy written. These severities are projected based on historical trends, adjusted for anticipated changes in underwriting standards, inflation, policy provisions, claims resolution practices, and general economic trends. These anticipated trends are reconsidered periodically based on actual development and are modified if necessary.

See Note 6 – Loss and Loss Adjustment Expense Reserves in the Annual Report for a detailed discussion of our loss reserving practices and a reconciliation of our loss and LAE reserve activity, along with incurred and paid claims development by accident year for our segments, based on definitions pursuant to statutory accounting principles.

Available Information

Our website is located at progressive.com. As soon as reasonably practicable, we make all documents that we file with, or furnish to, the SEC, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to these reports, available free of charge via our website at progressive.com/investors. These reports are also available on the SEC’s website: http://www.sec.gov. Information on our website does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other Progressive filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent we specifically incorporate such information by reference in such a filing.

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ITEM 1A. RISK FACTORS

Our business involves various risks and uncertainties, certain of which are discussed in this section. Management divides these risks into five broad categories in assessing how they may affect our financial condition, cash flows, and results of operations, as well as our ability to achieve our business objectives:


•	Insurance Risks - risks associated with assuming, or indemnifying for, the losses or liabilities incurred by policyholders


•	Operating Risks - risks stemming from external or internal events or circumstances that directly or indirectly may affect our insurance operations


•	Market Risks - risks that may cause changes in the value of assets held in our investment portfolios


•	Liquidity Risk - risk that our financial condition will be adversely affected by the inability to meet our short-term cash, collateral, or other financial obligations, and


•	Credit and Other Financial Risks - risks that the other party to a transaction will fail to perform according to the terms of a contract, or that we will be unable to satisfy our obligations when due or obtain capital when necessary.

Although we have organized risks generally according to these categories in the discussion below, many of the risks may have ramifications in more than one category. For example, although presented as an Operating Risk below, governmental regulation of insurance companies also affects our underwriting, investing, and financing activities, which are addressed separately under Insurance Risks, Market Risks, and Credit and Other Financial Risks below. These categories, therefore, should be viewed as a starting point for understanding the significant risks facing us and not as a limitation on the potential impact of the matters discussed.

It also should be noted that our business and that of other insurers may be adversely affected by a downturn in general economic conditions and other forces beyond our control. Issues such as unemployment rates, the number of vehicles sold, technological advances, home ownership trends, inflation or deflation, consumer confidence, and construction spending, among a host of other factors, will have a bearing on the amount of insurance that is purchased by consumers and small businesses and the costs that we incur. Also, to the extent that we have a concentration of business in one or more states or regions of the country, general economic conditions in those states or regions may have a greater impact on our business.

We cannot predict whether the risks and uncertainties discussed in this section, or other risks not presently known to us or that we currently believe to be immaterial, may develop into actual events and impact our businesses. If any one or more of them does so, the events could materially adversely affect our financial condition, cash flows, or results of operations, and the market prices of our common shares or debt securities could decline.

This information should be considered carefully together with the other information contained in this report and in the other reports and materials filed by us with the SEC, as well as news releases and other information we publicly disseminate from time to time.

I. Insurance Risks

Our success depends on our ability to underwrite and price risks accurately and to charge adequate rates to policyholders .

Our financial condition, cash flows, and results of operations depend on our ability to underwrite and set rates accurately for a full spectrum of risks. A primary role of the pricing function is to ensure that rates are adequate to generate sufficient premiums to pay losses, loss adjustment expenses, and underwriting expenses, and to earn a profit.

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Pricing involves the acquisition and analysis of historical data regarding vehicle accidents, other insured events, and associated losses, and the projection of future trends for such accidents and events, loss costs, expenses, and inflation, among other factors, for each of our products in multiple risk tiers and many different markets. Our ability to price accurately is subject to a number of risks and uncertainties, including, without limitation:


•	the availability of sufficient, reliable data


•	our ability to conduct a complete and accurate analysis of available data


•	uncertainties inherent in estimates and assumptions, generally


•	our ability to timely recognize changes in trends and to predict both the severity and frequency of future losses with reasonable accuracy


•	our ability to predict changes in operating expenses with reasonable accuracy


•	our ability to reflect changes in reinsurance costs in a timely manner


•	the development, selection, and application of appropriate rating formulae or other pricing methodologies


•	our ability to innovate with new pricing strategies and the success of those strategies


•	our ability to implement rate changes and obtain any required regulatory approvals on a timely basis


•	our ability to predict policyholder retention accurately


•	unanticipated court decisions, legislation, or regulatory actions


•	the frequency, severity, duration, and geographic location and scope of catastrophe events


•	our ability to understand the impact of ongoing changes in our claim settlement practices


•	changing vehicle usage and driving patterns, which may be influenced by oil and gas prices among other factors, changes in residential occupancy patterns, and 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


•	unexpected changes in the medical sector of the economy, including medical costs and systemic changes resulting from national or state health care laws or regulations


•	unforeseen disruptive technologies and events, and


•	unanticipated changes in auto repair costs, auto parts prices, used car prices, or construction requirements or labor and materials costs.

The realization of one or more of these risks may result in our pricing being based on inadequate or inaccurate data or inappropriate analyses, assumptions, or methodologies, and may cause us to estimate incorrectly future changes in the frequency or severity of claims. As a result, we could underprice risks, which would negatively affect our underwriting profit margins, or we could overprice risks, which could reduce our competitiveness and growth prospects. In either event, our financial condition, cash flows, and results of operations could be materially adversely affected. In addition, underpricing insurance policies over time could erode the capital position of one or more of our insurance subsidiaries, thereby constraining our ability to write new business.

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Our success depends on our ability to establish accurate loss reserves.

Our financial statements include loss reserves, which represent our best estimate as of the date of the financial statements of the amounts that our insurance subsidiaries ultimately will pay on claims that have been incurred, and the related costs of adjusting those claims. There is inherent uncertainty in the process of establishing property and casualty insurance loss reserves, which can arise from a number of factors, including:


•	the availability of sufficient, reliable data


•	the difficulty in predicting the rate and direction of changes in frequency and severity trends, including the effects of future inflation rates, for multiple products in multiple markets


•	unexpected changes in medical costs, auto repair costs, or the costs of construction labor and materials


•	unanticipated changes in governing statutes and regulations


•	new or changing interpretations of insurance policy provisions and coverage-related issues by courts


•	the effects of changes in our claims settlement practices


•	our ability to recognize fraudulent or inflated claims


•	the accuracy of our estimates regarding claims that have been incurred but not recorded as of the date of the financial statements


•	the accuracy and adequacy of actuarial techniques and databases used in estimating loss reserves, and


•	the accuracy and timeliness of our estimates of loss and loss adjustment expenses as determined for different categories of claims.

The ultimate paid losses and loss adjustment expenses may deviate, perhaps substantially, from point-in-time estimates of such losses and expenses, as reflected in the loss reserves included in our financial statements. Consequently, ultimate losses paid could materially exceed reported loss reserves and have a material adverse effect on our financial condition, cash flows, or results of operations.

Our insurance operating results may be materially adversely affected by severe weather conditions or other catastrophe events.

Catastrophes can be caused by natural events, such as hurricanes, tornadoes, windstorms, floods, earthquakes, hailstorms, severe winter weather, and fires, or by other events, such as explosions, terrorist attacks, riots, and hazardous material releases. The frequency, severity, duration, and geographic location and scope of such events are inherently unpredictable. Moreover, changing climate conditions, whether due to an increase in average temperatures (global climate change) or other causes, may increase how often severe weather events and other natural disasters occur, how long they last, and how much insured damage they cause, and may change where the events occur. Catastrophe losses may adversely affect the results of our Property segment more than they affect the results of our other businesses.

The extent of insured losses from a catastrophe is a function of both our total net insured exposure in the area affected by the event and the nature, severity, and duration of the event. We use catastrophe modeling tools to help estimate our exposure to such events. Those tools are based on historical data and other assumptions that limit their reliability and predictive value, and they may become even less reliable as climatic conditions change. As a result, our forecasting efforts may generate projections that prove to be materially inaccurate. An increase in the frequency, severity or duration, or unanticipated changes in geographic location or scope, of catastrophes could materially adversely affect our financial condition, cash flows, and results of operations.

Our success will depend on our ability to continue to accurately predict our reinsurance needs, obtain sufficient reinsurance coverage for our Property and other businesses at reasonable cost, and collect under our reinsurance contracts.

Our Property business relies on reinsurance contracts, state reinsurance funding, and catastrophe bonds (collectively, “reinsurance arrangements”) to reduce its exposure to certain catastrophe events. We also use reinsurance contracts to reinsure portions of our Commercial Lines and umbrella insurance businesses. Reinsurance arrangements are often subject to a threshold below which reinsurance does not apply, so that we are responsible for all losses below the threshold from a covered event, and to an aggregate dollar coverage limit, so that our claims liabilities arising from a covered event may exceed our reinsurance coverage. In addition, although the reinsurer is liable to the insurer to the extent of the reinsurance coverage, the

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original insurer remains liable under the policies to the insured as the direct insurer on all risks reinsured. As a result, we are subject to the risk that reinsurers will be unable to pay, or will dispute, reinsurance claims. Further, the availability and cost of reinsurance are subject to prevailing reinsurance market conditions (which can be impacted by the occurrence of significant reinsured events, such as catastrophes). We may not be able to obtain reinsurance coverage in the future at commercially reasonable rates or at all. The unavailability and/or cost of reinsurance could adversely affect our business volume, profitability, or financial condition.

II. Operating Risks

We compete in property-casualty markets that are highly competitive.

The markets in which we sell insurance are highly competitive. We face vigorous competition from large, well-capitalized national and international companies, as well as smaller regional insurers. Other companies, potentially including existing insurance companies, other well-financed companies seeking new opportunities, or new competitors with technological or other innovations, also may enter these markets in the future. Many of our competitors have substantial resources, experienced management, and strong marketing, underwriting, and pricing capabilities. The property and casualty insurance industry is a relatively mature industry, in which brand recognition, marketing skills, innovation, operational effectiveness, pricing, scale, and cost control are major competitive factors. If our competitors offer similar insurance products at lower prices, offer such insurance products bundled with other products or services that we do not offer, are permitted to offer their products under different legal and regulatory constraints than those that apply to us, or engage in other successful competitive initiatives, our ability to generate new business or to retain a sufficient number of our existing customers could be compromised. In addition, because auto insurance constitutes a significant portion of our overall business, we may be more sensitive than other insurers to, and more adversely affected by, trends that could decrease auto insurance rates or reduce demand for auto insurance over time, such as advances in autonomous vehicles and vehicle sharing arrangements.

Historically, the auto and property insurance markets have been described as cyclical, with periods of relatively strong profitability being followed by increased pricing competition among insurers. This price competition, which is sometimes referred to as a “soft market,” can adversely affect revenue and profitability levels. As insurers recognize this situation (which can occur at different times for different companies), the historical reaction has been for insurers to raise their rates (sometimes referred to as a “hard market”) in an attempt to restore profitability to acceptable levels. As more insurers react in this way, profit levels in the industry may increase to a point where some insurers begin to lower their rates, starting the cycle over again. In the past, this cycle has generally played out over a number of years. We cannot be certain whether and to what extent such cyclicality is currently impacting the auto or property insurance markets, nor can we predict whether it will do so in the future.

The highly competitive nature of the insurance marketplace could result in consolidation within the industry, or in the failure of one or more competitors. The concentration of premium volume in a reduced number of major competitors could significantly increase the level of competition in a manner that is not favorable to us. In addition, in the event of a failure of a major insurer or a state-sponsored catastrophe fund, our company and other insurance companies may be required by law to absorb the losses of the failed insurer or fund, resulting in a potentially significant increase in our costs. We might also be faced with an unexpected surge in new business from a failed insurer’s former policyholders. Such events could materially adversely affect our financial results, brand, and future business prospects.

Our success depends on our ability to innovate effectively and respond to our competitors’ initiatives.

Our ability to develop and implement innovative products and services that are accepted and valued by our customers and independent agents is critical to maintaining and enhancing our competitive position. Innovations must be implemented in compliance with applicable insurance regulations and may require extensive modifications to our systems and processes and extensive coordination with and reliance on the systems of third parties. As a result, if we do not handle these transitions effectively and bring such innovations to market with the requisite speed, the quality of our products, our relationships with our customers and agents, and our business prospects, may be materially adversely affected. In addition, innovations by competitors or other market participants may increase the level of competition in the industry. If we fail to respond appropriately to those innovations on a timely basis, our competitive position and results may be materially adversely affected.

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We must effectively manage complexity as we develop and deliver high quality products and customer experiences.

Ongoing competitive, technological, regulatory, informational, and other developments result in significant levels of complexity in our products and in the systems and processes we use to run our business. These risks include our increasing reliance on third-party systems, the development of new modes of communication, changing insurance shopping trends, and the availability of very large volumes of data (i.e., Big Data) and the challenges relating to analyzing those data sets. Complexity may create barriers to innovation or the provision of high-quality products and customer and agent experiences, may require us to modify our business practices, to adopt new systems, or to upgrade or replace outdated systems, each at significant expense, and may lead to increased difficulty in executing our business strategies.

Intellectual property rights could affect our competitiveness and our business operations.

There has been a proliferation of patents, both inside and outside the insurance industry, that significantly impacts our businesses. The existence of such patents, and other claimed intellectual property rights, may result in legal challenges to certain of our business practices by other insurance companies and non-insurance entities alleging that we are violating their rights. Such legal challenges could result in costly legal proceedings, substantial monetary damages, or expensive changes in our business processes and practices. Similarly, we may seek or obtain patent protection for innovations developed by us. However, we may not be able to obtain patents on these processes and practices, and defending our patents and other intellectual property rights against challenges, and enforcing and defending our rights, including if necessary through litigation, can be time consuming and expensive, and the results are inherently uncertain, which can further complicate business plans.

Our success depends on our ability to adjust claims accurately.

We must accurately evaluate and pay claims that are made under our insurance policies. Our failure to pay claims fairly, accurately, and in a timely manner, or to deploy claims resources appropriately and in a cost-effective manner, could result in unanticipated costs to us, lead to material litigation, undermine customer goodwill and our reputation in the marketplace, and impair our brand and, as a result, materially adversely affect our competitiveness, customer retention, financial results, prospects, and liquidity.

We must develop and maintain a brand that is recognized and trusted by consumers.

It is critical to our business that consumers recognize and trust the Progressive brand. We undertake distinctive advertising and marketing campaigns and other efforts to improve brand recognition, enhance perceptions of us, generate new business, and increase the retention of our current customers. We believe that improving the effectiveness of our advertising and marketing campaigns relative to those of our competitors is particularly important given the significance of brand and reputation in the marketplace and the continuing high level of advertising and marketing efforts and related expenditures within the insurance market. If our marketing campaigns are unsuccessful or are less effective than those of competitors, or if our reliance on a particular spokesperson or character is compromised, our business could be materially adversely affected.

Our brand also could be adversely affected by incidents that reflect negatively on us, whether due to our business practices, the conduct of our officers or employees, the actions of businesses with which we do business, including unaffiliated insurers whose products we offer or make available to our customers, or other causes. The negative impacts of these or other events may be aggravated as the perceptions of consumers and others are formed based on modern communication and social media tools over which we have no control.

Our ability to attract, develop, and retain talent, including employees, managers, and executives, and to maintain appropriate staffing levels, is critical to our success.

Our success depends on our ability to attract, develop, compensate, motivate, and retain talented employees, including executives, other key managers, and employees with strong technological, analytical, and other skills and know-how necessary for us to run our vehicle and property insurance businesses and assess potential expansion into new products and business areas. Our loss of certain officers and key employees, or the failure to attract or develop talented employees, executives and managers with diverse backgrounds and experiences, could have a material adverse effect on our business.

In addition, we must forecast sales and claims volume and other factors in changing business environments (for multiple products and business units and in many geographic markets) with reasonable accuracy and adjust our hiring and training programs and staffing levels accordingly. Our failure to recognize the need for such adjustments, or our failure or inability to react on a timely basis, could lead either to over-staffing or under-staffing in one or more business units or locations. In either such event, our financial results, customer relationships, employee morale, and brand could be materially adversely affected.

We use third-party labor to meet a portion of our staffing needs. Any significant loss in access to qualified external talent on a cost-effective basis could have an adverse effect on our business.

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Our success also depends, in large part, on our ability to maintain and improve the staffing effectiveness and culture that we have developed over the years. Our ability to do so may be impaired as a result of litigation against us, other judicial decisions, legislation or regulations, or other factors in the employment marketplace, as well as our failure to recognize and respond to changing trends and other circumstances that affect our employees. In such events, the productivity of our workers and the efficiency of our operations could be adversely affected, which could lead to an erosion of our operating performance and margins.

We are subject to a variety of complex laws and regulations.

Our insurance businesses operate in highly regulated environments. Our insurance subsidiaries are subject to regulation and supervision by state insurance departments in all 50 states and the District of Columbia, each of which has a unique and complex set of laws and regulations. In addition, certain federal laws impose additional requirements on businesses, including insurers, in a wide range of areas, such as the use of credit information, methods of customer communications, and the reimbursement of certain medical costs incurred by the government. Our insurance subsidiaries’ ability to implement business plans and remain competitive while complying with these laws and regulations, and to obtain necessary regulatory action in a timely manner, is and will continue to be critical to our success.

Most jurisdictions impose restrictions on, or require prior regulatory approval of, various actions by regulated insurers, which may adversely affect our insurance subsidiaries’ ability to operate, innovate, and obtain necessary rate adjustments in a timely manner. Our compliance efforts are further complicated by changes in laws or regulations applicable to insurance companies, or by judicial interpretations of those laws or regulations. Insurance laws and regulations may limit, among other things, an insurer’s ability to underwrite and price risks accurately, prevent the insurer from obtaining timely rate changes to respond to increased or decreased costs, restrict the ability to discontinue unprofitable businesses or exit unprofitable markets, prevent insurers from terminating policies under certain circumstances, dictate or limit the types of investments that an insurance company may hold, and impose specific requirements relating to information technology systems and related cybersecurity risks. Moreover, inconsistencies between requirements at the state and federal level may further complicate our compliance efforts, potentially resulting in additional costs for us. In addition, laws in certain jurisdictions mandate that insurance companies pay assessments in a number of circumstances, including potentially material assessments to pay claims upon the insolvency of other insurance companies or to cover losses in government-provided insurance programs for high risk auto and homeowners coverages. Compliance with laws and regulations often results in increased costs, which can be substantial, to our insurance subsidiaries. These costs, in turn, may adversely affect our profitability or our ability or desire to grow or operate our business in the applicable jurisdictions.

In addition, data privacy and security regulations impose complex compliance and reporting requirements and challenges. For example, California recently enacted consumer privacy protection legislation that will become effective in 2020. Compliance with this new legislation will be challenging as it will require us to modify our current business systems and operations in a short time frame and without the benefit of related regulations, which are not required to be issued until six months after the legislation’s effective date. Other states are considering privacy and security legislation, and variations in requirements across the states present ongoing compliance challenges. Compliance with these laws and regulations may result in increased costs, which may be substantial and may adversely affect our profitability or our ability or desire to grow or operate our business in certain jurisdictions.

The actual or alleged failure to comply with this complex variety of laws and regulations by us or other companies in the insurance, financial services, or related industries, also could result in actions or investigations by regulators, state attorneys general, federal officials, or other law enforcement officials. Such actions and investigations, and any determination that we have not complied with an applicable law or regulation, could potentially lead to significant monetary payments, fines and penalties, adverse publicity and damage to our reputation in the marketplace, and in certain cases, revocation of a subsidiary’s authority to do business in one or more jurisdictions. In addition, The Progressive Corporation and its subsidiaries could face individual and class action lawsuits by insureds and other parties for alleged violations of certain of these laws or regulations.

New federal or state legislation or regulations may be adopted in the future that could materially adversely affect our operations or ability to write business profitably in one or more jurisdictions.

Lawsuits challenging our business practices, and those of our competitors and other companies, are pending and more may be filed in the future.

The Progressive Corporation and/or its subsidiaries are named as defendants in class action and other lawsuits challenging various aspects of the subsidiaries’ business operations. These lawsuits have included cases alleging damages as a result of our subsidiaries’ methods used for evaluating and paying certain bodily injury, personal injury protection, and medical payment claims or for reimbursing medical costs incurred by Medicare/Medicaid beneficiaries; other claims handling procedures, including challenges relating to our network of repair facilities, our methods used for estimating physical damage to vehicles

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for repair purposes and for evaluating the actual cash value of total loss vehicles, our payment of fees and taxes, our subrogation practices, and our handling of diminution of value claims; our assessment of fees related to insufficient funds or reversed payments; interpretations of the provisions of our insurance policies; rating practices; certain policy sales, services, implementation and renewal practices and procedures, including with respect to accessibility; our Snapshot program; certain relationships with independent insurance agents; and certain employment practices, including claims relating to pay practices and fair employment practices, among other matters.Additional litigation may be filed against us in the future challenging similar or other of our business practices. In addition, lawsuits have been filed, and other lawsuits may be filed in the future, against our competitors and other businesses, and although we are not a party to such litigation, the results of those cases may create additional risks for, and/or impose additional costs and/or limitations on, our subsidiaries’ business operations.

Lawsuits against us often seek significant monetary damages and injunctive relief. The potential for injunctive relief can threaten our use of important business practices. Moreover, the resolution of individual or class action litigation in insurance or related fields may lead to a new layer of judicial regulation, resulting in material increases in our costs of doing business.

Litigation is inherently unpredictable. Adverse court decisions or significant settlements of pending or future cases could have a material adverse effect on our financial condition, cash flows, and results of operations. For further information on the risks of pending litigation, see Note 12 - Litigation in the Annual Report.

Our business could be materially adversely affected by a security breach or other attack involving our computer systems or the systems of one or more of our vendors.

Our business requires that we develop and maintain large and complex computer systems to run our operations and to store the significant volume of data that we acquire, including the personal confidential information of our customers and employees and our intellectual property, trade secrets, and other sensitive business and financial information. All of these systems are subject to “cyber attacks” by sophisticated third parties with substantial computing resources and capabilities, and to unauthorized or illegitimate actions by employees, consultants, agents and other persons with legitimate access to our systems. Such attacks or actions may include attempts to:


•	steal, corrupt, or destroy data, including our intellectual property, financial data, or the personal information of our customers or employees


•	misappropriate funds


•	disrupt or shut down our systems


•	deny customers, agents, brokers, or others access to our systems, or


•	infect our systems with viruses or malware.

Some of our systems rely on third-party vendors, through either a connection to, or an integration with, those third-parties’ systems. This approach may increase the risk of loss, corruption, or unauthorized publication of our information or the confidential information of our customers and employees or other cyber attack. Third-party risks may include, among other factors, the vendor’s lax security measures, data location uncertainty, and the possibility of data storage in inappropriate jurisdictions, where laws or security measures may be inadequate.

We undertake substantial efforts to protect our systems and sensitive or confidential information. These efforts include internal processes and technological defenses that are preventative or detective, and other controls designed to provide multiple layers of security protection. In addition, we seek to protect the security and confidentiality of information provided to our vendors under “cloud computing” or other arrangements through appropriate risk evaluation, security and financial due diligence, contracts designed to require high security and confidentiality standards, and review of third-party compliance with the required standards. While we expend significant resources on these defensive measures, our systems are being threatened on a regular basis, we have experienced minor incidents in the past, and there can be no assurance that we will be successful in preventing future attacks or detecting and stopping them once they have begun.

Our business could be significantly damaged by a security breach, data loss or corruption, or cyber attack. In addition to the potentially high costs of investigating and stopping such an event and implementing necessary fixes, we could incur substantial liability if confidential customer or employee information is stolen. In addition, such an event could cause a significant disruption of our ability to conduct our insurance operations, adversely affect our competitive position if material trade secrets or other confidential information are stolen, and have severe ramifications on our reputation and brand, potentially causing customers to refrain from buying insurance from us or other businesses to refrain from doing business with us. We have elected to self-insure these risks at this time. Therefore, the occurrence of a security breach, data loss or corruption, or cyber attack, if sufficiently severe, could have a material adverse effect on our business results, prospects, and liquidity.

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Our business depends on the secure and uninterrupted operation of our facilities, systems, and business functions and the operation of various third-party systems.

Our business is highly dependent upon our ability to perform, in an efficient and uninterrupted manner, necessary business functions. The shut-down or unavailability of one or more of our systems or facilities for any reason could significantly impair our ability to perform critical business functions on a timely basis. In addition, many of our critical business systems interface with and depend on third-party systems; an interruption of service from a third-party system for any reason could significantly impair our ability to perform critical business functions. If sustained or repeated, and if an alternate system, process, or vendor is not immediately available to us, such events could result in a deterioration of our ability to write and process policies, provide customer service, resolve claims in a timely manner, make payments when required, or perform other necessary business functions. Any such event could have a material adverse effect on our financial results and business prospects, as well as cause damage to our brand and customer goodwill.

Efforts to develop new products or enter new areas of business may not be successful and may create enhanced risks.

We are developing, and may develop in the future, new insurance products, including those that insure risks that we have not previously insured, contain new coverages, or change coverage terms. These new products may not be as profitable as our existing products and may not perform as well as we expect. In addition, these new products may change our risk exposures, and the business systems, data, and models we use to manage those exposures may be less accurate or less effective than those we use with existing products.

In addition, we are evaluating other business models, both insurance and non-insurance related, and are considering investments in different business areas. These activities may take the form of internal development, equity investments, targeted mergers or acquisitions, joint ventures, or strategic partnerships. These new ventures may require us to make significant expenditures, which may negatively impact our results in the near term, and if not successful, could materially and adversely affect our results of operations. While at the onset of the venture we would expect these projects to provide long-term value, there can be no assurance that our expectations will be realized.

If we were not able to send or accept electronic payments, our business and financial results could be adversely affected.

We rely on access to various financial networks to process payments received from our customers. These include credit card and debit card networks and the Automated Clearing House (ACH) network. Our ability to participate in these networks is dependent on our compliance with applicable laws and regulations and with the complex rules of each network and any related industry supervisory groups. If we fail to comply with legal requirements or rules and best practices established by a network or industry group, including those related to data security, we could be assessed significant monetary fines and other penalties, including, in certain cases, the termination of our right to use the applicable network or system. Such fines and penalties, and any disruption in or termination of our ability to process customer payments electronically, could materially adversely affect our business and our brand.

We may be required to recognize impairments in the value of the goodwill or intangible assets recorded in our financial statements.

As a result of business acquisitions, we have recorded goodwill (generally representing the amount paid in excess of the fair value of the assets acquired) and certain intangible assets (at fair value at the time of acquisition) and we may record additional goodwill and intangible assets in the future. We review goodwill and intangible assets for impairment at least annually. Valuing these assets, and evaluating their recoverability, requires us to make estimates and assumptions related to future returns on equity, margins, growth rates, discount rates, and other matters, and our estimates may change over time, potentially resulting in write-downs of the assets. Goodwill and intangible assets impairment charges could result from declines in operating results, divestitures or sustained market declines, among other factors, and could materially affect our financial condition and results of operations in the period in which they are recognized.

III. Market Risks

The performance of our fixed-income and equity investment portfolios is subject to a variety of investment risks.

Our investment portfolio consists principally of fixed-income securities and common equities. General economic conditions and other factors beyond our control can adversely affect the value of our investments and the amount and realization of investment income, or result in realized or unrealized investment losses.

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Our fixed-income portfolio is actively managed by our investment group and includes short-term investments, fixed-maturity securities, and preferred stocks. The performance of the fixed-income portfolio is subject to a number of risks, including:


•	Interest rate risk - the risk of adverse changes in the value of fixed-income securities as a result of increases in market interest rates.


•	Investment credit risk - the risk that the value of certain investments may decrease due to a deterioration in the financial condition, operating performance or business prospects of, or the liquidity available to, one or more issuers of those securities or, in the case of asset-backed securities, due to the deterioration of the loans or other assets that underlie the securities.


•	Concentration risk - the risk that the portfolio may be too heavily concentrated in the securities of one or more issuers, sectors, or industries, which could result in a significant decrease in the value of the portfolio in the event of a deterioration of the financial condition or performance of, or outlook for, those issuers, sectors, or industries.

•

Prepayment or extension risk - applicable to certain securities in the portfolio, such as residential mortgage-backed securities and other bonds with call provisions, prepayment risk is the risk that, as interest rates change, the principal of such securities may be repaid earlier than anticipated, requiring that we reinvest the proceeds at less attractive rates. Extension risk is the risk that a security may not be redeemed when anticipated, adversely affecting the value of the security and preventing the reinvestment of the principal at higher market rates.


•	Liquidity risk - discussed separately below.

In addition, the success of our investment strategies and asset allocations in the fixed-income portfolio may vary depending on the market environment. The fixed-income portfolio’s performance also may be adversely impacted if, among other factors: credit ratings assigned to such securities by nationally recognized statistical rating organizations are based on incomplete or inaccurate information or otherwise prove unwarranted; or our risk mitigation strategies are ineffective for the applicable market conditions.

The common equity portfolio is primarily managed externally to track the Russell 1000 Index, with a small portion actively managed by an external investment advisor. Our equity investments are subject to general movements in the values of equity markets and to the changes in the prices of the securities we hold. An investment portfolio that is designed to track an index, such as the Russell 1000, or that follows a specific investment discipline, such as value investing, is not necessarily less risky than other equity investment strategies. Equity markets, sectors, industries, and individual securities may be subject to high volatility and to long periods of depressed or declining valuations, and are also subject to most of the same risks that affect our fixed-income portfolio, as discussed above. In addition, even though the Russell 1000 Index is broadly diversified, significant portions of the index may be concentrated in one or more sectors, reducing our ability to manage our concentration risk through sector diversification. The actively managed equity portfolio is also subject to risks arising from the investment decisions of the investment advisor.

If the fixed-income or equity portfolios, or both, were to suffer a substantial decrease in value, our financial position, and financial results could be materially adversely affected. Under these circumstances, our income from these investments could be materially reduced, and declines in the value of our securities could further reduce our reported earnings and capital levels. A decrease in value of an insurance subsidiary’s investment portfolio could also put the subsidiary at risk of failing to satisfy regulatory minimum capital requirements and could limit the subsidiary’s ability to write new business. In any such event, our business could be materially adversely affected and our financial flexibility could be substantially constrained.

See Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Annual Report for additional discussion of the composition of our investment portfolio as of December 31, 2017, and of the market risks associated with our investment portfolio.

IV. Liquidity Risk

The inability to access our cash accounts or to convert investments into cash on favorable terms when we desire to do so may materially and adversely affect our business.

We rely on our ability to access our cash accounts at banks and other financial institutions to operate our business. If we are unable to access the cash in those accounts as needed, whether due to our own systems difficulties, an institution-specific issue at the bank or financial institution (such as a cybersecurity breach), a broader disruption in banking, financial or wire transfer systems, or otherwise, our ability to pay insurance claims and other financial obligations when due and otherwise operate our

- 20 -

business could be materially adversely affected. Likewise, our investment portfolios are subject to risks inherent in the nation’s and world’s capital markets. Any disruption in the functioning of those markets or in our ability to liquidate investments or specific categories of investments on favorable terms when desired, could impair our ability to pay claims or other financial obligations when due. Any such event or series of such events could result in significant operational difficulties, reputational harm and adverse actions by regulators and have a material adverse effect on our financial condition, cash flows, and results of operations.

V. Credit and Other Financial Risks

Our financial condition may be adversely affected if one or more parties with which we enter into significant contracts or transact business (including under certain government programs) become insolvent, experience other financial difficulties, or default in the performance of contractual or reimbursement obligations.

Our business is dependent on the performance by third parties of their responsibilities under various contractual or service arrangements and government programs. These include, for example, agreements with other insurance carriers to sell their products to our customers in bundled packages or otherwise, and arrangements for transferring certain of our risks (including reinsurance arrangements used by us, our corporate insurance policies, and the performance of state reinsurance facilities/associations), and reimbursement obligations under various state or federal programs, such as the Michigan Catastrophic Claims Association or the National Flood Insurance Program. In addition, from time to time, we enter into significant financial transactions, such as derivative instruments, with major banks, other financial institutions, or security clearinghouses. If one or more of these parties were to default in the performance of their obligations under their respective contracts or programs or determine to abandon or terminate support for a system, product, obligation, or service that is significant to our business, we could suffer significant financial losses or other problems, which in turn could materially adversely affect our financial condition, cash flows, or results of operations and cause damage to our brand and reputation.

Our insurance subsidiaries may be limited in the amount of dividends that they can pay, which in turn may limit our ability to repay indebtedness, make capital contributions to other subsidiaries or affiliates, pay dividends to shareholders, repurchase securities, or meet other obligations.

The Progressive Corporation is a holding company with no business operations of its own. Consequently, if its subsidiaries are unable to pay dividends or make other distributions, or are able to pay only limited amounts, The Progressive Corporation may be unable to make payments on its indebtedness, make capital contributions to or otherwise fund its subsidiaries or affiliates, pay dividends to its shareholders, or meet its other obligations. Each insurance subsidiary’s ability to pay dividends may be limited by one or more of the following factors:


•	insurance regulatory authorities require insurance companies to maintain specified minimum levels of statutory capital and surplus


•	insurance regulations restrict the amounts available for distribution based on either net income or surplus of the insurance company


•	competitive pressures require our insurance subsidiaries to maintain high financial strength ratings, and


•	in certain jurisdictions, prior approval must be obtained from regulatory authorities for the insurance subsidiaries to pay dividends or make other distributions to affiliated entities, including the parent holding company.

In addition, under the ARX stockholders’ agreement, ARX cannot pay a dividend without the consent of Progressive and another specified ARX stockholder.

If we are unable to obtain capital when necessary to support our business, our financial condition and our ability to grow could be materially adversely affected.

We may need to acquire additional capital from time to time as a result of many factors. These could include increased regulatory requirements, losses in our insurance or investment operations, or significant growth in the insurance premiums that we write, among others. If we are unable to obtain capital at favorable rates when needed, whether due to our results, volatility or disruptions in debt and equity markets beyond our control, or other reasons, our financial condition could be materially adversely affected. In such an event, unless and until additional sources of capital are secured, we may be limited in our ability, or unable, to service our debt obligations, pay dividends, grow our business, pay our other obligations when due or engage in other corporate transactions. Such a deterioration of our financial condition could adversely affect the perception of our company by insurance regulators, potentially resulting in regulatory actions, and the price of our common shares or debt securities could fall significantly.

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Our access to capital markets, ability to obtain or renew financing arrangements, obligations to post collateral under certain derivative contracts, and business operations are dependent on favorable evaluations and ratings by credit and other rating agencies.

Our credit and financial strength are evaluated and rated by various rating agencies, such as Standard & Poor’s, Moody’s Investors Service, Fitch Ratings, and A.M. Best. Downgrades in our credit ratings could adversely affect our ability to access the capital markets and/or lead to increased borrowing costs in the future (although the interest rates we pay on our current indebtedness would not be affected), as would adverse recommendations by equity analysts at the various brokerage houses and investment firms. Perceptions of our company by other businesses and consumers could also be significantly impaired. In addition, a downgrade could trigger contractual obligations in certain derivative transactions requiring us to post substantial amounts of additional collateral or allow a third party to liquidate the derivative transaction. Downgrades in the ratings of our insurance subsidiaries could likewise negatively impact our operations, potentially resulting in lower or negative premium growth. In any such event, our financial performance could be materially adversely affected.

Our dividend policy may result in varying amounts being paid to shareholders, or no payment in some periods, and the dividend policy ultimately may be changed in the discretion of the Board of Directors.

We have previously announced our intention to pay a dividend to shareholders on a quarterly basis and to consider paying a variable dividend on at least an annual basis. The amount of dividends, if any, may vary, perhaps significantly, from the amounts paid in preceding periods. In addition, the Board retains the discretion to alter our policy or not to pay dividends at any time. 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 U.S. federal income tax laws, disruptions of national or international capital markets, or other events affecting our liquidity, financial position or prospects, as described above. Any such change could adversely affect investors’ perceptions of the company and the value of, or the total return of an investment in, our common shares.

Our investments in certain tax-advantaged projects may not generate the anticipated returns.

We may invest in certain projects that are entitled to tax-advantaged treatment under applicable federal or state law, including renewable energy development, historic property rehabilitation and affordable housing, and we may make other tax-advantaged investments from time to time. Our investments in these projects are designed to generate a return through the realization of tax credits and, in some cases, through other tax benefits and cash flows from the project. Certain of these investments are subject to the risk that previously recorded tax credits can be challenged or are subject to recapture by the applicable taxing authorities if specific requirements are not satisfied. Many of the factors that could lead to a challenge or recapture of tax credits are beyond our control. The inability to realize these tax credits and other tax benefits could have a material adverse impact on our financial condition.

We do not manage to short-term earnings expectations; our goal is to maximize the long-term value of the enterprise, which, at times, may adversely affect short-term results.

We believe that shareholder value will be increased in the long run if we meet or exceed the financial goals and policies that we establish each year. We do not manage our business to maximize short-term stock performance or the amount of any dividend that may be paid. We report earnings and other operating results on a monthly basis. We also do not provide earnings estimates to the market and do not comment on earnings estimates by analysts. As a result, our reported results for a particular period may vary, perhaps significantly, from investors’ expectations, which could result in significant volatility in the price of our common shares or debt securities. Our Property business may cause additional volatility in our consolidated results.

In addition, due to our focus on the long-term value of the enterprise, we may undertake business strategies and establish related financial goals for a specific year that are designed to enhance our longer-term performance, while understanding that such strategies may not always similarly benefit short-term results, such as our annual underwriting profit or earnings per share. Consequently, these strategies may adversely affect short-term performance or the payment of dividends, and may result in additional volatility in the price of our common shares or debt securities.

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ITEM 1B. UNRESOLVED STAFF COMMENTS

We currently do not have any unresolved comments from the SEC staff.

ITEM 2. PROPERTIES

All of our properties are owned or leased by subsidiaries of The Progressive Corporation and are used for office functions (corporate, claims, and business unit), as call centers, for training, or for warehouse space.

We own 95 buildings located throughout the United States. Nearly two-thirds of these buildings are claims offices. Our owned facilities, which contain approximately 5.1 million square feet of space, are generally not segregated by industry segment. We own significant locations in Mayfield Village, Ohio and surrounding suburbs (including our corporate headquarters); Colorado Springs, Colorado; St. Petersburg, Florida; Tampa, Florida; and Tempe, Arizona.

We lease approximately 2.1 million square feet of space throughout the United States. These leases are generally short-term to medium-term leases of commercial space.

ITEM 3. LEGAL PROCEEDINGS

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

EXECUTIVE OFFICERS OF THE REGISTRANT

Incorporated by reference from information with respect to executive officers of The Progressive Corporation and its subsidiaries set forth in Item 10 in Part III of this Form 10-K.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Progressive’s Common Shares, $1.00 par value, are traded on the New York Stock Exchange (NYSE) under the symbol PGR.

Holders

We had 2,016 shareholders of record on December 31, 2018 .

Securities Authorized for Issuance Under Equity Compensation Plans

See Part III, Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” for information about securities authorized for issuance under our equity compensation plans.

Performance Graph

See the Performance Graph section in our Annual Report.

Recent Sales of Unregistered Securities

None.

Share Repurchases



ISSUER PURCHASES OF EQUITY SECURITIES
2018 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
October	1,012	$	71.17	666,319	24,333,681
November	3,530	68.88		669,849	24,330,151
December	0	0		669,849	24,330,151
Total	4,542	$	69.39

In May 2018, our Board of Directors approved an authorization to repurchase up to 25 million of our common shares; this 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 fourth quarter 2018 , all repurchases were accomplished in conjunction with our incentive compensation plans at the then-current market prices; there were no open market purchases during the quarter.

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. See Note 9 – Employee Benefit Plans , “Incentive Compensation Plans” in our Annual Report, for a summary of our restricted equity grants.

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ITEM 6. SELECTED FINANCIAL DATA

(millions - except per share amounts)



	For the years ended December 31,
	2018		2017		2016		2015		2014
Total revenues	$	31,979.0	$	26,839.0	$	23,441.4	$	20,853.8	$	19,391.4
Net income attributable to Progressive	2,615.3		1,592.2		1,031.0		1,267.6		1,281.0
Per common share:
Net income attributable to Progressive	4.42		2.72		1.76		2.15		2.15
Dividends declared per common share	2.5140		1.1247		0.6808		0.8882		0.6862
Comprehensive income attributable to Progressive	2,520.1		1,941.0		1,164.0		1,044.9		1,352.4
Total assets	46,575.0		38,701.2		33,427.5		29,819.3		25,787.6
Debt outstanding	4,404.9		3,306.3		3,148.2		2,707.9		2,164.7
Total shareholders’ equity	10,821.8		9,284.8		7,957.1		7,289.4		6,928.6
Redeemable noncontrolling interest	214.5		503.7		483.7		464.9		--

See Note 15 – Redeemable Noncontrolling Interest in the Annual Report, for a discussion of the acquisition of a controlling interest in ARX on April 1, 2015.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Incorporated by reference from Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The quantitative and qualitative disclosures about market risk are incorporated by reference from section “IV. Results of Operations – Investments” in our Management’s Discussion and Analysis of Financial Condition and Results of Operations, as described in Item 7 above, and from the Quantitative Market Risk Disclosures section in our Annual Report.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Consolidated Financial Statements of Progressive, along with the related Notes, Supplemental Information, and Report of the Independent Registered Public Accounting Firm, are incorporated by reference from our Annual Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

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ITEM 9A. CONTROLS AND PROCEDURES

Under the direction of our Chief Executive Officer and our Chief Financial Officer, we have 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.

Management’s Report on Internal Control over Financial Reporting and the attestation of the independent registered public accounting firm are incorporated by reference from our Annual Report.

We are not aware of any material change in our 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.

ITEM 9B. OTHER INFORMATION

None.

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information relating to our directors is incorporated herein by reference from the section entitled “Item 1: Election of Directors” in The Progressive Corporation’s Proxy Statement for the Annual Meeting of Shareholders to be held on May 10, 2019 (the “Proxy Statement”).

Information relating to executive officers of Progressive follows. Unless otherwise indicated, the executive officer has held the position(s) indicated for at least the last five years.



Name	Age	Offices Held and Last Five Years’ Business Experience
Susan Patricia Griffith	54	President and Chief Executive Officer since July 2016; Vice President from May 2015 to June 2016; Personal Lines Chief Operating Officer from April 2015 to June 2016; President of Customer Operations from April 2014 to March 2015; Claims Group President prior to April 2014
John P. Sauerland	54	Vice President since May 2015; Chief Financial Officer since April 2015; Personal Lines Group President prior to April 2015
John A. Barbagallo	59	Commercial Lines President since May 2015; Commercial Lines Group President, including Agency Operations prior to May 2015
Jeffrey W. Basch	60	Vice President and Chief Accounting Officer until March 2019
Steven A. Broz	48	Chief Information Officer since February 2016; Claims Process General Manager from March 2015 to January 2016; Enterprise Project Management Office Leader prior to March 2015
Patrick K. Callahan	48	Personal Lines President since April 2015; Direct Acquisition Business Leader prior to April 2015
M. Jeffrey Charney	59	Chief Marketing Officer
William M. Cody	56	Chief Investment Officer
Mariann Wojtkun Marshall	56	Assistant Secretary; Vice President and Chief Accounting Officer beginning March 2019; Director of GAAP Reporting prior to March 2019
Daniel P. Mascaro	55	Vice President, Secretary, and Chief Legal Officer since March 2017; Claims Legal Business Leader prior to March 2017
John Murphy	49	Customer Relationship Management President since January 2016; Customer Relationship Management Business Leader from February 2015 to January 2016; Corporate Process Business Leader prior to February 2015
Lori Niederst	45	Chief Human Resource Officer since November 2016; Senior Human Resource Business Leader prior to November 2016
Andrew J. Quigg	39	Chief Strategy Officer since July 2018; Customer Experience General Manager from May 2015 to June 2018; Direct Media Business Leader prior to May 2015
Michael D. Sieger	57	Claims President since January 2015; Claims Process General Manager prior to January 2015

Section 16(a) Beneficial Ownership Reporting Compliance . None

Code of Ethics. Progressive has a Code of Ethics for the Chief Executive Officer, Chief Financial Officer, and other senior financial officers. This Code of Ethics is available at: progressive.com/governance. We intend to continue to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding amendments to, and waivers from, the provisions of the foregoing Code of Ethics by posting such information on our Internet website at: progressive.com/governance.

Shareholder-Proposed Candidate Procedures. There were no material changes during 2018 to Progressive’s procedures by which a shareholder can recommend a director candidate during 2018 . The description of those procedures is incorporated by reference from the “To Recommend a Candidate for our Board of Directors” section of the Proxy Statement (which can be found in “Procedures for Recommendations and Nominations of Directors and Shareholder Proposals”).

Audit Committee. Incorporated by reference from the “Audit Committee” section of the Proxy Statement.

Financial Expert. Incorporated by reference from the “Audit Committee Financial Experts” section of the Proxy Statement (which can be found in “Audit Committee”).

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ITEM 11. EXECUTIVE COMPENSATION

Incorporated by reference from the sections of the Proxy Statement entitled “Compensation Discussion and Analysis,” “Executive Compensation,” “Other Board of Directors Information: Compensation Committee Interlocks and Insider Participation,” “Compensation Committee Report,” and “Compensation Programs and Risk Management.”

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information regarding ownership of Common Shares by certain beneficial owners and management is incorporated by reference from the section of the Proxy Statement entitled “Security Ownership of Certain Beneficial Owners and Management.”

The following information is set forth with respect to our equity compensation plans at December 31, 2018 .



EQUITY COMPENSATION PLAN INFORMATION
Plan Category	Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights		Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights	Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans
Equity compensation plans approved by security holders:
Employee Plans :
2015 Equity Incentive Plan	3,720,361	^1,2	NA	11,288,162	^3,4
2010 Equity Incentive Plan	1,135,995	¹	NA	100,000	⁴
Subtotal Employee Plans	4,856,356		NA	11,388,162
Director Plans :
2017 Directors Equity Incentive Plan	41,706		NA	405,010
Equity compensation plans not approved by security holders:
None
Total	4,898,062		NA	11,793,172

NA = Not applicable because restricted stock unit awards do not have an exercise price.

¹ Reflects restricted stock unit awards, including reinvested dividend equivalents, under which, upon vesting, the holder has the right to receive common shares on a one-to-one basis.

² Performance-based restricted stock unit awards, including dividend equivalents, of 1,017,520 units are included under the 2015 Equity Incentive Plan at their target value. Maximum potential payout for the performance awards outstanding under the 2015 Equity Incentive Plan was 2,486,046. For a description of the performance-based awards, including the performance measurement and vesting ranges, see Note 9 — Employee Benefit Plans in our Annual Report.

³ Gives effect to reservation of common shares subject to performance-based awards at maximum potential payout.

⁴ At December 31, 2018, 3,978,537 authorized securities were transferred from the 2010 Equity Incentive Plan to the 2015 Equity Incentive Plan, in accordance with the terms of the 2015 plan.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Incorporated by reference from the section of the Proxy Statement entitled “Other Board of Directors Information,” subsections “Board of Directors Independence Determinations,” and “Transactions with Related Parties.”

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Incorporated by reference from the section of the Proxy Statement entitled “Other Independent Registered Public Accounting Firm Information.”

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1) Listing of Financial Statements

The following consolidated financial statements are included in our Annual Report and are incorporated by reference in Item 8:


•	Report of Independent Registered Public Accounting Firm


•	Consolidated Statements of Comprehensive Income - For the Years Ended December 31, 2018 , 2017 , and 2016


•	Consolidated Balance Sheets - December 31, 2018 and 2017


•	Consolidated Statements of Changes in Shareholders’ Equity - For the Years Ended December 31, 2018 , 2017 , and 2016


•	Consolidated Statements of Cash Flows - For the Years Ended December 31, 2018 , 2017 , and 2016


•	Notes to Consolidated Financial Statements


•	Supplemental Information (Unaudited)

(a)(2) Listing of Financial Statement Schedules

The following financial statement schedules, Report of Independent Registered Public Accounting Firm and Consent of Independent Registered Public Accounting Firm are included in Item 15(c):


•	Schedule I - Summary of Investments - Other than Investments in Related Parties


•	Schedule II - Condensed Financial Information of Registrant


•	Schedule III - Supplementary Insurance Information


•	Schedule IV - Reinsurance


•	Report of Independent Registered Public Accounting Firm on Financial Statement Schedules


•	No other schedules are required to be filed herewith pursuant to Article 7 of Regulation S-X.

(a)(3) Listing of Exhibits

See exhibit index contained herein beginning at page 41. Management contracts and compensatory plans and arrangements are identified in the Exhibit Index as Exhibit Nos. 10.3 through 10.63.

(b) Exhibits

The exhibits in response to this portion of Item 15 are submitted concurrently with this report.

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SCHEDULE I — SUMMARY OF INVESTMENTS — OTHER THAN INVESTMENTS IN RELATED PARTIES

THE PROGRESSIVE CORPORATION AND SUBSIDIARIES

(millions)



	December 31, 2018
Type of Investment	Cost		Fair Value		Amount At Which Shown In The Balance Sheet
Fixed maturities:
Bonds:
United States Government and government agencies and authorities	$	9,897.4	$	9,916.5	$	9,916.5
States, municipalities, and political subdivisions	1,654.6		1,649.1		1,649.1
Public utilities	479.6		473.8		473.8
Corporate and other debt securities	8,328.9		8,220.5		8,220.5
Asset-backed securities	7,651.7		7,613.3		7,613.3
Redeemable preferred stocks	243.7		238.3		238.3
Total fixed maturities	28,255.9		28,111.5		28,111.5
Equity securities:
Common stocks:
Public utilities	81.4		140.4		140.4
Banks, trusts, and insurance companies	226.4		525.8		525.8
Industrial, miscellaneous, and all other	841.1		1,959.9		1,959.9
Nonredeemable preferred stocks	1,002.6		1,033.9		1,033.9
Total equity securities	2,151.5		3,660.0		3,660.0
Short-term investments	$	1,795.9	$	1,795.9	$	1,795.9
Total investments	$	32,203.3	$	33,567.4	$	33,567.4

Progressive did not have any securities of any one issuer, excluding U.S. government obligations, with an aggregate cost or fair value exceeding 10% of total shareholders’ equity at December 31, 2018 .

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SCHEDULE II — CONDENSED FINANCIAL INFORMATION OF REGISTRANT

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

THE PROGRESSIVE CORPORATION (PARENT COMPANY)

(millions)



	Years Ended December 31,
	2018			2017		2016
Revenues
Dividends from subsidiaries	$	939.1		$	867.3	$	375.5
Undistributed income (loss) from subsidiaries	1,770.7			866.3		741.9
Equity in net income of subsidiaries	2,709.8			1,733.6		1,117.4
Intercompany investment income	39.4			11.3		5.5
Gains (losses) on extinguishment of debt	0			0.2		1.6
Total revenues	2,749.2			1,745.1		1,124.5
Expenses
Interest expense	166.8			151.1		140.4
Deferred compensation ¹	7.5			23.2		5.3
Other operating costs and expenses	5.1			4.6		4.2
Total expenses	179.4			178.9		149.9
Income before income taxes	2,569.8			1,566.2		974.6
Benefit for income taxes	45.5			26.0		56.4
Net income attributable to Progressive	2,615.3			1,592.2		1,031.0
Other comprehensive income (loss)	(95.2		)	348.8		133.0
Comprehensive income attributable to Progressive	$	2,520.1		$	1,941.0	$	1,164.0

¹ See Note 4 – Employee Benefit Plans in these condensed financial statements.

See notes to condensed financial statements.

- 31 -

SCHEDULE II — CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)

CONDENSED BALANCE SHEETS

THE PROGRESSIVE CORPORATION (PARENT COMPANY)

(millions)



	December 31,
	2018			2017
Assets
Investment in affiliate	$	5.0		$	5.0
Investment in subsidiaries	13,652.2			11,721.3
Receivable from investment subsidiary	2,658.9			1,466.1
Intercompany receivable	651.1			578.6
Net deferred income taxes	68.2			67.1
Other assets	124.2			167.3
Total assets	$	17,159.6		$	14,005.4
Liabilities
Accounts payable, accrued expenses, and other liabilities	$	250.5		$	292.6
Dividend payable	1,467.9			655.1
Debt	4,404.9			3,269.2
Total liabilities	6,123.3			4,216.9
Redeemable noncontrolling interest (NCI)	214.5			503.7
Shareholders’ Equity
Serial Preferred Shares (authorized 20.0)
Serial Preferred Shares, Series B, no par value (cumulative, liquidation preference $1,000 per share) (authorized, issued, and outstanding 0.5 and 0)	493.9			0
Common shares, $1.00 par value (authorized 900.0; issued 797.5, including treasury shares of 214.3 and 215.8)	583.2			581.7
Paid-in capital	1,479.0			1,389.2
Retained earnings	8,386.6			6,031.7
Total accumulated other comprehensive income attributable to Progressive	(120.9		)	1,282.2
Total shareholders’ equity	10,821.8			9,284.8
Total liabilities, redeemable NCI, and shareholders’ equity	$	17,159.6		$	14,005.4

See notes to condensed financial statements.

- 32 -

SCHEDULE II — CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)

CONDENSED STATEMENTS OF CASH FLOWS

THE PROGRESSIVE CORPORATION (PARENT COMPANY)

(millions)



	Years Ended December 31,
	2018			2017			2016
Cash Flows From Operating Activities:
Net income attributable to Progressive	$	2,615.3		$	1,592.2		$	1,031.0
Adjustments to reconcile net income attributable to Progressive to net cash provided by operating activities:
Undistributed (income) loss from subsidiaries	(1,770.7		)	(866.3		)	(741.9		)
Amortization of equity-based compensation	2.4			2.1			2.2
(Gains) losses on extinguishment of debt	0			(0.2		)	(1.6		)
Changes in:
Intercompany receivable	77.5			(71.3		)	(37.3		)
Accounts payable, accrued expenses, and other liabilities	(29.6		)	53.6			24.2
Income taxes	(14.2		)	37.3			(5.0		)
Other, net	47.8			(22.6		)	(13.3		)
Net cash provided by operating activities	928.5			724.8			258.3
Cash Flows From Investing Activities:
Additional investments in equity securities of consolidated subsidiaries	(178.3		)	(86.7		)	(112.0		)
Acquisition of additional shares - ARX	(287.9		)	0			0
Acquisition of an insurance company	0			(18.7		)	0
(Paid to) received from investment subsidiary	(1,192.8		)	(344.2		)	78.6
Net cash used in investing activities	(1,659.0		)	(449.6		)	(33.4		)
Cash Flows From Financing Activities:
Net proceeds from debt issuance	1,134.0			841.1			495.6
Net proceeds from preferred stock issuance	493.9			0			0
Reacquisitions of debt	0			(594.4		)	(18.2		)
Dividends paid to common shareholders	(654.9		)	(395.4		)	(519.0		)
Dividends paid to preferred shareholders	(13.5		)	0			0
Acquisition of treasury shares for restricted stock tax liabilities	(78.6		)	(57.6		)	(25.1		)
Acquisition of treasury shares acquired in open market	(0.4		)	(4.9		)	(167.4		)
Loan to ARX Holding Corp. ¹	(150.0		)	(64.0		)	0
Tax benefit from vesting of equity-based compensation	0			0			9.2
Net cash provided by (used in) financing activities	730.5			(275.2		)	(224.9		)
Change in cash, cash equivalents, and restricted cash	0			0			0
Cash, cash equivalents, restricted cash - Beginning of year	0			0			0
Cash, cash equivalents, restricted cash - End of year	$	0		$	0		$	0

¹ See Note 4 – Debt in our Annual Report.

