III. RESULTS OF OPERATIONS – UNDERWRITING
A. Segment Overview
We report our underwriting operations in three segments: Personal Lines, Commercial Lines, and Property. As a component of our Personal Lines segment, we report our Agency and Direct business results to provide further understanding of our products by distribution channel.
The following table shows the composition of our companywide net premiums written, by segment, for the respective periods:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Personal Lines | | | | | | | |
Agency | 36 | % | | 38 | % | | 35 | % | | 38 | % |
Direct | 40 | | | 40 | | | 40 | | | 41 | |
Total Personal Lines1 | 76 | | | 78 | | | 75 | | | 79 | |
Commercial Lines | 19 | | | 17 | | | 20 | | | 16 | |
Property | 5 | | | 5 | | | 5 | | | 5 | |
Total underwriting operations | 100 | % | | 100 | % | | 100 | % | | 100 | % |
1 Personal auto products accounted for 91% of the total Personal Lines segment net premiums written during the three months and 93% during the six months ended June 30, 2022 and 2021, and our special lines products accounted for the balance.
The shift between our Personal Lines and Commercial Lines segments during both the second quarter and first six months of 2022, compared to the same periods last year, reflects Commercial Lines (including Protective Insurance products) growing at a faster rate than Personal Lines.
Our Personal Lines business writes insurance for personal autos and special lines products (e.g., motorcycles, watercraft, and RVs). Within Personal Lines we often refer to our four consumer segments, which include:
•Sam - inconsistently insured;
•Diane - consistently insured and maybe a renter;
•Wrights - homeowners who do not bundle auto and home; and
•Robinsons - homeowners who bundle auto and home.
While our personal auto policies are primarily written for 6-month terms, we write 12-month auto policies in our Platinum agencies to promote bundled auto and home growth. At June 30, 2022, 14% of our Agency auto policies in force were 12-month policies, compared to 13% a year earlier. While the shift to 12-month policies is slow, to the extent our Agency application mix of annual policies grows, that shift in policy term could increase our written premium mix by channel as 12-month policies have about twice the amount of net premiums written compared to 6-month policies. Our special lines products are written for 12-month terms.
Our Commercial Lines business writes auto-related liability and physical damage insurance, workers’ compensation insurance primarily for the transportation industry, and business-related general liability and property insurance, predominately for small businesses. The majority of our Commercial Lines business is written through the independent agency channel, although our direct business is growing. To serve our direct channel customers, we continued to expand our product offerings, including adding states where we offer BOP and include the product on our digital platform serving direct small business consumers (BusinessQuote Explorer®). The amount of commercial auto business written through the direct channel, excluding our TNC business, grew 4% on a quarter-over-prior-year-quarter basis. However, given the growth in our commercial auto agency book of business, which includes the Protective Insurance products, the direct commercial auto business represented 9% of our commercial auto premiums, compared to 10% a year earlier. We write about 90% of Commercial Lines policies for 12-month terms.
Our Property business writes residential property insurance for homeowners, other property owners, and renters. We write the majority of our Property business through the independent agency channel; however, we continue to expand the distribution of our Property product offerings in the direct channel, which represented about 24% of premiums written for the second quarter 2022, compared to 22% for the same period last year. Property policies are written for 12-month terms.
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 respective periods, our underwriting profitability results were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Underwriting Profit (Loss) | | Underwriting Profit (Loss) | | Underwriting Profit (Loss) | | Underwriting Profit (Loss) |
($ in millions) | $ | | Margin | | $ | | Margin | | $ | | Margin | | $ | | Margin |
Personal Lines | | | | | | | | | | | | | | | |
Agency | $ | 260.3 | | | 6.0 | % | | $ | 207.5 | | | 4.9 | % | | $ | 548.9 | | | 6.3 | % | | $ | 755.0 | | | 9.1 | % |
Direct | 198.4 | | | 4.0 | | | 128.4 | | | 2.8 | | | 348.8 | | | 3.6 | | | 543.0 | | | 6.0 | |
Total Personal Lines | 458.7 | | | 4.9 | | | 335.9 | | | 3.8 | | | 897.7 | | | 4.9 | | | 1,298.0 | | | 7.5 | |
Commercial Lines | 243.0 | | | 10.5 | | | 130.1 | | | 8.0 | | | 445.4 | | | 10.1 | | | 358.6 | | | 11.8 | |
Property1 | (156.9) | | | (27.5) | | | (83.3) | | | (16.6) | | | (148.6) | | | (13.2) | | | (154.0) | | | (15.8) | |
Other indemnity2 | (6.3) | | | NM | | 0.1 | | | NM | | (7.2) | | | NM | | 0.1 | | | NM |
Total underwriting operations | $ | 538.5 | | | 4.4 | % | | $ | 382.8 | | | 3.5 | % | | $ | 1,187.3 | | | 5.0 | % | | $ | 1,502.7 | | | 7.0 | % |
1 For the three and six months ended June 30, 2022, underwriting profit (loss) includes $5.0 million and $19.1 million, respectively, of amortization expense associated with acquisition-related intangible assets attributable to our Property segment, compared to $14.1 million and $28.3 million for the respective periods last year.
2 Underwriting margins for our other indemnity business are not meaningful (NM) due to the low level of premiums earned by, and the variability of loss costs in, such business.
During the second quarter 2022, the increase in our underwriting profitability primarily reflected a decrease in our expenses, which in part were due to a decrease in advertising spend and personnel costs, reflecting a decrease in our annual cash-incentive Gainshare program accrual. For the first six months of 2022, our profitability decreased from the same period last year primarily driven by higher accident severity and catastrophe losses. See the Losses and Loss Adjustment Expenses (LAE) section below for further discussion of our frequency and severity trends and catastrophe losses incurred during the period.
The pandemic has shifted consumer behavior and impacted general economic conditions. We have seen volatility in our severity trends as inflation continued to influence higher vehicle prices and costs to repair vehicles. We have responded, and will continue to respond, to these market changes through rate increases, underwriting restrictions, and other non-rate actions.
Further underwriting results for our Personal Lines business, including results by distribution channel, the Commercial Lines business, the Property business, and our underwriting operations in total, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
Underwriting Performance1 | 2022 | | 2021 | | Change | | 2022 | | 2021 | | Change |
Personal Lines – Agency | | | | | | | | | | | |
Loss & loss adjustment expense ratio | 77.3 | | | 76.5 | | | 0.8 | | | 76.3 | | | 72.2 | | | 4.1 | |
Underwriting expense ratio | 16.7 | | | 18.6 | | | (1.9) | | | 17.4 | | | 18.7 | | | (1.3) | |
Combined ratio | 94.0 | | | 95.1 | | | (1.1) | | | 93.7 | | | 90.9 | | | 2.8 | |
Personal Lines – Direct | | | | | | | | | | | |
Loss & loss adjustment expense ratio | 77.9 | | | 77.0 | | | 0.9 | | | 77.5 | | | 72.8 | | | 4.7 | |
Underwriting expense ratio | 18.1 | | | 20.2 | | | (2.1) | | | 18.9 | | | 21.2 | | | (2.3) | |
Combined ratio | 96.0 | | | 97.2 | | | (1.2) | | | 96.4 | | | 94.0 | | | 2.4 | |
Total Personal Lines | | | | | | | | | | | |
Loss & loss adjustment expense ratio | 77.7 | | | 76.8 | | | 0.9 | | | 76.9 | | | 72.5 | | | 4.4 | |
Underwriting expense ratio | 17.4 | | | 19.4 | | | (2.0) | | | 18.2 | | | 20.0 | | | (1.8) | |
Combined ratio | 95.1 | | | 96.2 | | | (1.1) | | | 95.1 | | | 92.5 | | | 2.6 | |
Commercial Lines | | | | | | | | | | | |
Loss & loss adjustment expense ratio | 70.4 | | | 71.8 | | | (1.4) | | | 70.6 | | | 67.9 | | | 2.7 | |
Underwriting expense ratio | 19.1 | | | 20.2 | | | (1.1) | | | 19.3 | | | 20.3 | | | (1.0) | |
Combined ratio | 89.5 | | | 92.0 | | | (2.5) | | | 89.9 | | | 88.2 | | | 1.7 | |
Property | | | | | | | | | | | |
Loss & loss adjustment expense ratio | 101.7 | | | 87.5 | | | 14.2 | | | 86.4 | | | 86.2 | | | 0.2 | |
Underwriting expense ratio2 | 25.8 | | | 29.1 | | | (3.3) | | | 26.8 | | | 29.6 | | | (2.8) | |
Combined ratio2 | 127.5 | | | 116.6 | | | 10.9 | | | 113.2 | | | 115.8 | | | (2.6) | |
Total Underwriting Operations | | | | | | | | | | | |
Loss & loss adjustment expense ratio | 77.4 | | | 76.5 | | | 0.9 | | | 76.2 | | | 72.5 | | | 3.7 | |
Underwriting expense ratio | 18.2 | | | 20.0 | | | (1.8) | | | 18.8 | | | 20.5 | | | (1.7) | |
Combined ratio | 95.6 | | | 96.5 | | | (0.9) | | | 95.0 | | | 93.0 | | | 2.0 | |
Accident year – Loss & loss adjustment expense ratio3 | 77.8 | | | 75.8 | | | 2.0 | | | 75.6 | | | 71.6 | | | 4.0 | |
1 Ratios are expressed as a percentage of net premiums earned. The portion of fees and other revenues related to our loss adjustment activities are netted against loss adjustment expenses and the portion of fees and other revenues related to our underwriting operations are netted against underwriting expenses in the ratio calculations.
