UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 1O-Q
 
 
(Mark One)
ýQuarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 20162017
or
¨Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                     to                     
Commission File Number: 1-9518
 
 
THE PROGRESSIVE CORPORATION
(Exact name of registrant as specified in its charter)
 
Ohio 34-0963169
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
   
6300 Wilson Mills Road, Mayfield Village, Ohio 44143
(Address of principal executive offices) (Zip Code)
(440) 461-5000
(Registrant’s telephone number, including area code)
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer ý  Accelerated filer ¨
Non-accelerated filer 
¨ (Do not check if a smaller reporting company)
  Smaller reporting company ¨
Emerging growth company¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Shares, $1.00 par value: 581,915,711581,048,285 outstanding at June 30, 20162017
 


PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
The Progressive Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(unaudited)
Three Months Six MonthsThree Months Six Months
Periods Ended June 30,2016
 2015
 
%
Change
 2016
 2015
 
%
Change
2017
 2016
 %
Change		 2017
 2016
 %
Change
(millions—except per share amounts)                      
Revenues                
Net premiums earned$5,561.8
 $4,995.8
 11 $10,879.2
 $9,662.1
 13$6,313.3
 $5,561.8
 14 $12,340.0
 $10,879.2
 13
Investment income114.6
 113.3
 1 233.4
 218.4
 7138.8
 114.6
 21 268.0
 233.4
 15
Net realized gains (losses) on securities:                
Net impairment losses recognized in earnings(0.2) (1.7) (88) (0.2) (9.6) (98)(13.8) (0.2) NM (14.8) (0.2) NM
Net realized gains (losses) on securities32.5
 77.7
 (58) 49.9
 118.6
 (58)45.9
 32.5
 41 98.8
 49.9
 98
Total net realized gains (losses) on securities32.3
 76.0
 (58) 49.7
 109.0
 (54)32.1
 32.3
 (1) 84.0
 49.7
 69
Fees and other revenues82.5
 74.9
 10 161.4
 148.6
 988.8
 82.5
 8 174.0
 161.4
 8
Service revenues26.5
 23.3
 14 51.5
 40.5
 2732.7
 26.5
 23 61.2
 51.5
 19
Gains on extinguishment of debt1.6
 0
 NM 1.6
 0
 NM0
 1.6
 (100) 0.2
 1.6
 (88)
Total revenues5,819.3
 5,283.3
 10 11,376.8
 10,178.6
 126,605.7
 5,819.3
 14 12,927.4
 11,376.8
 14
Expenses    
         
     
Losses and loss adjustment expenses4,243.0
 3,617.2
 17 8,156.4
 6,985.8
 174,614.9
 4,243.0
 9 8,878.3
 8,156.4
 9
Policy acquisition costs458.9
 417.3
 10 899.2
 796.7
 13514.2
 458.9
 12 1,017.1
 899.2
 13
Other underwriting expenses766.8
 662.4
 16 1,522.6
 1,312.8
 16845.0
 766.8
 10 1,690.6
 1,522.6
 11
Investment expenses5.3
 5.7
 (7) 10.1
 11.0
 (8)6.6
 5.3
 25 12.2
 10.1
 21
Service expenses23.7
 20.5
 16 45.3
 36.4
 2427.0
 23.7
 14 52.9
 45.3
 17
Interest expense34.3
 34.9
 (2) 68.5
 67.4
 243.4
 34.3
 27 80.2
 68.5
 17
Total expenses5,532.0
 4,758.0
 16 10,702.1
 9,210.1
 166,051.1
 5,532.0
 9 11,731.3
 10,702.1
 10
Net Income    
         
     
Income before income taxes287.3
 525.3
 (45) 674.7
 968.5
 (30)554.6
 287.3
 93 1,196.1
 674.7
 77
Provision for income taxes92.4
 156.8
 (41) 221.1
 304.4
 (27)181.9
 92.4
 97 393.1
 221.1
 78
Net income194.9
 368.5
 (47) 453.6
 664.1
 (32)372.7
 194.9
 91 803.0
 453.6
 77
Net income attributable to noncontrolling interest (NCI), net of tax4.0
 5.2
 (23) 4.5
 5.2
 (13)
Net (income) loss attributable to noncontrolling interest (NCI)(5.1) (4.0) 28 (11.1) (4.5) 147
Net income attributable to Progressive$190.9
 $363.3
 (47) $449.1
 $658.9
 (32)$367.6
 $190.9
 93 $791.9
 $449.1
 76
Other Comprehensive Income (Loss), Net of Tax    
     
Other Comprehensive Income (Loss)    
     
Changes in:                
Total net unrealized gains (losses) on securities$91.6
 $(149.8) (161) $161.1
 $(114.4) (241)$92.6
 $91.6
 1 $225.0
 $161.1
 40
Net unrealized losses on forecasted transactions(0.3) (0.3) 0 (0.6) (9.0) (93)(8.0) (0.3) NM (5.7) (0.6) NM
Foreign currency translation adjustment(0.1) 0
 NM 0.4
 (0.5) (180)(0.1) (0.1) 0 0.2
 0.4
 (50)
Other comprehensive income (loss)91.2
 (150.1) (161) 160.9
 (123.9) (230)
Other comprehensive income84.5
 91.2
 (7) 219.5
 160.9
 36
Other comprehensive (income) loss attributable to NCI(1.4) 2.8
 (150) (3.5) 2.8
 (225)(1.3) (1.4) (7) (2.2) (3.5) (37)
Comprehensive income attributable to Progressive$280.7
 $216.0
 30 $606.5
 $537.8
 13$450.8
 $280.7
 61 $1,009.2
 $606.5
 66
Computation of Per Share Earnings Attributable to Progressive    
         
     
Average shares outstanding - Basic582.4
 585.7
 (1) 582.8
 586.6
 (1)580.5
 582.4
 0 580.4
 582.8
 0
Net effect of dilutive stock-based compensation2.7
 3.8
 (29) 2.5
 3.7
 (32)3.3
 2.7
 22 3.1
 2.5
 24
Total equivalent shares - Diluted585.1
 589.5
 (1) 585.3
 590.3
 (1)
Total average equivalent shares - Diluted583.8
 585.1
 0 583.5
 585.3
 0
Basic: Earnings per share$0.33
 $0.62
 (47) $0.77
 $1.12
 (31)$0.63
 $0.33
 93 $1.36
 $0.77
 77
Diluted: Earnings per share$0.33
 $0.62
 (47) $0.77
 $1.12
 (31)$0.63
 $0.33
 93 $1.36
 $0.77
 77
Dividends declared per share1
$0
 $0
 $0
 $0
 $0
 $0
 $0
 $0
 
NM = Not Meaningful
1Progressive maintains an annual dividend program. See Note 8 -9 – Dividends for further discussion.
See notes to consolidated financial statements.


The Progressive Corporation and Subsidiaries
Consolidated Balance Sheets
(unaudited)
 June 30, December 31,
2015
(millions)2016
 2015
 
Assets     
Investments - Available-for-sale, at fair value:     
Fixed maturities (amortized cost: $13,409.6, $15,520.6, and $15,347.9)$13,589.5
 $15,589.0
 $15,332.2
Equity securities:     
        Nonredeemable preferred stocks (cost: $745.5, $632.4, and $674.2)858.5
 772.3
 782.6
        Common equities (cost: $1,558.6, $1,351.7, and $1,494.3)2,765.4
 2,546.8
 2,650.5
Short-term investments (amortized cost: $5,166.4, $1,669.3, and $2,172.0)5,166.4
 1,669.3
 2,172.0
Total investments22,379.8
 20,577.4
 20,937.3
Cash134.7
 263.8
 224.4
Accrued investment income93.9
 100.4
 102.2
Premiums receivable, net of allowance for doubtful accounts of $159.1, $140.6, and $164.84,522.2
 3,867.3
 3,987.7
Reinsurance recoverables, including $73.8, $46.2, and $46.1 on paid losses and loss adjustment expenses1,669.7
 1,402.3
 1,488.8
Prepaid reinsurance premiums178.0
 233.0
 199.3
Deferred acquisition costs645.2
 568.2
 564.1
Property and equipment, net of accumulated depreciation of $824.0, $770.3, and $778.31,083.7
 1,018.9
 1,037.2
Goodwill449.4
 472.9
 447.6
Intangible assets, net of accumulated amortization of $78.5, $16.3, and $47.4463.8
 526.0
 494.9
Other assets337.8
 274.0
 335.8
Total assets$31,958.2
 $29,304.2
 $29,819.3
Liabilities     
Unearned premiums$7,470.1
 $6,641.9
 $6,621.8
Loss and loss adjustment expense reserves10,674.8
 9,701.2
 10,039.0
Net deferred income taxes140.7
 176.0
 109.3
Dividends payable0
 0
 519.2
Accounts payable, accrued expenses, and other liabilities2,706.2
 2,252.9
 2,067.8
Debt1
2,664.1
 2,739.0
 2,707.9
Total liabilities23,655.9
 21,511.0
 22,065.0
Redeemable noncontrolling interest (NCI)2
466.8
 433.4
 464.9
Shareholders' Equity     
Common shares, $1.00 par value (authorized 900.0; issued 797.5, 797.6, and 797.6 including treasury shares of 215.6, 211.7, and 214.0)581.9

585.9

583.6
Paid-in capital1,264.6

1,177.0

1,218.8
Retained earnings5,031.2

4,694.9

4,686.6
Accumulated other comprehensive income, net of tax:




Net unrealized gains (losses) on securities970.1
 907.5
 809.0
Net unrealized losses on forecasted transactions(8.8) (7.5) (8.2)
Foreign currency translation adjustment(1.1) (0.8) (1.5)
Accumulated other comprehensive (income) loss attributable to noncontrolling interest(2.4) 2.8
 1.1
Total accumulated other comprehensive income957.8
 902.0
 800.4
Total shareholders’ equity7,835.5
 7,359.8
 7,289.4
Total liabilities, redeemable NCI, and shareholders’ equity$31,958.2
 $29,304.2
 $29,819.3
 June 30, December 31,
2016
(millions)2017
 2016
 
Assets     
Investments - Available-for-sale, at fair value:     
Fixed maturities (amortized cost: $18,311.7, $13,409.6, and $16,287.1)$18,388.1
 $13,589.5
 $16,243.8
Equity securities:     
  Nonredeemable preferred stocks (cost: $666.0, $745.5, and $734.2)783.1
 858.5
 853.5
  Common equities (cost: $1,472.3, $1,558.6, and $1,437.5)3,077.5
 2,765.4
 2,812.4
Short-term investments (amortized cost: $3,729.7, $5,166.4, and $3,572.9)3,729.7
 5,166.4
 3,572.9
Total investments25,978.4
 22,379.8
 23,482.6
Cash161.0
 134.7
 211.5
Restricted cash1
0.8
 0
 14.9
Accrued investment income112.1
 93.9
 103.9
Premiums receivable, net of allowance for doubtful accounts of $175.8, $159.1, and $186.85,091.3
 4,522.2
 4,509.2
Reinsurance recoverables, including $79.2, $73.8, and $83.8 on paid losses and loss adjustment expenses2,027.1
 1,669.7
 1,884.8
Prepaid reinsurance premiums212.6
 178.0
 170.5
Deferred acquisition costs727.2
 645.2
 651.2
Property and equipment, net of accumulated depreciation of $894.7, $824.0, and $845.81,152.1
 1,083.7
 1,177.1
Goodwill452.7
 449.4
 449.4
Intangible assets, net of accumulated amortization of $140.5, $78.5, and $109.5401.8
 463.8
 432.8
Other assets372.7
 337.8
 339.6
Total assets$36,689.8
 $31,958.2
 $33,427.5
Liabilities     
Unearned premiums$8,407.7
 $7,470.1
 $7,468.3
Loss and loss adjustment expense reserves12,060.4
 10,674.8
 11,368.0
Net deferred income taxes191.8
 140.7
 111.3
Dividends payable0
 0
 395.4
Accounts payable, accrued expenses, and other liabilities3,153.2
 2,706.2
 2,495.5
Debt2
3,383.4
 2,664.1
 3,148.2
Total liabilities27,196.5
 23,655.9
 24,986.7
Redeemable noncontrolling interest (NCI)3
501.8
 466.8
 483.7
Shareholders’ Equity
     
Common shares, $1.00 par value (authorized 900.0; issued 797.5, including treasury shares of 216.5, 215.6, and 217.6)581.0

581.9

579.9
Paid-in capital1,351.0

1,264.6

1,303.4
Retained earnings5,908.8

5,031.2

5,140.4
Accumulated other comprehensive income:




Net unrealized gains (losses) on securities1,164.6
 970.1
 939.6
Net unrealized losses on forecasted transactions(15.1) (8.8) (9.4)
Foreign currency translation adjustment(0.9) (1.1) (1.1)
Accumulated other comprehensive (income) loss attributable to NCI2.1
 (2.4) 4.3
Total accumulated other comprehensive income attributable to Progressive1,150.7
 957.8
 933.4
Total shareholders’ equity8,991.5
 7,835.5
 7,957.1
Total liabilities, redeemable NCI, and shareholders’ equity$36,689.8
 $31,958.2
 $33,427.5
1See Note 7 – Supplemental Cash Flow Information for further discussion.
2 Consists of both short-term and long-term debt. See Note 4 -– Debt for further discussion.
23 See Note 1112 – Redeemable Noncontrolling Interest for further discussion.
See notes to consolidated financial statements.


The Progressive Corporation and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
(unaudited)
 
Six months ended June 30,   
Six Months Ended June 30,   
(millions — except per share amounts)2016
 2015
2017
 2016
Common Shares, $1.00 Par Value      
Balance, Beginning of period$583.6
 $587.8
$579.9
 $583.6
Treasury shares purchased(3.6) (4.0)(0.7) (3.6)
Net restricted equity awards issued/vested/(forfeited)1.9
 2.1
Net restricted equity awards issued/vested1.8
 1.9
Balance, End of period$581.9
 $585.9
$581.0
 $581.9
Paid-In Capital      
Balance, Beginning of period$1,218.8
 $1,184.3
$1,303.4
 $1,218.8
Tax benefit from vesting of equity-based compensation6.7
 8.7
0
 6.7
Treasury shares purchased(7.7) (8.2)(1.5) (7.7)
Net restricted equity awards (issued)/(vested)/forfeited(1.9) (2.1)
Net restricted equity awards issued/vested(1.8) (1.9)
Amortization of equity-based compensation42.1
 26.5
52.2
 42.1
Reinvested dividends on restricted stock units0.5
 (0.1)0.1
 0.5
Adjustment to carrying amount of redeemable noncontrolling interest6.1
 (32.1)(1.4) 6.1
Balance, End of period$1,264.6
 $1,177.0
$1,351.0
 $1,264.6
Retained Earnings      
Balance, Beginning of period$4,686.6
 $4,133.4
$5,140.4
 $4,686.6
Net income attributable to Progressive449.1
 658.9
791.9
 449.1
Treasury shares purchased(100.8) (95.9)(21.9) (100.8)
Cash dividends declared on common shares0.2
 0
0
 0.2
Reinvested dividends on restricted stock units(0.5) 0.1
(0.1) (0.5)
Other, net(3.4) (1.6)(1.5) (3.4)
Balance, End of period$5,031.2
 $4,694.9
$5,908.8
 $5,031.2
Accumulated Other Comprehensive Income, Net of Tax   
Accumulated Other Comprehensive Income Attributable to Progressive   
Balance, Beginning of period$800.4
 $1,023.1
$933.4
 $800.4
Attributable to noncontrolling interest(3.5) 2.8
(2.2) (3.5)
Other comprehensive income160.9
 (123.9)219.5
 160.9
Balance, End of period$957.8
 $902.0
$1,150.7
 $957.8
Total Shareholders’ Equity$7,835.5
 $7,359.8
$8,991.5
 $7,835.5
There are 20.0 million Serial Preferred Shares authorized; no such shares are issued or outstanding.
There are 5.0 million Voting Preference Shares authorized; no such shares have been issued.
See notes to consolidated financial statements.











The Progressive Corporation and Subsidiaries
Consolidated Statements of Cash Flows        
(unaudited) (millions)
Six months ended June 30,2016
 2015
Six Months Ended June 30,2017
 2016
Cash Flows From Operating Activities      
Net income$453.6
 $664.1
$803.0
 $453.6
Adjustments to reconcile net income to net cash provided by operating activities:      
Depreciation58.1
 49.7
84.0
 58.1
Amortization of intangible assets31.1
 15.7
31.0
 31.1
Amortization of fixed-income securities42.1
 43.5
Net amortization of fixed-income securities44.1
 42.1
Amortization of equity-based compensation42.1
 26.5
53.9
 42.1
Net realized (gains) losses on securities(49.7) (109.0)(84.0) (49.7)
Net (gains) losses on disposition of property and equipment1.2
 0.7
3.2
 1.2
(Gains) losses on extinguishment of debt(1.6) 0
(0.2) (1.6)
Net loss on exchange transaction4.5
 0
0
 4.5
Changes in:      
Premiums receivable(531.5) (300.5)(582.0) (531.5)
Reinsurance recoverables(173.1) (116.1)(142.4) (173.1)
Prepaid reinsurance premiums41.3
 (1.2)(42.1) 41.3
Deferred acquisition costs(97.8) (46.4)(76.0) (97.8)
Income taxes(69.3) (82.9)(64.3) (69.3)
Unearned premiums832.6
 652.0
939.0
 832.6
Loss and loss adjustment expense reserves630.0
 537.7
692.3
 630.0
Accounts payable, accrued expenses, and other liabilities376.6
 66.9
430.2
 376.6
Restricted cash14.1
 0.3
Other, net(35.4) 29.3
(67.1) (19.2)
Net cash provided by operating activities1,554.8
 1,430.0
2,036.7
 1,571.3
Cash Flows From Investing Activities      
Purchases:      
Fixed maturities(4,489.6) (5,316.7)(6,803.3) (4,489.6)
Equity securities(290.5) (257.2)(89.5) (290.5)
Sales:      
Fixed maturities3,361.7
 2,780.0
2,359.9
 3,361.7
Equity securities182.9
 200.4
133.3
 182.9
Maturities, paydowns, calls, and other:      
Fixed maturities3,032.8
 1,595.1
2,413.5
 3,032.8
Equity securities0
 12.0
50.0
 0
Net sales (purchases) of short-term investments(2,959.1) 523.4
(146.8) (2,959.1)
Net unsettled security transactions270.0
 128.4
259.3
 270.0
Purchases of property and equipment(109.1) (53.6)(73.2) (109.1)
Net cash acquired in exchange transaction8.5
 0
Acquisition of ARX Holding Corp., net of cash acquired0
 (752.7)
Acquisition of additional shares of ARX Holding Corp.0
 (12.6)
Sales of property and equipment3.3
 7.1
12.5
 3.3
Net cash disposed in exchange transaction1
0
 (7.7)
Acquisition of an insurance company, net of cash acquired(18.1) 0
Net cash used in investing activities(989.1) (1,146.4)(1,902.4) (1,005.3)
Cash Flows From Financing Activities      
Proceeds from exercise of equity options0.5
 0
Tax benefit from vesting of equity-based compensation6.7
 8.7
0
 6.7
Net proceeds from debt issuance0
 382.0
841.1
 0
Payments of debt(13.0) (6.8)(12.5) (13.0)
Reacquisition of debt(18.2) 0
Redemption/reacquisition of subordinated debt(594.4) (18.2)
Dividends paid to shareholders(519.0) (403.6)(395.4) (519.0)
Acquisition of treasury shares(112.1) (108.1)
Acquisition of treasury shares for restricted stock tax liabilities(24.1) (20.6)
Acquisition of treasury shares acquired in open market0
 (91.5)
Net cash used in financing activities(655.6) (127.8)(184.8) (655.6)
Effect of exchange rate changes on cash0.2
 (0.4)0
 0.2
Increase (decrease) in cash(89.7) 155.4
Decrease in cash(50.5) (89.4)
Cash, January 1224.4
 108.4
211.5
 224.1
Cash, June 30$134.7
 $263.8
$161.0
 $134.7
1 See Note 7 – Supplemental Cash Flow Information for further discussion.
See notes to consolidated financial statements.


The Progressive Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
Note 1 Basis of Presentation — The accompanying consolidated financial statements include the accounts of The Progressive Corporation and ARX Holding Corp. (ARX), and their respective wholly owned insurance and non-insurance subsidiaries and affiliates in which Progressive or ARX has a controlling financial interest. The Progressive Corporation owned 69.2%69.0% of the outstanding capital stock of ARX at June 30, 2017 and 69.2% at June 30, 2016 and December 31, 2015, and 69.1% at June 30, 2015.2016. The decrease reflects ARX employee stock options that were exercised during the first quarter 2017. All intercompany accounts and transactions are eliminated in consolidation.
During the second quarter 2016, ARX entered into an exchange transaction with a third party pursuant to which ARX acquired 100% of the equity interest in an insurance subsidiary (and an affiliated company) that writes personal property insurance and disposed of 100% of the equity interest in an insurance subsidiary (and an affiliated company) that writes commercial property insurance. The book values of the entities that were acquired and disposed of were relatively equal at the time of the exchange.
The consolidated financial statements reflect all normal recurring adjustments that, in the opinion of management, were necessary for a fair statement of the results for the interim periods presented. The results of operations for the period ended June 30, 2016,2017, are not necessarily indicative of the results expected for the full year. These consolidated financial statements and the notes thereto should be read in conjunction with Progressive’s audited financial statements and accompanying notes included in Exhibit 13 to our Annual Report on Form 10-K for the year ended December 31, 2015 ("20152016 (“2016 Annual Report to Shareholders"Shareholders”).
Included in otherOther assets on the consolidated balance sheets areinclude properties that are considered "held“held for sale,” if any. At June 30, 2017, no properties were held for sale." The At June 30, 2016 and December 31, 2016, the fair value of these properties, less the estimated cost to sell them, was $8.7 million at June 30, 2016 and 2015, and December 31, 2015.million.


Note 2 Investments — Our securities are reported at fair value, with the changes in fair value of these securities (other than hybrid securities and derivative instruments) reported as a component of accumulated other comprehensive income, net of deferred income taxes. The changes in fair value of the hybrid securities and derivative instruments are recorded as a component of net realized gains (losses) on securities.
The following tables present the composition of our investment portfolio by major security type, consistent with our classification of how we manage, monitor, and measure the portfolio. The net holding period gains (losses) represent the amounts realized on our hybrid securities only.
 
($ in millions)Cost
 
Gross
Unrealized Gains

 
Gross
Unrealized
Losses

 
Net
Holding Period Gains
(Losses)1

 
Fair
Value

 
% of
Total
Fair
Value

Cost
 
Gross
Unrealized Gains

 
Gross
Unrealized
Losses

 
Net
Holding Period Gains
(Losses)

 
Fair
Value

 
% of
Total
Fair
Value

June 30, 2016           
June 30, 2017           
Fixed maturities:                      
U.S. government obligations$1,276.0
 $20.0
 $0
 $0
 $1,296.0
 5.8%$4,166.4
 $4.4
 $(15.8) $0
 $4,155.0
 16.0%
State and local government obligations2,545.5
 72.7
 (0.6) 0
 2,617.6
 11.7
2,473.3
 32.5
 (5.9) 0.2
 2,500.1
 9.7
Foreign government obligations24.9
 0.1
 0
 0
 25.0
 0.1
22.5
 0
 0
 0
 22.5
 0.1
Corporate debt securities3,833.9
 80.2
 (3.7) 0.6
 3,911.0
 17.5
4,991.6
 29.4
 (7.6) 0.4
 5,013.8
 19.3
Residential mortgage-backed securities1,672.8
 22.7
 (21.8) 1.2
 1,674.9
 7.5
1,222.8
 10.9
 (5.4) 2.3
 1,230.6
 4.7
Agency residential pass-through obligations46.4
 0.5
 0
 0
 46.9
 0.2
37.5
 0
 (0.5) 0
 37.0
 0.1
Commercial mortgage-backed securities2,177.3
 38.8
 (5.7) 0
 2,210.4
 9.9
2,364.9
 19.8
 (9.7) 0
 2,375.0
 9.1
Other asset-backed securities1,567.7
 4.5
 (1.0) 0.4
 1,571.6
 7.0
2,843.3
 6.4
 (2.5) 0.2
 2,847.4
 11.0
Redeemable preferred stocks265.1
 17.2
 (46.2) 0
 236.1
 1.0
189.4
 19.0
 (1.7) 0
 206.7
 0.8
Total fixed maturities13,409.6
 256.7
 (79.0) 2.2
 13,589.5
 60.7
18,311.7
 122.4
 (49.1) 3.1
 18,388.1
 70.8
Equity securities:                      
Nonredeemable preferred stocks745.5
 130.2
 (18.4) 1.2
 858.5
 3.8
666.0
 123.6
 (6.5) 0
 783.1
 3.0
Common equities1,558.6
 1,215.1
 (8.3) 0
 2,765.4
 12.4
1,472.3
 1,611.7
 (6.5) 0
 3,077.5
 11.8
Short-term investments5,166.4
 0
 0
 0
 5,166.4
 23.1
3,729.7
 0
 0
 0
 3,729.7
 14.4
Total portfolio2,3
$20,880.1
 $1,602.0
 $(105.7) $3.4
 $22,379.8
 100.0%
Total portfolio1,2
$24,179.7
 $1,857.7
 $(62.1) $3.1
 $25,978.4
 100.0%



($ in millions)Cost
 
Gross
Unrealized Gains

 
Gross
Unrealized
Losses

 
Net
Holding Period Gains
(Losses)1

 
Fair
Value

 
% of
Total
Fair
Value

Cost
 
Gross
Unrealized Gains

 
Gross
Unrealized
Losses

 
Net
Holding Period Gains
(Losses)

 
Fair
Value

 
% of
Total
Fair
Value

June 30, 2015           
June 30, 2016           
Fixed maturities:                      
U.S. government obligations$2,049.3
 $14.0
 $(0.1) $0
 $2,063.2
 10.0%$1,276.0
 $20.0
 $0
 $0
 $1,296.0
 5.8%
State and local government obligations3,177.2
 32.2
 (17.1) 0
 3,192.3
 15.5
2,545.5
 72.7
 (0.6) 0
 2,617.6
 11.7
Foreign government obligations18.6
 0
 0
 0
 18.6
 0.1
24.9
 0.1
 0
 0
 25.0
 0.1
Corporate debt securities3,433.9
 23.3
 (22.6) 0.2
 3,434.8
 16.7
3,833.9
 80.2
 (3.7) 0.6
 3,911.0
 17.5
Residential mortgage-backed securities1,879.5
 31.1
 (17.6) (0.5) 1,892.5
 9.2
1,672.8
 22.7
 (21.8) 1.2
 1,674.9
 7.5
Agency residential pass-through obligations116.0
 0.1
 (1.8) 0
 114.3
 0.6
46.4
 0.5
 0
 0
 46.9
 0.2
Commercial mortgage-backed securities2,548.4
 26.0
 (14.2) (0.1) 2,560.1
 12.4
2,177.3
 38.8
 (5.7) 0
 2,210.4
 9.9
Other asset-backed securities2,037.9
 3.6
 (0.7) 0.7
 2,041.5
 9.9
1,567.7
 4.5
 (1.0) 0.4
 1,571.6
 7.0
Redeemable preferred stocks259.8
 21.7
 (9.8) 0
 271.7
 1.3
265.1
 17.2
 (46.2) 0
 236.1
 1.0
Total fixed maturities15,520.6
 152.0
 (83.9) 0.3
 15,589.0
 75.7
13,409.6
 256.7
 (79.0) 2.2
 13,589.5
 60.7
Equity securities:                      
Nonredeemable preferred stocks632.4
 150.0
 (11.3) 1.2
 772.3
 3.8
745.5
 130.2
 (18.4) 1.2
 858.5
 3.8
Common equities1,351.7
 1,204.7
 (9.6) 0
 2,546.8
 12.4
1,558.6
 1,215.1
 (8.3) 0
 2,765.4
 12.4
Short-term investments1,669.3
 0
 0
 0
 1,669.3
 8.1
5,166.4
 0
 0
 0
 5,166.4
 23.1
Total portfolio2,3
$19,174.0
 $1,506.7
 $(104.8) $1.5
 $20,577.4
 100.0%
Total portfolio1,2
$20,880.1
 $1,602.0
 $(105.7) $3.4
 $22,379.8
 100.0%
 
($ in millions)Cost
 
Gross
Unrealized Gains

 
Gross
Unrealized
Losses

 
Net
Holding Period Gains
(Losses)1

 
Fair
Value

 
% of
Total
Fair
Value

Cost
 
Gross
Unrealized Gains

 
Gross
Unrealized
Losses

 
Net
Holding Period Gains
(Losses)

 
Fair
Value

 
% of
Total
Fair
Value

December 31, 2015           
December 31, 2016           
Fixed maturities:                      
U.S. government obligations$2,425.4
 $4.4
 $(0.6) $0
 $2,429.2
 11.6%$2,899.2
 $0
 $(29.1) $0
 $2,870.1
 12.2%
State and local government obligations2,677.6
 47.5
 (3.7) 0
 2,721.4
 13.0
2,509.5
 13.8
 (20.7) 0
 2,502.6
 10.7
Foreign government obligations18.6
 0
 0
 0
 18.6
 0.1
24.5
 0
 0
 0
 24.5
 0.1
Corporate debt securities3,713.2
 11.3
 (33.0) 0.1
 3,691.6
 17.6
4,557.8
 17.3
 (24.3) 0.1
 4,550.9
 19.4
Residential mortgage-backed securities1,726.0
 22.1
 (20.6) (0.8) 1,726.7
 8.3
1,448.5
 23.7
 (15.0) 1.5
 1,458.7
 6.2
Agency residential pass-through obligations90.3
 0.1
 (1.1) 0
 89.3
 0.4
41.2
 0
 (0.6) 0
 40.6
 0.2
Commercial mortgage-backed securities2,665.7
 16.9
 (29.4) 0
 2,653.2
 12.7
2,266.9
 12.0
 (25.5) 0
 2,253.4
 9.6
Other asset-backed securities1,771.1
 1.4
 (5.1) 0.5
 1,767.9
 8.4
2,350.7
 4.6
 (4.4) 0.2
 2,351.1
 10.0
Redeemable preferred stocks260.0
 17.6
 (43.3) 0
 234.3
 1.1
188.8
 5.1
 (2.0) 0
 191.9
 0.8
Total fixed maturities15,347.9
 121.3
 (136.8) (0.2) 15,332.2
 73.2
16,287.1
 76.5
 (121.6) 1.8
 16,243.8
 69.2
Equity securities:                      
Nonredeemable preferred stocks674.2
 122.8
 (15.7) 1.3
 782.6
 3.7
734.2
 135.4
 (16.1) 0
 853.5
 3.6
Common equities1,494.3
 1,170.4
 (14.2) 0
 2,650.5
 12.7
1,437.5
 1,377.0
 (2.1) 0
 2,812.4
 12.0
Short-term investments2,172.0
 0
 0
 0
 2,172.0
 10.4
3,572.9
 0
 0
 0
 3,572.9
 15.2
Total portfolio2,3
$19,688.4
 $1,414.5
 $(166.7) $1.1
 $20,937.3
 100.0%
Total portfolio1,2
$22,031.7
 $1,588.9
 $(139.8) $1.8
 $23,482.6
 100.0%
1Represents net holding period gains (losses) realized on certain hybrid securities (discussed below).
2Our portfolio reflects the effect of unsettled security transactions and collateral on open derivative positions; at June 30, 2017 and 2016, and 2015, $246.9December 31, 2016, we had $287.1 million, $246.9 million, and $159.7$27.8 million, respectively, were included in "other liabilities" and $23.1 million was in "other assets" at December 31, 2015.“other liabilities.”
32The total fair value of the portfolio at June 30, 20162017 and 2015,2016, and December 31, 20152016, included $0.6$1.1 billion, $0.7$0.6 billion, and $1.3 billion, respectively, of securities held in a consolidated, non-insurance subsidiary of the holding company, net of any unsettled security transactions.