See notes to condensed financial statements.

- 33 -

SCHEDULE II — CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)

NOTES TO CONDENSED FINANCIAL STATEMENTS

The accompanying condensed financial statements of The Progressive Corporation (parent company) should be read in conjunction with the consolidated financial statements and notes thereto in the Annual Report to Shareholders of The Progressive Corporation and its subsidiaries, which is included as Exhibit 13 to this Form 10-K.

Note 1. Statements of Cash Flows — For the purpose of the Statements of Cash Flows, cash includes only bank demand deposits. The Progressive Corporation does not hold any cash but has unrestricted access to funds maintained in a non-insurance, investment subsidiary to meet its holding company obligations; at December 31, 2018 and 2017 , $2.9 billion and $1.6 billion , respectively, of marketable securities were available in this subsidiary. Non-cash activity includes declared but unpaid dividends, and the change in redemption value of the redeemable NCI. For the years ended December 31, The Progressive Corporation paid the following:



(millions)	2018		2017		2016
Income taxes	$	679.2	$	669.7	$	450.2
Interest	153.6		142.2		134.2

Note 2. Income Taxes — The Progressive Corporation files a consolidated federal income tax return with its eligible subsidiaries and acts as an agent for the consolidated tax group when making payments to the Internal Revenue Service. Effective April 2, 2018, The Progressive Corporation acquired additional shares of ARX to increase its ownership above 80% . As a result, ARX and its subsidiaries will be included in The Progressive Corporation consolidated federal income tax return for the period from April 3 to December 31, 2018. The Progressive Corporation consolidated group’s net income taxes currently payable/recoverable are included in other liabilities/assets, respectively, in the accompanying Condensed Balance Sheets based on the balance at the end of the year. The Progressive Corporation and its eligible subsidiaries have adopted, pursuant to a written agreement, a method of allocating consolidated federal income taxes. Amounts allocated to the eligible subsidiaries under the written agreement are included in “Intercompany Receivable” in the accompanying Condensed Balance Sheets.

Note 3. Debt — The information relating to debt is incorporated by reference from Note 4 – Debt in our Annual Report.

Note 4. Employee Benefit Plans — The information relating to incentive compensation plans and deferred compensation is incorporated by reference from Note 9 – Employee Benefit Plans in our Annual Report.

Note 5. Other Comprehensive Income — On the condensed Statements of Comprehensive Income, other comprehensive income represents activity of the subsidiaries of The Progressive Corporation and includes net unrealized gains (losses) on securities, net unrealized gains on forecasted transactions, and foreign currency translation adjustments.

Note 6. Dividends — The information relating to our dividend policy is incorporated by reference from Note 14 – Dividends in our Annual Report.

- 34 -

SCHEDULE III — SUPPLEMENTARY INSURANCE INFORMATION

THE PROGRESSIVE CORPORATION AND SUBSIDIARIES

(millions)



Segment	Deferred policy acquisition costs ¹		Future policy benefits, losses, claims, and loss expenses ¹		Unearned premiums ¹		Other policy claims and benefits payable ¹		Premium revenue		Net investment income ^1,2		Benefits, claims, losses, and settlement expenses		Amortization of deferred policy acquisition costs		Other operating expenses			Net premiums written
Year ended December 31, 2018:
Personal Lines									$	26,034.7			$	18,389.8	$	1,964.4	$	3,563.3		$	27,157.6
Commercial Lines									3,610.9				2,394.0		396.0		396.0			3,996.4
Property									1,287.7				937.0		213.3		237.2			1,455.9
Other indemnity									0				0.2		0		(0.7		)	0
Total	$	951.6	$	15,400.8	$	10,686.5	$	0	$	30,933.3	$	796.2	$	21,721.0	$	2,573.7	$	4,195.8		$	32,609.9
Year ended December 31, 2017:
Personal Lines									$	21,947.2			$	16,141.4	$	1,656.4	$	2,954.8		$	22,928.4
Commercial Lines									2,793.9				1,966.4		309.3		335.3			3,112.7
Property									988.8				700.2		159.2		190.4			1,091.0
Other indemnity									0				0		0		0.2			0
Total	$	780.5	$	13,086.9	$	8,903.5	$	0	$	25,729.9	$	539.2	$	18,808.0	$	2,124.9	$	3,480.7		$	27,132.1
Year ended December 31, 2016:
Personal Lines									$	19,188.2			$	14,591.1	$	1,446.6	$	2,549.2		$	19,819.5
Commercial Lines									2,421.3				1,741.0		266.7		285.4			2,598.3
Property									864.5				546.1		150.5		137.2			935.7
Other indemnity									0				1.4		0		0.2			0
Total	$	651.2	$	11,368.0	$	7,468.3	$	0	$	22,474.0	$	456.5	$	16,879.6	$	1,863.8	$	2,972.0		$	23,353.5

¹ Progressive does not allocate assets, liabilities, or investment income to operating segments.

² Excludes total net realized gains (losses) on securities.

- 35 -

SCHEDULE IV — REINSURANCE

THE PROGRESSIVE CORPORATION AND SUBSIDIARIES

(millions)



Year Ended:	Gross Amount		Ceded to Other Companies		Assumed From Other Companies		Net Amount		Percentage of Amount Assumed to Net
December 31, 2018
Premiums earned:
Property and liability insurance	$	31,970.2	$	1,036.9	$	0	$	30,933.3	0	%
December 31, 2017
Premiums earned:
Property and liability insurance	$	26,425.7	$	695.8	$	0	$	25,729.9	0	%
December 31, 2016
Premiums earned:
Property and liability insurance	$	23,111.2	$	637.2	$	0	$	22,474.0	0	%

- 36 -

Report of Independent Registered Public Accounting Firm on Financial Statement Schedules

To the Board of Directors and Shareholders of The Progressive Corporation:

Our audits of the consolidated financial statements referred to in our report dated February 27, 2019 appearing in the 2018 Annual Report to Shareholders of The Progressive Corporation (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedules listed in Item 15(a)(2) of this Form 10-K. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

/s/ PricewaterhouseCoopers LLP

Cleveland, Ohio

February 27, 2019

- 37 -

ITEM 16. FORM 10-K SUMMARY

We have elected not to include a summary of information as permitted under this item.

- 38 -

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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
February 27, 2019	By:	/s/ Susan Patricia Griffith
		Susan Patricia Griffith
		President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



/s/ Susan Patricia Griffith	Director, President and Chief Executive Officer	February 27, 2019

Susan Patricia Griffith

/s/ John P. Sauerland	Vice President and Chief Financial Officer	February 27, 2019

John P. Sauerland

/s/ Jeffrey W. Basch	Vice President and Chief Accounting Officer	February 27, 2019

Jeffrey W. Basch

*	Chairperson of the Board	February 27, 2019
Lawton W. Fitt

*	Director	February 27, 2019
Philip Bleser

*	Director	February 27, 2019
Stuart B. Burgdoerfer

*	Director	February 27, 2019
Pamela J. Craig

*	Director	February 27, 2019
Charles A. Davis

*	Director	February 27, 2019
Roger N. Farah

*	Director	February 27, 2019
Jeffrey D. Kelly

*	Director	February 27, 2019
Patrick H. Nettles, Ph.D.

*	Director	February 27, 2019
Barbara R. Snyder

*	Director	February 27, 2019
Kahina Van Dyke

- 39 -

* Daniel P. Mascaro, by signing his name hereto, does sign this document on behalf of the persons indicated above pursuant to powers of attorney duly executed by such persons.



By:	/s/ Daniel P. Mascaro	February 27, 2019
	Daniel P. Mascaro
	Attorney-in-fact

- 40 -



EXHIBIT INDEX
Exhibit No. Under Reg. S-K, Item 601	Form 10-K Exhibit No.	Description of Exhibit	If Incorporated by Reference, Documents with Which Exhibit was Previously Filed with SEC
3(i)	3.1	Amended Articles of Incorporation of The Progressive Corporation (as amended 3/31/18)	Quarterly Report on Form 10-Q (filed on May 2, 2018; Exhibit 3.1 therein)
3(ii)	3.2	Code of Regulations of The Progressive Corporation (as amended August 3, 2017)	Quarterly Report on Form 10-Q (filed on November 2, 2017; Exhibit 3 therein)
4	4.1	Form of 3.75% Senior Notes due 2021, issued in the aggregate principal amount of $500,000,000 under the 1993 Senior Indenture (see exhibit 4.8 below), as amended and supplemented	Annual Report on Form 10-K (filed on March 1, 2017; Exhibit 4.1 therein)
4	4.2	Form of 6 5/8% Senior Notes due 2029, issued in the aggregate principal amount of $300,000,000 under the 1993 Senior Indenture, as amended and supplemented	Annual Report on Form 10-K (filed on March 2, 2015; Exhibit 4.2 therein)
4	4.3	Form of 6.25% Senior Notes due 2032, issued in the aggregate principal amount of $400,000,000 under the 1993 Senior Indenture, as amended and supplemented	Annual Report on Form 10-K (filed on February 27, 2018; Exhibit 4.3 therein)
4	4.4	Form of 6.70% Fixed-to-Floating Rate Junior Subordinated Debentures due 2067, issued in the original aggregate principal amount of $1,000,000,000 under the Junior Subordinated Indenture (see exhibit 4.24 below), as amended and supplemented	Annual Report on Form 10-K (filed on February 27, 2018; Exhibit 4.4 therein)
4	4.5	Form of 4.35% Senior Notes due 2044, issued in the aggregate principal amount of $350,000,000 under the 1993 Senior Indenture, as amended and supplemented	Current Report on Form 8-K (filed on April 25, 2014; Exhibit 4.2 therein)
4	4.6	Form of 3.70% Senior Notes due 2045, issued in the aggregate principal amount of $400,000,000 under the 1993 Senior Indenture, as amended and supplemented	Current Report on Form 8-K (filed on January 26, 2015; Exhibit 4.2 therein)
4	4.7	Form of 2.45% Senior Notes due 2027, issued in the aggregate principal amount of $500,000,000 under the 1993 Senior Indenture, as amended and supplemented	Current Report on Form 8-K (filed on August 25, 2016; Exhibit 4.2 therein)
4	4.8	Form 4.125% Senior Note Due 2047, issued in the aggregate principal amount of $ 850,000,000 under the 1993 Senior Indenture, as amended and supplemented	Current Report on Form 8-K (filed on April 6, 2017; Exhibit 4.2 therein)
4	4.9	Form 4.20% Senior Note Due 2048, issued in the aggregate principal amount of $600,000,000 under the 1993 Senior Indenture, as amended and supplemented	Current Report on Form 8-K (filed on March 14, 2018; Exhibit 4.2 therein)
4	4.10	Form 4.00% Senior Note Due 2029, issued in the aggregate principal amount of $550,000,000	Current Report on Form 8-K (filed on October 23, 2018; Exhibit 4.2 therein)
4	4.11	Form of certificate representing Series B Fixed-to-Floating Rate Cumulative Perpetual Serial Preferred Shares	Current Report on Form 8-K (filed on March 14, 2018; Exhibit 4.3 therein)
4	4.12	Indenture dated as of September 12,2018 between The Progressive Corporation and U.S. Bank National Association, Trustee (including table of contents and cross-reference sheet)	Current Report on Form 8-K (filed on September 13, 2018; exhibit 4.2 therein)

- 41 -



EXHIBIT INDEX
Exhibit No. Under Reg. S-K, Item 601	Form 10-K Exhibit No.	Description of Exhibit	If Incorporated by Reference, Documents with Which Exhibit was Previously Filed with SEC
4	4.13	First Supplemental Indenture dated October 23, 2018 between The Progressive Corporation and U.S. Bank National	Current Report on Form 8-K (filed on October 23, 2018; Exhibit 4.1 therein)
4	4.14	Indenture dated as of September 15, 1993 between The Progressive Corporation and State Street Bank and Trust Company (successor in interest to The First National Bank of Boston), as Trustee (“1993 Senior Indenture”) (including table of contents and cross-reference sheet)	Registration Statement No. 333-48935 (filed on March 31, 1998; Exhibit 4.1 therein)
4	4.15	First Supplemental Indenture dated March 15, 1996 to the 1993 Senior Indenture between The Progressive Corporation and State Street Bank and Trust Company	Registration Statement No. 333-01745 (filed on March 15, 1996; Exhibit 4.2 therein)
4	4.16	Second Supplemental Indenture dated February 26, 1999 to the 1993 Senior Indenture between The Progressive Corporation and State Street Bank and Trust Company, as Trustee	Registration Statement No. 333-100674 (filed on October 22, 2002; Exhibit 4.3 therein)
4	4.17	Fourth Supplemental Indenture dated November 21, 2002 to the 1993 Senior Indenture between The Progressive Corporation and State Street Bank and Trust Company, as Trustee	Registration Statement No. 333-143824 (filed on June 18, 2007; Exhibit 4.5 therein)
4	4.18	Fifth Supplemental Indenture dated June 13, 2007 to the 1993 Senior Indenture between The Progressive Corporation and U.S. Bank National Association, evidencing the designation of U.S. Bank National Association as successor Trustee under the 1993 Senior Indenture .	Registration Statement No. 333-143824 (filed on June 18, 2007; Exhibit 4.6 therein)
4	4.19	Sixth Supplemental Indenture dated August 22, 2011 to the 1993 Senior Indenture between The Progressive Corporation and U.S. Bank National Association, as Trustee	Annual Report on Form 10-K (filed on March 1, 2017; Exhibit 4.13 therein)
4	4.20	Seventh Supplemental Indenture dated April 25, 2014 to the 1993 Senior Indenture between The Progressive Corporation and U.S. Bank National Association, as Trustee	Current Report on Form 8-K (filed on April 25, 2014; Exhibit 4.1 therein)
4	4.21	Eighth Supplemental Indenture dated January 26, 2015 to the 1993 Senior Indenture between The Progressive Corporation and U.S. Bank National Association, as Trustee	Current Report on Form 8-K (filed on January 26, 2015; Exhibit 4.1 therein)
4	4.22	Ninth Supplemental Indenture dated August 25, 2016 to the 1993 Senior Indenture between The Progressive Corporation and U.S. Bank National Association, as Trustee	Current Report on Form 8-K (filed on August 25, 2016; Exhibit 4.1 therein)
4	4.23	Tenth Supplemental Indenture dated April 6, 2017 to the 1993 Senior Indenture between The Progressive Corporation and U.S. Bank National Association, as Trustee	Current Report on Form 8-K (filed on April 6, 2017; Exhibit 4.1 therein)

- 42 -



EXHIBIT INDEX
Exhibit No. Under Reg. S-K, Item 601	Form 10-K Exhibit No.	Description of Exhibit	If Incorporated by Reference, Documents with Which Exhibit was Previously Filed with SEC
4	4.24	Eleventh Supplemental Indenture dated March 14, 2018 to the 1993 Senior Indenture between The Progressive Corporation and U.S. Bank National Association, as Trustee	Current Report on Form 8-K (filed on March 14, 2018; Exhibit 4.1 therein)
4	4.25	Junior Subordinated Indenture dated as of June 21, 2007 between The Progressive Corporation and The Bank of New York Trust Company, N.A., Trustee (“Junior Subordinated Indenture”) (including table of contents and cross-reference sheet)	Annual Report on Form 10-K (filed on February 27, 2018; Exhibit 4.19 therein)
4	4.26	First Supplemental Indenture dated June 21, 2007 to the Junior Subordinated Indenture between The Progressive Corporation and The Bank of New York Trust Company, N.A., as Trustee	Annual Report on Form 10-K (filed on February 27, 2018; Exhibit 4.20 therein)
4	4.27	Second Supplemental Indenture dated September 2, 2011, to the Junior Subordinated Indenture dated June 21, 2007, between The Progressive Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee	Annual Report on Form 10-K (filed on March 1, 2017; Exhibit 4.19 therein)
4	4.28	Replacement Capital Covenant dated June 21, 2007, of The Progressive Corporation	Annual Report on Form 10-K (filed on February 27, 2018; Exhibit 4.22 therein)
4	4.29	Termination of Replacement Capital Covenant, dated June 23, 2010	Annual Report on Form 10-K (filed on February 29, 2016; Exhibit 4.19 therein)
4	4.30	Form of Confirmation Letter-Discretionary Line of Credit from PNC Bank, National Association to The Progressive Corporation	Quarterly Report on Form 10-Q (filed on May 11, 2015; Exhibit 4.1 therein)
4	4.31	Form of Discretionary Line of Credit Note from The Progressive Corporation to PNC Bank, National Association	Quarterly Report on Form 10-Q (filed on May 11, 2015; Exhibit 4.2 therein)
4	4.32	The Company agrees, upon request, to furnish to the U.S. Securities and Exchange Commission a copy of any instrument authorizing long-term debt that does not authorize debt in excess of 10% of the total assets of the Company and its subsidiaries on a consolidated basis.
10(i)	10.1	Stock Purchase Agreement, dated as of December 15, 2014, among ARX Holding Corp., The Progressive Corporation and the selling shareholders identified therein, including Exhibit H, the form of Stockholders' Agreement to be executed at closing	Annual Report on Form 10-K (filed on March 2, 2015; Exhibit 10.1 therein)
10(i)	10.2	Amendment No. 1 to Fourth Amended and Restated Stockholder's Agreement, dated April 1, 2015	Quarterly Report on Form 10-Q (filed on May 2, 2018; Exhibit 10.4 therein)

- 43 -



EXHIBIT INDEX
Exhibit No. Under Reg. S-K, Item 601	Form 10-K Exhibit No.	Description of Exhibit	If Incorporated by Reference, Documents with Which Exhibit was Previously Filed with SEC
10(iii)	10.3	The Progressive Corporation 2019 Gainsharing Plan	Filed herewith
10(iii)	10.4	The Progressive Corporation 2018 Gainsharing Plan	Annual Report on Form 10-K (filed on February 27, 2018; Exhibit 10.5 therein)
10(iii)	10.5	The Progressive Corporation 2017 Executive Annual Incentive Plan	Current Report on Form 8-K (filed on February 21, 2017; Exhibit 10.2 therein)
10(iii)	10.6	The Progressive Corporation 2017 Executive Annual Incentive Plan Award Agreement (2018 Fiscal Year )	Annual Report on Form 10-K (filed on February 27, 2018; Exhibit 10.9 therein)
10(iii)	10.7	The Progressive Corporation 2010 Equity Incentive Plan	Registration Statement No. 333-172663 (filed on March 8, 2011; Exhibit 4.1 therein)
10(iii)	10.8	First Amendment to The Progressive Corporation 2010 Equity Incentive Plan	Registration Statement No. 333-172663 (filed on March 8, 2011; Exhibit 4.2 therein)
10(iii)	10.9	Second Amendment to The Progressive Corporation 2010 Equity Incentive Plan	Registration Statement No. 333-172663 (filed on March 8, 2011; Exhibit 4.3 therein)
10(iii)	10.10	Third Amendment to The Progressive Corporation 2010 Equity Incentive Plan	Registration Statement No. 333-172663 (filed on March 8, 2011; Exhibit 4.4 therein)
10(iii)	10.11	Fourth Amendment to The Progressive Corporation 2010 Equity Incentive Plan	Annual Report on Form 10-K (filed on March 1, 2017; Exhibit 10.23 therein)
10(iii)	10.12	Fifth Amendment to The Progressive Corporation 2010 Equity Incentive Plan	Annual Report on Form 10-K (filed on February 27, 2018; Exhibit 10.25 therein)
10(iii)	10.13	Sixth Amendment to The Progressive Corporation 2010 Equity Incentive Plan	Annual Report on Form 10-K (filed on February 27, 2018; Exhibit 10.26 therein)
10(iii)	10.14	Form of Restricted Stock Unit Award Agreement for Time-Based Awards under The Progressive Corporation 2010 Equity Incentive Plan (for 2015)	Quarterly Report on Form 10-Q (filed on May 11, 2015; Exhibit 10.1 therein)
10(iii)	10.15	The Progressive Corporation 2015 Equity Incentive Plan	Current Report on Form 8-K (filed on February 4, 2015; Exhibit 10.1 therein)
10(iii)	10.16	Form of Restricted Stock Unit Award Agreement for Time-Based Awards under The Progressive Corporation 2015 Equity Incentive Plan (for 2016)	Quarterly Report on Form 10-Q (filed on May 5, 2016; Exhibit 10.1 therein)
10(iii)	10.17	Form of Restricted Stock Unit Award Agreement for Performance-Based Awards (Performance versus Market) under The Progressive Corporation 2015 Equity Incentive Plan (for 2016)	Quarterly Report on Form 10-Q (filed on May 5, 2016; Exhibit 10.2 therein)

- 44 -



EXHIBIT INDEX
Exhibit No. Under Reg. S-K, Item 601	Form 10-K Exhibit No.	Description of Exhibit	If Incorporated by Reference, Documents with Which Exhibit was Previously Filed with SEC
10(iii)	10.18	Form of Restricted Stock Unit Award Agreement for 2017 Time-Based Awards under The Progressive Corporation 2015 Equity Incentive Plan	Current Report on Form 8-K (filed on March 27, 2017; Exhibit 10.1 therein)
10(iii)	10.19	Form of Restricted Stock Unit Award Agreement for 2017 Performance-Based Awards (Performance versus Market) under The Progressive Corporation 2015 Incentive Plan	Current Report on Form 8-K (filed on March 27, 2017; Exhibit 10.2 therein)
10(iii)	10.20	Form of Restricted Stock Unit Award Agreement for 2017 Performance-Based Awards (Investment Results) under The Progressive Corporation 2015 Equity Incentive Plan	Current Report on Form 8-K (filed on March 27, 2017; Exhibit 10.3 therein)
10(iii)	10.21	Form of Restricted Stock Unit Award Agreement (2018 Special Time-Based Award) under The Progressive Corporation 2015 Equity Incentive Plan	Current Report on Form 8-K (filed on August 23, 2018; Exhibit 10 therein)
10(iii)	10.22	Form of Restricted Stock Unit Award Agreement for 2018 Performance-Based Awards (Investment Results) under The Progressive Corporation 2015 Equity Incentive Plan	Current Report on Form 8-K (filed on March 21, 2018; Exhibit 10.3 therein)
10(iii)	10.23	Form of Restricted Stock Unit Award Agreement for 2018 Performance-Based Awards (Performance Versus Market) under The Progressive Corporation 2015 Equity Incentive Plan	Current Report on Form 8-K (filed on March 21, 2018; Exhibit 10.2 therein)
10(iii)	10.24	Form of Restricted Stock Unit Award Agreement for 2018 Time-Based Awards under The Progressive Corporation 2015 Equity Incentive Plan	Current Report on Form 8-K (filed on March 21, 2018; Exhibit 10.1 therein)
10(iii)	10.25	The Progressive Corporation 2017 Directors Equity Incentive Plan	Current Report on Form 8-K (filed on February 21, 2017; Exhibit 10.1 therein)
10(iii)	10.26	Form of Restricted Stock Award Agreement under The Progressive Corporation 2017 Directors Equity Incentive Plan (for 2017)	Quarterly Report on Form 10-Q (filed on August 2, 2017; Exhibit 10.2 therein)
10(iii)	10.27	Form of Restricted Stock Award Agreement under The Progressive Corporation 2017 Directors Equity Incentive Plan (for 2018)	Filed herewith
10(iii)	10.28	The Progressive Corporation Executive Deferred Compensation Plan (2003 Amendment and Restatement)	Registration Statement No. 333-185704 (filed on December 27, 2012; Exhibit 4.3 therein)
10(iii)	10.29	First Amendment to The Progressive Corporation Executive Deferred Compensation Plan (2003 Amendment and Restatement)	Registration Statement No. 333-185704 (filed on December 27, 2012; Exhibit 4.4 therein)
10(iii)	10.30	Second Amendment to The Progressive Corporation Executive Deferred Compensation Plan (2003 Amendment and Restatement)	Registration Statement No. 333-185704 (filed on December 27, 2012; Exhibit 4.5 therein)
10(iii)	10.31	Third Amendment to The Progressive Corporation Executive Deferred Compensation Plan (2003 Amendment and Restatement)	Registration Statement No. 333-185704 (filed on December 27, 2012; Exhibit 4.6 therein)

- 45 -



EXHIBIT INDEX
Exhibit No. Under Reg. S-K, Item 601	Form 10-K Exhibit No.	Description of Exhibit	If Incorporated by Reference, Documents with Which Exhibit was Previously Filed with SEC
10(iii)	10.32	Fourth Amendment to The Progressive Corporation Executive Deferred Compensation Plan (2003 Amendment and Restatement)	Registration Statement No. 333-185704 (filed on December 27, 2012; Exhibit 4.7 therein)
10(iii)	10.33	The Progressive Corporation Executive Deferred Compensation Plan (2008 Amendment and Restatement)	Registration Statement No. 333-185704 (filed on December 27, 2012; Exhibit 4.8 therein)
10(iii)	10.34	First Amendment to The Progressive Corporation Executive Deferred Compensation Plan (2008 Amendment and Restatement)	Registration Statement No. 333-185704 (filed on December 27, 2012; Exhibit 4.9 therein)
10(iii)	10.35	The Progressive Corporation Executive Deferred Compensation Plan (2010 Amendment and Restatement)	Registration Statement No. 333-185704 (filed on December 27, 2012; Exhibit 4.10 therein)
10(iii)	10.36	First Amendment to The Progressive Corporation Executive Deferred Compensation Plan (2010 Amendment and Restatement)	Registration Statement No. 333-185704 (filed on December 27, 2012; Exhibit 4.11 therein)
10(iii)	10.37	Second Amendment to The Progressive Corporation Executive Deferred Compensation Plan (2010 Amendment and Restatement)	Current Report on Form 8-K (filed on October 14, 2014; Exhibit 10 therein)
10(iii)	10.38	Third Amendment to the Progressive Corporation Executive Deferred Compensation Plan (2010 Amendment and Restatement)	Annual Report on Form 10-K (filed on February 29, 2016; Exhibit 10.53 therein)
10(iii)	10.39	Fourth Amendment to The Progressive Corporation Executive Deferred Compensation Plan (2010 Amendment and Restatement)	Quarterly Report on Form 10-Q (filed on November 2, 2017; Exhibit 10 therein)
10(iii)	10.40	The Progressive Corporation Executive Deferred Compensation Plan (2018 Amendment and Restatement)	Quarterly Report on Form 10-Q (filed on July 31, 2018; Exhibit 10 therein)
10(iii)	10.41	The Progressive Corporation Executive Deferred Compensation Trust (November 8, 2002 Amendment and Restatement)	Registration Statement No. 333-185704 (filed on December 27, 2012; Exhibit 4.23 therein)
10(iii)	10.42	First Amendment to Trust Agreement between Fidelity Management Trust Company and Progressive	Registration Statement No. 333-185704 (filed on December 27, 2012; Exhibit 4.24 therein)
10(iii)	10.43	Second Amendment to The Progressive Corporation Executive Deferred Compensation Trust	Registration Statement No. 333-185704 (filed on December 27, 2012; Exhibit 4.25 therein)
10(iii)	10.44	Third Amendment to The Progressive Corporation Executive Deferred Compensation Trust	Registration Statement No. 333-185704 (filed on December 27, 2012; Exhibit 4.26 therein)
10(iii)	10.45	Fourth Amendment to The Progressive Corporation Executive Deferred Compensation Trust	Registration Statement No. 333-185704 (filed on December 27, 2012; Exhibit 4.27 therein)
10(iii)	10.46	Fifth Amendment to The Progressive Corporation Executive Deferred Compensation Trust	Registration Statement No. 333-185704 (filed on December 27, 2012; Exhibit 4.28 therein)
10(iii)	10.47	Sixth Amendment to The Progressive Corporation Executive Deferred Compensation Trust	Registration Statement No. 333-185704 (filed on December 27, 2012; Exhibit 4.29 therein)

- 46 -




EXHIBIT INDEX
Exhibit No. Under Reg. S-K, Item 601	Form 10-K Exhibit No.	Description of Exhibit	If Incorporated by Reference, Documents with Which Exhibit was Previously Filed with SEC
10(iii)	10.48	Seventh Amendment to The Progressive Corporation Executive Deferred Compensation Trust	Registration Statement No. 333-185704 (filed on December 27, 2012; Exhibit 4.30 therein)
10(iii)	10.49	Eighth Amendment to The Progressive Corporation Executive Deferred Compensation Trust (2002 Amendment and Restatement)	Filed herewith
10(iii)	10.50	Ninth Amendment to The Progressive Corporation Executive Deferred Compensation Trust	Quarterly Report on Form 10-Q (filed on May 11, 2015; Exhibit 10.5 therein)
10(iii)	10.51	Tenth Amendment to The Progressive Corporation Executive Deferred Compensation Trust	Quarterly Report on Form 10-Q (filed on May 11, 2015; Exhibit 10.6 therein)
10(iii)	10.52	The Progressive Corporation Directors Deferral Plan (2008 Amendment and Restatement)	Annual Report on Form 10-K (filed on February 27, 2018; Exhibit 10.91 therein)
10(iii)	10.53	The Progressive Corporation Directors Deferral Plan (2015 Amendment and Restatement)	Annual Report on Form 10-K (filed on February 29, 2016; Exhibit 10.77 therein)
10(iii)	10.54	The Progressive Corporation Directors Restricted Stock Deferral Plan Agreement	Filed herewith
10(iii)	10.55	The Progressive Corporation Directors Restricted Stock Deferral Plan (2008 Amendment and Restatement)	Annual Report on Form 10-K (filed on February 27, 2018; Exhibit 10.94 therein)
10(iii)	10.56	First Amendment to The Progressive Corporation Directors Restricted Stock Deferral Plan (2008 Amendment and Restatement)	Filed herewith
10(iii)	10.57	Director Compensation Schedule for 2018-2019 Term	Filed herewith
10(iii)	10.58	Director Compensation Schedule for 2017-2018 Term	Annual Report on Form 10-K (filed on February 27, 2018; Exhibit 10.99 therein)
10(iii)	10.59	The Progressive Corporation Executive Separation Allowance Plan (2017 Amendment and Restatement)	Current Report on Form 8-K (filed on May 16, 2017; Exhibit 10 therein)
10(iii)	10.60	First Amendment to The Progressive Corporation Executive Separation Allowance Plan (2017 Amendment and Restatement)	Filed herewith
10(iii)	10.61	Second Amendment to The Progressive Corporation Executive Separation Allowance Plan (2017 Amendment and Restatement)	Quarterly Report on Form 10-Q (filed on October 31, 2018; Exhibit 10.1 therein)
10(iii)	10.62	2018 Progressive Capital Management Annual Incentive Plan	Annual Report on Form 10-K (filed on February 27, 2018; Exhibit 10.109 therein)
10(iii)	10.63	2019 Progressive Capital Management Annual Incentive Plan	Filed herewith
13	13	The Progressive Corporation 2018 Annual Report to Shareholders	Filed herewith
21	21	Subsidiaries of The Progressive Corporation	Filed herewith

- 47 -



EXHIBIT INDEX
Exhibit No. Under Reg. S-K, Item 601	Form 10-K Exhibit No.	Description of Exhibit	If Incorporated by Reference, Documents with Which Exhibit was Previously Filed with SEC
23	23	Consent of Independent Registered Public Accounting Firm	Filed herewith
24	24	Powers of Attorney	Filed herewith
31	31.1	Rule 13a-14(a)/15d-14(a) Certification of the Principal Executive Officer, Susan Patricia Griffith	Filed herewith
31	31.2	Rule 13a-14(a)/15d-14(a) Certification of the Principal Financial Officer, John P. Sauerland	Filed herewith
32	32.1	Section 1350 Certification of the Principal Executive Officer, Susan Patricia Griffith	Furnished herewith
32	32.2	Section 1350 Certification of the Principal Financial Officer, John P. Sauerland	Furnished herewith
99	99	Letter to Shareholders from Susan Patricia Griffith, President and Chief Executive Officer	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

- 48 -

Exhibit 10.3

THE PROGRESSIVE CORPORATION

2019 GAINSHARING PLAN

1. The Plan . The Progressive Corporation and its wholly-owned and majority-owned subsidiaries and down-stream affiliates (collectively, "Progressive" or the "Company") have adopted The Progressive Corporation 2019 Gainsharing Plan (the "Plan") as part of their overall compensation program. The Plan is performance-based, is not a form of commission compensation, and is administered under the direction of the Compensation Committee of the Board of Directors of The Progressive Corporation (the “Committee”). Payment under the Plan, if any, is based on Company performance as defined by the Plan, not individual employee performance. Plan years will coincide with Progressive’s fiscal years.

2. Participants . Plan participants for each Plan year shall include all officers and regular employees of Progressive, unless determined otherwise by the Committee. Temporary employees are not eligible to participate in the Plan. Throughout this Plan, references to “executive officers” refer to executive officers within the meaning of any Securities and Exchange Commission (“SEC”) or New York Stock Exchange rule applicable to the Company.

3. Gainsharing Formula . Subject to the terms of the Plan, Annual Gainsharing Payments will be determined by application of the following formula:

Annual Gainsharing = Paid Eligible Earnings x Target Percentage x Performance Factor

Payment

4. Paid Eligible Earnings . Paid Eligible Earnings for any Plan year shall mean and include the following: regular, Earned Time Benefit pay (including Protected ETB-PSL but excluding the payout of unused Earned Time Benefit pay at termination), sick pay, holiday pay, funeral pay, overtime pay, military make-up pay, shift differential, and retroactive payments of any of the foregoing items, in each case received by the participant during the Plan year for work or services performed as an officer or employee of Progressive.

For purposes of the Plan, and notwithstanding the foregoing, Paid Eligible Earnings shall exclude all other types of compensation, including, without limitation: any short-term or long-term disability payments made to the participant; the earnings replacement component of any workers’ compensation benefit or award; any amounts paid pursuant to a judgment in, or settlement related to, any action, suit or proceeding, whether in law or equity, to any extent arising from or relating to a participant’s employment with the Company, or work or services performed for or on behalf of the Company; any amount paid under a separation allowance (or severance) plan; any bonus, Gainsharing or other incentive compensation award (whether denominated, or payable, in cash or equity), including, without limitation, payments from any discretionary cash fund; any dividend payments or dividend equivalent amounts; any unused Earned Time Benefit; and any other payment required by applicable law to be paid to a participant by the Company and intended to replace all or any portion of wages or earnings during a period of unemployment, whether due to illness, disability or otherwise (including, but not limited to, payments made pursuant to any statute, rule or regulation of a governmental authority relating to leave on account of maternity, paternity, parental status or responsibility, or sickness).

5. Target Percentages . Target Percentages vary by position. Target Percentages for Plan participants typically are as follows:



POSITION	TARGET %
Chief Executive Officer and Other Executive Officers	Determined by the Compensation Committee
Other Senior Executives and Executive Level Managers	60 - 150%
Business Leaders	35 - 60%
Directors and Senior Directors	20 - 35%
Middle Managers and Senior Managers	15 - 20%
Senior Professionals and Entry Level Managers	8 - 20%
Administrative Support and Entry Level Professionals	0 - 8%

Target Percentages will be established within the above ranges by, and may be changed with the approval of, the Chief Human Resource Officer; provided that the Chief Human Resource Officer may establish appropriate procedures to evaluate the need for, and if appropriate, implement individual exceptions to, the foregoing ranges. Target Percentages may be changed from year to year by the Chief Human Resource Officer. The Chief Human Resource Officer may consult with the Chief Executive Officer on any of the foregoing decisions. Notwithstanding anything herein to the contrary, only the Committee may establish or modify the Target Percentages for the Company’s executive officers.

If a participant’s Target Percentage changes during a Plan year, the Target Percentages used to calculate such participant’s Annual Gainsharing Payment hereunder shall be weighted appropriately to reflect such participant’s tenure in each such position during the Plan year.


6.	The Performance Factor .

A. Core Business Defined

The Performance Factor shall be determined by the performance of the Core Business during the Plan year, pursuant to the procedures and calculations described below. The “Core Business” shall be comprised of the following:


•	The Agency Auto business unit, consisting of the auto business produced by independent agents or brokers, including Strategic Alliances Agency auto, but excluding all Agency special lines businesses;


•	The Direct Auto business unit, consisting of the personal auto business produced by phone, over the Internet, or via a mobile device, but excluding all Direct special lines businesses;


•	The special lines business unit, which shall consist of special lines businesses generated by agents and brokers or directly by phone, over the Internet, or via a mobile device;


•	The Commercial Lines business unit; and


•	The Property business unit.

Each of the Agency Auto, Direct Auto, special lines, Commercial Lines and Property business units is referred to herein as a “Business Unit” or “Unit.” Notwithstanding the foregoing descriptions, for all purposes under this Plan, the following are excluded from the Core Business results (both

growth and profitability): results of the Professional Liability business, the Midland Financial Group, Inc. and other businesses in run-off; results of Property Plus Insurance Agency; results of the CAIP Servicing Group; flood insurance policies, renters insurance policies, umbrella policies and related expenses; business owners’ policies and related expenses; and any results of any Commercial Lines product or program pursuant to which the Company insures any transportation network company or other entity engaged in a ride, cartage, or vehicle sharing business, operation, platform, or program or in a business based on matching and/or sharing time, use and/or assets by and among people and/or businesses.

B. Matrices

For purposes of computing a performance score for the Core Business, operating performance results for each Business Unit are evaluated using a performance matrix for the Plan year. Each matrix assigns performance scores to various combinations of profitability and growth outcomes for the applicable Business Unit. Those scores are then weighted and combined to produce a Performance Factor as described in 6.D. below.

For 2019, and for each Plan year thereafter until otherwise determined by the Committee, each Business Unit will be evaluated, and separate Gainsharing matrices will be established by the Committee for the following:


•	Agency Auto;


•	Direct Auto;


•	Special lines;


•	Commercial Lines; and


•	Property.

C. Performance Measures

Growth. The growth measure for the Plan year under all matrices will be based on policies in force (“PIFs”).

For all matrices, growth will be measured by the percentage change in average PIFs for the Plan year compared to the average PIFs of the immediately preceding fiscal year. Average PIFs for the Plan year and for the immediately preceding fiscal year will be determined by adding the fiscal-month-end number of PIFs for each month during such year and dividing the total by twelve.

Assigned risk business will not be included in determining the growth of any Business Unit.

Profitability. For all Business Unit matrices, the measurement of profitability will be the combined ratio (calculated in accordance with U.S. generally accepted accounting principles) (the “GAAP Combined Ratio”) for the Plan year for the applicable Unit.

Assigned risk business will be included in determining the GAAP Combined Ratio for the applicable Business Unit. The net operating expense of Corporate Products (e.g., self-insurance) shall be apportioned among the appropriate Business Units in accordance with the respective amount(s) of net earned premiums generated by each such Business Unit and will be reflected in the calculation of the GAAP Combined Ratio for such Business Units.


D.	Calculation of Performance Factor

Performance Scores

Using the actual performance results and the Gainsharing matrix for each Business Unit, the GAAP Combined Ratio for each such Unit will be matched with the growth levels achieved by such Unit, to determine the performance score for each such Unit. The performance score for each Business Unit, which will be used to calculate the Performance Factor as described further below, can vary from 0 to 2.0.

Performance Factor

The resulting performance scores for each of the Agency Auto, Direct Auto, special lines, Commercial Lines and Property Business Units will then be multiplied by a weighting factor, which shall be a fraction or decimal equivalent, determined by dividing the net earned premiums generated by such Business Unit during the Plan year by the net earned premiums generated by all of the Business Units comprising the Core Business in the aggregate. The sum of these weighted performance scores will be the Performance Factor for the Plan year.

E. Limitations

The final Performance Factor cannot exceed 2.0.

7. Payment Procedures; Deferral .


A.	Executive Team .

In the case of a Participant who is the Chief Executive Officer or an executive officer reporting directly to the Chief Executive Officer as of February 14, 2019 (collectively, the “Executive Team”), subject to Paragraphs 9 and 16 below, Annual Gainsharing Payments shall be paid after the Committee determines the Performance Factor but in any event prior to March 15th of the year immediately following the Plan year; provided, however, that the Committee may, in its sole discretion, reduce the amount of, or eliminate in full, any Annual Gainsharing Payment to a member of the Executive Team at any time before payment, for any or no reason. The Committee may, in its sole discretion, treat individual members of the Executive Team differently for these purposes. Any such determination by the Committee shall be final and binding on each Participant whose Annual Gainsharing Payment is affected thereby and on such Participant’s estate and beneficiaries.


B.	Other Participants .

In the case of participants who are not members of the Executive Team, subject to Paragraphs 9 and 16 below, no later than December 31 of each Plan year, each participant will receive an initial payment in respect of his or her Annual Gainsharing Payment for that Plan year, if any, equal to 75% of an amount calculated on the basis of Paid Eligible Earnings for the first 24 pay periods of the Plan year, estimated earnings for the remainder of the Plan year, and an estimated performance factor determined using the performance data for each Business Unit through the first 11 months of the Plan year (estimated, if necessary), the applicable Gainsharing matrix and the calculations described above. Subject to Paragraphs 9 and 16 below, no later than February 28 of the following year, each participant will receive the amount equal to (x) his or her Annual Gainsharing Payment, if any, for such Plan year, based on his or her Paid Eligible Earnings and

performance data for the entire Plan year, minus (y) the amount of the initial payment received by such participant pursuant to the immediately preceding sentence.


C.	Deferral

Any Plan participant who is then eligible to participate in The Progressive Corporation Executive Deferred Compensation Plan ("Deferral Plan") may elect to defer all or a portion of the Annual Gainsharing Payment otherwise payable to him/her under this Plan, subject to and in accordance with the terms of the Deferral Plan. If a Plan participant has made such an election under the Deferral Plan, then to the extent of such election, the Annual Gainsharing Payment will, instead of being paid to such participant as described in the immediately preceding paragraphs, be credited to such participant’s account under the Deferral Plan in accordance with the terms of the Deferral Plan.

8. Other Plans . If, for any Plan year, an employee has been selected to participate in both this Plan and another cash incentive plan offered by the Company, then with respect to such employee, the Gainsharing formula set forth in Paragraph 3 hereof shall be appropriately adjusted by applying a weighting factor to reflect the proportion of the employee’s total annual incentive opportunity that is being provided by this Plan. The Committee shall have full authority to determine the incentive plan or plans in which any employee will participate during any plan year and, if an employee is selected to participate in more than one plan, the weighting factor that will apply to each such plan. Notwithstanding Section 3, if, for any Plan year, an employee has been selected to participate in both this Plan and the commission or any other cash incentive plan for employees of Property Plus Insurance Agency (“PPIA Plans;” and such employee being referred to as a “PPIA Employee”), then such PPIA Employee’s Annual Gainsharing Payment shall be reduced, potentially to zero, by any and all amounts earned by such PPIA Employee under the PPIA Plans with respect to the Plan year. Notwithstanding Section 7, the Company may choose to delay all or a portion of any Annual Gainsharing Payment to a PPIA Employee to allow the Company to calculate the reduction under this Section 8 for the full Plan Year.

9. Qualification Date; Leave of Absence; Withholding . Unless otherwise determined by the Committee, and except as expressly provided herein, in order to be entitled to receive an Annual Gainsharing Payment for any Plan year, the participant must be an active officer or regular employee of the Company on November 30 of the Plan year (“Qualification Date”). An individual (i) who is hired on or after December 1 of any Plan year or (ii) whose employment terminates for any reason prior to the Qualification Date is not entitled to an Annual Gainsharing Payment for that Plan year. Annual Gainsharing Payments are not earned until paid.

Any participant who is on a leave of absence covered by the Family and Medical Leave Act of 1993, as amended (or equivalent state or local law), the Americans with Disabilities Act of 1991, as amended (or equivalent state or local law), personal leave of absence with the approval of the Company, military leave or short or long-term disability (provided that, in the case of a long-term disability, the participant is still an employee of the Company) on the Qualification Date with respect to any Plan year will be entitled to receive an Annual Gainsharing Payment for such Plan year, calculated as provided in Paragraphs 3 through 6 above, based on the amount of Paid Eligible Earnings received by such participant during the Plan year and paid in the manner and at the times as are described in Paragraph 7 above but subject to Paragraph 16 below.

Progressive shall have the right to deduct from any Annual Gainsharing Payment, prior to payment, the amount of any taxes required to be withheld by any federal, state, local or foreign government with respect to such payments.

10. Non-Transferability . Annual Gainsharing Payments shall be payable only to the participant or, in the event of the participant’s death, to the participant’s estate. The right to any Annual Gainsharing Payment hereunder may not be sold, transferred, assigned or encumbered, voluntarily or involuntarily, other than by will or the laws of descent or distribution. Nothing herein shall prevent any participant's interest hereunder from being subject to involuntary attachment, levy or other legal process.

11. Administration . The Plan shall be administered by or under the direction of the Committee. The Committee shall have the authority to adopt, amend, revise and repeal such rules, guidelines, procedures and practices governing the Plan as it shall, from time to time, in its sole discretion, deem advisable.

The Committee shall have full authority to determine the manner in which the Plan will operate, to interpret the provisions of the Plan and to make all determinations hereunder. All such interpretations and determinations shall be final and binding on Progressive, all Plan participants, their estates and beneficiaries and all other parties. No such interpretation or determination shall be relied on as a precedent for any similar action or decision. No member of the Committee shall incur any liability for any action taken or omitted, or any determination made, in good faith with respect to the Plan.

Unless otherwise determined by the Committee, all of the authority of the Committee hereunder (including, without limitation, the authority to administer the Plan, select the persons entitled to participate herein, interpret the provisions thereof, waive any of the requirements specified herein and make determinations hereunder and to select, approve, establish, change or modify the Business Units and the Gainsharing formulae, weighting factors, performance targets and Target Percentages) may be exercised by the Chief Executive Officer and/or the Chief Human Resource Officer; provided, however, that only the Committee may take such actions or make such determinations with respect to the Company’s executive officers. In the event of a dispute or conflict, the determination of the Committee will govern.

12. Miscellaneous.

Recoupment. Progressive shall have the right to recoup any Annual Gainsharing Payment (or an appropriate portion thereof, as hereinafter provided) with respect to any Plan year paid to a participant hereunder who was an executive officer of Progressive at any time during such Plan year, if: (i) the Annual Gainsharing Payment was calculated by reference to the achievement during such Plan year of certain financial or operating results (which includes, for purposes hereof, the Performance Factor described in Section 6); (ii) such financial or operating results were incorrect and were subsequently the subject of a restatement by Progressive within three (3) years after the date on which such Annual Gainsharing Payment was paid to the participant; and (iii) the Annual Gainsharing Payment would not have been paid, in whole or in part, to the participant if the restated financial or operating results had been known at the time the payment was made. Such recoupment right shall be available to Progressive whether or not the participant in question was at fault or responsible in any way in causing such restatement. In such circumstances, Progressive will have the right to recover from each such participant for such Plan year, and each such participant will refund to Progressive promptly upon demand, the amount by which the Annual Gainsharing Payment paid to such participant for the Plan year in question exceeded the payment that would have been made if the Annual Gainsharing Payment had been calculated by reference to the restated results, without interest; provided, however, that Progressive will not seek to recover such amounts from any participant who is not a member of the Executive Team unless the amount due would exceed the lesser of five percent (5%) of the Annual Gainsharing Payment previously paid or twenty-thousand dollars ($20,000). Such recovery, at the Committee’s discretion, may be made by lump sum payment, installment

payments, credits against future Annual Gainsharing Payments or other bonus payments, credits against any other compensation or other appropriate mechanism. References in this paragraph to payments and amounts paid shall be deemed to include amounts deposited into the Deferral Plan as a result of an election by the participant.

Further Rights . Notwithstanding the foregoing subsection A., if any participant that was an executive officer at any time during such Plan year engaged in fraud or other misconduct (as determined by the Committee or the Board, in their respective sole discretion) resulting, in whole or in part, in a restatement of the financial or operating results used hereunder to determine the Annual Gainsharing Payments for a specific Plan year, Progressive will further have the right to recover from such participant, and the participant will refund to Progressive upon demand, an amount equal to the entire Annual Gainsharing Payment paid to such participant for such Plan year plus interest at the rate of eight percent (8%) per annum or, if lower, the highest rate permitted by law, calculated from the date that such bonus was paid to the participant. Progressive shall further have the right to recover from such participant Progressive’s costs and expenses incurred in connection with recovering such Annual Gainsharing Payment from the participant and enforcing its rights under this subsection B., including, without limitation, reasonable attorneys’ fees. There shall be no time limit on the Company’s right to recover such amounts under this subsection B., except as otherwise provided by applicable law. References in this paragraph to payments and amounts paid shall be deemed to include amounts deposited into the Deferral Plan as a result of an election by the participant.

Compliance with Law and Exchange Requirements . The Annual Gainsharing Payments determined and paid pursuant to the Plan shall be subject to all applicable laws and regulations. Without limiting the foregoing, and notwithstanding anything to the contrary contained in this Plan, if the SEC adopts final rules under Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act that require, as a condition to the Company’s continued listing on a national securities exchange (“Exchange”), that the Company develop and implement a policy requiring the recovery of erroneously awarded compensation, and such regulations are applicable to a participant awarded Annual Gainsharing Payments pursuant to the Plan, then the Annual Gainsharing Payment paid to such participant (and any payment made to a participant pursuant to a similar plan or an award under The Progressive Corporation 2017 Executive Annual Incentive Plan) shall be subject to recoupment by the Company pursuant to the terms of the rules of the SEC and any applicable Exchange and any policy of the Company adopted in response to such rules. References in this paragraph to payments and amounts paid shall be deemed to include amounts deposited into the Deferral Plan as a result of an election by the participant.

Rights Not Exclusive . The rights contained in the foregoing subsections A. through C. shall be in addition to, and shall not limit, any other rights or remedies that the Company may have under any applicable law or regulation. Nothing contained in subsections A. through C. shall be deemed to limit any additional legal or equitable rights or remedies the Company may have under applicable law with respect to any participant who may have caused or contributed to the Company's need to restate its financial results. If any of the provisions of subsections A. through C., or any part thereof, are held to be unenforceable, the court making such determination shall have the power to revise or modify such provision to make it enforceable to the maximum extent permitted by applicable law and, in its revised or modified form, said provision shall then be enforceable.

13. Termination; Amendment . The Plan may be suspended, terminated, amended or revised, in whole or in part, at any time and from time to time by the Committee, in its sole discretion.

14. Unfunded Obligations . The Plan will be unfunded and all payments due under the Plan shall be made from Progressive's general assets.

15. No Employment Rights . Nothing in the Plan, and no action hereunder, shall be construed as conferring upon any person the right to remain a participant in the Plan or to remain employed by Progressive, nor shall the Plan limit Progressive's right to discipline or discharge any of its officers or employees or change any of their job titles, duties, authority or compensation, at any time and without assigning a reason therefor.

16. Set-Off Rights . Progressive shall have the unrestricted right to set off against or recover out of any Annual Gainsharing Payment or other sums owed to any participant under the Plan any amounts owed by such participant (including pursuant to Section 12) to Progressive.

17. Misconduct. No Participant shall have the right to receive any portion of any Annual Gainsharing Payment if, prior to such payment being made, Participant’s employment is terminated as a result of any action or inaction that, under Progressive’s employment practices or policies as then in effect, constitutes grounds for immediate termination of employment, as determined by Progressive (or, in the case of an executive officer, the Committee) in its sole discretion. In addition, no participant who is a member of the Executive Team shall have the right to receive any Annual Gainsharing Payment if, prior to such payment being made, participant’s employment is terminated by Progressive for Cause, or if there occurs any action or inaction that constitutes grounds for termination for Cause or otherwise constitutes grounds for immediate termination of employment under the Company’s employment practices or policies as then in effect, as determined by the Committee in its sole discretion. For purposes of this Section 17, Cause shall mean a felony conviction of a participant or the failure of a participant to contest prosecution for a felony; a participant’s willful misconduct or dishonesty, any of which, in the judgment of the Committee, is harmful to the business or reputation of Progressive; or any material violation (in the judgment of the Committee) of any of the provisions of the Company’s Code of Business Conduct and Ethics or the Chief Executive Officer/Senior Financial Officer’s Code of Ethics (if applicable to the participant), or any confidentiality agreement, non-solicitation agreement, non-competition agreement or other agreement between the participant and Progressive.

18. Employees Subject to Foreign Jurisdictions. To the extent the Committee deems it necessary, appropriate or desirable to comply with foreign law or practice or taxation and to further the purposes of the Plan, the Committee may, without amending the Plan, exclude any employee not temporarily or permanently residing in the United States from participating in the Plan or establish rules applicable to Annual Gainsharing Payments to participants who are foreign nationals or foreign residents, are employed outside the United States, or both, including rules that differ from those set forth in this Plan.

19. Section 409A . Payments under the Plan are intended to be exempt from Section 409A because no legally binding right to any Annual Gainsharing Payment arises until the payment date, and, in the alternative, because any payment is a short term deferral under Section 409A; the Plan shall be administered and interpreted accordingly. Notwithstanding any provision of the Plan to the contrary, if the Committee determines that any payment under the Plan may constitute deferred compensation subject to Section 409A, the Committee may take any actions necessary to preserve the intended tax treatment of the benefits provided with respect to such payment. Any benefit under the Plan that is subject to Section 409A because deferred pursuant to the terms of the Deferral Plan shall be paid according to the terms of such plan.

20. Prior Plans . This Plan supersedes all prior plans, agreements, understandings and arrangements regarding bonuses or other cash incentive compensation payable to participants by, or due from, Progressive with respect to 2019 and future Plan years (other than the PPIA Plans, “stand-up” bonuses provided to employees of ARX Holding Corp. and its downstream subsidiaries and affiliates (“ARX”) and commissions provided to ARX employees involved in agency operations). Without limiting the generality of the foregoing, this Plan supersedes and replaces The Progressive Corporation 2018 Gainsharing Plan (the "Prior Plan”), which is and shall be deemed to have terminated on the last day of the Company’s 2018 fiscal year (the "Prior Plan Termination Date"); provided, however, that (i) any bonuses or other sums earned and payable under the Prior Plan with respect to any Plan year ended on or prior to the Prior Plan Termination Date shall be unaffected by such termination and shall be paid to the appropriate participants when and as provided thereunder, and (ii) any provisions regarding recoupment of payments from executive officers and the administrative and interpretive authority of the Committee, the Chief Executive Officer and the Chief Human Resource Officer under the Prior Plan shall survive such termination.

21. Effective Date . This Plan is adopted, and is to be effective, as of the first day of Progressive’s 2019 fiscal year. This Plan shall be effective for the 2019 Plan year and for each Plan year thereafter unless and until terminated by the Committee.