2 Included in the three and six months ended June 30, 2022, are 0.9 points and 1.7 points, respectively, of amortization expense on acquisition-related intangible assets attributable to our Property segment, and 2.8 points and 2.9 points for the respective periods last year. Excluding this expense, for the three months ended June 30, 2022 and 2021, the Property business would have reported expense ratios of 24.9 and 26.3, respectively, and combined ratios of 126.6 and 113.8, respectively. For the six months ended June 30, 2022 and 2021, excluding this expense, the Property business would have reported expense ratios of 25.1 and 26.7, respectively, and combined ratios of 111.5 and 112.9, respectively.
3 The accident year ratios include only the losses that occurred during the period noted. As a result, accident period results will change over time, either favorably or unfavorably, as we revise our estimates of loss costs when payments are made or reserves for that accident period are reviewed.
Losses and Loss Adjustment Expenses (LAE)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(millions) | 2022 | | 2021 | | 2022 | | 2021 |
Change in net loss and LAE reserves | $ | 1,131.6 | | | $ | 1,603.1 | | | $ | 1,696.9 | | | $ | 2,230.6 | |
Paid losses and LAE | 8,289.5 | | | 6,803.3 | | | 16,582.6 | | | 13,286.3 | |
Total incurred losses and LAE | $ | 9,421.1 | | | $ | 8,406.4 | | | $ | 18,279.5 | | | $ | 15,516.9 | |
Claims costs, our most significant expense, represent payments made and estimated future payments to be made, to or on behalf of our policyholders, including expenses needed to adjust or settle claims. Claims costs are a function of loss severity and frequency and, for our vehicle businesses, are influenced by inflation and driving patterns, among other factors, some of which are discussed below. In our Property business, severity is primarily a function of construction costs and the age of the structure. Accordingly, anticipated changes in these factors are taken into account when we establish premium rates and loss reserves. Loss reserves are estimates of future costs and our reserves are adjusted as underlying assumptions change and information develops.
Our total loss and LAE ratio increased 0.9 points for the second quarter 2022, compared to the same period last year, and 3.7 points on a year-to-date basis, primarily due to increased accident severity in both our personal and commercial auto businesses and higher catastrophe losses, partially offset by lower accident frequency in our personal auto business and the higher premium per vehicle due to rate increases in both our personal and commercial auto businesses.
The following table shows our consolidated catastrophe losses and related combined ratio point impact, excluding loss adjustment expenses, incurred during the periods:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
($ in millions) | $ | | Point | | $ | | Point | | $ | | Point | | $ | | Point |
Personal Lines | $ | 285.2 | | | 3.1 | | | $ | 211.8 | | | 2.4 | | | $ | 329.7 | | | 1.8 | | | $ | 276.9 | | | 1.6 | |
Commercial Lines | 9.6 | | | 0.4 | | | 6.6 | | | 0.4 | | | 12.4 | | | 0.3 | | | 8.4 | | | 0.3 | |
Property | 233.5 | | | 40.9 | | | 128.0 | | | 25.5 | | | 332.8 | | | 29.5 | | | 272.6 | | | 28.0 | |
Total net catastrophe losses incurred | $ | 528.3 | | | 4.3 | | | $ | 346.4 | | | 3.2 | | | $ | 674.9 | | | 2.8 | | | $ | 557.9 | | | 2.6 | |
During the second quarter 2022, the majority of catastrophe losses were due to thunderstorms, hail, and tornadoes, throughout the United States. We have responded, and plan to continue to respond, promptly to catastrophic events when they occur in order to provide exemplary claims service to our customers.
Future catastrophes could have a material impact on our financial condition, cash flows, or results of operations. As a result, we reinsure various risks including, but not limited to, catastrophic losses. We do not have catastrophe-specific reinsurance for our Personal Lines or commercial auto businesses, but we reinsure portions of our Property business. The Property business reinsurance programs include catastrophe occurrence excess of loss contracts and aggregate excess of loss contracts. We also purchase non-weather-related catastrophe reinsurance on our Protective Insurance workers’ compensation insurance.
We evaluate our reinsurance programs during the renewal process, if not more frequently, to ensure our programs continue to effectively address the company’s risk tolerance. During the second quarter 2022, we entered into new reinsurance contracts under our per occurrence excess of loss program for our Property business. The reinsurance program has retention thresholds for losses and allocated loss adjustment expense (ALAE) from a single catastrophic event of $200 million, which is unchanged from the retention threshold on the prior contracts. During 2022, we also entered into a new aggregate excess of loss reinsurance contract that increased our retention from $475 million to $575 million and reduced aggregate potential coverage by $50 million, to a total of $175 million, compared to our 2021 program. In our view, our capital position and growing balance sheet enabled us to assume more of these risks via higher retention levels. While the total coverage limit and per-event retention will evolve to fit the growth of our business, we expect to remain a consistent purchaser of reinsurance coverage. Consistent with this history, we were able to fully place our desired coverage at both January 1st and June 1st renewal events. See Item 1 – Description of Business-Reinsurance in our Annual Report on Form 10-K for the year ended December 31, 2021, for a discussion of our various reinsurance programs. During the second quarter and first six months of 2022, we did not experience significant excess of loss reinsurance activity and we have not exceeded the annual retention thresholds under our 2022 catastrophe aggregate excess of loss program.
The following discussion of our severity and frequency trends in our personal auto business excludes comprehensive coverage because of its inherent volatility, as it is typically linked to catastrophic losses generally resulting from adverse weather. For our commercial auto products, the reported frequency and severity trends include comprehensive coverage. Comprehensive coverage insures against damage to a customer’s vehicle due to various causes other than collision, such as windstorm, hail, theft, falling objects, and glass breakage.
Total personal auto incurred severity (i.e., average cost per claim, including both paid losses and the change in case reserves) on a calendar-year basis increased about 16% during the second quarter and first six months of 2022, compared to the same periods last year. These increases reflect the impact of inflation, which continues to increase in the valuation of used vehicles and our total loss and repair costs.
Following are the changes we experienced in severity in our auto coverages on a year-over-year basis:
•Collision increased 23% and 26% for the second quarter and first six months of 2022, respectively, and auto property damage increased about 24% and 23%, respectively, in part due to increased used car prices.
•Bodily injury increased about 9% and 8% for the second quarter and first six months of 2022, respectively, due in part to increasing non-medical losses.
•Personal injury protection (PIP) decreased about 7% during the second quarter and first six months of 2022, due in part to coverage reform in Michigan and high reopen activity in Florida during the first half of 2021.
To address inherent seasonality trends and lessen the effects of month-to-month variability in the commercial auto products, we use a trailing 12-month period in assessing severity. In the second quarter 2022, our commercial auto products’ incurred severity, excluding our TNC business, increased 12% compared to the same period last year. In addition to general trends in the marketplace, the increase in our commercial auto products’ severity primarily reflects shifts in the mix of business to for-hire transportation, which has higher average severity than the business auto and contractor business market targets. Since the loss patterns in the TNC business are not indicative of our other commercial auto products, disclosing severity and frequency trends excluding that business is more representative of our overall experience for the majority of our commercial auto products.
It is a challenge to estimate future severity, but we continue to monitor changes in the underlying costs, such as general inflation, used car prices, vehicle repair costs, medical costs, health care reform, court decisions, and jury verdicts, along with regulatory changes and other factors that may affect severity.
Our personal auto incurred frequency, on a year-over-year basis, decreased about 8% and 4% for the second quarter and first six months of 2022, respectively, compared to the same periods last year. Following are the frequency changes we experienced by coverage:
•PIP and bodily injury decreased about 11% and 9%, respectively, for the second quarter 2022 and 5% for the first six months of 2022.
•Collision and auto property damage decreased about 10% and 8%, respectively, for the second quarter and 5% and 3% for the first six months of 2022.
On a trailing 12-month basis, our commercial auto products’ incurred frequency, excluding our TNC business, increased 5% during the second quarter 2022, compared to the same period last year. The frequency increase was in part due to an uneven recovery across different commercial auto business markets, many of which have not yet returned to pre-pandemic levels and are continuing to see increasing frequency since the COVID-19 pandemic lows.
We closely monitor the changes in frequency, but the degree or direction of near-term frequency change is not something that we are able to predict with any degree of confidence, and this challenge is exacerbated by the uncertainty of the current environment. We will continue to analyze trends to distinguish changes in our experience from other external factors, such as changes in the number of vehicles per household, miles driven, vehicle usage, gasoline prices, advances in vehicle safety, and unemployment rates, versus those resulting from shifts in the mix of our business or changes in driving patterns, to allow us to react quickly to price for these trends and to reserve more accurately for our loss exposures.