Short-Term Investments Our short-term investments may include commercial paper and other investments that are expected to mature within one year. We did not enter into any repurchase commitment transactions during the first six months of 20162017 or 2015,2016, and we had no open repurchase commitments at June 30, 2017 and 2016, June 30, 2015, or December 31, 2015.2016.


Also included in short-term investments are reverse repurchase commitment transactions, where we loan cash to approved counterparties and receive U.S. Treasury Notes pledged as collateral against the cash borrowed. Our exposure to credit risk is limited due to the nature of the collateral (i.e., U.S. Treasury Notes) received. We have counterparty exposure on these trades in the event of a counterparty default to the extent the collateral security'ssecurity’s value is below the amount of cash we delivered to acquire the collateral. The short-term duration of the transactions (primarily overnight) reduces that exposure.

We had no open reverse repurchase commitments at June 30, 2017 and 2016,, June 30, 2015, or December 31, 20152016. ForWe did not enter into any reverse repurchase commitments for the six months ended June 30, 20162017,. During the six months ended June 30, 2016, our largest outstanding balance of reverse repurchase commitments was $265.0 million, which was open for one day;day. For the 12 days we invested in these transactions, the average daily balance of reverse repurchase commitments was $165.2 million.

To the extent ourwe enter into repurchase andor 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, we could elect to offset these transactions. Consistent with past practice, we have elected not to offset these transactions and therefore report these transactions on a gross basis on our balance sheets.arrangement.

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

June 30, December 31,
2015
June 30, December 31,
2016
(millions)2016
 2015
 2017
 2016
 
Fixed maturities:          
State and local government obligations$6.6
 $0
 $0
Corporate debt securities$31.3
 $105.6
 $49.1
61.3
 31.3
 40.1
Residential mortgage-backed securities173.3
 117.5
 144.3
189.7
 173.3
 170.5
Commercial mortgage-backed securities0
 17.3
 17.3
Other asset-backed securities10.2
 12.5
 11.3
7.7
 10.2
 8.9
Total fixed maturities214.8
 252.9
 222.0
265.3
 214.8
 219.5
Equity securities:          
Nonredeemable preferred stocks45.5
 66.6
 50.7
0
 45.5
 0
Total hybrid securities$260.3
 $319.5
 $272.7
$265.3
 $260.3
 $219.5
The state and local government obligations in the table above were acquired at a premium and contain a contingently exercisable call feature that allows the issuer, at its discretion, to call the securities at par based on a provision that is unrelated to the economic characteristics of the issuer.
Certain corporate debt securities are accounted for as hybrid securities since they were acquired at a premium and contain a change-in-control put option (derivative) that permits the investor, at its sole option if and when a change in control is triggered, to put the security back to the issuer at a 1% premium to par. Due to this change-in-control put option and the substantial market premium paid to acquire these securities, there is the potential that the election to put, upon the change in control, would result in an acceleration of the recognition of the remaining premium paid on these securities in our results of operations. This would result in a loss of $2.3 million as of June 30, 2016, if all of the bonds experienced a simultaneous change in control and we elected to exercise all of our put options. The put feature limits the potential loss in value that could be experienced in the event a corporate action occurs that results in a change in control that materially diminishes the credit quality of the issuer. Exercises of the puts would result in a loss of $4.6 million as of June 30, 2017, if all of the bonds experienced a simultaneous change in control and we elected to exercise all of our put options. We are under no obligation to exercise the put option we hold if a change in control occurs.
The residential mortgage-backed securities accounted for as hybrid securities are obligations of the issuer with payments of principal based on the performance of a reference pool of loans. This embedded derivative results in the securities incorporating the risk of default from both the issuer and the related loan pool.
During 2016, we sold the commercial mortgage-backed securities in the table above. These securities contained fixed interest rate reset features that will increase the coupons in the event the securities are not fully paid off on the anticipated repayment date. These reset features had the potential to more than double our initial purchase yield for each security.
The other asset-backed security in the table above represents one hybrid security that was acquired at a deep discount to par due to a failing auction, and contains a put option that allows the investor to put that security back to the auction at par if the auction is restored. This embedded derivative hashad the potential to more than double our initial investment yield at acquisition.
The hybrid securities in ourDuring 2016, we sold the nonredeemable preferred stock portfolio arestocks referred to in the table above. These securities were perpetual preferred stocks with fixed-rate coupons that have call features, whereby the change in value of the call features is a component of the overall change in value of the preferred stocks.


Fixed Maturities The composition of fixed maturities by maturity at June 30, 20162017, was:
 
(millions)Cost
 Fair Value
Cost
 Fair Value
Less than one year$3,252.4
 $3,229.1
$4,514.4
 $4,531.7
One to five years7,014.2
 7,100.7
10,871.3
 10,902.4
Five to ten years2,998.7
 3,110.6
2,849.6
 2,876.1
Ten years or greater144.3
 149.1
76.4
 77.9
Total$13,409.6
 $13,589.5
$18,311.7
 $18,388.1
 
Asset-backed securities are classified in the maturity distribution table based upon their projected cash flows. All other securities which do not have a single maturity date are reported based upon expected average maturity. Contractual maturities may differ from expected maturities because the issuers of the securities may have the right to call or prepay obligations.
Gross Unrealized Losses As of June 30, 20162017, we had $97.455.6 million of gross unrealized losses in our fixed-income securities (i.e., fixed-maturity securities, nonredeemable preferred stocks, and short-term investments) and $8.36.5 million in our common equities. We currently do not intend to sell the fixed-income securities and determined that it is more likely that we will not be required to sell these securities for the period of time necessary to recover their cost bases. A review of our fixed-income securities indicated that the issuers were current with respect to their interest obligations and that there was no evidence of any deterioration of the current cash flow projections that would indicate we would not receive the remaining principal at maturity.
For common equities, 95% of our common stock portfolio was indexed to the Russell 1000; as such, this portfolio may contain securities in a loss position for an extended period of time, subject to possible write-downs, as described below. We may retain these securities as long as the portfolio and index correlation remain similar. To the extent there is issuer-specific deterioration, we may write down the securities of that issuer. The remaining 5% of our common stocks were part of a managed equity strategy selected and administered by an external investment advisor. If our review of loss position securities were to indicate there was a fundamental, or market, impairment on these securities that was determined to be other-than-temporary, we would recognize a write-down in accordance with our stated policy.
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 GreaterTotal No. of Sec.
Total
Fair
Value
Gross Unrealized Losses
Less than 12 Months 12 Months or Greater
($ in millions)No. of Sec.
Fair
Value
Unrealized Losses
 No. of Sec.
Fair
Value
Unrealized Losses
No. of Sec.
Fair
Value
Unrealized Losses
 No. of Sec.
Fair
Value
Unrealized Losses
June 30, 2016       
June 30, 2017       
Fixed maturities:              
U.S. government obligations0
$0
$0
0
$0
$0
 0
$0
$0
41
$2,781.8
$(15.8)39
$2,725.1
$(15.1) 2
$56.7
$(0.7)
State and local government obligations47
131.9
(0.6)19
38.6
(0.2) 28
93.3
(0.4)222
818.7
(5.9)138
479.8
(3.3) 84
338.9
(2.6)
Corporate debt securities37
269.0
(3.7)23
147.1
(0.6) 14
121.9
(3.1)143
1,905.2
(7.6)122
1,599.6
(5.3) 21
305.6
(2.3)
Residential mortgage-backed securities137
1,154.4
(21.8)29
267.6
(1.3) 108
886.8
(20.5)153
501.1
(5.4)69
166.2
(0.7) 84
334.9
(4.7)
Agency residential pass-through obligations18
5.4
0
6
1.6
0
 12
3.8
0
67
34.6
(0.5)57
31.6
(0.4) 10
3.0
(0.1)
Commercial mortgage-backed securities55
530.3
(5.7)9
70.8
(0.4) 46
459.5
(5.3)74
905.6
(9.7)52
679.5
(5.7) 22
226.1
(4.0)
Other asset-backed securities53
502.1
(1.0)22
194.6
(0.3) 31
307.5
(0.7)160
2,077.8
(2.5)145
1,823.8
(1.9) 15
254.0
(0.6)
Redeemable preferred stocks8
181.6
(46.2)0
0
0
 8
181.6
(46.2)1
10.8
(1.7)0
0
0
 1
10.8
(1.7)
Total fixed maturities355
2,774.7
(79.0)108
720.3
(2.8) 247
2,054.4
(76.2)861
9,035.6
(49.1)622
7,505.6
(32.4) 239
1,530.0
(16.7)
Equity securities:              
Nonredeemable preferred stocks11
294.9
(18.4)2
31.2
(0.7) 9
263.7
(17.7)3
73.1
(6.5)0
0
0
 3
73.1
(6.5)
Common equities113
107.0
(8.3)108
100.7
(8.1) 5
6.3
(0.2)80
73.1
(6.5)74
72.3
(6.5) 6
0.8
0
Total equity securities124
401.9
(26.7)110
131.9
(8.8) 14
270.0
(17.9)83
146.2
(13.0)74
72.3
(6.5) 9
73.9
(6.5)
Total portfolio479
$3,176.6
$(105.7)218
$852.2
$(11.6) 261
$2,324.4
$(94.1)944
$9,181.8
$(62.1)696
$7,577.9
$(38.9) 248
$1,603.9
$(23.2)
 


Total No. of Sec.
Total
Fair
Value
Gross Unrealized Losses
Less than 12 Months 12 Months or GreaterTotal No. of Sec.
Total
Fair
Value
Gross Unrealized Losses
Less than 12 Months 12 Months or Greater
($ in millions)No. of Sec.
Fair
Value
Unrealized Losses
 No. of Sec.
Fair
Value
Unrealized Losses
No. of Sec.
Fair
Value
Unrealized Losses
 No. of Sec.
Fair
Value
Unrealized Losses
June 30, 2015       
June 30, 2016       
Fixed maturities:              
U.S. government obligations11
$7.6
$(0.1)11
$7.6
$(0.1) 0
$0
$0
0
$0
$0
0
$0
$0
 0
$0
$0
State and local government obligations736
1,319.3
(17.1)720
1,277.5
(16.5) 16
41.8
(0.6)47
131.9
(0.6)19
38.6
(0.2) 28
93.3
(0.4)
Corporate debt securities160
1,693.6
(22.6)146
1,406.4
(18.5) 14
287.2
(4.1)37
269.0
(3.7)23
147.1
(0.6) 14
121.9
(3.1)
Residential mortgage-backed securities140
1,189.2
(17.6)87
668.1
(5.9) 53
521.1
(11.7)137
1,154.4
(21.8)29
267.6
(1.3) 108
886.8
(20.5)
Agency residential pass-through obligations53
104.6
(1.8)53
104.6
(1.8) 0
0
0
18
5.4
0
6
1.6
0
 12
3.8
0
Commercial mortgage-backed securities155
1,426.9
(14.2)132
1,205.9
(13.5) 23
221.0
(0.7)55
530.3
(5.7)9
70.8
(0.4) 46
459.5
(5.3)
Other asset-backed securities38
715.3
(0.7)30
566.2
(0.5) 8
149.1
(0.2)53
502.1
(1.0)22
194.6
(0.3) 31
307.5
(0.7)
Redeemable preferred stocks5
123.7
(9.8)3
55.6
(3.1) 2
68.1
(6.7)8
181.6
(46.2)0
0
0
 8
181.6
(46.2)
Total fixed maturities1,298
6,580.2
(83.9)1,182
5,291.9
(59.9) 116
1,288.3
(24.0)355
2,774.7
(79.0)108
720.3
(2.8) 247
2,054.4
(76.2)
Equity securities:              
Nonredeemable preferred stocks14
345.9
(11.3)9
163.7
(1.8) 5
182.2
(9.5)11
294.9
(18.4)2
31.2
(0.7) 9
263.7
(17.7)
Common equities73
129.4
(9.6)72
128.9
(9.5) 1
0.5
(0.1)113
107.0
(8.3)108
100.7
(8.1) 5
6.3
(0.2)
Total equity securities87
475.3
(20.9)81
292.6
(11.3) 6
182.7
(9.6)124
401.9
(26.7)110
131.9
(8.8) 14
270.0
(17.9)
Total portfolio1,385
$7,055.5
$(104.8)1,263
$5,584.5
$(71.2) 122
$1,471.0
$(33.6)479
$3,176.6
$(105.7)218
$852.2
$(11.6) 261
$2,324.4
$(94.1)
Total No. of Sec.
Total
Fair
Value
Gross Unrealized Losses
Less than 12 Months 12 Months or GreaterTotal No. of Sec.
Total
Fair
Value
Gross Unrealized Losses
Less than 12 Months 12 Months or Greater
($ in millions)No. of Sec.
Fair
Value
Unrealized Losses
 No. of Sec.
Fair
Value
Unrealized Losses
No. of Sec.
Fair
Value
Unrealized Losses
 No. of Sec.
Fair
Value
Unrealized Losses
December 31, 2015       
December 31, 2016       
Fixed maturities:              
U.S. government obligations22
$897.1
$(0.6)22
$897.1
$(0.6) 0
$0
$0
30
$2,774.0
$(29.1)30
$2,774.0
$(29.1) 0
$0
$0
State and local government obligations290
606.7
(3.7)264
500.7
(2.6) 26
106.0
(1.1)618
1,497.9
(20.7)584
1,404.3
(19.6) 34
93.6
(1.1)
Corporate debt securities215
2,580.6
(33.0)197
2,294.6
(25.2) 18
286.0
(7.8)184
2,615.1
(24.3)175
2,559.9
(24.0) 9
55.2
(0.3)
Residential mortgage-backed securities188
1,294.7
(20.6)115
493.4
(3.7) 73
801.3
(16.9)178
917.7
(15.0)69
175.8
(1.1) 109
741.9
(13.9)
Agency residential pass-through obligations61
84.9
(1.1)61
84.9
(1.1) 0
0
0
55
36.0
(0.6)48
33.9
(0.6) 7
2.1
0
Commercial mortgage-backed securities207
2,046.5
(29.4)171
1,694.6
(25.8) 36
351.9
(3.6)111
1,347.3
(25.5)85
1,061.2
(22.9) 26
286.1
(2.6)
Other asset-backed securities101
1,548.6
(5.1)92
1,472.0
(4.5) 9
76.6
(0.6)103
1,605.2
(4.4)89
1,423.3
(3.9) 14
181.9
(0.5)
Redeemable preferred stocks9
199.4
(43.3)6
119.4
(14.5) 3
80.0
(28.8)2
31.0
(2.0)0
0
0
 2
31.0
(2.0)
Total fixed maturities1,093
9,258.5
(136.8)928
7,556.7
(78.0) 165
1,701.8
(58.8)1,281
10,824.2
(121.6)1,080
9,432.4
(101.2) 201
1,391.8
(20.4)
Equity securities:              
Nonredeemable preferred stocks10
301.8
(15.7)5
124.2
(1.7) 5
177.6
(14.0)13
329.6
(16.1)8
175.2
(3.8) 5
154.4
(12.3)
Common equities64
164.8
(14.2)60
161.4
(14.2) 4
3.4
0
75
22.1
(2.1)69
19.7
(1.7) 6
2.4
(0.4)
Total equity securities74
466.6
(29.9)65
285.6
(15.9) 9
181.0
(14.0)88
351.7
(18.2)77
194.9
(5.5) 11
156.8
(12.7)
Total portfolio1,167
$9,725.1
$(166.7)993
$7,842.3
$(93.9) 174
$1,882.8
$(72.8)1,369
$11,175.9
$(139.8)1,157
$9,627.3
$(106.7) 212
$1,548.6
$(33.1)

Since both June 30, 2015 and December 31, 2015,2016, the number of securities in our fixed-maturity portfolio with unrealized losses decreased,increased, primarily the result of decliningrising interest rates.rates during the latter part of 2016. A narrowing of credit spreads for the first six months of 2017 resulted in a decrease in the number of fixed-maturity securities with unrealized losses since December 31, 2016. We had no material decreases in valuation as a result of credit rating downgrades on our fixed-maturity securities. All of the fixed-maturity securities in an unrealized loss position at June 30, 20162017 in the table above are current with respect to required principal and interest payments.

Since December 31, 20152016, our nonredeemable preferred stocks with unrealized losses increaseddecreased to 11three securities, averaging approximately 6%8% of their total cost. The decrease in the number of securities is the result of valuation increases in the portfolio. We reviewed these securities and concluded that the unrealized losses are market-related adjustments to the values, which we determined not to be other-than-temporary; we expect to recover our initial investments on these securities. The number of issuers with unrealized losses in our common stock portfolio also increased during the first six months of 2016.2017. A review of the securities in a loss position did not uncover fundamental issues with the issuers that would indicate other-than-temporary


impairments existed. Additionally, market expectations for recovery in the next 12 months would put the fair values at or above our current book values. Lastly, we determined, as of the balance sheet date, that it was not likely these securities would be sold prior to that recovery.



Other-Than-Temporary Impairment (OTTI) The following table shows the total non-credit portion of the OTTI recorded in accumulated other comprehensive income, reflecting the original non-credit loss at the time the credit impairment was determined:determined (i.e., unadjusted for valuation changes subsequent to the original write-down):
 
June 30, December 31,
2015
June 30, December 31,
2016
(millions)2016
 2015
 2017
 2016
 
Fixed maturities:          
Residential mortgage-backed securities$(43.3) $(44.1) $(43.3)$(19.7) $(43.3) $(43.3)
Commercial mortgage-backed securities(0.6) (0.6) (0.6)(0.5) (0.6) (0.6)
Total fixed maturities$(43.9) $(44.7) $(43.9)$(20.2) $(43.9) $(43.9)

The following tables provide rollforwards of the amounts related to credit losses recognized in earnings for the periods ended June 30, 20162017 and 20152016, for which a portion of the OTTI losses were also recognized in accumulated other comprehensive income at the time the credit impairments were determined and recognized:
 
Three Months Ended June 30, 2016Three Months Ended June 30, 2017
Mortgage-Backed  Mortgage-Backed  
(millions)Residential 
 Commercial 
 Total
Residential 
 Commercial 
 Total
Balance at March 31, 2016$12.1
 $0.4
 $12.5
Balance at March 31, 2017$11.4
 $0.1
 $11.5
Reductions for securities sold/matured(11.4) 0
 (11.4)
Change in recoveries of future cash flows expected to be collected1
(0.3) 0
 (0.3)0.2
 0
 0.2
Balance at June 30, 2016$11.8
 $0.4
 $12.2
Balance at June 30, 2017$0.2
 $0.1
 $0.3
          
Six months ended June 30, 2016Six Months Ended June 30, 2017
Mortgage-Backed  Mortgage-Backed  
(millions)Residential 
 Commercial 
 Total
Residential 
 Commercial 
 Total
Balance at December 31, 2015$12.4
 $0.4
 $12.8
Balance at December 31, 2016$11.1
 $0.4
 $11.5
Reductions for securities sold/matured(10.9) (0.3) (11.2)
Change in recoveries of future cash flows expected to be collected1
(0.6) 0
 (0.6)0
 0
 0
Balance at June 30, 2016$11.8
 $0.4
 $12.2
Balance at June 30, 2017$0.2
 $0.1
 $0.3




 Three Months Ended June 30, 2015
 Mortgage-Backed  
(millions)Residential 
 Commercial 
 Total
Balance at March 31, 2015$12.2
 $0.4
 $12.6
Change in recoveries of future cash flows expected to be collected1
1.8
 0
 1.8
Balance at June 30, 2015$14.0
 $0.4
 $14.4
      
 Six Months Ended June 30, 2015
 Mortgage-Backed  
(millions)Residential 
 Commercial 
 Total
Balance at December 31, 2014$12.7
 $0.4
 $13.1
Change in recoveries of future cash flows expected to be collected1
1.3
 0
 1.3
Balance at June 30, 2015$14.0
 $0.4
 $14.4
 Three Months Ended June 30, 2016
 Mortgage-Backed  
(millions)Residential 
 Commercial 
 Total
Balance at March 31, 2016$12.1
 $0.4
 $12.5
Reductions for securities sold/matured0
 0
 0
Change in recoveries of future cash flows expected to be collected1
(0.3) 0
 (0.3)
Balance at June 30, 2016$11.8
 $0.4
 $12.2
      
 Six Months Ended June 30, 2016
 Mortgage-Backed  
(millions)Residential 
 Commercial 
 Total
Balance at December 31, 2015$12.4
 $0.4
 $12.8
Reductions for securities sold/matured0
 0
 0
Change in recoveries of future cash flows expected to be collected1
(0.6) 0
 (0.6)
Balance at June 30, 2016$11.8
 $0.4
 $12.2
1Reflects the current period change in the expected recovery of prior impairments that will be accreted into income over the remaining life of the security.
Although we determined it is more likely that we will not be required to sell the securities prior to the recovery of their respective cost bases (which could be maturity), we are required to measure the amount of potential credit losses on the securities that were in an unrealized loss position. In that process, we considered a number of factors and inputs related to the individual securities. The methodology and significant inputs used to measure the amount of credit losses in our portfolio included: current performance indicators on the business model or underlying assets (e.g., delinquency rates, foreclosure rates, and default rates); credit support (via current levels of subordination); historical credit ratings; and updated cash flow expectations based upon these performance indicators. In order to determine the amount of credit loss, if any, the net present value of the cash flows


expected (i.e., expected recovery value) was calculated using the current book yield for each security, and was compared to its current amortized value. In the event that the net present value was below the amortized value, a credit loss waswould be deemed to exist, and the security waswould be written down. We did not have any credit impairment write-downs for the six months ended June 30, 20162017 or 2015.2016.


Realized Gains (Losses) The components of net realized gains (losses) for the three and six months ended June 30, were:
Three Months Six MonthsThree Months Six Months
(millions)2016
 2015
 2016
 2015
2017
 2016
 2017
 2016
Gross realized gains on security sales              
Fixed maturities:              
U.S. government obligations$3.4
 $9.5
 $17.7
 $14.4
$4.5
 $3.4
 $4.9
 $17.7
State and local government obligations4.5
 0
 15.4
 0
2.6
 4.5
 3.1
 15.4
Corporate and other debt securities10.0
 6.8
 22.5
 15.9
7.3
 10.0
 11.4
 22.5
Residential mortgage-backed securities0.8
 0.1
 1.7
 0.2
20.9
 0.8
 21.0
 1.7
Agency residential pass-through obligations0.1
 0
 0.1
 0
0
 0.1
 0
 0.1
Commercial mortgage-backed securities2.9
 3.6
 6.5
 14.4
1.2
 2.9
 2.4
 6.5
Other asset-backed securities0
 0
 0.3
 0
Redeemable preferred stocks0
 0.1
 0
 0.1
0
 0
 0.3
 0
Total fixed maturities21.7
 20.1
 63.9
 45.0
36.5
 21.7
 43.4
 63.9
Equity securities:              
Nonredeemable preferred stocks5.4
 34.4
 7.0
 50.2
6.2
 5.4
 51.6
 7.0
Common equities19.4
 12.7
 28.9
 30.5
9.9
 19.4
 17.3
 28.9
Subtotal gross realized gains on security sales46.5
 67.2
 99.8
 125.7
52.6
 46.5
 112.3

99.8
Gross realized losses on security sales              
Fixed maturities:              
U.S. government obligations0
 (0.1) (0.4) (0.9)(0.4) 0
 (3.6) (0.4)
State and local government obligations(1.5) 0
 (1.6) 0
0
 (1.5) (0.1) (1.6)
Corporate and other debt securities(1.3) (0.5) (1.7) (1.3)(1.9) (1.3) (2.8) (1.7)
Residential mortgage-backed securities(0.3) 0
 (0.3) 0
Agency residential pass-through obligations(0.2) 0
 (0.2) 0
0
 (0.2) 0
 (0.2)
Commercial mortgage-backed securities(1.4) (0.8) (4.1) (1.0)(0.7) (1.4) (3.1) (4.1)
Total fixed maturities(4.4) (1.4) (8.0) (3.2)(3.3) (4.4) (9.9) (8.0)
Equity securities:              
Nonredeemable preferred stocks(1.7) (1.4) (2.7) (1.4)(4.6) (1.7) (5.8) (2.7)
Common equities(0.1) (0.1) (5.0) (0.7)0
 (0.1) (0.1) (5.0)
Subtotal gross realized losses on security sales(6.2) (2.9) (15.7) (5.3)(7.9) (6.2) (15.8) (15.7)
Net realized gains (losses) on security sales              
Fixed maturities:              
U.S. government obligations3.4
 9.4
 17.3
 13.5
4.1
 3.4
 1.3
 17.3
State and local government obligations3.0
 0
 13.8
 0
2.6
 3.0
 3.0
 13.8
Corporate and other debt securities8.7
 6.3
 20.8
 14.6
5.4
 8.7
 8.6
 20.8
Residential mortgage-backed securities0.8
 0.1
 1.7
 0.2
20.6
 0.8
 20.7
 1.7
Agency residential pass-through obligations(0.1) 0
 (0.1) 0
0
 (0.1) 0
 (0.1)
Commercial mortgage-backed securities1.5
 2.8
 2.4
 13.4
0.5
 1.5
 (0.7) 2.4
Other asset-backed securities0
 0
 0.3
 0
Redeemable preferred stocks0
 0.1
 0
 0.1
0
 0
 0.3
 0
Total fixed maturities17.3
 18.7
 55.9
 41.8
33.2
 17.3
 33.5
 55.9
Equity securities:              
Nonredeemable preferred stocks3.7
 33.0
 4.3
 48.8
1.6
 3.7
 45.8
 4.3
Common equities19.3
 12.6
 23.9
 29.8
9.9
 19.3
 17.2
 23.9
Subtotal net realized gains (losses) on security sales40.3
 64.3
 84.1
 120.4
44.7
 40.3
 96.5
 84.1
Other-than-temporary impairment losses              
Equity securities:              
Common equities(0.2) (1.7) (0.2) (9.4)(2.6) (0.2) (3.6) (0.2)
Subtotal investment other-than-temporary impairment losses(2.6) (0.2) (3.6) (0.2)
Other asset impairment(11.2) 0
 (11.2) 0
Subtotal other-than-temporary impairment losses(0.2) (1.7) (0.2) (9.4)(13.8) (0.2) (14.8) (0.2)
Other gains (losses)              
Hybrid securities3.0
 (3.9) 2.3
 (0.6)0.4
 3.0
 1.2
 2.3
Derivative instruments(10.8) 17.3
 (36.5) (1.5)0
 (10.8) 0
 (36.5)
Litigation settlements0
 0
 0
 0.1
0.8
 0
 1.1
 0
Subtotal other gains (losses)(7.8) 13.4
 (34.2) (2.0)1.2
 (7.8) 2.3
 (34.2)
Total net realized gains (losses) on securities$32.3
 $76.0
 $49.7
 $109.0
$32.1
 $32.3
 $84.0
 $49.7


Gross realized gains and losses were predominantly the result of sales transactions in our fixed-income portfolio related to movements in credit spreads and interest rates and sales from our equity portfolios. Our preferred stock portfolio reflects a large realized gain due primarily to one issue called by the issuer at par. This security was held at a deep discount due to previous other-than-temporary impairment write-downs taken during the market crisis of 2008. Subsequent to the write-down, the security experienced significant recovery and was trading near its anticipated call price. Upon call, we recognized the difference between the consideration received and our book value as a realized gain.
In addition, gains and losses reflect recoveries from litigation settlements related to investments and holding period valuation changes on hybrids and derivatives. Also included are write-downs for securities determined to be other-than-temporarily impaired.