22. Governing Law . This Plan shall be governed by, and interpreted and construed in accordance with, the laws of the State of Ohio applicable to contracts made and performed wholly within such state by residents thereof.

Exhibit 10.27

THE PROGRESSIVE CORPORATION

2017 DIRECTORS EQUITY INCENTIVE PLAN

Restricted Stock Award Agreement

This Agreement (“Agreement”) is made this May 23, 2018, by and between <name of participant> (“Participant”) and The Progressive Corporation (the “Company”).

1. Award of Restricted Stock . The Company hereby grants to Participant an award (the “Award”) of restricted stock (the “Restricted Stock”) consisting of <number of shares> of the Company’s Common Shares, $1 Par Value (“Common Shares”), pursuant to, and subject to the terms of, The Progressive Corporation 2017 Directors Equity Incentive Plan (the “Plan”).

2. Condition to Participant’s Rights under this Agreement . This Agreement shall not become effective, and Participant shall have no rights with respect to the Award or the Restricted Stock, unless and until Participant has fully executed this Agreement and delivered it to the Company (in the Company’s discretion, such execution and delivery may be accomplished through electronic means).

3. Restrictions; Vesting . The Restricted Stock shall be subject to the restrictions and other terms and conditions set forth in the Plan, which are hereby incorporated herein by reference, and in this Agreement. Subject to the terms and conditions of the Plan and this Agreement, Participant’s rights in and to the shares of Restricted Stock shall vest on April 11, 2019.

The shares of Restricted Stock awarded under this Agreement shall vest as set forth above unless, prior to such vesting date, the Award and the applicable shares of Restricted Stock are forfeited or have become subject to accelerated vesting under the terms and conditions of the Plan or this Agreement. Until the shares of Restricted Stock vest, Participant shall not sell, transfer, pledge, assign or otherwise encumber such shares of Restricted Stock or any interest therein.

4. Manner In Which Shares Will Be Held . All shares of Restricted Stock awarded to Participant hereunder shall be issued in book-entry form and held by the Company, or its designee, in such form, and as such, no stock certificates evidencing such shares will be issued or held with respect to such Restricted Stock. Certain terms, conditions and restrictions applicable to such Restricted Stock will be noted in the records of the Company’s transfer agent and in the book-entry system. At the Company’s discretion, and subject to the provisions of this Paragraph 4, stock certificates evidencing the shares of Restricted Stock awarded under this Agreement may be issued and registered in the name of Participant. In such event, such certificates shall be delivered to and held in custody by the Company, or its designee, until the restrictions thereon shall have lapsed or any conditions to the vesting of such Award, or a portion thereof, have been satisfied, and such certificates shall bear an appropriate legend referring to the terms, conditions and restrictions applicable to such Award.

Participant hereby irrevocably authorizes the Company and the Compensation Committee of the Board of Directors (the “Committee”) to take any and all appropriate action with respect to the evidence of Participant’s Restricted Stock, including, without limitation, issuing certificates for such Restricted Stock, issuing such Restricted Stock in book-entry form, transferring any previously issued certificates into book-entry form, transferring any Restricted Stock (whether held in certificate or book-entry form) into unrestricted form at vesting, or canceling any Restricted Stock (whether held in certificate or book-entry form) as and when required by this Agreement or the Plan, or undertaking any other action which may be done lawfully by the Company or the Committee in the administration of the Plan and this

Agreement. Participant specifically acknowledges and agrees that such certificates and/or book-entry evidence of Participant’s Restricted Stock may be transferred or cancelled pursuant to this Agreement and the Plan without requiring that a Stock Power be executed and delivered by Participant or requiring any other action on the part of Participant, and Participant authorizes the Company to undertake each such action without such Stock Powers.

Participant hereby further irrevocably appoints the Secretary of the Company and any employee of the Company who may be designated by the Secretary, and each of them, Participant’s true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for Participant and in his or her name, place and stead, in any and all capacities, to execute and deliver each and every document (including, without limitation, any such Stock Powers) which may be necessary or appropriate in connection with the issuance, transfer, cancellation or other action taken in connection with the Restricted Stock awarded hereunder pursuant to this Agreement or the Plan. The rights granted by Participant under this paragraph shall automatically expire as to shares of Restricted Stock awarded hereunder upon the transfer of such shares into unrestricted form at vesting or upon the cancellation of such shares at any time, as applicable, pursuant to this Agreement and the Plan.

5. Rights of Shareholder . Except as otherwise provided in this Agreement or the Plan, Participant shall have, with respect to the shares of Restricted Stock awarded hereunder, all of the rights of a shareholder of the Company, including the right to vote the shares and the right to receive any dividends as declared by the Company’s Board of Directors.

6. Shares Non-Transferable . No shares of Restricted Stock shall be transferable by Participant other than by will or by the laws of descent and distribution. In the event any Award is transferred or assigned pursuant to a court order, such transfer or assignment shall be without liability to the Company, and the Company shall have the right to offset against such Award any expenses (including attorneys’ fees) incurred by the Company in connection with such transfer or assignment.

7. Restricted Stock Deferral Plan . If Participant is eligible, and if Participant has made the appropriate election, to defer all or a portion of the Restricted Stock awarded hereunder into The Progressive Corporation Directors Restricted Stock Deferral Plan (the “Deferral Plan”), then the Common Shares that would otherwise vest in accordance with the terms of this Agreement and are subject to such election, instead of being delivered to Participant, shall be credited to Participant’s account and distributed in accordance with the terms of the Deferral Plan and Participant’s deferral election thereunder .

8. Dividends . Participant acknowledges and agrees that the Company will pay, or cause to be paid, any cash dividends payable in respect of Restricted Stock through such method(s) of payment as the Company deems advisable, on or promptly after the date established by the Board of Directors for the payment of such cash dividend to holders of the Company’s Common Shares (the “Dividend Payment Date”), including, but not limited to: (i) payment by the Company’s transfer agent through the procedures established generally for shareholders of record; or (ii) payment by the Company to Participant directly by appropriate check, draft or automatic deposit.

9. Termination of Service . Except as otherwise provided in the Plan or as determined by the Committee, if Participant’s service as a member of the Board of Directors terminates for any reason other than death or Disability, all Restricted Stock held by Participant which is unvested or subject to restriction at the time of such termination shall be automatically forfeited immediately after such termination. In the event Participant dies while serving on the Board of Directors, all Restricted Stock held by Participant shall vest in full immediately after Participant’s death, and the Company shall process such vesting within thirty (30) days of receipt of notice thereof. In the event Participant resigns or is removed from the Board of Directors as a result of Participant’s Disability, all Restricted Stock held by Participant shall vest in full immediately after such resignation or removal, and the Company shall process such vesting within

thirty (30) days of the date on which the Committee determines that such resignation or removal was the result of Participant’s Disability (but not later than December 31 of the year of such resignation or removal, or if later, the 15th day of the third calendar month following such resignation or removal) .

10. Entire Agreement . This Agreement constitutes the entire agreement between the parties and supersedes and cancels any other agreement, representation or communication, whether oral or in writing, between the parties hereto relating to the subject matter hereof; provided, however, that the Agreement shall be at all times subject to the Plan as provided above.

11. Amendment . The Committee, in its sole discretion, may hereafter amend the terms of this Award to the fullest extent permitted by Section 13 of the Plan.

12. Definitions : Unless otherwise defined in this Agreement, each capitalized term in this Agreement shall have the meaning given to it in the Plan.

13. Acknowledgment . Participant hereby: (i) acknowledges receiving a copy of the Plan Description relating to the Plan, and represents that he or she is familiar with all of the material provisions of the Plan, as set forth in such Plan Description; (ii) accepts this Agreement and the Restricted Stock awarded pursuant hereto subject to all provisions of the Plan and this Agreement; and (iii) agrees to accept as binding, conclusive and final all decisions and interpretations of the Committee relating to the Plan, this Agreement or the Restricted Stock awarded hereunder.

Agreed to as of the day and year first written above.

THE PROGRESSIVE CORPORATION

By:

Daniel P. Mascaro

Vice President & Secretary

Exhibit 10.49

EIGHTH AMENDMENT TO THE PROGRESSIVE CORPORATION

EXECUTIVE DEFERRED COMPENSATION TRUST

(November 8, 2002 Amendment and Restatement)

THIS EIGHTH AMENDMENT , dated and effective as of the third day of June, 2013, unless otherwise specified herein, by and between Fidelity Management Trust Company (the "Trustee") and The Progressive Corporation (the "Company");

WITNESSETH:

WHEREAS , the Trustee and the Company heretofore entered into a Trust Agreement dated November 8, 2002, with regard to The Progressive Corporation Executive Deferred Compensation Trust (the "Trust"); and

WHEREAS , the Sponsor hereby directs the Trustee, in accordance with Sections 5 and 8(g) of the Trust Agreement, as follows: (i) at the close of business (4:00p.m. ET) ("Market Close") on June 3, 2013, to liquidate all participant balances held in the Vanguard Institutional Index Fund Institutional Shares at its net asset value on such day, and to invest the proceeds in the Vanguard Institutional Index Fund Institutional Plus Shares at its net asset value on such day; (ii) to redirect all participant contributions directed to the Vanguard Institutional Index Fund Institutional Shares after the Market Close on June 3, 2013 to be invested in the Vanguard Institutional Index Fund Institutional Plus Shares; and (iii) to permit no further investments in the Vanguard Institutional Index Fund Institutional Shares as an investment option for the Plan after the Market Close on June 3, 2013. The parties hereto agree that the Trustee shall have no discretionary authority with respect to this sale and transfer directed by the Sponsor. Any variation from the procedure described herein may be instituted only at the express written direction of the Sponsor; and

WHEREAS , the Trustee and the Company now desire to amend said Trust Agreement as provided for in Section 12 thereof;

NOW, THEREFORE , in consideration of the above premises, the Trustee and the Company hereby amend the Trust Agreement by:

(1) Effective at Market Close on June 3, 2013, amending Section 5(a), Selection of Investment Options, by adding the following:

The parties acknowledge that the Company is capable of evaluating investment risks independently. The Company affirms that at all times all decisions concerning the plan's investment line-up or its investment strategies shall be made by exercising independent judgment.

(2) Effective at Market Close on June 3, 2013, amending the "investment options" section of Schedule "A" to add the following:


•	Vanguard Institutional Index Fund Institutional Plus Shares

(3) Effective at Market Close on June 3, 2013, amending the "investment options" section of Schedule "A" to delete the following:


•	Vanguard Institutional Index Fund

IN WITNESS WHEREOF , the Trustee and the Company have caused this Eighth Amendment to be executed by their duly authorized officers effective as of the day and year first above written. By signing below, the undersigned represent that they are authorized to execute this document on behalf of the respective parties. Notwithstanding any contradictory provision of the agreement that this document amends, each party may rely without duty of inquiry on the foregoing representation.





THE PROGRESSIVE CORPORATION By: /s/ Charles E. Jarrett 5/22/13 Its Authorized Signatory Date	FIDELITY MANAGEMENT TRUST COMPANY By: /s/ Carol Ayotte 8/2/13 FMTC Authorized Signatory Date Carol Ayotte Senior Vice President Relationship Management

Exhibit 10.54

As Filed

ONLY COMPLETE THIS AGREEMENT IF YOU WISH TO DEFER YOUR RESTRICTED STOCK AWARD

Directors Restricted Stock Deferral Agreement

The Progressive Corporation Directors

Restricted Stock Deferral Plan

Deferral Agreement

THIS DEFERRAL AGREEMENT is entered into pursuant to the provisions of The Progressive Corporation Directors Restricted Stock Deferral Plan (“RSD Plan”). All capitalized terms in this Agreement shall have the meanings ascribed to them in the RSD Plan.

Deferral Election. I hereby elect to defer receipt of the following portion of each Restricted Stock Award granted to me in 20__ under The Progressive Corporation 2017 Directors Equity Incentive Plan or similar plan. This election shall become effective as of the date the restrictions applicable to such Awards (or portion thereof) expire and shall not apply to any Award (or portion thereof) that fails to vest free of all restrictions. This election shall be irrevocable.

Please indicate the percentage of each Award you would like to defer: ______%

Designated Deferral Period. (The RSD Plan gives you the option of electing a Designated Deferral Period. If you elect a Designated Deferral Period, distributions from your deferral account established pursuant to this Agreement will commence within thirty (30) days following the date the Designated Deferral Period ends, or, if earlier, the date you die or terminate your service as a director of The Progressive Corporation or the date a Change in Control occurs. If you do not elect a Designated Deferral Period, distributions from your account will commence within thirty (30) days following the earlier of the date you die or terminate your service as a director of The Progressive Corporation or the date a Change in Control occurs.)

Please check one of the following:

____ I elect a Designated Deferral Period ending on the __ day of __________, 20____.

_____ I do not wish to elect a Designated Deferral Period.


3.	Method of Distribution. I hereby elect that any distribution of the balance of the deferral account established pursuant to this Agreement made on account of termination of service as a director or expiration of a Designated Deferral Period be paid as follows: (check one)

in a single lump sum payment______

OR in

Three annual installments ____

Five annual installments ____

Ten annual installments ____

I understand that RSD Plan distributions made on account of reasons other than termination of service as a director or expiration of a Designated Deferral Period will be made in a single lump sum payment, unless the RSD Plan provides otherwise.

Investment of Deferral Account. I understand that each amount credited to the deferral account established pursuant to this Agreement shall be deemed to be invested in the Common Shares, $1.00 par value, of The Progressive Corporation until distribution of the balance of the account. I also understand that this deemed investment is merely a device used to determine the amount payable to me under the RSD Plan and does not provide me with any actual rights or interests in such Common Shares or any other particular funds, securities or property of The Progressive Corporation or any of its affiliates. I also understand that my right to receive distributions under the RSD Plan makes me a general creditor of The Progressive Corporation with no greater right or priority than any other general creditor of The Progressive Corporation.

Miscellaneous. I understand that this Agreement is subject to the terms, conditions and limitations of the RSD Plan, as in effect from time to time, in all respects and that, except as expressly permitted by the RSD Plan, all elections made in this Agreement are irrevocable. I acknowledge that I have received, read and understand the document establishing the RSD Plan. I agree to accept as final and binding all decisions and interpretations of the Committee relating to the RSD Plan and this Agreement.

NAME OF ELIGIBLE DIRECTOR: _______________________________________

SIGNATURE: __________________________________________________________

DATE: ______________________________

SSN: ________________________________

The Deferral Agreement must be received by December 31, 20__ and shall be irrevocable thereafter.

Received and accepted on behalf of the Committee this ____ day of December, 20__.

Exhibit 10.56

FIRST AMENDMENT TO

THE PROGRESSIVE CORPORATION

DIRECTORS RESTRICTED STOCK DEFERRAL PLAN

(2008 Amendment and Restatement)

WHEREAS , The Progressive Corporation (“Company”) maintains The Progressive Corporation Directors Restricted Stock Deferral Plan pursuant to the 2008 Amendment and Restatement thereof; and

WHEREAS, it is desired to amend the Plan further;

NOW, THEREFORE , effective January 23, 2009, the Plan is hereby amended in the respects hereinafter set forth:


1.	The first sentence of Section 4.1 of the Plan is hereby amended and restated in its entirety to provide as follows:

“Each eligible director who elects to participate in this Plan for any Plan Year shall file a Deferral Election with the Committee before the beginning of such Plan Year, or before such later date as may be permitted by law, provided that any director was not a director during the previous two (2) Plan Years may file a Deferral Election with the Committee (i) within thirty (30) days after he/she is elected to the Board and (ii) prior to the grant of Restricted Stock which is the subject of such Deferral Election.”

2. Except as expressly set forth in this Amendment, the terms and provisions of the Plan shall remain unchanged and continue in full force and effect.

IN WITHESS WHEREOF , the Company has caused this Amendment to be executed by a duly authorized officer as of the 3rd day of February, 2009.

THE PROGRESSIVE CORPORATION

By: /s/ Charles E. Jarrett

Title: Secretary

Exhibit 10.57

Board of Directors' Compensation

Director compensation for the May 2018 to May 2019 term:



Board/Committee Role	Total Comp May 2018 to May 2019
Chairperson (1)	$420,000
Audit Committee Chair	$295,000
Audit Committee Member	$270,000
Compensation Committee Chair	$285,000
Compensation Committee Member	$260,000
Investment & Capital Committee Chair	$285,000
Investment & Capital Committee Member	$260,000
New Director (2)	$260,000
	Additional Pay
Nominating & Governance Committee Chair	$20,000
Nominating & Governance Committee Member	$15,000

(1) The Chairperson will not receive compensation for committee assignments except as Nominating & Governance Committee Chair.

(2) Compensation for new Directors that have not received a committee assignment is based upon the lowest paying Committee Member role, and prorated based on length of tenure remaining in the term .

Exhibit 10.60

FIRST AMENDMENT TO THE PROGRESSIVE CORPORATION EXECUTIVE SEPARATION ALLOWANCE PLAN

(2017 Amendment and Restatement)

WHEREAS, The Progressive Corporation (“Company”) currently maintains The Progressive Corporation Executive Separation Allowance Plan (“Plan”) pursuant to the 2017 Amendment and Restatement; and

WHEREAS, the Company desires to amend the Plan;

NOW, THEREFORE, the Plan is hereby amended as follows, effective as of December 4, 2017:


1.	Section 7.2 of the Plan is hereby amended and restated in its entirety to provide as follows:

“7.2 Notwithstanding the provisions of Section 7.1, the Company may, by action of its Chief Legal Officer, modify or amend the Executive Separation Agreement and General Release at any time, without action of the Compensation Committee of its Board of Directors or any Affiliated Company or any other person, to (i) respond to developments in applicable law, (ii) reflect changes to the names of benefit plans provided by the Company and referenced in the Plan, or (iii) conform such document to the terms of the Plan.”


2.	Exhibit A attached to the Plan is hereby amended and restated to read in its entirety as set forth on Exhibit A to this Amendment.

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

THE PROGRESSIVE CORPORATION

By:

Name and Title: Daniel P. Mascaro, Vice President

and Secretary

EXHIBIT A

EXECUTIVE SEPARATION AGREEMENT AND GENERAL RELEASE

THIS AGREEMENT is entered into by and between you («Name») and Progressive «PayrollCompany» (“Progressive”), together with its parents, subsidiaries, affiliates, predecessors, successors and assigns (collectively, with Progressive, the “Progressive Group”), pursuant to The Progressive Corporation Executive Separation Allowance Plan (“Plan”).

WHEREAS , your employment with Progressive ended effective «TermDate» (the “Separation Date”); and

WHEREAS , you desire to receive certain separation allowance benefits under the Plan; and

WHEREAS , the Plan provides separation allowance benefits only to employees who sign a Separation Agreement and General Release in the form specified in the Plan;

NOW, THEREFORE , you and the Progressive Group agree as follows:

1. Final Wages and ETB Payment. Progressive shall pay you for all hours of work performed and for all credited but unused Earned Time Benefit hours determined as of your Separation Date in accordance with Progressive’s standard practices. These payments will be made within thirty (30) days of the Separation Date, or at such earlier time as may be required by law, regardless of whether you accept this Agreement.

2. Severance Benefits. In consideration of your acceptance of this Agreement and subject to your fully meeting your obligations under it, Progressive will provide you with following severance pay and benefits:

Progressive shall pay you a separation allowance in the total gross amount of «SepText» Dollars ($«SepNo») (representing «sevwks» weeks of Compensation), less applicable tax withholding, other legally required deductions and (except to the extent prohibited by law) amounts due Progressive for any reason. Such separation allowance shall be paid in a lump sum at the time specified in Section 3.2 of the Plan and subject to the limitations specified in the Plan.

If you are participating in The Progressive Health, Life and Disability Benefits Plan (“Group Insurance Plan”), you may elect to continue your and your dependents’ medical, dental and vision coverages under the Group Insurance Plan for the periods specified in the Group Insurance Plan, subject to the terms, conditions and limitations of the Group Insurance Plan. If you elect to continue any of such coverages, Progressive shall pay the cost of continuing such coverages for a period not to exceed the number of weeks of Compensation used in computing the amount of your separation allowance under Paragraph 1 above, provided that you make payments at such times as and in such manner as Progressive shall specify equal to the contributions you would have had to make for those coverages for such period had you continued to receive those coverages

as an active employee during such period, all as determined by Progressive. You also shall be entitled to the conversion privileges, if any, applicable to your life insurance and/or other coverages under the Group Insurance Plan.


c.	Progressive shall make outplacement services available to you for a period of [ ] months, in accordance with Section 2.5 of the Plan.


d.	If you are rehired by Progressive or any other Participating Employer as a regular employee within a period of time following your Separation Date that does not exceed the number of weeks of Compensation used in computing your separation allowance under the Plan, you shall repay to Progressive the amount specified in Section 3.7 of the Plan at the time and in the manner specified therein.

[DELETE IF SEPARATION DATE IS AFTER CHANGE OF CONTROL.] You shall not be entitled to receive the severance pay and benefits described above, and this Agreement shall be considered null and void, if, at any time prior to payment to you of a separation allowance, Progressive determines that you have committed a violation of Progressive’s Code of Business Conduct and Ethics that would have led Progressive to terminate your employment in accordance with Progressive’s then current disciplinary practices with respect to the type of violation in question had you still been actively employed.

3. Effect on Equity Incentives. [If not Qualified Retirement] You acknowledge the forfeiture of any and all unvested Restricted Stock Units awarded to you under The Progressive Corporation 2010 Equity Incentive Plan and/or The Progressive Corporation 2015 Equity Incentive Plan, in each case as amended (the “Incentive Plans”), except to the extent stated in any agreement between you and Progressive related to unvested and outstanding performance-based restricted stock unit award(s) for which the Evaluation Period or the Growth Evaluation Period has ended prior to the Separation Date. Your rights, if any, under The Progressive Corporation Executive Deferred Compensation Plan and/or the Incentive Plans (collectively, the “Executive Compensation Programs”) shall be determined in accordance with the governing provisions of the Executive Compensation Programs as in effect from time to time and any agreements entered into thereunder. For purposes of such Executive Compensation Programs, you shall be considered to have terminated employment with Progressive on the Separation Date.

[If Qualified Retirement] The termination of your employment shall be deemed to be a Qualified Retirement as that term is used in The Progressive Corporation 2010 Equity Incentive Plan and/or The Progressive Corporation 2015 Equity Incentive Plan, in each case as amended (the “Incentive Plans”), and/or any Restricted Stock Unit Award Agreement between you and Progressive (the “Stock Agreements”), and you shall enjoy such rights and be subject to such forfeitures and requirements as are contained in said Incentive Plans and/or Stock Agreements in accordance with the Incentive Plans and Stock Agreements. Your rights, if any, under The Progressive Corporation Executive Deferred Compensation Plan and/or the Incentive Plans (collectively, the “Executive Compensation Programs”) shall be determined in accordance with the governing provisions of the Executive Compensation Programs as in effect from time to time and any agreements entered into thereunder. For purposes of such Executive Compensation Programs, the Separation Date shall be your Qualified Retirement Date.

[IF HOLD ARX HOLDING CORP. STOCK OPTIONS OR SHARES OF ARX COMMON STOCK ACQUIRED UPON EXERCISE OF STOCK OPTIONS.] The impact of your termination of employment on your stock options awarded under, and capital stock of ARX Holding Corp. (“ARX”) issued upon the exercise of stock options awarded under, the ARX Holding Corp. Stock Option Plan (the “Option Plan”) and any agreement between you and ARX Holding Corp. evidencing a stock option (the “Option Agreements”) will be governed by the terms of the Option Plan and the Option Agreements, and you will have such rights and be subject to such requirements (including the obligation, under the terms stated therein, to sell such options and shares of capital stock to ARX at book value) as are contained in said Option Plan and/or Option Agreements.

4. Acknowledgment of Full Payment and Status of Benefits. You acknowledge that the payments described in Paragraph 1 of this Agreement are in complete satisfaction of any and all wages and payments due to you from the Progressive Group, whether for services provided or otherwise, through the Separation Date and that, except as expressly provided under this Agreement, no further compensation is owed to you. You further acknowledge that, except as expressly provided in Paragraphs 2(b) and 3 above, your participation in all employee benefit plans and programs will end as of the Separation Date, in accordance with the terms of those plans and programs. You acknowledge that you have no rights under The Progressive Corporation Separation Allowance Plan.

5. Return of Documents and Other Property; Confidentiality; Trade Secrets.

You agree to continue to honor your obligations with respect to confidential and/or proprietary information belonging to the Progressive Group, including the Confidentiality Statement to which you agreed upon your hire, if any, and all applicable policies as set forth in Progressive’s Code of Business Conduct and Ethics and Workplace Policies. You affirm and represent that you have not taken or misused any such confidential and/or proprietary information and that you have returned to Progressive any records containing such confidential and/or proprietary information and all records that are the Progressive Group’s property.

Notwithstanding anything in this Agreement to the contrary, you and Progressive acknowledge that you shall not be held criminally or civilly liable under any Federal or State trade secret law for the disclosure of a trade secret that is made (i) in confidence to a Federal, State, or local government official, either directly or indirectly, or to an attorney; and (ii) solely for the purpose of reporting or investigating a suspected violation of law. In addition, you shall not be held criminally or civilly liable under any Federal or State trade secret law for the disclosure of a trade secret that is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal. Furthermore, in the event you file a lawsuit for retaliation by Progressive for reporting a suspected violation of law, you may disclose the trade secret to your attorney and use the trade secret information in the court proceeding, if you file any document containing the trade secret under seal and does not disclose the trade secret, except pursuant to court order.

6. Release of Claims. In exchange for separation allowance and benefits provided to you under this Agreement, to which you would not otherwise be entitled, you, on your

own behalf and on behalf of your heirs, executors, agents, representatives, administrators, survivors, assigns and anyone claiming by or through you, hereby release Progressive and the Progressive Group, along with each of their individual and respective current and former directors, officers, agents, attorneys and employees in their corporate as well as personal capacities (collectively, the “Releasees”), from any and all claims, liabilities, demands, actions, suits and causes of action, whether known or unknown, that you ever had or now may have against any of the Releasees, both in law and equity, arising from or relating to (a) your employment with Progressive and/or any other entity of the Progressive Group and/or (b) work or services you performed for or on behalf of Progressive or any other entity of the Progressive Group (collectively, “Claims”). Your released Claims include, without limitation: claims arising under the Age Discrimination in Employment Act (“ADEA”), the Fair Labor Standards Act, Title VII of the Civil Rights Act of 1964, the Family and Medical Leave Act, the Americans with Disabilities Act, the National Labor Relations Act, the Uniformed Services Employment and Reemployment Rights Act and the Employee Retirement Income Security Act of 1974, each as may be amended; claims arising under state law [, including [recite any desired state statutes]]; claims for emotional distress and/or mental and/or physical injury; and any other claims relating in any way to your employment with Progressive and/or any other entity of the Progressive Group and its termination.

[If Executive is a California resident, include] You further acknowledge that you have read and understand California Civil code Section 1542, which reads as follows:

“A general release does not extend to claims which the creditor does not know or suspect to exist in «HisHer» favor at the time of executing the release, which if known by him must have materially affected «HisHer» settlement with the debtor.”

You hereby waive the provisions and protections of California Civil code Section 1542 and agree that the above release shall apply to all Claims that you ever had or now may have against the Releasees, regardless of whether you currently are aware of the Claims or suspect that they exist.

[IF EXECUTIVE IS A RESIDENT OF ANY OTHER STATE REQUIRING RECITAL, INCLUDE RECITAL.]

7. No Pending or New Claims. You agree that you will not instigate, initiate, promote or participate in any Claims against Releasees unless required to do so by law, excepting only such Claim(s) as are permitted under Paragraph 11 below. In the event that you do so, the Claim(s) shall be dismissed immediately upon the presentation of this Agreement, and you shall reimburse Releasees for all legal fees and expenses incurred in defending such Claim(s) and obtaining their dismissal.

8. Cooperation. You agree to cooperate with the Progressive Group and/or any entity thereof, as well as any entity operating on its or their behalf, in response to all reasonable requests relating to your former job duties, including requests for such information as the location of documents or information and disclosure of all passwords necessary or desirable to the Progressive Group’s access of information that you password-protected on the information systems or the Progressive Group or any entity thereof. You further agree to cooperate with the Progressive Group and/or any entity thereof, as well as any entity operating on its or their behalf, in connection with any

investigation or legal proceeding arising out of matters that were under your responsibility or that were related to, or caused by, your actions.

9. Non-Disparagement. You agree not to disparage the Progressive Group or Releasees, including by libel or defamation. You may, however, provide truthful information to any state or federal administrative agency and in response to formal legal process, such as a subpoena compelling your testimony.

10. Non-Admission. You agree and acknowledge that this Agreement is not and shall not be construed to be, or represented to others as, an admission that Releasees violated any federal, state or local law or regulation or duty owed to you.

11. Right to Participate in Government Agency Proceedings. Notwithstanding any term or provision of this Agreement to the contrary (including, but not limited to, Paragraphs 5, 6, 7, 8 and 9 above), nothing in this Agreement, in Progressive’s Code of Business Conduct and Ethics and Workplace Policies, or in any other existing agreements between you and Progressive is intended or shall be construed to prohibit you, without notice to Progressive, from filing a charge with, or participating in any investigation or proceeding conducted by, the U.S. Equal Employment Opportunity Commission (or a comparable local, state or federal fair employment practices agency) or the U.S. Occupational Safety and Health Administration, from taking any actions protected by Section 7 of the National Labor Relations Act, from communicating directly with the Securities and Exchange Commission regarding any possible securities law violation, or from communicating with the Occupational Safety and Health Administration regarding a violation of any law it enforces. You acknowledge and agree, however, that, except with respect to any award pursuant to 15 U.S.C. § 78u-6 or any award administered by the U.S. Occupational Safety and Health Administration, this Agreement fully and finally resolves all monetary matters between you and Releasees, and you waive any right to monetary damages, attorneys’ fees, costs, equitable remedies and any other individual relief related to or arising from any such charge, or any ensuing complaint or lawsuit, filed by you or on your behalf.

12. Miscellaneous.


a.	Unless defined herein, all capitalized terms used in this Agreement shall have the meanings given to them in the Plan. The captions and headings in this Agreement are for convenience only and do not define or describe the scope or content of any provision of this Agreement.

This Agreement, together with the Plan and the other documents referenced herein, constitutes the entire agreement between the parties and supersedes all prior and contemporaneous oral or written representations, agreements and understandings relating to your employment, its termination and all related matters, excluding only, and subject to Paragraph 11, above, (i) your continuing obligations under Progressive’s Code of Business Conduct and Ethics and any existing agreements between you and Progressive with respect to Confidential Information and/or Proprietary Information and (ii) your rights, if any, under the Executive Compensation Programs and any agreements entered into thereunder. Any modifications or assignments of this Agreement must be in a writing signed by you and Progressive’s Chief Legal Officer (or, in the event of a conflict of

interest, Progressive’s Chief Financial Officer) in order to be effective. This Agreement is subject to the terms, provisions and limitations of the Plan in all respects.

In the event any provision of this Agreement shall be held to be void, unlawful or for any reason unenforceable or otherwise at variance with the intentions of the parties as expressed herein, the remaining portions of the Agreement shall remain in full force and effect. In the event you breach this Agreement or any part of it, or fail to perform your obligations under this Agreement, the Plan or any other agreement relating to your employment that survives this Agreement, Progressive’s obligations hereunder shall terminate but the Agreement otherwise shall remain in full force and effect, including your release of Claims. No waiver of any provision of this Agreement, or the breach thereof, shall be deemed a waiver of any other provision or breach.

This Agreement may be signed in counterparts, each of which shall be deemed an original and all of which, taken together, shall constitute the same instrument, though this Agreement shall be of no force or effect until executed by both you and Progressive. A wet signature on an electronically transmitted copy of the Agreement and/or a wet signature transmitted electronically (i.e., a facsimile or scanned image) shall have the same effect as the original.


e.	This Agreement shall be interpreted, enforced and governed under the laws of the State of Ohio, in which State the Plan was adopted and is maintained.

13. [INCLUDE IF EXECUTIVE IS 40 OR OVER AND PART OF GROUP (2 OR MORE) REORGANIZATION] Group Impact Attachment. In accordance with the provisions of the Older Workers Benefit Protection Act, attached as Attachment A to this Agreement is statistical information regarding job titles and ages of the employees whose employment will and will not be terminated as a result of the reduction in force as of the date below.

14. [INCLUDE IF EXECUTIVE IS 40 OR OVER] YOU FURTHER REPRESENT AND ACKNOWLEDGE:


A.	The only consideration for signing this Agreement is that stated expressly herein. No person or entity has made other promises or agreements of any kind to cause you to sign this Agreement.

You fully understand the meaning and intent of this Agreement. You have read the Agreement carefully, know its contents, understand its terms, their meaning and their effect upon your rights and duties. You enter into this Agreement knowingly and voluntarily, agree to all its terms and conditions, understand their final and binding effect, and sign THIS Agreement as your own free act with the full intent of releasing Releasees from all claims AS PROVIDED IN THIS AGREEMENT.


C.	THIS AGREEMENT DOES NOT WAIVE OR RELEASE ANY RIGHTS OR CLAIMS YOU MAY HAVE UNDER the ADEA THAT ARISE AFTER THE DATE YOU SIGN THIS AGREEMENT.


D.	The consideration provided to you under THIS AGREEMENT is in addition to anything of value to which you are entitled already.


E.	You have been advised by Progressive to consult with an attorney prior to executing this Agreement.

[INCLUDE IF EXECUTIVE IS 40 OR OVER] IMPORTANT! You have 45 days from receipt of this Agreement to consider whether to sign it. If you do not meet this deadline, you will not be eligible for a separation allowance. You may revoke the Agreement within seven (7) days after signing it, but you must do so by delivering written notification of such revocation to Progressive’s Chief Legal Officer at 6300 Wilson Mills Road, Mayfield Village, Ohio, 44143. If you sign the Agreement within 45 days and do not revoke it, it will become effective immediately following the expiration of the seven-day revocation period.

[INCLUDE IF EXECUTIVE IS UNDER 40] IMPORTANT! You have 45 days after your Separation Date within which to sign this Agreement and return it to Progressive. This Agreement will become effective once you sign it. If you do not meet this deadline, you will not be eligible for a separation allowance.

Date this Agreement was Given to You

________________________________________

By: _________________ __________

HR/Manager Initials Date

PROGRESSIVE «PayrollCompany»

By: ______________________________________

_________________________________________

Printed Name

Title: _____________________________________

I understand this Agreement and enter into it of my own free will. I understand that Progressive will not be required to provide any severance benefits under this Agreement until after this Agreement becomes effective.

______________________________ Date: ______________________________

[Name]

Exhibit 10.63

2019 PROGRESSIVE CAPITAL

MANAGEMENT ANNUAL INCENTIVE PLAN

The Plan . The Progressive Corporation and its subsidiaries (collectively "Progressive" or the “Company”) have adopted the 2019 Progressive Capital Management Annual Incentive Plan (the “Plan”) as part of their compensation program for the Company’s investment professionals for the Company’s 2019 fiscal year (the “Plan year”). The Plan is performance-based, is not a form of commission compensation, and is administered under the direction of the Compensation Committee of the Board of Directors of The Progressive Corporation (the “Compensation Committee” or “Committee”). Payment under the Plan, if any, is based on Company performance as defined by the Plan, not individual employee performance. References in this Plan to the Company’s portfolio mean the respective portfolios of the Company’s subsidiaries and affiliates that are actively managed by Progressive Capital Management Corp., (“PCM”) and references in this Plan to the Company’s investment results mean the investment results of those portfolios only.

The Company’s investment professionals invest the funds of the Company in accordance with investment guidelines approved from time to time by the Investment and Capital Committee of the Board of Directors. Those guidelines address such matters as minimum average credit quality and the duration of the portfolio, as well as limitations on the extent to which the portfolio can be concentrated in individual issuers. Compliance with the guidelines is routinely monitored and variations therefrom must be reported to, and approved by, the Investment and Capital Committee.

Participants . Progressive employees who are assigned primarily to the Company’s capital management function, including the Company’s Chief Investment Officer (“CIO”), are eligible to be selected for participation in the Plan. Eligible employees in addition to the CIO will be selected by the CIO in consultation with the Chief Executive Officer (“CEO”) or Chief Human Resource Officer (“CHRO”) (the “Designated Executives”) to participate in the Plan. Participants may also participate in other Gainsharing, bonus or incentive compensation plans maintained by Progressive, if so determined by the Designated Executives (or in the case of the CIO or any other executive officer, by the Compensation Committee). Other eligible employees of the Company may be selected for participation in the Plan for or at any time during the Plan year by the Designated Executives. In such cases, the Designated Executives will determine the new participant’s Target Percentage (described below) and other terms of participation (except with respect to the CIO or any other executive officer, as to whom all determinations must be made by the Committee). Throughout this Plan, references to “executive officers” refer to executive officers of The Progressive Corporation within the meaning of any Securities and Exchange Commission (“SEC”) or New York Stock Exchange rule applicable to the Company.

3. Annual Incentive Payment Determination.


A.	Annual Incentive Payment . Each participant may earn an annual cash bonus (the “Annual Incentive Payment”), subject to the terms of this Plan. The amount of the Annual Incentive Payment earned by any participant will be determined by application of the following formula:

Annual Incentive Payment = Paid Eligible Earnings x Target Percentage x Performance Factor

Paid Eligible Earnings . Paid Eligible Earnings for the Plan year shall mean and include the following: regular, Earned Time Benefit pay (including Protected ETB-PSL but excluding the payout of unused Earned Time Benefit pay at termination), sick pay, holiday pay, funeral pay, military make-up pay, overtime pay, shift differential, and retroactive payments of any of the foregoing items, in each case received by the participant during the Plan year for work or services performed as an officer or employee of Progressive.

For purposes of the Plan, and notwithstanding the foregoing, Paid Eligible Earnings shall exclude all other types of compensation, including, without limitation: any short-term or long-term disability payments made to the participant; the earnings replacement component of any worker's compensation benefit or award; any amounts paid pursuant to a judgment in, or settlement related to, any action, suit or proceeding, whether in law or equity, to any extent arising from or relating to a participant’s employment with the Company, or work or services performed for or on behalf of the Company; any amount paid under a separation allowance (or severance) plan; any bonus (including PCM Bonus Plan bonus or PCM Annual Incentive Plan payment), Gainsharing or other incentive compensation award (whether denominated, or payable, in cash or equity), including, without limitation, payments from any discretionary cash fund; any dividend payments or dividend equivalent amounts; any unused Earned Time Benefit; and any other payment required by applicable law to be paid to a participant by the Company and intended to replace all or any portion of wages or earnings during a period of unemployment, whether due to illness, disability or otherwise (including, but not limited to, payments made pursuant to any statute, rule or regulation of a governmental authority relating to leave on account of maternity, paternity, parental status or responsibility, or sickness).

C. Target Percentage . The Target Percentages for participants in the Plan shall be determined by or under the direction of the Committee, but will not exceed 125% for any participant. Target Percentages may vary among Plan participants and may be changed from year to year by or under the direction of the Designated Executives (or in the case of the CIO or any other executive officer, by the Compensation Committee).


D.	Performance Factor . The Performance Factor will be determined by the Committee after the expiration of the Plan year based on the performance of the Company’s fixed-income investment portfolio (the “Fixed-Income Portfolio” or “Portfolio”), and such other factors and information relating to the performance of the Company’s investment professionals as the Committee shall determine.

First, an indicated performance factor will be determined based on the fully taxable equivalent total return of the Fixed-Income Portfolio, in comparison to the total returns of the group of comparable investment firms identified by the Independent Data Source (the “Investment Benchmark”), over the one- and three-year periods ending on December 31 of the Plan year, as described below. For purposes of this Agreement, the “Independent Data Source” shall be a third party independent data source determined by the Committee. After the end of the Plan year, the Independent Data Source will determine the firms that are included in the Investment Benchmark in accordance with the criteria specified on Exhibit I hereto. The Independent Data Source will also provide to the Company the monthly total return data for each of the Investment Benchmark firms for the three-year period ending on December 31 of the Plan year.

Investment results for the Fixed-Income Portfolio will be marked to market, including 50% of the benefit of any state premium tax abatements for municipal securities held in the Portfolio that are realized by the Company during the Plan year, in order to calculate the Portfolio’s fully taxable equivalent total return for the one-year (2019) and three-year period (2017-2019) periods, in each case compounded on a monthly basis. The investment performance achieved by the Fixed-Income Portfolio for the one- and three-year periods (each, a “comparison period”) will then be compared against the total returns of the firms included in the Investment Benchmark for the same periods, also compounded on a monthly basis, as determined by the Company from the monthly performance data supplied by the Independent Data Source for each firm in the Investment Benchmark, to determine, for each comparison period, where the Fixed Income Portfolio’s performance falls on a percentile basis when compared to the firms in the Investment Benchmark, as further described on Exhibit II (“Performance Ranking”).

The Portfolio’s Performance Ranking will be used to determine a performance score of between 0 and 2.0 for each comparison period, based on the following schedule:



Comparison Period	Score = 0 Rank at or below	Score = 1.0 Rank equal to	Score = 2.0 Rank at or above
One year	15 ^th Percentile	50 ^th Percentile	85 ^th Percentile
Three year	25 ^th Percentile	50 ^th Percentile	75 ^th Percentile

A Performance Ranking between the values identified in the schedule will be interpolated on a straight-line basis to generate the applicable performance score, as further described on Exhibit II . Once these performance scores are determined, an overall indicated performance factor will be determined by averaging the performance scores for the one- and three-year comparison periods.

The overall indicated performance factor will be reported to the Compensation Committee after the expiration of the Plan year, together with such supporting documentation as the Committee may require. The Committee may consider such additional information as it deems necessary or appropriate in its discretion. Such information may include, without limitation:

•

the primary investment factors that are responsible for favorable or unfavorable results relative to the peer group, such as the Company’s duration and yield curve position and the extent of its exposure to sectors of the fixed-income markets, including corporate bonds, residential mortgage-backed securities, commercial mortgage-backed securities, other asset-backed securities, government bonds, preferred stocks and non-investment-grade bonds;


•	the Company’s holdings within each sector relative to the general market composition of each sector;


•	the extent to which material investment decisions may have been driven by Company strategic or capital considerations; and


•	the impact on investment results of significant portfolio cash flows driven by Company operations, strategic decisions or capital transactions.

In addition, the Committee may choose to consult with others, including, without limitation, management, the Board’s Investment and Capital Committee, other Board members, and outside compensation and investment professionals, in evaluating the performance of the

Company’s investment professionals for the year. The Committee will then determine the Performance Factor, which may vary among participants; provided that under no circumstances may the Performance Factor for any participant exceed 2.0 for the year.

E. In the event that the Independent Data Source (or its successor or assigns) discontinues providing the data that is necessary to make the calculations required by this Plan, or modifies the information in such a way as to render the comparisons required by this Plan to be not meaningful, in the Committee’s sole judgment, the determinations required above shall be made using investment return data for comparable firms satisfying the criteria set forth on Exhibit I as may be available from another recognized provider of investment industry data as the Committee may approve in its sole discretion.

F. Notwithstanding any other provision of this Plan, the Fixed Income Portfolio shall not include any portfolio managed by, or any investment made at the direction of, any business unit or area other than PCM.


4.	Payment Procedures; Deferral . The Annual Incentive Payments will be determined and paid to Plan participants as soon as practicable after the Performance Factor has been determined by the Committee, but no later than March 15th of the year immediately following the Plan year.

Any Plan participant who is then eligible to participate in The Progressive Corporation Executive Deferred Compensation Plan ("Deferral Plan") may elect to defer all or any portion of his or her Annual Incentive Payment otherwise payable under this Plan, subject to and in accordance with the terms of the Deferral Plan. If a Plan participant has made such an election under the Deferral Plan, then to the extent of such election, the Annual Incentive Payment will, instead of being paid to such participant as described in the immediately preceding paragraph, be credited to such participant’s account under the Deferral Plan in accordance with the terms of the Deferral Plan.

Qualification Date; Leave of Absence; Withholding . Unless otherwise determined by the Committee, and except as otherwise expressly provided herein, in order to be entitled to receive an Annual Incentive Payment for the Plan year, the participant must be an active officer or regular employee of Progressive on November 30 of the Plan year (“Qualification Date”). An individual who (i) is hired on or after December 1 of any Plan year, or (ii) whose employment terminates for any reason prior to the Qualification Date is not entitled to an Annual Incentive Payment for that Plan year. Annual Incentive Payments are not earned until paid.

Any participant who is on a leave of absence covered by the Family and Medical Leave Act of 1993, as amended (or equivalent state or local law), the American with Disabilities Act of 1991, as amended (or equivalent state or local law), personal leave approved by the Company, military leave or short- or long-term disability (provided that, in the case of a long-term disability, the participant is still an employee of the Company) on the Qualification Date relating to the Plan year will be entitled to receive an Annual Incentive Payment for the Plan year based on the Paid Eligible Earnings received by the participant during the Plan year.


6.	Other Plans . Participants may be selected to participate in this Plan and in one or more other incentive plans offered by the Company. In the case of the CIO or any other executive officer, all

determinations with respect to such incentive plans and the executive’s participation therein shall be made by the Compensation Committee. In all other cases, the Designated Executives shall have full authority to determine the incentive plan or plans in which any employee shall participate during the Plan year and the weighting factor (if any) that will apply to each such plan.

Non-Transferability . Annual Incentive Payments shall be payable only to the participant or, in the event of the participant’s death, to the participant’s estate. The right to any Annual Incentive Payment hereunder may not be sold, transferred, assigned or encumbered, voluntarily or involuntarily, other than by will or the laws of descent or distribution. Nothing herein shall prevent any participant's interest hereunder from being subject to involuntary attachment, levy or other legal process.


8.	Administration . The Plan will be administered by or under the direction of the Committee. The Committee will have the authority to adopt, alter, amend, modify and repeal such rules, guidelines, procedures and practices governing the Plan as it, from time to time, in its sole discretion deems advisable.

The Committee will have full authority to determine the manner in which the Plan will operate, to interpret the provisions of the Plan and to make all determinations thereunder. All such interpretations and determinations will be final and binding on Progressive, all Plan participants, their estates and beneficiaries and all other parties. No such interpretation or determination may be relied on as a precedent for any similar action or decision. No member of the Committee shall incur any liability for any action taken or omitted, or any determination made, in good faith with respect to the Plan.

Unless otherwise determined by the Committee, all of the authority of the Committee hereunder (including, without limitation, the authority to administer the Plan, select the persons entitled to participate herein, interpret the provisions hereof, waive any of the requirements specified herein and make determinations hereunder and to establish, approve, change or modify Investment Benchmarks, Performance Targets and Target Percentages) may be exercised by the Designated Officers. If one or more of the Designated Officers is unavailable or unable to participate, or if such position is vacant, the Chief Financial Officer may act instead of such officer.

Notwithstanding anything in this Plan to the contrary: (a) all determinations made under this Plan with respect to the CIO or any other individual deemed to be an executive officer of the Company must be made only by the Compensation Committee; and (b) only the Committee may make the determination of the Performance Factor required by Section 3.D. above.


9.	Miscellaneous .

Recoupment . Progressive shall have the right to recoup any Annual Incentive Payment (or an appropriate portion thereof, as hereinafter provided) with respect to any Plan year paid to a participant hereunder who was an executive officer of Progressive at any time during such Plan year, if: (i) the Annual Incentive Payment was calculated by reference to the achievement during such Plan year of certain financial or operating results (which includes, for purposes hereof, the performance of the Fixed-Income Portfolio); (ii) such financial or operating results were incorrect and were subsequently the subject of a restatement by Progressive within three (3) years after the date on which such Annual Incentive Payment was paid to the participant; and (iii) the Annual Incentive Payment would have been paid, in whole or in part, to the participant if the restated financial or operating results had been known at the time the payment was made. Such recoupment right shall be available to Progressive whether or not the participant in question was at fault or responsible in any way in causing such restatement. In such circumstances, Progressive will have the right to recover from each such participant for such Plan year, and each such participant will refund to Progressive promptly upon demand, the amount by which the Annual Incentive Payment paid to such participant for the Plan year in question exceeded the payment that would have been

made if the Annual Incentive Payment had been calculated by reference to the restated results, without interest; provided, however, that Progressive will not seek to recover such amounts from any participant who was not an executive officer at any time during the Plan year unless the amount due would exceed the lesser of five percent (5%) of the Annual Incentive Payment previously paid or twenty-thousand dollars ($20,000). Such recovery, at the Committee’s discretion, may be made by lump sum payment, installment payments, credits against future Annual Incentive Payments, annual gainsharing payments or other bonus payments, credits against any other compensation, or other appropriate mechanism. References in this paragraph to payments and amounts paid shall be deemed to include amounts deposited in the Deferral Plan as a result of an election by the participant.

Further Rights . Notwithstanding the foregoing subsection A., if any participant that was an executive officer at any time during such Plan year engaged in fraud or other misconduct (as determined by the Committee or the Board, in their respective sole discretion) resulting, in whole or in part, in a restatement of the financial or operating results used hereunder to determine the Annual Incentive Payments for a specific Plan year, Progressive will further have the right to recover from such participant, and the participant will refund to Progressive upon demand, an amount equal to the entire Annual Incentive Payment paid to such participant for such Plan year plus interest at the rate of eight percent (8%) per annum or, if lower, the highest rate permitted by law, calculated from the date that such bonus was paid to the participant. Progressive shall further have the right to recover from such participant Progressive’s costs and expenses incurred in connection with recovering such Annual Incentive Payment from the participant and enforcing its rights under this subsection B., including, without limitation, reasonable attorneys’ fees. There shall be no time limit on the Company’s right to recover such amounts under this subsection B., except as otherwise provided by applicable law. References in this paragraph to payments and amounts paid shall be deemed to include amounts deposited into the Deferral Plan as a result of an election by the participant.

Compliance with Law and Exchange Requirements . The Annual Incentive Payments determined and paid pursuant to the Plan shall be subject to all applicable laws and regulations. Without limiting the foregoing, and notwithstanding anything to the contrary contained in this Plan, if the SEC adopts final rules under Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act that require, as a condition to the Company’s continued listing on a national securities exchange (“Exchange”), that the Company develop and implement a policy requiring the recovery of erroneously awarded compensation, and such regulations are applicable to a participant awarded an Annual Incentive Payment pursuant to the Plan, then the Annual Incentive Payment paid to such participant (and any payment made to such participant pursuant to a similar plan) shall be subject to recoupment by the Company pursuant to the terms of the rules of the SEC and any applicable Exchange and any policy of the Company adopted in response to such rules. References in this paragraph to payments and amounts paid shall be deemed to include amounts deposited into the Deferral Plan as a result of an election by the participant.


10.	Termination; Amendments . The Plan may be suspended, terminated, amended or revised, in whole or in part, at any time and from time to time by the Committee, in its sole discretion.


11.	Unfunded Obligations . The Plan will be unfunded and all payments due under the Plan will be made from Progressive's general assets.

12.

No Employment Rights . Nothing in the Plan, and no action hereunder, shall be construed as conferring upon any person the right to remain a participant in the Plan or to remain employed by Progressive, nor shall the Plan limit Progressive's right to discipline or discharge any of its officers or employees or change any of their job titles, duties, authority or compensation, at any time and without assigning a reason therefor.


13.	Set-off Rights . Progressive shall have the unrestricted right to set off against or recover out of any Annual Incentive Payment or other sums owed to any participant under the Plan any amounts owed by such participant (including pursuant to Section 9) to Progressive.

14,

Misconduct. No participant shall have the right to receive any Annual Incentive Payment if, prior to such payment being made, participant’s employment is terminated as a result of any action or inaction that, under Progressive’s employment practices or policies as then in effect, constitutes grounds for immediate termination of employment, as determined by Progressive (or, in the case of an executive officer, the Committee) in its sole discretion. In addition, no participant who is an executive officer shall have the right to receive any Annual Incentive Payment if, prior to such payment being made, participant’s employment is terminated by Progressive for Cause, or if there occurs any action or inaction that constitutes grounds for termination for Cause or otherwise constitutes grounds for immediate termination of employment under the Company’s employment practices or policies as then in effect, as determined by the Committee in its sole discretion. For purposes of this Section 14, Cause shall mean a felony conviction of a participant or the failure of a participant to contest prosecution for a felony; a participant’s willful misconduct or dishonesty, any of which, in the judgment of the Committee, is harmful to the business or reputation of Progressive; or any material violation (in the judgment of the Committee) of any of the provisions of the Company’s Code of Business Conduct and Ethics or the Chief Executive Officer/Senior Financial Officer’s Code of Ethics (if applicable to the participant), or any confidentiality agreement, non-solicitation agreement, non-competition agreement or other agreement between the participant and Progressive.


15.	Employees Subject to Foreign Jurisdictions. To the extent the Committee deems it necessary, appropriate or desirable to comply with foreign law or practice or taxation and to further the purposes of the Plan, the Committee may, without amending the Plan, exclude any employee not temporarily or permanently residing in the United States from participating in the Plan or establish rules applicable

to Annual Gainsharing Payments to participants who are foreign nationals or foreign residents, are employed outside the United States, or both, including rules that differ from those set forth in this Plan.

16.

Section 409A . Payments under the Plan are intended to be exempt from Section 409A because no legally binding right to any Annual Incentive Payment arises until the payment date, and, in the alternative, because any payment is a short term deferral under Section 409A; the Plan shall be administered and interpreted accordingly. Notwithstanding any provision of the Plan to the contrary, if the Committee determines that any payment under the Plan may constitute deferred compensation subject to Section 409A, the Committee may take any actions necessary to preserve the intended tax treatment of the benefits provided with respect to such payment. Any benefit under the Plan that is subject to Section 409A because deferred pursuant to the terms of the Deferral Plan shall be paid according to the terms of such plan.

17.

Prior Plans . This Plan supersedes all prior plans, agreements, understandings and arrangements regarding bonuses or other cash incentive compensation payable or due to any participant from Progressive with respect to the performance of Progressive’s investment portfolio. Without limiting the generality of the foregoing, this Plan supersedes and replaces the 2018 Progressive Capital Management Annual Incentive Plan (the "Prior Plan”), which is and shall be deemed to have terminated on the last day of the Company’s 2018 fiscal year (the "Prior Plan Termination Date"); provided, however, that (a) any bonuses or other sums earned and payable under the Prior Plan with respect to any Plan year ended on or prior to the Prior Plan Termination Date shall be unaffected by such termination and shall be paid to the appropriate participants when and as provided thereunder, and (b) any provisions regarding recoupment of payments from executive officers and the administrative and interpretive authority of the Committee and the Designated Officers under the Prior Plan shall survive such termination.


18.	Effective Date. This Plan is adopted, and is effective, as of the first day of the Company’s 2019 fiscal year and will be effective for the 2019 Plan year (which coincides with Progressive’s 2019 fiscal year, except that investment returns are calculated on a calendar year basis).


19.	Governing Law . This Plan shall be governed by, and interpreted and construed in accordance with, the laws of the State of Ohio applicable to contracts made and performed wholly within such state by residents thereof.