The table below presents the actuarial adjustments implemented and the loss reserve development experienced on a companywide basis in the following periods:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
($ in millions) | 2022 | | 2021 | | 2022 | | 2021 |
ACTUARIAL ADJUSTMENTS | | | | | | | |
Reserve decrease (increase) | | | | | | | |
Prior accident years | $ | (65.5) | | | $ | (22.1) | | | $ | (50.4) | | | $ | (44.2) | |
Current accident year | (14.4) | | | 15.5 | | | (53.2) | | | 18.4 | |
Calendar year actuarial adjustments | $ | (79.9) | | | $ | (6.6) | | | $ | (103.6) | | | $ | (25.8) | |
PRIOR ACCIDENT YEARS DEVELOPMENT | | | | | | | |
Favorable (unfavorable) | | | | | | | |
Actuarial adjustments | $ | (65.5) | | | $ | (22.1) | | | $ | (50.4) | | | $ | (44.2) | |
All other development | 111.4 | | | (50.5) | | | (94.5) | | | (152.8) | |
Total development | $ | 45.9 | | | $ | (72.6) | | | $ | (144.9) | | | $ | (197.0) | |
(Increase) decrease to calendar year combined ratio | 0.4 | pts. | | (0.7) | pts. | | (0.6) | pts. | | (0.9) | pts. |
Total development consists of both actuarial adjustments and “all other development” on prior accident years. The actuarial adjustments represent the net changes made by our actuarial staff to both current and prior accident year reserves based on regularly scheduled reviews. Through these reviews, our actuaries identify and measure variances in the projected frequency and severity trends, which allow them to adjust the reserves to reflect the current cost trends. For our Property business, 100% of catastrophe losses are reviewed monthly, and any development on catastrophe reserves are included as part of the actuarial adjustments. For the Personal Lines and Commercial Lines businesses, development for catastrophe losses in the vehicle businesses would be reflected in “all other development,” discussed below, to the extent they relate to prior year reserves. We report these actuarial adjustments separately for the current and prior accident years to reflect these adjustments as part of the total prior accident years development.
“All other development” represents claims settling for more or less than reserved, emergence of unrecorded claims at rates different than anticipated in our incurred but not recorded (IBNR) reserves, and changes in reserve estimates on specific claims. Although we believe the development from both the actuarial adjustments and “all other development” generally results from the same factors, we are unable to quantify the portion of the reserve development that might be applicable to any one or more of those underlying factors.
Our objective is to establish case and IBNR reserves that are adequate to cover all loss costs, while incurring minimal variation from the date the reserves are initially established until losses are fully developed. Our ability to meet this objective is impacted by many factors. Changes in case law, particularly related to PIP, can make it difficult to estimate reserves timely and with minimal variation. See Note 6 – Loss and Loss Adjustment Expense Reserves, for a more detailed discussion of our prior accident years development.
Underwriting Expenses
The companywide underwriting expense ratio (i.e., policy acquisition costs and other underwriting expenses, net of certain fees and other revenues, expressed as a percentage of net premiums earned) decreased 1.8 points for the second quarter 2022, compared to the same period last year, and 1.7 points on a year-to-date basis, primarily reflecting a decrease in our advertising spend and a decrease in personnel costs. In total, our advertising spend decreased 7% for both the second quarter and first six months of 2022, compared to the same periods last year in an effort to improve profitability to reach our 96 combined ratio goal, and had a 0.9 and 1.0 point, respectively, impact on our companywide expense ratio. We experienced a decrease in personnel costs primarily resulting from a decrease in our annual cash-incentive Gainshare program accrual, reflecting lower year-to-date segment profitability, which had a 0.9 and 0.8 point, respective, impact on our companywide expense ratio.
To analyze underwriting expenses, we also review our non-acquisition expense ratio (NAER), which excludes costs related to policy acquisition, including advertising and agency commissions, from our underwriting expense ratio. By excluding acquisition costs from our underwriting expense ratio, we are able to understand costs other than those necessary to acquire new policies and grow the business. During the second quarter, our NAER decreased 0.5 points, 0.6 points, and 0.8 points in our Personal Lines, Commercial Lines, and Property businesses, respectively, compared to the same period last year. On a year-to-date basis, our NAER decreased 0.2 points, 0.4 points, and 0.7 points in our Personal Lines, Commercial Lines, and Property businesses, respectively, compared to the same period last year.
C. Growth
For our underwriting operations, we analyze growth in terms of both premiums and policies. Net premiums written represent the premiums from policies written during the period, less any premiums ceded to reinsurers. Net premiums earned, which are a function of the premiums written in the current and prior periods, are earned as revenue over the life of the policy using a daily earnings convention. Policies in force, our preferred measure of growth since it removes the variability due to rate changes or mix shifts, represents all policies under which coverage was in effect as of the end of the period specified.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
($ in millions) | 2022 | | 2021 | | % Growth | | 2022 | | 2021 | | % Growth |
NET PREMIUMS WRITTEN | | | | | | | | | | | |
Personal Lines | | | | | | | | | | | |
Agency | $ | 4,493.6 | | | $ | 4,326.1 | | | 4 | % | | $ | 9,010.0 | | | $ | 8,784.8 | | | 3 | % |
Direct | 4,978.9 | | | 4,574.1 | | | 9 | | | 10,181.4 | | | 9,576.8 | | | 6 | |
Total Personal Lines | 9,472.5 | | | 8,900.2 | | | 6 | | | 19,191.4 | | | 18,361.6 | | | 5 | |
Commercial Lines | 2,308.8 | | | 1,986.3 | | | 16 | | | 5,234.5 | | | 3,780.4 | | | 38 | |
Property | 639.6 | | | 590.9 | | | 8 | | | 1,175.7 | | | 1,064.5 | | | 10 | |
Other indemnity1 | 1.2 | | | 2.9 | | | (59) | | | 1.5 | | | 2.9 | | | (48) | |
Total underwriting operations | $ | 12,422.1 | | | $ | 11,480.3 | | | 8 | % | | $ | 25,603.1 | | | $ | 23,209.4 | | | 10 | % |
NET PREMIUMS EARNED | | | | | | | | | | | |
Personal Lines | | | | | | | | | | | |
Agency | $ | 4,366.5 | | | $ | 4,220.3 | | | 3 | % | | $ | 8,689.8 | | | $ | 8,318.5 | | | 4 | % |
Direct | 4,905.9 | | | 4,633.9 | | | 6 | | | 9,699.5 | | | 9,065.6 | | | 7 | |
Total Personal Lines | 9,272.4 | | | 8,854.2 | | | 5 | | | 18,389.3 | | | 17,384.1 | | | 6 | |
Commercial Lines | 2,304.4 | | | 1,621.8 | | | 42 | | | 4,431.6 | | | 3,039.6 | | | 46 | |
Property | 570.5 | | | 502.3 | | | 14 | | | 1,128.6 | | | 974.8 | | | 16 | |
Other indemnity1 | 0.6 | | | 4.0 | | | (85) | | | 1.3 | | | 4.0 | | | (68) | |
Total underwriting operations | $ | 12,147.9 | | | $ | 10,982.3 | | | 11 | % | | $ | 23,950.8 | | | $ | 21,402.5 | | | 12 | % |
1 Represents Protective Insurance’s run-off business. | | | | | | | | | | | |
| | | | | | | June 30, |
(thousands) | | | | | | | 2022 | | 2021 | | % Growth |
POLICIES IN FORCE | | | | | | | | | | | |
Personal Lines | | | | | | | | | | | |
Agency auto | | | | | | | 7,619.5 | | | 8,014.2 | | | (5) | % |
Direct auto | | | | | | | 9,557.0 | | | 9,581.3 | | | 0 | |
Total auto | | | | | | | 17,176.5 | | | 17,595.5 | | | (2) | |
Special lines1 | | | | | | | 5,485.0 | | | 5,211.7 | | | 5 | |
Personal Lines — total | | | | | | | 22,661.5 | | | 22,807.2 | | | (1) | |
Commercial Lines | | | | | | | 1,024.6 | | | 916.6 | | | 12 | |
Property | | | | | | | 2,823.0 | | | 2,655.5 | | | 6 | |
Companywide total | | | | | | | 26,509.1 | | | 26,379.3 | | | 0 | % |
1 Includes insurance for motorcycles, watercraft, RVs, and similar items.
To analyze growth, we review new policies, rate levels, and the retention characteristics of our segments. Although new policies are necessary to maintain a growing book of business, we recognize the importance of retaining our current customers as a critical component of our continued growth.
As shown in the tables below, we measure retention by policy life expectancy. We review our customer retention for our personal auto products using both a trailing 3-month and a trailing 12-month period. We believe changes in policy life expectancy using a trailing 12-month period measure is indicative of recent experience, mitigates the effects of month-to-month variability, and addresses seasonality. Although using a trailing 3-month measure does not address seasonality and can reflect more volatility, this measure is more responsive to current experience and generally can be an indicator of how our retention rates are moving. We believe the second quarter 2021 year-over-year change in the trailing 3-month policy life expectancy is not representative of true retention activity due to the significant renewal activity during the second quarter 2020, as a result of suspending cancellations of policies for non-payment, and, therefore, we have chosen not to disclose this measure in the tables below as we do not believe the change is meaningful.