The other asset impairment relates to a renewable energy investment, which is reflected in “other assets” on the balance sheet, under which the future pretax cash flow is expected to be less than the carrying value of the asset.
Net Investment Income  The components of net investment income for the three and six months ended June 30, were: 
Three Months Six MonthsThree Months Six Months
(millions)2016
2015
 2016
2015
2017
2016
 2017
2016
Fixed maturities:      
U.S. government obligations$4.3
$7.2
 $9.1
$16.3
$17.0
$4.3
 $29.7
$9.1
State and local government obligations13.2
16.2
 26.7
28.1
13.1
13.2
 26.4
26.7
Foreign government obligations0.1
0.1
 0.2
0.2
0.1
0.1
 0.2
0.2
Corporate debt securities26.4
24.2
 54.6
47.1
31.3
26.4
 60.9
54.6
Residential mortgage-backed securities11.6
13.2
 23.8
26.0
10.1
11.6
 19.5
23.8
Agency residential pass-through obligations0.2
0.7
 0.6
0.7
0.2
0.2
 0.4
0.6
Commercial mortgage-backed securities19.3
18.8
 40.2
35.7
18.3
19.3
 37.1
40.2
Other asset-backed securities5.9
5.5
 11.9
10.5
11.8
5.9
 21.7
11.9
Redeemable preferred stocks3.9
3.8
 7.7
7.6
2.9
3.9
 6.3
7.7
Total fixed maturities84.9
89.7
 174.8
172.2
104.8
84.9
 202.2
174.8
Equity securities:      
Nonredeemable preferred stocks12.6
10.9
 24.4
21.4
10.6
12.6
 22.1
24.4
Common equities13.6
12.3
 28.1
24.0
14.6
13.6
 27.9
28.1
Short-term investments3.5
0.4
 6.1
0.8
8.8
3.5
 15.8
6.1
Investment income114.6
113.3
 233.4
218.4
138.8
114.6
 268.0
233.4
Investment expenses(5.3)(5.7) (10.1)(11.0)(6.6)(5.3) (12.2)(10.1)
Net investment income$109.3
$107.6
 $223.3
$207.4
$132.2
$109.3
 $255.8
$223.3

The amount of investment income (interest and dividends) we recognize varies from year to year based on the average assets held during the year and the book yields of the securities in our portfolio.

Trading Securities At June 30, 20162017 and 20152016, and December 31, 20152016, we did not hold any trading securities and did not have any net realized gains (losses) on trading securities for the three and six months ended June 30, 20162017 and 20152016.
Derivative Instruments For all derivative positions discussed below, realized holding period gains and losses are netted with any upfront cash that may be exchanged under the contract to determine if the net position should be classified either as an asset or liability. To be reported as a net derivative asset and a component of the available-for-sale portfolio, the inception-to-date realized gain on the derivative position at period end would have to exceed any upfront cash received. On the other hand, a net derivative liability would include any inception-to-date realized loss plus the amount of upfront cash received (or netted, if upfront cash was paid) and would be reported as a component of other liabilities. These net derivative assets/liabilities are not separately disclosed on the balance sheet due to their immaterial effect on our financial condition, cash flows, and results of operations.


Derivative InstrumentsThe following table shows the status of our derivative instruments at June 30, 20162017 and 2015,2016, and December 31, 20152016, and for the three and six months ended June 30, 20162017 and 20152016:
 
(millions)    
Balance Sheet2
 Comprehensive Income Statement    
Balance Sheet2
 Comprehensive Income Statement
      Assets (Liabilities)
Fair Value		 
Pretax Net Realized
Gains (Losses)
      Assets (Liabilities)
Fair Value		 
Pretax Net Realized
Gains (Losses)
Notional Value1
       Three Months  Ended Six Months Ended
Notional Value1
       Three Months Ended Six Months Ended
June 30, Dec. 31,     June 30, Dec. 31, June 30, June 30,June 30, Dec. 31,     June 30, Dec. 31, June 30, June 30,
Derivatives designated as:2016
 2015
 2015
 Purpose Classification 2016
 2015
 2015
 2016
 2015
 2016
 2015
2017
 2016
 2016
 Purpose Classification 2017
 2016
 2016
 2017
 2016
 2017
 2016
Hedging instrument                                          
Closed:                                          
Ineffective cash flow hedge$20
 $0
 $18
 
Manage 
interest 
rate risk
 NA $0
 $0
 $0
 $0.1
 $0
 $0.1
 $0
$31
 $20
 $370
 
Manage 
interest 
rate risk
 NA $0
 $0
 $0
 $0
 $0.1
 $0
 $0.1
Non-hedging instruments                                          
Assets:                     
Interest rate swaps0
 750
 750
 
Manage 
portfolio
duration
 
Investments—
fixed 
maturities
 0
 18.6
 4.4
 0
 15.5
 0
 (3.3)
Liabilities:                                          
Interest rate swaps565
 0
 0
 
Manage 
portfolio
duration
 Other liabilities (27.9) 0
 0
 (10.9) 0
 (34.9) 0
0
 565
 0
 
Manage 
portfolio
duration
 Other liabilities 0
 (27.9) 0
 0
 (10.9) 0
 (34.9)
U.S. Treasury Note futures0
 90
 0
 Manage 
portfolio
duration		 Other liabilities 0
 (0.3) 0
 0
 (0.3) 0
 (0.3)
Closed:                  ��                       
Interest rate swaps185
 0
 0
 
Manage 
portfolio
duration
 NA 0
 0
 0
 0
 0
 (1.9) 0
0
 185
 750
 
Manage 
portfolio
duration
 NA 0
 0
 0
 0
 0
 0
 (1.9)
U.S. Treasury Note futures55
 326
 691
 Manage 
portfolio
duration		 NA 0
 0
 0
 0
 2.1
 0.2
 2.1
0
 55
 135
 Manage 
portfolio
duration		 NA 0
 0
 0
 0
 0
 0
 0.2
TotalNA
 NA
 NA
   $(27.9) $18.3
 $4.4
 $(10.8) $17.3
 $(36.5) $(1.5)NA
 NA
 NA
   $0
 $(27.9) $0
 $0
 $(10.8) $0
 $(36.5)
                     
NA= Not applicable
1The amounts represent the value held at quarter and year end for open positions and the maximum amount held during the period for closed positions.
2To the extent we hold both derivative assets and liabilities with the same counterparty that are subject to an enforceable master netting arrangement, we expect that we will reportreported them on a gross basis on our balance sheets, consistent with our historical presentation.
CASH FLOW HEDGES
Our ineffective cash flow hedge, which is reflected in the table above, resulted from the repurchase of a portion of our 6.70% Fixed-to-Floating Rate Junior Subordinated Debentures due 2067 during 2015 and the second quarter 2016, andDuring March 2017, we reclassified the unrealized gain on forecasted transactions to net realized gains on securities.
We entered into a forecasted debt issuance hedge to hedge, against a possible rise in interest rates, in conjunction with the $400$850 million of 3.70%4.125% Senior Notes due 2047 issued in January 2015.April 2017. Upon issuance, we closed the hedge and recognized, as part of accumulated other comprehensive income, a pretax loss of $12.9$8.0 million in January 2015.April 2017.

During the third quarter 2016, we entered into a $350 million forecasted transaction to hedge against a possible rise in interest rates in anticipation of a debt offering under which we issued $500 million of 2.45% Senior Notes due 2027. When the contract was closed, the $1.4 million loss on the derivative was immediately recognized as a realized loss. The $31 million in 2017 and the remaining $20 million in 2016 of our ineffective cash flow hedge resulted from the repurchase of a portion of our 6.70% Fixed-to-Floating Rate Junior Subordinated Debentures due 2067, and we reclassified the unrealized gain on forecasted transactions to net realized gains on securities. The portion repurchased in 2017 resulted in an immaterial gain.
See Note 4 – Debt for further discussion.
INTEREST RATE SWAPS and U.S. TREASURY FUTURES
We use interest rate swaps and treasury futures contracts primarilyfrom time to time to manage the fixed-income portfolio duration. We did not hold any interest rate swap positions at June 30, 2017 or December 31, 2016. At June 30, 2016, and 2015, and December 31, 2015, we held interest rate swap positions for which we are paying a fixed rate and receiving a variable rate, effectively shortening the duration of our fixed-income portfolio. On the positions open at June 30, 2016, since inception, interest rates have fallen resulting in a fair value loss and a fair value decrease of $31.2 million since December 31, 2015.



During the first quarter 2016, we closed one 10-year interest rate swap position (opened in 2013) in which we were paying a fixed rate and receiving a variable rate, effectively shortening the duration of our fixed-income portfolio. The net realized loss during the first quarter was the result of overall falling interest rates during the period the position was open.
We did not enter into any U.S. treasury futures during the second quarter 2016. During the first quarter 2016, we entered into U.S. treasury futures by selling contracts; all positions were closed as of the end of the first quarter. The net realized gain during the first quarter was the result of overall rising interest rates during the period that the contracts were held. During the second quarter 2015, we entered into U.S. treasury futures by selling contracts; all positions were closed as of December 31, 2015.
As of June 30, 2016, the balance of the cash collateral that we delivered to the applicable counterparties on the then open interest rate swaps was $30.6 million. As of June 30, 2015We did not open any U.S. treasury futures during 2017. During 2016, we opened and December 31, 2015,closed treasury futures; no positions were outstanding at the balanceend of the cash collateral that we had received from the applicable counterparties on the interest rate swap positions was $21.9 million and $4.9 million, respectively.second quarter or year end.


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

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

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



The composition of the investment portfolio by major security type and our outstanding debt was:
Fair Value  Fair Value  
(millions)Level 1
 Level 2
 Level 3
 Total
 Cost
Level 1
 Level 2
 Level 3
 Total
 Cost
June 30, 2016         
June 30, 2017         
Fixed maturities:                  
U.S. government obligations$1,296.0
 $0
 $0
 $1,296.0
 $1,276.0
$4,155.0
 $0
 $0
 $4,155.0
 $4,166.4
State and local government obligations0
 2,617.6
 0
 2,617.6
 2,545.5
0
 2,500.1
 0
 2,500.1
 2,473.3
Foreign government obligations25.0
 0
 0
 25.0
 24.9
22.5
 0
 0
 22.5
 22.5
Corporate debt securities0
 3,911.0
 0
 3,911.0
 3,833.9
0
 5,013.8
 0
 5,013.8
 4,991.6
Subtotal1,321.0
 6,528.6
 0
 7,849.6
 7,680.3
4,177.5
 7,513.9
 0
 11,691.4
 11,653.8
Asset-backed securities:                  
Residential mortgage-backed0
 1,674.9
 0
 1,674.9
 1,672.8
0
 1,230.6
 0
 1,230.6
 1,222.8
Agency residential pass-through obligations0
 46.9
 0
 46.9
 46.4
0
 37.0
 0
 37.0
 37.5
Commercial mortgage-backed0
 2,201.2
 9.2
 2,210.4
 2,177.3
0
 2,375.0
 0
 2,375.0
 2,364.9
Other asset-backed0
 1,571.6
 0
 1,571.6
 1,567.7
0
 2,847.4
 0
 2,847.4
 2,843.3
Subtotal asset-backed securities0
 5,494.6
 9.2
 5,503.8
 5,464.2
0
 6,490.0
 0
 6,490.0
 6,468.5
Redeemable preferred stocks:                  
Financials0
 93.2
 0
 93.2
 81.7
0
 64.1
 0
 64.1
 60.4
Utilities0
 53.8
 0
 53.8
 65.2
0
 32.2
 0
 32.2
 30.5
Industrials0
 89.1
 0
 89.1
 118.2
0
 110.4
 0
 110.4
 98.5
Subtotal redeemable preferred stocks0
 236.1
 0
 236.1
 265.1
0
 206.7
 0
 206.7
 189.4
Total fixed maturities1,321.0
 12,259.3
 9.2
 13,589.5
 13,409.6
4,177.5
 14,210.6
 0
 18,388.1
 18,311.7
Equity securities:                  
Nonredeemable preferred stocks:                  
Financials156.5
 702.0
 0
 858.5
 745.5
85.3
 697.8
 0
 783.1
 666.0
Subtotal nonredeemable preferred stocks156.5
 702.0
 0
 858.5
 745.5
85.3
 697.8
 0
 783.1
 666.0
Common equities:                  
Common stocks2,765.1
 0
 0
 2,765.1
 1,558.3
3,077.2
 0
 0
 3,077.2
 1,472.0
Other risk investments0
 0
 0.3
 0.3
 0.3
0
 0
 0.3
 0.3
 0.3
Subtotal common equities2,765.1
 0
 0.3
 2,765.4
 1,558.6
3,077.2
 0
 0.3
 3,077.5
 1,472.3
Total fixed maturities and equity securities4,242.6
 12,961.3
 9.5
 17,213.4
 15,713.7
7,340.0
 14,908.4
 0.3
 22,248.7
 20,450.0
Short-term investments5,041.2
 125.2
 0
 5,166.4
 5,166.4
2,448.0
 1,281.7
 0
 3,729.7
 3,729.7
Total portfolio$9,283.8
 $13,086.5
 $9.5
 $22,379.8
 $20,880.1
$9,788.0
 $16,190.1
 $0.3
 $25,978.4
��$24,179.7
Debt$0
 $2,842.3
 $139.8
 $2,982.1
 $2,664.1
$0
 $3,564.4
 $114.8
 $3,679.2
 $3,383.4


Fair Value  Fair Value  
(millions)Level 1
 Level 2
 Level 3
 Total
 Cost
Level 1
 Level 2
 Level 3
 Total
 Cost
June 30, 2015         
June 30, 2016         
Fixed maturities:      
        
  
U.S. government obligations$2,063.2
 $0
 $0
 $2,063.2
 $2,049.3
$1,296.0
 $0
 $0
 $1,296.0
 $1,276.0
State and local government obligations0
 3,192.3
 0
 3,192.3
 3,177.2
0
 2,617.6
 0
 2,617.6
 2,545.5
Foreign government obligations18.6
 0
 0
 18.6
 18.6
25.0
 0
 0
 25.0
 24.9
Corporate debt securities0
 3,433.8
 1.0
 3,434.8
 3,433.9
0
 3,911.0
 0
 3,911.0
 3,833.9
Subtotal2,081.8
 6,626.1
 1.0
 8,708.9
 8,679.0
1,321.0
 6,528.6
 0
 7,849.6
 7,680.3
Asset-backed securities:                  
Residential mortgage-backed0
 1,892.5
 0
 1,892.5
 1,879.5
0
 1,674.9
 0
 1,674.9
 1,672.8
Agency residential pass-through obligations0
 114.3
 0
 114.3
 116.0
0
 46.9
 0
 46.9
 46.4
Commercial mortgage-backed0
 2,549.2
 10.9
 2,560.1
 2,548.4
0
 2,201.2
 9.2
 2,210.4
 2,177.3
Other asset-backed0
 2,041.5
 0
 2,041.5
 2,037.9
0
 1,571.6
 0
 1,571.6
 1,567.7
Subtotal asset-backed securities0
 6,597.5
 10.9
 6,608.4
 6,581.8
0
 5,494.6
 9.2
 5,503.8
 5,464.2
Redeemable preferred stocks:                  
Financials0
 97.5
 0
 97.5
 76.8
0
 93.2
 0
 93.2
 81.7
Utilities0
 61.2
 0
 61.2
 65.0
0
 53.8
 0
 53.8
 65.2
Industrials0
 113.0
 0
 113.0
 118.0
0
 89.1
 0
 89.1
 118.2
Subtotal redeemable preferred stocks0
 271.7
 0
 271.7
 259.8
0
 236.1
 0
 236.1
 265.1
Total fixed maturities2,081.8
 13,495.3
 11.9
 15,589.0
 15,520.6
1,321.0
 12,259.3
 9.2
 13,589.5
 13,409.6
Equity securities:                  
Nonredeemable preferred stocks:                  
Financials167.7
 604.6
 0
 772.3
 632.4
156.5
 702.0
 0
 858.5
 745.5
Subtotal nonredeemable preferred stocks167.7
 604.6
 0
 772.3
 632.4
156.5
 702.0
 0
 858.5
 745.5
Common equities:                  
Common stocks2,546.5
 0
 0
 2,546.5
 1,351.4
2,765.1
 0
 0
 2,765.1
 1,558.3
Other risk investments0
 0
 0.3
 0.3
 0.3
0
 0
 0.3
 0.3
 0.3
Subtotal common equities2,546.5
 0
 0.3
 2,546.8
 1,351.7
2,765.1
 0
 0.3
 2,765.4
 1,558.6
Total fixed maturities and equity securities4,796.0
 14,099.9
 12.2
 18,908.1
 17,504.7
4,242.6
 12,961.3
 9.5
 17,213.4
 15,713.7
Short-term investments1,434.2
 235.1
 0
 1,669.3
 1,669.3
5,041.2
 125.2
 0
 5,166.4
 5,166.4
Total portfolio$6,230.2
 $14,335.0
 $12.2
 $20,577.4
 $19,174.0
$9,283.8
 $13,086.5
 $9.5
 $22,379.8
 $20,880.1
Debt$0
 $2,763.9
 $178.5
 $2,942.4
 $2,739.0
$0
 $2,842.3
 $139.8
 $2,982.1
 $2,664.1


Fair Value  Fair Value  
(millions)Level 1
 Level 2
 Level 3
 Total
 Cost
Level 1
 Level 2
 Level 3
 Total
 Cost
December 31, 2015         
December 31, 2016         
Fixed maturities:                  
U.S. government obligations$2,429.2
 $0
 $0
 $2,429.2
 $2,425.4
$2,870.1
 $0
 $0
 $2,870.1
 $2,899.2
State and local government obligations0
 2,721.4
 0
 2,721.4
 2,677.6
0
 2,502.6
 0
 2,502.6
 2,509.5
Foreign government obligations18.6
 0
 0
 18.6
 18.6
24.5
 0
 0
 24.5
 24.5
Corporate debt securities0
 3,691.6
 0
 3,691.6
 3,713.2
0
 4,550.9
 0
 4,550.9
 4,557.8
Subtotal2,447.8
 6,413.0
 0
 8,860.8
 8,834.8
2,894.6
 7,053.5
 0
 9,948.1
 9,991.0
Asset-backed securities:                  
Residential mortgage-backed0
 1,726.7
 0
 1,726.7
 1,726.0
0
 1,458.7
 0
 1,458.7
 1,448.5
Agency residential pass-through obligations0
 89.3
 0
 89.3
 90.3
0
 40.6
 0
 40.6
 41.2
Commercial mortgage-backed0
 2,643.3
 9.9
 2,653.2
 2,665.7
0
 2,253.1
 0.3
 2,253.4
 2,266.9
Other asset-backed0
 1,767.9
 0
 1,767.9
 1,771.1
0
 2,351.1
 0
 2,351.1
 2,350.7
Subtotal asset-backed securities0
 6,227.2
 9.9
 6,237.1
 6,253.1
0
 6,103.5
 0.3
 6,103.8
 6,107.3
Redeemable preferred stocks:                  
Financials0
 92.0
 0
 92.0
 76.8
0
 59.5
 0
 59.5
 59.8
Utilities0
 51.2
 0
 51.2
 65.1
0
 30.9
 0
 30.9
 30.5
Industrials0
 91.1
 0
 91.1
 118.1
0
 101.5
 0
 101.5
 98.5
Subtotal redeemable preferred stocks0
 234.3
 0
 234.3
 260.0
0
 191.9
 0
 191.9
 188.8
Total fixed maturities2,447.8
 12,874.5
 9.9
 15,332.2
 15,347.9
2,894.6
 13,348.9
 0.3
 16,243.8
 16,287.1
Equity securities:                  
Nonredeemable preferred stocks:                  
Financials154.9
 627.7
 0
 782.6
 674.2
138.1
 715.4
 0
 853.5
 734.2
Subtotal nonredeemable preferred stocks154.9
 627.7
 0
 782.6
 674.2
138.1
 715.4
 0
 853.5
 734.2
Common equities:                  
Common stocks2,650.2
 0
 0
 2,650.2
 1,494.0
2,812.0
 0
 0
 2,812.0
 1,437.1
Other risk investments0
 0
 0.3
 0.3
 0.3
0
 0
 0.4
 0.4
 0.4
Subtotal common equities2,650.2
 0
 0.3
 2,650.5
 1,494.3
2,812.0
 0
 0.4
 2,812.4
 1,437.5
Total fixed maturities and equity securities5,252.9
 13,502.2
 10.2
 18,765.3
 17,516.4
5,844.7
 14,064.3
 0.7
 19,909.7
 18,458.8
Short-term investments2,056.3
 115.7
 0
 2,172.0
 2,172.0
3,009.3
 563.6
 0
 3,572.9
 3,572.9
Total portfolio$7,309.2
 $13,617.9
 $10.2
 $20,937.3
 $19,688.4
$8,854.0
 $14,627.9
 $0.7
 $23,482.6
 $22,031.7
Debt$0
 $2,722.9
 $164.9
 $2,887.8
 $2,707.9
$0
 $3,188.5
 $127.3
 $3,315.8
 $3,148.2
Our portfolio valuations, excluding short-term investments, classified as either Level 1 or Level 2 in the above tables are priced exclusively by external sources, including: pricing vendors, dealers/market makers, and exchange-quoted prices. We did not have any transfers between Level 1 and Level 2 during 20162017 or 2015.2016. We recognize transfers between levels at the end of the reporting period.
Our short-term security holdings classified as Level 1 are highly liquid, actively marketed, and have a very short duration, primarily 30 days or less to redemption. These securities are held at their original cost, adjusted for any accretion of discount, since that value very closely approximates what an active market participant would be willing to pay for such securities. The remainder of our short-term securities are classified as Level 2 and are not priced externally since these securities continually trade at par value. These securities are classified as Level 2 since they are primarily longer-dated auction securities issued by municipalities that contain a redemption put feature back to the auction pool with a redemption period typically less than seven days. The auction pool is created by a liquidity provider and if the auction is not available at the end of the seven days, we have the right to put the security back to the issuer at par.


At June 30, 20162017, vendor-quoted prices represented 35%58% of our Level 1 classifications (excluding short-term investments), compared to 43%35% and 49%52% at June 30, 20152016 and December 31, 2015,2016, respectively. The securities quoted by vendors in Level 1 primarily represent our holdings in U.S. Treasury Notes, which are frequently traded, and the quotes are considered similar to exchange-traded quotes. The balance of our Level 1 pricing comes from quotes obtained directly from trades made on active exchanges. The decline in vendor-quoted Level 1 prices since December 31, 2015 was due to a reduction of U.S. Treasury Notes with the funds deployed primarily to short-term investments.
At June 30, 20162017 and 2015,2016, and December 31, 20152016, vendor-quoted prices comprised 98%99%, 97%98%, and 97%99%, respectively, of our Level 2 classifications (excluding short-term investments), while dealer-quoted prices represented 2%1%, 3%2%, and 3%1%, respectively. In our process for selecting a source (e.g., dealer, pricing service) to provide pricing for securities in our portfolio, we reviewed documentation from the sources that detailed the pricing techniques and methodologies used by these sources and determined if their policies adequately considered market activity, either based on specific transactions for the particular security type or based on modeling of securities with similar credit quality, duration, yield, and structure that were recently transacted. Once a source is chosen, we continue to monitor any changes or modifications to their processes by reviewing their documentation on internal controls for pricing and market reviews. We review quality control measures of our sources as they become available to determine if any significant changes have occurred from period to period that might indicate issues or concerns regarding their evaluation or market coverage.
As part of our pricing procedures, we obtain quotes from more than one source to help us fully evaluate the market price of securities. However, our internal pricing policy is to use a consistent source for individual securities in order to maintain the integrity of our valuation process. Quotes obtained from the sources are not considered binding offers to transact. Under our policy, when a review of the valuation received from our selected source appears to be outside of what is considered market level activity (which is defined as trading at spreads or yields significantly different than those of comparable securities or outside the general sector level movement without a reasonable explanation), we may use an alternate source’s price. To the extent we determine that it may be prudent to substitute one source’s price for another, we will contact the initial source to obtain an understanding of the factors that may be contributing to the significant price variance, which often leads the source to adjust their pricing input data for future pricing.
To allow us to determine if our initial source is providing a price that is outside of a reasonable range, we review our portfolio pricing on a weekly basis. We frequentlyWhen necessary, we challenge prices from our sources when a price provided does not match our expectations based on our evaluation of market trends and activity. Initially, we perform a review of our portfolio by sector to identify securities whose prices appear outside of a reasonable range. We then perform a more detailed review of fair values for securities disclosed as Level 2. We review dealer bids and quotes for these and/or similar securities to determine the market level context for our valuations. We then evaluate inputs relevant for each class of securities disclosed in the preceding hierarchy tables.
For our structured debt securities, including commercial, residential, and asset-backed securities, we evaluate available market-related data for these and similar securities related to collateral, delinquencies, and defaults for historical trends and reasonably estimable projections, as well as historical prepayment rates and current prepayment assumptions and cash flow estimates. We further stratify each class of our structured debt securities into more finite sectors (e.g., planned amortization class, first pay, second pay, senior, subordinated, etc.) and use duration, credit quality, and coupon to determine if the fair value is appropriate.

For our corporate debt and preferred stock (redeemable and nonredeemable) portfolios, as well as the notes and debentures issued by The Progressive Corporation (see Note 4-Debt4–Debt), we review securities by duration, coupon, and credit quality, as well as changes in interest rate and credit spread movements within that stratification. The review also includes recent trades, including: volume traded at various levels that establish a market, issuer specific fundamentals, and industry specific economic news as it comes to light.
For our municipal securities (e.g., general obligations, revenue, and housing), we stratify the portfolio to evaluate securities by type, coupon, credit quality, and duration to review price changes relative to credit spread and interest rate changes. Additionally, we look to economic data as it relates to geographic location as an indication of price-to-call or maturity predictors. For municipal housing securities, we look to changes in cash flow projections, both historical and reasonably estimable projections, to understand yield changes and their effect on valuation.
Lastly, for our short-term securities, we look at acquisition price relative to the coupon or yield. Since our short-term securities are typically 90 days or less to maturity, with the majority listed in Level 2 being seven days or less to redemption, we believe that acquisition price is the best estimate of fair value.



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 received externally and research material valuation differences. We compare our results to index returns for each major sector adjusting for duration and credit quality differences to better understand our portfolio’s results. Additionally, we review on a monthly basis our external sales transactions and compare the actual final market sales price to a previous market valuation price. 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 June 30, 20162017 and 20152016, and December 31, 20152016, securities in our fixed-maturity portfolio listed as Level 3 were comprised substantially of securities that were either: (i) private placements, (ii) thinly held and/or traded securities, or (iii) non-investment-grade or non-rated securities with little liquidity. Based on these factors, it was difficult to independently verify observable market inputs that were used to generate the external valuations we received. Despite the lack of sufficient observable market information for our Level 3 securities, we believe the valuations received in conjunction with our procedures for evaluating third-party prices support the fair values reported in the financial statements.
We did not hold any internally priced securities at June 30, 20162017 and 2016, or December 31, 2015. At June 30, 2015, we held two internally priced securities in our corporate portfolio that we priced at cost since we had expected them to be fully redeemed by the end of 2015; these securities were no longer held at December 31, 2015.2016.
We review the prices from our external sources for reasonableness using internally developed assumptions to derive prices for the securities, which are then compared to the prices we received. During 20162017 or 20152016, 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.