EXHIBIT I

INVESTMENT BENCHMARK CRITERIA

After the end of the Plan year, the Independent Data Source will determine the firms comprising the Investment Benchmark for the Plan year from its records and will supply to the Company the monthly total returns and any other relevant data for each of those firms for the three-year period ending on December 31 of the Plan year.

A firm will be included in the Investment Benchmark if the Independent Data Source is able to determine from its records that:


1.	The firm has provided monthly data regarding its holdings and investment return, as necessary to determine or calculate such firm’s monthly total return, and to evaluate such firm’s compliance with each of the criteria set forth below, for the entire three-year period ending on December 31 of the Plan year; and


2.	At all times during the three-year period ending on December 31 of the Plan year, the information provided by the firm shows, or the Independent Data Source is able to calculate, that such firm’s investment portfolio satisfies each of the following criteria:

Duration: Effective Duration between 1.5 years and 5.0 years

Credit Quality Average = A, or = AA, or = AAA, or = AAA+

Convexity (%) >= -1

Sector Allocation: U.S. High Yield Corporate Debt <= 10%

Sector Allocation: Mortgages <= 60%

Sector Allocation: U.S. Investment Grade Corporate Debt <= 60%

Sector Allocation: CMBS <= 60%

Sector Allocation: ABS <= 60%

Sector Allocation: Emerging Markets Debt <= 5%


3.	The Company will have no discretion to alter the Investment Benchmark list after it is finalized by the Independent Data Source.

EXHIBIT II

DETERMINATION OF PERFORMANCE RANKING AND PERFORMANCE SCORES

Once all the total returns are calculated, the data is sorted in descending order from highest to lowest total return. From here, the process to compute the Performance Factor is as follows (this Exhibit shows the procedures and related calculations for the 1-year comparison period required by the Plan; the calculations for the 3-year comparison period would follow the same procedures, except that necessary adjustments would be made to determine the top and bottom 25% levels and the performance score variances between those levels):

INTERPOLATED VALUES FOR SETTING TOP AND BOTTOM 15% LEVELS

The top 15% and bottom 15% total return rankings are computed based on the total number of firms in the Investment Benchmark, excluding the PCM Fixed-Income Portfolio return. For example, if there were 279 participants, the return required to earn a 2.0 portfolio performance factor would be determined by interpolating between the forty-first and forty-second firm’s returns, since 15% of 279 = 41.85. The same procedure would be used to determine the 0.0 portfolio performance factor.

The total returns, computed by Investment Accounting, for the interpolated positions are calculated as follows (continuing to use an example of 279 survey firms):

Interpolated Value = Firm 41 return - ((Firm 41 Return - Firm 42 Return)*0.85)

Firm 41 = 18.35%

Firm 42 = 18.23%

Firm 41.85 (Interpolated Value) = 18.35% - ((18.35%-18.23%)*0.85) = 18.25%.

In this case, the PCM Performance Factor will equal 2.0 if its total return equals the interpolated value for Firm 41.85 of 18.25%. A similar calculation is then used to determine the bottom 15% group and interpolated value for a 0.0 performance score.

Once the two groups are computed, top and bottom 15%, the remainder of the performance scores are calculated as follows:

Performance score variance = (2.00) / Number of positions from first participant after the top 15% ranking to the 1 ^st participant in the bottom 15% ranking. In the case of 279 participants, the number of positions to divide the 2.00 performance factors by would be 198.

The calculation for the performance score variance from 2.00 - 0.00 would be:

2.00 / 198 = .010101 per position for 279 firms

In the case of a tie in total returns between firms, each firm will have the same performance score, one step under the next higher position. The next lowest position would then be stepped down by a factor based on the number of participants who tie. In the case of a tie between two firms, the step down will be twice the performance score variance to maintain the proper stepping to the 0.00 performance score level.

Example: If firms 42 and 43 each had the same total return in the 279 firm example, then firms 42 and 43 would each have a Performance Factor of 1.989899, which is 2.00 - .0010101. The number 44

position in this example would have a performance score of 1.969697, which is the required step down from 42 to 44.

In addition, if the returns are tied between the interpolated value set for the 2.00 performance score and any position below the 2.00 level, those lower positions will also be set to a 2.00 performance score. The step down factor in the performance score will work similarly as noted in the example above. For the last 15% group, all firms with total returns equaling the last interpolated total return value would have the same performance score as the last interpolated value (.0101012), and all others in the last 15% group would have a 0.00 Portfolio Performance Factor.

Once all the performance scores have been created, from 2.00 to 0.00, PCM’s return is compared to the rankings to determine its Performance Factor. If the PCM return is not in the top or bottom 15% and does not match the return of any participant, then PCM’s Performance Factor is an interpolated value between the firms with the next highest and next lowest returns.

The interpolation computation for the Performance Factor based on PCM’s return is as follows:

Performance score of firm below PCM return + (PCM’s Return - Return below PCM) / (Return above PCM - Return below PCM) * (Performance score of firm above PCM -Performance score of firm below PCM)

Assuming the following data, using the 279 firm example:



Firm	Performance score	Total return
Firm above PCM	.90	13.61
PCM		13.39
Firm below PCM	.89	13.34

The calculation of PCM’s Performance Factor is:

0.89 + (13.39-13.34) / (13.61-13.34) * (0.90-0.89) = 0.89

The final performance score is rounded to the nearest one-hundredth, if necessary.

Exhibit 13

THE PROGRESSIVE CORPORATION

2018 ANNUAL REPORT TO SHAREHOLDERS

App.-A-1

The Progressive Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

For the years ended December 31,



(millions—except per share amounts)	2018			2017			2016
Revenues
Net premiums earned	$	30,933.3		$	25,729.9		$	22,474.0
Investment income	820.5			563.1			478.9
Net realized gains (losses) on securities:
Net realized gains (losses) on security sales	170.7			115.7			155.8
Net holding period gains (losses) on securities	(507.9		)	(1.6		)	(17.9		)
Net impairment losses recognized in earnings	(68.3		)	(64.5		)	(86.8		)
Total net realized gains (losses) on securities	(405.5		)	49.6			51.1
Fees and other revenues	472.2			370.6			332.5
Service revenues	158.5			126.8			103.3
Other gains (losses)	0			(1.0		)	1.6
Total revenues	31,979.0			26,839.0			23,441.4
Expenses
Losses and loss adjustment expenses	21,721.0			18,808.0			16,879.6
Policy acquisition costs	2,573.7			2,124.9			1,863.8
Other underwriting expenses	4,195.8			3,480.7			2,972.0
Investment expenses	24.3			23.9			22.4
Service expenses	134.1			109.5			92.0
Interest expense	166.5			153.1			140.9
Total expenses	28,815.4			24,700.1			21,970.7
Net Income
Income before income taxes	3,163.6			2,138.9			1,470.7
Provision for income taxes	542.6			540.8			413.5
Net income	2,621.0			1,598.1			1,057.2
Net (income) loss attributable to noncontrolling interest (NCI)	(5.7		)	(5.9		)	(26.2		)
Net income attributable to Progressive	2,615.3			1,592.2			1,031.0
Other Comprehensive Income (Loss)
Changes in:
Total net unrealized gains (losses) on securities	(99.3		)	355.4			130.6
Net unrealized losses on forecasted transactions	0.8			(5.4		)	(1.2		)
Foreign currency translation adjustment	0			1.1			0.4
Other comprehensive income (loss)	(98.5		)	351.1			129.8
Other comprehensive (income) loss attributable to NCI	3.3			(2.3		)	3.2
Comprehensive income attributable to Progressive	$	2,520.1		$	1,941.0		$	1,164.0
Computation of Earnings Per Common Share
Net income attributable to Progressive	$	2,615.3		$	1,592.2		$	1,031.0
Less: Preferred share dividends	21.4			0			0
Net income available to common shareholders	$	2,593.9		$	1,592.2		$	1,031.0
Average common shares outstanding — Basic	582.4			580.8			581.7
Net effect of dilutive stock-based compensation	4.3			4.9			3.3
Total average equivalent common shares — Diluted	586.7			585.7			585.0
Basic: Earnings per common share	$	4.45		$	2.74		$	1.77
Diluted: Earnings per common share	$	4.42		$	2.72		$	1.76

See notes to consolidated financial statements.

App.-A-2

The Progressive Corporation and Subsidiaries

Consolidated Balance Sheets

December 31,



(millions — except per share amount)	2018			2017
Assets
Available-for-sale, at fair value:
Fixed maturities (amortized cost: $28,255.9 and $20,209.9)	$	28,111.5		$	20,201.7
Short-term investments (amortized cost: $1,795.9 and $2,869.4)	1,795.9			2,869.4
Total available-for-sale securities	29,907.4			23,071.1
Equity securities, at fair value:
Nonredeemable preferred stocks (cost: $1,002.6 and $698.6)	1,033.9			803.8
Common equities (cost: $1,148.9 and $1,499.0)	2,626.1			3,399.8
Total equity securities	3,660.0			4,203.6
Total investments	33,567.4			27,274.7
Cash and cash equivalents	69.5			265.0
Restricted cash	5.5			10.3
Total cash, cash equivalents, and restricted cash	75.0			275.3
Accrued investment income	190.8			119.7
Premiums receivable, net of allowance for doubtful accounts of $252.1 and $210.9	6,497.1			5,422.5
Reinsurance recoverables	2,696.1			2,273.4
Prepaid reinsurance premiums	309.7			203.3
Deferred acquisition costs	951.6			780.5
Property and equipment, net of accumulated depreciation of $1,033.2 and $940.6	1,131.7			1,119.6
Goodwill	452.7			452.7
Intangible assets, net of accumulated amortization of $247.7 and $175.7	294.6			366.6
Net deferred income taxes	43.2			0
Other assets	365.1			412.9
Total assets	$	46,575.0		$	38,701.2
Liabilities
Unearned premiums	$	10,686.5		$	8,903.5
Loss and loss adjustment expense reserves	15,400.8			13,086.9
Net deferred income taxes	0			135.0
Accounts payable, accrued expenses, and other liabilities ¹	5,046.5			3,481.0
Debt ²	4,404.9			3,306.3
Total liabilities	35,538.7			28,912.7
Redeemable noncontrolling interest (NCI) ³	214.5			503.7
Shareholders ’ Equity
Serial Preferred Shares (authorized 20.0)
Serial Preferred Shares, Series B, no par value (cumulative, liquidation preference $1,000 per share) (authorized, issued, and outstanding 0.5 and 0)	493.9			0
Common shares, $1.00 par value (authorized 900.0; issued 797.5, including treasury shares of 214.3 and 215.8)	583.2			581.7
Paid-in capital	1,479.0			1,389.2
Retained earnings	8,386.6			6,031.7
Accumulated other comprehensive income:
Net unrealized gains (losses) on securities	(105.6		)	1,295.0
Net unrealized losses on forecasted transactions	(17.2		)	(14.8		)
Accumulated other comprehensive (income) loss attributable to NCI	1.9			2.0
Total accumulated other comprehensive income attributable to Progressive	(120.9		)	1,282.2
Total shareholders ’ equity	10,821.8			9,284.8
Total liabilities, redeemable NCI, and shareholders’ equity	$	46,575.0		$	38,701.2

¹ See Note 12 – Litigation, Note 13 – Commitments and Contingencies , and Note 14 – Dividend s for further discussion.

² Consists of long-term debt. See Note 4 – Debt for further discussion .

³ See Note 15 – Redeemable Noncontrolling Interest for further discussion .

See notes to consolidated financial statements.

App.-A-3

The Progressive Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

For the years ended December 31,



(millions — except per share amounts)	2018			2017			2016
Serial Preferred Shares, No Par Value
Balance, Beginning of year	$	0		$	0		$	0
Issuance of Serial Preferred Shares, Series B	493.9			0			0
Balance, End of year	493.9			0			0
Common Shares, $1.00 Par Value
Balance, Beginning of year	581.7			579.9			583.6
Treasury shares purchased	(1.4		)	(1.5		)	(6.1		)
Net restricted equity awards issued/vested	2.9			3.3			2.4
Balance, End of year	583.2			581.7			579.9
Paid-In Capital
Balance, Beginning of year	1,389.2			1,303.4			1,218.8
Treasury shares purchased	(3.3		)	(3.4		)	(13.4		)
Net restricted equity awards issued/vested	(2.9		)	(3.3		)	(2.4		)
Amortization of equity-based compensation	76.2			92.9			80.9
Reinvested dividends on restricted stock units	12.2			8.0			6.1
Adjustment to carrying amount of redeemable noncontrolling interest	7.6			(8.4		)	4.2
Tax benefit from vesting of equity-based compensation	0			0			9.2
Balance, End of year	1,479.0			1,389.2			1,303.4
Retained Earnings
Balance, Beginning of year	6,031.7			5,140.4			4,686.6
Net income attributable to Progressive	2,615.3			1,592.2			1,031.0
Treasury shares purchased	(74.3		)	(57.6		)	(173.0		)
Cash dividends declared on common shares ($2.5140, $1.1247, and $0.6808 per share)	(1,466.0		)	(654.2		)	(394.7		)
Cash dividends declared on Serial Preferred Shares, Series B ($27.024 per share, $0, and $0)	(13.5		)	0			0
Reinvested dividends on restricted stock units	(12.2		)	(8.0		)	(6.1		)
Cumulative effect of change in accounting principle ¹	1,300.2			0			0
Reclassification of disproportionate tax effects ¹	4.3			0			0
Other, net	1.1			18.9			(3.4		)
Balance, End of year	8,386.6			6,031.7			5,140.4
Accumulated Other Comprehensive Income (Loss) Attributable to Progressive
Balance, Beginning of year	1,282.2			933.4			800.4
Attributable to noncontrolling interest	(0.1		)	(2.3		)	3.2
Other comprehensive income (loss)	(98.5		)	351.1			129.8
Cumulative effect of change in accounting principle ¹	(1,300.2		)	0			0
Reclassification of disproportionate tax effects ¹	(4.3		)	0			0
Balance, End of year	(120.9		)	1,282.2			933.4
Total Shareholders’ Equity	$	10,821.8		$	9,284.8		$	7,957.1

¹ See Note 1 – Accounting and Reporting Policies for further discussion.

There are 5.0 million Voting Preference Shares authorized; no such shares have been issued.

See notes to consolidated financial statements.

App.-A-4

The Progressive Corporation and Subsidiaries

Consolidated Statements of Cash Flows

For the years ended December 31,



(millions)	2018			2017			2016
Cash Flows From Operating Activities
Net income	$	2,621.0		$	1,598.1		$	1,057.2
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	190.4			169.9			137.4
Amortization of intangible assets	72.0			66.2			62.1
Net amortization of fixed-income securities	34.3			86.2			77.2
Amortization of equity-based compensation	77.2			95.4			85.2
Net realized (gains) losses on securities	405.5			(49.6		)	(51.1		)
Net (gains) losses on disposition of property and equipment	32.1			7.2			6.6
Other (gains) losses	0			1.0			(1.6		)
Net loss on exchange transaction	0			0			4.5
Changes in:
Premiums receivable	(1,074.6		)	(913.2		)	(518.5		)
Reinsurance recoverables	(422.7		)	(388.6		)	(388.2		)
Prepaid reinsurance premiums	(106.4		)	(32.8		)	48.8
Deferred acquisition costs	(171.1		)	(129.3		)	(103.8		)
Income taxes	(158.7		)	(172.6		)	(55.7		)
Unearned premiums	1,783.0			1,434.9			830.7
Loss and loss adjustment expense reserves	2,313.9			1,718.8			1,323.2
Accounts payable, accrued expenses, and other liabilities	746.6			400.0			308.9
Other, net	(57.7		)	(134.8		)	(90.2		)
Net cash provided by operating activities	6,284.8			3,756.8			2,732.7
Cash Flows From Investing Activities
Purchases:
Fixed maturities	(21,153.0		)	(14,587.8		)	(11,610.6		)
Equity securities	(538.8		)	(255.6		)	(434.2		)
Sales:
Fixed maturities	7,835.6			5,382.5			5,694.9
Equity securities	823.5			252.9			484.6
Maturities, paydowns, calls, and other:
Fixed maturities	5,099.8			5,215.8			4,907.4
Equity securities	26.6			50.0			0
Net sales (purchases) of short-term investments	1,116.3			727.6			(1,357.2		)
Net unsettled security transactions	11.7			(33.6		)	50.9
Purchases of property and equipment	(266.0		)	(155.7		)	(215.0		)
Sales of property and equipment	9.4			15.3			6.2
Acquisition of additional shares of ARX Holding Corp.	(296.9		)	0			0
Acquisition of an insurance company, net of cash acquired	0			(18.1		)	0
Net cash disposed in exchange transaction	0			0			(7.7		)
Net cash used in investing activities	(7,331.8		)	(3,406.7		)	(2,480.7		)
Cash Flows From Financing Activities
Net proceeds from debt issuance	1,134.0			841.1			495.6
Net proceeds from issuance of Serial Preferred Shares, Series B	493.9			0			0
Payments of debt	(37.1		)	(49.0		)	(25.5		)
Dividends paid to common shareholders	(654.9		)	(395.4		)	(519.0		)
Dividends paid to preferred shareholders	(13.5		)	0			0
Proceeds from exercise of equity options	3.3			0.5			0
Acquisition of treasury shares for restricted stock tax liabilities	(78.6		)	(57.6		)	(25.1		)
Acquisition of treasury shares acquired in open market	(0.4		)	(4.9		)	(167.4		)
Redemption/reacquisition of subordinated debt	0			(635.6		)	(18.2		)
Tax benefit from vesting of equity-based compensation	0			0			9.2
Net cash provided by (used in) financing activities	846.7			(300.9		)	(250.4		)
Effect of exchange rate changes on cash	0			(0.3		)	0.4
Increase (decrease) in cash, cash equivalents, and restricted cash	(200.3		)	48.9			2.0
Cash, cash equivalents, and restricted cash - Beginning of year	275.3			226.4			224.4
Cash, cash equivalents, and restricted cash - End of year	$	75.0		$	275.3		$	226.4

See notes to consolidated financial statements.

App.-A-5

The Progressive Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2018 , 2017 , and 2016

1. REPORTING AND ACCOUNTING POLICIES

Nature of Operations The Progressive insurance organization began business in 1937. The financial results of The Progressive Corporation include its subsidiaries and affiliates (references to “subsidiaries” in these notes include affiliates as well). Our insurance subsidiaries (collectively the Progressive Group of Insurance Companies) provide personal and commercial auto insurance, residential property insurance, and other specialty property-casualty insurance and related services. Our Personal Lines segment writes insurance for personal autos and recreational vehicles, which we refer to as our special lines products, through both an independent insurance agency channel and a direct channel. Our Commercial Lines segment writes primary liability, physical damage, and other auto-related insurance for automobiles and trucks owned and/or operated predominantly by small businesses through both the independent agency and direct channels. Our Property segment writes residential property insurance for homeowners, other property owners, and renters, through both an independent insurance agency channel and a direct channel. We operate our businesses throughout the United States.

Basis of Consolidation and Reporting 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. All intercompany accounts and transactions are eliminated in consolidation.

The Progressive Corporation owned 86.8% of the outstanding capital stock of ARX at December 31, 2018 , 69.0% at December 31, 2017 , and 69.2% at December 31, 2016 . The increase in Progressive's ownership of ARX is primarily due to the minority ARX shareholders exercising their rights to "put" a portion of their shares, including exercised stock options, to Progressive pursuant to the ARX stockholders' agreement. See Note 15 – Redeemable Noncontrolling Interest for further discussion.

Estimates We are required to make estimates and assumptions when preparing our financial statements and accompanying notes in conformity with accounting principles generally accepted in the United States of America (GAAP). As estimates develop into fact, results may, and will likely, differ from those estimates.

Investments Our fixed-maturity securities and short-term investments are accounted for on an available-for-sale basis. Fixed-maturity securities include debt securities and redeemable preferred stocks, which may have fixed or variable principal payment schedules, may be held for indefinite periods of time, and may be used as a part of our asset/liability strategy or sold in response to changes in interest rates, anticipated prepayments, risk/reward characteristics, liquidity needs, or other economic factors. These securities are carried at fair value with the corresponding unrealized gains (losses), net of deferred income taxes, reported in accumulated other comprehensive income. Fair values are obtained from recognized pricing services or are quoted by market makers and dealers, with limited exceptions discussed in Note 3 - Fair Value .

Short-term investments may include Eurodollar deposits, commercial paper, repurchase transactions, and other securities expected to mature within one year. From time to time, we may also invest in municipal bonds that have maturity dates that are longer than one year but have either liquidity facilities or mandatory put features within one year.

Equity securities include common stocks, nonredeemable preferred stocks, and other risk investments. These securities are carried at fair value, and as of January 1, 2018, with the changes in fair value reported as a component of net holding period gains (losses) on securities reported in net income. See New Accounting Standards - Adopted below for further discussion.

Trading securities are securities bought principally for the purpose of sale in the near term. We do not hold any trading securities. To the extent we have trading securities, changes in fair value would be recognized in income in the current period. Derivative instruments, which may be used for trading purposes or classified as trading derivatives due to the characteristics of the transaction, are discussed below.

Derivative instruments may include futures, options, forward positions, foreign currency forwards, interest rate swap agreements, and credit default swaps and may be used in the portfolio for general investment purposes or to hedge the exposure to:


•	Changes in fair value of an asset or liability (fair value hedge),


•	Foreign currency of an investment in a foreign operation (foreign currency hedge), or


•	Variable cash flows of a forecasted transaction (cash flow hedge).

App.-A-6

We did not have any derivatives outstanding at December 31, 2018 and 2017. To the extent we have derivatives held for general investment purposes, these derivative instruments are recognized as either assets or liabilities and measured at fair value, with changes in fair value recognized in income as a component of net holding period gains (losses) on securities during the period of change.

Derivatives designated as hedges are required to be evaluated on established criteria to determine the effectiveness of their correlation to, and ability to reduce the designated risk of, specific securities or transactions. Effectiveness is required to be reassessed regularly. Hedges that are deemed to be effective would be accounted for as follows:


•	Fair value hedge : changes in fair value of the hedge, as well as the hedged item, would be recognized in income in the period of change while the hedge is in effect.


•	Foreign currency hedge : changes in fair value of the hedge, as well as the hedged item, would be reflected as a change in translation adjustment as part of accumulated other comprehensive income. Gains and losses on the foreign currency hedge would offset the foreign exchange gains and losses on the foreign investment as they are recognized into income.


•	Cash flow hedge : changes in fair value of the hedge would be reported as a component of accumulated other comprehensive income and subsequently amortized into earnings over the life of the hedged transaction.

If a hedge is deemed to become ineffective or discontinued, the following accounting treatment would be applied:


•	Fair value hedge : the derivative instrument would continue to be adjusted through income, while the adjustment in the change in value of the hedged item would be reflected as a change in unrealized gains (losses) as part of accumulated other comprehensive income.


•	Foreign currency hedge : changes in the value of the hedged item would continue to be reflected as a change in translation adjustment as part of accumulated other comprehensive income, but the derivative instrument would be adjusted through income for the current period.


•	Cash flow hedge : changes in fair value of the derivative instrument would be reported in income for the current period.

For derivatives settled through a clearinghouse, we will need cash to post initial margin and are subject to increases in margin beyond changes in fair value. For bi-lateral derivative positions, net cash requirements are limited to changes in fair values, which may vary as a result of changes in interest rates, currency exchange rates, and other factors. Exposure to credit risk is limited to the carrying value; collateral may be required to limit credit risk. We have elected not to offset fair value amounts that arise from derivative positions with the same counterparty under a master netting arrangement.

Investment securities are exposed to various risks such as interest rate, market, credit, and liquidity risk. Fair values of securities fluctuate based on the nature and magnitude of changing market conditions; significant changes in market conditions could materially affect the portfolio’s value in the near term. We regularly monitor our portfolio for price changes, which might indicate potential impairments, and perform detailed reviews of fixed-maturity 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 condition, business prospects, or other factors, (ii) market-related factors, such as interest rates, or (iii) credit-related losses, where the present value of cash flows expected to be collected are lower than the amortized cost basis of the security.

We analyze our investment in debt securities that are in a loss position to determine if we intend to sell, or if it is more likely than not that we will be required to sell, the security prior to recovery and, if so, we write down the security to its current fair value, with the entire amount of the write-down recorded to earnings. To the extent that it is more likely than not that we will hold the debt security until recovery (which could be maturity), we determine if any of the decline in value is due to a credit loss (i.e., where the present value of future cash flows expected to be collected is lower than the amortized cost basis of the security) and, if so, we recognize that portion of the impairment as a component of net realized gains (losses) in the comprehensive income statement, with the difference (i.e., non-credit related impairment) recognized as part of our net unrealized gains (losses) in accumulated other comprehensive income.

Investment income consists of interest, dividends, and accretion net of amortization. Interest is recognized on an accrual basis using the effective yield method, except for asset backed securities, discussed below. Depending on the nature of the equity instruments, dividends are recorded at either the ex-dividend date or on an accrual basis.

Asset-backed securities, which are included in our fixed-maturity portfolio, are generally accounted for under the retrospective method. The retrospective method recalculates yield assumptions (based on changes in interest rates or cash flow expectations) historically to the inception of the investment holding period, and applies the required adjustment, if any, to the cost basis, with the offset recorded to investment income. The prospective method is used primarily for interest-only securities, non-investment-

App.-A-7

grade asset-backed securities, and certain asset-backed securities with sub-prime loan exposure or where there is a greater risk of non-performance and where it is possible the initial investment may not be substantially recovered. The prospective method requires a calculation of expected future repayments and resets the yield to allow for future period adjustments; no current period impact to investment income or the security’s cost is made based on the cash flow update. Prepayment assumptions are updated quarterly.

Realized gains (losses) on securities are computed based on the first-in first-out method and include write-downs on available-for-sale securities considered to have other-than-temporary declines in fair value (excluding non-credit related impairments), as well as holding period valuation changes on equity securities, hybrid instruments (e.g., securities with embedded options, where the option is a feature of the overall change in the value of the instrument), derivatives, and trading securities.

Insurance Premiums and Receivables Insurance premiums written are earned into income on a pro rata basis over the period of risk, based on a daily earnings convention. Accordingly, unearned premiums represent the portion of premiums written that are applicable to the unexpired risk. We provide insurance and related services to individuals and commercial accounts and offer a variety of payment plans. Generally, premiums are collected prior to providing risk coverage, minimizing our exposure to credit risk.

For our vehicle businesses, we perform a policy level evaluation to determine the extent to which the premiums receivable balance exceeds the unearned premiums balance. We then age this exposure to establish an allowance for doubtful accounts based on prior experience.

For our Property business, we do not establish an allowance for doubtful accounts since the risk of uncollectibility is relatively low. If premiums are unpaid by the policy due date, we provide advance notice of cancellation in accordance with each state’s requirements and, if the premiums remain unpaid after receipt of notice, cancel the policy and write off any remaining balance.

Deferred Acquisition Costs Deferred acquisition costs include commissions, premium taxes, and other variable underwriting and direct sales costs incurred in connection with the successful acquisition or renewal of insurance contracts. These acquisition costs, net of ceding allowances, are deferred and amortized over the policy period in which the related premiums are earned. We consider anticipated investment income in determining the recoverability of these costs. Management believes these costs will be fully recoverable in the near term.

We do not defer any advertising costs. Total advertising costs, which are expensed as incurred, for the years ended

December 31, were:



(millions)	Advertising Costs
2018	$	1,422.4
2017	1,005.4
2016	756.2

Loss and Loss Adjustment Expense Reserves Loss reserves represent the estimated liability on claims reported to us, plus reserves for losses incurred but not recorded (IBNR). These estimates are reported net of amounts estimated to be recoverable from salvage and subrogation. Loss adjustment expense reserves represent the estimated expenses required to settle these claims and losses. The methods of making estimates and establishing these reserves are reviewed regularly, and resulting adjustments are reflected in income in the current period. Such loss and loss adjustment expense reserves are susceptible to change in the near term.

Reinsurance Our reinsurance transactions include Regulated plans and Non-Regulated plans. The Regulated plans in which we participate are governed by insurance regulations and include state-provided reinsurance facilities (e.g., Michigan Catastrophic Claims Association, Florida Hurricane Catastrophe Fund, North Carolina Reinsurance Facility), as well as state-mandated involuntary plans for commercial vehicles (Commercial Automobile Insurance Procedures/Plans – CAIP) and federally regulated plans for flood (National Flood Insurance Program – NFIP); we act as a servicing agent for CAIP and as a participant in the “Write Your Own” program for the NFIP. The Non-Regulated plans are voluntary contractual arrangements primarily related to the transportation network company business written by our Commercial Lines segment and our Property business. Prepaid reinsurance premiums are earned on a pro rata basis over the period of risk, based on a daily earnings convention, which is consistent with premiums earned. See Note 7 – Reinsurance for further discussion.

Income Taxes The income tax provision is calculated under the balance sheet approach. Deferred tax assets and liabilities are recorded based on the difference between the financial statement and tax bases of assets and liabilities at the enacted tax rates. The principal items giving rise to such differences are investment securities (e.g., net unrealized gains (losses), net holding

App.-A-8

period gains (losses) on securities, write-downs on securities determined to be other-than-temporarily impaired), loss and loss adjustment expense reserves, unearned premiums reserves, deferred acquisition costs, property and equipment, intangible assets, and non-deductible accruals. We review our deferred tax assets regularly for recoverability. The effects of any changes in the tax rate are recorded to our provision for income taxes, including any changes on items initially recognized in accumulated other comprehensive income. See Note 5 – Income Taxes for further discussion.

Property and Equipment Property and equipment are recorded at cost, less accumulated depreciation, and include capitalized software developed or acquired for internal use. Depreciation is recognized over the estimated useful lives of the assets using accelerated methods for computer equipment and laptops and the straight-line method for all other fixed assets. We evaluate impairment whenever events or circumstances warrant such a review and write-off the impaired assets if appropriate.

The cost and useful lives for property and equipment at December 31, were:



($ in millions)	2018			2017			Useful Lives
Buildings, improvements, and integrated components	$	928.8		$	962.0		7-40 years
Capitalized software	327.0			273.1			3-10 years
Software licenses (internal use)	259.1			197.0			1-5 years
Land	177.0			203.4			NA
Computer equipment and laptops	123.2			92.8			3 years
All other property and equipment	349.8			331.9			3-15 years
Total cost	2,164.9			2,060.2
Accumulated depreciation	(1,033.2		)	(940.6		)
Balance at end of year	$	1,131.7		$	1,119.6
NA = Not applicable

At December 31, 2018 and 2017 , included in other assets in the consolidated balance sheets is $39.3 million and $5.3 million , respectively, of “held for sale” property, which represents the fair value of this property less the estimated costs to sell. The increase primarily reflects our decision to transition away from the use of service centers as part of our claims operating model.

Total capitalized interest, which primarily relates to capitalized software projects, for the years ended December 31, was:



(millions)	Capitalized Interest
2018	$	1.8
2017	2.8
2016	2.9

Goodwill and Intangible Assets Goodwill is the excess of the purchase price over the estimated fair value of the assets and liabilities acquired and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Substantially all of the goodwill recorded as of December 31, 2018 and 2017, relates to the April 1, 2015, acquisition of a controlling interest in ARX.

Intangible assets primarily arose through the acquisition of ARX and mainly represent the future premiums that will be recognized from the policies and agency relationships that existed at the acquisition date. The majority of the intangible assets have finite lives, which, at December 31, 2018, had a remaining life range from 1 to 10 years. See Note 16 – Goodwill and Intangible Assets for further discussion.

We evaluate our goodwill for impairment at least annually using a qualitative approach. If events or changes in circumstances indicate that the carrying value of goodwill or intangible assets may not be recoverable, we will evaluate such items for impairment using a quantitative approach.

Guaranty Fund Assessments We are subject to state guaranty fund assessments, which provide for the payment of covered claims or other insurance obligations of insurance companies deemed insolvent. These assessments are accrued after a formal determination of insolvency has occurred, and we have written the premiums on which the assessments will be based. Assessments that are available for recoupment from policyholders are capitalized when incurred; all other assessments are expensed.

App.-A-9

Fees and Other Revenues Fees and other revenues primarily represent fees collected from policyholders relating to installment charges in accordance with our bill plans, as well as late payment and insufficient funds fees and revenue from ceding commissions. Fees and other revenues are generally earned when invoiced, except for excess ceding commissions, which are earned over the policy period.

Service Revenues and Expenses Our service businesses provide insurance-related services. Service revenues and expenses from our commission-based businesses are recorded in the period in which they are earned or incurred. Service revenues generated from processing business for involuntary CAIP plans are earned on a pro rata basis over the term of the related policies. Service expenses related to these CAIP plans are expensed as incurred.

Equity-Based Compensation We issue time-based and performance-based restricted stock unit awards to key members of management as our form of equity compensation, and time-based restricted stock awards to non-employee directors. Collectively, we refer to these awards as “restricted equity awards.” Compensation expense for time-based restricted equity awards with installment vesting is recognized over each respective vesting period. For performance-based restricted equity awards, compensation expense is recognized over the respective estimated vesting periods. Dividend equivalent units are credited to outstanding restricted stock unit awards, both time-based and performance-based, at the time a dividend is paid to shareholders and paid upon vesting of the underlying award.

We record an estimate for expected forfeitures of restricted equity awards based on our historical forfeiture rates. In addition, we shorten the vesting periods of certain time-based restricted equity awards based on the “qualified retirement” provisions in our equity compensation plans, under which (among other provisions) if the participant satisfies certain age and years-of-service requirements, the vesting and distribution of 50% of outstanding time-based restricted equity awards accelerates upon reaching eligibility for a qualified retirement and shortly after the grant date for each subsequent award.

ARX also has nonqualified and incentive stock options outstanding that were issued prior to April 2015 as a form of equity compensation to certain of the officers and employees of ARX and its subsidiaries. These outstanding stock options are subject to the put/call features contained in the ARX stockholders’ agreement, pursuant to which The Progressive Corporation has the right, and can be required, to purchase all the shares underlying these awards in 2021. The vested stock options, and the shares issuable upon exercise of the stock options, are also subject to repurchase by ARX if the holder’s employment terminates. See Note 15 – Redeemable Noncontrolling Interest for further discussion. These stock options, which are treated for accounting purposes as liability awards, are expensed over the respective vesting periods based on the Black-Scholes value determined at period end.

The total compensation expense recognized for equity-based compensation, including both equity and liability awards, for the years ended December 31, was:



(millions)	2018		2017		2016
Pretax expense	$	77.2	$	95.4	$	85.2
Tax benefit ¹	16.2		33.4		29.8

¹ Calculated using the corporate federal tax rate of 21% for 2018 and 35% for 2017 and 2016.

Earnings Per Common Share Net income attributable to Progressive is reduced by cumulative preferred share dividends to determine net income available to common shareholders, and is used in our calculation of the per common share amounts. Basic earnings per common share is computed using the weighted average number of common shares outstanding during the reporting period, excluding unvested time-based and performance-based restricted equity awards that are subject to forfeiture. Diluted earnings per common share includes common stock equivalents assumed outstanding during the period. Our common stock equivalents include the incremental shares assumed to be issued for:


•	earned but unvested time-based restricted equity awards, and


•	performance-based restricted equity awards that satisfied certain contingency conditions for unvested common stock equivalents during the period; it is highly likely that these awards will continue to satisfy the conditions until the date of vesting.

App.-A-10

Supplemental Cash Flow Information Cash and cash equivalents include bank demand deposits and daily overnight reverse repurchase commitments of funds held in bank demand deposit accounts by ARX’s subsidiaries. The amount of reverse repurchase commitments held by ARX’s subsidiaries at December 31, 2018 , 2017 , and 2016 , were $117.3 million , $247.2 million , and $150.0 million , respectively. 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 subsidiaries of ARX are administrators. Non-cash activity includes declared but unpaid dividends.

For the years ended December 31, we paid the following:



(millions)	2018		2017		2016
Income taxes	$	702.6	$	715.6	$	459.4
Interest	154.0		146.3		139.2

New Accounting Standards

Issued

In August 2018, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU), which provides additional guidance on the requirements for capitalizing and amortizing implementation costs incurred in a cloud computing arrangement that does not include a software license. This ASU will be effective for fiscal years (including interim periods within those fiscal years) beginning after December 15, 2019 (2020 for calendar-year companies). We do not expect this standard to have a material impact on our financial condition, cash flows, or results of operations.

In August 2018, the FASB also issued an ASU, which amends the disclosure requirements for fair value measurements. The ASU requires companies to disclose the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The ASU also removes current disclosure requirements for the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. The ASU is effective for fiscal years beginning after December 15, 2019, and should be applied prospectively for the additions to the disclosure requirements and applied retrospectively to all periods presented for all other amendments. As permitted by the ASU, we elected to partially early adopt the removal of current disclosure requirements and will adopt the new disclosure requirements as of the effective date. We do not expect this standard to have an impact on our financial condition, cash flows, or results of operations.

In July 2018, the FASB issued an ASU, which provides targeted improvements to the new lease accounting guidance issued by the FASB in February 2016. The ASU, which eliminates the off-balance-sheet accounting for leases, will require lessees to report their operating leases as both an asset and liability on the statement of financial position and to disclose key information about leasing arrangements in the financial statement footnotes. Under the ASU, there will be no change to the recognition of lease expense in our results of operations. The ASU will be effective for fiscal years (including interim periods within those fiscal years) beginning after December 15, 2018 (2019 for calendar-year companies). Under the ASU, companies will have the option to apply the new lease requirements either as of the effective date (i.e., January 1, 2019), with comparative information presented in accordance with the previous standard, or on a modified retrospective basis, which would restate all financial statement information as of the beginning of the earliest period presented. We adopted this standard as of January 1, 2019, and recorded an increase to assets and liabilities of about $215 million , which reflects the present value of future operating lease payments; comparative information is presented in accordance with the previous standard. The ASU had no impact on our results of operations or cash flows.

In March 2017, the FASB issued an 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 (2019 for calendar-year companies), 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.

App.-A-11

In January 2017, the FASB issued an ASU, which eliminates the requirement to determine the implied fair value of goodwill in measuring an impairment loss. Upon adoption, the measurement of a goodwill impairment will represent the excess of the reporting unit’s carrying value over fair value, limited to the carrying value of goodwill. This ASU is effective for goodwill impairment tests in fiscal years beginning after December 15, 2019 (2020 for calendar-year companies), with early adoption permitted. We do not expect this standard to have a material impact on our financial condition or results of operations.

In June 2016, the FASB issued an ASU intended to improve the timing, and enhance the accounting and disclosure, of credit losses on financial assets. Additionally, this update will modify the existing accounting guidance related to the impairment evaluation for available-for-sale debt securities and will result in the creation of an allowance for credit losses as a contra asset account. The ASU will require cumulative-effect changes to retained earnings in the period of adoption, if any occur, and will also require prospective changes on previously recorded impairments. This ASU is effective for fiscal years (including interim periods within those fiscal years) beginning after December 15, 2019 (2020 for calendar-year companies), with early adoption permissible (including interim periods within that fiscal year) beginning after December 15, 2018 (2019 for calendar-year companies). While the ASU creates additional accounting complexities related to the recognition of the impairment losses, and subsequent recoveries, through an allowance for credit losses account, we do not expect the ASU to have a material impact on our current method of evaluating investment securities or reinsurance recoverables for credit losses or the timing or recognition of the amounts of the impairment losses.

Adopted

On January 1, 2018, we adopted the ASU intended to improve the recognition and measurement of financial instruments. Under this update, the changes in fair value of equity securities are recognized as a component of net income. Upon adoption, we recorded a cumulative-effect adjustment of $1.3 billion , which is net of taxes. The cumulative-effect adjustment represents the amount of after-tax net unrealized gains on equity securities that was recorded as part of accumulated other comprehensive income at December 31, 2017. The adoption of this ASU had no impact on comprehensive income. Consistent with our historical presentation, cash flows on equity securities will be reflected as investing activities in the Consolidated Statements of Cash Flows.

In the first quarter 2018, we adopted the ASU related to the reclassification of certain tax effects from accumulated other comprehensive income. This update provided companies with the option to reclassify disproportionate tax effects in accumulated other comprehensive income caused by the legislation commonly known as the Tax Cuts and Jobs Act of 2017 to retained earnings. We opted to make the reclassification, which resulted in a decrease to accumulated other comprehensive income and an offsetting increase to retained earnings of $4.3 million . This reclass was solely due to the effect of the change in the U.S. federal tax rate on our available-for-sale fixed-maturity securities and our hedges on forecasted transactions. There were no disproportionate tax effects related to our equity securities subsequent to adopting the ASU related to classification and measurement discussed above.

App.-A-12

2. INVESTMENTS

The following tables present the composition of our investment portfolio by major security type, consistent with our classification of how we manage, monitor, and measure the portfolio. Our securities are reported in our Consolidated Balance Sheets at fair value. The changes in fair value for our fixed-maturity securities (other than hybrid securities) are reported as a component of accumulated other comprehensive income, net of deferred income taxes, in our Consolidated Balance Sheets.

The net holding period gains (losses) reported below represent the inception-to-date changes in fair value. The changes in the net holding period gains (losses) between periods for the hybrid securities and, beginning in 2018 , equity securities are recorded as a component of net realized gains (losses) on securities in our Consolidated Statements of Comprehensive Income. Prior to 2018, the change in fair value of our equity securities was part of accumulated other comprehensive income (see Note 1 – Reporting and Accounting Policies for further discussion). For comparative purposes, the change in fair value of the hybrid securities that was recognized in 2017 and 2016 was reclassified out of "net realized gains (losses) on security sales" and into "net holding period gains (losses) on securities" to conform to the current year presentation.



($ in millions)	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Net Holding Period Gains (Losses)			Fair Value		% of Total Fair Value
December 31, 2018
Available-for-sale securities:
Fixed maturities:
U.S. government obligations	$	9,897.4	$	71.2	$	(52.1	)	$	0		$	9,916.5	29.5	%
State and local government obligations	1,654.6		7.3		(12.8		)	0			1,649.1		4.9
Corporate debt securities	8,808.5		13.6		(125.3		)	(2.5		)	8,694.3		25.9
Residential mortgage-backed securities	733.5		6.0		(5.1		)	0			734.4		2.2
Commercial mortgage-backed securities	3,332.8		7.8		(39.0		)	0			3,301.6		9.8
Other asset-backed securities	3,585.4		3.6		(11.8		)	0.1			3,577.3		10.7
Redeemable preferred stocks	243.7		5.9		(3.5		)	(7.8		)	238.3		0.7
Total fixed maturities	28,255.9		115.4		(249.6		)	(10.2		)	28,111.5		83.7
Short-term investments	1,795.9		0		0			0			1,795.9		5.4
Total available-for-sale securities	30,051.8		115.4		(249.6		)	(10.2		)	29,907.4		89.1
Equity securities:
Nonredeemable preferred stocks	1,002.6		0		0			31.3			1,033.9		3.1
Common equities	1,148.9		0		0			1,477.2			2,626.1		7.8
Total equity securities	2,151.5		0		0			1,508.5			3,660.0		10.9
Total portfolio ^1,2	$	32,203.3	$	115.4	$	(249.6	)	$	1,498.3		$	33,567.4	100.0	%

App.-A-13



($ in millions)	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Net Holding Period Gains (Losses)			Fair Value		% of Total Fair Value
December 31, 2017
Fixed maturities:
U.S. government obligations	$	6,688.8	$	1.1	$	(44.0	)	$	0		$	6,645.9	24.4	%
State and local government obligations	2,285.6		20.7		(9.3		)	0.1			2,297.1		8.4
Corporate debt securities	4,997.2		14.8		(14.4		)	0.1			4,997.7		18.3
Residential mortgage-backed securities	828.8		11.3		(3.4		)	0			836.7		3.1
Commercial mortgage-backed securities	2,760.1		11.8		(13.3		)	0			2,758.6		10.1
Other asset-backed securities	2,454.5		4.5		(4.5		)	0.2			2,454.7		9.0
Redeemable preferred stocks	194.9		17.8		(1.5		)	(0.2		)	211.0		0.8
Total fixed maturities	20,209.9		82.0		(90.4		)	0.2			20,201.7		74.1
Short-term investments	2,869.4		0		0			0			2,869.4		10.5
Total fixed maturities and short-term	23,079.3		82.0		(90.4		)	0.2			23,071.1		84.6
Equity securities:
Nonredeemable preferred stocks	698.6		114.0		(8.8		)	0			803.8		2.9
Common equities	1,499.0		1,901.0		(0.2		)	0			3,399.8		12.5
Total equity securities	2,197.6		2,015.0		(9.0		)	0			4,203.6		15.4
Total available-for-sale portfolio ^1,2	$	25,276.9	$	2,097.0	$	(99.4	)	$	0.2		$	27,274.7	100.0	%

¹ Our portfolio reflects the effect of unsettled security transactions; at December 31, 2018 , $5.9 million was included in “other liabilities,” compared to $5.8 million in “other assets” at December 31, 2017 .

² The total fair value of the portfolio at December 31, 2018 and 2017 included $2.9 billion and $1.6 billion , respectively, of securities held in a consolidated, non-insurance subsidiary of the holding company, net of any unsettled security transactions.

At December 31, 2018 , bonds and certificates of deposit in the principal amount of $250.8 million were on deposit to meet state insurance regulatory and/or rating agency requirements. We did not hold any securities of any one issuer, excluding U.S. government obligations, with an aggregate cost or fair value exceeding 10% of total shareholders’ equity at December 31, 2018 or 2017 . At December 31, 2018 , we did not hold any debt securities that were non-income producing during the preceding 12 months.

Short-Term Investments Our short-term investments may include commercial paper and other investments that are expected to mature or are redeemable within one year.

We did not have any open repurchase or reverse repurchase transactions in our short-term investment portfolio at December 31, 2018 or 2017 . To the extent we enter into repurchase or reverse repurchase transactions, and consistent with past practice, we would elect not to offset these transactions and would report them on a gross basis on our balance sheets despite the option to elect to offset these transactions as long as they were with the same counterparty and subject to an enforceable master netting arrangement.

Hybrid Securities Included in our fixed maturities are hybrid securities, which are reported at fair value at December 31 :



(millions)	2018		2017
Fixed Maturities:
State and local government obligations	$	3.6	$	6.1
Corporate debt securities	158.9		99.8
Other asset-backed securities	4.5		6.7
Redeemable preferred stocks	77.7		30.3
Total hybrid securities	$	244.7	$	142.9

Certain securities in our portfolio are accounted for as hybrid securities because they contain embedded derivatives that are not deemed to be clearly and closely related to the host investments. Since the embedded derivatives (e.g., change-in-control put option, debt-to-equity conversion, or any other feature unrelated to the credit quality or risk of default of the issuer that could

App.-A-14

impact the amount or timing of our expected future cash flows) do not have observable intrinsic values, we have elected to record the changes in fair value of these securities through income as realized gains or losses.

Fixed Maturities The composition of fixed maturities by maturity at December 31, 2018 , was:



(millions)	Cost		Fair Value
Less than one year	$	4,880.1	$	4,867.0
One to five years	17,719.4		17,652.0
Five to ten years	5,581.3		5,517.5
Ten years or greater	75.1		75.0
Total	$	28,255.9	$	28,111.5

Asset-backed securities are classified in the maturity distribution table based upon their projected cash flows. All other securities that 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 December 31, 2018 , we had $249.6 million of gross unrealized losses in our fixed-maturity securities. A review of these securities indicated that the issuers were current with respect to their interest obligations and that there was no evidence of deterioration of the current cash flow projections that would indicate we would not receive the remaining principal at maturity.

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)	Total No. of Sec.	Total Fair Value		Gross Unrealized Losses			No. of Sec.	Fair Value		Unrealized Losses			No. of Sec.	Fair Value		Unrealized Losses
December 31, 2018
Fixed maturities:
U.S. government obligations	51	$	4,438.0	$	(52.1	)	2	$	126.6	$	(0.1	)	49	$	4,311.4	$	(52.0	)
State and local government obligations	299	972.4		(12.8		)	49	192.7		(0.3		)	250	779.7		(12.5		)
Corporate debt securities	368	6,723.3		(125.3		)	133	2,613.3		(33.4		)	235	4,110.0		(91.9		)
Residential mortgage-backed securities	228	450.2		(5.1		)	32	248.8		(0.8		)	196	201.4		(4.3		)
Commercial mortgage-backed securities	140	2,328.5		(39.0		)	48	741.2		(8.9		)	92	1,587.3		(30.1		)
Other asset-backed securities	203	2,691.3		(11.8		)	84	1,551.7		(3.2		)	119	1,139.6		(8.6		)
Redeemable preferred stocks	3	48.5		(3.5		)	1	18.9		(0.6		)	2	29.6		(2.9		)
Total fixed maturities	1,292	$	17,652.2	$	(249.6	)	349	$	5,493.2	$	(47.3	)	943	$	12,159.0	$	(202.3	)

App.-A-15



	Total No. of Sec.	Total Fair Value		Gross Unrealized Losses			Less than 12 Months						12 Months or Greater
($ in millions)	Total No. of Sec.	Total Fair Value		Gross Unrealized Losses			No. of Sec.	Fair Value		Unrealized Losses			No. of Sec.	Fair Value		Unrealized Losses
December 31, 2017
Fixed maturities:
U.S. government obligations	58	$	5,817.0	$	(44.0	)	41	$	4,869.3	$	(34.6	)	17	$	947.7	$	(9.4	)
State and local government obligations	358	1,200.3		(9.3		)	230	737.6		(4.4		)	128	462.7		(4.9		)
Corporate debt securities	222	2,979.4		(14.4		)	171	2,072.9		(9.1		)	51	906.5		(5.3		)
Residential mortgage-backed securities	201	300.9		(3.4		)	30	75.1		(0.2		)	171	225.8		(3.2		)
Commercial mortgage-backed securities	105	1,682.3		(13.3		)	63	1,221.2		(5.9		)	42	461.1		(7.4		)
Other asset-backed securities	197	1,837.3		(4.5		)	134	1,377.8		(3.3		)	63	459.5		(1.2		)
Redeemable preferred stocks	2	21.8		(1.5		)	1	10.8		(0.1		)	1	11.0		(1.4		)
Total fixed maturities	1,143	13,839.0		(90.4		)	670	10,364.7		(57.6		)	473	3,474.3		(32.8		)
Equity securities:
Nonredeemable preferred stocks	4	127.8		(8.8		)	1	56.5		(0.5		)	3	71.3		(8.3		)
Common equities	19	13.4		(0.2		)	18	13.4		(0.2		)	1	0		0
Total equity securities	23	141.2		(9.0		)	19	69.9		(0.7		)	4	71.3		(8.3		)
Total portfolio	1,166	$	13,980.2	$	(99.4	)	689	$	10,434.6	$	(58.3	)	477	$	3,545.6	$	(41.1	)

During 2018 , the number of securities in our fixed-maturity portfolio with unrealized losses increased slightly as a result of rising interest rates. We had no material decreases in valuation as a result of credit rating downgrades during the year and all of the securities in the table above are current with respect to required principal and interest payments.

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



	December 31,
(millions)	2018			2017
Fixed maturities:
Residential mortgage-backed securities	$	(19.7	)	$	(19.7	)
Commercial mortgage-backed securities	(0.1		)	(0.3		)
Total fixed maturities	$	(19.8	)	$	(20.0	)

App.-A-16

The following tables provide rollforwards of the amounts related to credit losses recognized in earnings for the periods ended December 31, 2018 , 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:



(millions)	Residential Mortgage- Backed		Commercial Mortgage- Backed		Total
Total at December 31, 2017	$	0	$	0.5	$	0.5
Credit losses for which an OTTI was not previously recognized	0		0		0
Reductions for securities sold/matured	0		0		0
Change in recoveries of future cash flows expected to be collected ¹	0		0		0
Total at December 31, 2018	$	0	$	0.5	$	0.5



(millions)	Residential Mortgage- Backed			Commercial Mortgage- Backed			Total
Total 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	(0.2		)	0			(0.2		)
Total at December 31, 2017	$	0		$	0.5		$	0.5



(millions)	Residential Mortgage- Backed			Commercial Mortgage- Backed		Total
Total 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	(1.3		)	0		(1.3		)
Total at December 31, 2016	$	11.1		$	0.4	$	11.5

¹ Reflects expected recovery of prior period 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 year ended December 31, 2018 .

App.-A-17

Realized Gains (Losses) The components of net realized gains (losses) for the years ended December 31, were:



(millions)	2018			2017			2016
Gross realized gains on security sales
Available-for-sale securities:
U.S. government obligations	$	6.7		$	6.2		$	24.6
State and local government obligations	9.5			10.5			16.0
Corporate and other debt securities	2.4			20.3			43.3
Residential mortgage-backed securities	0			23.8			2.5
Commercial mortgage-backed securities	2.0			4.9			13.3
Other asset-backed securities	0.1			0.3			0
Redeemable preferred stocks	4.5			8.5			20.9
Short-term investments	0			0			0.1
Total available-for-sale securities	25.2			74.5			120.7
Equity securities:
Nonredeemable preferred stocks	4.1			58.4			11.9
Common equities	286.6			43.0			61.3
Total equity securities	290.7			101.4			73.2
Subtotal gross realized gains on security sales	315.9			175.9			193.9
Gross realized losses on security sales
Available-for-sale securities:
U.S. government obligations	(98.7		)	(28.7		)	(2.4		)
State and local government obligations	(2.9		)	(0.1		)	(1.6		)
Corporate and other debt securities	(10.4		)	(5.1		)	(2.5		)
Residential mortgage-backed securities	(0.1		)	(0.4		)	(0.2		)
Commercial mortgage-backed securities	(6.3		)	(5.3		)	(5.6		)
Other asset-backed securities	(1.1		)	(0.4		)	0
Redeemable preferred stocks	(0.1		)	(6.4		)	(6.6		)
Short-term investments	0			(0.2		)	(0.1		)
Total available-for-sale securities	(119.6		)	(46.6		)	(19.0		)
Equity securities:
Nonredeemable preferred stocks	(3.9		)	(5.9		)	(5.3		)
Common equities	(21.7		)	(12.2		)	(15.7		)
Total equity securities	(25.6		)	(18.1		)	(21.0		)
Subtotal gross realized losses on security sales	(145.2		)	(64.7		)	(40.0		)
Net realized gains (losses) on security sales
Available-for-sale securities:
U.S. government obligations	(92.0		)	(22.5		)	22.2
State and local government obligations	6.6			10.4			14.4
Corporate and other debt securities	(8.0		)	15.2			40.8
Residential mortgage-backed securities	(0.1		)	23.4			2.3
Commercial mortgage-backed securities	(4.3		)	(0.4		)	7.7
Other asset-backed securities	(1.0		)	(0.1		)	0
Redeemable preferred stocks	4.4			2.1			14.3
Short-term investments	0			(0.2		)	0
Total available-for-sale securities	(94.4		)	27.9			101.7
Equity securities:
Nonredeemable preferred stocks	0.2			52.5			6.6
Common equities	264.9			30.8			45.6
Total equity securities	265.1			83.3			52.2
Litigation settlements and other gains (losses)	0			1.2			0.4
Subtotal net realized gains (losses) on security sales	170.7			112.4			154.3
Net holding period gains (losses)
Hybrid securities	(10.4		)	(1.6		)	2.1
Equity securities	(497.5		)	0			0
Derivatives	0			0			(20.0		)
Subtotal net holding period gains (losses)	(507.9		)	(1.6		)	(17.9		)
Other-than-temporary impairment losses
Fixed maturities:
Commercial mortgage-backed securities	0			(0.4		)	0
Redeemable preferred stocks	0			0			(25.3		)
Total fixed maturities	0			(0.4		)	(25.3		)
Equity securities:
Common equities	0			(11.2		)	(0.3		)
Subtotal investment other-than-temporary impairment losses	0			(11.6		)	(25.6		)
Other asset impairment	(68.3		)	(49.6		)	(59.7		)
Subtotal other-than-temporary impairment losses	(68.3		)	(61.2		)	(85.3		)
Total net realized gains (losses) on securities	$	(405.5	)	$	49.6		$	51.1

App.-A-18

Gross realized gains in 2018 were predominantly in common equities as we sold a portion of our holdings twice during the year in an effort to reduce the portfolio’s overall risk profile. Gross realized losses in 2018 were primarily in treasury securities, within our fixed-maturity portfolio. Treasury securities are used to manage our overall portfolio duration and with the volatility in interest rates during 2018, we were active in managing the portfolio’s duration to limit potentially significant negative impacts to the fixed-maturity portfolio’s overall valuation. Also included are holding period gains and losses, related to valuation changes on equity securities and hybrid securities, recoveries from litigation settlements related to investments, and 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. See Note 5 - Income Taxes for the tax benefits related to these investments.