D. Personal Lines
The following table shows our year-over-year changes for our Personal Lines business:
| | | | | | | | | | | | | | | | | |
| Growth Over Prior Year |
| Quarter | | Year-to-date |
| 2022 | 2021 | | 2022 | 2021 |
Applications | | | | | |
New | (13) | % | 7 | % | | (18) | % | 11 | % |
Renewal | 2 | | 9 | | | 4 | | 11 | |
Written premium per policy - Auto | 11 | | (2) | | | 8 | | (3) | |
Policy life expectancy - Auto | | | | | |
Trailing 3 months | (32) | | NM | | | |
Trailing 12 months | (11) | | 3 | | | | |
NM = Not meaningful
New application growth in our Personal Lines products were down during the second quarter and first six months of 2022, with our personal auto new application growth down 15% and 21%, respectively, and our special lines new application growth down 7% and 8%. The decrease in personal auto new applications is primarily attributable to the rate actions and underwriting restrictions that began in the second quarter of 2021 and continued through the second quarter 2022. The decrease in special lines new applications primarily reflects a decrease in demand for RV, boat, and motorcycle products, as compared to the first half 2021 when sales of these products was strong. We continued to see personal auto and special lines renewal application growth.
Results varied by consumer segment. At the end of the second quarter 2022, Robinsons saw single-digit personal auto policy in force growth, compared to the second quarter last year, while Sams saw a low double-digit decline in policy in force growth. New auto applications experienced a decrease across all four consumer segments in the second quarter, year over year. Quote volume increased in the second quarter, on a year-over-year basis, in all of our consumer segments, except Sams, with all consumer segments seeing a decreased rate of conversion.
During the second quarter 2022, we implemented rate increases in 17 states. In the aggregate, on a countrywide basis, personal auto net rate increases were about 2% for the quarter. During the second quarter 2022, we also reduced advertising spend and tightened underwriting criteria in consumer segments where losses indicated rates are not meeting our profitability goals. These actions had and may continue to have a negative impact on our new and renewal business applications and policy life expectancy in the near term, as indicated by the decline in the trailing 3-month and trailing 12-month policy life expectancy.
Our written premium per policy increased during the second quarter and first six months of 2022, primarily due to the rate increases, which started in the second quarter 2021 and continued throughout the first half of 2022. Our focus on achieving our target underwriting profitability takes precedence over growth. We will continue to manage growth and profitability in accordance with our long-standing goal of growing as fast as we can as long as we can provide great customer service at or below a companywide 96 combined ratio on a calendar-year basis.
We report our Agency and Direct business results separately as components of our Personal Lines segment to provide further understanding of our products by distribution channel. The channel discussions below are focused on personal auto insurance since this product accounted for 91% and 93% of the Personal Lines segment net premiums written during the second quarter and first six months of 2022, respectively.
The Agency Business
| | | | | | | | | | | | | | | | | |
| Growth Over Prior Year |
| Quarter | | Year-to-date |
| 2022 | 2021 | | 2022 | 2021 |
Applications - Auto | | | | | |
New | (20) | % | 9 | % | | (24) | % | 7 | % |
Renewal | (2) | | 6 | | | (1) | | 9 | |
Written premium per policy - Auto | 12 | | (1) | | | 10 | | (1) | |
Policy life expectancy - Auto | | | | | |
Trailing 3 months | (34) | | NM | | | |
Trailing 12 months | (13) | | 3 | | | | |
NM = Not meaningful
The Agency business includes business written by more than 40,000 independent insurance agencies that represent Progressive, as well as brokerages in New York and California. During the second quarter 2022, only four states generated new Agency auto application growth, including only one of our top 10 largest Agency states. During the second quarter, each of our consumer segments experienced a reduction in new applications and policies in force compared to the same period last year.
During the second quarter and first six months of 2022, we experienced an increase in Agency auto quote volume of 9% and 7%, respectively, with a rate of conversion (i.e., converting a quote to a sale) decrease of 26% and 29%, compared to the same periods last year. For the second quarter and year-to-date periods, each consumer segment, other than Sams, saw increases in quote volume, compared to last year. The rate of conversion was down significantly in the second quarter and first six months of 2022, compared to the same periods last year, reflecting rate increases and the impact from tightening underwriting criteria. Written premium per policy for new and renewal Agency auto business increased 6% and 14%, respectively, compared to the second quarter 2021. The decreases in policy life expectancy were expected given the rate actions taken over the last year, and policy life expectancy may continue to be negatively impacted by our current rate actions.
The Direct Business
| | | | | | | | | | | | | | | | | |
| Growth Over Prior Year |
| Quarter | | Year-to-date |
| 2022 | 2021 | | 2022 | 2021 |
Applications - Auto | | | | | |
New | (11) | % | 10 | % | | (19) | % | 13 | % |
Renewal | 4 | | 12 | | | 6 | | 15 | |
Written premium per policy - Auto | 10 | | (4) | | | 7 | | (4) | |
Policy life expectancy - Auto | | | | | |
Trailing 3 months | (29) | | NM | | | |
Trailing 12 months | (9) | | 3 | | | | |
NM = Not meaningful
The Direct business includes business written directly by Progressive online, through mobile devices, and over the phone. During the quarter, 21 states generated new auto application growth, including three of our top 10 largest Direct states. During the second quarter 2022, total applications increased 1% due to growth in policy renewals. During the second quarter, new applications decreased across all consumer segments except Robinsons, while policies in force grew in our Wrights and Robinsons consumer segments, compared to last year.
During the second quarter and first six months of 2022, we experienced an increase in Direct auto quote volume of 5% and a decrease of 6%, respectively, while our rate of conversion decreased 14%, compared to the same periods last year for both the quarter and year-to-date periods. The decrease we experienced in our quote volume primarily reflected the decrease in advertising spending during the first half of 2022. All consumer segments saw an increase in quotes during the quarter except for Sams, with all consumer segments experiencing decreased quote volume, except Robinsons, during the first six months of 2022.
During the second quarter 2022, written premium per policy for new and renewal Direct auto business increased 6% and 10%, respectively, compared to the same period last year, primarily driven by rate increases. Consistent with our Agency business, the Direct business decrease in policy life expectancy reflects the rate actions taken over the last year.
E. Commercial Lines
The following table shows our year-over-year changes for our Commercial Lines business, excluding our TNC, BOP, and Protective Insurance products:
| | | | | | | | | | | | | | | | | |
| Growth Over Prior Year |
| Quarter | | Year-to-date |
| 2022 | 2021 | | 2022 | 2021 |
Applications | | | | | |
New | (6) | % | 52 | % | | 1 | % | 40 | % |
Renewal | 15 | | 8 | | | 14 | | 10 | |
Written premium per policy | 14 | | 20 | | | 17 | | 16 | |
Policy life expectancy - Trailing 12 months | 1 | | 5 | | | | |
Our Commercial Lines business operates in five traditional business markets, which include business auto, for-hire transportation, contractor, for-hire specialty, and tow markets, primarily written through the agency channel. We also write TNC business and BOP insurance. In the second quarter 2021, we acquired Protective Insurance, which expanded our portfolio of offerings to larger fleet and workers’ compensation insurance for trucking, along with trucking industry independent contractors, and affinity programs; these products are excluded from the table above.
During the second quarter 2022, the decrease in Commercial Lines new application growth primarily reflected a slow down from the significant amount of growth experienced in 2021, primarily in our for-hire transportation business market. During the second quarter 2022, we experienced a 2% decline in quote volume and a 4% decline in the rate of conversion, compared to the same period last year, primarily driven by the for-hire transportation market. During the first six months of 2022, quote volume increased 4%, while conversion decreased 3%, compared to the same period last year.
During the second quarter, written premium per policy for new commercial auto business increased 8%, while renewal business increased 20%, compared to the same period last year. The increases in written premiums were primarily due to rate increases. Our policy life expectancy increased primarily due to product model enhancements, compared to 2021.
F. Property
The following table shows our year-over-year changes for our Property business:
| | | | | | | | | | | | | | | | | |
| Growth Over Prior Year |
| Quarter | | Year-to-date |
| 2022 | 2021 | | 2022 | 2021 |
Applications | | | | | |
New | (5) | % | 29 | % | | (6) | % | 28 | % |
Renewal | 8 | | 8 | | | 9 | | 10 | |
Written premium per policy | 4 | | 0 | | | 4 | | 0 | |
Policy life expectancy - Trailing 12 months | (8) | | (6) | | | | |
Our Property business writes residential property insurance for homeowners, other property owners, and renters, in the agency and direct channels. During the second quarter and first six months of 2022, our Property business experienced a decrease in new applications, primarily due to the rate and other actions taken to address the profitability concerns.
During 2022, we continued to make underwriting changes to reduce our concentration risks by focusing our growth efforts in states with traditionally less catastrophe exposure and limit growth in the coastal and hail prone states. During 2021, we announced plans to non-renew about 60,000 policies in Florida, starting during the second quarter 2022. During the second quarter 2022, new legislation was introduced prohibiting the non-renewal of certain policies. In response, we changed our process to provide impacted policyholders the opportunity to have their policy renewed if meeting certain criteria. We expect to non-renew significantly less of the policies previously intended for non-renewal.