The following tables provide a summary of changes in fair value associated with Level 3 assets for the three and six months ended June 30, 20162017 and 20152016:
 
Level 3 Fair Value
Level 3 Fair Value
Three Months Ended June 30, 2016Three Months Ended June 30, 2017
(millions)Fair Value at March 31, 2016
 
Calls/
Maturities/
Paydowns

 Purchases
 Sales
 Net Realized (Gain) Loss on Sales
 Change in Valuation
 
Net
Transfers
In (Out)

 Fair Value at June 30, 2016
Fair Value at March 31, 2017
 
Calls/
Maturities/
Paydowns

 Purchases
 Sales
 Net Realized (Gain) Loss on Sales
 Change in Valuation
 
Net
Transfers
In (Out)

 Fair Value at June 30, 2017
Fixed maturities:                              
Corporate debt securities$0
 $0
 $0
 $0
 $0
 $0
 $0
 $0
Asset-backed securities:                              
Commercial mortgage-backed9.5
 (0.3) 0
 0
 0
 0
 0
 9.2
$0
 $0
 $0
 $0
 $0
 $0
 $0
 $0
Total fixed maturities9.5
 (0.3) 0
 0
 0
 0
 0
 9.2
0
 0
 0
 0
 0
 0
 0
 0
Equity securities:                              
Nonredeemable preferred stocks:               
Financials0
 0
 0
 0
 0
 0
 0
 0
Common equities:                              
Other risk investments0.3
 0
 0
 0
 0
 0
 0
 0.3
0.3
 0
 0
 0
 0
 0
 0
 0.3
Total Level 3 securities$9.8
 $(0.3) $0
 $0
 $0
 $0
 $0
 $9.5
$0.3
 $0
 $0
 $0
 $0
 $0
 $0
 $0.3
               
Level 3 Fair Value
Six months ended June 30, 2017
(millions)Fair Value at Dec. 31, 2016
 
Calls/
Maturities/
Paydowns

 Purchases
 Sales
 Net Realized (Gain) Loss on Sales
 Change in Valuation
 
Net
Transfers
In (Out)

 Fair Value at June 30, 2017
Fixed maturities:               
Asset-backed securities:               
Commercial mortgage-backed$0.3
 $(0.3) $0
 $0
 $0
 $0
 $0
 $0
Total fixed maturities0.3
 (0.3) 0
 0
 0
 0
 0
 0
Equity securities:               
Common equities:               
Other risk investments0.4
 (0.1) 0
 0
 0
 0
 0
 0.3
Total Level 3 securities$0.7
 $(0.4) $0
 $0
 $0
 $0
 $0
 $0.3

 
 Level 3 Fair Value
 Six Months Ended June 30, 2016
(millions)Fair Value at Dec. 31, 2015
 Calls/
Maturities/
Paydowns
 Purchases
 Sales
 Net Realized (Gain) Loss on Sales
 Change in Valuation
 Net
Transfers
In (Out)
 Fair Value at June 30, 2016
Fixed maturities:               
Corporate debt securities$0
 $0
 $0
 $0
 $0
 $0
 $0
 $0
Asset-backed securities:               
Commercial mortgage-backed9.9
 (0.6) 0
 0
 0
 (0.1) 0
 9.2
Total fixed maturities9.9
 (0.6) 0
 0
 0
 (0.1) 0
 9.2
Equity securities:               
Nonredeemable preferred stocks:               
Financials0
 0
 0
 0
 0
 0
 0
 0
Common equities:               
Other risk investments0.3
 0
 0
 0
 0
 0
 0
 0.3
Total Level 3 securities$10.2
 $(0.6) $0
 $0
 $0
 $(0.1) $0
 $9.5



 Level 3 Fair Value
 Three Months Ended June 30, 2015
(millions)Fair Value at March 31, 2015
 Calls/
Maturities/
Paydowns
 Purchases
 Sales
 Net Realized (Gain) Loss on Sales
 Change in
Valuation
 Net
Transfers
In (Out)
 Fair Value at June 30, 2015
Fixed maturities:               
Corporate debt securities$0
 $0
 $1.0
 $0
 $0
 $0
 $0
 $1.0
Asset-backed securities:               
Commercial mortgage-backed11.4
 (0.4) 0
 0
 0
 (0.1) 0
 10.9
Total fixed maturities11.4
 (0.4) 1.0
 0
 0
 (0.1) 0
 11.9
Equity securities:               
Nonredeemable preferred stocks:               
Financials1
69.9
 0
 0
 0
 (39.4) (2.0) (28.5) 0
Common equities:               
Other risk investments0.3
 0
 0
 0
 0
 0
 0
 0.3
Total Level 3 securities$81.6
 $(0.4) $1.0
 $0
 $(39.4) $(2.1) $(28.5) $12.2
1The $69.9 million decrease during the quarter reflects the reclassification of our 5% interest in ARX Holding Corp. upon acquisition of a controlling interest in ARX, which occurred on April 1, 2015. The $39.4 million reflects our inception-to-date gain recognized, including a $2.0 million reduction in valuation that occurred during the second quarter 2015.


 Level 3 Fair Value
 Six Months Ended June 30, 2015
(millions)Fair Value at Dec. 31, 2014
 Calls/
Maturities/
Paydowns
 Purchases
 Sales
 Net Realized (Gain) Loss on Sales
 Change in
Valuation
 Net
Transfers
In (Out)
 Fair Value at June 30, 2015
Fixed maturities:               
Corporate debt securities$0
 $0
 $1.0
 $0
 $0
 $0
 $0
 $1.0
Asset-backed securities:               
Commercial mortgage-backed11.6
 (0.6) 0
 0
 0
 (0.1) 0
 10.9
Total fixed maturities11.6
 (0.6) 1.0
 0
 0
 (0.1) 0
 11.9
Equity securities:               
Nonredeemable preferred stocks:               
Financials1
69.3
 0
 0
 0
 (39.4) (1.4) (28.5) 0
Common equities:               
Other risk investments0.4
 0
 0
 0
 0
 (0.1) 0
 0.3
Total Level 3 securities$81.3
 $(0.6) $1.0
 $0
 $(39.4) $(1.6) $(28.5) $12.2
1The $69.3 million decrease during the year reflects the reclassification of our 5% interest in ARX Holding Corp. upon acquisition of a controlling interest in ARX. The $39.4 million reflects our inception-to-date gain recognized, including a $1.4 million reduction in valuation that occurred during the first six months of 2015.



 Level 3 Fair Value
 Three Months Ended June 30, 2016
(millions)Fair Value at March 31, 2016
 Calls/
Maturities/
Paydowns
 Purchases
 Sales
 Net Realized (Gain) Loss on Sales
 Change in
Valuation
 Net
Transfers
In (Out)
 Fair Value at June 30, 2016
Fixed maturities:               
Asset-backed securities:               
Commercial mortgage-backed$9.5
 $(0.3) $0
 $0
 $0
 $0
 $0
 $9.2
Total fixed maturities9.5
 (0.3) 0
 0
 0
 0
 0
 9.2
Equity securities:               
Common equities:               
Other risk investments0.3
 0
 0
 0
 0
 0
 0
 0.3
Total Level 3 securities$9.8
 $(0.3) $0
 $0
 $0
 $0
 $0
 $9.5
                
 Level 3 Fair Value
 Six months ended June 30, 2016
(millions)Fair Value at Dec. 31, 2015
 
Calls/
Maturities/
Paydowns

 Purchases
 Sales
 Net Realized (Gain) Loss on Sales
 
Change in
Valuation

 
Net
Transfers
In (Out)

 Fair Value at June 30, 2016
Fixed maturities:               
Asset-backed securities:               
Commercial mortgage-backed$9.9
 $(0.6) $0
 $0
 $0
 $(0.1) $0
 $9.2
Total fixed maturities9.9
 (0.6) 0
 0
 0
 (0.1) 0
 9.2
Equity securities:               
Common equities:               
Other risk investments0.3
 0
 0
 0
 0
 0
 0
 0.3
Total Level 3 securities$10.2
 $(0.6) $0
 $0
 $0
 $(0.1) $0
 $9.5

The following tables provide a summary of the quantitative information about Level 3 fair value measurements for our applicable securities at June 30, 20162017 and 20152016, and December 31, 20152016:
 
Quantitative Information about Level 3 Fair Value MeasurementsQuantitative Information about Level 3 Fair Value Measurements
($ in millions)Fair Value at June 30, 2016
 Valuation Technique Unobservable Input Unobservable
Input Assumption
Fair Value at June 30, 2017
 Valuation Technique Unobservable Input Unobservable
Input Assumption
Fixed maturities:     
Asset-backed securities:     
Commercial mortgage-backed$9.2
 External vendor 
Prepayment rate1
 0%$0
 NA NA NA
Subtotal Level 3 securities9.2
  0
 
Pricing exemption securities2
0.3
  
Pricing exemption securities1
0.3
 
Total Level 3 securities$9.5
  $0.3
 
NA= Not applicable, since we did not hold any commercial mortgage-backed Level 3 securities at June 30, 2017.
1Assumes that one security has 0% of the principal amount of the underlying loans that will be paid off prematurely in each year.
2The fair values for these securities were determined with unobservable inputs not reasonably available to us.



Quantitative Information about Level 3 Fair Value MeasurementsQuantitative Information about Level 3 Fair Value Measurements
($ in millions)Fair Value at June 30, 2015
 Valuation Technique Unobservable Input Unobservable
Input Assumption
Fair Value at June 30, 2016
 Valuation Technique Unobservable Input Unobservable
Input Assumption
Fixed maturities:      
Asset-backed securities:      
Commercial mortgage-backed$10.9
 External vendor 
Prepayment rate1
 0%$9.2
 External vendor 
Prepayment rate1
 0%
Subtotal Level 3 securities10.9
  9.2
  
Pricing exemption securities2
1.3
  0.3
  
Total Level 3 securities$12.2
  $9.5
  
1Assumes that one security has 0% of the principal amount of the underlying loans that will be paid off prematurely in each year.
2 The fair values for these securities were determined with unobservable inputs not reasonably available to us.
 
Quantitative Information about Level 3 Fair Value MeasurementsQuantitative Information about Level 3 Fair Value Measurements
($ in millions)Fair Value at Dec. 31, 2015
 Valuation Technique Unobservable Input Unobservable
Input Assumption
Fair Value at Dec. 31, 2016
 Valuation Technique Unobservable Input Unobservable
Input Assumption
Fixed maturities:      
Asset-backed securities:      
Commercial mortgage-backed$9.9
 External vendor 
Prepayment rate1
 0%$0.3
 External vendor 
Prepayment rate1
 0%
Subtotal Level 3 securities9.9
  0.3
  
Pricing exemption securities2
0.3
  0.4
  
Total Level 3 securities$10.2
  $0.7
  
1Assumes that one security has 0% of the principal amount of the underlying loans that will be paid off prematurely in each year.
2 The fair values for these securities were determined with unobservable inputs not reasonably available to us.
Due to the relative size of the Level 3 securities’ fair values compared to the total portfolio’s fair value, any changes in pricing methodology would not have a significant change in valuation that would materially impact net or comprehensive income.


Note 4 Debt — Debt at each of the balance sheet periods consisted of:
 
June 30, 2016 June 30, 2015 December 31, 2015June 30, 2017 June 30, 2016 December 31, 2016
(millions)
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
3.75% Senior Notes due 2021$498.3
 $547.7
 $498.0
 $533.0
 $498.1
 $528.7
$498.6
 $528.0
 $498.3
 $547.7
 $498.4
 $528.8
2.45% Senior Notes due 2027496.0
 474.2
 0
 0
 495.8
 464.6
6 5/8% Senior Notes due 2029295.8
 401.8
 295.6
 380.9
 295.7
 376.0
296.0
 389.0
 295.8
 401.8
 295.9
 380.1
6.25% Senior Notes due 2032395.1
 535.0
 394.9
 492.1
 395.0
 490.6
395.2
 522.7
 395.1
 535.0
 395.2
 499.0
4.35% Senior Notes due 2044346.4
 400.3
 346.3
 346.5
 346.4
 352.8
346.5
 376.5
 346.4
 400.3
 346.4
 362.3
3.70% Senior Notes due 2045395.1
 412.0
 395.0
 351.7
 395.0
 362.0
395.2
 389.7
 395.1
 412.0
 395.1
 372.5
4.125% Senior Notes due 2047841.1
 884.3
 0
 0
 0
 0
6.70% Fixed-to-Floating Rate Junior Subordinated Debentures due 2067593.6
 545.5
 630.7
 659.7
 612.8
 612.8
0
 0
 593.6
 545.5
 594.1
 581.2
Other debt instruments139.8
 139.8
 178.5
 178.5
 164.9
 164.9
114.8
 114.8
 139.8
 139.8
 127.3
 127.3
Total$2,664.1
 $2,982.1
 $2,739.0
 $2,942.4
 $2,707.9
 $2,887.8
$3,383.4
 $3,679.2
 $2,664.1
 $2,982.1
 $3,148.2
 $3,315.8
 


The other debt instruments reported in the table above represent ARX indebtedness and consist of:
June 30, 2016 June 30, 2015 December 31, 2015 June 30, 2017 June 30, 2016 December 31, 2016 
Type of debt instrumentNumber of Instruments
 
Carrying
Value

 Number of Instruments
 Carrying
Value
 Number of Instruments
 Carrying
Value
Stated Maturity Date(s)
($ in millions)
Type of debt instrument
Number of Instruments
 
Carrying
Value

 Number of Instruments
 Carrying
Value
 Number of Instruments
 Carrying
Value
Stated Maturity Date(s)
Term loans2
 $74.6
 2
 $99.5
 2
 $87.1
December 2018 and 20192
 $49.6
 2
 $74.6
 2
 $62.1
December 2018 and 2019
Junior subordinated notes1
2
 41.2
 2
 41.3
 2
 41.2
June 2036 and 20372
 41.2
 2
 41.2
 2
 41.2
June 2036 and 2037
Senior notes4
 24.0
 4
 24.0
 4
 24.0
Various2
4
 24.0
 4
 24.0
 4
 24.0
Various2
Surplus note3
0
 0
 1
 13.7
 1
 12.6
November 2021
Total  $139.8
   $178.5
   $164.9
   $114.8
   $139.8
   $127.3
 
1 ARX issued junior subordinated floating rate notes to trusts established by ARX in connection with issuances of trust preferred securities by the trusts
(discussed (discussed below).
2 The senior notes mature in May 2033, April 2034, December 2034, and June 2035.
3 The surplus note was debt of the subsidiary disposed of by ARX in the exchange transaction during the second quarter 2016 (see Note 1 – Basis of Presentation for further discussion).
The Progressive Corporation Debt
During the second quarter of 2016,2017, we repurchased,issued $850 million of 4.125% Senior Notes due 2047 (the “4.125% Senior Notes”) in an underwritten public offering. We received proceeds, after deducting underwriter’s discounts, commissions and other issuance costs, of approximately $841.1 million. In addition, upon issuance of the open market, $19.84.125% Senior Notes, we closed a forecasted debt issuance hedge, which was entered into to hedge against a possible rise in interest rates, and recognized an $8.0 million in aggregate principal amountpretax loss as part of accumulated other comprehensive income (loss); the loss will be recognized as an adjustment to interest expense and amortized over the life of the 4.125% Senior Notes.
During the second quarter 2017, we redeemed our 6.70% Fixed-to-Floating Rate Junior Subordinated Debentures due 2067 (the "6.70% Debentures"“6.70% Debentures”)., at par, in aggregate principal amount of $563.7 million. During the first quarter of 2017 and the full year 2016, we repurchased, in the open market, $30.9 million and $19.8 million, respectively, in aggregate principal amount of our 6.70% Debentures. Since the carrying value of the debt we repurchased exceededdiffered from the amount paid to extinguish the debt, we recognized a gain on the extinguishment of $1.6$0.2 million during 2016. In addition, for the portion of the 6.70% Debentures we repurchased, we reclassified $0.1 million on a pretax basis, of the unrealized gain on forecasted transactions from accumulated other comprehensive income on the balance sheet to net realized gains on securities on the comprehensive income statement during 2016. We did not repurchase any debt in the first quarter 2017 and $1.6 million in 2016.

We did not repurchase any debt securities during the first six months of 2015. During the year ended December 31, 2015,third quarter 2016, we repurchased, in the open market, $18.4issued $500 million in aggregate principal amount of our 6.70% Debentures.2.45% Senior Notes due 2027 in an underwritten public offering. We received proceeds, after deducting underwriter’s discounts, commissions, and other issuance costs, of approximately $495.6 million.
ARX Debt (i.e., otherOther debt instruments)
The other debt instruments were issued by ARX.ARX, prior to The Progressive Corporation acquiring a controlling interest in 2015. ARX, not The Progressive Corporation or any of its other subsidiaries, is responsible for the other debt, which includes amounts that were borrowed and contributed to the capital of ARX'sARX’s insurance subsidiaries or used, or made available for use, for other business purposes.

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

Pursuant to agreements entered into by ARX relating to the trust preferred securities transactions, ARX established trusts that are entirely owned by ARX. The trusts, which are the holders of the junior subordinated notes, issued trust preferred securities to third parties. The shares in the trusts are not transferable. The trusts are considered special purpose variable interest entities for which ARX is not the primary beneficiary and, therefore, they are accounted for under the equity method of accounting and


not consolidated with ARX. Our ownership interest of $1.3 million at June 30, 2017 and 2016, and December 31, 2016, in the variable interest entities is reported as a component of "other assets"“other assets” on our consolidated balance sheets.

During the third quarter 2017, ARX intends to redeem their junior subordinated notes and senior notes, in their entirety, with proceeds from a 5-year, fixed-rate loan expected to be made by The Progressive Corporation to fund the redemptions; this intercompany transaction will be eliminated in consolidation and is not expected to have a significant impact on the purchase price pursuant to the put and call provisions of the stockholders’ agreement entered into between The Progressive Corporation and the ARX minority stockholders (see Note 12 – Redeemable Noncontrolling Interest for further discussion).
The Progressive Corporation Line of Credit
During the second quarter 2016,2017, we renewed the unsecured, discretionaryentered into a new line of credit (the "Line of Credit") with PNC Bank, National Association (PNC), which replaced the line of credit that expired during the quarter, in the maximum principal amount of $100$250 million. Subject to the terms and conditions of the Lineline of Creditcredit documents, advances under the Lineline of Creditcredit (if any) will bear interest at a variable rate equal to the higher of PNC'sPNC’s Prime Rate andor the sum of the Federal Funds Open Rate plus 50 basis points. Each advance would need to


must be repaid on the 30th day after the advance or, if earlier, on April 30, 2017,2018, the expiration date of the Lineline of Credit.credit. Prepayments are permitted without penalty. All advances under the line of credit are subject to PNC’s discretion. We had no borrowings under the Line of Credit or the prior line of credit during the first six months of 20162017 or throughout 2015.2016.
Note 5 Income Taxes — At June 30, 20162017 and 2015,2016, and December 31, 2015,2016, we determined that we did not need a valuation allowance on our gross deferred tax assets. Although realization of the deferred tax assets is not assured, management believes that it is more likely than not that the deferred tax assets will be realized based on our expectation that we will be able to fully utilize the deductions that are ultimately recognized for tax purposes.
For the three and six months ended June 30, 2016, the effective tax rate was 32.2% and 32.8%, respectively, compared to 29.9% and 31.4% for the same periods last year. The year-over-year increase in the effective rate for both the three and six month periods is primarily due to the reversal of approximately $14 million of deferred taxes associated with the appreciation of our previous 5% investment in ARX as a result of our acquisition of a controlling interest in ARX during the second quarter of 2015.
For the six months ended June 30, 2016,2017, there have been no material changes in our uncertain tax positions.positions or effective tax rate.
Note 6Loss and Loss Adjustment Expense Reserves — Activity in the loss and loss adjustment expense reserves is summarized as follows:
 June 30,
(millions)2017 2016
Balance, Beginning of period$11,368.0
 $10,039.0
Less reinsurance recoverables on unpaid losses1,801.0
 1,442.7
Net balance, Beginning of period9,567.0
 8,596.3
Net loss and loss adjustment expense reserves disposed1
—
 (2.5)
Total beginning reserves9,567.0
 8,593.8
Incurred related to:   
Current year8,804.1
 8,126.8
Prior years74.2
 29.6
Total incurred8,878.3
 8,156.4
Paid related to:   
Current year4,951.0
 4,611.5
Prior years3,381.8
 3,059.8
Total paid8,332.8
 7,671.3
Net balance, End of period10,112.5
 9,078.9
Plus reinsurance recoverables on unpaid losses1,947.9
 1,595.9
Balance, End of period$12,060.4
 $10,674.8
1 During 2016, $2.5 million net reserves were disposed by ARX in an exchange transaction.

We experienced unfavorable reserve development of $74.2 million and $29.6 million for the first six months of 2017 and 2016, respectively, which is reflected as “Incurred related to prior years” in the table above.
Year-to-date 2017
Approximately $56 million of the unfavorable prior year reserve development was attributable to accident year 2016 with the balance attributable to accident year 2015.
Our commercial and personal auto businesses incurred about $102 million of unfavorable loss and loss adjustment expense (LAE) reserve development for the first six months of 2017, partially offset by the favorable loss and LAE reserve development of about $28 million in our special lines and Property businesses.
Our Agency and Direct auto businesses incurred about $65 million and $29 million, respectively, of the total unfavorable reserve development, primarily due to an increase in costs related to property damage, more late reported bodily injury claims than anticipated, and higher LAE costs.
Our Property business experienced about $20 million in favorable development primarily due to the identification of prior year losses eligible to be ceded under our catastrophe bond reinsurance program.
Year-to-date 2016
Approximately $16 million of the unfavorable prior year reserve development was attributable to accident year 2015 and $23 million of the unfavorable development was attributable to accident year 2014; we had favorable development for accident year 2013 and prior accident years.
Our commercial and personal auto businesses incurred unfavorable loss and LAE reserve development for the first six months of 2016, partially offset by the favorable loss and LAE reserve development in our Property business of $22 million. In our Property business, both the severity and frequency of late reported claims was less than anticipated.
Our personal auto product developed unfavorably $29 million primarily from our Agency auto businesses.


Our Commercial Lines business made up about $22 million of the unfavorable development.
Our personal auto and Commercial Lines businesses incurred unfavorable IBNR loss reserve development, primarily due to a higher severity and frequency of late reported claims than anticipated for accident year 2015, driven in part by storms in late December 2015, resulting in a greater number of claims being reported in January 2016 than anticipated.
In addition, our Commercial Lines business experienced unfavorable case reserve development for accident year 2014 primarily due to a higher severity than anticipated on our largest limits.
Note 7 Supplemental Cash Flow Information — Cash includes only bank demand deposits. We paid the following in the respective periods: 
Six Months Ended June 30,Six Months Ended June 30,
(millions)2016
 2015
2017
 2016
Income taxes$275.4
 $372.1
$494.2
 $275.4
Interest70.1
 62.0
73.3
 70.1

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

The cash transfered in the exchange transaction, which occurred in June 2016, was revised to correct the reclassification of a non-cash transaction; there was no overall impact on the decrease in cash that was reported in our consolidated statement of cash flows for the six months ended June 30, 2016.
Note 78 Segment Information — Our Personal Lines segment writes insurance for personal autos and recreational vehicles.vehicles (our special lines products). Our Commercial Lines segment writes primary liability and physical damage insurance for automobiles and trucks owned and/or operated predominantly by small businesses in the business auto, for-hire transportation, contractor, for-hire specialty, tow, and for-hire livery markets. Our Property segment writes personalresidential property insurance for homeowners, other property owners, and renters. Our other indemnity businesses manage our run-off businesses, including the run-off of our professional liability insurance for community banks.businesses. Our service businesses provide insurance-related services, including processing Commercial AutoAutomobile Insurance Procedures/Plans (CAIP) business, and serving as an agent for property,homeowners, general liability, and business owners policies, and workers’ compensation insurance through our programs with American Strategic Insurance and other subsidiaries of ARX (ASI),ASI and unaffiliated insurance companies. All segment revenues are generated from external customers; all intercompany transactions, including those withbetween Progressive and ASI, are eliminated in consolidation.



Following are the operating results for the respective periods:
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended June 30, Six Months Ended June 30,
2016 2015 2016 20152017 2016 2017 2016
(millions)Revenues 
Pretax
Profit
(Loss)
 Revenues 
Pretax
Profit
(Loss)
 Revenues 
Pretax
Profit
(Loss)
 Revenues 
Pretax
Profit
(Loss)
Revenues 
Pretax
Profit
(Loss)
 Revenues 
Pretax
Profit
(Loss)
 Revenues 
Pretax
Profit
(Loss)
 Revenues 
Pretax
Profit
(Loss)
Personal Lines                              
Agency$2,423.3
 $84.5
 $2,276.4
 $171.9
 $4,771.2
 $255.9
 $4,520.9
 $366.4
$2,752.5
 $205.5
 $2,423.3
 $84.5
 $5,384.0
 $455.2
 $4,771.2
 $255.9
Direct2,334.8
 73.6
 2,031.8
 118.1
 4,555.5
 153.1
 3,987.2
 186.3
2,650.0
 162.7
 2,334.8
 73.6
 5,173.7
 338.0
 4,555.5
 153.1
Total Personal Lines1
4,758.1
 158.1
 4,308.2
 290.0
 9,326.7
 409.0
 8,508.1
 552.7
5,402.5
 368.2
 4,758.1
 158.1
 10,557.7
 793.2
 9,326.7
 409.0
Commercial Lines593.4
 31.2
 489.3
 83.2
 1,142.2
 92.3
 955.7
 161.7
671.7
 56.2
 593.4
 31.2
 1,317.2
 123.6
 1,142.2
 92.3
Property2
210.3
 (13.6) 198.7
 1.0
 410.3
 (38.1) 198.7
 1.0
239.1
 3.7
 210.3
 (13.6) 465.1
 11.5
 410.3
 (38.1)
Other indemnity0
 (0.1) (0.4) (0.4) 0
 (0.8) (0.4) 0
0
 (0.1) 0
 (0.1) 0
 (0.3) 0
 (0.8)
Total underwriting operations5,561.8
 175.6
 4,995.8
 373.8
 10,879.2
 462.4
 9,662.1
 715.4
6,313.3
 428.0
 5,561.8
 175.6
 12,340.0
 928.0
 10,879.2
 462.4
Fees and other revenues3
82.5
 NA
 74.9
 NA
 161.4
 NA
 148.6
 NA
88.8
 NA
 82.5
 NA
 174.0
 NA
 161.4
 NA
Service businesses26.5
 2.8
 23.3
 2.8
 51.5
 6.2
 40.5
 4.1
32.7
 5.7
 26.5
 2.8
 61.2
 8.3
 51.5
 6.2
Investments4
146.9
 141.6
 189.3
 183.6
 283.1
 273.0
 327.4
 316.4
170.9
 164.3
 146.9
 141.6
 352.0
 339.8
 283.1
 273.0
Gains on extinguishment of debt1.6
 1.6
 0
 0
 1.6
 1.6
 0
 0
0
 0
 1.6
 1.6
 0.2
 0.2
 1.6
 1.6
Interest expenseNA
 (34.3) NA
 (34.9) NA
 (68.5) NA
 (67.4)NA
 (43.4) NA
 (34.3) NA
 (80.2) NA
 (68.5)
Consolidated total$5,819.3
 $287.3
 $5,283.3
 $525.3
 $11,376.8
 $674.7
 $10,178.6
 $968.5
$6,605.7
 $554.6
 $5,819.3
 $287.3
 $12,927.4
 $1,196.1
 $11,376.8
 $674.7
NA = Not applicable
1Personal auto insurance accounted for 92%93% of the total Personal Lines segment net premiums earned in both the second quartersquarter and first six months of 2016ended June 30, 2017, and 2015;92% for the same periods in 2016; insurance for our special lines products (e.g., motorcycles, ATVs, RVs, manufactured homes, watercraft, and snowmobiles)RVs) accounted for the balance of the Personal Lines net premiums earned.
2We began reporting our Property business as a segment on April 1, 2015, upon acquisition of a controlling interest in ARX; therefore, the six months ended June 30, 2015 only include results for three months and are not comparable to results reported for the six months ended June 30, 2016.
For the three and six months ended June 30, 2016,2017, pretax lossprofit (loss) includes $68.1$15.5 million and $113.4 million, respectively, of catastrophe losses and $54.3 million for the three and six months ended June 30, 2015. For the three and six months ended June 30, 2016, pretax loss also includes $15.6 million and $31.1$31.0 million, respectively, of amortization expense predominately associated with the acquisition of a controlling interest in ARX and $15.7$15.6 million and $31.1 million for the three and six months ended June 30, 2015.same periods in 2016.
3Pretax profit (loss) for fees and other revenues are allocatedattributable to operating segments.
4Revenues 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 respective periods:
 
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended June 30, Six Months Ended June 30,
2016 2015 2016 20152017 2016 2017 2016
Under-writing
Margin		 
Combined
Ratio
 Under-writing
Margin		 
Combined
Ratio
 
Under-writing
Margin
 
Combined
Ratio
 
Under-writing
Margin
 
Combined
Ratio
Under-writing
Margin		 
Combined
Ratio
 Under-writing
Margin		 
Combined
Ratio
 
Under-writing
Margin
 
Combined
Ratio
 
Under-writing
Margin
 
Combined
Ratio
Personal Lines                
Agency3.5 % 96.5 7.6% 92.4 5.4 % 94.6 8.1% 91.97.5% 92.5 3.5 % 96.5 8.5% 91.5 5.4 % 94.6
Direct3.2
 96.8 5.8
 94.2 3.4
 96.6 4.7
 95.36.1
 93.9 3.2
 96.8 6.5
 93.5 3.4
 96.6
Total Personal Lines3.3
 96.7 6.7
 93.3 4.4
 95.6 6.5
 93.56.8
 93.2 3.3
 96.7 7.5
 92.5 4.4
 95.6
Commercial Lines5.3
 94.7 17.0
 83.0 8.1
 91.9 16.9
 83.18.4
 91.6 5.3
 94.7 9.4
 90.6 8.1
 91.9
Property1
(6.5) 106.5 0.5
 99.5 (9.3) 109.3 0.5
 99.51.5
 98.5 (6.5)
 106.5 2.5
 97.5 (9.3)
 109.3
Other indemnity2
 NM
 NM  NM
 NM  NM
 NM  NM NMNM
 NM NM
 NM  NM
 NM  NM NM
Total underwriting operations3.2
 96.8 7.5
 92.5 4.3
 95.7 7.4
 92.66.8
 93.2 3.2
 96.8 7.5
 92.5 4.3
 95.7
1We began reporting our Property business as a segment on April 1, 2015, when we acquired a controlling interest in ARX; therefore, the six months ended June 30, 2015 only include results for three months and are not comparable to results reported for the six months ended June 30, 2016.
Included in both the three and six months ended June 30, 2016,2017, is 7.46.5 points and 7.66.7 points, respectively, of amortization expense predominately associated with the acquisition of a controlling interest in ARX and 7.97.4 points and 7.6 points, respectively, for both periods in 2015.the three and six months ended June 30, 2016. In addition, 2016 second quarter and year-to-date results include 2.1 points and 1.1 points, respectively, of expense related to thea loss on thean exchange transaction (See Note 1 - Basis of Presentation for discussion).that occurred in 2016.
2Underwriting margins and combined ratios are not meaningful (NM) for our other indemnity businesses due to the low level of premiums earned by, and the variability of loss costs in, such businesses.