The following table reflects our holding period realized gains (losses) on equity securities recognized for the year ended December 31, 2018 for equity securities held at year end:



(millions)	2018
Total net gains (losses) recognized during the period on equity securities	$	(232.4	)
Less: Net gains (losses) recognized on equity securities sold during the period	265.1
Net holding period gains (losses) recognized during the period on equity securities held at period end	$	(497.5	)

Note: Comparative disclosure for the prior year period is not meaningful.

Net Investment Income The components of net investment income for the years ended December 31, were:



(millions)	2018			2017			2016
Available-for-sale securities:
Fixed maturities:
U.S. government obligations	$	196.8		$	72.7		$	18.2
State and local government obligations	37.7			51.5			52.3
Foreign government obligations	0			0.3			0.4
Corporate debt securities	217.9			125.2			110.7
Residential mortgage-backed securities	27.6			34.7			47.3
Commercial mortgage-backed securities	93.9			79.6			81.6
Other asset-backed securities	75.7			47.1			28.0
Redeemable preferred stocks	12.3			11.8			14.9
Total fixed maturities	661.9			422.9			353.4
Short-term investments	52.9			37.8			19.7
Total available-for-sale securities	714.8			460.7			373.1
Equity securities:
Nonredeemable preferred stocks	45.9			44.1			48.6
Common equities	59.8			58.3			57.2
Total equity securities	105.7			102.4			105.8
Investment income	820.5			563.1			478.9
Investment expenses	(24.3		)	(23.9		)	(22.4		)
Net investment income	$	796.2		$	539.2		$	456.5

The amount of investment income (interest and dividends) we recognize varies based on the average assets held during the year and the book yields of the securities in our portfolio. The increases in net investment income in 2018 and 2017, were due to a combination of an increase in average assets and an increase in portfolio yields. The increase in average assets was due to strong underwriting growth and profitability, as well as the proceeds from debt and preferred stock issuances. The increase in portfolio yields was a result of our decisions to hold a short-duration portfolio, which allowed us to reinvest significant maturities and paydowns of principal at higher yields, and to increase the portfolio duration from 2.2 years at December 31, 2016 to 2.5 years at December 31, 2017 , and finally to 2.8 years at December 31, 2018 , as interest rates generally rose.

App.-A-19

Trading Securities At December 31, 2018 and 2017 , we did not hold any trading securities and we did not have any net realized gains (losses) on trading securities for the years ended December 31, 2018 , 2017 , and 2016 .

Derivative Instruments At December 31, 2018 , 2017 , and 2016 , we had no open derivative positions.

During 2018, we reclassified $1.0 million of net unrealized losses from accumulated other comprehensive income to interest expense on our closed debt issuance cash flow hedges, compared to net unrealized gains of $0.3 million and $1.9 million during 2017 and 2016, respectively.

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 unrealized loss of $8.0 million in April 2017.

From time to time, we use interest rate swaps and treasury futures contracts to manage the fixed-income portfolio duration. During 2016 , we closed interest rate swaps and treasury futures contracts with notional values of $750 million and $135 million , respectively. We recorded a net realized loss of $19.0 million on the interest rate swaps and a net realized gain of $0.3 million on the treasury futures.

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, which are continually priced on a daily basis, 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.

App.-A-20

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
December 31, 2018
Fixed maturities:
U.S. government obligations	$	9,916.5	$	0	$	0	$	9,916.5	$	9,897.4
State and local government obligations	0		1,649.1		0		1,649.1		1,654.6
Corporate debt securities	0		8,694.3		0		8,694.3		8,808.5
Subtotal	9,916.5		10,343.4		0		20,259.9		20,360.5
Asset-backed securities:
Residential mortgage-backed	0		734.4		0		734.4		733.5
Commercial mortgage-backed	0		3,301.6		0		3,301.6		3,332.8
Other asset-backed	0		3,577.3		0		3,577.3		3,585.4
Subtotal asset-backed securities	0		7,613.3		0		7,613.3		7,651.7
Redeemable preferred stocks:
Financials	0		78.2		0		78.2		79.3
Utilities	0		0		0		0		0
Industrials	9.5		150.6		0		160.1		164.4
Subtotal redeemable preferred stocks	9.5		228.8		0		238.3		243.7
Total fixed maturities	9,926.0		18,185.5		0		28,111.5		28,255.9
Short-term investments	1,722.1		73.8		0		1,795.9		1,795.9
Total available-for-sale securities	11,648.1		18,259.3		0		29,907.4		30,051.8
Equity securities:
Nonredeemable preferred stocks:
Financials	71.9		887.1		25.1		984.1		951.6
Utilities	0		44.8		0		44.8		46.0
Industrials	0		0		5.0		5.0		5.0
Subtotal nonredeemable preferred stocks	71.9		931.9		30.1		1,033.9		1,002.6
Common equities:
Common stocks	2,625.8		0		0		2,625.8		1,148.6
Other risk investments	0		0		0.3		0.3		0.3
Subtotal common equities	2,625.8		0		0.3		2,626.1		1,148.9
Total equity securities	2,697.7		931.9		30.4		3,660.0		2,151.5
Total portfolio	$	14,345.8	$	19,191.2	$	30.4	$	33,567.4	$	32,203.3
Debt	$	0	$	4,532.3	$	0	$	4,532.3	$	4,404.9

App.-A-21



	Fair Value
(millions)	Level 1		Level 2		Level 3		Total		Cost
December 31, 2017
Fixed maturities:
U.S. government obligations	$	6,645.9	$	0	$	0	$	6,645.9	$	6,688.8
State and local government obligations	0		2,297.1		0		2,297.1		2,285.6
Corporate debt securities	0		4,997.7		0		4,997.7		4,997.2
Subtotal	6,645.9		7,294.8		0		13,940.7		13,971.6
Asset-backed securities:
Residential mortgage-backed	0		836.7		0		836.7		828.8
Commercial mortgage-backed	0		2,758.6		0		2,758.6		2,760.1
Other asset-backed	0		2,454.7		0		2,454.7		2,454.5
Subtotal asset-backed securities	0		6,050.0		0		6,050.0		6,043.4
Redeemable preferred stocks:
Financials	0		64.1		0		64.1		61.3
Utilities	0		11.4		0		11.4		10.1
Industrials	0		135.5		0		135.5		123.5
Subtotal redeemable preferred stocks	0		211.0		0		211.0		194.9
Total fixed maturities	6,645.9		13,555.8		0		20,201.7		20,209.9
Short-term investments	1,824.4		1,045.0		0		2,869.4		2,869.4
Total fixed maturities and short-term	8,470.3		14,600.8		0		23,071.1		23,079.3
Equity securities:
Nonredeemable preferred stocks:
Financials	80.6		718.2		0		798.8		693.6
Utilities	0		0		0		0		0
Industrials	0		0		5.0		5.0		5.0
Subtotal nonredeemable preferred stocks	80.6		718.2		5.0		803.8		698.6
Common equities:
Common stocks	3,399.5		0		0		3,399.5		1,498.7
Other risk investments	0		0		0.3		0.3		0.3
Subtotal common equities	3,399.5		0		0.3		3,399.8		1,499.0
Total equity securities	3,480.1		718.2		5.3		4,203.6		2,197.6
Total available-for-sale portfolio	$	11,950.4	$	15,319.0	$	5.3	$	27,274.7	$	25,276.9
Debt	$	0	$	3,606.5	$	37.1	$	3,643.6	$	3,306.3

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.

Our short-term security holdings classified as Level 1 are highly liquid, actively marketed, and have a very short duration, primarily 90 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 securities issued by municipalities that contain either liquidity facilities or mandatory put features within one year.

At December 31, 2018 , vendor-quoted prices represented 79% of our Level 1 classifications (excluding short-term investments), compared to 66% at December 31, 2017 . 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.

App.-A-22

At December 31, 2018 , vendor-quoted prices comprised 99% of our Level 2 classifications (excluding short-term investments), while dealer-quoted prices represented 1% , compared to 98% and 2% at December 31, 2017 , respectively. In our process for selecting a source (e.g., dealer or 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 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 30 days or less to redemption, we believe that acquisition price is the best estimate of fair value.

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

App.-A-23

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 December 31, 2018 and 2017 , we did not have any securities in our fixed-maturity portfolio listed as Level 3.

At December 31, 2018 , we owned two privately held nonredeemable preferred securities with a combined value of $30.1 million that were priced internally, compared to one private nonredeemable preferred security with a value of $5.0 million that was priced internally at December 31, 2017 . At December 31, 2018 , and 2017 , we held one Level 3 other risk investment with a value of $0.3 million .

We review the prices from our external sources for reasonableness using internally developed assumptions to derive prices for the Level 3 securities, which are then compared to the prices we received. During 2018 or 2017 , 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. 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.

The following tables provide a summary of changes in fair value associated with Level 3 assets for the years ended December 31, 2018 and 2017 :



	Level 3 Fair Value
(millions)	Fair Value at Dec. 31, 2017		Calls/ Maturities/ Paydowns		Purchases		Sales		Net Realized (Gain)/Loss on Sales		Change in Valuation		Net Transfers In (Out)		Fair Value at Dec. 31, 2018
Fixed maturities:
Asset-backed securities:
Commercial mortgage-backed	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Equity securities:
Nonredeemable preferred stocks:
Financials	0		0		25.1		0		0		0		0		25.1
Industrials	5.0		0		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	$	5.3	$	0	$	25.1	$	0	$	0	$	0	$	0	$	30.4

App.-A-24



	Level 3 Fair Value
(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 Dec. 31, 2017
Fixed maturities:
Asset-backed securities:
Commercial mortgage-backed	$	0.3	$	(0.3	)	$	0	$	0	$	0	$	0	$	0	$	0
Equity securities:
Nonredeemable preferred stocks:
Financials	0		0			0		0		0		0		0		0
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

The following tables provide a summary of the quantitative information about Level 3 fair value measurements for our applicable securities at December 31 :



	Quantitative Information about Level 3 Fair Value Measurements
($ in millions)	Fair Value at Dec. 31, 2018		Valuation Technique	Unobservable Input	Unobservable Input Assumption
Equity securities:
Nonredeemable preferred stocks:
Financials ¹	$	25.1	Internal price	Unadjusted purchase price	9.0
Industrials ²	5.0		Internal price	Price-to-sales ratio	5.5
Subtotal Level 3 securities	30.1
Pricing exemption securities ³	0.3
Total Level 3 securities	$	30.4

¹ The security was internally-priced since it is privately held. The security was purchased during December 2018 and the value at December 31, 2018 reflects the unadjusted purchase price per share.

² The security was internally-priced since it is privately held. The price at December 31, 2018 , was calculated using a price-to-sales ratio.

³ The unobservable input is not reasonably available to us.



	Quantitative Information about Level 3 Fair Value Measurements
($ in millions)	Fair Value at Dec. 31, 2017		Valuation Technique	Unobservable Input	Unobservable Input Assumption
Equity securities:
Nonredeemable preferred stocks:
Financials	$	0	NA	NA	NA
Industrials ¹	5.0		Internal price	Unadjusted purchase price	3.9
Subtotal Level 3 securities	5.0
Pricing exemption securities ²	0.3
Total Level 3 securities	$	5.3

NA= Not Available

¹ The security was internally-priced since it is privately held. The security was purchased during third quarter 2017 and the value at December 31, 2017, reflects the unadjusted purchase price per share.

² The unobservable input is not reasonably available to us.

App.-A-25

4. DEBT

Debt at December 31, consisted of:



	2018				2017
(millions)	Carrying Value		Fair Value		Carrying Value		Fair Value
3.75% Senior Notes due 2021 (issued: $500.0, August 2011)	$	499.1	$	506.5	$	498.8	$	520.7
2.45% Senior Notes due 2027 (issued: $500.0, August 2016)	496.5		455.5		496.1		477.9
6 5/8% Senior Notes due 2029 (issued: $300.0, March 1999)	296.4		368.5		296.1		382.3
4.00% Senior Notes due 2029 (issued: $550.0, October 2018)	544.5		562.4		0		0
6.25% Senior Notes due 2032 (issued: $400.0, November 2002)	395.5		496.6		395.3		516.9
4.35% Senior Notes due 2044 (issued: $350.0, April 2014)	346.6		350.2		346.5		388.7
3.70% Senior Notes due 2045 (issued: $400.0, January 2015)	395.3		366.7		395.2		402.9
4.125% Senior Notes due 2047 (issued: $850.0, April 2017)	841.4		831.9		841.2		917.1
4.20% Senior Notes due 2048 (issued: $600.0, March 2018)	589.6		594.0		0		0
Other debt instruments ¹	0		0		37.1		37.1
Total	$	4,404.9	$	4,532.3	$	3,306.3	$	3,643.6

¹ Consist of term loans issued by ARX prior to The Progressive Corporation acquiring a controlling interest in 2015. The repayment was funded in part with proceeds from fixed-rate loans made to ARX by The Progressive Corporation. These intercompany transactions were eliminated in consolidation.

Aggregate required principal payments on debt outstanding at December 31, 2018, are as follows:



(millions)
Year	Payments
2019	$	0
2020	0
2021	500
2022	0
2023	0
Thereafter	3,950
Total	$	4,450

All of the outstanding debt was issued by The Progressive Corporation and includes amounts that were borrowed and contributed to the capital of its insurance subsidiaries or used, or made available for use, for other business purposes. Fair values for these debt instruments are obtained from external sources. There are no restrictive financial covenants or credit rating triggers on the outstanding debt.

Interest on all debt is payable semiannually at the stated rates. All principal is due at the maturity stated in the tables above. Each note is redeemable, in whole or in part, at any time; however, the redemption price will equal the greater of the principal amount of the note or a “make whole” amount calculated by reference to the present values of remaining scheduled principal and interest payments under the note.

We issued $550 million of 4.00% Senior Notes due 2029 in October 2018, $600 million of 4.20% Senior Notes due 2048 in March 2018, and $850 million of 4.125% Senior Notes due 2047 in April 2017, in underwritten public offerings. The net proceeds from these issuances, after deducting underwriters’ discounts, commissions, and other issuance costs, were approximately $544.5 million , $589.5 million , and $841.1 million , respectively.

App.-A-26

Prior to certain issuances of our debt securities, we entered into forecasted transactions to hedge against possible rises in interest rates. When the contracts were closed upon the issuance of the applicable debt securities, we recognized the unrealized gains (losses) on these contracts as part of accumulated other comprehensive income (see Note 1 – Reporting and Accounting Policies for further discussion). These unrealized gains (losses) are being amortized as adjustments to interest expense over the life of the related notes. The following table shows the original gain (loss) recognized at debt issuance and the unamortized balance at December 31, 2018 , on a pretax basis:



(millions)	Unrealized Gain (Loss) at Debt Issuance			Unamortized Balance at December 31, 2018
3.75% Senior Notes	$	(5.1	)	$	(1.5	)
6 5/8% Senior Notes	(4.2		)	(2.6		)
6.25% Senior Notes	5.1			3.5
4.35% Senior Notes	(1.6		)	(1.5		)
3.70% Senior Notes	(12.9		)	(11.9		)
4.125% Senior Notes	(8.0		)	(7.8		)

During 2018, The Progressive Corporation entered into a new line of credit with PNC Bank, National Association (PNC) in the maximum principal amount of $250 million . The prior line of credit, entered into in 2017, expired in April 2018. The line of credit has the same terms and conditions of the previous line of credit. 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, 2019, the expiration date of the line of credit. Prepayments are permitted without penalty. The line of credit is uncommitted and, as such, all advances are subject to PNC’s discretion. We had no borrowings under either line of credit in 2018 or 2017.

5. INCOME TAXES

The components of our income tax provision were as follows:



(millions)	2018			2017			2016
Current tax provision
Federal	$	673.1		$	680.9		$	469.6
State	21.5			12.8			12.7
Deferred tax expense (benefit)
Federal	(145.9		)	(149.4		)	(66.3		)
State	(6.1		)	(3.5		)	(2.5		)
Total income tax provision	$	542.6		$	540.8		$	413.5

App.-A-27

The provision for income taxes in the accompanying consolidated statements of comprehensive income differed from the statutory rate as follows:



($ in millions)	2018					2017					2016
Income before income taxes	$	3,163.6				$	2,138.9				$	1,470.7
Tax at statutory federal rate	$	664.4		21	%	$	748.6		35	%	$	514.8		35	%
Tax effect of:
Tax credits ¹	(76.3		)	(2	)	(52.4		)	(2	)	(62.2		)	(4	)
Stock-based compensation ²	(25.1		)	(1	)	(25.1		)	(1	)	0			0
Tax-deductible dividends	(14.6		)	(1	)	(9.7		)	0		(6.1		)	0
Dividends received deduction ^{3, 4}	(9.7		)	0		(20.7		)	(1	)	(22.6		)	(2	)
Exempt interest income ⁴	(5.9		)	0		(16.9		)	(1	)	(15.7		)	(1	)
Nondeductible compensation expense ⁵	(0.2		)	0		10.1			0		0.5			0
Net deferred tax liability revaluation ⁶	0			0		(99.5		)	(5	)	0			0
State income taxes, net of federal taxes	12.2			0		6.0			0		6.6			0
Other items, net	(2.2		)	0		0.4			0		(1.8		)	0
Total income tax provision	$	542.6		17	%	$	540.8		25	%	$	413.5		28	%

¹ Includes $ 71.0 million , $ 48.7 million , and $58.7 million for 2018, 2017, and 2016, respectively, of benefits on investments in federal renewable energy tax credit funds.

² Represents excess tax benefits associated with share-based payments awards. Prior to 2017, these excess tax benefits were recorded directly to additional paid-in capital under the then existing accounting guidance.

³ 2018 amount reflects a dividends received deduction percentage of 50% under the 2017 Tax Act. In 2017 and prior years the deduction percentage was 70% .

⁴ 2018 amounts reflect a proration percentage of 25% for such income attributable to investments held by our insurance companies. In 2017 and prior years the proration percentage was 15% .

⁵ Decrease in 2018 reflects our updated interpretation regarding compensation that qualifies for deduction under the 2017 Tax Act based on additional guidance issued. Increase in 2017 primarily reflected our initial interpretation regarding the deductibility of such compensation. See further discussion below.

⁶ Pursuant to the 2017 Tax Act.

We understand that the sponsor of three federal renewable energy tax credit funds in which we invested from 2016 through 2018, along with the owners of the sponsor, are under investigation by federal authorities. We have also learned that the sponsor and certain related entities filed for bankruptcy protection in early February 2019 and, since then, federal authorities filed a forfeiture action in federal court against certain real estate and related entities owned, directly or indirectly, by the sponsor’s owners. The forfeiture action alleges that the sponsor and its owners engaged in fraud in connection with its operations and the establishment of certain tax credit funds. Our investment in these transactions generated approximately $150 million of tax benefits. We cannot predict if these matters will lead to an impact on the validity of any portion of these federal tax credits or require an additional write down on the related investments, which were valued at $24.3 million , in the aggregate, as of December 31, 2018.

On December 22, 2017, legislation commonly known as the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) was signed into law. One of the provisions of the 2017 Tax Act reduced the corporate federal income tax rate from 35% to 21% effective January 1, 2018. Pursuant to current accounting guidance, all deferred tax assets and liabilities at December 31, 2017, were revalued to recognize the tax rate that is expected to apply when the tax effects are ultimately recognized in future periods. The impact of revaluing the deferred tax assets and liabilities from 35% to 21% was a net reduction to income tax expense of $99.5 million in 2017, as disclosed in the table above. This revaluation adjustment included a $275.7 million reduction related to the deferred tax liability associated with the net unrealized gains on our investment portfolio, which was originally recorded as a component of other comprehensive income and not through the tax provision. The remaining $176.2 million , which increased the tax provision, was associated with our other deferred tax assets and liabilities identified in the table below.

As of December 31, 2018, we updated our accounting for the tax effects of the enactment of the 2017 Tax Act, which we were not able to fully complete at December 31, 2017, with regards to the following:

•

We reversed $3.9 million of the $4.5 million provisional tax amount that we recorded in 2017 related to deductibility of compensation expense for certain covered executives due to uncertainty surrounding the appropriate tax treatment of outstanding performance-based awards at that time. The IRS issued additional guidance during 2018 that clarified the treatment of these awards. We also recorded a benefit of $0.3 million in 2018 related to compensation expense for time-based awards granted to the chief financial officer that we had treated as nondeductible at December 31, 2017. The benefit of both of these amounts is reflected in the nondeductible compensation expense line item in the table above for the 2018 year.

App.-A-28

•

We recorded an increase to the deferred tax asset for loss and loss adjustment expense reserves of $67.1 million and an offsetting deferred tax liability in the same amount for the transition adjustment, which is recognized over an 8-year period as required by the 2017 Tax Act. At December 31, 2017, we did not record any amounts related to the changes in loss reserve discounting required by the 2017 Tax Act since the IRS had not yet published new discount factors based on loss payment patterns and interest rates determined under the 2017 Tax Act and we were unable to make a reasonable estimate. The IRS published the new discount factors in 2018, which allowed us to compute the adjustments. The impact of these amounts are included in the 2018 deferred tax assets and liabilities and are reflected in the table below.

Deferred income taxes reflect the effect for financial statement reporting purposes of temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities. The following table shows the components of the net deferred tax asset (liability) at December 31, 2018 and 2017 , respectively. As noted above, the federal deferred tax assets (liabilities) at December 31, 2017, have been revalued to reflect the new 21% federal corporate income tax rate under the 2017 Tax Act.



(millions)	2018			2017
Federal deferred tax assets:
Unearned premiums reserve	$	439.9		$	368.9
Non-deductible accruals	169.3			166.0
Loss and loss adjustment expense reserves	134.6			48.4
Net unrealized losses on fixed-maturity securities	28.2			0
Hedges on forecasted transactions	4.6			4.8
Other	16.2			7.3
Federal deferred tax liabilities:
Net holding period gains on equity securities	(316.8		)	0
Deferred acquisition costs	(199.8		)	(163.9		)
Property and equipment	(85.7		)	(75.5		)
Loss and loss adjustment expense reserve transition adjustment	(58.5		)	0
Intangible assets	(52.2		)	(66.6		)
Investment basis differences	(43.3		)	(5.5		)
Prepaid expenses	(4.7		)	(7.1		)
Deferred gain on extinguishment of debt	0			(0.4		)
Net unrealized gains on securities	0			(419.5		)
Other	(8.9		)	(6.1		)
Net federal deferred tax asset (liability)	22.9			(149.2		)
Net state deferred tax asset	20.3			14.2
Net deferred tax asset (liability)	$	43.2		$	(135.0	)

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 and, therefore, no valuation allowance was needed at December 31, 2018 or 2017 .

At December 31, 2018 and 2017, we had $16.8 million and $23.8 million , respectively, of net taxes payable (included in other liabilities on the balance sheet).

The Progressive Corporation and its wholly-owned subsidiaries file a consolidated federal income tax return. Effective April 2, 2018, we acquired additional shares of ARX to increase our ownership above 80% . As a result, ARX and its subsidiaries will be included in The Progressive Corporation consolidated federal income tax return for the period from April 3 to December 31, 2018. ARX will file a final consolidated federal income tax return with its subsidiaries for the period from January 1 to April 2, 2018.

The Progressive Corporation and its wholly-owned subsidiaries have been a participant in the Compliance Assurance Program (CAP) since 2007. Under CAP, the IRS begins its examination process for the tax year before the tax return is filed, by examining significant transactions and events as they occur; however, a CAP examination does not include equity investments

App.-A-29

in pass-through entities in which the taxpayer owns less than 100% (e.g., partnerships, joint ventures, etc.). The goal of the CAP program is to expedite the exam process and to reduce the level of uncertainty regarding a taxpayer’s tax filing positions.

All federal income tax years prior to 2015 are closed to examination for both The Progressive Corporation and ARX. The IRS CAP exams for 2015-2017 for The Progressive Corporation have been completed and the returns were accepted as filed. We consider these years to be effectively settled. The 2018 tax year remains open to examination.

For 2017 and prior years, ARX and its wholly owned subsidiaries filed their own consolidated federal income tax returns since we owned less than 80% of their outstanding stock. All tax years prior to 2015 are closed and the 2015-2018 tax years remain open to examination.

The statute of limitations for state income tax purposes generally remains open for three to four years from the return filing date, depending upon the jurisdiction. There has been no significant state income tax audit activity.

We recognize interest and penalties, if any, as a component of income tax expense. For the years ended December 31, 2018, 2017, and 2016, $0 , $0.2 million , and less than $0.1 million , respectively, of interest and penalties expense has been recorded in the tax provision. We have not recorded any unrecognized tax benefits, or any related interest and penalties, as of December 31, 2018 and 2017 .

6. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES

We write personal and commercial auto insurance, residential property insurance, and other specialty property-casualty insurance and related services throughout the United States. As a property-casualty insurance company, we are exposed to hurricanes or other catastrophes. To help mitigate this risk, we maintain excess of loss and aggregate stop-loss reinsurance coverage on our Property business. Although the occurrence of a major catastrophe could have a significant effect on our monthly or quarterly results, we believe that, based on historical experience, such an event would not be so material as to disrupt the overall normal operations of Progressive. We are unable to predict the frequency or severity of any such events that may occur in the near term or thereafter.

As we are primarily an insurer of motor vehicles and residential property, we have limited exposure to environmental, asbestos, and general liability claims. We have established reserves for such exposures, which represent about 0.05% of our total loss and loss adjustment expense reserves. We believe these reserves to be adequate based on information currently known. These claims are not expected to have a material effect on our liquidity, financial condition, cash flows, or results of operations.

Loss and Loss Adjustment Expense Reserves

Loss and loss adjustment expense (LAE) reserves represent our best estimate of our ultimate liability for losses and LAE relating to events that occurred prior to the end of any given accounting period but have not yet been paid. For our vehicle businesses, which represent about 97% of our total carried reserves, we establish loss and LAE reserves after completing reviews at a disaggregated level of grouping. Progressive’s actuarial staff reviews over 400 subsets of business data, which are at a combined state, product, and line coverage level, to calculate the needed loss and LAE reserves. During a reserve review, ultimate loss amounts are estimated using several industry standard actuarial projection methods. These methods take into account historical comparable loss data at the subset level and estimate the impact of various loss development factors, such as the frequency (number of losses per earned car year), severity (dollars of loss per each claim), and average premium (dollars of premium per earned car year), as well as the frequency and severity of loss adjustment expense costs.

We begin our review of a set of data by producing multiple estimates of needed reserves, using both paid and incurred data, to determine if a reserve change is required. In the event of a wide variation among results generated by the different projections, our actuarial group will further analyze the data using additional quantitative analysis. Each review develops a point estimate for a relatively small subset of the business, which allows us to establish meaningful reserve levels for that subset. We believe our comprehensive process of reviewing at a subset level provides us more meaningful estimates of our aggregate loss reserves.

The actuarial staff completes separate projections of needed case and incurred but not recorded (IBNR) reserves. Since a large majority of the parties involved in an accident report their claims within a short time period after the occurrence, we do not carry a significant amount of IBNR reserves for older accident years. Based on the methodology we use to estimate case reserves for our vehicle businesses, we do not have expected development on reported claims included in our IBNR reserves. We do, however, include anticipated salvage and subrogation recoveries in our IBNR reserves, which could result in negative carried IBNR reserves, primarily in our physical damage reserves.

Changes from historical data may reduce the predictiveness of our projected future loss costs. Internal considerations that are process-related, which generally result from changes in our claims organization’s activities, include claim closure rates, the

App.-A-30

number of claims that are closed without payment, and the level of the claims representatives’ estimates of the needed case reserve for each claim. These changes and their effect on the historical data are studied at the state level versus on a larger, less indicative, countrywide basis. External items considered include the litigation atmosphere, state-by-state changes in medical costs, and the availability of services to resolve claims. These also are better understood at the state level versus at a more macro, countrywide level. The actuarial staff takes these changes into consideration when making their assumptions to determine needed reserve levels.

Similar to our vehicle businesses, our actuarial staff analyzes loss and LAE Property data on an accident period basis. Many of the methodologies and key parameters reviewed are similar. Unlike our vehicle businesses, primarily due to the low levels of reserves, data is reviewed at a macro level and a range of reserves is generated to determine a reasonable range. In addition, for our Property business, since claims adjusters primarily establish the case reserves, the actuarial staff includes expected development on case reserves as a component of the overall IBNR reserves.

Activity in the loss and loss adjustment expense reserves is summarized as follows:



(millions)	2018		2017		2016
Balance at January 1	$	13,086.9	$	11,368.0	$	10,039.0
Less reinsurance recoverables on unpaid losses	2,170.1		1,801.0		1,442.7
Net balance at January 1	10,916.8		9,567.0		8,596.3
Net loss and loss adjustment reserves disposed	0		0		(2.5		)
Total beginning reserves	10,916.8		9,567.0		8,593.8
Incurred related to:
Current year	21,632.5		18,782.1		16,967.1
Prior years	88.5		25.9		(87.5		)
Total incurred	21,721.0		18,808.0		16,879.6
Paid related to:
Current year	13,792.1		12,201.5		11,149.0
Prior years	6,017.6		5,256.7		4,757.4
Total paid	19,809.7		17,458.2		15,906.4
Net balance at December 31	12,828.1		10,916.8		9,567.0
Plus reinsurance recoverables on unpaid losses	2,572.7		2,170.1		1,801.0
Balance at December 31	$	15,400.8	$	13,086.9	$	11,368.0

We experienced unfavorable reserve development of $88.5 million and $25.9 million in 2018 and 2017, respectively, and favorable development of $87.5 million in 2016, which is reflected as “Incurred related to prior years” in the table above.

2018


•	Approximately $99 million of unfavorable prior year reserve development was attributable to accident years 2017 and 2016. This unfavorable development was offset by about $10 million of favorable development attributable to accident year 2015 and prior accident years.


•	Our personal auto products incurred almost $85 million of unfavorable loss and LAE reserve development, with approximately 70% attributable to the Agency business and 30% attributable to the Direct business, primarily reflecting unfavorable development from reopened Florida personal injury protection (PIP) claims.


•	Our special lines and Property businesses experienced about $5 million and $3 million of unfavorable development, respectively, while our commercial auto products had about $4 million of favorable reserve development.

2017


•	Approximately $64 million of unfavorable prior year reserve development was attributable to accident years 2016 and 2015. This unfavorable development was offset by $38 million of favorable development attributable to accident year 2014 and prior accident years.


•	Our personal auto products incurred $70 million of unfavorable loss and LAE reserve development, primarily in the Agency business, in part reflecting an increase in costs related to property damage and higher LAE costs, primarily due to an increase in incentive compensation and defense counsel spend.

App.-A-31


•	Our Property business experienced $37 million in favorable development primarily due to lower severity and frequency than anticipated for accident year 2016 and development of losses eligible to be ceded under our catastrophe bond reinsurance program.


•	Our commercial auto products had less than $1 million of unfavorable reserve development.

2016


•	Approximately $56 million of the favorable prior year reserve development was attributable to accident year 2015, and approximately $51 million of favorable development was attributable to accident years 2013 and prior. This favorable development was partially offset by $19 million of unfavorable development attributable to accident year 2014.


•	Our Personal Lines and Property businesses incurred $54 million and $52 million , respectively, of favorable loss and LAE reserve development, partially offset by the unfavorable loss and LAE development in Commercial Lines. In our Property business, both the severity and frequency of late reported claims was less than anticipated.


•	Our personal auto product developed favorably $40 million , almost evenly split between Direct and Agency.


•	Our personal auto business incurred favorable case development, primarily in bodily injury due to a lower than anticipated severity.


•	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, due in part to 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.

Incurred and Paid Claims Development by Accident Year

The tables below present our incurred and paid claims development by accident year for the last five years, which generally represents the maximum development period for claims in any of our segments. The tables below include inception-to-date information for companies acquired and wholly exclude companies disposed of, rather than including information from the date of acquisition, or until the date of disposition. We believe the most meaningful presentation of claims development is through the retrospective approach by presenting all relevant historical information for all periods presented.

We have elected to present our incurred and paid claims development consistent with our GAAP reportable segments (see Note 10 – Segment Information for a discussion of our segment reporting), with a further disaggregation of our Personal Lines and Commercial Lines claims development between liability and physical damage, since the loss patterns are significantly different between them. The other business primarily includes reserves for our run-off products, which are not considered material, and, therefore, we are not including separate claims development tables.

The following tables show incurred and paid claims development, net of reinsurance, by accident year. Only 2018 is audited; all prior years are considered required supplementary information and, therefore, are unaudited. Expected development on our case reserves is excluded from the IBNR reserves on our vehicle businesses, as discussed above. For the Property business, the IBNR reserves include expected case development based on the methodology used in establishing the case reserves for that segment. The cumulative number of incurred claims are based on accident coverages (e.g., bodily injury, collision, comprehensive, personal injury protection, property damage) related to opened claims. Coverage counts related to claims closed without payment are excluded from the cumulative number of incurred claims.

App.-A-32



Personal Lines - Agency - Liability
($ in millions)											As of
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance											December 31, 2018
	For the years ended December 31,										Total of IBNR Liabilities Plus Expected Development on Reported Claims		Cumulative Number of Incurred Claim Counts
Accident Year	2014 ¹		2015 ¹		2016 ¹		2017 ¹		2018				Cumulative Number of Incurred Claim Counts
2014	$	3,702.1	$	3,627.7	$	3,633.2	$	3,654.4	$	3,611.2	$	0	701,788
2015			3,774.9		3,773.8		3,798.8		3,815.6		55.9		704,995
2016					4,082.9		4,130.0		4,152.0		69.5		740,325
2017							4,474.8		4,485.8		188.6		777,415
2018									5,141.8		802.8		839,051
							Total		$	21,206.4
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
	For the years ended December 31,
Accident Year	2014 ¹		2015 ¹		2016 ¹		2017 ¹		2018
2014	$	1,809.0	$	2,868.1	$	3,284.5	$	3,482.3	$	3,559.1
2015			1,793.1		2,976.0		3,416.5		3,623.3
2016					1,941.6		3,231.5		3,723.1
2017							2,074.0		3,478.5
2018									2,378.0
							Total		$	16,762.0
	All outstanding liabilities before 2014, net of reinsurance ¹								64.6
	Liabilities for claims and claim adjustment expenses, net of reinsurance								$	4,509.0

¹ Required supplementary information (unaudited)



Personal Lines - Agency - Physical Damage
($ in millions)											As of
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance											December 31, 2018
	For the years ended December 31,										Total of IBNR Liabilities Plus Expected Development on Reported Claims			Cumulative Number of Incurred Claim Counts
Accident Year	2014 ¹		2015 ¹		2016 ¹		2017 ¹		2018					Cumulative Number of Incurred Claim Counts
2014	$	2,107.5	$	2,090.3	$	2,089.9	$	2,088.0	$	2,091.6	$	0		1,374,721
2015			2,136.8		2,137.2		2,134.4		2,131.5		(3.8		)	1,336,486
2016					2,423.4		2,398.9		2,401.8		(2.8		)	1,398,842
2017							2,635.5		2,638.5		(11.8		)	1,513,912
2018									2,819.0		(120.8		)	1,677,878
							Total		$	12,082.4
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
	For the years ended December 31,
Accident Year	2014 ¹		2015 ¹		2016 ¹		2017 ¹		2018
2014	$	2,078.8	$	2,091.6	$	2,090.6	$	2,090.7	$	2,091.0
2015			2,106.2		2,138.1		2,134.4		2,134.1
2016					2,391.0		2,406.9		2,402.1
2017							2,599.8		2,643.2
2018									2,769.1
							Total		$	12,039.5
	All outstanding liabilities before 2014, net of reinsurance ¹								0.4
	Liabilities for claims and claim adjustment expenses, net of reinsurance								$	43.3

¹ Required supplementary information (unaudited)

App.-A-33



Personal Lines - Direct - Liability
($ in millions)											As of
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance											December 31, 2018
	For the years ended December 31,										Total of IBNR Liabilities Plus Expected Development on Reported Claims		Cumulative Number of Incurred Claim Counts
Accident Year	2014 ¹		2015 ¹		2016 ¹		2017 ¹		2018				Cumulative Number of Incurred Claim Counts
2014	$	2,946.8	$	2,887.4	$	2,898.1	$	2,913.6	$	2,884.1	$	0	592,145
2015			3,330.5		3,328.3		3,354.2		3,399.3		44.3		659,289
2016					3,819.0		3,843.9		3,871.2		58.9		735,483
2017							4,209.5		4,209.9		167.0		770,740
2018									4,904.8		725.4		856,025
							Total		$	19,269.3
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
	For the years ended December 31,
Accident Year	2014 ¹		2015 ¹		2016 ¹		2017 ¹		2018
2014	$	1,413.0	$	2,278.0	$	2,624.2	$	2,780.0	$	2,844.0
2015			1,545.2		2,615.0		3,021.0		3,238.2
2016					1,780.6		2,991.1		3,476.9
2017							1,912.6		3,255.2
2018									2,235.1
							Total		$	15,049.4
	All outstanding liabilities before 2014, net of reinsurance ¹								38.7
	Liabilities for claims and claim adjustment expenses, net of reinsurance								$	4,258.6

¹ Required supplementary information (unaudited)



Personal Lines - Direct - Physical Damage
($ in millions)											As of
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance											December 31, 2018
	For the years ended December 31,										Total of IBNR Liabilities Plus Expected Development on Reported Claims			Cumulative Number of Incurred Claim Counts
Accident Year	2014 ¹		2015 ¹		2016 ¹		2017 ¹		2018					Cumulative Number of Incurred Claim Counts
2014	$	1,889.3	$	1,862.2	$	1,861.7	$	1,859.2	$	1,861.7	$	0		1,471,084
2015			2,110.7		2,097.7		2,093.5		2,090.8		(4.0		)	1,540,090
2016					2,521.0		2,475.4		2,477.7		(3.8		)	1,676,008
2017							2,750.6		2,743.7		(16.1		)	1,790,360
2018									3,202.3		(175.4		)	2,065,458
							Total		$	12,376.2
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
	For the years ended December 31,
Accident Year	2014 ¹		2015 ¹		2016 ¹		2017 ¹		2018
2014	$	1,874.6	$	1,864.1	$	1,862.7	$	1,861.8	$	1,861.4
2015			2,094.7		2,100.1		2,094.7		2,093.7
2016					2,505.0		2,485.8		2,479.3
2017							2,742.1		2,753.5
2018									3,170.0
							Total		$	12,357.9
	All outstanding liabilities before 2014, net of reinsurance ¹								0.1
	Liabilities for claims and claim adjustment expenses, net of reinsurance								$	18.4

¹ Required supplementary information (unaudited)

App.-A-34



Commercial Lines - Liability
($ in millions)											As of
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance											December 31, 2018
	For the years ended December 31,										Total of IBNR Liabilities Plus Expected Development on Reported Claims		Cumulative Number of Incurred Claim Counts
Accident Year	2014 ¹		2015 ¹		2016 ¹		2017 ¹		2018				Cumulative Number of Incurred Claim Counts
2014	$	822.5	$	795.4	$	820.3	$	823.0	$	813.5	$	0	74,682
2015			897.6		911.1		914.8		899.7		14.0		77,839
2016					1,185.8		1,204.8		1,231.1		26.4		92,730
2017							1,374.1		1,366.6		70.9		96,905
2018									1,700.8		292.5		108,792
							Total		$	6,011.7
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
	For the years ended December 31,
Accident Year	2014 ¹		2015 ¹		2016 ¹		2017 ¹		2018
2014	$	234.0	$	438.7	$	610.0	$	715.3	$	771.0
2015			238.4		501.5		675.0		786.3
2016					298.6		639.9		886.0
2017							325.8		712.9
2018									382.7
							Total		$	3,538.9
	All outstanding liabilities before 2014, net of reinsurance ¹								31.4
	Liabilities for claims and claim adjustment expenses, net of reinsurance								$	2,504.2

¹ Required supplementary information (unaudited)



Commercial Lines - Physical Damage
($ in millions)											As of
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance											December 31, 2018
	For the years ended December 31,										Total of IBNR Liabilities Plus Expected Development on Reported Claims			Cumulative Number of Incurred Claim Counts
Accident Year	2014 ¹		2015 ¹		2016 ¹		2017 ¹		2018					Cumulative Number of Incurred Claim Counts
2014	$	240.3	$	239.7	$	238.6	$	238.0	$	238.4	$	0		59,630
2015			274.4		274.1		273.5		272.4		(0.6		)	62,599
2016					379.6		379.8		378.2		(0.2		)	74,180
2017							415.4		412.1		(2.0		)	77,170
2018									475.0		(10.0		)	83,350
							Total		$	1,776.1
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
	For the years ended December 31,
Accident Year	2014 ¹		2015 ¹		2016 ¹		2017 ¹		2018
2014	$	224.6	$	238.3	$	237.7	$	237.9	$	238.2
2015			248.5		271.9		272.0		272.2
2016					336.7		376.9		376.8
2017							369.0		409.4
2018									426.0
							Total		$	1,722.6
	All outstanding liabilities before 2014, net of reinsurance ¹								0.4
	Liabilities for claims and claim adjustment expenses, net of reinsurance								$	53.9

¹ Required supplementary information (unaudited)

App.-A-35



Property Business
($ in millions)											As of
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance											December 31, 2018
	For the years ended December 31,										Total of IBNR Liabilities Plus Expected Development on Reported Claims		Cumulative Number of Incurred Claim Counts
Accident Year	2014 ¹		2015 ¹		2016 ¹		2017 ¹		2018				Cumulative Number of Incurred Claim Counts
2014	$	415.5	$	389.1	$	379.7	$	376.3	$	375.3	$	2.5	40,992
2015			460.0		416.5		403.6		398.8		3.8		41,980
2016					568.6		541.2		537.1		9.6		53,582
2017							672.8		680.9		11.5		71,153
2018									839.0		159.8		58,135
							Total		$	2,831.1
Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
	For the years ended December 31,
Accident Year	2014 ¹		2015 ¹		2016 ¹		2017 ¹		2018
2014	$	269.2	$	351.5	$	365.9	$	370.3	$	371.9
2015			280.3		372.8		383.5		390.1
2016					415.2		498.2		516.9
2017							506.7		647.1
2018									595.9
							Total		$	2,521.9
	All outstanding liabilities before 2014, net of reinsurance ¹								5.5
	Liabilities for claims and claim adjustment expenses, net of reinsurance								$	314.7

¹ Required supplementary information (unaudited)

App.-A-36

The following table reconciles the net incurred and paid claims development tables to the liability for claims and claim adjustment expenses:



(millions)	2018		2017
Net outstanding liabilities
Personal Lines
Agency, Liability	$	4,509.0	$	3,955.5
Agency, Physical Damage	43.3		26.2
Direct, Liability	4,258.6		3,685.1
Direct, Physical Damage	18.4		(5.6		)
Commercial Lines
Liability	2,504.2		2,027.4
Physical Damage	53.9		51.7
Property	314.7		245.8
Other business	42.9		43.7
Liabilities for unpaid claims and claim adjustment expenses, net of reinsurance	11,745.0		10,029.8
Reinsurance recoverable on unpaid claims
Personal Lines
Agency, Liability	836.8		769.8
Agency, Physical Damage	0		0
Direct, Liability	1,070.4		838.1
Direct, Physical Damage	0		0
Commercial Lines
Liability	287.4		105.1
Physical Damage	0		0.1
Property	145.4		243.8
Other business	222.1		200.9
Total reinsurance recoverable on unpaid claims	2,562.1		2,157.8
Unallocated claims adjustment expense related to:
Liabilities for unpaid claims and claim adjustment expenses, net of reinsurance	1,083.1		887.0
Reinsurance recoverable on unpaid claims	10.6		12.3
Total gross liability for unpaid claims and claim adjustment expense	$	15,400.8	$	13,086.9

The following table shows the average historical claims duration as of December 31, 2018 :



(Required Supplementary Information - Unaudited)
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance	Years
	1	2	3	4	5
Personal Lines
Agency, Liability	47.1%	30.7%	11.6%	5.4%	2.1%
Agency, Physical Damage	98.9	1.1	(0.1)	0	0
Direct, Liability	46.1	31.2	12.2	5.9	2.2
Direct, Physical Damage	100.1	(0.1)	(0.2)	0	0
Commercial Lines
Liability	24.6	27.7	20.1	12.6	6.8
Physical Damage	90.4	9.0	(0.1)	0.1	0.1
Property	73.0	20.0	3.3	1.4	0.4

App.-A-37

7. REINSURANCE

The effect of reinsurance on premiums written and earned for the years ended December 31, was as follows:



	2018						2017						2016
(millions)	Written			Earned			Written			Earned			Written			Earned
Direct premiums	$	33,753.1		$	31,970.2		$	27,860.7		$	26,425.7		$	23,941.9		$	23,111.2
Ceded premiums:
Regulated plans	(596.4		)	(557.5		)	(505.9		)	(479.6		)	(439.4		)	(425.1		)
Non-Regulated plans	(546.8		)	(479.4		)	(222.7		)	(216.2		)	(149.0		)	(212.1		)
Total ceded premiums	(1,143.2		)	(1,036.9		)	(728.6		)	(695.8		)	(588.4		)	(637.2		)
Net premiums	$	32,609.9		$	30,933.3		$	27,132.1		$	25,729.9		$	23,353.5		$	22,474.0

The Regulated plans are federal or state run plans and primarily include the following:


•	Federal reinsurance plan


•	National Flood Insurance Program (NFIP)


•	State-provided reinsurance facilities


•	Michigan Catastrophic Claims Association (MCCA)


•	North Carolina Reinsurance Facility (NCRF)


•	Florida Hurricane Catastrophe Fund (FHCF)


•	State-mandated involuntary plans


•	Commercial Automobile Insurance Procedures/Plans (CAIP)

The Non-Regulated plans are comprised of voluntary external reinsurance contracts. These include amounts ceded on our Commercial Lines business primarily related to transportation network company (TNC) business under quota-share reinsurance agreements and amounts ceded on our Property business under catastrophic reinsurance agreements and, effective January 1, 2017, aggregate stop-loss reinsurance agreements. During 2018, we expanded our TNC business from one state in 2016 and 2017 to four states at December 31, 2018.

Our prepaid reinsurance premiums and reinsurance recoverables were comprised of the following at December 31:



	Prepaid Reinsurance Premiums								Reinsurance Recoverables
($ in millions)	2018				2017				2018				2017
Regulated plans:
MCCA	$	55.3	18	%	$	44.3	22	%	$	1,903.9	71	%	$	1,611.5	71	%
CAIP	72.9		24		50.0		25		254.7		9		218.0		10
NCRF	34.0		11		31.5		15		78.1		3		74.2		3
NFIP	55.9		18		53.8		26		27.8		1		148.8		7
Other	0.6		0		0.3		0		21.4		1		8.2		0
Total Regulated plans	218.7		71		179.9		88		2,285.9		85		2,060.7		91
Non-Regulated plans:
Commercial Lines	79.2		25		14.3		7		254.2		10		63.4		3
Property	11.8		4		9.1		5		147.7		5		138.6		6
Other	0		0		0		0		8.3		0		10.7		0
Total Non-Regulated plans	91.0		29		23.4		12		410.2		15		212.7		9
Total	$	309.7	100	%	$	203.3	100	%	$	2,696.1	100	%	$	2,273.4	100	%

Reinsurance contracts do not relieve us from our obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to us. Our exposure to losses from the failure of Regulated plans is minimal, since these plans are funded by the federal government or by mechanisms supported by insurance companies in applicable states. We evaluate the financial condition of our other reinsurers and monitor concentrations of credit risk to minimize our exposure to significant losses from reinsurer insolvencies.

App.-A-38

8. STATUTORY FINANCIAL INFORMATION

Consolidated statutory surplus was $11,731.2 million and $9,664.4 million at December 31, 2018 , and 2017 , respectively. Statutory net income was $2,916.9 million , $1,416.2 million , and $1,022.3 million for the years ended December 31, 2018 , 2017 , and 2016 , respectively.

At December 31, 2018 , $955.0 million of consolidated statutory surplus represented net admitted assets of our insurance subsidiaries and affiliates that are required to meet minimum statutory surplus requirements in such entities’ states of domicile. The companies may be licensed in states other than their states of domicile, which may have higher minimum statutory surplus requirements. Generally, the net admitted assets of insurance companies that, subject to other applicable insurance laws and regulations, are available for transfer to the parent company cannot include the net admitted assets required to meet the minimum statutory surplus requirements of the states where the companies are licensed.

During 2018 , the insurance subsidiaries paid aggregate cash dividends of $938.9 million to their parent company. Based on the dividend laws in effect at December 31, 2018, the insurance subsidiaries could pay aggregate dividends of $2,887.0 million in 2019 without prior approval from regulatory authorities, provided the dividend payments are not made within 12 months of previous dividends paid by the applicable subsidiary.

9. EMPLOYEE BENEFIT PLANS

Beginning July 1, 2017, employees of ARX and its subsidiaries were included in the benefit plans described below. References in this Note 9 to Progressive refer to The Progressive Corporation and its subsidiaries, including ARX and its subsidiaries. Prior to July 1, 2017, ARX maintained employee benefit plans that were separate from the plans that covered employees of The Progressive Corporation’s other subsidiaries.

Retirement Plans Progressive has a defined contribution pension plan (401(k) Plan) that covers employees who have been employed with the company for at least 30 days . Under Progressive’s 401(k) Plan, we match up to a maximum of 6% of an employee’s eligible compensation contributed to the plan. Employee and company matching contributions are invested, at the direction of the employee, in a number of investment options available under the plan, including various mutual funds, a self-directed brokerage option, and a Progressive common stock fund. Progressive’s common stock fund is an employee stock ownership program (ESOP) within the 401(k) Plan. At December 31, 2018, the ESOP held 24.1 million of our common shares, all of which are included in shares outstanding. Dividends on these shares are reinvested in common shares or paid out in cash, at the election of the participant, and the related tax benefit is recorded as part of our tax provision. Matching contributions to these plans for the years ended December 31, 2018, 2017, and 2016 were $106.8 million , $97.3 million , and $86.8 million .

Postemployment Benefits Progressive provides various postemployment benefits to former or inactive employees who meet eligibility requirements, and to their beneficiaries and covered dependents. Postemployment benefits include salary continuation and disability-related benefits, including workers’ compensation and, if elected, continuation of health-care benefits for specified limited periods. The liability for these benefits was $20.2 million and $19.5 million at December 31, 2018 and 2017, respectively.

Incentive Compensation Plans – Employees Progressive’s incentive compensation programs include both non-equity incentive plans (cash) and equity incentive plans. Progressive’s cash incentive compensation included an annual cash incentive program for a limited number of senior executives and Progressive’s Gainsharing program for other employees; the structures of these programs were similar in nature. Progressive’s equity incentive compensation plans provide for the granting of restricted stock unit awards to key members of management .

In addition, ARX provides periodic cash bonuses to its employees and, prior to 2017, annual cash bonuses to its employees. ARX also has an equity compensation plan under which it has granted stock option awards, exercisable for shares of ARX common stock, to certain of its key employees. These stock option awards include both nonqualified and incentive stock options; all such stock options are subject to the put and call provisions of the ARX stockholders’ agreement (see Note 15 – Redeemable Noncontrolling Interest for further discussion). As a result of these provisions, and the determination that the ultimate settlement of these awards would be in cash, the ARX stock options are treated as liability awards for accounting purposes.

App.-A-39

The amounts charged to income for Progressive and ARX incentive compensation plans for the years ended December 31, were:



	2018				2017				2016
(millions)	Pretax		After Tax		Pretax		After Tax		Pretax		After Tax
Non-equity incentive plans – cash	$	539.5	$	426.2	$	461.3	$	299.8	$	386.8	$	251.4
Equity incentive plans:
Equity awards	76.2		60.2		92.9		60.4		80.9		52.6
Liability awards	1.0		0.8		2.5		1.6		4.3		2.8

The increase in 2017 expense for the equity awards, compared to 2018 and 2016, primarily reflected an increase in management’s expectation of the percentage of certain performance-based awards that will ultimately vest (discussed below). The after-tax amounts are determined using the corporate federal tax rate of 21% for 2018 and 35% for 2017 and 2016.

Progressive’s 2015 Equity Incentive Plan, which provide for the granting of equity-based compensation to officers and other key employees, currently has authorized awards for up to 17.0 million shares, which includes 4.0 million shares transferred from the 2010 Equity Incentive Plan in accordance with the terms of the 2015 Equity Incentive Plan. No awards have been granted under the 2010 Equity Incentive Plan since January 2016 and none will be granted in the future.

The restricted equity awards are issued as either time-based or performance-based awards. All restricted stock units are settled at or after vesting in Progressive common shares from existing treasury shares on a one-to-one basis. The time-based awards vest in equal installments upon the lapse of specified periods of time, typically three , four , and five years.

The performance-based awards were granted to approximately 50 Progressive executives and senior managers in 2018 in addition to their time-based awards to provide additional incentive to achieve pre-established profitability and growth targets, relative investment performance, or specific growth measures.