The targeted rate increases taken during the last 12 months, are beginning to be earned into the book of business; however, we realize that our current pricing actions and underwriting activities to limit growth in the coastal and hail prone states and to increase our exposure in states with traditionally less catastrophe exposure will require more time than originally anticipated. This information, combined with the continued extent of the weather-related losses, prompted us to reevaluate the portion of goodwill assigned to our Property business for impairment, resulting in a non-cash goodwill impairment charge of $224.8 million during the second quarter 2022, which represented the entire amount of goodwill assigned to the ARX reporting unit.
In addition to rate increases, as part of the underwriting changes discussed above, during the second quarter 2022 our written premium per policy increased, compared to the same period last year, primarily due to a shift in the mix of business toward providing coverage to higher valued properties. The written premium per policy impact from rate increases and underwriting changes were partially offset by a shift in the mix of business to a larger share of renters policies, which have lower written premiums per policy. Our policy life expectancy decreased from the same period last year, primarily due to the targeted rate increases in states where we were not achieving our profitability targets. We intend to continue to make targeted rate increases in states where we believe it is necessary to achieve our profitability targets.
G. Income Taxes
A deferred tax asset or liability is a tax benefit or expense that is expected to be realized in a future period. At June 30, 2022, we reported a net federal deferred tax asset, compared to net federal deferred tax liabilities at June 30, 2021 and December 31, 2021. The change to a deferred asset from a deferred liability was primarily due to unrealized losses on securities in the fixed-income and equity portfolios. At June 30, 2022 and 2021, we had net current income taxes payable of $114.0 million and $37.2 million, respectively, which were reported as part of accounts payable, accrued expenses, and other liabilities in our consolidated balance sheets. At December 31, 2021, we reported recoverable income taxes of $19.2 million, which was reflected as part of other assets. The taxes payable/recoverable vary from period to period based on the amount of estimated taxes paid.
The effective tax rate for the three and six months ended June 30, 2022, was 14.6% and 6.8%, respectively, compared to 20.9% and 20.8% for the same periods last year. Excluding the effect of the goodwill impairment, which was a one-time charge, the effective tax rate for the three and six months ended June 30, 2022, were 22.6% and 79.9%, respectively. The higher effective rates for the current quarter and year, excluding the goodwill impairment charge, are in part due to our permanent tax differences having a greater impact on the effective rate given our pretax loss, compared to pretax income in the same periods last year.
IV. RESULTS OF OPERATIONS – INVESTMENTS
A. Investment Results
Our management philosophy governing the portfolio is to evaluate investment results on a total return basis. The fully taxable equivalent (FTE) total return includes recurring investment income, adjusted to a fully taxable amount for certain securities that receive preferential tax treatment (e.g., municipal securities), and total net realized, and changes in total net unrealized, gains (losses) on securities.
The following table summarizes investment results for the periods ended June 30:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months | | Six Months |
| 2022 | | 2021 | | 2022 | | 2021 |
Pretax recurring investment book yield (annualized) | 2.3 | % | | 1.9 | % | | 2.1 | % | | 2.0 | % |
| | | | | | | |
FTE total return: | | | | | | | |
Fixed-income securities | (2.4) | | | 1.1 | | | (5.9) | | | 0.2 | |
Common stocks | (16.3) | | | 7.3 | | | (20.4) | | | 20.7 | |
Total portfolio | (3.6) | | | 1.7 | | | (7.2) | | | 1.9 | |
The increase in the book yield, compared to last year, for both periods, reflected investing new cash from operations at higher interest rates and an increase in interest rates on our floating rate securities. The decrease in the fixed-income total return, compared to last year, reflected the impact of rising interest rates during the last twelve months, as well as widening credit spreads.
A further break-down of our FTE total returns for our fixed-income portfolio for the periods ended June 30, follows:
| | | | | | | | | | | | | | | | | | | | | |
| Three Months | | Six Months |
| 2022 | | 2021 | | 2022 | | 2021 |
Fixed-income securities: | | | | | | | |
U.S. Treasury Notes | (1.7) | % | | 0.4 | % | | (5.8) | % | | (0.7) | % |
Municipal bonds | (1.9) | | | 1.4 | | | (6.7) | | | 0.4 | |
Corporate bonds | (3.1) | | | 1.3 | | | (6.7) | | | (0.3) | |
Residential mortgage-backed securities | (0.6) | | | 0.5 | | | (1.5) | | | 0.9 | |
Commercial mortgage-backed securities | (3.6) | | | 1.8 | | | (7.7) | | | 1.0 | |
Other asset-backed securities | (1.2) | | | 0.5 | | | (2.7) | | | 0.7 | |
Preferred stocks | (8.1) | | | 6.2 | | | (10.9) | | | 6.1 | |
Short-term investments | 0.1 | | | 0 | | | 0.2 | | | 0.1 | |
B. Portfolio Allocation
The composition of the investment portfolio was:
| | | | | | | | | | | | | | | | | | | | | | | |
($ in millions) | Fair Value | | % of Total Portfolio | | Duration (years) | | Rating1 |
June 30, 2022 | | | | | | | |
U.S. government obligations | $ | 18,719.2 | | | 36.0 | % | | 3.7 | | AAA |
State and local government obligations | 2,135.4 | | | 4.1 | | | 3.7 | | AA+ |
Foreign government obligations | 16.4 | | | 0.1 | | | 4.0 | | AAA |
Corporate debt securities | 10,167.8 | | | 19.6 | | | 3.0 | | BBB |
Residential mortgage-backed securities | 799.3 | | | 1.5 | | | 0.4 | | A |
Commercial mortgage-backed securities | 6,094.6 | | | 11.7 | | | 2.7 | | A+ |
Other asset-backed securities | 5,036.0 | | | 9.7 | | | 1.1 | | AA |
Preferred stocks | 1,564.3 | | | 3.0 | | | 3.0 | | BBB- |
Short-term investments | 4,611.8 | | | 8.9 | | | <0.1 | | AA |
Total fixed-income securities | 49,144.8 | | | 94.6 | | | 2.8 | | AA- |
Common equities | 2,784.7 | | | 5.4 | | | na | | na |
Total portfolio2 | $ | 51,929.5 | | | 100.0 | % | | 2.8 | | AA- |
June 30, 2021 | | | | | | | |
U.S. government obligations | $ | 19,437.7 | | | 38.1 | % | | 3.4 | | AAA |
State and local government obligations | 2,440.5 | | | 4.8 | | | 3.8 | | AA |
Foreign government obligations | 12.7 | | | 0.1 | | | 1.6 | | AA+ |
Corporate debt securities | 10,678.2 | | | 20.9 | | | 3.3 | | BBB |
Residential mortgage-backed securities | 671.3 | | | 1.3 | | | 1.2 | | AA- |
Commercial mortgage-backed securities | 5,708.1 | | | 11.2 | | | 3.6 | | A+ |
Other asset-backed securities | 3,899.0 | | | 7.7 | | | 1.3 | | AA |
Preferred stocks | 1,793.3 | | | 3.6 | | | 3.6 | | BBB- |
Short-term investments | 1,710.6 | | | 3.3 | | | 0.1 | | A+ |
Total fixed-income securities | 46,351.4 | | | 91.0 | | | 3.1 | | AA- |
Common equities | 4,591.4 | | | 9.0 | | | na | | na |
Total portfolio2 | $ | 50,942.8 | | | 100.0 | % | | 3.1 | | AA- |
December 31, 2021 | | | | | | | |
U.S. government obligations | $ | 18,488.2 | | | 35.9 | % | | 3.6 | | AAA |
State and local government obligations | 2,185.3 | | | 4.2 | | | 3.6 | | AA+ |
Foreign government obligations | 17.9 | | | 0.1 | | | 4.5 | | AAA |
Corporate debt securities | 10,692.1 | | | 20.7 | | | 2.9 | | BBB |
Residential mortgage-backed securities | 790.0 | | | 1.5 | | | 0.4 | | A- |
Commercial mortgage-backed securities | 6,535.6 | | | 12.7 | | | 3.2 | | A+ |
Other asset-backed securities | 4,982.3 | | | 9.7 | | | 1.2 | | AA |
Preferred stocks | 1,821.6 | | | 3.6 | | | 3.6 | | BBB- |
Short-term investments | 942.6 | | | 1.8 | | | 0.2 | | AA |
Total fixed-income securities | 46,455.6 | | | 90.2 | | | 3.0 | | AA- |
Common equities | 5,058.5 | | | 9.8 | | | na | | na |
Total portfolio2 | $ | 51,514.1 | | | 100.0 | % | | 3.0 | | AA- |
na = not applicable | | | | | | | |
1 Represents ratings at period end. Credit quality ratings are assigned by nationally recognized statistical rating organizations. To calculate the weighted average credit quality ratings, we weight individual securities based on fair value and assign a numeric score of 0-5, with non-investment-grade and non-rated securities assigned a score of 0-1. To the extent the weighted average of the ratings falls between AAA and AA+, we assign an internal rating of AAA-.
2 Includes $0, $412.1 million, and $143.4 million of net unsettled security purchase transactions at June 30, 2022 and 2021, and December 31, 2021, respectively, with the offsetting payable included in other liabilities.
The total fair value of the portfolio at June 30, 2022 and 2021, and December 31, 2021, included $4.9 billion, $3.3 billion, and $4.2 billion, respectively, of securities held in a consolidated, non-insurance subsidiary of the holding company, net of unsettled security transactions.