Note 89 Dividends— We maintain a policy of paying an annual variable dividend that, if declared, would be payable shortly after the close of the year. This annual variable dividend is based on a target percentage of after-tax underwriting income (using a 35% tax rate) multiplied by a companywide performance factor (Gainshare factor), which, beginning in 2017, is determined by reference to the Agency auto, Direct auto, special lines, and Commercial Lines, and Property business units, with minor exclusions and subject to the limitations discussed below. The target percentage is determined by our Board of Directors on an annual basis and announced to shareholders and the public. In December 20152016, the Board determined the target percentage for 20162017 to be 33-1/3% of annual after-tax underwriting income, which is unchanged from the 20152016 target percentage.
The Gainshare factor can range from zero to two and is determined by comparing our operating performance for the Agency auto, Direct auto, special lines, and Commercial Linesspecified business units for the year to certain predetermined profitability and growth objectives approved by the Compensation Committee of the Board. This Gainshare factor is also used in the annual cash bonus program currently in place for our employees (our “Gainsharing program”). Although reviewed every year, the structure of the Gainsharing program generally remains the same. On a year-to-date basis, as of June 30, 20162017, the Gainshare factor was 1.50.1.79. Since the final factor will be determined based on our results for the full year, the final factor may vary from the current factor.
Our annual dividend program will result in a variable payment to shareholders each year, subject to certain limitations. If the Gainshare factor is zero or if our comprehensive income is less than after-tax underwriting income, no dividend would be payable under our annual variable dividend policy. For the six months ended June 30, 2016, our comprehensive income was $606.5 million, which is more than the $300.6 million of after-tax underwriting income for the same period. However,In addition, the ultimate decision on whether or not a dividend will be paid and the amount of any dividend, areis in the discretion of the Board of Directors. The Board could decide to alter our policy, or not to pay the annual variable dividend, at any time prior to the declaration of the dividend for the year. Such an action by the Board could result from, among other reasons, changes in the insurance marketplace, changes in our performance or capital needs, changes in federal income tax laws, disruptions of national or international capital markets, or other events affecting our business, liquidity, or financial position. If a dividend for 2016 were to be paid, the Board would likely declare the 2016 annual dividend in December 2016, with a record date in early 2017 and payment shortly thereafter.
Following is a summary of our shareholder dividends that were declared in the last two years:
(millions, except per share amounts)(millions, except per share amounts) Amount(millions, except per share amounts) Amount
Dividend TypeDeclaredPaidPer Share
Total1

DeclaredPaidPer Share
Total1

Annual – VariableDecember 2015February 2016$0.8882
$519.0
December 2016February 2017$0.6808
$395.4
Annual – VariableDecember 2014February 20150.6862
404.1
December 2015February 2016$0.8882
$519.2
1Represents the final amountBased on an estimate of dividends declared based on shares outstanding as of the record date. For the dividends declared in December 2016 and 2015, we paid $395.4 million and $519.0 million, respectively.


Note 910 Other Comprehensive Income (Loss) — The components of other comprehensive income (loss), including reclassification adjustments by income statement line item, were as follows:
      Components of Changes in
Accumulated Other
Comprehensive Income (after tax)		      Components of Changes in
Accumulated Other
Comprehensive Income (after tax)
(millions)Pretax total
accumulated
other
comprehensive
income
 Total tax
(provision)
benefit
 After tax total
accumulated
other
comprehensive
income
 Total net
unrealized
gains
 (losses)
on securities
 Net
unrealized
gains on
forecasted
transactions
 Foreign
currency
translation
adjustment
 (Income)loss attributable to NCI
Pretax total
accumulated
other
comprehensive
income
 Total tax
(provision)
benefit
 After tax total
accumulated
other
comprehensive
income
 Total net
unrealized
gains
 (losses)
on securities
 Net
unrealized
gains on
forecasted
transactions
 Foreign
currency
translation
adjustment
 (Income)loss attributable to NCI
Balance at March 31, 2016$1,338.7
 $(470.7) $868.0
 $878.5
 $(8.5) $(1.0) $(1.0)
Balance at March 31, 2017$1,645.9
 $(578.4) $1,067.5
 $1,072.0
 $(7.1) $(0.8) $3.4
             
Other comprehensive income (loss) before reclassifications:                          
Investment securities181.3
 (63.7) 117.6
 117.6
 0
 0
 0
177.2
 (62.1) 115.1
 115.1
 0
 0
 0
Net non-credit related OTTI losses, adjusted for valuation changes0
 0
 0
 0
 0
 0
 0
0
 0
 0
 0
 0
 0
 0
Forecasted transactions0
 0
 0
 0
 0
 0
 0
(12.0) 4.2
 (7.8) 0
 (7.8) 0
 0
Foreign currency translation adjustment(0.1) 0
 (0.1) 0
 0
 (0.1) 0
(0.2) 0.1
 (0.1) 0
 0
 (0.1) 0
Loss attributable to noncontrolling interest (NCI)(2.2) 0.8
 (1.4) 0
 0
 0
 (1.4)(1.9) 0.6
 (1.3) 0
 0
 0
 (1.3)
Total other comprehensive income (loss) before reclassifications179.0
 (62.9) 116.1
 117.6
 0
 (0.1) (1.4)163.1
 (57.2) 105.9
 115.1
 (7.8) (0.1) (1.3)
Less: Reclassification adjustment for amounts realized in net income by income statement line item:                          
Net impairment losses recognized in earnings0.2
 (0.1) 0.1
 0.1
 0
 0
 0
(2.6) 0.9
 (1.7) (1.7) 0
 0
 0
Net realized gains (losses) on securities40.0
 (14.1) 25.9
 25.9
 0
 0
 0
37.2
 (13.0) 24.2
 24.2
 0
 0
 0
Interest expense0.5
 (0.2) 0.3
 0
 0.3
 0
 0
0.3
 (0.1) 0.2
 0
 0.2
 0
 0
Total reclassification adjustment for amounts realized in net income40.7
 (14.4) 26.3
 26.0
 0.3
 0
 0
34.9
 (12.2) 22.7
 22.5
 0.2
 0
 0
Total other comprehensive income (loss)138.3
 (48.5) 89.8
 91.6
 (0.3) (0.1) (1.4)128.2
 (45.0) 83.2
 92.6
 (8.0) (0.1) (1.3)
Balance at June 30, 2016$1,477.0
 $(519.2) $957.8
 $970.1
 $(8.8) $(1.1) $(2.4)
Balance at June 30, 2017$1,774.1
 $(623.4) $1,150.7
 $1,164.6
 $(15.1) $(0.9) $2.1


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

 
Total tax
(provision)
benefit

 
After tax total
accumulated
other
comprehensive
income

 
Total net
unrealized
gains
 (losses)
on securities

 
Net
unrealized
gains on
forecasted
transactions

 
Foreign
currency
translation
adjustment

 (Income)loss attributable to NCI
Balance at December 31, 2016$1,439.5
 $(506.1) $933.4
 $939.6
 $(9.4) $(1.1) $4.3
              
Other comprehensive income (loss) before reclassifications:             
Investment securities431.7
 (151.3) 280.4
 280.4
 0
 0
 0
Net non-credit related OTTI losses, adjusted for valuation changes0
 0
 0
 0
 0
 0
 0
Forecasted transactions(8.0) 2.8
 (5.2) 0
 (5.2) 0
 0
Foreign currency translation adjustment0.3
 (0.1) 0.2
 0
 0
 0.2
 0
Loss attributable to noncontrolling interest (NCI)(3.4) 1.2
 (2.2) 0
 0
 0
 (2.2)
Total other comprehensive income (loss) before reclassifications420.6
 (147.4) 273.2
 280.4
 (5.2) 0.2
 (2.2)
Less: Reclassification adjustment for amounts realized in net income by income statement line item:             
Net impairment losses recognized in earnings(3.6) 1.3
 (2.3) (2.3) 0
 0
 0
Net realized gains (losses) on securities88.8
 (31.1) 57.7
 57.7
 0
 0
 0
Interest expense0.8
 (0.3) 0.5
 0
 0.5
 0
 0
Total reclassification adjustment for amounts realized in net income86.0
 (30.1) 55.9
 55.4
 0.5
 0
 0
Total other comprehensive income (loss)334.6
 (117.3) 217.3
 225.0
 (5.7) 0.2
 (2.2)
Balance at June 30, 2017$1,774.1
 $(623.4) $1,150.7
 $1,164.6
 $(15.1) $(0.9) $2.1




       Components of Changes in
Accumulated Other
Comprehensive Income (after tax)
(millions)Pretax total
accumulated
other
comprehensive
income
 Total tax
(provision)
benefit
 After tax total
accumulated
other
comprehensive
income
 Total net
unrealized
gains
 (losses)
on securities
 Net
unrealized
gains on
forecasted
transactions
 Foreign
currency
translation
adjustment
 (Income)loss attributable to NCI
Balance at December 31, 2015$1,234.5
 $(434.1) $800.4
 $809.0
 $(8.2) $(1.5) $1.1
Other comprehensive income (loss) before reclassifications:             
Investment securities324.0
 (114.0) 210.0
 210.0
 0
 0
 0
Net non-credit related OTTI losses, adjusted for valuation changes(0.1) 0.1
 0
 0
 0
 0
 0
Forecasted transactions0
 0
 0
 0
 0
 0
 0
Foreign currency translation adjustment0.6
 (0.2) 0.4
 0
 0
 0.4
 0
Loss attributable to noncontrolling interest (NCI)(5.5) 2.0
 (3.5) 0
 0
 0
 (3.5)
Total other comprehensive income (loss) before reclassifications319.0
 (112.1) 206.9
 210.0
 0
 0.4
 (3.5)
Less: Reclassification adjustment for amounts realized in net income by income statement line item:             
Net impairment losses recognized in earnings0.2
 (0.1) 0.1
 0.1
 0
 0
 0
Net realized gains (losses) on securities75.3
 (26.5) 48.8
 48.8
 0
 0
 0
Interest expense1.0
 (0.4) 0.6
 0
 0.6
 0
 0
Total reclassification adjustment for amounts realized in net income76.5
 (27.0) 49.5
 48.9
 0.6
 0
 0
Total other comprehensive income (loss)242.5
 (85.1) 157.4
 161.1
 (0.6) 0.4
 (3.5)
Balance at June 30, 2016$1,477.0
 $(519.2) $957.8
 $970.1
 $(8.8) $(1.1) $(2.4)



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

 
Total tax
(provision)
benefit

 
After tax total
accumulated
other
comprehensive
income

 Total net
unrealized
gains
 (losses)
on securities
 
Net
unrealized
gains on
forecasted
transactions

 
Foreign
currency
translation
adjustment

 (Income)loss attributable to NCI
Pretax total
accumulated
other
comprehensive
income

 
Total tax
(provision)
benefit

 
After tax total
accumulated
other
comprehensive
income

 Total net
unrealized
gains
 (losses)
on securities
 
Net
unrealized
gains on
forecasted
transactions

 
Foreign
currency
translation
adjustment

 (Income)loss attributable to NCI
Balance at March 31, 2015$1,614.2
 $(564.9) $1,049.3
 $1,057.3
 $(7.2) $(0.8) $0
Balance at March 31, 2016$1,338.7
 $(470.7) $868.0
 $878.5
 $(8.5) $(1.0) $(1.0)
Other comprehensive income (loss) before reclassifications:                          
Investment securities(161.5) 52.8
 (108.7) (108.7) 0
 0
 0
180.9
 (63.5) 117.4
 117.4
 0
 0
 0
Net non-credit related OTTI losses, adjusted for valuation changes0
 0
 0
 0
 0
 0
 0
0
 0
 0
 0
 0
 0
 0
Forecasted transactions0
 0
 0
 0
 0
 0
 0
0
 0
 0
 0
 0
 0
 0
Foreign currency translation adjustment0
 0
 0
 0
 0
 0
 0
(0.1) 0
 (0.1) 0
 0
 (0.1) 0
Loss attributable to noncontrolling interest (NCI)4.3
 (1.5) 2.8
 0
 0
 0
 2.8
(2.2) 0.8
 (1.4) 0
 0
 0
 (1.4)
Total other comprehensive income (loss) before reclassifications(157.2) 51.3
 (105.9) (108.7) 0
 0
 2.8
178.6
 (62.7) 115.9
 117.4
 0
 (0.1) (1.4)
Less: Reclassification adjustment for amounts realized in net income by income statement line item:                          
Net impairment losses recognized in earnings(1.7) 0.6
 (1.1) (1.1) 0
 0
 0
(0.2) 0.1
 (0.1) (0.1) 0
 0
 0
Net realized gains (losses) on securities64.9
 (22.7) 42.2
 42.2
 0
 0
 0
40.0
 (14.1) 25.9
 25.9
 0
 0
 0
Interest expense0.5
 (0.2) 0.3
 0
 0.3
 0
 0
0.5
 (0.2) 0.3
 0
 0.3
 0
 0
Total reclassification adjustment for amounts realized in net income63.7
 (22.3) 41.4
 41.1
 0.3
 0
 0
40.3
 (14.2) 26.1
 25.8
 0.3
 0
 0
Total other comprehensive income (loss)(220.9) 73.6
 (147.3) (149.8) (0.3) 0
 2.8
138.3
 (48.5) 89.8
 91.6
 (0.3) (0.1) (1.4)
Balance at June 30, 2015$1,393.3
 $(491.3) $902.0
 $907.5
 $(7.5) $(0.8) $2.8
Balance at June 30, 2016$1,477.0
 $(519.2) $957.8
 $970.1
 $(8.8) $(1.1) $(2.4)


      Components of Changes in
Accumulated Other
Comprehensive Income (after tax)		      
Components of Changes in
Accumulated Other
Comprehensive Income (after tax)
(millions)Pretax total
accumulated
other
comprehensive
income
 Total tax
(provision)
benefit
 After tax total
accumulated
other
comprehensive
income
 Total net
unrealized
gains
 (losses)
on securities
 Net
unrealized
gains on
forecasted
transactions
 Foreign
currency
translation
adjustment
 (Income)loss attributable to NCI
Pretax total
accumulated
other
comprehensive
income

 
Total tax
(provision)
benefit

 
After tax total
accumulated
other
comprehensive
income

 Total net
unrealized
gains
 (losses)
on securities
 
Net
unrealized
gains on
forecasted
transactions

 
Foreign
currency
translation
adjustment

 (Income)loss attributable to NCI
Balance at December 31, 2014$1,574.0
 $(550.9) $1,023.1
 $1,021.9
 $1.5
 $(0.3) $0
Balance at December 31, 2015$1,234.5
 $(434.1) $800.4
 $809.0
 $(8.2) $(1.5) $1.1
Other comprehensive income (loss) before reclassifications:                          
Investment securities(62.2) 18.1
 (44.1) (44.1) 0
 0
 0
323.6
 (113.8) 209.8
 209.8
 0
 0
 0
Net non-credit related OTTI losses, adjusted for valuation changes0
 0
 0
 0
 0
 0
 0
(0.1) 0.1
 0
 0
 0
 0
 0
Forecasted transactions(12.8) 4.4
 (8.4) 0
 (8.4) 0
 0
0
 0
 0
 0
 0
 0
 0
Foreign currency translation adjustment(0.9) 0.4
 (0.5) 0
 0
 (0.5) 0
0.6
 (0.2) 0.4
 0
 0
 0.4
 0
Loss attributable to noncontrolling interest (NCI)4.3
 (1.5) 2.8
 0
 0
 0
 2.8
(5.5) 2.0
 (3.5) 0
 0
 0
 (3.5)
Total other comprehensive income (loss) before reclassifications(71.6) 21.4
 (50.2) (44.1) (8.4) (0.5) 2.8
318.6
 (111.9) 206.7
 209.8
 0
 0.4
 (3.5)
Less: Reclassification adjustment for amounts realized in net income by income statement line item:                          
Net impairment losses recognized in earnings(9.6) 3.4
 (6.2) (6.2) 0
 0
 0
(0.2) 0.1
 (0.1) (0.1) 0
 0
 0
Net realized gains (losses) on securities117.7
 (41.2) 76.5
 76.5
 0
 0
 0
75.3
 (26.5) 48.8
 48.8
 0
 0
 0
Interest expense1.0
 (0.4) 0.6
 0
 0.6
 0
 0
1.0
 (0.4) 0.6
 0
 0.6
 0
 0
Total reclassification adjustment for amounts realized in net income109.1
 (38.2) 70.9
 70.3
 0.6
 0
 0
76.1
 (26.8) 49.3
 48.7
 0.6
 0
 0
Total other comprehensive income (loss)(180.7) 59.6
 (121.1) (114.4) (9.0) (0.5) 2.8
242.5
 (85.1) 157.4
 161.1
 (0.6) 0.4
 (3.5)
Balance at June 30, 2015$1,393.3
 $(491.3) $902.0
 $907.5
 $(7.5) $(0.8) $2.8
Balance at June 30, 2016$1,477.0
 $(519.2) $957.8
 $970.1
 $(8.8) $(1.1) $(2.4)
In an effort to manage interest rate risk, we entered into forecasted transactions on each of Progressive'sProgressive’s outstanding debt issuances. Upon issuing the debt, the gains (losses) recognized on thesethe effective cash flow hedges are recorded as unrealized gains (losses) in accumulated other comprehensive income and amortized into interest expense over the term of the related debt issuance. We expect to reclassify $1.7expenses of $1.0 million (pretax) into income during the next 12 months, related to net unrealized gainslosses on forecasted transactions.
Note 1011 Litigation — The Progressive Corporation and/or its insurance subsidiaries are named as defendants in various lawsuits arising out of claims made under insurance policies written by our insurance subsidiaries in the ordinary course of business. We consider all legal actions relating to such claims in establishing our loss and loss adjustment expense reserves.
In addition, The Progressive Corporation and/or its insurance subsidiaries are named as defendants in a number of class action or individual lawsuits arising outthat challenge certain of the operations of the insurance subsidiaries.
These cases include those alleging damages as a result of our subsidiaries’ practices in evaluating or paying medical or injury claims or benefits, including, but not limited to, personal injury protection, medical payments, and bodily injury benefits; the utilization, content, or appearance of policy documents; labor rates paid to auto body repair shops; wage and hour issues; and cases challenging other aspects of our subsidiaries’ claims or marketing practices or other business operations. Other insurance companies face many of these same issues.
The nature and volume of litigation to which The Progressive Corporation is subject is similar to that which was disclosed in Note 12 – Litigation in our 2016 Annual Report to Shareholders.
We plan to contest the pending lawsuits vigorously, but may pursue settlement negotiations in some cases, if appropriate. The outcomes of pending cases are uncertain at this time. We establish accruals for these lawsuits when it is probable that a loss has been or will be incurred and we can reasonably estimate its potential loss exposure, which may include a range of loss. As to lawsuits infor which the loss is not considered bothneither probable andor estimable, or is considered probable but not estimable, we do not establish an accrual. Nevertheless, we continue to evaluate this pending litigation to determine if any losses not deemed probable and estimable become so, at which point we would establish an accrual in accordance with current accounting guidance.at our best estimate of the loss or range of loss.


With respect to our pending lawsuits that are not related to claims under insurance policies, the accruals that we have established, if any, were not material at June 30, 2017 or 2016, and there were not any material settlements during the first six months of 2017 or 2016. With respect toFor most of these lawsuits, we do not consider any losses to be both probable and estimable, and we are unable to estimate a meaningful range of loss, if any, at this time, due to the factors discussed in Note 12 -– Litigation in our 20152016 Annual Report to Shareholders. In the event that any one or more of these lawsuits results in a substantial judgment against or settlement by Progressive,us, or if our accruals (if any) prove to be inadequate by a significant amount, the resulting liability could have a material adverse effect on our consolidated financial condition, cash flows, and/or


results of operations. For a further discussion on our pending litigation and related reserving policies, see Note 12 -– Litigation in our 20152016 Annual Report to Shareholders.
Note 1112 Redeemable Noncontrolling Interest — In connection with the April 2015 acquisition of a controlling interest in ARX, in the second quarter of 2015, The Progressive Corporation entered into a stockholders’ agreement with the other ARX stockholders. As part of the stockholders’ agreement, the minority ARX shareholders have the right to “put” their ARX shares to Progressive in two installments, one in early 2018 and one in early 2021, and Progressive has the ability to "call"“call” a portion of the outstanding shares shortly thereafter. If these rights are exercised in full when available, our ownership stake in ARX capital stock will exceed 80% in 2018 and will reach 100% in 2021.
Since these securities are redeemable upon the occurrence of an event that is not solely within the control of Progressive, we have recorded the redeemable noncontrolling interest (NCI) as mezzanine equity on our consolidated balance sheets, which represents the minority shares at the current estimated purchase price pursuant to the put and call provisions of the stockholders'stockholders’ agreement. The estimated purchase price is based, in part, on the change in tangible net book value of ARX from December 31, 2014 to the putbalance sheet dates.
In addition to these minority shares, at June 30, 2017, ARX employees hold options to purchase 22,550 ARX shares. These options and call dates.
No redeemable noncontrolling interest (NCI) existed priorany shares issued upon exercise are subject to the ARX acquisition on April 1, 2015. stockholders’ agreement, including the right to “put” these shares to Progressive, as described above. Until the options are exercised, the underlying obligation of approximately $32.4 million is not recorded as part of redeemable NCI.
The changes in the components of redeemable NCI during the six months ended June 30, 20162017 and 2015,2016, and the year ended December 31, 2015,2016, were:
($ in millions)June 30, 2016 June 30, 2015 December 31, 2015
Balance, Beginning of period$464.9
 $0
 $0
Fair value at date of acquisition0
 411.5
 411.5
Net income attributable to NCI4.5
 5.2
 32.9
Other comprehensive loss attributable to NCI3.5
 (2.8) (1.1)
Purchase of shares from NCI0
 (12.6) (12.6)
Change in redemption value of NCI(6.1) 32.1
 34.2
Balance, End of period$466.8
 $433.4
 $464.9
The decrease in the redemption value of the noncontrolling interest during 2016 was due in part to a decrease in ARX's tangible net book value as a result of the exchange transaction that occurred during the second quarter 2016 (see Note 1 - Basis for Presentation for further discussion). The entity disposed of in the exchange transaction had more tangible assets than the entity acquired.
(millions)June 30, 2017
 June 30, 2016
 December 31, 2016
Balance, Beginning of period$483.7
 $464.9
 $464.9
Net income attributable to NCI11.1
 4.5
 26.2
Other comprehensive income (loss) attributable to NCI2.2
 3.5
 (3.2)
Exercise of employee stock options3.4
 0
 0
Change in redemption value of NCI1.4
 (6.1) (4.2)
Balance, End of period$501.8
 $466.8
 $483.7
Note 1213 Goodwill and Intangible Assets
Goodwill
During the second quarter 2016,2017, the carrying amount of goodwill increased $1.8$3.3 million as a result of the ARX exchange transaction discussedacquisition of a small excess and surplus lines insurance company, which will provide us flexibility in Note 1-Basis of Presentation. There were noour Commercial Lines business going forward. Goodwill recorded at June 30, 2017, was $452.7 million. No accumulated goodwill impairment charges recognized during the six months ended June 30, 2016 and 2015, and the year ended December 31, 2015. Additionally, there were no triggering events during 2016 that would have required a change to the carrying amount of goodwill.losses exist.


Intangible Assets
The following table is a summary of the net carrying amount of other intangible assets as of June 30, 20162017 and 2015,2016, and December 31, 2015:2016:
($ in millions)June 30, 2016 June 30, 2015 December 31, 2015
(millions)June 30, 2017
 June 30, 2016
 December 31, 2016
Intangible assets subject to amortization$451.4
 $513.6
 $482.5
$389.4
 $451.4
 $420.4
Indefinite lived intangible assets1
12.4
 12.4
 12.4
Indefinite-lived intangible assets1
12.4
 12.4
 12.4
Total$463.8
 $526.0
 $494.9
$401.8
 $463.8
 $432.8
1Indefinite-lived intangible assets are comprised of state insurance and agent licenses. State insurance licenses were previously subject to amortization under superseded accounting guidance and have $0.6 million of accumulated amortization for all periods presented.



Intangible assets subject to amortization consisted of the following:
($ in millions)June 30, 2016 June 30, 2015 December 31, 2015
(millions)June 30, 2017 June 30, 2016 December 31, 2016
CategoryGross Carrying Amount
Accumulated Amortization
Net Carrying Amount
 Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
 Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
 Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
 Gross Carrying Amount
Accumulated Amortization
Net Carrying Amount
Policies in force$256.2
$45.9
$210.3
 $256.2
$9.2
$247.0
 $256.2
$27.5
$228.7
$256.2
$82.4
$173.8
 $256.2
$45.9
$210.3
 $256.2
$64.1
$192.1
Agency relationships159.2
14.2
145.0
 159.2
2.8
156.4
 159.2
8.5
150.7
159.2
25.6
133.6
 159.2
14.2
145.0
 159.2
19.9
139.3
Software rights79.1
13.4
65.7
 79.1
2.8
76.3
 79.1
8.2
70.9
79.1
24.1
55.0
 79.1
13.4
65.7
 79.1
18.8
60.3
Trade name34.8
4.4
30.4
 34.8
0.9
33.9
 34.8
2.6
32.2
34.8
7.8
27.0
 34.8
4.4
30.4
 34.8
6.1
28.7
Total$529.3
$77.9
$451.4
 $529.3
$15.7
$513.6
 $529.3
$46.8
$482.5
$529.3
$139.9
$389.4
 $529.3
$77.9
$451.4
 $529.3
$108.9
$420.4
Amortization expense was $15.6$15.5 million and $31.1$31.0 million for the three and six months ended June 30, 20162017, compared to $15.6 million and $15.7$31.1 million forduring the three and six months ended June 30, 2015; there was no amortization expense incurred in the first quarter 2015.same periods last year.
Note 1314 New Accounting Standards
Issued

IssuedIn March 2016,2017, the Financial Accounting Standards BoardBoards (FASB) issued an accounting standardstandards update (ASU) related to simplifypremium amortization on purchased callable debt securities. The intent of the accountingstandard is to shorten the amortization period for employee share-based payment transactions. Thiscertain 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, 2016 (2017 for calendar-year companies), with early adoption permitted. Several aspects of the ASU include income tax consequences, classification of awards as either equity or liabilities,2018, and classification on the statement of cash flows. Under provisions of the ASU:
All excess tax benefits and tax deficiencies should be recognized as income tax expense or benefit in the comprehensive income statement (applied prospectively) and classified in the statement of cash flows as an operating activity (applied using either a prospective or retrospective transition method)
Companies are allowed to decide whether or not to record forfeitures of share-based awards when the forfeiture occurs or to record compensation expense over the vesting period net of estimated forfeitures (applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity upon adoption)
Companies are permitted to withhold up to the maximum statutory tax rate and still maintain equity classification of share-based awards (applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity upon adoption)
Companies are required to classify as a financing activity in the statement of cash flows the payment of cash to a taxing authority when the company withholds shares for such purpose (applied retrospectively)

We expect the change in the accounting for the excess tax benefits/deficiencies to impact our results of operations and are currently evaluating the impact of the other provisions of the ASU on our financial condition, cash flows, and results of operations. Over the last three years, the tax benefit, which is currently being recorded in paid in capital, was $16.8 million in 2015, $12.8 million in 2014, and $10.3 million in 2013. We currently record estimated forfeitures over the vesting period and withhold at the minimum statutory tax rate, and we do not anticipate making any changes upon adoption of the ASU.

In June 2016, the FASB released 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 (2020years. Since we have historically used a yield-to-worst scenario for calendar-year companies), with early adoption permissible (including interim periods withinour securities that fiscal year) beginning after December 15, 2018 (2019 for calendar-year companies). We are currently evaluatingwere purchased at a premium, and the impact the guidance will have on our financial statements, including the potential impacts of the new allowance account.
Adopted In 2016, we adopted two accounting standard updates that became effective for fiscal years beginning after December 15, 2015. The first was the ASU that clarified guidance around accounting for fees paid in a cloud computing arrangement and amended the accounting treatment for the acquisition of licenses from third-parties for internal use software. Progressive adopted this ASUcall on a prospective basispremium security most often produces the lowest and will apply the guidance for future cloud computing arrangements thatmost conservative yield, we enter into.  Upon adoption, we began including the costs of our fixed-term licenses as part of the total amount of capitalized software developed or acquired for internal use, rather than recording them as prepaid assets, when applicable. Thisdo not expect this standard did notto have a material impact on our results of operations.


The second ASU adopted is related to the accounting for share-based payments when the terms of an employee award can be achieved after the requisite service period. To the extent an equity award contains provisions that permit an employee who leaves the company before the performance targets are reached to receive some or all of the benefits of the award if and as the award later vests, this standard requires companies to recognize the compensation cost during the employee's remaining service period. Since we adopted this ASU prospectively, the requirements only apply to the performance-based restricted stock unit awards granted by Progressive to its executive officers and other select senior managers after January 1, 2016. The amount of expense that was accelerated pursuant to this ASU did not have a materialsignificant impact on our financial condition, cash flows, or results of operationsoperations.
Adopted
On January 1, 2017, we adopted the ASU to simplify the accounting for employee share-based payment transactions. There were several provisions that could be adopted under this ASU. We did not elect to make any changes to our method of recording forfeitures and are continuing to withhold taxes at the minimum statutory tax rate. We did elect, on a retrospective basis, to disclose the payment of cash to a taxing authority for which we withheld shares for this purpose as a financing activity. Lastly, on a prospective basis, during the first six months of 2017, we recognized $8.7 million of excess tax benefits as an income tax benefit in 2016.

our consolidated statements of comprehensive income.