Vesting of performance-based awards is contingent upon the achievement of predetermined performance goals within specified time periods. The targets for the performance-based awards, as well as the number of units that ultimately may vest, vary by grant. All performance-based awards include a specified number of units that will vest if performance meets a specified target and minimum performance goals. If at least the minimum performance goals are achieved, the range at which an award can vest is determined by the type of measurement goals included in the award, as follows:



Performance Measurement	Year(s) of Grant	Vesting range (as a percentage of target)
Growth of our personal auto and commercial auto businesses and homeowners multi-peril business, each compared to its respective market	2018	0-250%
Growth of our personal auto and commercial auto businesses, compared to the combined personal and commercial auto market	2013-2017	0-250%
Investment results relative to peer group	2013-2018	0-200%
Growth in percentage of auto policies bundled with other specified types of policies	2015	0% or 100-200%
Unit growth in a specified customer segment	2016-2017	0% or 85-150%

Generally, time-based and performance-based equity awards are expensed pro rata over their respective vesting periods based on the market value of the awards at the time of grant. Performance-based equity awards that contain variable vesting criteria are expensed based on management’s expectation of the percentage of the award, if any, that will ultimately vest. These estimates can change periodically throughout the measurement period.

App.-A-40

A summary of all employee restricted equity award activity during the years ended December 31, follows:



	2018				2017				2016
Restricted Equity Awards	Number of Shares ¹		Weighted Average Grant Date Fair Value		Number of Shares ¹		Weighted Average Grant Date Fair Value		Number of Shares ¹		Weighted Average Grant Date Fair Value
Beginning of year	5,858,848		$	30.47	6,951,373		$	26.18	7,725,227		$	23.37
Add (deduct):
Granted ²	1,876,109		45.55		2,383,475		32.01		1,870,660		31.54
Vested	(2,811,070	)	26.41		(3,220,671	)	22.53		(2,422,700	)	21.50
Forfeited	(67,531	)	36.10		(255,329	)	28.03		(221,814	)	24.64
End of year ^3,4	4,856,356		$	38.56	5,858,848		$	30.47	6,951,373		$	26.18

¹ Includes restricted stock units; Upon vesting, all units will be converted on a one-for-one basis into Progressive common shares funded from existing treasury shares. All performance-based awards are included at their target amounts.

² We reinvest dividend equivalents on restricted stock units. For 2018 , 2017 , and 2016 , the number of units “granted” shown in the table above includes 144,668 , 157,396 , and 165,045 of dividend equivalent units, respectively, at a weighted average grant date fair value of $0 , since the dividends were factored into the grant date fair value of the original grant.

³ At December 31, 2018 , the number of shares included 1,017,520 performance-based units at their target amounts. We expect 2,447,409 units to vest based upon our current estimates of the likelihood of achieving the pre-determined performance goals applicable to each award.

⁴ At December 31, 2018 , the total unrecognized compensation cost related to unvested equity awards was $100.6 million , which includes performance-based awards at their currently estimated vesting value. This compensation expense will be recognized into the income statement over the weighted average vesting period of 2.2 years.

The aggregate fair value of the restricted equity awards that vested during the years ended December 31, 2018 , 2017 , and 2016 , was $162.7 million , $130.5 million , and $77.0 million , respectively, based on the actual stock price on the applicable vesting date.

As a result of the put and call rights described in Note 15 – Redeemable Noncontrolling Interest , all outstanding stock options awarded to ARX employees prior to April 1, 2015, are treated as liability awards for accounting purposes; however, the awards maintain the specific features per the original award agreements. The value of each option is based upon our good faith estimate of the fair market value as of the end of the reporting period and the pro rata expense is recognized.

A summary of all ARX employee stock option activity during the years ended December 31, follows:



	2018				2017				2016
Options Outstanding	Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price		Number of Shares	Weighted Average Exercise Price
Beginning of year	22,550		$	564.60	24,995		$	526.46	24,995	$	526.46
Add (deduct):
Exercised ¹	(6,483	)	506.26		(2,445	)	174.65		0	0
End of year	16,067		$	588.15	22,550		$	564.60	24,995	$	526.46
Exercisable, end of year	13,967		$	562.17	17,950		$	517.75	16,995	$	438.77

¹ At the time of exercise in 2018 and 2017, the value earned by the option holders was $6.2 million and $2.9 million , respectively.



	2018				2017				2016
Non-Vested Options Outstanding	Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price
Beginning of year	4,600		$	747.45	8,000		$	712.74	12,000		$	677.81
Add (deduct):
Vested	(2,500	)	736.12		(3,400	)	665.79		(4,000	)	607.95
End of year ¹	2,100		$	760.93	4,600		$	747.45	8,000		$	712.74

¹ At December 31, 2018, 2017, and 2016, the remaining unrecognized compensation cost related to unvested options was $0.2 million , $0.7 million , and $1.6 million , respectively, and the remaining weighted average vesting period on the unvested awards was 0.53 years, 1.01 years, and 1.36 years, respectively.

App.-A-41

Incentive Compensation Plans – Directors Progressive’s 2003 Directors Equity Incentive Plan, has expired and no new awards may be made under this plan; in 2017, shareholders approved the Progressive 2017 Directors Equity Incentive Plan and it provides for the granting of equity-based awards, including restricted stock awards, to non-employee directors, and originally authorized awards for up to 0.5 million shares.

The Progressive Corporation permits each non-employee director to indicate a preference to receive either 100% of their compensation in the form of a restricted stock award or 60% in the form of a restricted stock award and 40% in the form of cash. If the director does not state a preference, it is presumed that he or she preferred to receive 100% of their compensation in the form of restricted stock. After considering such preferences, the Compensation Committee of the Board of Directors determines the awards (restricted stock, or restricted stock and cash) for each non-employee director.

The restricted stock awards are issued as time-based awards. The vesting period (i.e., requisite service period) is typically 11 months from the date of each grant. To the extent a director is newly appointed during the year, or a director’s committee assignments change, the vesting period may be shorter. Both the restricted stock awards and cash, if elected, are expensed pro rata over their respective vesting periods based on the market value of the awards at the time of grant.

A summary of all directors’ restricted stock activity during the years ended December 31, follows:



	2018				2017				2016
Restricted Stock	Number of Shares		Weighted Average Grant Date Fair Value		Number of Shares		Weighted Average Grant Date Fair Value		Number of Shares		Weighted Average Grant Date Fair Value
Beginning of year	53,284		$	40.54	55,839		$	33.24	89,427		$	27.23
Add (deduct):
Granted	41,706		62.23		53,284		40.54		55,839		33.24
Vested	(53,284	)	40.54		(55,839	)	33.24		(89,427	)	27.23
End of year ¹	41,706		$	62.23	53,284		$	40.54	55,839		$	33.24

¹ At December 31, 2018, the remaining unrecognized compensation cost related to restricted stock awards was $0.9 million .

The aggregate fair value of the restricted stock vested, during the years ended December 31, 2018 , 2017 , and 2016 , was $3.2 million , $2.2 million , and $3.0 million , respectively, based on the actual stock price at time of vesting.

Deferred Compensation The Progressive Corporation Executive Deferred Compensation Plan (Deferral Plan) permits eligible Progressive executives to defer receipt of some or all of their annual incentive payments and all of their annual equity awards. Deferred cash compensation is deemed invested in one or more investment funds, including Progressive common shares, offered under the Deferral Plan and elected by the participant. All Deferral Plan distributions attributable to deferred cash compensation will be paid in cash.

For all equity awards granted in or after March 2005, and deferred pursuant to the Deferral Plan, the deferred amounts are deemed invested in our common shares and are ineligible for transfer to other investment funds in the Deferral Plan; distributions of these deferred awards will be made in Progressive common shares. For all restricted stock awards granted prior to that date, the deferred amounts are eligible to be transferred to any of the investment funds in the Deferral Plan; distributions of these deferred awards will be made in cash. We reserved 11.1 million of our common shares for issuance under the Deferral Plan.

An irrevocable grantor trust has been established to provide a source of funds to assist us in meeting our liabilities under the Deferral Plan. The Deferral Plan Irrevocable Grantor Trust account held the following assets at December 31:



(millions)	2018		2017
Progressive common shares ¹	$	114.7	$	128.2
Other investment funds ²	124.0		167.0
Total	$	238.7	$	295.2

¹ Included 3.6 million and 4.4 million common shares as of December 31, 2018 and 2017 , respectively, to be distributed in common shares.

² Amount is included in other assets on the balance sheet.

App.-A-42

10. SEGMENT INFORMATION

We write personal and commercial auto insurance, residential property insurance, and other specialty property-casualty insurance and related services. Our Personal Lines segment writes insurance for personal autos and recreational vehicles (our special lines products). The Personal Lines segment is comprised of both the Agency and Direct businesses. The Agency business includes business written by our network of more than 35,000 independent insurance agencies, including brokerages in New York and California, and strategic alliance business relationships (other insurance companies, financial institutions, and national agencies). The Direct business includes business written directly by us online, by phone, or on mobile devices. We operate our personal auto businesses throughout the United States.

Our Commercial Lines segment writes primary liability, physical damage, and other auto-related 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. This segment operates throughout the United States and is distributed through both the independent agency and direct channels.

Our Property segment writes residential property insurance for homeowners, other property owners, and renters through both the independent agency and direct channel, and writes flood insurance, through the “Write Your Own” program for the National Flood Insurance Program, through the agency channel. Our Property segment operates throughout the majority of the United States.

Our other indemnity businesses manage our run-off businesses.

Our service businesses provide insurance-related services, including processing CAIP business, and serving as an agent for homeowners, general liability, and workers’ compensation insurance, among other products, through our programs with ASI and unaffiliated insurance companies.

All segment revenues are generated from external customers and we do not have a reliance on any major customer.

We evaluate profitability based on pretax underwriting profit (loss) for the Personal Lines, Commercial Lines, and Property segments and for the other indemnity businesses. Pretax underwriting profit (loss) is calculated as net premiums earned plus fees and other revenues, less: (i) losses and loss adjustment expenses; (ii) policy acquisition costs; and (iii) other underwriting expenses. Service business pretax profit (loss) is the difference between service business revenues and service business expenses.

Expense allocations are based on certain assumptions and estimates primarily related to revenue and volume; stated segment operating results would change if different methods were applied. We do not allocate assets or income taxes to operating segments. In addition, we do not separately identify depreciation expense by segment, and such allocation would be impractical. Companywide depreciation expense was $190.4 million in 2018 , $169.9 million in 2017 , and $137.4 million in 2016 . The accounting policies of the operating segments are the same as those described in Note 1 – Reporting and Accounting Policies .

App.-A-43

Following are the operating results for the years ended December 31:



	2018					2017						2016
(millions)	Revenues		Pretax Profit (Loss)			Revenues			Pretax Profit (Loss)			Revenues		Pretax Profit (Loss)
Personal Lines
Agency	$	13,017.2	$	1,435.7		$	11,177.6		$	839.6		$	9,791.7	$	492.8
Direct	13,017.5		1,088.5			10,769.6			683.7			9,396.5		412.2
Total Personal Lines ¹	26,034.7		2,524.2			21,947.2			1,523.3			19,188.2		905.0
Commercial Lines	3,610.9		478.6			2,793.9			214.1			2,421.3		155.2
Property ²	1,287.7		(88.7		)	988.8			(50.3		)	864.5		32.5
Other indemnity	0		0.9			0			(0.2		)	0		(1.6		)
Total underwriting operations	30,933.3		2,915.0			25,729.9			1,686.9			22,474.0		1,091.1
Fees and other revenues ³	472.2		NA			370.6			NA			332.5		NA
Service businesses	158.5		24.4			126.8			17.3			103.3		11.3
Investments ⁴	415.0		390.7			612.7			588.8			530.0		507.6
Other gains (losses)	0		0			(1.0		)	(1.0		)	1.6		1.6
Interest expense	NA		(166.5		)	NA			(153.1		)	NA		(140.9		)
Consolidated total	$	31,979.0	$	3,163.6		$	26,839.0		$	2,138.9		$	23,441.4	$	1,470.7

NA = Not Applicable

¹ Personal auto insurance accounted for 94% of the total Personal Lines segment net premiums earned in 2018 , compared to 93% in 2017 and 92% in 2016 ; insurance for our special lines products (e.g., motorcycles, ATVs, RVs, watercraft, and snowmobiles) accounted for the balance of the Personal Lines net premiums earned.

² During 2018 , 2017 , and 2016, pretax profit (loss) includes $72.0 million , $66.2 million , and $62.1 million , respectively, of amortization expense predominately associated with the acquisition of a controlling interest in ARX. Although this expense is included in our Property segment, it is not reported in the consolidated results of ARX and, therefore, does not affect the value of net income attributable to noncontrolling interest.

³ Pretax profit (loss) for fees and other revenues are allocated to operating segments.

⁴ Revenues represent recurring investment income and total net realized gains (losses) on securities; pretax profit is net of investment expenses.

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 years ended December 31:



	2018			2017			2016
	Underwriting Margin		Combined Ratio	Underwriting Margin		Combined Ratio	Underwriting Margin		Combined Ratio
Personal Lines
Agency	11.0	%	89.0	7.5	%	92.5	5.0	%	95.0
Direct	8.4		91.6	6.3		93.7	4.4		95.6
Total Personal Lines	9.7		90.3	6.9		93.1	4.7		95.3
Commercial Lines	13.3		86.7	7.7		92.3	6.4		93.6
Property ¹	(6.9	)	106.9	(5.1	)	105.1	3.8		96.2
Total underwriting operations	9.4		90.6	6.6		93.4	4.9		95.1

¹ Included in 2018 , 2017 , and 2016, are 5.6 points, 6.7 points, and 7.2 points, respectively, of amortization expense predominately associated with the acquisition of a controlling interest in ARX.

App.-A-44

11. OTHER COMPREHENSIVE INCOME (LOSS)

The components of other comprehensive income (loss), including reclassification adjustments by income statement line item, for the years ended December 31, were as follows:



										Components of Changes in Accumulated Other Comprehensive Income (after tax)
(millions)	Pretax total accumulated other comprehensive income (loss)			Total tax (provision) benefit			After tax total accumulated other comprehensive income (loss)			Total net unrealized gains (losses) on securities			Net unrealized gains (losses) on forecasted transactions			Foreign currency translation adjustment		(Income) loss attributable to NCI
Balance at December 31, 2017	$	1,977.8		$	(695.6	)	$	1,282.2		$	1,295.0		$	(14.8	)	$	0	$	2.0
Cumulative effect adjustment ¹	(2,006.0		)	705.8			(1,300.2		)	(1,300.2		)	0			0		0
Reclassification of disproportionate amounts ²	(4.3		)	(3.4		)	(7.7		)	(1.1		)	(3.2		)	0		(3.4		)
Adjusted balance at December 31, 2017	(32.5		)	6.8			(25.7		)	(6.3		)	(18.0		)	0		(1.4		)
Other comprehensive income (loss) before reclassifications:
Investment securities	(224.1		)	47.0			(177.1		)	(177.1		)	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			0			0			0			0			0		0
(Income) loss attributable to noncontrolling interest (NCI)	4.3			(1.0		)	3.3			0			0			0		3.3
Total other comprehensive income (loss) before reclassifications	(219.8		)	46.0			(173.8		)	(177.1		)	0			0		3.3
Less: Reclassification adjustment for amounts realized in net income by income statement line item:
Net impairment losses recognized in earnings	0			0			0			0			0			0		0
Net realized gains (losses) on securities	(98.3		)	20.5			(77.8		)	(77.8		)	0			0		0
Other gains (losses)	0			0			0			0			0			0		0
Interest expense	(1.0		)	0.2			(0.8		)	0			(0.8		)	0		0
Total reclassification adjustment for amounts realized in net income	(99.3		)	20.7			(78.6		)	(77.8		)	(0.8		)	0		0
Total other comprehensive income (loss)	(120.5		)	25.3			(95.2		)	(99.3		)	0.8			0		3.3
Balance at December 31, 2018	$	(153.0	)	$	32.1		$	(120.9	)	$	(105.6	)	$	(17.2	)	$	0	$	1.9

¹ Reflects the fair value changes on equity securities as of December 31, 2017 , which are reported as realized gains (losses) under the new accounting guidance. See Note 1 – Reporting and Accounting Policies for additional information.

² Reflects the effect of the change in the U.S. federal tax rate on our available-for-sale fixed-maturity securities and our hedges on forecasted transactions as of December 31, 2017 (see Note 1 – Reporting and Accounting Policies for additional information) and the adjustment to reflect the change in value on (income) loss attributable to NCI in conjunction with the "put" transaction (see Note 15 – Redeemable Noncontrolling Interest for additional information).

App.-A-45



										Components of Changes in Accumulated Other Comprehensive Income (after tax)
(millions)	Pretax total accumulated other comprehensive income (loss)			Total tax (provision) benefit			After tax total accumulated other comprehensive income (loss)			Total net unrealized gains (losses) on securities			Net unrealized gains (losses) 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	636.9			(224.0		)	412.9			412.9			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	0.4			(0.1		)	0.3			0			0			0.3			0
(Income) loss attributable to noncontrolling interest (NCI)	(3.5		)	1.2			(2.3		)	0			0			0			(2.3		)
Total other comprehensive income (loss) before reclassifications	625.8			(220.1		)	405.7			412.9			(5.2		)	0.3			(2.3		)
Less: Reclassification adjustment for amounts realized in net income by income statement line item:
Net impairment losses recognized in earnings	(14.9		)	5.3			(9.6		)	(9.6		)	0			0			0
Net realized gains (losses) on securities	103.3			(36.2		)	67.1			67.1			0			0			0
Other gains (losses) ¹	(1.2		)	0.4			(0.8		)	0			0			(0.8		)	0
Interest expense	0.3			(0.1		)	0.2			0			0.2			0			0
Total reclassification adjustment for amounts realized in net income	87.5			(30.6		)	56.9			57.5			0.2			(0.8		)	0
Total other comprehensive income (loss)	538.3			(189.5		)	348.8			355.4			(5.4		)	1.1			(2.3		)
Balance at December 31, 2017	$	1,977.8		$	(695.6	)	$	1,282.2		$	1,295.0		$	(14.8	)	$	0		$	2.0

¹ During 2017, we ceased writing insurance in Australia resulting in a loss of $1.2 million relating to the foreign currency translation adjustment. The loss is netted with other gains (losses) on our consolidated statements of comprehensive income for the year end December 31, 2017.

App.-A-46



										Components of Changes in Accumulated Other Comprehensive Income (after tax)
(millions)	Pretax total accumulated other comprehensive income (loss)			Total tax (provision) benefit			After tax total accumulated other comprehensive income (loss)			Total net unrealized gains (losses) on securities			Net unrealized gains (losses) on forecasted transactions			Foreign currency translation adjustment			(Income) loss attributable to NCI
Total 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	320.5			(112.6		)	207.9			207.9			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	0.6			(0.2		)	0.4			0			0			0.4			0
(Income) loss attributable to noncontrolling interest (NCI)	5.1			(1.9		)	3.2			0			0			0			3.2
Total other comprehensive income (loss) before reclassifications	326.1			(114.6		)	211.5			207.9			0			0.4			3.2
Less: Reclassification adjustment for amounts realized in net income by income statement line item:
Net impairment losses recognized in earnings	(27.1		)	9.5			(17.6		)	(17.6		)	0			0			0
Net realized gains (losses) on securities	146.3			(51.4		)	94.9			94.9			0			0			0
Other gains (losses)	0			0			0			0			0			0			0
Interest expense	1.9			(0.7		)	1.2			0			1.2			0			0
Total reclassification adjustment for amounts realized in net income	121.1			(42.6		)	78.5			77.3			1.2			0			0
Total other comprehensive income (loss)	205.0			(72.0		)	133.0			130.6			(1.2		)	0.4			3.2
Total at December 31, 2016	$	1,439.5		$	(506.1	)	$	933.4		$	939.6		$	(9.4	)	$	(1.1	)	$	4.3

In an effort to manage interest rate risk, we often enter into forecasted transactions on Progressive’s debt issuances. We expect to reclassify $1.0 million (pretax) into interest expense during the next 12 months, related to net unrealized losses on forecasted transactions (see Note 4 – Debt for further discussion).

12. 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 subsidiaries are named as defendants in a number of class action or individual lawsuits that challenge certain of the operations of the subsidiaries. Other insurance companies face many of these same issues.

We describe litigation contingencies for which a loss is probable. In addition, we establish accruals for these lawsuits when we can reasonably estimate potential loss exposure, which may include a range of loss, and we will disclose such amount or range of loss if material. As to lawsuits for which the loss 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 probable and estimable become so, at which point we would establish an accrual at our best estimate of the loss or range of loss.

We also describe litigation contingencies for which a loss is reasonably possible (but not probable). When disclosing reasonably possible litigation contingencies, we will disclose the amount or range of possible loss, if we are able to make that determination and if material. We review all reasonably possible losses on an ongoing basis to determine whether the likelihood of incurring a loss has become probable, or whether the circumstances have changed such that we may now reasonably estimate a range of loss.

App.-A-47

We may also be exposed to litigation contingencies that are remote. Remote litigation contingencies are those for which the likelihood of a loss is slight at period end. We do not disclose, or establish accruals for, remote litigation contingencies, but we evaluate these contingencies on an ongoing basis to determine whether the likelihood of a loss has increased.

Each year, certain of our pending litigation matters are brought to conclusion. For cases that have settled, but for which settlement is not complete, an accrual is established at our best estimate of the loss exposure. We regularly review these and other accruals to ensure they are adequate, and that there is not the possibility of material losses in excess of our accruals.

Settlements that are complete are fully reflected in our financial statements. The amounts accrued and/or paid for settlements during the periods presented were not material to our consolidated financial condition, cash flows, or results of operations.

The pending lawsuits summarized below are in various stages of development, and the outcomes are uncertain as of December 31, 2018. At period end, except to the extent an immaterial accrual has been established, we do not consider the losses from these pending cases to be both probable and estimable, and we are unable to estimate a range of loss at this time. It is not possible to determine loss exposure for a number of reasons, including, without limitation, one or more of the following: liability appears to be remote; putative class action lawsuits generally pose immaterial exposure until a class is actually certified, which, historically, has not been granted by courts in the vast majority of our cases in which class certification has been sought; class definitions are often indefinite and preclude detailed exposure analysis; and complaints rarely state an amount sought as relief, and when such amount is stated, it often is a function of pleading requirements and may be unrelated to the potential exposure.

We plan to contest these suits vigorously, but may pursue settlement negotiations in some cases, as we deem appropriate. In the event that any one or more of these cases results in a substantial judgment against, or settlement by, us or if our accruals (if any) prove to be inadequate, the resulting liability could have a material adverse effect on our consolidated financial condition, cash flows, and/or results of operations. Based on information currently known, we do not believe that the outcome of any pending cases described below will have a material impact on our consolidated financial condition, cash flows, and/or results of operations.

At December 31, 2018, pending lawsuits as described above that challenge certain of the operations of our subsidiaries included:

Lawsuits seeking class/collective action status :


•	alleging we sell or charge insureds for illusory coverage or coverage lower than amounts allowed by law for personal injury protection (PIP) coverage and pay related claims at levels lower than allowed by law.


•	challenging how physical damage claims are handled, adjusted and ultimately paid, including how we value total loss claims, the payment of fees and taxes associated with total losses, and the payment of diminution damages.


•	challenging our practice in Florida of adjusting PIP payments.


•	challenging our assessment of fees.


•	challenging our adjustment of medical bills submitted by insureds or medical providers in medical claims.


•	challenging our claim settlement practices where the tortfeasor and the injured party are both Progressive insureds.


•	challenging general claim practices, such as those relating to rental reimbursement.


•	challenging our payment and reimbursement practices to Medicare Advantage Plans on first party medical, PIP, and bodily injury claims.


•	alleging we improperly sell secondary PIP coverage to Medicare and Medicaid beneficiaries in New Jersey.


•	challenging our rating practices.


•	challenging our acceptance of uninsured motorist (UM) rejection.


•	alleging we sell illusory underinsured motorist (UIM) coverage.


•	alleging that the Snapshot ^® device causes damage to vehicles.


•	alleging that we fail to pay overtime to certain employees who we classify as exempt from overtime pay requirements.

Lawsuits certified or conditionally certified as class/collective actions :


•	alleging that we undervalued total loss claims through the use of certain valuation tools.


•	challenging our practice in Florida of adjusting PIP payments.


•	challenging the manner in which we grant a discount for anti-theft devices.

Individual lawsuits :


•	challenging the estimation of physical damage and payment practices for physical damage repairs, and allegations of tortious interference with contract and insurance industry antitrust practice asserted by body shops outside our network program.

App.-A-48


•	claiming that we and other shareholders were overpaid for stock as part of a leveraged buy-out that preceded the entity’s bankruptcy.


•	claiming patent infringement.


•	alleging that we are vicariously liable for the fraudulent acts of an agent.


•	challenging, on a representative basis, certain of our pay practices.


•	challenging various employment practices.

13. COMMITMENTS AND CONTINGENCIES

We have certain noncancelable operating lease commitments with lease terms greater than one year for property and computer equipment. The minimum commitments under these agreements at December 31, 2018 , were as follows:



(millions)	Commitments
2019	$	64.1
2020	65.5
2021	52.8
2022	24.3
2023	8.5
Thereafter	3.8
Total	$	219.0

Some of the leases have options to renew at the end of the lease periods. The expense we incurred for the leases disclosed above, as well as other operating leases that may be cancelable or have terms less than one year, was:



(millions)	Expense
2018	$	77.3
2017	77.2
2016	72.9

We also have certain noncancelable purchase obligations. The minimum commitment under these agreements at December 31, 2018 , was $697.5 million .

The insurance operations of ARX have several multiple-layer property catastrophe reinsurance contracts with various reinsurers with terms ranging from one to three years. The minimum commitment under these contracts was $81.5 million at December 31, 2018.

14. DIVIDENDS

Common Share Dividends

Following is a summary of our common shareholder dividends that were declared in the last three years, under our annual variable dividend policy:



(millions, except per share amounts)			Amount of Common Share Dividends
Dividend Type	Declared	Paid	Per Share		Accrued ¹
Annual – Variable	December 2018	February 2019	$	2.5140	$	1,467.9
Annual – Variable	December 2017	February 2018	1.1247		655.1
Annual – Variable	December 2016	February 2017	0.6808		395.4

¹ The accrual is based on an estimate of shares outstanding as of the record date and is recorded as a component of "accounts payable, accrued expenses, and other liabilities" on the Consolidated Balance Sheets; the prior year amount was reclassified into this line item from "dividends payable" to conform to the current year presentation. For the dividends declared in December 2017 and 2016, we paid $654.9 million and $395.4 million , respectively.

During 2018, 2017, and 2016, we maintained a policy of paying an annual variable dividend that, when declared, would be payable shortly after the close of the year. This annual variable dividend was based on a target percentage of after-tax underwriting income multiplied by a performance factor (Gainshare factor), which, in 2018, it was determined by reference to the Agency auto, Direct auto, special lines, Commercial Lines, and Property business units, with minor exclusions and

App.-A-49

adjustments. In December 2017 , the Board determined the target percentage for 2018 to be 33-1/3% of annual after-tax underwriting income, which is unchanged from the target percentage in both 2017 and 2016 . For the dividends declared in 2018, we applied a tax rate of 21% to calculate after-tax underwriting income, and a 35% tax rate for dividends declared for all prior years, since inception of the annual variable dividend. For the dividends declared in 2018 , the Gainshare factor was 1.91 , compared to 1.79 in 2017 and 1.67 in 2016 .

In December 2018, the Board of Directors terminated the annual variable dividend policy and replaced it with a policy under which the Board expects to declare regular, quarterly common share dividends and, on at least an annual basis, to consider declaring an additional common share dividend. This policy is effective for 2019.

Preferred Share Dividends

In March 2018, we issued 500,000 Series B Fixed-to-Floating Rate Cumulative Perpetual Serial Preferred Shares, without par value (the “Series B Preferred Shares”), with a liquidation preference of $1,000 per share (the “stated amount”). Holders of the Series B Preferred Shares will be entitled to receive cumulative cash dividends semi-annually in March and September, if and when declared by the Board of Directors. Until March 15, 2023 (the “fixed-rate period”), the annual dividend rate is fixed at 5.375% of the stated amount per share. Beginning March 15, 2023, the annual dividend rate switches to a floating rate equal to the three-month LIBOR rate plus a spread of 2.539% applied to the stated amount per share. After the fixed-rate period and up until redemption of the Series B Preferred Shares, the dividends would be payable quarterly, if and when declared by the Board of Directors. The Series B Preferred Shares are perpetual and have no stated maturity date. After the fixed-rate period, we may redeem the Series B Preferred Shares at the stated amount plus all accrued and unpaid dividends.

In 2018, the Board declared and we paid a dividend of $27.024 per preferred share, or $13.5 million .

15. 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 stockholders had the right to “put” a portion of their ARX shares to Progressive in 2018, and have the right to put all of their remaining shares to Progressive in 2021. In 2018, minority ARX stockholders put 204,527 shares, including 5,483 shares that were issued upon the exercise of outstanding stock options. Progressive acquired these additional shares, in a cash transaction, for a total cost of $295.9 million . If ARX stockholders do not put all of their shares to Progressive in 2021, Progressive has the ability to “call ” all of the outstanding shares shortly thereafter and to bring its ownership stake to 100% in 2021. Progressive's purchase prices for shares, pursuant to these put or call rights, will be determined by adding (A) the price per share paid at the closing on April 1, 2015, to (B) the product of the change in the fully diluted net tangible book value per share of ARX between December 31 , 2014, a nd December 31, 2020, times a multiple of between 1.0 and 2.0 . The multiple will be determined based on the growth and profitability of ARX’s business over the applicable time period, pursuant to criteria included in the stockholders’ agreement. Among other provisions, the stockholders’ agreement also prohibits ARX from taking a number of actions, including the payment of dividends, without the consent of The Progressive Corporation and one other stockholder.

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, calculated as described above, of the stockholders’ agreement.

The redeemable noncontrolling interest was initially recorded at a fair value of $411.5 million , representing the minority shares at the net acquisition price adjusted for the fair value of the put and call rights. The value of the put and call rights on the acquisition date was based on an internally developed modified binomial model. Subsequent changes to the redeemable noncontrolling interest are based on the maximum redemption value at the end of the reporting period, as determined in accordance with the stockholders’ agreement.

In addition to these minority shares, at December 31, 2018, ARX employees held options to purchase 16,067 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 $23.1 million is not recorded as part of redeemable NCI.

App.-A-50

The changes in the components of redeemable NCI during the year ended December 31, were:



(millions)	2018			2017		2016
Balance, Beginning of year	$	503.7		$	483.7	$	464.9
Net income attributable to NCI	5.7			5.9		26.2
Other comprehensive income (loss) attributable to NCI ¹	(3.3		)	2.3		(3.2		)
Exercise of employee stock options	9.4			3.4		0
Purchase/change of ARX minority shares	(298.2		)	0		0
Change in redemption value of NCI	(2.8		)	8.4		(4.2		)
Balance, End of year	$	214.5		$	503.7	$	483.7

¹ Amount represents the other comprehensive income (loss) attributable to NCI, as reflected on the the Consolidated Statements of Comprehensive Income; any reclassification to accumulated other comprehensive income (loss) attributable to NCI due to a change in the minority ownership percentage does not impact the amount of redeemable NCI.

16. GOODWILL AND INTANGIBLE ASSETS

Goodwill

Goodwill recorded at December 31, 2018 , and 2017, was $452.7 million . No accumulated goodwill impairment losses exist.

Intangible Assets

The following table is a summary of the net carrying amount of other intangible assets as of December 31 :



(millions)	2018		2017
Intangible assets subject to amortization	$	282.2	$	354.2
Indefinite-lived intangible assets ¹	12.4		12.4
Total	$	294.6	$	366.6

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 both years presented.

Intangible assets subject to amortization for the years ended December 31, consisted of the following:



(millions)	2018						2017
Category	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Policies in force	$	256.2	$	137.3	$	118.9	$	256.2	$	100.7	$	155.5
Agency relationships	159.2		42.6		116.6		159.2		31.3		127.9
Software rights	79.1		40.1		39.0		79.1		29.4		49.7
Trade name	34.8		27.1		7.7		34.8		13.7		21.1
Total	$	529.3	$	247.1	$	282.2	$	529.3	$	175.1	$	354.2

Amortization expense was $72.0 million , $66.2 million , and $62.1 million for the years ended December 31, 2018 , 2017 , and 2016, respectively.

During 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 the Progressive brand. As of December 31, 2018, the remaining average life of all of our intangible assets was 3.9 years .

App.-A-51

The estimated aggregate amortization on these intangible assets for each of the next five years as of December 31, 2018, is as follows:



(millions)
Year	Amortization Expense
2019	$	66.4
2020	56.9
2021	56.6
2022	29.2
2023	13.5

App.-A-52

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of The Progressive Corporation

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of The Progressive Corporation and its subsidiaries (the "Company") as of December 31, 2018 and 2017, and the related consolidated statements of comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2018 including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

App.-A-53

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

Cleveland, Ohio

February 27, 2019

We have served as the Company’s auditor since 1984.

App.-A-54

Management’s Report on Internal Control over Financial Reporting

Progressive’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Our internal control structure was designed under the supervision of our Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and our directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation under the framework in Internal Control – Integrated Framework (2013), management concluded that our internal control over financial reporting was effective as of December 31, 2018 .

During the fourth quarter 2018 , there were no changes in our internal control over financial reporting identified in the internal control review process that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PricewaterhouseCoopers LLP, an independent registered public accounting firm that audited the financial statements included in this Annual Report, has audited, and issued an attestation report on the effectiveness of, our internal control over financial reporting as of December 31, 2018 ; such report appears herein.

CEO and CFO Certifications

Susan Patricia Griffith, President and Chief Executive Officer of The Progressive Corporation, and John P. Sauerland, Vice President and Chief Financial Officer of The Progressive Corporation, have issued the certifications required by Sections 302 and 906 of The Sarbanes-Oxley Act of 2002 and applicable SEC regulations with respect to Progressive’s 2018 Annual Report on Form 10-K, including the financial statements provided in this Report. Among other matters required to be included in those certifications, Mrs. Griffith and Mr. Sauerland have each certified that, to the best of their knowledge, the financial statements, and other financial information included in the Annual Report on Form 10-K, fairly present in all material respects the financial condition, results of operations, and cash flows of Progressive as of, and for, the periods presented. See Exhibits 31 and 32 to Progressive’s Annual Report on Form 10-K for the complete Sections 302 and 906 certifications, respectively.

App.-A-55

The Progressive Corporation and Subsidiaries

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our consolidated financial statements and the related notes, together with the supplemental information, should be read in conjunction with the following discussion and analysis of our consolidated financial condition and results of operations.

I. OVERVIEW

The Progressive insurance organization has been offering insurance to consumers since 1937. The Progressive Corporation is a holding company that does not have any revenue producing operations, physical property, or employees of its own. The Progressive Corporation wholly owns insurance and non-insurance subsidiaries and owns a controlling interest in ARX Holding Corp. (“ARX”), the parent company of American Strategic Insurance and other insurance subsidiaries and affiliates (“ASI”) and non-insurance subsidiaries. The Progressive Group of Insurance Companies consists of our insurance subsidiaries and affiliates. The Progressive Group of Insurance Companies, together with our holding company, its other subsidiaries, and affiliates, comprise what we refer to as Progressive.

The Progressive Group of Insurance Companies offer personal and commercial auto insurance, residential property insurance, and other specialty property-casualty insurance and related services throughout the United States. Our Personal Lines segment writes insurance for personal autos and recreational vehicles, which we refer to as our special lines products, through more than 35,000 independent insurance agencies and directly to consumers online, on mobile devices, and over the phone. Our Commercial Lines segment offers insurance for cars and trucks owned and/or operated predominantly by small businesses through both the independent agency and direct channels. Our Property segment writes residential property insurance for homeowners, other property owners, and renters in both the independent agency channel and the direct channel. We are the third largest private passenger auto insurer in the country, the number one writer of commercial auto insurance, and one of the top 15 homeowners insurance carriers based on premiums written.

Our underwriting operations, combined with our service and investment operations, make up the consolidated group.

A. Operating Results

The Progressive Group of Insurance Companies recognized strong growth in both premiums and policies in force in 2018 across all of its segments. On a year-over-year basis, both net premiums written and earned grew 20% to $32.6 billion and $30.9 billion, respectively. During the year, we generated nearly $5.5 billion more in written premiums than in 2017, reflecting both unit growth and an increase in average written premiums per policy. We had 20.4 million companywide policies in force at December 31, 2018, an increase of 12%, or 2.2 million policies, over the prior year.

On a year-over-year basis, net income and comprehensive income attributable to Progressive increased 64% and 30%, respectively, primarily reflecting an increase in our underwriting results. We produced an underwriting margin of 9.4%, which was 2.8 points better than 2017, reflecting a decrease in catastrophe losses, along with an increase in average written premium per policy and a decrease in our auto claims frequency compared to 2017.

Investment income (e.g., interest and dividends) increased 46% on a year-over-year basis, primarily reflecting an increase in average assets and portfolio yields. The realized losses on securities for 2018 were primarily the result of net holding period losses on our equity portfolio. Due to a change in accounting guidance, as of January 1, 2018, the change in value of our equity securities is reported as a component of net income, instead of being a component of other comprehensive income as they were classified in the prior year. This accounting change caused volatility in net income for 2018, based on equity market conditions, and will likely cause volatility in the future. Therefore, year-over-year comparisons of net income may be less meaningful and comprehensive income may be a more beneficial measure of our overall performance. Comprehensive income was $2.5 billion, an increase of $0.6 billion from last year, driven primarily by our previously mentioned significant increase in underwriting profitability.

The impairment losses for the year reflected write-downs on investments related to renewable energy tax credits, which are held outside of our investment portfolio and are reported in other assets. As a result of these investments, we also recorded $71.0 million of federal tax benefits in our income tax provision during 2018, which represented all of the expected tax benefits from these investments (see Note 5 – Income Taxes for further discussion). In addition, the change in the statutory federal income tax rate to 21% from 35% last year reduced our tax expense for 2018.

We ended 2018 with total capital (debt plus shareholders’ equity) of $15.2 billion, $2.6 billion more than 2017. The year-over-year increase reflects income generated, along with $1.65 billion of debt and preferred equity issued, during the year, netted with our common share dividend of $1.5 billion.

App.-A-56

B. Insurance Operations

For 2018, our companywide underwriting profit margin was 9.4%, compared to 6.6% in 2017. Our Personal and Commercial Lines operating segments were profitable with underwriting margins of 9.7% and 13.3%, respectively, while our Property segment had an underwriting loss of 6.9% for the year, which included 5.6 points of amortization expense, predominately related to the acquisition of a majority interest in ARX in 2015. Our special lines products also had a profitable year, contributing a 0.4 point favorable impact on our total Personal Lines combined ratio points.

During the year, on a companywide basis, we recognized 2.0 loss ratio points related to catastrophe losses, compared to 3.2 points in 2017. The unfavorable impact of these catastrophe losses for our vehicle businesses and Property business were 1.1 points and 20.9 points, respectively, compared to 2.1 points and 30.3 points last year. Hurricane Michael was the largest named storm in 2018 and accounted for 20% of our companywide net catastrophe losses. On a direct basis, the Property business incurred about $130 million of losses and loss and loss adjustment expenses (LAE) from Hurricane Michael, but ceded $70 million under our catastrophe reinsurance agreements.

For the year, our companywide prior accident year development was 0.3 points of unfavorable impact on our combined ratio, compared to 0.1 points of unfavorable development in 2017. Our overall incurred severity in our personal auto businesses increased about 5%, while frequency decreased about 3%, compared to the prior year.

On a year-over-year basis, both companywide net premiums written and earned increased 20%. Changes in net premiums written are a function of new business applications (i.e., policies sold), premium per policy, and retention.

During 2018, total new personal auto applications increased 20% on a year-over-year basis, including a 14% increase in our Agency auto business and a 25% increase in our Direct auto business. The significant increase in Direct auto applications reflects, in part, increased advertising spend during the year, as well as our improved competitive position in the marketplace. We will continue to spend on marketing when we believe it is an efficient use of our dollars. We continued to generate strong growth in our bundled auto and home customers (i.e., Robinsons) in both the Agency and Direct channels. Increasing the number of Robinsons we write is critical to achieving success in our Destination Era strategy.

For our Commercial Lines business, new applications increased 12% for the year. This increase was primarily driven by increased quote volume and the lifting of certain underwriting restrictions that were in place during 2017. We will continue to monitor our rate levels with a view toward continuing to manage profitable growth, while providing high-quality customer service.

Our Property business new applications increased 53% for the year. The growth in the Property business includes state expansion and more competitive product offerings. Part of the year-over-year increase also reflected business that we began writing in 2018 when an unaffiliated carrier stopped offering homeowners insurance through our in-house agency, as well as growth in both the number of Platinum agents and the business written through those agencies.

During 2018, on a year-over-year basis, written premium per policy increased 5% for our Agency and 4% for our Direct personal auto businesses, primarily reflecting a 1.2% increase in auto rates taken during the year and a shift in business mix. Written premium per policy for our special lines products increased 5%, compared to last year. Commercial Lines experienced a 14% increase in written premium per policy, which reflects shifts in our mix of businesses to higher premium products, as well as rate actions taken throughout 2017 and 2018. For the Property business, written premium per policy decreased 3% , primarily reflecting the renters business, which has lower premiums per policy, comprising a greater proportion of the total Property business. For our core Property business (e.g., home and condo insurance), the written premium per policy increased slightly. We continue to increase rate levels in our Property business to help meet our profitability targets in this segment. As Property policies generally have 12 month terms, much of our rate increases taken in the second half of 2017 and during 2018 have yet to be reflected in earned premium.

To grow policies in force, it is critical that we retain our customers for longer periods. Consequently, increasing retention continues to be one of our most important priorities. Our efforts to increase our share of multi-product households continue to be a key initiative to support that goal. Policy life expectancy, which is our actuarial estimate of the average length of time that a policy will remain in force before cancellation or lapse in coverage, is our primary measure of customer retention in our vehicle businesses. Our trailing 12-month total auto policy life expectancy was up 3% over last year, while our total auto trailing 3-month policy life expectancy, which does not address seasonality and can reflect more volatility, was down 4%. Our Agency auto and Direct auto trailing 12-month policy life expectancy were up 4% and 1%, respectively, special lines decreased 3%, and Commercial Lines increased 1% year over year. The increases in our 12-month policy life expectancy for our auto businesses reflect our improved competitive position in 2018 as well as our Destination Era initiatives, where we have experienced an increase in customers who bundle their auto coverage with other products, which tends to translate to longer

App.-A-57

relationships with these customers. We remain focused in our retention efforts in light of the trailing 3-month policy life expectancy decreasing year over year, since this metric tends to be a leading indicator of retention. We are also continuing to make investments to improve the customer experience in an effort to lengthen retention.

C. Investments

The fair value of our investment portfolio was $ 33.6 billion at December 31, 2018 . 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 our Group II securities (the securities allocated to Group I and II are defined below under Results of Operations – Investments ). At December 31, 2018 , 14% of our portfolio was allocated to Group I securities and 86% to Group II securities, compared to 17% and 83%, respectively, at December 31, 2017 .

Our recurring investment income generated a pretax book yield of 2.8% for 2018 , compared to 2.4% for 2017 . Our investment portfolio produced a fully taxable equivalent (FTE) total return of 1.2% for 2018 , compared to 5.2% for 2017 . Our fixed-income and common stock portfolios had FTE total returns of 1.5% and (4.4)% , respectively, for 2018 , and 3.0% and 21.8% , for 2017 .

At December 31, 2018 , the fixed-income portfolio had a weighted average credit quality of AA- and a duration of 2.8 years, compared to AA- and 2.5 years at December 31, 2017 . We lengthened our portfolio duration modestly during the year in response to higher interest rates as the risk/reward to our portfolio’s value at higher rate levels moved toward a more

balanced position. However, our duration remains below the mid-point of our range as a means to limit a decline in portfolio

value from a significant increase in rates from current levels.

II. FINANCIAL CONDITION

A. Liquidity and Capital Resources

The Progressive Corporation receives cash through subsidiary dividends, security sales, borrowings, and other transactions, and uses these funds to contribute to its subsidiaries (e.g., to support growth), to make payments to shareholders and debt holders (e.g., dividends and interest, respectively), and to repurchase its common shares and debt, as well as for acquisitions and other business purposes that might arise.

During 2018, The Progressive Corporation received cash from the following sources:


•	Subsidiary dividends - received $760.8 million of dividends, net of capital contributions, from our insurance and non-insurance subsidiaries,


•	Debt issuances - issued $600 million of our 4.20% Senior Notes due 2048 and $550 million of our 4.00% Senior Notes due 2029 in underwritten public offerings, and


•	Preferred share issuance - issued $500 million of Series B Fixed-to-Floating Rate Cumulative Perpetual Serial Preferred Shares, without par value (the "Series B Preferred Shares"), in an underwritten public offering.

The Progressive Corporation deployed capital through the following actions in 2018:


•	Dividends


◦	Common shares - declared a $2.5140 per common share annual variable dividend, which returned $1,467.9 million of capital to our common shareholders in February 2019, and


◦	Preferred shares - declared and paid $13.5 million to our Series B Preferred shareholders;


•	Increased our percentage ownership of ARX when minority ARX stockholders sold shares to Progressive, at a total cost of $295.9 million;


•	Repurchased 1.4 million of our common shares at a total cost of $79.0 million, primarily pursuant to our equity compensation plans and to neutralize dilution from equity-based compensation in the year of issuance as stated in our financial policies; and


•	Loaned funds to ARX, which it used in part to repay in full term loans from third parties in the aggregate principal amount of $37.1 million.

Over the last three years, The Progressive Corporation received dividends from its subsidiaries, net of capital contributions, of $1.8 billion. Regulatory restrictions on subsidiary dividends are described in Note 8 – Statutory Financial Information .

During the last three years, we issued $2.5 billion of senior notes and $500 million of our Series B Preferred Shares to take advantage of attractive terms in the market and provide additional financial flexibility. 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 that our debt securities are downgraded by a rating agency. During the last three years, we did not borrow under our uncommitted line of credit or engage in other short-term borrowings to fund our

App.-A-58

operations or for liquidity purposes. During the same period, we repaid $0.8 billion of our outstanding debt, paid common and preferred share dividends of $1.6 billion, and repurchased our common shares at a total cost of $0.3 billion. We also paid $0.3 billion to increase our ownership of ARX (discussed below).

Prior to 2019, we maintained a policy of paying a common share annual variable dividend that, if declared, would be payable shortly after the close of the year. Under this policy, we declared dividends in each of the last three years based on a specified formula. In December 2018, the Board of Directors terminated our annual variable dividend policy, effective after payment of the 2018 annual variable dividend in February 2019. See Note 14 – Dividends for a further discussion of our 2018 common share annual variable dividend policy, along with the details on the preferred share dividend payments.

In lieu of the annual variable dividend policy, the Board expects to declare regular, quarterly common share dividends and, on at least an annual basis, consider declaring an additional common share dividend after considering our existing capital resources and current and future capital needs and not solely based on a specific formula or calculation. The ultimate decision on whether or not a dividend will be paid is in the discretion of the Board and they could decide to alter our policy, or to not declare a quarterly or annual common share dividend, at any time. 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 the U.S. federal income tax laws, disruptions of national or international capital markets, or other events affecting our business, liquidity, or financial position. Under the dividend policy effective in 2019, it is expected that the Board will initially target the regular, quarterly common share dividend to be about $0.10 per quarter.

For the three years ended December 31, 2018, operations generated positive cash flows of about $12.8 billion, and cash flows are expected to remain positive in both the short-term and reasonably foreseeable future. In 2018, operating cash flows increased $2.5 billion, compared to 2017, primarily due to an increase in premiums collected in excess of paid losses due to the growth during the year. As of December 31, 2018, we held $11.7 billion in short-term investments and U.S. Treasury securities. Based on our portfolio allocation and investment strategies, we believe that we have sufficient readily available marketable securities to cover our claims payments in the event our cash flow from operations were to be negative. See Item 1A, “Risk Factors,” in our Form 10-K filed with the Securities and Exchange Commission for a discussion of certain matters that may affect our portfolios and capital position.

Progressive’s insurance operations create liquidity by collecting and investing premiums from new and renewal business in advance of paying claims. As primarily an auto insurer, our claims liabilities are generally short in duration. Typically, at any point in time, approximately 50% of our outstanding loss and LAE reserves are paid within the following twelve months and less than 20% are still outstanding after three years. See Note 6 – Loss and Loss Adjustment Expense Reserves for further information on the timing of claims payments.

Insurance companies are required to satisfy regulatory surplus and premiums written-to-surplus ratio requirements. As of December 31, 2018, our consolidated statutory surplus was $11.7 billion, compared to $9.7 billion at December 31, 2017. Our net premiums written-to-surplus ratio was 2.8 to 1 at year-end 2018 and 2017, compared to 2.7 to 1 at year-end 2016. At year-end 2018, we also had access to $2.9 billion of securities held in a non-insurance subsidiary, portions of which could be contributed to the capital of our insurance subsidiaries to support growth or for other purposes. We used $1.5 billion of available funds to pay the annual variable dividend in February 2019.

Insurance companies are also required to satisfy risk-based capital ratios. These ratios are determined by a series of dynamic surplus-related calculations required by the laws of various states that contain a variety of factors that are applied to financial balances based on the degree of certain risks (e.g., asset, credit, and underwriting). Our insurance subsidiaries’ risk-based capital ratios are in excess of applicable minimum regulatory requirements. Nonetheless, the payment of dividends by our insurance subsidiaries are subject to certain limitations. See Note 8 – Statutory Financial Information for additional information on insurance subsidiary dividends and Note 15 – Redeemable Noncontrolling Interest for information on the dividend restriction under the ARX stockholders’ agreement.

App.-A-59

We seek to deploy our capital in a prudent manner and use multiple data sources and modeling tools to estimate the frequency, severity, and correlation of identified exposures, including, but not limited to, catastrophic and other insured losses, natural disasters, and other significant business interruptions, to estimate our potential capital needs. Management views our capital position as consisting of three layers, each with a specific size and purpose:


•	The first layer of capital, which we refer to as “regulatory capital,” is the amount of capital we need to satisfy state insurance regulatory requirements and support our objective of writing all the business we can write and service, consistent with our underwriting discipline of achieving a combined ratio of 96 or better. This capital is held by our various insurance entities.

•

The second layer of capital we call “extreme contingency.” While our regulatory capital is, by definition, a cushion for absorbing financial consequences of adverse events, such as loss reserve development, litigation, weather catastrophes, and investment market corrections, we view that as a base and hold additional capital for even more extreme conditions. The modeling used to quantify capital needs for these conditions is extensive, including tens of thousands of simulations, representing our best estimates of such contingencies based on historical experience. This capital is held either at a non-insurance subsidiary of the holding company or in our insurance entities, where it is potentially eligible for a dividend up to the holding company.


•	The third layer is capital in excess of the sum of the first two layers and provides maximum flexibility to fund other business opportunities, repurchase stock or other securities, satisfy acquisition-related commitments, and pay dividends to shareholders, among other purposes. This capital is largely held at a non-insurance subsidiary of the holding company.

At all times during the last two years, our total capital exceeded the sum of our regulatory capital layer plus our self-constructed extreme contingency layer. At December 31, 2018, we held total capital (debt plus shareholders’ equity) of $15.2 billion, compared to $12.6 billion at December 31, 2017. Our debt-to-total capital (debt plus shareholders’ equity, which does not include redeemable noncontrolling interest) ratios at December 31, 2018, 2017, and 2016 were 28.9%, 26.3%, and 28.3%, respectively, and were consistent with our financial policy of maintaining a ratio of less than 30%, which we target to meet annually.

Based upon our capital planning and forecasting efforts, we believe that we have sufficient capital resources and cash flows from operations to support our current business, scheduled principal and interest payments on our debt, dividends on our common shares and Series B Preferred Shares, our contractual obligations, and other expected capital requirements for the foreseeable future.

We have an unsecured discretionary line of credit (the "Line of Credit") with PNC Bank, National Association, in the maximum principal amount of $250 million, which will expire on April 30, 2019. 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 last three years.

App.-A-60

B. Commitments, Contingencies, and Other Off-Balance-Sheet Arrangements

Contractual Obligations

A summary of our noncancelable contractual obligations as of December 31, 2018, follows:



	Payments due by period
(millions)	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Debt	$	4,450.0	$	0	$	500.0	$	0	$	3,950.0
Interest payments on debt	3,469.7		184.9		376.3		338.8		2,569.7
Operating leases	219.0		64.1		118.3		32.8		3.8
Purchase obligations	697.5		565.4		121.2		10.5		0.4
Catastrophe excess of loss reinsurance contracts ¹	81.5		74.8		6.7		0		0
Loss and loss adjustment expense reserves	15,400.8		7,618.2		5,028.6		1,314.4		1,439.6
Total	$	24,318.5	$	8,507.4	$	6,151.1	$	1,696.5	$	7,963.5

¹ The insurance operations of ARX have several multiple-layer property catastrophe reinsurance contracts with various reinsurers with terms ranging from one to three years.

Purchase obligations represent our noncancelable commitments for goods and services (e.g., software licenses, maintenance on information technology equipment, and media placements). Unlike many other forms of contractual obligations, loss and LAE reserves do not have definitive due dates and the ultimate payment dates are subject to a number of variables and uncertainties. As a result, the total loss and LAE reserve payments to be made by period, as shown above, are estimates based on our recent payment patterns. To further understand our claims payments, see Note 6 – Loss and Loss Adjustment Expense Reserves .

Off-Balance-Sheet Arrangements

During the last two years, our off-balance-sheet leverage included operating leases and purchase obligations (disclosed in the table above and Note 13 – Commitments and Contingencies ). We did not have any open derivative positions at December 31, 2018 and 2017. We did not have any U.S. Treasury futures contracts during 2018 or 2017. During 2016, we opened and closed, within the same year, U.S. Treasury futures contracts as a means to manage the overall duration of our fixed-income portfolio and recorded net realized gains of $0.3 million.

App.-A-61

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.

The following table shows the composition of our companywide net premiums written, by segment, for the years ended December 31:



	2018		2017		2016
Personal Lines
Agency	41	%	43	%	43	%
Direct	42		42		42
Total Personal Lines ¹	83		85		85
Commercial Lines	12		11		11
Property	5		4		4
Total underwriting operations	100	%	100	%	100	%

¹ Personal auto represented 94% of our total Personal Lines net premiums written in 2018, 93% in 2017, and 92% in 2016; our special lines products accounted for the balance.

Our Personal Lines segment writes insurance for personal auto and special lines products (e.g., motorcycles, watercraft, and RVs). We currently write our Personal Lines products in all 50 states. We also offer our personal auto product (not special lines products) in the District of Columbia. Our personal auto policies are primarily written for 6-month terms, while the special lines products 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. The majority of our Commercial Lines business is written through the independent agency channel. The amount of business written through the direct channel continues to grow and represented about 12% of premiums written for 2018. We write Commercial Lines business in all 50 states and our policies are primarily written for 12-month terms.

Our Property business writes residential property insurance for single family homes, condominium unit owners, renters, etc., and primarily consists of the operations of the ARX organization. We write the majority of our Property business through the independent agency channel; however, we continue to expand the distribution of our Property product offerings in the direct channel. Property policies are written for 12-month terms. We write residential property insurance in 43 states and the District of Columbia, and both renters insurance and flood insurance in 44 states and the District of Columbia. Our flood insurance is written primarily through the National Flood Insurance Program. Florida and Texas remain the largest states for the Property business, comprising just over 40% of the 2018 written premium volume.