Our asset allocation strategy is to maintain 0%-25% of our portfolio in Group I securities, with the balance (75%-100%) of our portfolio in Group II securities.
We define Group I securities to include:
•common equities,
•nonredeemable preferred stocks,
•redeemable preferred stocks, except for 50% of investment-grade redeemable preferred stocks with cumulative dividends, which are included in Group II, and
•all other non-investment-grade fixed-maturity securities.
Group II securities include:
•short-term securities, and
•all other fixed-maturity securities, including 50% of the investment-grade redeemable preferred stocks with cumulative dividends.
We believe this asset allocation strategy allows us to appropriately assess the risks associated with these securities for capital purposes and is in line with the treatment by our regulators.
The following table shows the composition of our Group I and Group II securities:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | June 30, 2021 | | December 31, 2021 |
($ in millions) | Fair Value | % of Total Portfolio | | Fair Value | % of Total Portfolio | | Fair Value | % of Total Portfolio |
Group I securities: | | | | | | | | |
Non-investment-grade fixed maturities | $ | 1,648.7 | | 3.2 | % | | $ | 1,834.2 | | 3.6 | % | | $ | 2,032.4 | | 3.9 | % |
Redeemable preferred stocks1 | 101.9 | | 0.2 | | | 91.7 | | 0.2 | | | 90.9 | | 0.2 | |
Nonredeemable preferred stocks | 1,360.5 | | 2.6 | | | 1,609.8 | | 3.2 | | | 1,639.9 | | 3.2 | |
Common equities | 2,784.7 | | 5.4 | | | 4,591.4 | | 9.0 | | | 5,058.5 | | 9.8 | |
Total Group I securities | 5,895.8 | | 11.4 | | | 8,127.1 | | 16.0 | | | 8,821.7 | | 17.1 | |
Group II securities: | | | | | | | | |
Other fixed maturities | 41,421.9 | | 79.7 | | | 41,105.1 | | 80.7 | | | 41,749.8 | | 81.1 | |
Short-term investments | 4,611.8 | | 8.9 | | | 1,710.6 | | 3.3 | | | 942.6 | | 1.8 | |
Total Group II securities | 46,033.7 | | 88.6 | | | 42,815.7 | | 84.0 | | | 42,692.4 | | 82.9 | |
Total portfolio | $ | 51,929.5 | | 100.0 | % | | $ | 50,942.8 | | 100.0 | % | | $ | 51,514.1 | | 100.0 | % |
1 We did not hold any non-investment-grade redeemable preferred stocks at June 30, 2022 and 2021, or December 31, 2021.
To determine the allocation between Group I and Group II, we use the credit ratings from models provided by the National Association of Insurance Commissioners (NAIC) to classify our residential and commercial mortgage-backed securities, excluding interest-only securities, and the credit ratings from nationally recognized statistical rating organizations (NRSRO) to classify all other debt securities. NAIC ratings are based on a model that considers the book price of our securities when assessing the probability of future losses in assigning a credit rating. As a result, NAIC ratings can vary from credit ratings issued by NRSROs. Management believes NAIC ratings more accurately reflect our risk profile when determining the asset allocation between Group I and Group II securities.
The decrease in the percentage of Group I securities since year end was driven by sales and valuation declines in our common equity portfolio with the proceeds from the common stock sales and the $1.5 billion debt offering in March 2022, reinvested in Group II short-term investments.
Unrealized Gains and Losses
As of June 30, 2022, our fixed-maturity portfolio had pretax net unrealized losses, recorded as part of accumulated other comprehensive income, of $2,776.4 million, compared to net unrealized gains of $638.8 million and $71.4 million at June 30, 2021 and December 31, 2021, respectively. The decreases from both periods in 2021 were due to increasing interest rates across our fixed-maturity portfolio and wider credit spreads outside of our short-term and Treasury portfolios.
See Note 2 – Investments for a further break-out of our gross unrealized gains (losses).
Holding Period Gains and Losses
The following table provides the balance and activity for both the gross and net holding period gains (losses) for the six months ended June 30, 2022:
| | | | | | | | | | | |
(millions) | Gross Holding Period Gains | Gross Holding Period Losses | Net Holding Period Gains (Losses) |
Balance at December 31, 2021 | | | |
Hybrid fixed-maturity securities | $ | 13.0 | | $ | (5.5) | | $ | 7.5 | |
Equity securities | 3,877.2 | | (14.7) | | 3,862.5 | |
Total holding period securities | 3,890.2 | | (20.2) | | 3,870.0 | |
Current year change in holding period securities | | | |
Hybrid fixed-maturity securities | (13.0) | | (74.4) | | (87.4) | |
Equity securities | (1,859.8) | | (163.6) | | (2,023.4) | |
Total changes in holding period securities | (1,872.8) | | (238.0) | | (2,110.8) | |
Balance at June 30, 2022 | | | |
Hybrid fixed-maturity securities | 0 | | (79.9) | | (79.9) | |
Equity securities | 2,017.4 | | (178.3) | | 1,839.1 | |
Total holding period securities | $ | 2,017.4 | | $ | (258.2) | | $ | 1,759.2 | |
Changes in holding period gains (losses), similar to unrealized gains (losses) in our fixed-maturity portfolio, are the result of changes in market performance as well as sales of securities based on various portfolio management decisions.
Fixed-Income Securities
The fixed-income portfolio is managed internally and includes fixed-maturity securities, short-term investments, and nonredeemable preferred stocks.
Following are the primary exposures for our fixed-income portfolio. Details of our policies related to these exposures can be found in the Management’s Discussion and Analysis included in our 2021 Annual Report to Shareholders.
•Interest rate risk - our duration of 2.8 years at June 30, 2022, fell within our acceptable range of 1.5 to 5 years. We shortened our portfolio duration from 3.0 years at December 31, 2021, which we believe provides some protection against further increases in interest rates. The duration distribution of our fixed-income portfolio, excluding short-term investments, represented by the interest rate sensitivity of the comparable benchmark U.S. Treasury Notes, was:
| | | | | | | | | | | | | | | | | |
Duration Distribution | June 30, 2022 | | June 30, 2021 | | December 31, 2021 |
1 year | 18.4 | % | | 21.9 | % | | 22.0 | % |
2 years | 17.9 | | | 18.5 | | | 18.8 | |
3 years | 23.6 | | | 24.4 | | | 23.5 | |
5 years | 20.8 | | | 17.1 | | | 17.6 | |
7 years | 14.3 | | | 12.2 | | | 13.1 | |
10 years | 5.0 | | | 5.9 | | | 5.0 | |
| | | | | |
| | | | | |
Total fixed-income portfolio | 100.0 | % | | 100.0 | % | | 100.0 | % |
•Credit risk - our credit quality rating of AA- was above our minimum threshold during the second quarter 2022. The credit quality distribution of the fixed-income portfolio was:
| | | | | | | | | | | | | | | | | |
Rating | June 30, 2022 | | June 30, 2021 | | December 31, 2021 |
AAA | 57.7 | % | | 55.8 | % | | 54.7 | % |
AA | 8.5 | | | 7.5 | | | 8.7 | |
A | 8.4 | | | 9.3 | | | 8.6 | |
BBB | 21.0 | | | 22.1 | | | 21.7 | |
Non-investment grade/non-rated1 | | | | | |
BB | 3.5 | | | 4.3 | | | 4.8 | |
B | 0.6 | | | 0.5 | | | 1.1 | |
CCC and lower | 0.1 | | | 0.1 | | | 0.1 | |
Non-rated | 0.2 | | | 0.4 | | | 0.3 | |
Total fixed-income portfolio | 100.0 | % | | 100.0 | % | | 100.0 | % |
1 The ratings in the table above are assigned by NRSROs.
•Concentration risk - we did not have any investments in a single issuer, either overall or in the context of individual asset classes and sectors, that exceeded our thresholds during the second quarter 2022.
•Prepayment and extension risk - we did not experience significant adverse prepayment or extension of principal relative to our cash flow expectations in the portfolio during the second quarter 2022.
•Liquidity risk - our overall portfolio remains very liquid and we believe that it is sufficient to meet expected near-term liquidity requirements.
◦The short-to-intermediate duration of our portfolio provides a source of liquidity, as we expect approximately $2.6 billion, or 9.9%, of principal repayment from our fixed-income portfolio, excluding U.S. Treasury Notes and short-term investments, during 2022. Cash from interest and dividend payments and our short-term portfolio provide additional sources of recurring liquidity.