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

I. OVERVIEW
During the second quarter 2016, The Progressive Corporation’s insurance subsidiaries recognized growth in both premiums and policies in force. Companywideforce in the second quarter 2017, compared to the same period last year. During the second quarter 2017, companywide net premiums written and earned increased 13% and 11%14%, respectively, and policies in force grew 7%. Each ofAt the same time, we met our segments contributed to the strong top line growth duringprofitability objective with a 6.8% underwriting margin for the quarter.
For theOn a quarter-over-prior-year quarter basis, net income and comprehensive income attributable to Progressive were up 93% and 61%, respectively. Net income was $367.6 million, or $0.63 per share, and comprehensive income was $450.8 million. Pretax underwriting income was up 144%, partially due to higher written premium per policy on a year-over-year basis, net income declined 47%. Eachreflecting rate increases taken during the second half of our vehicle segments produced less underwriting income2016, as well as lower auto claim frequency in the second quarter 2017. Investment income (e.g., interest and dividends) increased 21% on a quarter-over-prior-year quarter basis, primarily reflecting an increase in average assets as the pretax book yield was 2.3% for the three months ended June 30, 2017 and 2016.
During the second quarter 2017, our total capital position (debt plus equity) increased $740 million, to $12.4 billion. During the quarter, we issued $850 million of 4.125% Senior Notes due 2047 and used $563.7 million of the proceeds to redeem our 6.70% Fixed-to-Floating Rate Junior Subordinated Debentures at par.
A. Insurance Operations
All of our operating segments were profitable during the second quarter 2017. Our Personal Lines underwriting margin was 6.8%, Commercial Lines was 8.4%, and Property business was 1.5%. The special lines products have a seasonal impact on our total Personal Lines combined ratio. Although our special lines products generated underwriting profit during the second quarter 2017, these products unfavorably impacted our total Personal Lines combined ratio by about 0.2 points. Our Property business continues to be impacted by catastrophe losses, which, on an industrywide basis, are well above the long-term average for the first six months of 2017.
Our catastrophe losses for the second quarter 2017 were $235.6 million, or 3.7 points, compared to $216.5 million, or 3.9 points, for the same period last year. Just over half of the catastrophe losses for the second quarter 2017, both on the vehicle and Property businesses, were due to storms in Texas and Colorado. For both the second quarter 2017 and 2016, our companywide prior accident year development had a 0.6 point favorable impact on our companywide combined ratio. Our total personal auto business incurred frequency was down nearly 2%, while incurred severity was up about 3% quarter over prior year quarter. While we priced for the increase in severity, we were not anticipating the decrease in frequency, which contributed to the underwriting profitability in the quarter.
During the second quarter 2017, our Personal Lines, Commercial Lines, and Property segments each contributed to our premium growth and each had solid increases in policies in force.
During the quarter, total new personal auto applications (i.e., issued policies) increased 12% on a quarter-over-prior-year quarter basis, including a 17% increase in our Agency auto business and an 8% increase in our Direct auto business. The personal auto businesses continued to benefit from our competitive product offerings and position in the marketplace. We also continued to experience new business growth in our “Robinsons” (bundled home and auto) customers and completed the countrywide roll-out (excluding Florida, Alaska, and Hawaii) of our new online quoting platform, which we call HomeQuote Explorer. Given our strong underwriting profitability in the Direct business this year, we increased advertising spend in the second quarter 2017. As a result of the higher media spend, we continued to see our new application growth increase through the second quarter. New applications for our special lines products were flat during the second quarter 2017, compared to the same period last year.
During the second quarter 2017, we also expanded distribution of our new Snapshot® mobile app and plan to complete the countrywide roll-out by the end of 2017, pending regulatory approvals. The introduction of the mobile app, which is in addition to the plug-in device, is increasing consumer adoption of Snapshot. Also, during the second quarter 2017, on a trailing 12-month basis, we surpassed $4 billion in Snapshot net premiums written for the first time. This amount includes the premiums from all new and renewal policies written during the last 12 months that at some point in time, during either the current or a prior term of the policy, were enrolled in the Snapshot program, although certain of these policies did not earn a premium discount and, in general, about one third of the policies did not complete the requirements for employing the device or mobile app to track the customer’s driving habits. 


For the Commercial Lines business, new applications decreased 4% on a quarter-over-prior-year quarter basis during the second quarter 2017. Although still down compared to the same period last year, while our Property business reported an underwriting loss this quarter, compared to a profit last year. On a consolidated basis, pretax underwriting profitability decreased 53%, to $175.6 million, for the quarter as compared toduring the second quarter 2015. On a quarter-over-prior-year quarter basis,2017, we experienced greater catastrophe losses and less favorable prior accident year development, which accounted for nearly two-thirdssubstantial improvement over the first quarter 2017, following the lifting of the lower underwriting profit for the quarter. The balance of the decline generally reflected higher frequency and severityrestrictions imposed during the quarter.second half of 2016. In addition, during the quarter, we entered Hawaii, making it the 50th state where we write our commercial auto product.
Comprehensive income increased 30% onThe Property business had a quarter-over-prior-year quarter basis with the35% increase in our investment portfolio's unrealized gains more than offsetting the reduction in underwriting income. Our investment income of $114.6 million was comparable to the second quarter 2015, and realized gains were down 58%, largely due to losses on our derivative positions. During the second quarter, our total capital position (debt plus shareholders' equity) increased $0.5 billion to $10.5 billion, compared to year-end 2015.
A. Insurance Operations
During the second quarter 2016, we realized an increase in net premiums written of 13% on a companywide basis, compared to the prior-year period. Our Agency and Direct Personal Lines businesses increased 8% and 15%, respectively, our Commercial Lines business grew 25%, and our Property business increased 11%. The net premium written growth in our Property business was aided by both the termination of a 10% quota share reinsurance contract in June 2016 and the change in our method of recognizing ceded reinsurance premiums on our catastrophe reinsurance contracts. In June 2015, we changed from one acceptable method to another and began recognizing the ceded premiums on a pro rata basis over the contract period, rather than at the inception of the contract. Excluding these unusual items, our Property business net premiums written would have decreased 4% for the second quarter 2016, and had no impact on net premiums earned. The decrease primarily reflects the loss of a business relationship that occurred after Progressive acquired a controlling interest in ARX.
To analyze growth in our vehicle businesses, we review written premium per policy (i.e., rates), new business applications (i.e., issued policies), and customer retention.
For the second quarter, on a year-over-year basis, written premium per policy increased 4% in our Personal Lines auto businesses and 1% for our special lines products. In addition to mix changes, the personal auto increase reflected rate increases. In our Commercial Lines business, written premium per policy increased 13% for the quarter, continuing to reflect the new business mix shift in our truck product tiers. Adjusting rates is an ongoing process. We will continue to evaluate future rate needs with the goal of having our rate adequacy match the market conditions going forward with the evolving mix of our vehicle businesses.
Personal Lines new applications for the second quarter 2016 increased 15%,2017, compared to the same period last year. AgencyThe growth is largely attributable to state expansion that occurred during the last 12 months in business written by both ARX and DirectProgressive (i.e., renters business), more competitive product offerings, as well as momentum in growing Robinsons through our Platinum agency offering.
During the quarter, on a quarter-over-prior-year quarter basis, our written premium per policy for our personal auto new applicationsbusinesses increased 20% and 17%6%, respectively, whileprimarily reflecting the rate increases taken during the last 12 months. Written premium per policy for our special lines new applicationsproducts increased 6%. We are continuing to benefit from the roll out of3% and increased 11% for our latest auto product models, greater advertising spend, and competitor rate increases. Our Commercial Lines new applications increased 21%, reflecting improved competitiveness frombusiness. The Commercial Lines increase reflects rate actions taken in late 2016 and early 2015,2017, as well as business mix shifting toward some higher average premium business market targets. The written premium per policy for our Property business decreased 7%, reflecting an increase in the renters business, which included lifting some ofhas lower premiums per policy, as well as the previously imposed underwriting restrictions on new business, while competitors were doing the opposite and raising rates.
Duringexchange transaction that occurred in the second quarter 2016, our renewal applications increased 4%where we acquired a residential property insurance company (lower premiums per policy) and divested a commercial property insurance company (higher premiums per policy).
We ended the second quarter 2017 with over 11 million auto policies in Personal Lines and 7% in Commercial Lines. The primary contributor toforce, 8% greater than the Personal Lines increase was our Direct auto business, which grew 10%.same period last year. Our Agency auto and special lines products renewal applications were uppolicies in force grew 2% and 1%, respectively.


We continue to focus our efforts to become a destination insurer by identifying ways to ensure that Progressive is positioned to addressover the lifetime needsend of customers and provide solutions to meet their needs beyond the initial auto insurance product. As part of this vision, we plan to continue to:
increase brand awareness and balance our marketing activity to execute on our multi-channel strategy and drive new business growth and retention across all of our segments;
broaden our offerings to increase multi-product households, including the continued roll out of "Platinum," which provides designated agents with a single offering that combines home insurance from ASI and auto insurance from Progressive, as well as partnering with unaffiliated insurance providers to offer other insurance products to our customers, such as homeowners, flood, classic car, special event, travel, pet, life, ID protection, and more; and
roll out our most recent auto product design, which introduced improved segmentation and more attractive pricing and features for our "Robinsons" (i.e., bundled auto and homeowners); we are continually evolving our product models and introduced our newest product model in one state during June with additional states to be added throughout the remainder of this year and into 2017.
During the quarter, we continued to offer coverage for drivers of Transportation Network Companies (TNCs), which is a personal policy endorsement that fills most of the coverage gap between a personal auto policy held by the driver and the commercial coverage held by a TNC, such as Uber or Lyft. This coverage is being offered in Texas. In addition, during the second quarter ourlast year and Commercial Lines business begangrew 4%. On a relationship with Uber by launching a pilot program, also in Texas, to provide commercial auto coverage to Uber.

Year-over-yearyear-over-year basis, total Personal Lines increased policies in force in our vehicle businesses grew 6%, with Personal Lines growing 6%by nearly 920,000 policies and Commercial Lines growing 11%.increased policies by just over 25,000. Our Direct auto and Agency auto businesses grew 11% and 4%, respectively, and our special lines products grew 3%Property segment reported just over last year. At June 30, 2016, we had 14.5 million Personal Lines policies in force, about 715,000 more policies in force than at the end of 2015, and Commercial Lines added about 45,000 policies in force during the first half of the year.

At June 30, 2016, our Property business reported nearly 1.21.3 million policies in force, which is about 100,000 policies in force higher than at December 31, 2015. The primary driveran 11% increase over the end of this increase related to the second quarter 2016 exchange transaction whereby ARX acquired 100% of the equity interest in an insurance subsidiary (and an affiliated company) that writes personal property insurance and disposed of 100% of the equity interest in an insurance subsidiary (and an affiliated company) that writes commercial property insurance. At the time of the exchange transaction, the acquired company had approximately 96,000 more policies in force than the subsidiary that was disposed of.

last year.
To further grow policies in force, it is critical that we retain our customers for longer periods. Consequently, increasing retention is one of our most important priorities, and our efforts to increase the number of multi-product households continues 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 one measure of customer retention in our vehicle businesses. We have historically disclosedDuring the second quarter 2017, we achieved all-time highs in our changes intotal personal auto policy life expectancyexpectancies 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. Using a trailing 12-month measure, policy life expectancy increased 5% for our Agency auto business and 4% for our Direct auto business, compared to last year. The policy life expectancy for our Commercial Lines business was up 10% and special lines products remained relatively flat, compared to last year.

We also review 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 create more volatility, this measure is more responsive to current experience and can be an indicator of how our retention rates are moving. Our trailing 3-month policy life expectancy at June 30, 2016, on a year-over-year basis, was up 8% in Agency auto and 6% in Direct auto. We continue to maintain our focus on providing customers with more stable rates and other insurance-related products and services they may need over timereflecting continued improvements in our ongoing efforts to increase retention.new business mix and underlying nurture processes.
B. Investments

The fair value of our investment portfolio was $22.4$26.0 billion at June 30, 2016.2017. Our asset allocation strategy is to maintain 0%-25% of our portfolio in Group I securities, with the balance (75%-100%) of our portfolio in Group II securities. We definesecurities (the securities allocated to Group I securities to include:
common equities
nonredeemable preferred stocks


redeemable preferred stocks, except for 50%and II are defined below under Results 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 use the credit ratings from models provided by the National Association of Insurance Commissioners (NAIC), when available, for classifying our residential and commercial mortgage-backed securities (excluding interest-only securities), and credit ratings from nationally recognized statistical rating organizations (NRSRO) for all other debt securities, in determining whether securities should be classified as Group I or Group II.Operations – Investments). At June 30, 2016, 19%2017, 17% of our portfolio was allocated to Group I securities and 81%83% to Group II securities, compared to 20%18% and 80%82%, respectively, at December 31, 2015.2016.
Our recurring investment income generated a pretax book yield of 2.3% for both the second quarter 2016, compared to 2.4% for the second quarter 2015.2017 and 2016. Our investment portfolio produced a fully taxable equivalent (FTE) total return of 1.4%1.3% for the second quarter 2016,2017, compared to (0.1)%1.4% for the same period in 2015.2016. Our fixed-income and common stock portfolios had FTE total returns of 1.3%1.1% and 2.3%3.5%, respectively, for the second quarter 2016,2017, compared to (0.1)%1.3% and 0%2.3% last year. Further detail of our FTE total returns are provided in our Results of Operations-Investments section.
At June 30, 2016,2017, the fixed-income portfolio had a weighted average credit quality of A+ and a duration of 1.82.3 years, compared to A+ and 1.92.2 years at December 31, 2015.2016. We maintain our fixed-income portfolio strategy of investing in high-quality, liquid securities. We remain confident in our preference for shorter duration positioning during times of low interest rates as a means to limit any decline in portfolio value from an increase in rates, and we expect long-term benefits from any return to more substantial yields.
II. FINANCIAL CONDITION
A. Liquidity and Capital Resources
Progressive’s insurance operations create liquidity by collecting and investing premiums from new and renewal business in advance of paying claims. Operations generated positive cash flows of about $1.55$2.0 billion and $1.43$1.6 billion for the first six months of both2017 and 2016, and 2015.respectively.


Our total capital (debt plus shareholders'shareholders’ equity) was $10.5$12.4 billion, at book value, at June 30, 2017, compared to $10.5 billion at June 30, 2016, compared to $10.1 and $11.1 billion at June 30, 2015 and $10.0 billion at December 31, 2015. Our interest expense decreased 2% on a quarter-over-prior-year quarter basis2016. The increase in book value is partially attributable to the issuance of $850 million of 4.125% Senior Notes due 2047 in April 2017 and increased 2% on a year-over-year basis. The decrease$500 million of 2.45% Senior Notes due 2027 in the second quarter partially reflects the decrease in the interest onAugust 2016. In June 2017, we also redeemed our 6.70% Fixed-to-Floating Rate Junior Subordinated Debentures, due 2067 (due toat par, in the repurchases discussed below), while the increase for the year is primarily attributable to theaggregate principal amount of $563.7 million. Our interest expense increased 27% on the outstandingquarter-over-prior-year quarter basis, reflecting these new debt of ARX, which did not become part of our consolidated results until the second quarter 2015.issuances. Our debt-to-total capital ratio, which reflects debt as a percent of debt plus shareholders'shareholders’ equity and excludes redeemable noncontrolling interest, was 27.3% at June 30, 2017, 25.4% at June 30, 2016, and 27.1% at June 30, and December 31, 2015.
During the second quarter 2016, we used $18.2 million of available cash to repurchase $19.8 million in aggregate principal amount of our 6.70% Debentures. In comparison, during the full year 2015, we used $19.3 million in available cash to repurchase $18.4 million in aggregate principal amount of the above referenced Debentures. We currently have outstanding $594.6 million in principal amount of our 6.70% Debentures. Beginning on June 15, 2017, and on each quarterly interest payment date thereafter, we will have the right to redeem the Debentures at par, in whole or in part, at our discretion. If we do not choose to redeem at June 15, 2017, the Debentures will convert from their current fixed interest rate to a variable rate equal to the 3-month LIBOR plus 2.0175%. If not so redeemed, the 6.70% Debentures will become due on June 15, 2037, subject to certain limitations set forth in the Debenture documents. We are evaluating our options with respect to the redemption of the 6.70% Debentures and have not made a decision at this time. In addition to these debt repurchases, the $12.6 million surplus note that was part of our consolidated outstanding debt28.3% at December 31, 2015, was debtofthe subsidiary disposed of in the exchange transaction that occurred during the second quarter 2016 (see Note 1 - Basis of Presentation and Note 4 - Debt for additional discussion).2016.
As part of the stockholders'stockholders’ agreement related to the ARX Holding Corp. acquisition, Progressive has the ability to achieve 100% ownership of ARX by the end of the second quarter of 2021. In addition, the minority ARX shareholders have the right to “put” their ARX shares to Progressive, at various times and in varying amounts, prior to that date. The estimated cost to acquire the additional ARX shares is represented by the redeemable noncontrolling interest reflected on our consolidated balance sheet (see Note 11 -12 – Redeemable Noncontrolling Interest).


Based upon our capital planning and forecasting efforts, we believe that we have sufficient capital resources, cash flows from operations, and borrowing capacity to support our current and anticipated business needs, scheduled principal and interest payments on our debt, payment obligations under the ARX stockholders’ agreement, any declared dividends, and other expected capital requirements. The covenants on The Progressive Corporation'sCorporation’s existing debt securities do not include any rating or credit triggers that would require an adjustment of the interest rate or an acceleration of principal payments in the event our securities are downgraded by a rating agency.
We seek to deploy capital in a prudent manner and use multiple data sources and modeling tools to estimate the frequency, severity, and correlation of identified exposures, including, but not limited to, catastrophic and other insured losses, and other significant business interruptions, to estimate our potential capital needs.
During the first six months of 20162017 and at all times during 2015,2016, our total capital exceeded the sum of our regulatory capital layer plus our self-constructed extreme contingency layer, as described in our Annual Report to Shareholders for the year ended December 31, 2015.2016.
Our available capital allowed us to take several actions to deploy underleveraged capital, including:

Repurchases of our common shares. In accordance with our financial policies, we continued our practice of repurchasingwill repurchase our common shares when it is prudent to do so. We had no open market repurchases of our common shares during the first six months of 2017. We did, however, repurchase shares in conjunction with our incentive compensation plans during 2017. In the second quarter of 2017, the Board of Directors approved a new authorization to repurchase up to 25 million common shares. This authorization canceled and replaced the shares that remained under the Board’s June 2011 authorization. As of June 30, 2016,2017, we had 9.125.0 million shares remaining under our 20112017 Board repurchase authorization. The following table shows our share repurchase activity during the respective periods:
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended June 30, Six Months Ended June 30,
(millions, except per share amounts)2016
 2015
 2016
 2015
2017
 2016
 2017
 2016
Total number of shares purchased1.3
 1.6
 3.6
 4.0
0.1
 1.3
 0.7
 3.6
Total cost$41.8
 $42.2
 $112.1
 $108.1
$2.7
 $41.8
 $24.1
 $112.1
Average price paid per share$32.57
 $27.00
 $31.53
 $26.88
$40.47
 $32.57
 $36.32
 $31.53
 
Dividends. As part of our capital management activities, in February 20162017 and 2015,2016, we paid annual variable dividends of $0.8882$0.6808 per share and $0.6862$0.8882 per share, respectively, which were each declared in December of the prior year.

During the second quarter 2017, we entered into a new line of credit with PNC Bank, National Association (PNC) in the maximum principal amount of $250 million. This line of credit replaced our unsecured discretionary line of credit with PNC in the maximum principal amount of $100 million, which expired on April 30, 2017. Subject to the terms and conditions of the line of credit documents, advances under the current line of credit (if any) will bear interest at a variable rate equal to the higher of PNC’s Prime Rate or the sum of the Federal Funds Open Rate plus 50 basis points. Each advance must be repaid on the 30th day after the advance or, if earlier, on April 30, 2018, the expiration date of the line of credit. Prepayments are permitted without penalty. All advances under the line of credit are subject to PNC’s discretion.


Short-Term Borrowings
We did not engage in short-term borrowings, including any borrowings under our discretionary line of credit, to fund our operations or for liquidity purposes during the six months ended June 30, 20162017 or at any point in 2015.2016. As discussed above, our insurance operations create liquidity by collecting and investing insurance premiums in advance of paying claims. Information concerning our insurance operations can be found below under Results of Operations—Operations – Underwriting, and details about our investment portfolio can be found below under Results of Operations—Operations – Investments.
Our unsecured discretionary line of credit (the "Line of Credit") with PNC Bank, National Association (PNC) in the maximum principal amount of $100 million was renewed during the second quarter 2016. Our prior Line of Credit expired on April 30, 2016. The new Line of Credit has the same terms and conditions as the previous Line of Credit and will expire on April 30, 2017. We had no borrowings under the Line of Credit during 2016 or throughout 2015.
We did not enter into any repurchase commitment transactions during the first six months of 20162017 or 2015,2016, and we had no open repurchase commitments at June 30, 20162017 or 2015,2016, or December 31, 2015.2016.
B. Commitments and Contingencies
Contractual Obligations
During the first six months of 2016,2017, our contractual obligations have not changed materially from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2015.2016.
Off-Balance-Sheet Arrangements
Our off-balance-sheet leverage includes derivative positions, operating leases, and purchase obligations. See the “Derivative Instruments” section of Note 2 -– Investments and of this Management’s Discussion and Analysis for a summary of our derivative activity since year-end 2015.2016. There have been no material changes in the other off-balance-sheet items since the discussion in the notes to the financial statements in Progressive’s Annual Report on Form 10-K for the year ended December 31, 2015.2016.



III. RESULTS OF OPERATIONS – UNDERWRITING
A. GrowthSegment 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.

 Three Months Ended June 30, Six Months Ended June 30,
($ in millions)2016
 2015
 
%
Change
 2016
 2015
 
%
Change
NET PREMIUMS WRITTEN           
Personal Lines           
Agency$2,542.5
 $2,345.7
 8 $5,038.1
 $4,701.8
 7
Direct2,365.6
 2,049.4
 15 4,855.8
 4,229.0
 15
Total Personal Lines4,908.1
 4,395.1
 12 9,893.9
 8,930.8
 11
Commercial Lines724.1
 578.7
 25 1,385.6
 1,109.8
 25
Property302.4
 272.7
 11 473.5
 272.7
 NM
Other indemnity1
0
 (0.4) 100 0
 (0.4) 100
Total underwriting operations$5,934.6
 $5,246.1
 13 $11,753.0
 $10,312.9
 14
NET PREMIUMS EARNED           
Personal Lines           
Agency$2,423.3
 $2,276.4
 6 $4,771.2
 $4,520.9
 6
Direct2,334.8
 2,031.8
 15 4,555.5
 3,987.2
 14
Total Personal Lines4,758.1
 4,308.2
 10 9,326.7
 8,508.1
 10
Commercial Lines593.4
 489.3
 21 1,142.2
 955.7
 20
Property210.3
 198.7
 6 410.3
 198.7
 NM
Other indemnity1
0
 (0.4) 100 0
 (0.4) 100
Total underwriting operations$5,561.8
 $4,995.8
 11 $10,879.2
 $9,662.1
 13
NM = We began reporting our Property business as a segment on April 1, 2015, upon acquisition of a controlling interest in ARX; therefore, the six months ended June 30, 2015 only include results for three months and are not comparable to results reported for the six months ended June 30, 2016.
1The negative written and earned premiums in 2015 represent reinstatement premiums paid to the reinsurers of our professional liability group business pursuant to their reinsurance contracts.
Net premiums written represent the premiums from policies written during the period less any premiums ceded to reinsurers. Net premiums earned, which are a functionOur Personal Lines business writes insurance for personal autos and special lines products (e.g., motorcycles, watercraft, and RVs) and represented about 83% and 85% of theour total net 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, represents all policies under which coverage was in effect as of the end of the period specified. As of June 30, our policies in force were:
(thousands)2016
 2015
 
%
Change
POLICIES IN FORCE     
Vehicle businesses:     
Agency auto4,937.6
 4,753.6
 4
Direct auto5,284.4
 4,744.8
 11
Total auto10,222.0
 9,498.4
 8
Special lines1
4,257.3
 4,127.8
 3
Total Personal Lines14,479.3
 13,626.2
 6
Commercial Lines600.3
 538.4
 11
Property2
1,177.0
 1,054.7
 12
1Includes insurance for motorcycles, ATVs, RVs, manufactured homes, watercraft, snowmobiles, and similar items, as well as a personal umbrella product.
2Includes the addition of approximately 96,000 policies during the second quarter 2016, as a result of the exchange transaction (see Note 1 - Basis of Presentation for further discussion).

To analyze growth in our vehicle businesses, we also review new policies, rate levels, and the retention characteristics of our books of business. The following table shows our year-over-year changes in new and renewal applications (i.e., issued policies):
 Growth Over Prior Year
 Quarter Year-to-date
 2016 2015 2016 2015
APPLICATIONS       
Personal Lines:       
New15% 7% 15% 7%
Renewal4% 2% 3% 3%
Commercial Lines:       
New21% 10% 22% 14%
Renewal7% 1% 5% 2%
Property:       
New11% NA NA NA
Renewal1% NA NA NA
NA = We began reporting our Property business as a segment on April 1, 2015, upon acquisition of a controlling interest in ARX; therefore, thefirst six months ended June 30, 2015 only include results for three monthsof 2017, respectively, compared to 83% and are not comparable to results reported84% for the six months ended June 30, 2016.

The year-over-year growth in new applications insame periods last year. We currently write our Personal Lines business forproducts in all 50 states. We also offer our personal auto product (not special lines products) in the District of Columbia.

Personal auto represented 89% and 92% of our total Personal Lines net premiums written in the second quarter and year-to-date reflected increasesfirst six months of 2017, respectively, compared to 88% and 91% for the same periods last year. These auto policies are primarily written for 6-month terms. The remaining Personal Lines business is comprised of special lines products, which are written for 12-month terms.

Our Commercial Lines business writes primary liability, physical damage, and other auto-related insurance for automobiles and trucks owned and/or operated predominantly by small businesses. Our Commercial Lines business represented 13% and 11% of our total net premiums written in the second quarter and first six months of 2017, respectively, compared to 12% for the same periods last year. During the second quarter 2017, we began writing Commercial Lines business in Hawaii and are now writing Commercial Lines in all 50 states; we do not write Commercial Lines in the District of Columbia. The majority of our policies in this business are written for 12-month terms.

Our Property business writes residential property insurance (e.g., single family homes, condominium unit owners, rental coverage) for homeowners, other property owners, and renters. Our Property business represented 4% of our total net premiums written in both our Agencythe second quarter and Direct auto businesses, as we continuedfirst six months of 2017, compared to benefit from5% and 4%, respectively, for the roll out of our latest product model, greater advertising spend, and competitor rate increases. The increase in our Agency auto application growth reflected both more quotes and an increase in conversion on those quotes.In addition, we continued to see moresame periods last year. Property primarily consists of the Direct application growth coming from the online quotes insteadoperations of the phone as more consumers are usingARX organization. ARX wholly owns or controls the Internet and mobile devicesinsurance companies that we refer to shop for and buy auto insurance.
The significant increase in our Commercial Lines new application growth reflected strong demand and improved competitiveness in all of our business market targets. We believe that the growth was due to both internal actions (e.g., rate stability and the removal of underwriting restrictions) and competitors' actions (e.g., rate increases and implementation of underwriting restrictions).
The increase in our new Property applications reflects growth in the renters businessaggregate as well as the exchange transaction. The company acquired in the exchange receives significantly more applications than the company disposed of.


We are continuing to focus on our Destination Era strategy to form a deeper relationship with our customers as their insurance needs evolve and on our efforts to further penetrate customer households through cross-selling auto policies with other products, including through our Progressive Home Advantage® (PHA) program, to meet a broad range of customer needs. PHA is the program in which we “bundle” our auto product with property insurance provided by“ASI.” ASI, primarilyprincipally in the Agency channel, or unaffiliatedwrites residential property in 40 states and the District of Columbia and flood insurance carriers in the Direct channel. Bundled products are becoming an integral part of our consumer offerings and an important part of our strategic agenda. These customers represent a sizable segment of the market, and our experience is that they tend to stay with us longer and generally have lower claims costs. An increasing number of our customers, especially Direct auto customers, are now multi-product customers combining their auto insurance with special lines, homeowners, or renters insurance products. As of June 30, 2016, PHA was available to Direct customers nationwide and Agency customers in 3443 states and the District of Columbia. In the Direct channel, PHA is provided by multiple, unaffiliatedProgressive also writes renters insurance providers, as well as by ASI. We offer these PHA products over the phonein 38 states and online on a nationwide basis and through mobile devices in the majority of the country.
We are continuing to deploy the infrastructure that we are developing to support the Platinum offering in our Agency channel. The Platinum product is a home and auto insurance combined offering that provides the agents a single offering with compensation, coordinated policy periods, single event deductible, and other features that meet the needs and desires that our agents have expressed. Platinum is targeted to those agents who have the appropriate customers and believe our bundled offering is a "must have" for their agency. During the second quarter 2016, we saw the bundled home and auto strategy begin to develop a more positive growth trend. At June 30, 2016, there were about 972 agents throughout 23 states that have the Platinum program available to them.
We continue to refine our personal auto segmentation and underwriting models. Our current model features more competitive preferred pricing, more sophisticated pricing for households that insure more than one product through Progressive, and enhancements to Snapshot®, our usage-based insurance program. Snapshotprovides customers the opportunity to improve their auto insurance rates based on their personal driving behavior. Snapshot is currently available to our Agency and Direct auto customers in 48 states plus the District of Columbia; Snapshot is not available in CaliforniaColumbia. Florida and North Carolina due toTexas represented half of the regulatory environment.

We realize the importance of continuing to be a leaderyear-to-date premium volume in the mobile space to allow us to provide consumers the ability to transact all forms of business when and where they want andProperty business. Property policies are generally written on whatever device best suits their needs (e.g., smartphone, tablet). For our auto insurance products, we provide consumers with the direct capability to quote and buy auto insurance, comparison shop, make payments and endorsements, store digital ID cards, report claims, view Snapshot progress, and request roadside assistance, among other things. In addition, much of our Agency-dedicated website, which includes quote/buy, servicing, and reporting capabilities, is accessible to agents through tablet computers.