App.-A-62

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 margin, which is underwriting profit or loss expressed as a percentage of net premiums earned, to analyze our results. For the three years ended December 31, our underwriting profitability results were as follows:



	2018					2017					2016
	Underwriting Profit (Loss)					Underwriting Profit (Loss)					Underwriting Profit (Loss)
($ in millions)	$			Margin		$			Margin		$			Margin
Personal Lines
Agency	$	1,435.7		11.0	%	$	839.6		7.5	%	$	492.8		5.0	%
Direct	1,088.5			8.4		683.7			6.3		412.2			4.4
Total Personal Lines	2,524.2			9.7		1,523.3			6.9		905.0			4.7
Commercial Lines	478.6			13.3		214.1			7.7		155.2			6.4
Property ¹	(88.7		)	(6.9	)	(50.3		)	(5.1	)	32.5			3.8
Other indemnity ²	0.9			NM		(0.2		)	NM		(1.6		)	NM
Total underwriting operations	$	2,915.0		9.4	%	$	1,686.9		6.6	%	$	1,091.1		4.9	%

¹ During 2018, 2017, and 2016, pretax profit (loss) includes $72.0 million, $66.2 million, and $62.1 million, respectively, of amortization expense predominately associated with the acquisition of a controlling interest in ARX. Although this expense is included in our Property segment, it is not reported in the consolidated results of ARX and, therefore, does not affect the value of net income attributable to noncontrolling interest.

² Underwriting margins for our other indemnity businesses are not meaningful (NM) due to the low level of premiums earned by, and the variability of loss costs in, such businesses .

Our underwriting profit for 2018, compared to 2017 and 2016, was favorably impacted by higher earned premium per policy in both the Personal Lines and Commercial Lines businesses, reflecting increases in rates and shifts in the mix of business. In addition, claims frequency decreased in 2018 and 2017, in excess of the amounts anticipated for both our personal and commercial auto products. Catastrophe losses as a percent of earned premiums were also lower in 2018 than in 2017 and 2016, contributing to the improved profitability.

App.-A-63

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, as defined in Note 10 – Segment Information , were as follows:



Underwriting Performance ¹	2018	2017	2016
Personal Lines – Agency
Loss & loss adjustment expense ratio	69.8	73.0	75.3
Underwriting expense ratio	19.2	19.5	19.7
Combined ratio	89.0	92.5	95.0
Personal Lines – Direct
Loss & loss adjustment expense ratio	71.4	74.1	76.8
Underwriting expense ratio	20.2	19.6	18.8
Combined ratio	91.6	93.7	95.6
Total Personal Lines
Loss & loss adjustment expense ratio	70.6	73.6	76.1
Underwriting expense ratio	19.7	19.5	19.2
Combined ratio	90.3	93.1	95.3
Commercial Lines
Loss & loss adjustment expense ratio	66.3	70.3	71.9
Underwriting expense ratio	20.4	22.0	21.7
Combined ratio	86.7	92.3	93.6
Property
Loss & loss adjustment expense ratio	72.8	70.8	63.2
Underwriting expense ratio ²	34.1	34.3	33.0
Combined ratio ²	106.9	105.1	96.2
Total Underwriting Operations ³
Loss & loss adjustment expense ratio	70.2	73.1	75.1
Underwriting expense ratio	20.4	20.3	20.0
Combined ratio	90.6	93.4	95.1
Accident year – Loss & loss adjustment expense ratio ⁴	69.9	73.0	75.5

¹ Ratios are expressed as a percentage of net premiums earned; fees and other revenues are deducted from underwriting expenses in the ratio calculations.

² Included in 2018, 2017, and 2016, are 5.6 points, 6.7 points, and 7.2 points, respectively, of amortization expense predominately associated with our acquisition of a controlling interest in ARX. Excluding this expense, the Property business would have reported expense ratios of 28.5, 27.6, and 25.8, and combined ratios of 101.3, 98.4, and 89.0, for 2018, 2017, and 2016, 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.

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.

App.-A-64

Losses and Loss Adjustment Expenses (LAE)



(millions)	2018		2017		2016
Change in net loss and LAE reserves	$	1,911.3	$	1,349.8	$	973.2
Paid losses and LAE	19,809.7		17,458.2		15,906.4
Total incurred losses and LAE	$	21,721.0	$	18,808.0	$	16,879.6

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. See Critical Accounting Policies for a discussion of the effect of changing estimates.

Our total loss and LAE ratio decreased 2.9 points and 2.0 points in 2018 and 2017, respectively, compared to the prior year. Our accident year loss and LAE ratio, which excludes the impact of prior accident year reserve development during each calendar year, decreased 3.1 points and 2.5 points in 2018 and 2017, respectively. Several factors that contributed to the year-over-year changes are discussed below and include the impact of catastrophe losses, changes in severity and frequency, and prior accident year reserve development. Lower catastrophe losses and a decrease in auto frequency were the primary factors contributing to the improved ratios in 2018.

We experienced severe weather conditions in several areas of the country during each of the last three years. Hail storms, tornadoes, wind, flooding, and hurricane activity contributed to catastrophe losses each year. The following table shows catastrophe losses incurred for the years ended December 31:



($ in millions)	2018			2017			2016
Vehicle businesses	$	337.1		$	531.2		$	381.1
Property business, net of reinsurance (excluding ASL)	274.4			303.5			170.7
Reinsurance recoverable on ASL ¹	(5.6		)	(4.2		)	—
Property business, net	268.8			299.3			170.7
Total catastrophe losses incurred	$	605.9		$	830.5		$	551.8
Increase to combined ratio	2.0		pts.	3.2		pts.	2.5		pts.

¹ Represents the reinsurance recoverable recorded on the losses under our aggregate stop-loss agreement (ASL); see table below for further information.

The catastrophe losses in 2018 were primarily due to severe storms in California, Colorado, Florida, Georgia, North Carolina, and Texas, including Hurricane Michael and wildfires in California. We responded, and will continue to respond, promptly to catastrophic events when they occur in order to provide exemplary claims service to our customers.

We do not have catastrophe-specific reinsurance for our vehicle businesses, but we reinsure most of our Property business against various risks, including, but not limited to, catastrophic losses. The Property business has aggregate stop-loss agreements and catastrophe reinsurance coverage agreements.

We had aggregate stop-loss reinsurance agreements (ASL), which were in effect during 2018 and 2017, with substantially the same terms. These ASL agreements cover Property losses and a portion of LAE known as allocated loss adjustment expenses (ALAE) except those from named storms (both hurricanes and tropical storms) and liability claims, for business written by ARX subsidiaries that write Property business. As such, it provides protection for losses and ALAE incurred by our Property business in the ordinary course, including those resulting from other significant severe weather events, such as hail, tornadoes, etc. This agreement provides $200 million of coverage to the extent that the net loss and LAE ratio for the full accident year exceeds 63%. The ASL reduces the likelihood that we will experience a net underwriting loss for reasons other than named storms and liability claims. In 2019, we renewed the ASL agreement under substantially the same terms as the prior agreements with the exception that the 2019 ASL agreement also covers an additional $100 million of retained losses and ALAE from named storms.

App.-A-65

We did not have any covered losses that exceeded the threshold under the 2018 ASL agreement. The table above reports the reinsurance recoverables under our aggregate stop-loss agreements related to development on 2017 losses during 2018, and for accident year 2017 losses in 2017. The following table shows the total reinsurance recoverables activity during 2018 and 2017, under the ASL by accident year:



	Calendar Year
(millions)	2018		2017
Reinsurance recoverable balance at January 1	$	4.6	$	0
Reinsurance recoverables recognized on losses
Accident year:
2018	0		0
2017	5.6		4.2
Total	5.6		4.2
Reinsurance recoverables recognized on ALAE
Accident year:
2018	0		0
2017	2.3		0.4
Total	2.3		0.4
Total reinsurance recoverables recognized
Accident year:
2018	0		0
2017	7.9		4.6
Total	7.9		4.6
Reinsurance recoverable balance at December 31	$	12.5	$	4.6

In addition to the aggregate stop-loss agreements, our Property business is covered by multi-year catastrophe reinsurance contracts, which carry retention thresholds for losses and LAE from a single catastrophic event of $60 million for 2018, compared to the $50 million retention level in 2017. We believe this increased retention level is appropriate given our growth in both premiums and regulatory capital. On a gross basis, including losses and LAE, the Property business incurred $130 million from Hurricane Michael. Pursuant to the excess of loss reinsurance coverages, we were able to cede $70 million of these losses and LAE. Our Property business gross losses and LAE from Hurricane Florence and the California wildfires did not exceed the $60 million retention threshold.

The following discussion of our severity and frequency trends in our personal auto businesses excludes comprehensive coverage because of its inherent volatility, as it is typically linked to catastrophic losses generally resulting from adverse weather. For our commercial auto products, the reported frequency and severity trends include comprehensive coverage. Comprehensive coverage insures against damage to a customer’s vehicle due to various causes other than collision, such as windstorm, hail, theft, falling objects, and glass breakage.

Total personal auto incurred severity (i.e., average cost per claim, including both paid losses and the change in case reserves) on a calendar-year basis was up over the prior-year periods in the 3% to 5% range for the last three years.


•	2018 - Severity increased about 8% for our collision coverage, about 4% for our property damage and bodily injury coverages, and about 2% for our Personal Injury Protection (PIP) coverage.


•	2017 - Severity increased about 5% for our property damage coverage, about 4% for our PIP coverage, and 2% for our bodily injury coverage, while collision coverage was flat.


•	2016 - Severity increased about 5% for our PIP coverage, about 3% for our property damage coverage, about 4% for collision coverage, and 2% for our bodily injury coverage.

On a calendar-year basis, our commercial auto products incurred severity increased 10% in 2018, compared to a 7% increase in 2017, and a 17% increase in 2016. About half of the severity increase in 2018 reflects a shift in the mix of business to for-hire trucking, which has higher average severity than the business auto and contractor market tiers.

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.

App.-A-66

Our personal auto incurred frequency, on a calendar-year basis, was down about 3% in both 2018 and 2017, and flat in 2016.


•	2018 - Frequency decreased about 3% for all coverages (PIP, collision, property damage, and bodily injury).


•	2017 - Frequency decreased about 5% for our PIP coverage, about 4% for our collision coverage, about 3% for our property damage coverage, and 2% for our bodily injury coverage.


•	2016 - Our collision coverage had a decrease in frequency of about 1%. Our property damage coverage frequency was relatively flat, while our PIP and bodily injury coverages had an increase in frequency of about 1% and 3%, respectively.

On a year-over-year basis, incurred frequency in our Commercial Lines business saw a decrease of about 3% in both 2018 and 2017, and an increase of about 4% for 2016. The 2018 frequency decrease was in part driven by continued product segmentation and underwriting restrictions, which created a mix shift toward more preferred, lower-frequency, business.

We closely monitor the changes in frequency, but the degree or direction of near-term frequency change is not something that we are able to predict with any certainty. We 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, advances in vehicle safety, and unemployment rates, versus those resulting from shifts in the mix of our business, to allow us to reserve more accurately for our loss exposures.

The table below presents the actuarial adjustments implemented and the loss reserve development experienced in the years ended December 31:



($ in millions)	2018			2017			2016
ACTUARIAL ADJUSTMENTS
Reserve decrease (increase)
Prior accident years	$	(25.0	)	$	138.5		$	142.6
Current accident year	17.0			(19.8		)	(6.2		)
Calendar year actuarial adjustments	$	(8.0	)	$	118.7		$	136.4
PRIOR ACCIDENT YEARS DEVELOPMENT
Favorable (unfavorable)
Actuarial adjustments	$	(25.0	)	$	138.5		$	142.6
All other development	(63.5		)	(164.4		)	(55.1		)
Total development	$	(88.5	)	$	(25.9	)	$	87.5
(Increase) decrease to calendar year combined ratio	(0.3		) pts.	(0.1		) pts.	0.4		pts.

Total development consists of both actuarial adjustments and “all other development.” The actuarial adjustments represent the net changes made by our actuarial staff to both current and prior accident year reserves based on regularly scheduled reviews. Through these reviews, our actuaries identify and measure variances in the projected frequency and severity trends, which allow them to adjust the reserves to reflect the current cost trends. For our Property business, 100% of the outstanding reserves are 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. Development for catastrophe losses for the vehicle businesses would be reflected in "all other development," discussed below, to the extent they relate to prior year reserves. We report these actuarial adjustments separately for the current and prior accident years to reflect these adjustments as part of the total prior accident years development.

“All other development” represents claims settling for more or less than reserved, emergence of unrecorded claims at rates different than anticipated in our incurred but not recorded (IBNR) reserves, and changes in reserve estimates on specific claims. Although we believe the development from both the actuarial adjustments and “all other development” generally results from the same factors, we are unable to quantify the portion of the reserve development that might be applicable to any one or more of those underlying factors.

Our objective is to establish case and IBNR reserves that are adequate to cover all loss costs, while incurring minimal variation from the date the reserves are initially established until losses are fully developed. As reflected in the table above, we experienced unfavorable prior year development during both 2018 and 2017 and favorable development during 2016. For 2018, we incurred unfavorable reserve development primarily due to reopened PIP claims in our personal auto business. For 2017, we incurred unfavorable reserve development in our Agency personal auto business, which was partially offset by favorable development in our Property business. For 2016, we incurred favorable reserve development in both our Personal Lines and Property businesses, which was partially offset by unfavorable IBNR loss reserve development in our Commercial Lines

App.-A-67

business due to higher severity and frequency of late reported claims than anticipated for accident year 2015. See Note 6 – Loss and Loss Adjustment Expense Reserves for a more detailed discussion of the factors impacting 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

On a year-over-year basis, our total underwriting expenses increased 21% in 2018 and 16% in 2017, primarily reflecting an increase in our advertising spend and employee-related infrastructure costs. Our advertising expenditures increased 41% and 33% in 2018 and 2017, respectively. We will continue to invest in advertising as long as we generate sales at a cost below the maximum amount we are willing to spend to acquire a new customer. Nevertheless, our underwriting expense ratios (i.e., policy acquisition costs and other underwriting expenses, less fees and other revenues, expressed as a percentage of net premiums earned) were relatively flat, in part reflecting the increase in earned premium per policy we realized during the same periods.

App.-A-68

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, represent all policies under which coverage was in effect as of the end of the period specified.



For the years ended December 31,	2018				2017				2016
($ in millions)	$		% Growth		$		% Growth		$		% Growth
NET PREMIUMS WRITTEN
Personal Lines
Agency	$	13,562.3	16	%	$	11,685.4	16	%	$	10,107.6	10	%
Direct	13,595.3		21		11,243.0		16		9,711.9		15
Total Personal Lines	27,157.6		18		22,928.4		16		19,819.5		12
Commercial Lines	3,996.4		28		3,112.7		20		2,598.3		20
Property	1,455.9		33		1,091.0		17		935.7		NA
Total underwriting operations	$	32,609.9	20	%	$	27,132.1	16	%	$	23,353.5	14	%
NET PREMIUMS EARNED
Personal Lines
Agency	$	13,017.2	16	%	$	11,177.6	14	%	$	9,791.7	7	%
Direct	13,017.5		21		10,769.6		15		9,396.5		15
Total Personal Lines	26,034.7		19		21,947.2		14		19,188.2		11
Commercial Lines	3,610.9		29		2,793.9		15		2,421.3		21
Property	1,287.7		30		988.8		14		864.5		NA
Total underwriting operations	$	30,933.3	20	%	$	25,729.9	14	%	$	22,474.0	13	%

December 31,	2018				2017				2016
(# in thousands)	#		% Growth		#		% Growth		#		% Growth
POLICIES IN FORCE
Agency auto	6,358.3		12	%	5,670.7		12	%	5,045.4		7	%
Direct auto	7,018.5		16		6,039.1		13		5,348.3		9
Total auto	13,376.8		14		11,709.8		13		10,393.7		8
Special lines ¹	4,382.2		0		4,365.7		2		4,263.1		4
Personal Lines	17,759.0		10	%	16,075.5		10	%	14,656.8		6	%
Commercial Lines	696.9		8	%	646.8		6	%	607.9		9	%
Property	1,936.5		32	%	1,461.7		22	%	1,201.9		12	%

NA = not applicable since we began reporting our Property business as a segment on April 1, 2015, upon acquisition of a controlling interest in ARX; Property business written prior to that date was negligible.

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

At year-end 2018, we had approximately 2.2 million more policies in force than the year-ended 2017. The increase reflects both an increase in new applications (i.e., policies sold) and lengthening retention on a trailing 12-month basis in our vehicle businesses.

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. 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.

App.-A-69

D. Personal Lines

The following table shows our year-over-year changes for our Personal Lines business:



	Growth Over Prior Year
	2018		2017		2016
APPLICATIONS
New	17	%	15	%	12	%
Renewal	11		7		5
WRITTEN PREMIUM PER POLICY - AUTO	4		5		5
RETENTION MEASURES - AUTO
Policy life expectancy
Trailing 3-months	(4	)	12		3
Trailing 12-months	3		7		5

In our Personal Lines business, the increase in both new and renewal applications during 2018 primarily reflected increases in our personal auto products, which we attribute to our competitive product offerings and position in the marketplace. The Direct business contributed more to our auto growth, primarily due to an increase in our advertising spend in 2018 and lower new applications in the first half of 2017, following a reduction of our advertising spend during 2016. Rate increases taken in our auto businesses over the trailing 12-month period, in addition to a shift in business mix, contributed to the increase we experienced in written premium per policy for 2018. For the year ended December 31, 2018, written premium per policy increased 4% in both the new and renewal auto businesses, compared to 2017. We believe that our Destination Era efforts, including our efforts to improve the customer experience, continue to have a positive impact on our retention and we will continue to focus our efforts on retention. During 2018, we experienced trailing 12-month policy life expectancy growth, although at a lower growth rate than the prior two years, and a decline in our trailing 3-month measure. The decline in policy life expectancy growth is due, in part, to targeted underwriting changes introduced in our new product model.

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
	2018		2017		2016
Auto: new applications	14	%	21	%	18	%
renewal applications	12		7		2
written premium per policy	5		6		5
Auto retention measures:
policy life expectancy - trailing 3-months	(2	)	14		5
trailing 12-months	4		8		7

The Agency business includes business written by more than 35,000 independent insurance agencies that represent Progressive, as well as brokerages in New York and California. During 2018, we generated new Agency auto application growth in 45 states, including all of our top 10 largest Agency states. The new policy growth resulted from increases in demand from agents, as indicated by a 2% increase in our quote volume, as well as better meeting the needs of end consumers, as evidenced by a year-over-year increase of 12% in our rate of conversion (i.e., converting a quote to a sale). We had double-digit new auto application growth on a year-over-year basis in each of our consumer segments (e.g., inconsistently insured, consistently insured non-homeowners, homeowners who do not bundle auto and home, and homeowners who bundle auto and home), with our bundled home and auto customers, the consumer segment we refer to as “Robinsons,” growing about three times faster than the other consumer segments combined, albeit on a smaller base.

Written premium per policy for new and renewal Agency auto business increased 6% and 5%, respectively, during 2018, compared to last year, primarily reflecting a shift in the mix of business toward higher premium coverages and rate increases taken during the year. We continued to see our 12-month retention metrics improve, with a decline in our 3-month metric, as previously discussed.

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The Direct Business



	Growth Over Prior Year
	2018		2017		2016
Auto: new applications	25	%	16	%	9	%
renewal applications	15		9		10
written premium per policy	4		5		5
Auto retention measures:
policy life expectancy - trailing 3-months	(5	)	10		1
trailing 12-months	1		4		4

The Direct business includes business written directly by Progressive on the Internet, through mobile devices, and over the phone. During the current year, we generated Direct new auto application growth in all 50 states and the District of Columbia, resulting from year-over-year increases in our Direct auto quotes and rate of conversion by 10% and 14%, respectively.

New and renewal applications increased on a year-over-year basis during 2018, primarily reflecting our competitiveness in the marketplace and a 41% increase in advertising spend, which helped drive new business growth and also contributed to the total increase in our Direct business expense ratio during the year. Similar to the Agency business, we continued to grow our new Direct auto applications double digits across all consumer segments and, with the marketing investments that targeted auto/home bundlers, we grew our Direct Robinsons applications about two times faster than our other consumer segments, albeit on a smaller base.

Written premium per policy for both new and renewal Direct auto business increased 4% during 2018, compared to last year, primarily reflecting rate increases previously discussed. We will continue to focus our efforts on retention, especially given the year-over-year decrease in the trailing 3-month metric and the slowing growth in the trailing 12-month policy life expectancy.

E. Commercial Lines



	Growth Over Prior Year
	2018		2017		2016
New applications	12	%	1	%	11	%
Renewal applications	6		8		7
Written premium per policy	14		12		10
Policy life expectancy - trailing 12-months	1		(4	)	6

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. The preferred truck market, which is comprised of tenured financially responsible operators with strong safety records, is a subset of the for-hire transportation business market target.

Commercial Lines experienced solid year-over-year new application growth in 2018, reflecting increased quote volume and competitor rate increases. We continue to monitor the growth and profitability across all of our business market targets and will impose underwriting restrictions when we believe it is necessary to meet our profitability objectives. During 2018, we increased rates and experienced shifts in business mix, to higher premium segments, which contributed to the increase in our written premium per policy during the year. Our policy life expectancy increased slightly, primarily attributable to a shift in business mix and competitors taking higher rate increases.

At December 31, 2018, we insured transportation network company business in four states, with three states added in 2018. With the enforcement of the federal electronic logging device mandate, we have seen greater market acceptance of Smart Haul ^® , our usage-based insurance program for our for-hire transportation policyholders. We believe we are well positioned to offer competitive rates to the best owners/operators and small fleets through Smart Haul.

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F. Property



	Growth Over Prior Year
	2018		2017		2016 ¹
New applications	53	%	48	%	17	%
Renewal applications	25		16		7
Written premium per policy	(3	)	(5	)	(7	)

¹ Property business prior to the April 1, 2015, acquisition of a controlling interest in ARX was negligible. 2016 new and renewal application growth was calculated using application counts from the last nine months of 2016, for comparability to application counts from 2015. Written premium per policy growth reflects 12 months of activity for 2016, compared to nine months for 2015.

Our Property business writes residential property insurance for homeowners, other property owners, and renters in the agency and direct channels. The significant growth in new applications is largely attributable to state expansion that occurred during 2018, 2017, and 2016, more competitive product offerings, and business we began writing when an unaffiliated carrier stopped offering homeowners insurance through our in-house agency during 2018, as well as momentum in growing Robinsons through our Platinum agency offering. The decrease in premium per policy continues to reflect a relatively higher percentage of renters policies, which have lower premiums per policy. Our core Property policies (e.g., home and condo insurance) had a slight increase in written premium per policy, compared to 2017.

In addition, the Property growth is benefiting from HomeQuote Explorer ^® (HQX), our direct online homeowner insurance shopping experience that was launched in March 2017. During 2018, we began offering the ability to buy certain of our homeowners policies online through the HQX platform. By the end of 2018, the online buy button functionality was offered in four states and we plan to expand to other states over time.

G. Litigation

The Progressive Corporation and/or its insurance subsidiaries are named as defendants in various lawsuits arising out of claims made under insurance policies issued by the 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, various Progressive entities are named as defendants in a number of alleged class action or individual lawsuits arising out of the operations of the insurance subsidiaries. These cases include those alleging damages as a result of our practices in evaluating or paying medical or injury claims or benefits, including, but not limited to, personal injury protection, medical payments, uninsured motorist/underinsured motorist (UM/UIM), and bodily injury benefits; labor rates paid to auto body repair shops; and cases challenging other aspects of our claims or marketing practices or other business operations. Other insurance companies face many of these same issues. During the last three years, we have settled several class action and individual lawsuits. These settlements did not have a material effect on our financial condition, cash flows, or results of operations. See Note 12 – Litigation for a more detailed discussion.

H. Income Taxes

A deferred tax asset or liability is a tax benefit or expense that is expected to be realized in a future tax return. At December 31, 2018, we reported a net deferred tax asset, and a net deferred tax liability at December 31, 2017. The change from a net deferred liability to a net deferred asset during the year was primarily attributable to equity net holding period losses and unrealized losses on fixed-income securities during the year, and an increase in unearned premiums (net of deferred acquisition costs) and in loss and loss adjustment expense reserves, due to continued growth of the business. We determined that we did not need a valuation allowance on our gross deferred tax assets for either year. Although realization of the gross deferred tax assets is not assured, management believes it is more likely than not that the gross deferred tax assets will be realized based on our expectation we will be able to fully utilize the deductions that are ultimately recognized for tax purposes.

At December 31, 2018 and 2017, we had net current income taxes payable of $16.8 million and $23.8 million, respectively, which were reported as part of “other liabilities.”

Our effective tax rate was 17% for 2018, compared to 25% and 28% for 2017 and 2016, respectively. The decrease in the effective rate during 2018, compared to 2017 and 2016, primarily reflects the reduction in the federal corporate income tax rate to 21%, from the prior 35%, under the legislation commonly know as the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”). The decrease in the effective rate during 2017, compared to 2016, primarily reflects the recognition of $99.5 million of federal tax benefits from the revaluation of our net deferred tax liabilities to the new federal corporate income tax rate of 21%, from the previous rate of 35% under the 2017 Tax Act. The effective rate in 2018, 2017, and 2016, also reflects $71.0 million, $48.7 million, and $58.7 million, respectively, of federal tax benefits resulting from our investments in renewable energy; all of the

App.-A-72

expected tax benefits from these investments were recorded in our income tax provision during 2018, 2017, and 2016, respectively. The renewable energy investments include transactions with a single sponsor that resulted in tax benefits of approximately $150 million during those years. The sponsor, its owners, and certain affiliates are the subject of federal investigations involving allegations of fraud in connection with its operations and the establishment of certain tax credit funds. We cannot predict if these matters will lead to an impact on the validity of any portion of these federal tax credits. See Note 5 - Income Taxes for additional information.

Consistent with prior years, we had no uncertain tax positions.

See Note 5 - Income Taxes for further information.

App.-A-73

IV. RESULTS OF OPERATIONS – INVESTMENTS

A. Portfolio Summary

At year-end 2018 , the fair value of our investment portfolio was $33.6 billion , approximately 23% , or $6.3 billion, greater than at year-end 2017 . The increase primarily reflected operating and investment returns and our debt and preferred stock issuances, in part offset by our use of capital during the year, including debt servicing, shareholder dividends, and our increase in ownership of ARX.

Our investment income (interest and dividends) increased 46% in 2018 and 18% in 2017 , as compared to the prior years, reflecting higher average assets and yields in both periods. In 2018, 2017, and 2016, we recognized realized gains on security sales. Beginning in 2018, we were required to report the change in value of our equity securities as part of our net holding period gains (losses), whereas previously the change was a component of other comprehensive income. This reclassification will create more volatility in the total net realized gains (losses) we report. Included in the impairment losses we recognized during 2018, 2017, and 2016, were write-downs of $68.3 million , $49.6 million , and $59.7 million , respectively, related to “other asset” impairments on renewable energy tax credit fund investments.

B. Investment Results

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

The following summarizes investment results for the years ended December 31 :



	2018		2017		2016
Pretax recurring investment book yield	2.8	%	2.4	%	2.3	%
Weighted average FTE book yield	2.9		2.6		2.6
FTE total return:
Fixed-income securities	1.5		3.0		2.9
Common stocks	(4.4	)	21.8		12.8
Total portfolio	1.2	%	5.2	%	4.0	%

Market volatility picked up in 2018 , which contributed to lower returns for both fixed income and equities, compared to the prior year. Fixed-income returns were hindered by both rising rates and widening credit spreads (more yield on non-treasury bonds relative to treasury securities of similar maturity). The equity market ended the year lower following the significant decline during the fourth quarter 2018. In 2017, both fixed-income securities and common stocks had higher returns than the prior year, which reflected a narrowing of credit spreads that resulted in increased valuations, despite the rise in benchmark treasury rates, and a higher overall equity market return during the year.

A further break-down of our FTE total returns for our portfolio, including the net gains (losses) on our derivative positions, for the years ended December 31, follows:



	2018		2017		2016
Fixed-income securities:
U.S. Treasury Notes	1.3	%	1.2	%	(0.5	)%
Municipal bonds	2.3		4.9		2.3
Corporate bonds	1.0		3.0		4.6
Residential mortgage-backed securities	2.7		4.7		3.5
Commercial mortgage-backed securities	2.1		4.0		3.9
Other asset-backed securities	2.2		1.8		1.8
Preferred stocks	(1.9	)	12.9		11.0
Short-term investments	2.0		1.2		0.5
Common stocks:
Indexed	(4.1	)	22.7		12.4
Actively managed	(8.5	)	7.8		20.8

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C. Portfolio Allocation

The composition of the investment portfolio at December 31, was:



($ in millions)	Fair Value		% of Total Portfolio		Duration (years)	Rating ¹
2018
Fixed maturities	$	28,111.5	83.7	%	2.9	AA-
Nonredeemable preferred stocks	1,033.9		3.1		2.6	BBB-
Short-term investments	1,795.9		5.4		0.1	AA
Total fixed-income securities	30,941.3		92.2		2.8	AA-
Common equities	2,626.1		7.8		na	na
Total portfolio ^2,3	$	33,567.4	100.0	%	2.8	AA-

2017
Fixed maturities	$	20,201.7	74.1	%	2.8	AA-
Nonredeemable preferred stocks	803.8		2.9		3.3	BBB-
Short-term investments	2,869.4		10.5		<0.1	AA-
Total fixed-income securities	23,874.9		87.5		2.5	AA-
Common equities	3,399.8		12.5		na	na
Total portfolio ^2,3	$	27,274.7	100.0	%	2.5	AA-
na = not applicable

¹ Represents ratings at December 31, 2018 and 2017 . Credit quality ratings are assigned by nationally recognized statistical rating organizations. To calculate the weighted average credit quality ratings, we weight individual securities based on fair value and assign a numeric score of 0-5, with non-investment-grade and non-rated securities assigned a score of 0-1. To the extent the weighted average of the ratings falls between AAA and AA+, we assign an internal rating of AAA-.

² Our portfolio reflects the effect of unsettled security transactions; at December 31, 2018 , $5.9 million was included in “other liabilities,” compared to $5.8 million in “other assets” at December 31, 2017 .

³ The total fair value of the portfolio at December 31, 2018 and 2017 , included $2.9 billion and $1.6 billion , respectively, of securities held in a consolidated, non-insurance subsidiary of the holding company, net of any unsettled security transactions.

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 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.

App.-A-75

The following table shows the composition of our Group I and Group II securities at December 31:



	2018				2017
($ in millions)	Fair Value		% of Total Portfolio		Fair Value		% of Total Portfolio
Group I securities:
Non-investment-grade fixed maturities	$	754.8	2.2	%	$	404.8	1.5	%
Redeemable preferred stocks ¹	154.1		0.5		147.4		0.5
Nonredeemable preferred stocks	1,033.9		3.1		803.8		2.9
Common equities	2,626.1		7.8		3,399.8		12.5
Total Group I securities	4,568.9		13.6		4,755.8		17.4
Group II securities:
Other fixed maturities ²	27,202.6		81.0		19,649.5		72.1
Short-term investments	1,795.9		5.4		2,869.4		10.5
Total Group II securities	28,998.5		86.4		22,518.9		82.6
Total portfolio	$	33,567.4	100.0	%	$	27,274.7	100.0	%

¹ Includes non-investment-grade redeemable preferred stocks of $69.9 million and $83.8 million at December 31, 2018 and 2017 , respectively.

² Includes investment-grade redeemable preferred stocks, with cumulative dividends, of $84.2 million and $63.6 million at December 31, 2018 and 2017 , 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 (NRSROs) 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 II securities.

We reduced our exposure to common equities during both the first and third quarter of 2018 by approximately 10% in each

quarter by selling securities in our indexed common stock portfolio and re-allocating the funds to our fixed-maturity portfolio to protect our balance sheet from potential equity market declines from elevated valuation levels.

Unrealized Gains and Losses

As of December 31, 2018 , our fixed-maturity portfolio had pretax net unrealized losses, recorded as part of accumulated other comprehensive income, of $ 134.2 million , compared to $8.4 million at December 31, 2017 . The change reflects valuation declines in all sectors during the year, most notably in our U.S. Treasury, corporate, and commercial mortgage-backed portfolios, reduced by net realized losses on sales of securities primarily in our U.S. Treasury portfolio.

See Note 2 – Investments for further details on our gross unrealized gains and losses.

App.-A-76

Holding Period Gains and Losses

The following table provides the gross and net holding period gain (loss) balance and activity during 2018:



(millions)	Gross Holding Period Gains			Gross Holding Period Losses			Net Holding Period Gains (Losses)
Balance at December 31, 2017
Hybrid fixed-maturity securities	$	0.6		$	(0.4	)	$	0.2
Equity securities	2,015.0			(9.0		)	2,006.0
Total holding period securities	2,015.6			(9.4		)	2,006.2
Current year change in holding period securities
Hybrid fixed-maturity securities	(0.5		)	(9.9		)	(10.4		)
Equity securities	(446.3		)	(51.2		)	(497.5		)
Total changes in holding period securities	(446.8		)	(61.1		)	(507.9		)
Balance at December 31, 2018
Hybrid fixed-maturity securities	0.1			(10.3		)	(10.2		)
Equity securities	1,568.7			(60.2		)	1,508.5
Total holding period securities	$	1,568.8		$	(70.5	)	$	1,498.3

Changes in holding period gains (losses), similar to unrealized gains (losses) in our fixed-maturity portfolio, are the result of changes in market performance as well as sales of securities based on various portfolio management decisions.

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Other-Than-Temporary Impairment (OTTI)

Realized losses may include write-downs of securities determined to have had other-than-temporary declines in fair value. In light of the new accounting guidance effective for 2018, we are no longer required to analyze our equity securities for

OTTI. The write-down activity recorded in the comprehensive income statements for the years ended December 31, was as follows:



(millions)	Total Write-downs		Write-downs on Securities Sold			Write-downs on Securities Held at Period End
2018
Total investment portfolio	$	0	$	0		$	0
Other assets ¹	68.3		0			68.3
Total write-downs	$	68.3	$	0		$	68.3
2017
Commercial mortgage-backed securities	$	0.4	$	0		$	0.4
Common equities	14.5		(3.3		)	11.2
Total investment portfolio	14.9		(3.3		)	11.6
Other assets ¹	49.6		0			49.6
Total write-downs	$	64.5	$	(3.3	)	$	61.2
2016
Redeemable preferred stocks ²	$	25.4	$	(0.1	)	$	25.3
Common equities	1.7		(1.4		)	0.3
Total investment portfolio	27.1		(1.5		)	25.6
Other assets ¹	59.7		0			59.7
Total write-downs	$	86.8	$	(1.5	)	$	85.3

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. See Note 5 - Income Taxes for the tax benefits related to these investments.

² Reflects a change in our intent to hold the securities to a recovery of their respective cost bases.

See Critical Accounting Policies, Other-Than-Temporary Impairment, for a complete discussion on our analysis regarding our treatment of OTTI.

Fixed-Income Securities

The fixed-income portfolio is managed internally and includes fixed-maturity securities, short-term investments, and nonredeemable preferred stocks. 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 2.8 years at December 31, 2018 , compared to 2.5 years at December 31, 2017 . The increase in duration reflects our proactive monitoring and reacting to the changing interest rate environment while maintaining a conservative duration position to limit potential declines in portfolio value from increases in 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, at December 31, was:



Duration Distribution	2018		2017
1 year	19.4	%	19.8	%
2 years	17.0		15.7
3 years	27.0		27.0
5 years	22.8		24.1
7 years	10.4		8.7
10 years	3.5		4.7
20 years	(0.1	)	0
Total fixed-income portfolio	100.0	%	100.0	%

App.-A-78

The negative duration in the 20-year category in 2018 arises 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 will reset from a fixed rate to a floating rate, which could cause these securities to trade at a discount and, therefore, with a negative duration as the securities’ valuation will 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 average portfolio credit quality rating, as defined by NRSROs, which was successfully maintained during both 2018 and 2017.

The credit quality distribution of the fixed-income portfolio at December 31, was:



Rating	2018		2017
AAA	50.5	%	45.8	%
AA	10.8		13.6
A	8.4		12.2
BBB	25.9		23.2
Non-investment grade/non-rated: ¹
BB	3.0		3.6
B	1.1		1.0
CCC and lower	0.1		0.1
Non-rated	0.2		0.5
Total fixed-income portfolio	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 3.6% of the total fixed-income portfolio at December 31, 2018 , compared to 2.6% at December 31, 2017 .

The changes in credit quality profile from December 31, 2017 , 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 consider concentration risk both overall and in the

context of individual asset classes and sectors, including but not limited to common equities, residential and commercial

mortgage-backed securities, municipal bonds, and high-yield bonds. At December 31, 2018 and 2017 , we were within all of the constraints described above.

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 these risks. During 2018 , we did not experience significant adverse 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 $4.5 billion, or 23.6%, of principal repayment from our fixed-income portfolio, excluding U.S. Treasury Notes and short-term investments, during 2019 . Cash from interest and dividend payments provides an additional source of recurring liquidity.

App.-A-79

The duration of our U.S. government obligations, which are included in the fixed-income portfolio, was comprised of the following at December 31, 2018 :



($ in millions)	Fair Value		Duration (years)
U.S. Treasury Notes
Less than one year	$	375.4	0.8
One to two years	1,740.2		1.7
Two to three years	2,592.0		2.6
Three to five years	3,622.9		4.1
Five to seven years	915.7		5.7
Seven to ten years	670.3		8.1
Total U.S. Treasury Notes	$	9,916.5	3.6

As of December 31, 2018 , we had no interest rate swaps or treasury futures.

ASSET-BACKED SECURITIES

Included in the fixed-income portfolio are asset-backed securities, which were comprised of the following at December 31 :



($ in millions)	Fair Value		Net Unrealized Gains (Losses)			% of Asset- Backed Securities		Duration (years)	Rating (at period end)
2018
Residential mortgage-backed securities:
Collateralized mortgage obligations	$	435.3	$	(2.4	)	5.7	%	1.5	AA
Home equity (sub-prime bonds)	299.1		3.3			3.9		0.4	A-
Residential mortgage-backed securities	734.4		0.9			9.6		1.0	AA-
Commercial mortgage-backed securities	3,301.6		(31.2		)	43.4		2.7	AA-
Other asset-backed securities:
Automobile	1,609.0		(3.3		)	21.1		0.9	AAA-
Credit card	644.5		(0.5		)	8.5		0.5	AAA
Student loan	475.7		(1.0		)	6.3		1.1	AA+
Other ¹	848.1		(3.4		)	11.1		1.6	AA-
Other asset-backed securities	3,577.3		(8.2		)	47.0		1.0	AA+
Total asset-backed securities	$	7,613.3	$	(38.5	)	100.0	%	1.7	AA
2017
Residential mortgage-backed securities:
Collateralized mortgage obligations	$	404.3	$	0		6.7	%	1.1	A+
Home equity (sub-prime bonds)	432.4		7.9			7.1		0.2	BBB+
Residential mortgage-backed securities	836.7		7.9			13.8		0.7	A-
Commercial mortgage-backed securities	2,758.6		(1.5		)	45.6		2.9	A
Other asset-backed securities:
Automobile	1,182.2		(1.8		)	19.5		0.7	AAA-
Credit card	95.8		(0.1		)	1.6		0.5	AAA
Student loan	538.7		2.3			8.9		1.1	AA-
Other ¹	638.0		(0.4		)	10.6		2.2	A+
Other asset-backed securities	2,454.7		0			40.6		1.2	AA+
Total asset-backed securities	$	6,050.0	$	6.4		100.0	%	1.9	A+

¹ Includes equipment leases, whole business securitizations, and other types of structured debt.

App.-A-80

The increase in asset-backed securities since December 31, 2017 , is primarily due to purchases of commercial mortgage-backed securities, automobile receivables, credit card receivables, and other asset-backed securities, partially offset by maturities and security sales in the residential mortgage-backed sector. See below for a further discussion of our residential and commercial mortgage-backed securities. The other asset-backed securities are not included in the discussion below due to the high credit quality, short duration, and security structure of those instruments.

Residential Mortgage-Backed Securities (RMBS) The following table details the credit quality rating and fair value of our RMBSs, along with the loan classification and a comparison of the fair value at December 31, 2018 , to our original investment value (adjusted for returns of principal, amortization, and write-downs):



Residential Mortgage-Backed Securities (at December 31, 2018)
				Collateralized Mortgage Obligations
($ in millions) Rating ¹	Home Equity			Agency Pass-Through			Non-Agency Prime			Alt-A ²			Government/GSE ³			Total			% of Total
AAA	$	47.9		$	26.6		$	265.8		$	4.4		$	44.7		$	389.4		53.0	%
AA	82.9			0			12.0			15.5			0.8			111.2			15.1
A	51.2			0			3.0			0			0			54.2			7.4
BBB	27.3			0			5.7			1.1			0			34.1			4.6
Non-investment grade/non-rated:
BB	27.6			0			2.2			0.7			0			30.5			4.2
B	35.0			0			0			0.8			0			35.8			4.9
CCC and lower	12.8			0			5.2			0			0			18.0			2.5
Non-rated	14.4			0			7.1			39.7			0			61.2			8.3
Total fair value	$	299.1		$	26.6		$	301.0		$	62.2		$	45.5		$	734.4		100.0	%
Increase (decrease) in value	1.1		%	(3.7		)%	(0.4		)%	1.7		%	(2.7		)%	0.1		%

¹ The credit quality ratings in the table above are assigned by NRSROs; when we assign the NAIC ratings for our RMBSs, $131.8 million of our non-investment-grade securities are rated investment grade and classified as Group II and $13.7 million, or 1.9% of our total RMBSs, are not rated by the NAIC and are classified as Group I.

² 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.

³ 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).

Our collateralized mortgage obligation (CMO) portfolio is primarily composed of non-GSE/FHA/VA mortgage securities. The majority of our portfolio consists of older deals with predictable prepayment speeds, high levels of credit support, and stable delinquency trends. During the year, we purchased well-structured new issue positions backed by high-quality collateral. Our RMBS portfolio decreased in value during the year due to security maturities and principal repayments.

App.-A-81

Commercial Mortgage-Backed Securities (CMBS) The following table details the credit quality rating and fair value of our CMBSs, along with a comparison of the fair value at December 31, 2018 , to our original investment value (adjusted for returns of principal, amortization, and write-downs):



Commercial Mortgage-Backed Securities (at December 31, 2018)
($ in millions) Rating ¹	Multi-Borrower			Single-Borrower			Total			% of Total
AAA	$	242.0		$	937.2		$	1,179.2		35.7	%
AA	119.2			780.5			899.7			27.3
A	79.7			472.9			552.6			16.7
BBB	37.0			499.0			536.0			16.2
Non-investment grade/non-rated:
BB	0			121.5			121.5			3.7
B	0.7			11.9			12.6			0.4
Total fair value	$	478.6		$	2,823.0		$	3,301.6		100.0	%
Increase (decrease) in value	(0.1		)%	(1.1		)%	(0.9		)%

¹ The credit quality ratings in the table above are assigned by NRSROs; when we assign the NAIC ratings for our CMBSs, $124.3 million of our non-investment-grade securities are rated investment grade and classified as Group II and $9.8 million, or 0.3% of our total CMBSs, are not rated by the NAIC and are classified as Group I.

In our CMBS bond portfolio, our focus continues to be on single-borrower transactions, which represented 85.5% of the portfolio at December 31, 2018 . During the year, we also selectively added multifamily bonds, seasoned conduit bonds from

vintages with conservative underwriting, and bonds defeased by U.S. Treasuries. During the year, we increased our CMBS

bond portfolio by $572.6 million on a cost basis. We decreased the duration in our CMBS bond portfolio from 2.9 to 2.7 years

during the year as both seasoned fixed-rate and low-duration floating-rate securities were added to the portfolio. The average

credit quality was AA- at December 31, 2018 and A at December 31, 2017 .

MUNICIPAL SECURITIES

Included in the fixed-income portfolio at December 31, 2018 and 2017 , were $1,649.1 million and $2,297.1 million , respectively, of state and local government obligations. These securities had a duration of 2.9 years and an overall credit quality rating of AA+ (excluding the benefit of credit support from bond insurance) at December 31, 2018 , compared to 2.7 years and AA at December 31, 2017 . These securities had net unrealized losses of $5.5 million at December 31, 2018 , compared to net unrealized gains of $11.4 million at December 31, 2017 .

The following table details the credit quality rating of our municipal securities at December 31, 2018 , without the benefit of credit or bond insurance:



Municipal Securities (at December 31, 2018)
(millions) Rating	General Obligations		Revenue Bonds		Total
AAA	$	248.0	$	395.2	$	643.2
AA	421.1		526.3		947.4
A	1.0		39.3		40.3
BBB	4.0		14.2		18.2
Total	$	674.1	$	975.0	$	1,649.1

Included in revenue bonds were $736.5 million of single-family housing revenue bonds issued by state housing finance agencies, of which $537.3 million were supported by individual mortgages held by the state housing finance agencies and $199.2 million were supported by mortgage-backed securities. Of the programs supported by mortgage-backed securities, approximately 27% were collateralized by Fannie Mae and Freddie Mac mortgages; the remaining 73% were collateralized by Ginnie Mae mortgages, which are fully guaranteed by the U.S. government. Of the programs supported by individual mortgages held by the state housing finance agencies, the overall credit quality rating was AA+. Most of these mortgages were supported by FHA, VA, or private mortgage insurance providers.

App.-A-82

We reduced our holdings of tax-exempt municipal bonds during 2018 , as the new corporate tax rate we use to value our tax-exempt bonds rendered them less attractive relative to alternative taxable investments.

CORPORATE SECURITIES

Included in our fixed-income securities at December 31, 2018 and 2017 , were $8,694.3 million and $4,997.7 million , respectively, of corporate securities. These securities had a duration of 3.3 years and 2.6 years at December 31, 2018 and 2017 , respectively, and an overall credit quality rating of BBB at both December 31, 2018 and 2017 . These securities had net unrealized losses of $111.7 million and net unrealized gains of $0.4 million at December 31, 2018 and 2017 , respectively.

We increased the size of our corporate bond portfolio in 2018 as we took advantage of market volatility to add exposure at attractive levels.

The table below shows the exposure break-down by sector and rating at year-end:



Corporate Securities (at December 31, 2018)
(millions) Rating	Consumer		Industrial		Communication		Financial Services		Agency		Technology		Basic Materials		Energy		Total
AAA	$	0	$	0	$	0	$	53.1	$	0	$	0	$	0	$	0	$	53.1
AA	0		0		0		264.9		0.7		39.4		0		0.1		305.1
A	186.5		147.7		156.0		745.9		0		1.7		29.5		3.6		1,270.9
BBB	2,905.2		902.5		481.3		856.5		0		648.0		200.8		339.5		6,333.8
Non-investment grade/non-rated:
BB	14.2		112.9		140.8		19.0		0		118.2		18.1		57.5		480.7
B	99.9		58.6		0		43.7		0		9.3		17.1		22.1		250.7
Total fair value	$	3,205.8	$	1,221.7	$	778.1	$	1,983.1	$	0.7	$	816.6	$	265.5	$	422.8	$	8,694.3

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 December 31, 2018 , we held $238.3 million in redeemable preferred stocks and $1,033.9 million in nonredeemable preferred stocks, compared to $211.0 million and $803.8 million , respectively, at December 31, 2017 . At December 31, 2018 , our preferred stock portfolio had net unrealized gains of $2.4 million and net holding period gains of $23.5 million recorded as part of net realized gains (losses), compared to $121.5 million of net unrealized gains at December 31, 2017 .

Our preferred stock securities had a negative return in 2018 as their high level of income was not able to offset spread widening. More volatile sectors, such as equities and preferred stocks, traded down at the end of the year as concerns rose about a global economic slowdown and other geopolitical issues. We came into the year with a low allocation but increased it in the later part of the year by slowly adding to the portfolio as spreads widened.

Our preferred stock portfolio had a duration of 2.4 years at December 31, 2018 , compared to 2.9 years at December 31, 2017 . The majority of our preferred securities have fixed-rate dividends until a call date and then, if not called, convert to floating-rate dividends. The interest rate duration of our preferred securities is calculated to reflect the call, floor, and floating rate features. Although a preferred security will remain outstanding if not called, its interest rate duration will reflect the variable nature of the dividend. The overall credit quality rating was BBB- at both December 31, 2018 and 2017. Our non-investment-grade preferred stocks were primarily with issuers that maintain investment-grade senior debt ratings.

App.-A-83

The table below shows the exposure break-down by sector and rating at year-end:



Preferred Stocks (at December 31, 2018)
	Financial services
(millions) Rating	U.S. Banks		Foreign Banks		Insurance		Other Financial		Industrials		Utilities		Total
A	$	75.0	$	0	$	0	$	9.9	$	0	$	0	$	84.9
BBB	519.4		0		98.6		51.4		119.9		44.8		834.1
Non-investment grade/non-rated:
BB	147.9		72.8		29.8		0		40.2		0		290.7
B	0		0		0		32.4		0		0		32.4
Non-rated	0		0		0		25.1		5.0		0		30.1
Total fair value	$	742.3	$	72.8	$	128.4	$	118.8	$	165.1	$	44.8	$	1,272.2

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 December 31, 2018 , all of our preferred securities continued to pay their dividends in full and on time. Approximately 79% of our preferred stock securities pay dividends that have tax preferential characteristics, while the balance pay dividends that are fully taxable.

Common Equities

Common equities, as reported on the balance sheets at December 31, were comprised of the following:



($ in millions)	2018				2017
Indexed common stocks	$	2,480.2	94.4	%	$	3,248.4	95.6	%
Managed common stocks	145.6		5.6		151.1		4.4
Total common stocks	2,625.8		100.0		3,399.5		100.0
Other risk investments	0.3		0		0.3		0
Total common equities	$	2,626.1	100.0	%	$	3,399.8	100.0	%

In our indexed common stock portfolio, our individual holdings are selected based on their contribution to the correlation with the Russell 1000 Index. For both periods reported in the table above, the GAAP basis total return was within the desired tracking error when compared to the index. We held 803 out of 982, or 82%, of the common stocks comprising the index at December 31, 2018 , which made up 94% of the total market capitalization of the index.

We reduced our exposure to common equities during both the first and third quarter of 2018 by approximately 10% in each

The actively managed common stock portfolio, which is managed by an external investment manager had a cost basis of $131.3 million and $101.9 million at December 31, 2018 and 2017 , respectively.

App.-A-84

The following is a summary of our indexed common stock portfolio holdings by sector compared to the Russell 1000 Index composition:



Sector	Equity Portfolio Allocation at December 31, 2018		Russell 1000 Allocation at December 31, 2018		Russell 1000 Sector Return in 2018
Consumer discretionary	15.0	%	15.3	%	(0.1	)%
Consumer staples	6.0		6.5		(9.7	)
Financial services	19.7		19.9		(8.1	)
Health care	13.8		14.2		6.5
Materials and processing	3.3		3.4		(16.3	)
Other energy	4.9		5.0		(18.5	)
Producer durable	10.3		9.9		(12.4	)
Technology	21.8		20.6		(1.2	)
Utilities	5.2		5.2		(0.1	)
Total common stocks	100.0	%	100.0	%	(4.8	)%

App.-A-85

V. CRITICAL ACCOUNTING POLICIES

Progressive is required to make certain estimates and assumptions when preparing its financial statements and accompanying notes in conformity with GAAP. Actual results could differ from those estimates in a variety of areas. The two areas that we view as most critical with respect to the application of estimates and assumptions are the establishment of our loss reserves and the method of determining impairments in our investment portfolio.

A. Loss and LAE Reserves

Loss and loss adjustment expense (LAE) reserves represent our best estimate of our ultimate liability for losses and LAE relating to events that occurred prior to the end of any given accounting period but have not yet been paid. At December 31, 2018 , we had $12.8 billion of net loss and LAE reserves, which included $10.2 billion of case reserves and $2.6 billion of incurred but not recorded (IBNR) reserves. Personal auto liability and commercial auto liability reserves represent approximately 95% of our total carried net reserves. For this reason, the following discussion focuses on our vehicle businesses.

We do not review our loss reserves for the vehicle businesses on a macro level and, therefore, do not derive a companywide range of reserves to compare to a standard deviation. Instead, we review a large majority of our reserves by product/state subset combinations on a quarterly time frame, with the remaining reserves generally reviewed on a semiannual basis. A change in our scheduled reviews of a particular subset of the business depends on the size of the subset or emerging issues relating to the product or state. By reviewing the reserves at such a detailed level, we have the ability to identify and measure variances in the trends by state, product, and line coverage that otherwise would not be seen on a consolidated basis. We believe our comprehensive process of reviewing at a subset level provides us more meaningful estimates of our aggregate loss reserves.

In analyzing the ultimate accident year loss and LAE experience, our actuarial staff reviews in detail, at the subset level, frequency (number of losses per earned car year), severity (dollars of loss per each claim), and average premium (dollars of premium per earned car year), as well as the frequency and severity of our LAE costs. The loss ratio, a primary measure of loss experience, is equal to the product of frequency times severity divided by the average premium. The average premium for personal and commercial auto businesses is not estimated. The actual frequency experienced will vary depending on the change in mix of class of drivers insured by Progressive, but the frequency projections for these lines of business are generally stable in the short term, because a large majority of the parties involved in an accident report their claims within a short time period after the occurrence. The severity experienced by Progressive is much more difficult to estimate, especially for injury claims, since severity is affected by changes in underlying costs, such as medical costs, jury verdicts, and regulatory changes. In addition, severity will vary relative to the change in our mix of business by limit.

Assumptions regarding needed reserve levels made by the actuarial staff take into consideration influences on available historical data that reduce the predictiveness of our projected future loss costs. Internal considerations that are process-related, which generally result from changes in our claims organization’s activities, include claim closure rates, the number of claims that are closed without payment, and the level of the claims representatives’ estimates of the needed case reserve for each claim. These changes and their effect on the historical data are studied at the state level versus on a larger, less indicative, countrywide basis.

External items considered include the litigation atmosphere, changes in medical costs, and the availability of services to resolve claims. These also are better understood at the state level versus at a more macro, countrywide level.

At December 31, 2018 , Progressive had $15.4 billion of carried gross reserves and $12.8 billion of net reserves (net of reinsurance recoverables on unpaid losses). Our net reserve balance implicitly assumes that the loss and LAE severity for accident year 2018 over accident year 2017 would be 5.3% higher for personal auto liability and 12.1% higher for commercial auto liability. As discussed above, the severity estimates are influenced by many variables that are difficult to precisely quantify and which influence the final amount of claims settlements. That, coupled with changes in internal claims practices, the legal environment, and state regulatory requirements, requires significant judgment in the estimate of the needed reserves to be carried.