◦The duration of our U.S. government obligations, which are included in the fixed-income portfolio, was comprised of the following at June 30, 2022:
| | | | | | | | | | | |
($ in millions) | Fair Value | | Duration (years) |
U.S. Treasury Notes | | | |
Less than one year | $ | 219.5 | | | 0.5 | |
One to two years | 4,094.7 | | | 1.6 | |
Two to three years | 4,102.8 | | | 2.5 | |
Three to five years | 5,235.1 | | | 4.0 | |
Five to seven years | 3,946.2 | | | 5.8 | |
Seven to ten years | 1,120.9 | | | 8.3 | |
Total U.S. Treasury Notes | $ | 18,719.2 | | | 3.7 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
ASSET-BACKED SECURITIES
Included in the fixed-income portfolio are asset-backed securities, which were comprised of the following at the balance sheet dates listed:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in millions) | Fair Value | | Net Unrealized Gains (Losses) | | % of Asset- Backed Securities | | Duration (years) | | Rating (at period end)1 |
June 30, 2022 | | | | | | | | | |
Residential mortgage-backed securities | $ | 799.3 | | | $ | (10.2) | | | 6.7 | % | | 0.4 | | | A |
Commercial mortgage-backed securities | 6,094.6 | | | (644.8) | | | 51.1 | | | 2.7 | | | A+ |
Other asset-backed securities | 5,036.0 | | | (201.6) | | | 42.2 | | | 1.1 | | | AA |
Total asset-backed securities | $ | 11,929.9 | | | $ | (856.6) | | | 100.0 | % | | 1.9 | | | AA- |
June 30, 2021 | | | | | | | | | |
Residential mortgage-backed securities | $ | 671.3 | | | $ | 3.5 | | | 6.5 | % | | 1.2 | | | AA- |
Commercial mortgage-backed securities | 5,708.1 | | | 79.9 | | | 55.6 | | | 3.6 | | | A+ |
Other asset-backed securities | 3,899.0 | | | 33.1 | | | 37.9 | | | 1.3 | | | AA |
Total asset-backed securities | $ | 10,278.4 | | | $ | 116.5 | | | 100.0 | % | | 2.6 | | | AA- |
December 31, 2021 | | | | | | | | | |
Residential mortgage-backed securities | $ | 790.0 | | | $ | 1.7 | | | 6.4 | % | | 0.4 | | | A- |
Commercial mortgage-backed securities | 6,535.6 | | | (25.4) | | | 53.1 | | | 3.2 | | | A+ |
Other asset-backed securities | 4,982.3 | | | 0.9 | | | 40.5 | | | 1.2 | | | AA |
Total asset-backed securities | $ | 12,307.9 | | | $ | (22.8) | | | 100.0 | % | | 2.2 | | | AA- |
1 The credit quality ratings in the table above are assigned by NRSROs.
Residential Mortgage-Backed Securities (RMBS) The following table details the credit quality rating and fair value of our RMBS, along with the loan classification and a comparison of the fair value at June 30, 2022, to our original investment value (adjusted for returns of principal, amortization, and write-downs):
| | | | | | | | | | | | | | | | | | | | | | | | | |
Residential Mortgage-Backed Securities (at June 30, 2022) |
($ in millions) Rating1 | Non-Agency | | | | Government/GSE2 | | Total | | % of Total |
AAA | $ | 138.4 | | | | | $ | 1.3 | | | $ | 139.7 | | | 17.5 | % |
AA | 34.6 | | | | | 0.4 | | | 35.0 | | | 4.4 | |
A | 400.1 | | | | | 0 | | | 400.1 | | | 50.0 | |
BBB | 213.0 | | | | | 0 | | | 213.0 | | | 26.6 | |
Non-investment grade/non-rated: | | | | | | | | | |
BB | 0.6 | | | | | 0 | | | 0.6 | | | 0.1 | |
B | 0 | | | | | 0 | | | 0 | | | 0 | |
CCC and lower | 3.2 | | | | | 0 | | | 3.2 | | | 0.4 | |
Non-rated | 7.7 | | | | | 0 | | | 7.7 | | | 1.0 | |
Total fair value | $ | 797.6 | | | | | $ | 1.7 | | | $ | 799.3 | | | 100.0 | % |
Increase (decrease) in value | (3.3) | % | | | | 0.7 | % | | (3.3) | % | | |
1 The credit quality ratings are assigned by NRSROs; when we assigned the NAIC ratings for our RMBS, 92.6% of our non-investment-grade securities were rated investment grade and reported as Group II securities, with the remainder classified as Group I.
2 The securities in this category are insured by a Government Sponsored Entity (GSE) and/or collateralized by mortgage loans insured by the Federal Housing Administration (FHA) or the U.S.Department of Veteran Affairs (VA). .
In the residential mortgage-backed sector, our portfolio consists of deals that are backed by high-credit quality borrowers or have strong structural protections through underlying loan collateralization. During the second quarter 2022, we selectively added to our portfolio and opportunistically tendered some of the securities at attractive levels.
Commercial Mortgage-Backed Securities (CMBS) The following table details the credit quality rating and fair value of our CMBS, along with a comparison of the fair value at June 30, 2022, to our original investment value (adjusted for returns of principal, amortization, and write-downs):
| | | | | | | | | | | | | | | | | | | | | | | |
Commercial Mortgage-Backed Securities (at June 30, 2022) |
($ in millions) Rating1 | Multi-Borrower | | Single-Borrower | | Total | | % of Total |
AAA | $ | 246.5 | | | $ | 1,536.0 | | | $ | 1,782.5 | | | 29.2 | % |
AA | 0 | | | 1,754.5 | | | 1,754.5 | | | 28.9 | |
A | 0 | | | 1,034.8 | | | 1,034.8 | | | 17.0 | |
BBB | 0 | | | 1,026.2 | | | 1,026.2 | | | 16.8 | |
Non-investment grade/non-rated: | | | | | | | |
BB | 0 | | | 496.4 | | | 496.4 | | | 8.1 | |
B | 0.2 | | | 0 | | | 0.2 | | | 0 | |
| | | | | | | |
| | | | | | | |
Total fair value | $ | 246.7 | | | $ | 5,847.9 | | | $ | 6,094.6 | | | 100.0 | % |
Increase (decrease) in value | (3.4) | % | | (9.8) | % | | (9.6) | % | | |
1 The credit quality ratings are assigned by NRSROs; when we assigned the NAIC ratings for our CMBS, 36.9% of our non-investment-grade securities were rated investment grade and reported as Group II securities, with the remainder classified as Group I.
The CMBS portfolio experienced wider spreads and high volatility in the second quarter of 2022. New issuances in the single-asset single-borrower (SASB) market slowed significantly due to less favorable market conditions, as well as low trading volumes and liquidity in the secondary trading market. Given ongoing uncertainty about the future trajectory of the economy and its impact on real estate, we did not add to our portfolio during the quarter, and reduced certain positions that we believe will be sensitive to potential future economic weakness. Our focus continues to be on SASB with high-quality collateral in the office, self-storage, multi-family, and industrial sectors.
Other Asset-Backed Securities (OABS) The following table details the credit quality rating and fair value of our OABS, along with a comparison of the fair value at June 30, 2022, to our original investment value (adjusted for returns of principal, amortization, and write-downs):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Other Asset-Backed Securities (at June 30, 2022) |
($ in millions) Rating | Automobile | Collateralized Loan Obligations | Student Loan | Whole Business Securitizations | Equipment | Other | Total | % of Total |
AAA | $ | 1,094.7 | | $ | 1,207.8 | | $ | 48.9 | | $ | 0 | | $ | 561.8 | | $ | 200.3 | | $ | 3,113.5 | | 61.8 | % |
AA | 217.9 | | 570.2 | | 5.7 | | 0 | | 146.3 | | 29.9 | | 970.0 | | 19.3 | |
A | 17.7 | | 0 | | 7.7 | | 0 | | 107.4 | | 146.0 | | 278.8 | | 5.5 | |
BBB | 6.6 | | 0 | | 0 | | 598.6 | | 0 | | 36.3 | | 641.5 | | 12.7 | |
Non-investment grade/non-rated: | | | | | | | | |
BB | 0 | | 0 | | 0 | | 0 | | 0 | | 32.2 | | 32.2 | | 0.7 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total fair value | $ | 1,336.9 | | $ | 1,778.0 | | $ | 62.3 | | $ | 598.6 | | $ | 815.5 | | $ | 444.7 | | $ | 5,036.0 | | 100.0 | % |
Increase (decrease) in value | (1.6) | % | (3.3) | % | (5.0) | % | (9.8) | % | (1.9) | % | (7.6) | % | (3.9) | % | |
Our allocation to OABS remained fairly consistent over the last 12 months. As valuations across other asset classes were more attractive, our OABS portfolio offered less relative value.
MUNICIPAL SECURITIES
The following table details the credit quality rating of our municipal securities at June 30, 2022, without the benefit of credit or bond insurance:
| | | | | | | | | | | | | | | | | |
Municipal Securities (at June 30, 2022) |
(millions) Rating | General Obligations | | Revenue Bonds | | Total |
AAA | $ | 629.2 | | | $ | 248.4 | | | $ | 877.6 | |
AA | 506.0 | | | 709.8 | | | 1,215.8 | |
A | 0 | | | 41.1 | | | 41.1 | |
BBB | 0 | | | 0.7 | | | 0.7 | |
Non-rated | 0 | | | 0.2 | | | 0.2 | |
Total | $ | 1,135.2 | | | $ | 1,000.2 | | | $ | 2,135.4 | |
Included in revenue bonds were $498.8 million of single-family housing revenue bonds issued by state housing finance agencies, of which $352.5 million were supported by individual mortgages held by the state housing finance agencies and $146.3 million were supported by mortgage-backed securities.