We also want to be the destination insurer for small business owners. Through our Progressive Commercial AdvantageSM program, we offer our commercial auto customers general liability and business owners policies and workers' compensation coverage written by unaffiliated insurance companies or agencies. The workers' compensation coverage is offered in 45 states, while the other products are offered throughout the continental United States.
We experienced the following changes in written premium per policy:
 Growth Over Prior Year
 Quarter Year-to-date
 2016 2015 2016 2015
WRITTEN PREMIUM PER POLICY       
Personal Lines—auto4% 4% 4% 4%
Commercial Lines13% 8% 12% 6%
Property(7)% NA NA NA
NA = Not applicable; any Property business written by Progressive prior to April 1, 2015 was negligible.
The increased written premium per policy in our personal auto business included higher written premium per policy in both our Agency and Direct auto businesses. In addition to mix changes, the personal auto increase reflected rate increases taken during 2015 and year-to-date 2016. For our Commercial Lines business, the increase in written premium per policy primarily reflected a shift in a mix of business in our truck product tiers. Adjusting rates in our vehicle businesses is a continuous process and we will continue to evaluate future rate needs and react quickly as we recognize changing trends at the state level. The decrease in our written premium per policy for our Property business primarily reflects the disposition of our commercial property business in the exchange transaction along with growth in the renters business.12-month term.


Another important element affecting growth is customer retention. One measure of retention for our vehicle businesses is policy life expectancy, which is our actuarial estimate of the average length of time that a policy (including any renewals) will remain in force before cancellation or lapse in coverage. The following table shows our year-over-year changes in policy life expectancy for our vehicle business using both 3-month and 12-month measures. In addition, we are disclosing our quarterly year-over-year change in our renewal ratio in our personal auto business. The renewal ratio is the percent of policies that have come up for renewal during the quarter that have actually renewed.
 Growth Over Prior Year
 2016 2015
RETENTION MEASURES   
Personal Lines—auto   
Policy life expectancy   
     Trailing 3-months6% (4)%
     Trailing 12-months4% (4)%
 Renewal ratio0.1% (0.1)%
Commercial Lines - policy life expectancy (trailing 12-months)10% 9%
Although the trailing 3-month measure for personal auto 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. The 3-month policy life expectancy in both our Agent and Direct auto business continue to experience the favorable trajectory that began in the latter half of 2015, primarily reflecting a mix shift and our competitive position in the market. In our Commercial Lines business, the increase in policy life expectancy primarily reflects more rate stability and an improved competitive position.
Recognizing the importance that retention has on our ability to continue to grow profitably, we emphasize competitive pricing for a given risk, quality service, and having the products and services available for our customers as their needs change during their insurable life.
B. Profitability
Profitability for our underwriting operations is defined by pretax underwriting profit, which is calculated as net premiums earned plus fees and other revenues less losses and loss adjustment expenses, policy acquisition costs, and other underwriting expenses. We also use underwriting profit margin, which is underwriting profit expressed as a percentage of net premiums earned, to analyze our results. For the respective periods, our underwriting profitability results were as follows:
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended June 30, Six Months Ended June 30,
2016 2015 2016 20152017 2016 2017 2016
Underwriting
Profit (Loss)
 
Underwriting
Profit (Loss)
 
Underwriting
Profit (Loss)
 
Underwriting
Profit (Loss)
Underwriting
Profit (Loss)
 
Underwriting
Profit (Loss)
 Underwriting
Profit (Loss)		 Underwriting
Profit (Loss)
($ in millions)$ Margin   $ Margin   $ Margin   $ Margin  $ Margin   $ Margin   $ Margin   $ Margin  
Personal Lines                              
Agency$84.5
 3.5 % $171.9
 7.6% $255.9
 5.4 % $366.4
 8.1%$205.5
 7.5% $84.5
 3.5 % $455.2
 8.5% $255.9
 5.4 %
Direct73.6
 3.2
 118.1
 5.8
 153.1
 3.4
 186.3
 4.7
162.7
 6.1
 73.6
 3.2
 338.0
 6.5
 153.1
 3.4
Total Personal Lines158.1
 3.3
 290.0
 6.7
 409.0
 4.4
 552.7
 6.5
368.2
 6.8
 158.1
 3.3
 793.2
 7.5
 409.0
 4.4
Commercial Lines31.2
 5.3
 83.2
 17.0
 92.3
 8.1
 161.7
 16.9
56.2
 8.4
 31.2
 5.3
 123.6
 9.4
 92.3
 8.1
Property1
(13.6) (6.5) 1.0
 0.5
 (38.1) (9.3) 1.0
 0.5
3.7
 1.5
 (13.6) (6.5) 11.5
 2.5
 (38.1) (9.3)
Other indemnity2
(0.1)  NM
 (0.4)  NM
 (0.8)  NM
 0
  NM
(0.1) NM
 (0.1) NM
 (0.3)  NM
 (0.8)  NM
Total underwriting operations$175.6
 3.2 % $373.8
 7.5% $462.4
 4.3 % $715.4
 7.4%$428.0
 6.8% $175.6
 3.2 % $928.0
 7.5% $462.4
 4.3 %
1 We began reporting our Property business as a segment on April 1, 2015, when we acquired a controlling interest in ARX; therefore, the six months ended June 30, 2015 only include results for three months and are not comparable to results reported for the six months ended June 30, 2016.
For the three and six months ended June 30, 2016, pretax loss includes $15.62017, amounts include $15.5 million and $31.1$31.0 million, respectively, of amortization expense predominately associated with the acquisition of a controlling interest in ARX, and $15.7$15.6 million and $31.1 million for the three and six months ended June 30, 2015.respective periods last year.
2Underwriting margins for our other indemnity businesses are not meaningful (NM) due to the low levellack of premiums earned by, and the variability of loss costs in, such businesses.
Our underwriting margin decreasedincreased in both the second quarter and the first six months of 20162017, compared to the same periods last year. Catastrophe lossesThis increase was partially driven by our vehicle businesses experiencing lower frequency in the first half of 2017, compared to last year, which was not factored into our pricing, as well as higher earned premium per policy on both our personal and less favorable prior accident year development, which are discussed in more detail below, were thecommercial auto products, on a year-over-year basis, reflecting rate increases taken during 2016 and into 2017.


primary contributors to the decrease in underwriting profitability in our vehicle businesses and to the underwriting loss recognized in our Property business.
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,Three Months Ended June 30,Six Months Ended June 30,
Underwriting Performance1
2016
 2015
 Change
 2016
 2015
 Change
2017
 2016
 Change
2017
 2016
 Change
Personal Lines—Agency                    
Loss & loss adjustment expense ratio76.8
 73.1
 3.7 pts. 75.0
 72.5
 2.5 pts.73.0
 76.8
 (3.8) pts.71.9
 75.0
 (3.1) pts.
Underwriting expense ratio19.7
 19.3
 0.4 pts. 19.6
 19.4
 0.2 pts.
19.5
 19.7
 (0.2) pts.19.6
 19.6
 0 pts.
Combined ratio96.5
 92.4
 4.1 pts. 94.6
 91.9
 2.7 pts.92.5
 96.5
 (4.0) pts.91.5
 94.6
 (3.1) pts.
Personal Lines—Direct                    
Loss & loss adjustment expense ratio77.3
 74.7
 2.6 pts. 76.4
 75.0
 1.4 pts.75.0
 77.3
 (2.3) pts.73.8
 76.4
 (2.6) pts.
Underwriting expense ratio19.5
 19.5
 0 pts. 20.2
 20.3
 (0.1) pts.18.9
 19.5
 (0.6) pts.19.7
 20.2
 (0.5) pts.
Combined ratio96.8
 94.2
 2.6 pts. 96.6
 95.3
 1.3 pts.93.9
 96.8
 (2.9) pts.93.5
 96.6
 (3.1) pts.
Total Personal Lines                    
Loss & loss adjustment expense ratio77.1
 73.9
 3.2 pts. 75.7
 73.7
 2.0 pts.74.0
 77.1
 (3.1) pts.72.8
 75.7
 (2.9) pts.
Underwriting expense ratio19.6
 19.4
 0.2 pts. 19.9
 19.8
 0.1 pts.19.2
 19.6
 (0.4) pts.19.7
 19.9
 (0.2) pts.
Combined ratio96.7
 93.3
 3.4 pts. 95.6
 93.5
 2.1 pts.93.2
 96.7
 (3.5) pts.92.5
 95.6
 (3.1) pts.
Commercial Lines                    
Loss & loss adjustment expense ratio71.8
 61.3
 10.5 pts. 69.2
 61.2
 8.0 pts.69.4
 71.8
 (2.4) pts.68.5
 69.2
 (0.7) pts.
Underwriting expense ratio22.9
 21.7
 1.2 pts. 22.7
 21.9
 0.8 pts.22.2
 22.9
 (0.7) pts.22.1
 22.7
 (0.6) pts.
Combined ratio94.7
 83.0
 11.7 pts. 91.9
 83.1
 8.8 pts.91.6
 94.7
 (3.1) pts.90.6
 91.9
 (1.3) pts.
Property2
        
  
Property      
  
Loss & loss adjustment expense ratio71.3
 67.8
 3.5 pts. 74.5
 67.8
 6.7 pts.63.6
 71.3
 (7.7) pts.61.5
 74.5
 (13.0) pts.
Underwriting expense ratio2
35.2
 31.7
 3.5 pts. 34.8
 31.7
 3.1 pts.34.9
 35.2
 (0.3) pts.36.0
 34.8
 1.2 pts.
Combined ratio2
106.5
 99.5
 7.0 pts. 109.3
 99.5
 9.8 pts.98.5
 106.5
 (8.0) pts.97.5
 109.3
 (11.8) pts.
Total Underwriting Operations3
                    
Loss & loss adjustment expense ratio76.3
 72.4
 3.9 pts. 74.9
 72.3
 2.6 pts.73.1
 76.3
 (3.2) pts.72.0
 74.9
 (2.9) pts.
Underwriting expense ratio20.5
 20.1
 0.4 pts. 20.8
 20.3
 0.5 pts.20.1
 20.5
 (0.4) pts.20.5
 20.8
 (0.3) pts.
Combined ratio96.8
 92.5
 4.3 pts. 95.7
 92.6
 3.1 pts.93.2
 96.8
 (3.6) pts.92.5
 95.7
 (3.2) pts.
Accident year loss & loss adjustment expense ratio4
76.9
 74.2
 2.7 pts. 74.6
 74.2
 0.4 pts.73.7
 76.9
 (3.2) pts.71.4
 74.6
 (3.2) pts.
1Ratios are expressed as a percentage of net premiums earned; fees and other revenues are netted with underwriting expenses in the ratio calculations.
2 We began reporting our Property business as a segment on April 1, 2015, when we acquired a controlling interest in ARX; therefore, the six months ended June 30, 2015 onlyUnderwriting expense and combined ratios include results for three months and are not comparable to results reported for the six months ended June 30, 2016.
Includes amortization expense predominately associated with the acquisition of a controlling interest in ARX of 6.5 points and 6.7 points for the three and six months ended June 30, 2017, respectively, and 7.4 points and 7.6 points for the three and six months ended June 30, 2016, and 7.9 points for both periodsrespectively; the decrease reflects year-over-year growth in 2015.net premiums earned. In addition, 2016 results include 2.1 points and 1.1 points of expense for the second quarter and year-to-date, respectively, related to a loss on an exchange transaction. Excluding both the amortization expense and the loss on the exchange, transaction (See Note 1 - Basis of Presentation for discussion). Excluding these additional expenses, for the three months and six months ended June 30, 2017 and 2016, the Property business would have reported an expense ratio of 25.728.4 and 26.1,25.7, respectively, and combined ratios of 92.0 and 97.0, and 100.6;respectively; for the three and six months ended June 30, 2015,2017 and 2016, the expense ratio would have been 23.829.3 and 26.1 and the combined ratio would have been 91.6.90.8 and 100.6.
3Combined ratios for the other indemnity businesses are not presented separately due to the low level of premiums earned by, and the variability of loss costs in, such businesses. These businesses generated an underwriting loss of $0.1 million for the three months ended June 30, 2016, compared to an underwriting loss of $0.4 million for the three months ended June 30, 2015.2017 and 2016. For the six months ended June 30, 2016,2017, the other indemnity businesses generated an underwriting loss of $0.8$0.3 million, compared to noan underwriting profit or loss of $0.8 million for the same period last year.
4The accident year ratio includesratios 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,Three Months Ended June 30, Six Months Ended June 30,
($ in millions)2016
 2015
 2016
 2015
(millions)2017
 2016
 2017
 2016
Change in net loss and LAE reserves$295.1
 $285.5
 $476.8
 $409.2
$334.0
 $303.4
 $545.5
 $485.1
Paid losses and LAE3,947.9
 3,331.7
 7,679.6
 6,576.6
4,280.9
 3,939.6
 8,332.8
 7,671.3
Total incurred losses and LAE$4,243.0
 $3,617.2
 $8,156.4
 $6,985.8
$4,614.9
 $4,243.0
 $8,878.3
 $8,156.4
Claims costs, our most significant expense, represent payments made, and estimated future payments to be made, to or on behalf of our policyholders, including expenses needed to adjust or settle claims. Claims costs are a function of loss severity and frequency and, for our vehicle businesses, are influenced by inflation and driving patterns, among other factors, some of which are discussed below. In our Property business, claim severity is primarily a function of construction costs and the age of the structure. Accordingly, anticipated changes in these factors are taken into account when we establish premium rates and loss reserves. Loss reserves are estimates of future costs and our reserves are adjusted as underlying assumptions change and information develops.
Our total loss and loss adjustment expense ratio increased 3.9decreased 3.2 points for the second quarter 2016,2017, compared to the second quarter 2015,2016, and 2.62.9 points on a year-to-date basis. Several factors that contributed to the year-over-year change are discussed below and include catastrophe losses, changes in severity and frequency, and less favorable prior accident year reserve. For our Commercial Lines business, the increase in our year-over-year loss and LAE ratio for both the second quarter and first six months wasbasis, primarily due to unfavorable development in both periods of 2016, compared to favorable development last year, as well as increases in our severity due tolower auto frequency during the quarter than expected and net premiums earned growing at a shift in our mix of business to our for-hire transportation and for-hire specialty business market targets.faster pace than losses.
The following table shows our consolidated catastrophe losses incurred during the periods:
 Three Months Ended June 30, Six Months Ended June 30,
($ in millions)2017
 2016
 2017
 2016
        
Vehicle businesses$162.0 $148.4 $223.4 $205.5
        
Property business - excluding ASL132.2 68.1 225.1 113.4
Reinsurance recoverable on ASL1
(58.6) — (101.9) —
Property business - net of ASL73.6 68.1 123.2 113.4
        
     Total catastrophe losses incurred$235.6 $216.5 $346.6 $318.9
Increase to combined ratio3.7 pts.
 3.9 pts.
 2.8 pts. 2.9 pts.
1 Represents the reinsurance recoverable recorded on our losses under our aggregate stop-loss agreement (ASL); including LAE costs, the recoverable would have been $64.8 million and $112.9 million, for the three and six months ended June 30, 2017, respectively.
 Three Months Ended June 30, Six Months Ended June 30,
($ in millions)2016 2015 2016 2015
Vehicle businesses$148.4
 $100.3
 $205.5
 $109.7
Property business68.1
 54.3
 113.4
 54.3
     Total catastrophe losses incurred$216.5
 $154.6
 $318.9
 $164.0
Increase to combined ratio3.9 pts.
 3.1 pts.
 2.9 pts. 1.7 pts.

TheJust over half of the catastrophe losses in 2016the second quarter 2017 were primarily due to flood, wind and hail storms and flooding in Texas. In general,Texas and Colorado. As shown in the table above, for the three and six months ended June 30, 2017, we recorded a reinsurance recoverable on our losses under our aggregate stop-loss agreement in our Property business. This agreement, which became effective on January 1, 2017, covers all current accident year losses, except those from named storms and liability claims, and a portion of the LAE associated with those losses and provides $200 million of coverage if ASI’s applicable loss and LAE fromratio for the full year exceeds 63%. The current recoverable is based on our year-to-date results through June 30, 2017. To the extent our year-to-date loss and LAE ratio falls below 63% at some point during the remainder of the year, we would reverse a single catastrophic event has to exceed $45 million before we are covered by our property catastrophe excessportion of lossthe reinsurance andrecoverable, which would have to exceed $175 million from severe thunderstormsresult in the aggregate for any calendarreported catastrophe losses on our Property business being greater than the actual amount of losses incurred on storms that happened during the periods shown. As a result, due to the structure of the agreement, the amount of the reinsurance recoverable will fluctuate from period-to-period until the end of the year before we would be covered by our catastrophe bond reinsurance. We have responded, and will continue to respond, promptly to catastrophic events when they occur in order to provide exemplary claims service to our customers.full year results are known.
The following discussion of our severity and frequency trends in our vehicle businessespersonal auto business excludes comprehensive coverage because of its inherent volatility, as it is typically linked to catastrophic losses generally resulting from adverse weather. Comprehensive coverage insures against damage to a customer’s vehicle due to various causes other than collision, such as windstorm,windstorms, hail, theft, falling objects, and glass breakage.


Total personal auto incurred severity (i.e., average cost per claim, including both paid losses and the change in case reserves) on a calendar-year basis increased about 3% toand 4% for the three and six months ended June 30, 2016,2017, respectively, compared to the same prior year period.periods last year. Following are the changes we experienced in severity in our auto coverages on a year-over-year basis:
Bodily injury increased less than 1%about 2% for the second quarter and decreased about 1%4% for the first six months of 2016.2017.
Auto property coveragesdamage increased with property damage upabout 6% for both periods, in part reflecting closures of claims inventory at a pace in excess of historical norms.
Collision decreased about 2% for both periods. Collision increased about 4% for the second quarter and 6% year to date.
Personal injury protection (PIP) increased about 1%13% for the second quarter and 6%10% year to date.date, primarily in Michigan.
It is a challenge to estimate future severity, especially for bodily injury and PIP claims, but we continue to monitor changes in the underlying costs, such as medical costs, health care reform, and jury verdicts, along with regulatory changes and other factors that may affect severity.


Our incurred frequency of auto accidents, on a calendar yearcalendar-year basis, increaseddecreased about 2% and 3% for the second quarter 2016three and decreased about 1% for the first six months of 2016,ended June 30, 2017, respectively, compared to the same periods last year. Following are our frequency changes by coverage on a year-over-year basis:
Bodily injury and PIP increased 3% to 4%property damage decreased about 1% for both the second quarter and first six months of 2016.
Auto property damage and Collision increased 1% to 2% in the second quarter and decreased 2% to 3% for the first six months primarily dueof 2017.
Collision decreased about 3% for the second quarter and 4% year to lower levels of weather-related claims in the midwestern and northeastern states during the first quarter.date.
PIP decreased about 6% for both periods.

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, greater vehicle safety, and unemployment rates, versus those resulting from shifts in the mix of our business, to allow us to reserve more accurately for our loss exposure.

The table below presents the actuarial adjustments implemented and the loss reserve development experienced in the following periods on a companywide basis:
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended June 30, Six Months Ended June 30,
($ in millions)2016 2015 2016 20152017 2016 2017 2016
ACTUARIAL ADJUSTMENTS              
Reserve decrease/(increase)       
Reserve decrease (increase)       
Prior accident years$23.9
 $34.4
 $47.7
 $45.5
$45.5
 $23.9
 $70.9
 $47.7
Current accident year(4.6) 29.7
 (2.7) 29.0
(2.9) (4.6) (16.4) (2.7)
Calendar year actuarial adjustment$19.3
 $64.1
 $45.0
 $74.5
$42.6
 $19.3
 $54.5
 $45.0
PRIOR ACCIDENT YEARS DEVELOPMENT              
Favorable/(Unfavorable)       
Favorable (unfavorable)       
Actuarial adjustment$23.9
 $34.4
 $47.7
 $45.5
$45.5
 $23.9
 $70.9
 $47.7
All other development6.9
 54.4
 (77.3) 141.2
(8.5) 6.9
 (145.1) (77.3)
Total development$30.8
 $88.8
 $(29.6) $186.7
$37.0
 $30.8
 $(74.2) $(29.6)
(Increase)/decrease to calendar year combined ratio0.6 pts.
 1.8 pts.
 (0.3) pts. 1.9 pts.
(Increase) decrease to calendar year combined ratio0.6 pts. 0.6 pts. (0.6) pts. (0.3) 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 allowsallow them to adjust the reserves to reflect the current costs. 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. Catastrophe losses for the vehicle businesses would be reflected in the all other development, discussed below, to the extent they related to prior year reserves. We report these actuarial adjustments separately for the current and prior accident years to reflect these adjustments as part of the total prior accident years’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“all other development"development” generally results from the same factors, as discussed below, we are unable to quantify the portion of the reserve development that might be applicable to any one or more of those underlying factors.
Our objective is to establish case and IBNR reserves that are adequate to cover all loss costs, while incurring minimal variation from the date that the reserves are initially established until the losses are fully developed. As reflected in the table above, we experienced favorable development in bothduring the second quarter of 20162017 and 2015.2016. We experienced unfavorable development in the first six months of 20162017 and favorable development in the first six months2016. See Note 6 – Loss and Loss Adjustment Expense Reserves, for a more detailed discussed of 2015.
Year-to-date 2016
Approximately $16 million of the unfavorableour prior year reserve development was attributable to accident year 2015 and $23 million of the unfavorable development was attributable to accident year 2014; we had favorable development for accident year 2013 and prior accident years.
Our commercial and personal auto businesses incurred unfavorable loss and LAE reserve development for the first six months of 2016, partially offset by the favorable loss and LAE reserve development in our Property business of $22 million. In our Property business both the severity and frequency of late reported claims was less than anticipated.
Our personal auto product developed unfavorably $29 million primarily from our Agency auto businesses.
Our Commercial Lines business made up about $22 million of the unfavorable development.


Our personal auto and Commercial Lines businesses incurred unfavorable IBNR loss reserve development, primarily dueWe continue to a higher severity and frequency of late reported claims than anticipated for accident year 2015, driven in part by storms in late December 2015, resulting in a greater number of claims being reported in January 2016 than anticipated.
In addition, our Commercial Lines business experienced unfavorable case reserve development for accident year 2014 primarily due to a higher severity than anticipatedfocus on our largest limits.
Year-to-date 2015
Approximately $152 million of the favorable prior year reserve development was attributable to accident year 2014.
All of our businesses incurred favorable loss and LAE reserve development for the first six months of 2015, including our Property business, which was acquired during the second quarter 2015.
About $105 million, or just over half, of the favorable reserve development was in our personal auto product. Our Agency and Direct auto businesses accounted for approximately 27% and 29%, respectively, of the total favorable reserve development.
Our Commercial Lines business made up about $44 million of the favorable development.
In our personal auto and Commercial Lines businesses, we incurred favorable case loss reserve development primarily in bodily injury and uninsured motorist bodily injury coverages, due to lower than anticipated severity.
In our loss reserve analysis, we workattempting to enhance accuracy and to further our understanding of our loss costs. A detailed discussion of our loss reserving practices, primarily related to our vehicle businesses, can be found in our Report on Loss Reserving Practices, which was filed in a Form 8-K on August 26, 2015.
Underwriting Expenses
Progressive’s underwriting expense ratio (i.e., policy acquisition costs and other underwriting expenses, net of fees and other revenues, expressed as a percentage of net premiums earnedearned) were 0.4 points and 0.50.3 points higherlower for the second quarter and first six months of 2016,2017, respectively, compared to the same periods last year.year, reflecting our underwriting expenses growing at a slower rate than net premiums earned, due in part to an increase in earned premium per policy as a result of rate increases taken over the last 12 months.



C. Personal LinesGrowth

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.

 Growth over prior year
 Quarter Year-to-date
Net premiums written12% 11%
Net premiums earned10% 10%
Policies in force  6%
 Three Months Ended June 30, Six Months Ended June 30,
($ in millions)2017 2016 % Growth 2017 2016 % Growth
NET PREMIUMS WRITTEN           
Personal Lines           
Agency$2,916.4
 $2,542.5
 15 % $5,737.1
 $5,038.1
 14%
Direct2,681.7
 2,365.6
 13
 5,474.3
 4,855.8
 13
Total Personal Lines5,598.1
 4,908.1
 14
 11,211.4
 9,893.9
 13
Commercial Lines857.1
 724.1
 18
 1,518.0
 1,385.6
 10
Property1
290.9
 302.4
 (4) 507.7
 473.5
 7
Total underwriting operations$6,746.1
 $5,934.6
 14 % $13,237.1
 $11,753.0
 13%
NET PREMIUMS EARNED           
Personal Lines           
Agency$2,752.5
 $2,423.3
 14 % $5,384.0
 $4,771.2
 13%
Direct2,650.0
 2,334.8
 14
 5,173.7
 4,555.5
 14
Total Personal Lines5,402.5
 4,758.1
 14
 10,557.7

9,326.7
 13
Commercial Lines671.7
 593.4
 13
 1,317.2
 1,142.2
 15
Property239.1
 210.3
 14
 465.1
 410.3
 13
Total underwriting operations$6,313.3
 $5,561.8
 14 % $12,340.0

$10,879.2
 13%
1Adjusting for the termination of a 10% quota share reinsurance contract in June 2016, net premiums written growth would have been 25% and 26% for the three and six months ended June 30, 2017, respectively, compared to the same periods last year.
       June 30,
(thousands)      2017 2016 % Growth
POLICIES IN FORCE           
Agency auto      5,350.3
 4,937.6
 8%
Direct auto      5,692.6
 5,284.4
 8
Total auto      11,042.9
 10,222.0
 8
Special lines1
      4,356.3
 4,257.3
 2
Personal Lines - total      15,399.2
 14,479.3
 6%
Commercial Lines      625.7
 600.3
 4%
Property      1,311.1
 1,177.0
 11%
Progressive’s Personal Lines business writes1 Includes insurance for personal autosmotorcycles, watercraft, RVs, and recreational vehiclessimilar items.

At June 30, 2017, we had approximately 1.1 million more policies in force than in the comparable period last year. The increase reflects both an increase in new applications and represented about 83%lengthening retention.

Although new policies are necessary to maintain a growing book of business, we continue to recognize the importance of retaining our current customers as a critical component of our total second quarter net premiums written, compared to 84% last year.continued growth. As shown in the tables below, we measure retention by policy life expectancy and the renewal ratio (i.e., the percent of policies that came up for renewal during the year that actually renewed). We currently writedisclose our Personal Lines productschanges in all 50 states.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 offerreview our customer retention for our personal auto products (not special lines 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.


D. Personal Lines
The following table shows our year-over-year changes for our Personal Lines business:
 Growth Over Prior Year
 Quarter Year-to-date
 2017
2016
 2017
2016
APPLICATIONS     
New9 %15% 7%15%
Renewal6 %4% 6%3%
WRITTEN PREMIUM PER POLICY - AUTO6 %4% 6%4%
RETENTION MEASURES - AUTO     
Policy life expectancy     
Trailing 3-months4 %6%   
Trailing 12-months5 %4%   
Renewal ratio(0.1)%0.1%   

In our Personal Lines business, the increase in both new and renewal applications primarily reflected increases in our personal auto products. In the auto businesses, the increase in new applications was primarily attributed to our competitive product offerings and position in the District of Columbiamarketplace, which, in part, reflects our increase in advertising spend during 2017. Rate increases taken in our auto businesses during 2016 and Australia.
Personal auto represented 88% and 91% of our total Personal Lines net premiumsinto 2017 contributed to the increase we experienced in written inpremium per policy. For both the second quarter and first six months of 2016 compared to 87% and 90% in 2015. These auto policies are primarily written for 6-month terms. While still a small percentage of our new business applications, we began writing Agency auto policies primarily for 12-month terms in conjunction with our Platinum offering, which bundles auto and homeowners and offers, but does not require, annual policies. The remaining Personal Lines business is comprised of special lines products (e.g., motorcycles, watercraft, and RVs), which are written for 12-month terms. The special lines products are typically used more during the warmer weather months and, therefore, could have a negative impact on our total Personal Lines underwriting profitability during those periods and a favorable impact during the off season.
Compared to June 30, 2015, policies in force grew 8% for auto and 3% for our special lines products. Net premiums written for personal auto increased 13% and 12% for the three and six months ended June 30, 2016, respectively,2017, written premium per policy increased 5% for new auto business and 6% for renewal auto business, compared to 7% for both periods in 2015. The special lines products net premiums written grew 3% for both the quarter and year-to-date 2016, compared to 4% and 7%, respectively, last year.
Our total Personal Lines business generated combined ratios of 96.7 and 95.6 for the second quarter and first six months of 2016, respectively, compared to 93.3 and 93.5 for the same periods in 2015. In the second quarter of 2016, 44 states were profitable, including ninelast year.

We report our Agency and Direct business results separately as components of our top 10 states, comparedPersonal Lines segment to 46 states (including eightprovide further understanding of our top 10 states) for the same period in 2015. Texas, which is one of our largest states, was unprofitable in both 2016 and 2015 due to the significant catastrophe losses incurred in the state, primarily related to hail, flooding, and wind storms.