App.-A-86

The following table highlights what the effect would be to our carried loss and LAE reserves, on a net basis, as of December 31, 2018 , if during 2019 we were to experience the indicated change in our estimate of severity for the 2018 accident year (i.e., claims that occurred in 2018):



	Estimated Changes in Severity for Accident Year 2018
(millions)	-4%		-2%		As Reported		+2%		+4%
Personal auto liability	$	9,135.0	$	9,363.4	$	9,591.8	$	9,820.2	$	10,048.6
Commercial auto liability	2,552.5		2,589.7		2,626.9		2,664.1		2,701.3
Other ¹	609.4		609.4		609.4		609.4		609.4
Total	$	12,296.9	$	12,562.5	$	12,828.1	$	13,093.7	$	13,359.3

¹ Includes reserves for personal and commercial auto physical damage claims and our non-auto lines of business; no change in estimates is presented due to the immaterial level of these reserves.

Note: Every percentage point change in our estimate of severity for the 2018 accident year would affect our personal auto liability reserves by $114.2 million and our commercial auto reserves by $18.6 million .

Our 2018 year-end loss and LAE reserve balance also includes claims from prior years. Claims that occurred in 2018, 2017, and 2016, in the aggregate, accounted for approximately 93% of our reserve balance. If during 2019 we were to experience the indicated change in our estimate of severity for the total of the prior three accident years (i.e., 2018, 2017, and 2016), the effect to our year-end 2018 reserve balances would be as follows:



	Estimated Changes in Severity for Accident Years 2018, 2017, and 2016
(millions)	-4%		-2%		As Reported		+2%		+4%
Personal auto liability	$	8,371.8	$	8,981.8	$	9,591.8	$	10,201.8	$	10,811.8
Commercial auto liability	2,438.9		2,532.9		2,626.9		2,720.9		2,814.9
Other ¹	609.4		609.4		609.4		609.4		609.4
Total	$	11,420.1	$	12,124.1	$	12,828.1	$	13,532.1	$	14,236.1

¹ Includes reserves for personal and commercial auto physical damage claims and our non-auto lines of business; no change in estimates is presented due to the immaterial level of these reserves.

Note: Every percentage point change in our estimate of severity for the 2018, 2017, and 2016 accident years would affect our personal auto liability reserves by $305.0 million and our commercial auto reserves by $47.0 million .

Our best estimate of the appropriate amount for our reserves as of year-end 2018 is included in our financial statements for the year. Our goal is to ensure that total reserves are adequate to cover all loss costs, while sustaining minimal variation from the time reserves are initially established until losses are fully developed. At the point in time when reserves are set, we have no way of knowing whether our reserve estimates will prove to be high or low, or whether one of the alternative scenarios discussed above is “reasonably likely” to occur. The above tables show the potential favorable or unfavorable development we will realize if our estimates miss by 2% or 4%.

App.-A-87

B. 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. In light of the new accounting guidance effective for 2018, we are no longer required to analyze our equity securities for OTTI.

We routinely monitor our fixed-maturity 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 (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-maturity securities 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 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 fixed-maturity securities that are not deemed to be other-than-temporarily impaired.

The following table stratifies the gross unrealized losses in our fixed-maturity portfolio at December 31, 2018 , by the duration in a loss position and magnitude of the loss as a percentage of the cost of the security:



	Fair Value		Total Gross Unrealized Losses		Decline of Investment Value of Greater Than 15%
(millions)	Fair Value		Total Gross Unrealized Losses		Decline of Investment Value of Greater Than 15%
Unrealized loss for less than 12 months	$	5,493.2	$	47.3	$	0
Unrealized loss for 12 months or greater	12,159.0		202.3		7.4
Total	$	17,652.2	$	249.6	$	7.4

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 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 their respective cost bases, 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.

App.-A-88

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; our ability to access capital markets and financing arrangements when needed to support growth or other capital needs, and the favorable evaluations by credit and other rating agencies on which this access depends; 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 or under certain government programs; 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, including our efforts to enter into new business areas with which we have less experience; 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, and our ability to respond to changes in catastrophe loss trends; 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, whether from cyber attacks, other technology events or other means; our continued access to and functionality of third-party systems that are critical to our business; our ability to maintain adequate staffing levels, and the sources from which we obtain talent; our continued ability to access cash accounts and/or convert securities into cash on favorable terms when we desire to do so; 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.

App.-A-89

Supplemental Information

The Progressive Corporation and Subsidiaries

Quarterly Financial and Common Share Data

(unaudited)



(millions – except per share amounts)									Stock Price ¹
Quarter	Total Revenues		Net Income		Net Income Attributable to Progressive		Per Common Share ²		Close		Rate of Return ³	Dividends Declared Per Common Share ⁴
2018
1	$	7,430.1	$	729.8	$	718.0	$	1.22	$	60.93		$	0
2	8,018.0		701.2		704.2		1.19		59.15			0
3	8,495.8		930.2		928.4		1.57		71.04			0
4	8,035.1		259.8		264.7		0.44		60.33			2.5140
	$	31,979.0	$	2,621.0	$	2,615.3	$	4.42	$	60.33	9.3%	$	2.5140
2017
1	$	6,321.7	$	430.3	$	424.3	$	0.73	$	39.18		$	0
2	6,605.7		372.7		367.6		0.63		44.09			0
3	6,791.8		214.8		224.0		0.38		48.42			0
4	7,119.8		580.3		576.3		0.98		56.32			1.1247
	$	26,839.0	$	1,598.1	$	1,592.2	$	2.72	$	56.32	61.6%	$	1.1247
2016
1	$	5,557.5	$	258.7	$	258.2	$	0.44	$	35.14		$	0
2	5,819.3		194.9		190.9		0.33		33.50			0
3	5,935.0		205.5		198.7		0.34		31.50			0
4	6,129.6		398.1		383.2		0.66		35.50			0.6808
	$	23,441.4	$	1,057.2	$	1,031.0	$	1.76	$	35.50	14.7%	$	0.6808

¹ Prices are as reported on the New York Stock Exchange (NYSE). Progressive’s common shares are listed under the symbol PGR.

² Based on net income available to Progressive common shareholders, which is net of preferred share dividends beginning in March 2018. The sum may not equal the total because the average equivalent shares differ in the quarterly and annual periods.

³ Represents annual rate of return, assuming dividend reinvestment.

⁴ For a discussion of Progressive’s dividend policy, see Note 14 - Dividends for further information.

App.-A-90

The Progressive Corporation and Subsidiaries

Ten Year Summary – Selected Financial Information

(unaudited)



(millions – except ratios, policies in force, per share amounts, and number of people employed)	2018			2017			2016			2015			2014
Net premiums written	$	32,609.9		$	27,132.1		$	23,353.5		$	20,564.0		$	18,654.6
Growth	20		%	16		%	14		%	10		%	8		%
Net premiums earned	$	30,933.3		$	25,729.9		$	22,474.0		$	19,899.1		$	18,398.5
Growth	20		%	14		%	13		%	8		%	8		%
Policies in force (thousands):
Personal Lines	17,759.0			16,075.5			14,656.8			13,764.7			13,261.9
Growth	10		%	10		%	6		%	4		%	2		%
Commercial Lines	696.9			646.8			607.9			555.8			514.7
Growth	8		%	6		%	9		%	8		%	0		%
Property ¹	1,936.5			1,461.7			1,201.9			1,076.5			—
Growth ¹	32		%	22		%	12		%	NM			—
Total revenues	$	31,979.0		$	26,839.0		$	23,441.4		$	20,853.8		$	19,391.4
Underwriting margins: ²
Personal Lines	9.7		%	6.9		%	4.7		%	6.5		%	6.7		%
Commercial Lines	13.3		%	7.7		%	6.4		%	15.9		%	17.2		%
Property ¹	(6.9		)%	(5.1		)%	3.8		%	10.1		%	—
Total underwriting operations	9.4		%	6.6		%	4.9		%	7.5		%	7.7		%
Net income attributable to Progressive	$	2,615.3		$	1,592.2		$	1,031.0		$	1,267.6		$	1,281.0
Per common share	4.42			2.72			1.76			2.15			2.15
Average equivalent common shares	586.7			585.7			585.0			589.2			594.8
Comprehensive income attributable to Progressive	$	2,520.1		$	1,941.0		$	1,164.0		$	1,044.9		$	1,352.4
Total assets	$	46,575.0		$	38,701.2		$	33,427.5		$	29,819.3		$	25,787.6
Debt outstanding	4,404.9			3,306.3			3,148.2			2,707.9			2,164.7
Redeemable noncontrolling interest	214.5			503.7			483.7			464.9			—
Total shareholders’ equity	10,821.8			9,284.8			7,957.1			7,289.4			6,928.6
Statutory surplus	11,731.2			9,664.4			8,560.0			7,575.5			6,442.8
Common shares outstanding	583.2			581.7			579.9			583.6			587.8
Common share close price (at December 31)	$	60.33		$	56.32		$	35.50		$	31.80		$	26.99
Rate of return ³	9.3		%	61.6		%	14.7		%	20.9		%	5.3		%
Market capitalization	$	35,184.5		$	32,761.3		$	20,586.5		$	18,558.5		$	15,864.7
Book value per common share	17.71			15.96			13.72			12.49			11.79
Ratios:
Return on average common shareholders’ equity:
Net income attributable to Progressive	24.7		%	17.8		%	13.2		%	17.2		%	19.1		%
Comprehensive income attributable to Progressive	23.8		%	21.7		%	14.9		%	14.2		%	20.1		%
Debt to total capital ⁴	28.9		%	26.3		%	28.3		%	27.1		%	23.8		%
Price to earnings	13.6			20.7			20.2			14.8			12.6
Price to book	3.4			3.5			2.6			2.5			2.3
Net premiums written to statutory surplus	2.8			2.8			2.7			2.7			2.9
Statutory combined ratio	89.9			92.8			94.8			91.8			92.1
Dividends declared per common share ⁵	$	2.5140		$	1.1247		$	0.6808		$	0.8882		$	0.6862
Number of people employed	37,346			33,656			31,721			28,580			26,501

¹ We began reporting our Property business as a segment on April 1, 2015, when we acquired a controlling interest in ARX; therefore, year-over-year growth for 2015 is not meaningful (NM).

² Underwriting margins are calculated as pretax underwriting profit (loss), as defined in Note 10 – Segment Information , as a percentage of net premiums earned.

App.-A-91



(millions – except ratios, policies in force, per share amounts, and number of people employed)	2013			2012			2011			2010			2009
Net premiums written	$	17,339.7		$	16,372.7		$	15,146.6		$	14,476.8		$	14,002.9
Growth	6		%	8		%	5		%	3		%	3		%
Net premiums earned	$	17,103.4		$	16,018.0		$	14,902.8		$	14,314.8		$	14,012.8
Growth	7		%	7		%	4		%	2		%	3		%
Policies in force (thousands):
Personal Lines	13,056.4			12,735.3			12,283.8			11,702.7			10,940.6
Growth	3		%	4		%	5		%	7		%	5		%
Commercial Lines	514.6			519.6			509.1			510.4			512.8
Growth	(1		)%	2		%	0		%	0		%	(5		)%
Property ¹	—			—			—			—			—
Growth ¹	—			—			—			—			—
Total revenues	$	18,170.9		$	17,083.9		$	15,774.6		$	15,215.5		$	14,791.1
Underwriting margins: ²
Personal Lines	6.6		%	4.4		%	6.8		%	7.0		%	7.6		%
Commercial Lines	6.5		%	5.2		%	9.1		%	12.5		%	14.2		%
Property ¹	—			—			—			—			—
Total underwriting operations	6.5		%	4.4		%	7.0		%	7.6		%	8.4		%
Net income attributable to Progressive	$	1,165.4		$	902.3		$	1,015.5		$	1,068.3		$	1,057.5
Per common share	1.93			1.48			1.59			1.61			1.57
Average equivalent common shares	603.6			607.8			636.9			663.3			672.2
Comprehensive income attributable to Progressive	$	1,246.1		$	1,080.8		$	924.3		$	1,398.8		$	1,752.2
Total assets	$	24,408.2		$	22,694.7		$	21,844.8		$	21,150.3		$	20,049.3
Debt outstanding	1,860.9			2,063.1			2,442.1			1,958.2			2,177.2
Redeemable noncontrolling interest	—			—			—			—			—
Total shareholders’ equity	6,189.5			6,007.0			5,806.7			6,048.9			5,748.6
Statutory surplus	5,991.0			5,605.2			5,269.2			5,073.0			4,953.6
Common shares outstanding	595.8			604.6			613.0			662.4			672.6
Common share close price (at December 31)	$	27.27		$	21.10		$	19.51		$	19.87		$	17.99
Rate of return ³	30.9		%	15.4		%	0.2		%	16.9		%	21.5		%
Market capitalization	$	16,247.5		$	12,757.1		$	11,959.6		$	13,161.9		$	12,100.1
Book value per common share	10.39			9.94			9.47			9.13			8.55
Ratios:
Return on average common shareholders’ equity:
Net income attributable to Progressive	17.7		%	14.5		%	16.5		%	17.1		%	21.4		%
Comprehensive income attributable to Progressive	19.0		%	17.4		%	15.0		%	22.3		%	35.5		%
Debt to total capital ⁴	23.1		%	25.6		%	29.6		%	24.5		%	27.5		%
Price to earnings	14.1			14.3			12.3			12.3			11.5
Price to book	2.6			2.1			2.1			2.2			2.1
Net premiums written to statutory surplus	2.9			2.9			2.9			2.9			2.8
Statutory combined ratio	93.4			95.2			92.9			92.5			91.6
Dividends declared per common share ⁵	$	1.4929		$	1.2845		$	0.4072		$	1.3987		$	0.1613
Number of people employed	26,145			25,889			25,007			24,638			24,661

³ Represents annual rate of return, assuming dividend reinvestment.

⁴ Ratio reflects debt as a percent of debt plus shareholders’ equity; redeemable noncontrolling interest is not part of this calculation.

⁵ Represents dividends pursuant to the annual variable dividend policy, which the Board of Directors terminated in 2018, plus special cash dividends of $1.00 per common share in 2013, 2012, and 2010 (see Note 14 – Dividends for further discussion).

App.-A-92

The Progressive Corporation and Subsidiaries

Performance Graph

(unaudited)

The following performance graph compares the performance of Progressive’s Common Shares (“PGR”) to the Standard & Poor’s Index (“S&P Index”) and the Value Line Property/Casualty Industry Group (“P/C Group”) for the last five years.

Cumulative Five-Year Total Return*

PGR, S&P Index, P/C Group (Performance Results through 12/31/18)



(Assumes $100 was invested at the close of trading on December 31, 2013)
	2014		2015		2016		2017		2018
PGR	$	105.35	$	127.41	$	146.19	$	236.27	$	258.28
S&P Index	113.69		115.28		129.04		157.25		150.33
P/C Group ¹	114.54		127.17		150.39		188.96		187.71

*Assumes reinvestment of dividends

¹ Per Value Line Publishing LLC

App.-A-93

The Progressive Corporation and Subsidiaries

Quantitative Market Risk Disclosures

(unaudited)

Quantitative market risk disclosures are only presented for market risk categories when risk is considered material. Materiality is determined based on the fair value of the financial instruments at December 31, 2018 , and the potential for near-term losses from reasonably possible near-term changes in market rates or prices. We had no trading financial instruments at December 31, 2018 and 2017 . See Management’s Discussion and Analysis of Financial Condition and Results of Operations for our discussion of the qualitative information about market risk.

OTHER-THAN-TRADING FINANCIAL INSTRUMENTS

Financial instruments subject to interest rate risk were:



	Fair Value
	-200 bps		-100 bps				+100 bps		+200 bps
(millions)	Change ¹		Change ¹		Actual		Change		Change
U.S. government obligations	$	10,659.2	$	10,278.5	$	9,916.5	$	9,572.4	$	9,246.1
State and local government obligations	1,742.9		1,696.1		1,649.1		1,601.9		1,554.8
Asset-backed securities	7,877.9		7,745.8		7,613.3		7,480.6		7,348.7
Corporate securities	9,284.6		8,984.7		8,694.3		8,415.2		8,148.3
Preferred stocks	1,333.5		1,303.7		1,272.2		1,241.8		1,213.7
Short-term investments	1,796.7		1,796.3		1,795.9		1,795.6		1,795.2
Total at December 31, 2018	$	32,694.8	$	31,805.1	$	30,941.3	$	30,107.5	$	29,306.8
Total at December 31, 2017	$	25,082.4	$	24,480.9	$	23,874.9	$	23,292.1	$	22,716.1

¹ The amounts reflect an interest rate of 1 basis point (bps) when the hypothetical decline in interest rates would have pushed yields to a negative level.

Exposure to risk is represented in terms of changes in fair value due to selected hypothetical movements in market rates. Bonds and preferred stocks are individually priced to yield to the worst case scenario, which includes any issuer-specific features, such as a call option. Asset-backed securities and state and local government housing securities are priced assuming deal specific prepayment scenarios, considering the deal structure, prepayment penalties, yield maintenance agreements, and the underlying collateral.

Financial instruments subject to equity market risk were:



	Fair Value
(millions)	-10%		Actual		+10%
Common equities at December 31, 2018	$	2,362.2	$	2,626.1	$	2,890.0
Common equities at December 31, 2017	$	3,043.5	$	3,399.8	$	3,756.1

The model represents the estimated value of our common equity portfolio given a +/-10% change in the market, based on the common stock portfolio’s weighted average beta of 1.01 for 2018 and 1.05 for 2017 . The beta is derived from recent historical experience, using the S&P 500 as the market surrogate. The historical relationship of the common stock portfolio’s beta to the S&P 500 is not necessarily indicative of future correlation, as individual company or industry factors may affect price movements. Betas are not available for all securities. In such cases, the change in fair value reflects a direct +/-10% change; the portion of our securities without betas is <0.1%.

App.-A-94

The Progressive Corporation and Subsidiaries

Net Premiums Written by State

(unaudited)



($ in millions)	2018				2017				2016				2015				2014
Florida	$	4,700.9	14.4	%	$	3,808.0	14.0	%	$	3,305.1	14.1	%	$	2,839.6	13.8	%	$	2,399.0	12.9	%
Texas	3,388.6		10.4		2,704.9		10.0		2,226.8		9.5		1,941.5		9.4		1,664.6		8.9
California	1,836.0		5.6		1,520.5		5.6		1,284.8		5.5		1,173.6		5.7		1,080.6		5.8
New York	1,699.0		5.2		1,472.8		5.4		1,279.4		5.5		1,095.6		5.3		1,000.7		5.4
Georgia	1,452.9		4.5		1,177.0		4.4		939.4		4.0		813.2		4.0		774.0		4.1
Michigan	1,423.7		4.4		1,186.8		4.4		971.3		4.2		812.5		4.0		659.6		3.5
Ohio	1,194.0		3.7		1,033.5		3.8		905.2		3.9		820.8		4.0		807.7		4.3
Pennsylvania	1,157.4		3.5		1,005.5		3.7		895.8		3.8		787.3		3.8		718.6		3.9
New Jersey	1,088.1		3.3		985.8		3.6		902.8		3.9		820.2		4.0		754.6		4.0
Louisiana	856.5		2.6		739.2		2.7		694.7		3.0		614.9		3.0		552.5		3.0
All other	13,812.8		42.4		11,498.1		42.4		9,948.2		42.6		8,844.8		43.0		8,242.7		44.2
Total	$	32,609.9	100.0	%	$	27,132.1	100.0	%	$	23,353.5	100.0	%	$	20,564.0	100.0	%	$	18,654.6	100.0	%

App.-A-95

Principal Office

The Progressive Corporation

6300 Wilson Mills Road

Mayfield Village, Ohio 44143

440-461-5000

progressive.com

24-Hour Insurance Quotes, Claims Reporting, and Customer Service



	Personal autos, motorcycles, and recreational vehicles	Commercial autos/trucks
To receive a quote	1-800-PROGRESSIVE (1-800-776-4737) progressive.com	1-888-806-9598 progressivecommercial.com
To report a claim	1-800-PROGRESSIVE (1-800-776-4737) progressive.com	1-800-PROGRESSIVE (1-800-776-4737)
For customer service:
If you bought your policy through an independent agent or broker	1-800-925-2886 (1-800-300-3693 in California) progressiveagent.com	1-800-444-4487 progressivecommercial.com
If you bought your policy directly through Progressive online or by phone	1-800-PROGRESSIVE (1-800-776-4737) progressive.com	1-800-895-2886 progressivecommercial.com

Homeowners - to receive a quote, report a claim, or speak to a customer service representative, please call 1-800-PROGRESSIVE or visit progressive.com and your inquiry will be routed to the appropriate contact center.
In addition, iPhone ^® and Android ^® users can download the Progressive App to start a quote, report a claim, or service a policy.

Annual Meeting The Annual Meeting of Shareholders will be held at the offices of The Progressive Corporation, Studio 96, 6671 Beta Drive, Mayfield Village, Ohio 44143 on May 10, 2019, at 10 a.m. eastern time. There were 2,016 shareholders of record on December 31, 2018.

Common Shares and Dividends The Progressive Corporation’s common shares are traded on the New York Stock Exchange (symbol PGR). Progressive currently has a dividend policy under which the Board expects to declare regular, quarterly common share dividends and, on at least an annual basis, to consider declaring an additional variable common share dividend. A question and answer discussion on the dividend policy can be found at: progressive.com/dividend.

Shareholder/Investor Relations Progressive does not maintain a mailing list for distribution of shareholders’ reports. To view Progressive’s publicly filed documents, shareholders can access our website: progressive.com/sec. To view our earnings and other releases, access: progressive.com/investors.

For financial-related information or to request copies of Progressive’s publicly filed documents free of charge, write to: The Progressive Corporation, Investor Relations, 6300 Wilson Mills Road, Box W33, Mayfield Village, Ohio 44143, email: investor_relations@progressive.com, or call: 440-395-2222.

For all other company information, call: 440-461-5000 or access our website at: progressive.com/contactus.

Transfer Agent and Registrar

Registered Shareholders: If you have questions or changes to your account and your Progressive common shares are registered in your name, write to: American Stock Transfer & Trust Company, Attn: Operations Center, 6201 15th Avenue, Brooklyn, NY 11219; phone: 1-866-709-7695; email: info@astfinancial.com; or visit their website at: astfinancial.com.

Beneficial Shareholders: If your Progressive common shares are held in a brokerage or other financial institution account, contact your broker or financial institution directly regarding questions or changes to your account.

App.-A-96

Contact Non-Management Directors Interested parties have the ability to contact the non-management directors as a group by sending a written communication clearly addressed to the non-management directors to either of the following:

Lawton W. Fitt, Chairperson of the Board, The Progressive Corporation, email: chair@progressive.com; or

Daniel P. Mascaro, Secretary, The Progressive Corporation, 6300 Wilson Mills Road, Mayfield Village, Ohio 44143 or email: secretary@progressive.com.

The recipient will forward communications so received to the non-management directors.

Accounting Complaint Procedure Any employee or other interested party with a complaint or concern regarding accounting, internal accounting controls, or auditing matters relating to Progressive may report such complaint or concern directly to the Chairperson of the Audit Committee, as follows: Patrick H. Nettles, Ph.D., Chair of the Audit Committee, auditchair@progressive.com.

Any such complaint or concern also may be reported anonymously over the following toll-free Alert Line: 1-800-683-3604 or online at: www.progressivealertline.com. Progressive will not retaliate against any individual by reason of his or her having made such a complaint or reported such a concern in good faith. View the complete procedures at: progressive.com/governance.

Whistleblower Protections Progressive will not retaliate against any officer or employee of Progressive because of any lawful act done by the officer or employee to provide information or otherwise assist in investigations regarding conduct that the officer or employee reasonably believes to be a violation of federal securities laws or of any rule or regulation of the Securities and Exchange Commission. View the complete Whistleblower Protections at: progressive.com/governance.

Corporate Governance Progressive’s Corporate Governance Guidelines and Board Committee Charters are available at: progressive.com/governance.

Counsel Baker & Hostetler LLP, Cleveland, Ohio

Charitable Contributions We contribute annually to: (i) The Insurance Institute for Highway Safety to further its work in reducing the human trauma and economic costs of auto accidents; and (ii) The Progressive Insurance Foundation, which provides matching funds to eligible 501(c)(3) charitable organizations to which employees contribute. Over the last five years, the matching funds provided by The Progressive Insurance Foundation averaged approximately $4 million per year.

Social Responsibility and Sustainability Progressive uses an interactive online format to communicate our social responsibility efforts. This report can be found at: progressive.com/socialresponsibility.

Online Annual Report and Proxy Statement Our 2018 Annual Report to Shareholders can be found at: progressive.com/annualreport.

Our 2019 Proxy Statement and 2018 Annual Report to Shareholders, in a PDF format, can be found at: progressiveproxy.com.

App.-A-97



Directors
Philip Bleser ^3,5,6	Patrick H. Nettles, Ph.D. ^1,6
Retired Chairman of Global Corporate	Executive Chairman,
Banking,	Ciena Corporation
J. P. Morgan Chase & Co.	(telecommunications)
(financial services)

Stuart B. Burgdoerfer ^1,6	Barbara R. Snyder ^3,6	1 Audit Committee Member
Executive Vice President and	President,	2 Executive Committee Member
Chief Financial Officer,	Case Western Reserve University	3 Compensation Committee Member
L Brands, Inc.	(higher education)	4 Investment and Capital Committee
(retailing)		Member
		5 Nominating and Governance
Pamela J. Craig ⁶	Kahina Van Dyke ⁶	Committee Member
Retired Chief Financial Officer,	SVP of Business and Corporate	6 Independent Director
Accenture PLC	Development,
(global management consulting)	Ripple Labs, Inc.
	(global digital payments network)
Charles A. Davis ^4,6
Chief Executive Officer,
Stone Point Capital LLC
(private equity investing)

Roger N. Farah ^2,3,5,6
Former Executive Director,
Tory Burch LLC
(retailing)

Lawton W. Fitt ^2,4,5,6
Chairperson of the Board
Retired Partner,
Goldman Sachs Group
(financial services)

Susan Patricia Griffith ²
President and Chief Executive Officer,
The Progressive Corporation

Jeffrey D. Kelly ^1,6
Retired Chief Operating Officer and
Chief Financial Officer,
RenaissanceRe Holdings Ltd.
(reinsurance services)

App.-A-98



Corporate Officers		Other Executive Officers
Lawton W. Fitt		John A. Barbagallo
Chairperson of the Board		Commercial Lines President
(non-executive)
		Steven A. Broz
Susan Patricia Griffith		Chief Information Officer
President
and Chief Executive Officer		Patrick K. Callahan
		Personal Lines President
John P. Sauerland
Vice President		M. Jeffrey Charney
and Chief Financial Officer		Chief Marketing Officer

Daniel P. Mascaro		William M. Cody
Vice President, Secretary,		Chief Investment Officer
and Chief Legal Officer
		John Murphy
Jeffrey W. Basch		Customer Relationship Management
Vice President		President
and Chief Accounting Officer (until March 2019)
		Lori Niederst
Patrick S. Brennan		Chief Human Resource Officer
Treasurer
		Andrew J. Quigg
Mariann Wojtkun Marshall		Chief Strategy Officer
Assistant Secretary; Vice President and
Chief Accounting Officer (beginning March 2019)		Michael D. Sieger
		Claims President




^© 2019 The Progressive Corporation

App.-A-99

Exhibit 21

SUBSIDIARIES OF THE PROGRESSIVE CORPORATION



		Jurisdiction
Name of Subsidiary		of Incorporation
ARX Holding Corp. (owns 86.8% of outstanding capital stock)		Delaware
American Strategic Insurance Corp.		Florida
Ark Royal Underwriters, LLC		Florida
ASI Assurance Corp.		Florida
ASI Home Insurance Corp.		Florida
ASI Lloyds, Inc.		Texas
ASI Preferred Insurance, Corp. ^*		Florida
ASI Select Auto Insurance Corp.		California
ASI Select Insurance Corp.		Delaware
ASI Services, Inc.		Florida
ASI Underwriters Corp.		Florida
ASI Underwriters of Texas, Inc.		Texas
e-Ins. LLC ^*		Florida
Progressive Property Insurance Company		Florida
PropertyPlus Insurance Agency, Inc.		Delaware
Sunshine Security Insurance Agency, Inc.		Florida
Drive Insurance Holdings, Inc.		Delaware
Drive New Jersey Insurance Company		New Jersey
Progressive American Insurance Company		Ohio
Progressive Bayside Insurance Company		Ohio
Progressive Casualty Insurance Company		Ohio
PC Investment Company		Delaware
Progressive Gulf Insurance Company		Ohio
Progressive Specialty Insurance Company		Ohio
Trussville/Cahaba, AL, LLC		Ohio
Progressive Classic Insurance Company		Wisconsin
Progressive Commercial Advantage Agency, Inc.		Ohio
Progressive Commercial Casualty Company		Ohio
Progressive Freedom Insurance Company		Ohio
Progressive Hawaii Insurance Corp.		Ohio
Progressive Michigan Insurance Company		Michigan
Progressive Mountain Insurance Company		Ohio
Progressive Northern Insurance Company		Wisconsin
Progressive Northwestern Insurance Company		Ohio
Progressive Preferred Insurance Company		Ohio
Progressive Security Insurance Company		Louisiana
Progressive Southeastern Insurance Company		Indiana
Progressive West Insurance Company		Ohio
Garden Sun Insurance Services, Inc.		Hawaii
Pacific Motor Club		California

^* Wholly owned by ARX Holding Corp.; however, ownership is shared by one or more ARX Holding Corp. subsidiary. Subsidiary is reported under the majority owned parent.



		Jurisdiction
Name of Subsidiary		of Incorporation
Progny Agency, Inc.		New York
Progressive Adjusting Company, Inc.		Ohio
Progressive Capital Management Corp.		New York
Progressive Commercial Holdings, Inc.		Delaware
Artisan and Truckers Casualty Company		Wisconsin
Blue Hill Specialty Insurance Company, Inc.		Illinois
National Continental Insurance Company		New York
Progressive Express Insurance Company		Ohio
United Financial Casualty Company		Ohio
Progressive Direct Holdings, Inc.		Delaware
Mountain Laurel Assurance Company		Ohio
Progressive Advanced Insurance Company		Ohio
Progressive Advantage Agency, Inc.		Ohio
Progressive Auto Pro Insurance Agency, Inc.		Florida
Progressive Choice Insurance Company		Ohio
Progressive Direct Insurance Company		Ohio
Gadsden, AL, LLC		Ohio
Progressive Garden State Insurance Company		New Jersey
Progressive Marathon Insurance Company		Michigan
Progressive Max Insurance Company		Ohio
Progressive Paloverde Insurance Company		Indiana
Progressive Premier Insurance Company of Illinois		Ohio
Progressive Select Insurance Company		Ohio
Progressive Universal Insurance Company		Wisconsin
Progressive Investment Company, Inc.		Delaware
Progressive Premium Budget, Inc.		Ohio
Progressive RSC, Inc.		Ohio
Progressive Vehicle Service Company		Ohio
Village Transport Corp.		Delaware
Wilson Mills Land Co.		Ohio

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-16509, 33-51034, 33-57121, 333-41238, 333-172663, 333-185703, 333-185704, 333-204406, and 333-217922) and Form S-3 (No. 333-227315) of The Progressive Corporation of our report dated February 27, 2019 relating to the financial statements and the effectiveness of internal control over financial reporting, which appears in the 2018 Annual Report to Shareholders, which is incorporated by reference in this Annual Report on Form 10‑K. We also consent to the incorporation by reference of our report dated February 27, 2019 relating to the financial statement schedules, which appears in this Form 10‑K.

/s/ PricewaterhouseCoopers LLP

Cleveland, Ohio

February 27, 2019

Exhibit 24

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint John P. Sauerland, Daniel P. Mascaro, David M. Coffey, Laurie F. Humphrey and Andrew J. Kane, and each of them, my true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for me and in my name, place and stead, in any and all capacities, to sign and file with the Securities and Exchange Commission the Annual Report on Form 10-K of The Progressive Corporation for the year ended December 31, 2018, and any and all amendments relating thereto and other documents in connection therewith, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary and requisite to be done in connection with the foregoing, as fully to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their respective substitutes, may lawfully do or cause to be done by virtue hereof.

IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies) set forth below this 11th day of February, 2019.

/s/Jeffrey W. Basch

Jeffrey W. Basch

Vice President and Chief Accounting Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint Jeffrey W. Basch, Daniel P. Mascaro, David M. Coffey, Laurie F. Humphrey and Andrew J. Kane, and each of them, my true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for me and in my name, place and stead, in any and all capacities, to sign and file with the Securities and Exchange Commission the Annual Report on Form 10-K of The Progressive Corporation for the year ended December 31, 2018, and any and all amendments relating thereto and other documents in connection therewith, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary and requisite to be done in connection with the foregoing, as fully to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their respective substitutes, may lawfully do or cause to be done by virtue hereof.

IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies) set forth below this 11th day of February, 2019.

/s/John P. Sauerland

John P. Sauerland

Vice President and Chief Financial Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint Jeffrey W. Basch, John P. Sauerland, Daniel P. Mascaro, David M. Coffey, Laurie F. Humphrey and Andrew J. Kane, and each of them, my true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for me and in my name, place and stead, in any and all capacities, to sign and file with the Securities and Exchange Commission the Annual Report on Form 10-K of The Progressive Corporation for the year ended December 31, 2018, and any and all amendments relating thereto and other documents in connection therewith, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary and requisite to be done in connection with the foregoing, as fully to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their respective substitutes, may lawfully do or cause to be done by virtue hereof.

IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies) set forth below this 11 day of February, 2019.

/s/Susan Patricia Griffith

Susan Patricia Griffith

Director, President and Chief Executive Officer

POWER OF ATTORNEY

IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies) set forth below this 12 day of February, 2019.

/s/Philip Bleser

Philip Bleser

Director

POWER OF ATTORNEY

IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies) set forth below this 12 day of February, 2019.

/s/Stuart B. Burgdoerfer

Stuart B. Burgdoerfer

Director

POWER OF ATTORNEY

IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies) set forth below this 12 day of February, 2019.

/ s/Charles A. Davis

Charles A. Davis

Director

POWER OF ATTORNEY

IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies) set forth below this 12 day of February, 2019.

/s/Roger N. Farah

Roger N. Farah

Director

POWER OF ATTORNEY

IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies) set forth below this 19th day of February, 2019.

/s/Lawton W. Fitt

Lawton W. Fitt

Director

POWER OF ATTORNEY

IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies) set forth below this 12 day of February, 2019.

/s/Pamela J. Craig

Pamela J. Craig

Director

POWER OF ATTORNEY

IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies) set forth below this 12 day of February, 2019.

/s/Jeffrey D. Kelly

Jeffrey D. Kelly

Director

POWER OF ATTORNEY

IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies) set forth below this 12th day of February, 2019.

/s/Patrick H. Nettles, Ph.D.

Patrick H. Nettles, Ph.D.

Director

POWER OF ATTORNEY

IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies) set forth below this 20th day of February, 2019.

/s/Kahina Van Dyke

Kahina Van Dyke

Director

POWER OF ATTORNEY

IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies) set forth below this 18th day of February, 2019.

/s/Barbara R. Snyder

Barbara R. Snyder

Director

Exhibit 31.1

CERTIFICATION

I, Susan Patricia Griffith, certify that:


1.	I have reviewed this annual report on Form 10-K 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:	February 27, 2019	/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 annual report on Form 10-K 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:	February 27, 2019	/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 Annual Report on Form 10-K of the Company for the period ended December 31, 2018 (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

February 27, 2019

Exhibit 32.2

SECTION 1350 CERTIFICATION

I, John P. Sauerland, Vice President and 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:

(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

February 27, 2019

Exhibit 99

LETTER TO SHAREHOLDERS

This year was truly one for the record books, albeit many of the records we broke were set internally. The spirit of Progressive people is to set audacious goals, and we find that doing so intensifies our collaboration and strengthens our relationships as a collective team. That may sound pedestrian, but it is fundamental to our identity and allows us to consider the enterprise in its entirety and not as siloed functional areas. This isn’t something that we can visibly quantify, but it has worked for over 80 years, and we believe it allows us to balance our achievements with a strong sense of togetherness with our Core Values as the backdrop.

To that end, in 2018 we achieved the following:


•	We moved up one position to become the #3 company in the private passenger auto market. As we’ve stated time and time again, this gets us one step closer to achieving our ultimate vision.


•	We crossed the $30 billion net premiums written (NPW) threshold after celebrating $20 billion in NPW only a few years earlier.


•	We surpassed 20 million total policies in force (PIF) and 13 million auto PIFs allowing us to be in more homes where we can continue to grow, especially with the Robinsons (customers with auto + home). That rate of growth is incredible and could not have been achieved had we all not been in sync on hiring and training well in advance of need in order to service these new customers.


•	We have continued to mount a full court press on retention and now serve over 2 million customers who have been with us for a decade or longer. We do not take this for granted and are acutely aware that we need to earn their business each and every day.


•	We now serve over a million Robinsons and see so much more opportunity to grow in this consumer segment. Having started at Progressive over 31 years ago, it’s a thrill to see how we have evolved from our nonstandard roots and are able to serve every demographic.


•	We concluded a multi-year investment in a new policy processing system, which now manages all auto and special lines policies.

In a nutshell

We wrapped up the year with a combined ratio (CR) of 90.6 and NPW growth of 20%. The results are extraordinary and especially solid coming off of two very successful prior years of profitable growth. We added over $5 billion in NPW in 2018 after adding $3.8 billion in 2017 and $2.8 billion in 2016.

Our Personal Lines CR was 90.3, with NPW growth of 18% and auto PIF growth of 14%. Both the Agency and Direct channels contributed to these stellar results. Our special lines products PIF growth was relatively flat year-over-year, reflecting our already significant share of this market, specifically with our motorcycle and boat products.

A significant contributor to our results came from our Commercial Lines area. We ended 2018 with a CR of 86.7 and nearly 30% NPW growth and PIF growth just shy of 8%.

While growth was also strong in Property with NPW and PIF growth of 33% and 32%, respectively, our profit results were vastly affected by weather and natural catastrophes. Our catastrophe reinsurance program limited our retained losses and loss adjustment expenses from Hurricane Michael to $60 million. Unfortunately, our retained catastrophe losses and loss adjustment expenses from hurricanes, hail, winter storms, and the California wildfires totaled $295 million, accounting for 23 points of our Property combined ratio of 106.9. We continue to take rate to get us in line with our profitability target, but this will take time to earn in, since Property policies have annual terms. In addition to rate, we are using underwriting rules and coverage restrictions to manage our portfolio in high risk areas. We remain confident that we will course correct, that is if the elements cooperate.

On the investment side we produced a 2018 total return of 1.2%. The year was characterized by a return of volatility to the financial markets after a relatively placid period in the previous 12 months. Our fixed-income portfolio was able to earn 1.5%, as our relatively shorter interest rate exposure and conservative asset allocation allowed us to earn a positive return in a period of rising rates. Following several years of strong returns, our equity portfolio returned -4.4% in 2018, as domestic equity markets saw a steep drop in the fourth quarter.

The size of our investment portfolio has grown from $27 billion at the beginning of the year to over $33 billion at the end of 2018. Even as financial markets may offer us more attractive investment opportunities than a year ago, our focus on protecting the balance sheet has not changed. When adding risk to our investment portfolio, we will continue to pursue investments that provide a favorable risk-return profile to Progressive over the long term.

We accessed the capital markets twice in 2018 in order to support the company’s strong operating growth and for other general corporate purposes. In March, we issued $600 million of 4.20% 30-year senior notes and $500 million of 5.375% cumulative perpetual preferred stock. We returned to the capital markets in October to issue $550 million of 4.00% 10-year senior notes. The combination of internally generated profits and these external financings will both support our future growth and allow us to maintain flexibility in our capital allocation decisions. As in previous years, we bought back enough Progressive shares to neutralize dilution from equity-based compensation. We continue to believe the most efficient use of our capital is to reinvest it into our fast-growing operating business.

We ended 2018 with a Gainshare score of 1.91. This is the best result since 2004 and the 7th year in a row that the score has increased. We declared an annual dividend of $2.514 per common share, based on 2018 results and the formula that we communicated publicly. As previously announced and effective in 2019, we have revised our dividend policy (details discussed later).

As we head into 2019, we will continue to focus on policy or unit growth, as we often refer to it, while pursuing our goal of earning at least four cents of underwriting profit. We will watch trends closely to stay ahead of them and not shock our customers with rate increases. Meanwhile, our investment team will continue to focus on their goal of protecting the balance sheet and supporting the growth of the operating side of Progressive.

Looking to the Horizons

You may recall that in the August 2017 Investor Relations Webcast, we outlined the three Horizons construct. We believe that investing concurrently in the near-, mid-, and long-term future of Progressive will ensure that we create and sustain an enduring business. Our stance is that when we are executing on the core business so well, it is exactly the time to devote time, energy, and dollars to advancing our future business opportunities. We internally refer to this as an “always growing” mindset.

Horizon One (Execute): This has been our focus since the company was founded in 1937 and, in more recent years, we have been more surgically focused on growth and gaining a larger share of both the auto and home markets, as well as creating more Robinsons. This focus has clearly paid off and we believe there is much more room for growth, so this will continue to be an area of concentration.

Horizon Two (Expand): In this horizon, we are focusing on adjacencies — building upon our existing capabilities and market position to offer more products and services to our current and potential customers. We have made large investments in developing a business owners policy product, which we expect to launch this year, as well as offering other coverages for small businesses that desire to shop directly with Progressive. We’ve made people, systems, and brand investments and see this as an area where we can excel and profitably grow. In another sector, we continue to deepen our relationship with Uber and have gone from 1 state in 2016 to 4 in 2018 and expect to expand to 13 states in total in early 2019.

Horizon Three (Explore): As I communicated in last year’s letter to shareholders, in December of 2017, we formed an internal eleven-person, part-time Strategy Council to take some time to understand future trends and market shaping forces. The team focused on opportunities where we can use our skills to define ideas for future business initiatives and invest in areas where we believe we can win. In July of 2018, we named Andrew Quigg our Chief Strategy Officer. He has created a new full-time strategy team that will concentrate on designing products that solve unmet consumer needs. We are excited to explore, test, and invest in this horizon to achieve our goal of always growing.

Managing Capital for the Future

We take great pride in our transparency around communicating significant changes. Although we provided some detailed Q&A with our November earnings release, I would like to expand upon our capital management philosophy and how we plan to use that capital.

At Progressive, effective capital management is an important component of our financial brand. When considering how to deploy capital, we have consistently said that we will look first to invest to support the growth of the current and future earnings power of Progressive. If we have capital beyond what is needed to fund growth and innovation, that is, when we have “underleveraged capital,” we will return it to shareholders. We have historically used three tools to send underleveraged capital back to our shareholders: an annual dividend, share repurchases, and special dividends. We believe this approach is a strong indicator of our thoughtful stewardship of capital.

Many years ago, we articulated a formula for calculating our annual variable dividend, which considered the business and investment results. At that time, we had moderate growth expectations and attractive investment returns and routinely generated more capital than we needed. Our formulaic variable dividend, and special dividends when warranted, served us very well, returning on average about 50% of comprehensive income annually. Since the inception of the variable dividend program, we produced an annual return on shareholders’ equity of 17% and grew our book value just over 100%, which is among the best in the industry, even after the significant amount of cash we returned to shareholders over that same time. We are very proud of these results.

More recently, we have been experiencing faster growth in a very low-return investment environment, creating a need for more capital to underpin growth. While our business does not consume massive capital for property, plant, or equipment, the regulatory construct and need for contingent capital, due to weather and other unforeseen circumstances, requires significant capital reserves. Given our strong growth and outlook, we decided that it was a good time to take a step back and reassess our dividend policy, especially given the fact that our business model is evolving as we think about our long-term growth potential. We are committed to investing our capital when we have compelling opportunities to do so and to being flexible and nimble to drive shareholder value and to attract a broad and diverse set of shareholders. Given the current business environment, our opportunities to grow, and our commitment to shareholder value, we decided to alter our approach to our annual dividend.

It is difficult to forecast the amount of capital that we will need to invest to pursue the opportunities that will be developed in all three Horizons and, therefore, we believe that a flexible dividend policy is appropriate for Progressive. At the same time, we recognize that many of our shareholders and prospective shareholders value a predictable cash return from their investments. Therefore, we adopted a new dividend policy that will pay a regular quarterly dividend, which we expect to be $0.10 per common share through 2019, with the potential for an annual, variable dividend at year end. The variable component of the dividend will reflect the performance of the business and the growth and investment opportunities we see and will be determined by the Board of Directors. While the old dividend formula was affected by the company’s Gainshare factor, the new approach will not be so influenced. We found that the Gainshare factor reflects performance and does not capture growth and investment opportunities, which had the potential to increase dividend payouts when it could be advantageous to retain the capital in the business to support growth. While less formulaic than our previous variable dividend approach, the new variable dividend will avoid the binary nature of the current dividend’s payout based on the restriction of comprehensive income necessarily exceeding after-tax underwriting income.

We have been pleased with how our variable dividend has complemented our overall capital strategy for the past decade and are equally excited about the modified dividend policy and the flexibility it affords us to pursue sustained growth for the benefit of shareholders. We remain committed to investing our assets to grow our business and maximize value and, when our growth does not require all of the capital we have available, to returning underleveraged capital to shareholders.

Our Four Cornerstones

On many occasions, we’ve shared the construct we use to think about having a competitive advantage and we fittingly named it our four cornerstones. The first three make up the foundation and reflect who we are (Core Values), why we’re here (Our Purpose), and where we’re headed (Our Vision). The last, and where I will provide a few highlights of several of the investments we’ve made, we refer to as our four Strategic Pillars (how we’ll get there).

Pillar 1: Progressive people and our culture are collectively our most powerful source of competitive advantage.

Sufficiently describing our unique and special culture continues to elude me. Maybe it’s the pride of knowing that we are making a difference in each other’s lives and doing our best to be there for our customers when they need us the most. It might be the small, subtle gestures that are witnessed so frequently that it would take a novel to share every kind action that takes place within and outside our walls. What we do know is that the basis of our distinct culture starts with our Core Values and we follow them diligently in order to get great results in the right way.

I often comment about there not being a spreadsheet that I can reference to prove how incredible our culture is (and you know we like our spreadsheets). That said, we did receive countless recognitions from outside sources. I won’t name them all, but they came in the form of accolades like best company to work for, best workplace for diversity, best workplace for women, parents, veterans, and millennials. Lists don’t define us and we wouldn’t change what we do just to be put on those lists. We do strongly believe that if you treat people like they want to be treated and create a workplace where you can feel comfortable bringing your whole self to work, you tend to get noticed.

Pillar 2: Meeting the broader needs of our customers throughout their lifetime.

We continued heavy investment in our digital customer service products in 2018. We recognize that when someone decides to start a relationship with Progressive, we must support that relationship with world-class experiences and treatment in all areas, especially digital. This includes a focus and investment on a smart, simple, and satisfying digital offering that meets our customers’ needs wherever, whenever, and however they choose. As such, we continued a large commitment to revamp our self-service website experience in conjunction with extending our mobile app offering. This undertaking included not just a new web interface, look, and set of features, but also a new technology stack. With these investments, going forward we’ll be better positioned to continue advancing in innovative ways, across all digital touchpoints, in a way that builds stronger and longer relationships with our customers.

We also leveraged new technologies to meet the evolving expectations of customers and to drive additional expense reduction. Of note here, we launched our virtual assistant in our mobile app in November. Leveraging the star of our Superstore marketing campaign, we dubbed this virtual assistant “Ask Flo.” It allows customers to get instant support by interacting with an automated bot in a chat-like interface — with the heart and personality of our brand as personified by “Flo.”

To deliver our ideal customer experience, we also believe it’s critical to understand and recognize that different customers have different needs and preferences. In order to personalize at scale, we have been working on a project to personalize the renewal experience and give customers a compelling reason to continue their relationship with Progressive. To that end, we’re standing up a technology platform that will enable us to test personalized experiences, deployed in a coordinated fashion across all of our customer communication channels. Our vision is to create truly customized journeys, aligned with how each customer prefers to interact with us.

We understand that price is critical to insurance consumers, so we need to do all we can to lower costs to enable competitive prices. Of course, this can’t be at the expense of a positive customer experience. With this in mind, we’ve been able to find solutions that properly balance lower costs and a great customer experience.

We’re also heavily experimenting and utilizing artificial intelligence (AI). One example of this is in a new chatbot application where we use AI to interpret incoming chat requests and provide automated responses based on the perceived intent of the customer. In some cases, the response provides answers to the most commonly asked questions related to that topic, and in other cases it provides a phone number so that the customer can contact the group best positioned to address their issue. The model reduces the effort required to deliver straightforward answers on simple issues.

Another example of our use of AI is a Progressive-built application we call Docuflash. It uses artificial intelligence to discern document content to forward incoming documents without human intervention. Docuflash leverages optical character recognition (OCR) to “read” incoming documents, classify them appropriately, and forward them to the appropriate group for additional work as needed. Eliminating this more rudimentary work generates expense savings and creates the opportunity for our people to focus on the more complex tasks of acting on the incoming documents.

We also introduced new technology into our voice experience by replacing our legacy touch-tone interactive voice response (IVR) system with one where our customers can speak naturally when calling Progressive. Our new experience is easier and allows more self-service options for customers to interact with us without a Progressive consultant getting involved. We believe these advancements allow us to meet customers’ needs by providing a superior customer experience while giving us an expense benefit.

Pillar 3: Maintaining a leading brand recognized for innovative offerings and supported by experiences that instill confidence.

We designed and released an all-new quoting experience for and on behalf of our agents to make it easier to support quoting bundled policies for our customers. Our For Agents Only (FAO) Portfolio quoting (also referred to as Portfolio), is now live for all agents appointed to write new business in three states with plans for future state releases and expectations to share Portfolio with agents countrywide by mid-2020.

Portfolio offers the following:

Less data entry: Portfolio reduces quote time by finding available customer, vehicle, and property information. In addition, Portfolio auto-fills customer information across products so agents can spend less time typing and more time forming relationships with their customers.

The more (products) the merrier: Thanks to Portfolio, FAO can now support bundled quotes for the first time. When agents start a quote from the FAO homepage, Portfolio's product picker displays all available products, allowing agents to select multiple products right from the beginning. Supported products—those that agents can quote and sell within Portfolio—include auto, special lines, home, condo, and renters.

The power of choice: Rather than working directly through an insurance company's quoting system, many agents use comparative rater software to shop multiple companies for their customers. Agents can easily add products to a rater quote before completing the sale in Portfolio.

It all comes together: The namesake Portfolio page gives agents and their customers an overview of premium, bundle savings, and applied discounts. Agents can add or remove a product with one click, speeding up the sales process.

Our highly recognized brand grants us a venue to clearly communicate our innovative offerings to our customers and consumers alike. Few brands have sustained a single icon for over a decade. Flo is one of the longest-running brand characters, appearing in over 150 ads that take place in our alternate-reality “Superstore.” To keep our flagship show fresh, this year we introduced Flo’s Squad, her ever-expanding crew of colleagues who represent our long-lasting commitment to providing impressive service and protection at an affordable price.

In addition to expanding our characters, we also expanded our messages, in order to more firmly align them with the needs of our customers. As an example, in new ads like “Fluent in Insurance , ” we promoted our online insurance jargon translator, Progressive Answers. We doubled the number of media impressions focused on auto/home bundle messages in 2018, compared to 2015. And, in partnership with national media outlets, including “The Today Show,” we more widely publicized our Keys to Progress ^® program, which in recent years donated, on average, 100 refurbished cars per year, to veterans in need.

Creative was not the only area of optimization. We also delivered some exciting portfolio shopping experiences, including Progressive HomeQuote Explorer ^® (HQX) and Progressive BusinessQuote Explorer ^® (BQX), leading digital home and business insurance marketplaces.

Pillar 4: Offering competitive prices driven by industry-leading segmentation, claims accuracy, and operational efficiency.

Our auto policies in force grew over 14%. As we shared with you during our third quarter webcast, our expanding ability to segment has accelerated policy growth in recent periods. During the time frame from 2013 to 2016, it took us 30 months to add a million auto policies in force. The next million policies took us 15 months with the subsequent million taking only 8 months. Most recently, we added 1 million policies in force in a mere six months. We attribute this to our large investments in our product design focused on segmentation and risk selection (matching rate to risk).

In addition, we continue to evolve our usage-based insurance segmentation. We introduced, in 10 states, a new algorithm that adds distracted driving to the other already powerful variables we track, and we plan to roll it out more broadly in 2019.

Operational efficiency is a key component of our competitive prices strategy pillar. At 20.4%, our expense ratio is among the lowest in our industry. A bit more than half of that ratio is comprised of commissions paid to our agents and advertising costs, or what we refer to as acquisition costs. We view increasing these acquisition costs as generally requisite to growing profitably. To grow and ensure the viability of the agency distribution channel, we pay competitive commissions and we target aggregate commission at around 10.5% of agency premium. We’ve grown advertising costs to over $1.4 billion in 2018 and have done so optimizing incremental spend at the lowest level possible. We did this not only in digital media but increasingly in mass media and even down to cost per incremental sale metrics at the television show and daypart level. We buy the majority of our media in-house and analyze massive amounts of data, often in real-time, to ensure very competitive advertising spend.

We also focus on non-acquisition costs as we believe lowering these costs while still providing great service and a great work environment allows us to grow faster. We invest in technology to drive cost out of our processes while improving the customer and agent experience and allowing for our people to focus on higher value-added work. Policies in force per FTE (full-time equivalent) and revenues per FTE are key metrics in driving towards a lower cost structure and we’ve made great progress on both of these. Our ultimate metric of underwriting cost effectiveness is what we call our non-acquisition expense ratio (NAER). For 2018, we reduced our Personal Lines NAER by 0.7 points to 9.1% and for our Commercial Lines business, we reduced NAER by 0.8 points to

11.0%. These improvements allow us to continue to keep our rates competitive and meet or exceed our profitability targets.

The costs to settle a claim, or loss adjustment expense (LAE), is balanced along with customer service, work environment, and settling the claim accurately. We are extremely pleased that our accuracy performance improved in a year with significant growth in both claim counts and claim employees, while lowering the cost to settle our average auto, special lines, and commercial lines claim features by over 2%. In concert with growing average premium per policy, this lower cost per claims feature allowed us to lower our loss adjustment expense ratio by 0.7 points for the year to 10.2%.

That’s a wrap

As we put a bow on 2018 and reflect on the numerous celebrations that took place over the year, it reminded me of something that Peter B. Lewis always said — make sure to have fun. We all worked hard and together achieved a tremendous amount on the business front, but along the way we had a lot of fun, which exemplifies the spirit of Progressive.

We are so thankful for our partners, our agents, and the customers that motivate us to do better every day. You all have our commitment that we will work hand in glove to excel as we sprint into 2019.

I am especially grateful to the over 38 thousand Progressive people that inspire me daily. The accomplishments that we collectively achieved this year mean so much more when they are attained with people you enjoy working with side-by-side.

Thanks for all that you do.

/s/ Tricia Griffith

Tricia Griffith

President and Chief Executive Officer