Of the programs supported by mortgage-backed securities, 82% were collateralized by Ginnie Mae mortgages, which are fully guaranteed by the U.S. government; the remaining 18% were collateralized by Fannie Mae and Freddie Mac mortgages. Of the programs supported by individual mortgages held by the state housing finance agencies, the overall credit quality rating was AA+. Most of these mortgages were supported by the Federal Housing Administration, the U.S. Department of Veterans Affairs, or private mortgage insurance providers.
Credit spreads for tax-exempt municipal bonds tightened during the second quarter 2022, while spreads for taxable municipal bonds widened. Our allocation to the sector declined modestly and we were not active during the quarter.
CORPORATE DEBT SECURITIES
The following table details the credit quality rating of our corporate debt securities at June 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Corporate Securities (at June 30, 2022) |
(millions) Rating | Consumer | Industrial | Communication | Financial Services | | Technology | Basic Materials | Energy | Total |
| | | | | | | | | |
AA | $ | 22.5 | | $ | 0 | | $ | 0 | | $ | 223.1 | | | $ | 13.6 | | $ | 0 | | $ | 43.0 | | $ | 302.2 | |
A | 325.7 | | 271.4 | | 203.6 | | 1,093.2 | | | 44.8 | | 114.7 | | 183.5 | | 2,236.9 | |
BBB | 2,305.8 | | 1,314.2 | | 123.3 | | 1,040.5 | | | 618.0 | | 12.8 | | 912.0 | | 6,326.6 | |
Non-investment grade/non-rated: | | | | | | | | | |
BB | 362.7 | | 195.9 | | 195.1 | | 96.5 | | | 37.7 | | 30.8 | | 60.0 | | 978.7 | |
B | 245.8 | | 24.7 | | 0 | | 8.9 | | | 0 | | 0 | | 0 | | 279.4 | |
CCC and lower | 44.0 | | 0 | | 0 | | 0 | | | 0 | | 0 | | 0 | | 44.0 | |
| | | | | | | | | |
Total fair value | $ | 3,306.5 | | $ | 1,806.2 | | $ | 522.0 | | $ | 2,462.2 | | | $ | 714.1 | | $ | 158.3 | | $ | 1,198.5 | | $ | 10,167.8 | |
During the second quarter of 2022, the size of our corporate debt portfolio saw a modest decrease primarily due to sales of securities with less attractive risk/reward profiles and securities that matured. The portfolio valuation also declined due to the increase in interest rates and wider credit spreads. In addition, we have agreements to purchase bank loan investments and have an associated open funding commitment of $14.0 million at June 30, 2022.
We slightly shortened the maturity profile of the corporate portfolio during the second quarter 2022. The duration of the corporate portfolio was 3.0 years at June 30, 2022, compared to 3.1 years at March 31, 2022. Overall, our corporate securities, as a percentage of the fixed-income portfolio decreased during the second quarter 2022. At June 30, 2022, our corporate securities made up approximately 21% of the fixed-income portfolio, compared to approximately 23% at March 31, 2022.
PREFERRED STOCKS – REDEEMABLE AND NONREDEEMABLE
The table below shows the exposure break-down by sector and rating at June 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
Preferred Stocks (at June 30, 2022) |
| Financial Services | | | |
(millions) Rating | U.S. Banks | Foreign Banks | Insurance | Other Financial | Industrials | Utilities | Total |
| | | | | | | |
BBB | $ | 874.7 | | $ | 33.6 | | $ | 111.2 | | $ | 37.6 | | $ | 136.3 | | $ | 41.7 | | $ | 1,235.1 | |
Non-investment grade/non-rated: | | | | | | | |
BB | 151.4 | | 37.7 | | 0 | | 0 | | 23.8 | | 34.4 | | 247.3 | |
| | | | | | | |
Non-rated | 0 | | 0 | | 43.8 | | 21.1 | | 17.0 | | 0 | | 81.9 | |
Total fair value | $ | 1,026.1 | | $ | 71.3 | | $ | 155.0 | | $ | 58.7 | | $ | 177.1 | | $ | 76.1 | | $ | 1,564.3 | |
The majority of our preferred securities have fixed-rate dividends until a call date and then, if not called, generally convert to floating-rate dividends. The interest rate duration of our preferred securities is calculated to reflect the call, floor, and floating-rate features. Although a preferred security will remain outstanding if not called, its interest rate duration will reflect the variable nature of the dividend. Our non-investment-grade preferred stocks were all with issuers that maintain investment-grade senior debt ratings.
We also face the risk that dividend payments on our preferred stock holdings could be deferred for one or more periods or skipped entirely. As of June 30, 2022, all of our preferred securities continued to pay their dividends in full and on time. Approximately 81% of our preferred stock securities pay dividends that have tax preferential characteristics, while the balance pay dividends that are fully taxable.
During the second quarter 2022, the portfolio market valuation decreased as credit spreads widened, interest rates increased, and we sold some preferred positions. We primarily sold nonredeemable preferred securities with less attractive risk/reward profiles.
Common Equities
Common equities, as reported on the balance sheets, were comprised of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in millions) | June 30, 2022 | | June 30, 2021 | | December 31, 2021 |
Common stocks | $ | 2,766.2 | | | 99.3 | % | | $ | 4,579.8 | | | 99.7 | % | | $ | 5,041.6 | | | 99.7 | % |
Other risk investments | 18.5 | | | 0.7 | | | 11.6 | | | 0.3 | | | 16.9 | | | 0.3 | |
Total common equities | $ | 2,784.7 | | | 100.0 | % | | $ | 4,591.4 | | | 100.0 | % | | $ | 5,058.5 | | | 100.0 | % |
The majority of our common stock portfolio consists of individual holdings selected based on their contribution to the correlation with the Russell 1000 Index. We held 783 out of 1,020, or 77%, of the common stocks comprising the index at June 30, 2022, which made up 94% of the total market capitalization of the index. At June 30, 2022 and 2021, and December 31, 2021, the year-to-date total return, based on GAAP income, was within our targeted tracking error, which is +/- 50 basis points.
The other risk investments consist of limited partnership interests. During the second quarter 2022, we did not fund any partnership investments, and we have an open funding commitment of $7.3 million at June 30, 2022.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995: Investors are cautioned that certain statements in this report not based upon historical fact are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements often use words such as “estimate,” “expect,” “intend,” “plan,” “believe,” and other words and terms of similar meaning, or are tied to future periods, in connection with a discussion of future operating or financial performance. Forward-looking statements are based on current expectations and projections about future events, and are subject to certain risks, assumptions and uncertainties that could cause actual events and results to differ materially from those discussed herein. These risks and uncertainties include, without limitation, uncertainties related to:
•our ability to underwrite and price risks accurately and to charge adequate rates to policyholders;
•our ability to establish accurate loss reserves;
•the impact of severe weather, other catastrophe events and climate change;
•the effectiveness of our reinsurance programs and the continued availability of reinsurance and performance by reinsurers;
•the highly competitive nature of property-casualty insurance markets;
•whether we innovate effectively and respond to our competitors’ initiatives;
•whether we effectively manage complexity as we develop and deliver products and customer experiences;
•how intellectual property rights affect our competitiveness and our business operations;
•whether we adjust claims accurately;
•our ability to maintain a recognized and trusted brand;
•our ability to attract, develop and retain talent and maintain appropriate staffing levels;
•compliance with complex and changing laws and regulations;
•litigation challenging our business practices, and those of our competitors and other companies;
•the impacts of a security breach or other attack involving our computer systems or the systems of one or more of our vendors;
•the secure and uninterrupted operation of the facilities, systems, and business functions that are critical to our business;
•the success of our efforts to acquire or develop new products or enter into new areas of business and navigate related risks;
•our continued ability to send and accept electronic payments;
•the possible impairment of our goodwill or intangible assets;
•the performance of our fixed-income and equity investment portfolios;
•the impact on our investment returns and strategies from regulations and societal pressures relating to environmental, social, and other public policy matters;
•the elimination of the London Interbank Offered Rate;
•our continued ability to access our cash accounts and/or convert securities into cash on favorable terms;
•the impact if one or more parties with which we enter into significant contracts or transact business fail to perform;
•legal restrictions on our insurance subsidiaries’ ability to pay dividends to The Progressive Corporation;
•limitations on our ability to pay dividends on our common shares under the terms of our outstanding preferred shares;
•our ability to obtain capital when necessary to support our business and potential growth;
•evaluations by credit rating and other rating agencies;
•the variable nature of our common share dividend policy;
•whether our investments in certain tax-advantaged projects generate the anticipated returns;
•the impact from not managing to short-term earnings expectations in light of our goal to maximize the long-term value of the enterprise;
•the impacts of the COVID-19 pandemic and measures taken in response; and
•other matters described from time to time in our releases and publications, and in our periodic reports and other documents filed with the United States Securities and Exchange Commission, including, without limitation, the Risk Factors section of our Annual Report on Form 10-K for the year ending December 31, 2021.
In addition, investors should be aware that generally accepted accounting principles prescribe when a company may reserve for particular risks, including litigation exposures. Accordingly, results for a given reporting period could be significantly affected if and when we establish reserves for one or more contingencies. Also, our regular reserve reviews may result in adjustments of varying magnitude as additional information regarding claims activity becomes known. Reported results, therefore, may be volatile in certain accounting periods.