The special lines products have a seasonal impact on our total Personal Lines combined ratio. For the second quarter 2016, special lines products had about a 0.1 point unfavorable impact on the total Personal Lines combined ratio, compared to a favorable 0.3 points in the second quarter last year. On a year-to-date basis, the special lines products favorably impacted the Personal Lines ratio 1.0 points and 1.7 points in 2016 and 2015, respectively.
The Personal Lines business is comprised of the Agency business and the Direct business.by distribution channel.
The Agency Business
Growth over prior yearGrowth Over Prior Year
Quarter  Year-to-dateQuarter Year-to-date
Net premiums written8%  7%
Net premiums earned6%  6%
Auto: policies in force   4%
new applications20%  18%
2017
2016
 2017
2016
Auto: new applications17 %20% 16%18%
renewal applications2%  0%7 %2% 6%0%
written premium per policy4%  4%6 %4% 6%4%
Auto: retention measures:   
Auto retention measures:   
policy life expectancy - trailing 3-months8%   6 %8%  
trailing 12-months5%  6 %5%  
renewal ratio0.1%  (0.1)%0.1%  
The Agency business includes business written by more than 35,000 independent insurance agencies that represent Progressive, as well as brokerages in New York and California. New and renewal applications increased on a year-over-year basis during the second quarter 2016,2017, primarily reflecting our competitiveness in the marketplace as a result of our competitive position in the market, due to the roll outmany of our current product model, which features more preferred pricing along with more sophisticated pricing for customers who insure morecompetitors taking higher rate increases than one product through Progressive. Inwe have. During the second quarter 2016,2017, we continued to experience new business application growth and strong policy in force growth in our Robinsons (bundled home and auto) product. During the year, we generated new Agency auto application growth in 4333 states, as well as the Districtincluding six of Columbia. Nine of our top 10 largest Agency states had new application growth in second quarter 2016.states.
Rate increases taken in our Agency auto business in 2015 and year-to-date 2016, contributed to the increase we experienced in written premium per policy. Written premium per policy for new and renewal Agency auto business increased 3% and 5%, respectively, in second quarter 2016, as compared to the same period last year.
On a year-over-year basis, Agency auto quotes were up for the second quarter and first six months as we continued to roll out our latest product model. Our Agency auto rate of conversion (i.e., converting a quote to a sale) increased about 9%7% for the second quarter and 5% for the six months ended June 30, 2017, compared to last year. Written premium per policy for new and renewal Agency auto business increased 5% and 7%, respectively, for the second quarter 2017, and 4% and 7% for the first six months, of 2016.as compared to the same periods last year, primarily reflecting rate increases taken during 2016 and 2017.


The Direct Business
Growth over prior yearGrowth Over Prior Year
Quarter  Year-to-dateQuarter Year-to-date
Net premiums written15%  15%
Net premiums earned15%  14%
Auto: policies in force   11%
new applications17%  17%
2017
2016
 2017
2016
Auto: new applications8 %17% 3%17%
renewal applications10%  9%8 %10% 9%9%
written premium per policy4%  4%5 %4% 6%4%
Auto: retention measures:   
Auto retention measures:   
policy life expectancy - trailing 3-months6%   1 %6%  
trailing 12-months4%  2 %4%  
renewal ratio0%  (0.2)%0%  

The Direct business includes business written directly by Progressive on the Internet, through mobile devices, and over the phone. New and renewal applications increased during the second quarter and the six months ended June 30, 2017, compared to last year, primarily reflecting our competitiveness in the Direct channel continuedmarketplace. During the second quarter 2017, we rolled out countrywide, excluding Florida, Alaska, and Hawaii due to increase year over year reflecting demand by consumers to shop


and buy on mobile devices and the Internet,limited number of carriers in these states, our new online quoting platform, called HomeQuote Explorer, which supports our bundling efforts. New application growth benefited from our increased advertising spend, and competitors raising rates. In second quarter 2016, only sixspend. During the year, we generated new Direct auto application growth in 30 states, did not generate an increase in new business applications, noneincluding five of which were in our top 10 largest Direct states.
Our Direct auto states.
rate of conversion increased about 4% for the second quarter and 3% for the six months ended June 30, 2017, compared to last year. Written premium per policy for new and renewal Direct auto business increased 3%5% and 6%, while written premium per policy for the renewal business increased about 5%respectively, for the second quarter and the first six months, as compared to the prior year.same periods last year, primarily reflecting rate increases taken during the last 12 months.
On a year-over-year basis,Despite the total number of quotesincrease in advertising spend, our expense ratio in the Direct business increased about 12% indecreased on a year-over-year basis for both the second quarter 2016 and 18% year-to-date, as demand continues to increase for consumers using mobile devices andfirst six months of 2017, reflecting growth in net premiums earned exceeding the Internet. The overall Direct business conversion rate saw an increasegrowth in the second quarter 2016, following a decrease in the conversion rate in the first quarter. On a year-to-date basis, our conversion rate was flat compared to prior year.expenses.

D.E. Commercial Lines
 Growth over prior year
 Quarter Year-to-date
Net premiums written25% 25%
Net premiums earned21% 20%
Policies in force  11%
New applications21% 22%
Renewal applications7% 5%
Written premium per policy13% 12%
Policy life expectancy - trailing 12-months10%  
Progressive’s 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, with the majority of our customers insuring approximately two vehicles. Our Commercial Lines business represented about 12% of our total net premiums written for second quarter 2016, and 11% for second quarter 2015. Even though we continue to write our Commercial Lines business predominantly through the Agency channel, net premiums written through the Direct channel increased by 16% for second quarter 2016, compared to the same period last year.
We currently write our Commercial Lines business in 49 states; we do not write Commercial Lines in Hawaii or the District of Columbia. We plan to start writing in Hawaii in late 2016. The majority of our policies in this business are written for 12-month terms.
 Growth Over Prior Year
  Quarter Year-to-date
 2017
2016
 2017
2016
New applications(4)%21% (12)%22%
Renewal applications10 %7% 10 %5%
Written premium per policy11 %13% 8 %12%
Policy life expectancy - trailing 12-months0 %10%   
Our Commercial Lines business operates in the business auto, for-hire transportation, contractor, for-hire specialty, tow, and for-hire livery markets.markets and is primarily written in the agency channel. Commercial Lines continued to experience negative new application growth in the second quarter of 2017; however, we experienced a significant increase in new applications yearsubstantial improvement over year, reflecting strong demand and improved competitiveness in our for-hire transportation and for-hire specialty market targets. The actionsthe first quarter 2017, after we tooklifted the underwriting restrictions at the end of the first quarter. These restrictions were imposed during the last several yearssecond half of 2016 to raiseallow us to focus on targeted growth in more profitable business markets. In addition to the underwriting restrictions, we increased rates during the second half of 2016 and restrict business were ahead of our competition, and we are now seeing our competitors following suit.
A shift to new business with higher average written premiumsinto 2017, which contributed to the increase in our written premium per policy in our Commercial Linesduring the quarter and the year.
The strong new business for second quarter 2016. Written premium per policy for new Commercial Lines business was up approximately 19% as a result of these actions, while renewal business increased 6% over 2015.
Our Commercial Lines business policy life expectancy increasedapplication growth we generated in 2016 reflecting our increased competitive position.
During 2016, we increased our advertising spend for our Commercial Lines business, which was the primary driver for our higher expense ratio for the second quarter and year-to-date 2016, comparedled to the same periods last year.


E. Property
Growth over prior year
Quarter
Net premiums written11 %
Net premiums earned6 %
Policies in force12 %
New applications11 %
Renewal applications1 %
Written premium per policy(7)%
Our Property business writes personal residential property insurance (single family homes, condominium unit owners, rental coverage, etc.) for homeowners, other property owners, and renters and primarily consists of the operations of the ARX organization. Our Property business represented 5% of our companywide net premiums written for the second quarter and 4% year-to-date. Since Progressive acquired a controlling interest in ARX in April 2015, comparisons on a year-over-year basis for the six months ended June 30, 2016 are not meaningful. ARX wholly owns or controls the insurance companies that we refer to in the aggregate as “ASI.” As of quarter end, ASI wrote homeowners and renters insurance, principally in the Agency channel, in 34 states and the District of Columbia for personal property and wrote flood insurance in 37 states and D.C. Property policies are generally written on a 12-month basis.

The significantsolid growth in our net premiums written reflects the termination of a quota share reinsurance contract in 2016 (discussed below) and a revision in the manner of recognizing ceded reinsurance premiums beginning in June 2015. Excluding these unusual items, net premiums written would have decreased 4%, primarily reflecting the loss of a business relationship that occurred after Progressive acquired a controlling interest in ARX. Texas and Florida comprise half of our Property business based on 2016 year-to-date premium volume.

The increase in policies in force reflects the addition of approximately 96,000 policiesrenewal applications during the second quarter 2016, as a result of ARX entering into an exchange transaction in which ARX acquired 100% of the equity interest in an insurance subsidiary (and an affiliated company) that writes personal property insurance in Florida and disposed of 100% of the equity interest in an insurance subsidiary (and an affiliated company) that wrote commercial property insurance in four states (see Note 1 - Basis of Presentation for additional discussion). The commercial property business was not strategic to Progressive and presented a different risk profile from ASI's core personal property business. The exchange allowed us to divest this business to a company with a different strategic direction, while allowing us to grow the personal property business.

The exchange transaction and growth in our renters business contributed to the increase in the new application growth, as well as the decrease in the written premium per policy. The personal property business we acquired writes significantly more applications on average each month, but at much lower rates than the commercial business we disposed of.

The underwriting loss in the Property business for both the second quarter and first six months of 2016,2017. These applications primarily reflected catastrophe losses, mainly dueconsisted of 12-month policies that have started to hail stormsrenew in Texas, and the amortization of certain intangible losses, and a loss on the exchange transaction.

ASI has exposure to catastrophe losses in the states in which it writes business. To help mitigate these risks, ASI purchases reinsurance from unaffiliated reinsurance companies (most of which are “A” rated by A.M. Best) and from a reinsurance company established as part of a catastrophe bond transaction. In addition, ASI purchases state-mandated hurricane reinsurance in Florida. ASI cedes approximately 15% of the direct premiums written by it under these catastrophe reinsurance programs and about 15% through its other reinsurance programs, including 8% of direct premiums written ceded to the National Flood Insurance Program.

During the second quarter 2016, ASI terminated its 10% quota share reinsurance contract. Although this decision does not change the excess reinsurance philosophy used by ASI, given Progressive's capital position, the quota share arrangement was no longer needed to provide capital to help ASI maximize available growth opportunities. Net premiums written increased $70.3 million during the second quarter 2016 as a result of the termination; there was no impact on our results of operations.2017.


F. Other IndemnityProperty
Our other indemnity businesses consist of managing
 Growth Over Prior Year
 Quarter 
Year-to-date1
 2017
2016
 2017
New applications35 %11 % 33 %
Renewal applications19 %1 % 20 %
Written premium per policy(7)%(7)% (8)%
1 We are not reporting results for 2016 since the year-over-year results are not comparable to the same period in 2015 due to the fact that we only began reporting our run-off businesses, includingProperty business as a segment on April 1, 2015, and, therefore, the run-off of our professional liability businesses. We only had five professional liability policies in force as ofsix months ended June 30, 2015 only include three months of results.
Our Property business writes residential property insurance for homeowners, other property owners, and renters primarily in the Agency channel. While the significant growth in new applications was aided by the exchange transaction in June of last year, it is largely attributable to state expansion that occurred during the last 12 months in both Property business written by ARX and Progressive’s renters business, more competitive product offerings, as well as momentum in growing Robinsons through our Platinum agency offering. As a result of the exchange, ARX’s insurance subsidiaries started writing more residential property insurance in June 2016, although we continue to process claims on expired policies.which has significantly more applications and lower premiums per policy than the commercial property insurance it stopped writing.
G. 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 auto insurance procedures/plans (CAIP) and commission-based businesses. 

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.year. At June 30, 20162017 and 2015,2016, and December 31, 2015,2016, we reported net deferred tax liabilities. At June 30, 20162017 and 2015,2016, and December 31, 2015,2016, we had net current income taxes payable of $17.9 million, $15.0 million, $21.7 million, and $25.1$41.2 million, respectively, which were reported as part of “other“other liabilities."”
There were no material changes in our uncertain tax positions during the quartersix months ended June 30, 2016.2017.






IV. RESULTS OF OPERATIONS – INVESTMENTS
A. Investment Results
We report total return to reflect more accurately our management philosophy governing the portfolio and our evaluation of investment results. The fully taxable equivalent (FTE) total return includes recurring investment income, adjusted to a fully taxable amount for certain securities that receive preferential tax treatment (e.g., municipal securities), net realized gains (losses) on securities, and changes in net unrealized gains (losses) on investments.

Our investment portfolio produced aan FTE total return of 1.4%1.3% for the three months ended June 30, 2016,2017, compared to (0.1)%1.4% for the same period in 2015.2016. Our fixed-income and common stock portfolios had FTE total returns of 1.3%1.1% and 2.3%3.5%, respectively, for the three months ended June 30, 2016,2017, and (0.1)%1.3% and 0%2.3%, for the same period in 2015. The higher2016. Although our fixed-income total returns infor the quarters ended June 30, 2017 and 2016 were similar, the drivers of those returns were somewhat different. During the second quarter of 2016, as2017, the U.S. treasury yield curve flattened, pushing short rates up and longer rates a little lower, while credit spread compression generated most of the increase in the valuation of our securities. Additionally, the higher yields on short-term securities also added to our returns for the quarter. Strong returns in common and preferred stocks during the first six months of 2017, compared to the second quarterfirst six months of 2015, reflect a general decline2016, provided the increase in interest rates and narrowing of credit spreads (additional yield on non-treasury bonds relative to comparable treasury securities similar in maturity), which resulted in increased valuations. The higher common stockour total portfolio return for the second quarter ofyear. In 2016, compared to the second quarter of 2015, reflected a higher overall equity market return during the quarter.U.S. treasury rates and risk premium pricing both declined.

The following summarizes investment results for the periods ended June 30:
Three Months Six MonthsThree Months Six Months
2016
 2015
 2016 20152017
 2016
 2017 2016
Pretax recurring investment book yield (annualized)2.3% 2.4 % 2.3% 2.4%2.3% 2.3% 2.3% 2.3%
Weighted average FTE book yield (annualized)2.5% 2.7 % 2.6% 2.7%2.5% 2.5% 2.6% 2.6%
FTE total return:              
Fixed-income securities1.3% (0.1)% 2.5% 0.9%1.1% 1.3% 2.2% 2.5%
Common stocks2.3% 0 % 4.1% 1.7%3.5% 2.3% 9.8% 4.1%
Total portfolio1.4% (0.1)% 2.7% 1.0%1.3% 1.4% 3.1% 2.7%



A further break-down of our FTE total returns for our portfolio, including theany net gains (losses) on our derivative positions, for the periods ended June 30, follows: 
Three Months Six MonthsThree Months Six Months
2016
 2015
 2016 20152017
 2016
 2017 2016
Fixed-income securities:              
U.S. Treasury Notes0.4 % 0.8 % 0.6 % 0.8 %0.8% 0.4 % 1.4% 0.6 %
Municipal bonds1.7 % (0.1)% 3.5 % 1.1 %1.6% 1.7 % 3.4% 3.5 %
Corporate bonds1.8 % (0.6)% 4.6 % 1.5 %1.0% 1.8 % 2.0% 4.6 %
Commercial mortgage-backed securities2.1 % (0.6)% 3.8 % 1.1 %1.5% 2.1 % 2.8% 3.8 %
Collateralized mortgage obligations1.0 % 0.4 % 1.3 % 1.0 %1.3% 1.0 % 2.4% 1.3 %
Asset-backed securities1.1 % 0.3 % 1.4 % 0.7 %
Other asset-backed securities and home-equity bonds0.8% 1.1 % 1.4% 1.4 %
Agency residential pass-through obligations1.1 % (0.9)% 3.0 % (0.9)%0.8% 1.1 % 1.3% 3.0 %
Agency debt(0.7)% 0.1 % 0 % 0.1 %0.7% (0.7)% 1.1% 0 %
Preferred stocks3.9 % 0 % 4.1 % 2.2 %4.2% 3.9 % 9.6% 4.1 %
Common stock portfolios:              
Indexed2.4 % 0.2 % 3.8 % 2.1 %3.4% 2.4 % 10.0% 3.8 %
Actively managed0.9 % (1.0)% 9.8 % (0.5)%5.3% 0.9 % 7.5% 9.8 %



B. Portfolio Allocation
The composition of the investment portfolio at June 30, 20162017 and 2015,2016, and December 31, 20152016 was: 
($ in millions)
Fair
Value

 
% of
Total
Portfolio

 
Duration
(years)

 
Rating1
Fair
Value

 
% of
Total
Portfolio

 
Duration
(years)

 
Rating1
June 30, 2017      
Fixed maturities$18,388.1
 70.8% 2.6
 A+
Nonredeemable preferred stocks783.1
 3.0
 3.6
 BBB-
Short-term investments3,729.7
 14.4
 <0.1
 AA
Total fixed-income securities22,900.9
 88.2
 2.3
 A+
Common equities3,077.5
 11.8
 na
 na
Total portfolio2,3
$25,978.4
 100.0% 2.3
 A+
June 30, 2016            
Fixed maturities$13,589.5
 60.7% 2.3
 A$13,589.5
 60.7% 2.3
 A
Nonredeemable preferred stocks858.5
 3.8
 3.0
 BBB-858.5
 3.8
 3.0
 BBB-
Short-term investments5,166.4
 23.1
 <0.1
  AA+5,166.4
 23.1
 <0.1
  AA+
Total fixed-income securities19,614.4
 87.6
 1.8
 A+19,614.4
 87.6
 1.8
  A+
Common equities2,765.4
 12.4
 na
 na2,765.4
 12.4
 na
 na
Total portfolio2,3
$22,379.8
 100.0% 1.8
 A+$22,379.8
 100.0% 1.8
  A+
June 30, 2015      
Fixed maturities$15,589.0
 75.7% 2.0
 A+
Nonredeemable preferred stocks772.3
 3.8
 2.5
 BB+
Short-term investments1,669.3
 8.1
 <0.1
  AA
Total fixed-income securities18,030.6
 87.6
 1.9
 A+
Common equities2,546.8
 12.4
 na
 na
Total portfolio2,3
$20,577.4
 100.0% 1.9
 A+
December 31, 2015      
December 31, 2016      
Fixed maturities$15,332.2
 73.2% 2.1
 A+$16,243.8
 69.2% 2.6
 A+
Nonredeemable preferred stocks782.6
 3.7
 2.6
 BBB-853.5
 3.6
 3.1
 BBB-
Short-term investments2,172.0
 10.4
 <0.1
  A+3,572.9
 15.2
 0.2
 AA-
Total fixed-income securities18,286.8
 87.3
 1.9
 A+20,670.2
 88.0
 2.2
 A+
Common equities2,650.5
 12.7
 na
 na2,812.4
 12.0
 na
 na
Total portfolio2,3
$20,937.3
 100.0% 1.9
 A+$23,482.6
 100.0% 2.2
 A+
na = not applicable            
1Represents ratings at period end. Credit quality ratings are assigned by nationally recognized statistical rating organizations. To calculate the weighted average credit quality ratings, we weight individual securities based on fair value and assign a numeric score of 0-5, with non-investment-grade and non-rated securities assigned a score of 0-1. To the extent the weighted average of the ratings falls between AAA and AA+, we would assign an internal rating of AAA-.
2Our portfolio reflects the effect of unsettled security transactions and collateral on open derivative positions; at June 30, 2017 and 2016, and 2015, $246.9December 31, 2016, we had $287.1 million, $246.9 million, and $159.7$27.8 million, respectively, were included in "other liabilities" and $23.1 million was in "other assets" at December 31, 2015.“other liabilities.”
3The total fair value of the portfolio at June 30, 20162017 and 2015,2016, and December 31, 20152016, included $0.6$1.1 billion, $0.7$0.6 billion, and $1.3 billion, respectively, of securities held in a consolidated, non-insurance subsidiary of the holding company, net of any unsettled security transactions.

During the first six months of 2016, we increased our short-term holdings and decreased our U.S. Treasury portfolio. There were two primary factors that contributed to this shift in portfolio allocation. First, at the close of 2015, we held a large position in U.S. Treasuries that matured in the first quarter of 2016. We reinvested these maturities in short-term securities. Second, as interest rates declined during the first quarter, we reduced our portfolio duration by roughly 0.1 years by selling some longer-dated U.S. Treasuries and investing the proceeds in our short-term portfolio.

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 as definedto 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 Overview – Investments section and as reflected in the following tables. 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 at June 30, 20162017 and 2015,2016, and December 31, 2015:2016: 
($ in millions)
Fair
Value

 
% of
Total
Portfolio

June 30, 2017   
Group I securities:   
Non-investment-grade fixed maturities$387.6
 1.5%
Redeemable preferred stocks1
144.5
 0.6
Nonredeemable preferred stocks783.1
 3.0
Common equities3,077.5
 11.8
Total Group I securities4,392.7
 16.9
Group II securities:   
Other fixed maturities2
17,856.0
 68.7
Short-term investments3,729.7
 14.4
Total Group II securities21,585.7
 83.1
Total portfolio$25,978.4
 100.0%
June 30, 2016   
Group I securities:   
Non-investment-grade fixed maturities$510.6
 2.3%
Redeemable preferred stocks1
154.4
 0.7
Nonredeemable preferred stocks858.5
 3.8
Common equities2,765.4
 12.4
Total Group I securities4,288.9
 19.2
Group II securities:   
Other fixed maturities2
12,924.5
 57.7
Short-term investments5,166.4
 23.1
Total Group II securities18,090.9
 80.8
Total portfolio$22,379.8
 100.0%
December 31, 2016   
Group I securities:   
Non-investment-grade fixed maturities$356.2
 1.5%
Redeemable preferred stocks1
135.3
 0.6
Nonredeemable preferred stocks853.5
 3.6
Common equities2,812.4
 12.0
Total Group I securities4,157.4
 17.7
Group II securities:   
Other fixed maturities2
15,752.3
 67.1
Short-term investments3,572.9
 15.2
Total Group II securities19,325.2
 82.3
Total portfolio$23,482.6
 100.0%
($ in millions)
Fair
Value

 
% of
Total
Portfolio

June 30, 2016   
Group I securities:   
Non-investment-grade fixed maturities$510.6
 2.3%
Redeemable preferred stocks1
154.4
 0.7
Nonredeemable preferred stocks858.5
 3.8
Common equities2,765.4
 12.4
Total Group I securities4,288.9
 19.2
Group II securities:   
Other fixed maturities2
12,924.5
 57.7
Short-term investments5,166.4
 23.1
Total Group II securities18,090.9
 80.8
Total portfolio$22,379.8
 100.0%
June 30, 2015   
Group I securities:   
Non-investment-grade fixed maturities$676.8
 3.3%
Redeemable preferred stocks1
172.8
 0.8
Nonredeemable preferred stocks772.3
 3.8
Common equities2,546.8
 12.4
Total Group I securities4,168.7
 20.3
Group II securities:   
Other fixed maturities2
14,739.4
 71.6
Short-term investments1,669.3
 8.1
Total Group II securities16,408.7
 79.7
Total portfolio$20,577.4
 100.0%
December 31, 2015   
Group I securities:   
Non-investment-grade fixed maturities$611.7
 2.9%
Redeemable preferred stocks1
155.1
 0.7
Nonredeemable preferred stocks782.6
 3.7
Common equities2,650.5
 12.7
Total Group I securities4,199.9
 20.0
Group II securities:   
Other fixed maturities2
14,565.4
 69.6
Short-term investments2,172.0
 10.4
Total Group II securities16,737.4
 80.0
Total portfolio$20,937.3
 100.0%
1Includes non-investment-grade redeemable preferred stocks of $82.3 million, $72.7 million, $73.9 million, and $75.9$78.7 million at June 30, 20162017 and 2015,2016, and December 31, 2015,2016, respectively.
2Includes investment-grade redeemable preferred stocks, with cumulative dividends, of $62.2 million, $81.7 million, $98.9 million, and $79.2$56.6 million at June 30, 20162017 and 2015,2016, and December 31, 2015,2016, respectively.
To determine the allocation between Group I and Group II, we use the credit ratings from models provided by the National Association of Insurance Commissioners (NAIC) for classifying our residential and commercial mortgage-backed securities, excluding interest-only securities, and the credit ratings from nationally recognized statistical rating organizations (NRSRO) for all other debt securities. NAIC ratings are based on a model that considers the book price of our securities when assessing the probability of future losses in assigning a credit rating. As a result, NAIC ratings can vary from credit ratings issued by NRSROs. Management believes NAIC ratings more accurately reflect our risk profile when determining the asset allocation between Group I and Group II securities.



Unrealized Gains and Losses
As of June 30, 20162017, our portfolio had pretax net unrealized gains, recorded as part of accumulated other comprehensive income, of $1,496.31,795.6 million, compared to $1,401.91,496.3 million and $1,247.81,449.1 million at June 30, 20152016 and December 31, 20152016, respectively.
The net unrealized gains in our fixed-income portfolio increaseddecreased $82.7 million and $197.999.1 million since June 30, 20152016 and increased $116.2 million since December 31, 2015, respectively.2016. The changeschange since June 30, 2016 was affected by sales of securities with net realized gains (most notably in both periods were the resultredeemable and nonredeemable preferred stocks of $62.7 million, corporate debt securities of $28.6 million, and residential mortgage-backed securities of $21.4 million), as well as valuation declines in our U.S. Treasury, municipal, corporate, and commercial mortgage-backed portfolios. The increase since December 31, 2016 was primarily due to valuation increases in mostall fixed-income sectors, including U.S. Treasuries, as interest rates and credit spreads declined,in non-treasury securities tightened, partially offset by sales of securities with net realized gains in our U.S. Treasury, municipal, corporate, and nonredeemable preferred stock, residential mortgage-backed, and corporate portfolios. The contributions by individual sectors to the fixed-income portfolio change in net unrealized gains are discussed below. The net unrealized gains in our common stock portfolio increased $11.7$398.4 million and $50.6$230.3 million since June 30, 20152016 and December 31, 2015,2016, respectively, reflecting changes in the broad equity market over these periods, adjusting for net gains recognized on security sales.
See Note 2 – Investments for a further break-out of our gross unrealized gains and losses.
Other-Than-Temporary Impairment (OTTI)
Net realized gains (losses) may include write-downs of securities determined to have had other-than-temporary declines in fair value. We routinely monitor our portfolio for pricing changes that might indicate potential impairments and perform detailed reviews of securities with unrealized losses. In such cases, changes in fair value are evaluated to determine the extent to which such changes are attributable to: (i) fundamental factors specific to the issuer, such as financial conditions, business prospects, or other factors, (ii) market-related factors, such as interest rates or equity market declines (e.g., negative return at either a sector index level or at the broader market level), or (iii) credit-related losses, where the present value of cash flows expected to be collected is lower than the amortized cost basis of the security.
Fixed-income securities and common equities with declines attributable to issuer-specific fundamentals are reviewed to identify available evidence, circumstances, and influences to estimate the potential for, and timing of, recovery of the investment’s impairment. An other-than-temporary impairment loss is deemed to have occurred when the potential for recovery does not satisfy the criteria set forth in the current accounting guidance.
For fixed-income investments with unrealized losses due to market- or sector-related declines, the losses are not deemed to qualify as other-than-temporary if we do not have the intent to sell the investments, and it is more likely that we will not be required to sell the investments prior to the periods of time that we anticipate to be necessary for the investments to recover their cost bases. In general, our policy for common equity securities with market- or sector-related declines is to recognize impairment losses on individual securities with losses we cannot reasonably conclude will recover in the near term under historical conditions when: (i) we are able to objectively determine that the loss is other-than-temporary, or (ii) the security has been in such a loss position for three consecutive quarters.
When a security in our fixed-maturity portfolio has an unrealized loss and we intend to sell the security, or it is more likely than not that we will be required to sell the security, we write-down the security to its current fair value and recognize the entire unrealized loss through the comprehensive income statement as a realized loss. If a fixed-maturity security has an unrealized loss and it is more likely than not that we will hold the debt security until recovery (which could be maturity), then we determine if any of the decline in value is due to a credit loss (i.e., where the present value of cash flows expected to be collected is lower than the amortized cost basis of the security) and, if so, we will recognize that portion of the impairment in net income as part of the comprehensive income statement as a realized loss; any remaining unrealized loss on the security is considered to be due to other factors (e.g., interest rate and credit spread movements) and is reflected in other comprehensive income as part of shareholders’ equity, along with unrealized gains or losses on securities that are not deemed to be other-than-temporarily impaired.








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

 
Write-downs
on Securities
Sold

 
Write-downs
on Securities
Held at
Period End

 
Total
Write-downs

 
Write-downs
on Securities
Sold

 
Write-downs
on Securities
Held at
Period End

Total
Write-downs

 
Write-downs
on Securities
Sold

 
Write-downs
on Securities
Held at
Period End

 
Total
Write-downs

 
Write-downs
on Securities
Sold

 
Write-downs
on Securities
Held at
Period End

2017           
Common equities$2.6
 $0
 $2.6
 $3.6
 $0
 $3.6
Total investment portfolio2.6
 0
 2.6
 3.6
 0
 3.6
Other assets1
11.2
 0
 11.2
 11.2
 0
 11.2
Total write-downs$13.8
 $0
 $13.8
 $14.8
 $0
 $14.8
2016                      
Common equities$0.2
 $0
 $0.2
 $0.2
 $0
 $0.2
$0.2
 $0
 $0.2
 $0.2
 $0
 $0.2
Total portfolio$0.2
 $0
 $0.2
 $0.2
 $0
 $0.2
2015           
Common equities$1.7
 $0
 $1.7
 $9.6
 $(0.2) $9.4
Total portfolio$1.7
 $0
 $1.7
 $9.6
 $(0.2) $9.4
Total investment portfolio0.2
 0
 0.2
 0.2
 0
 0.2
Other assets0
 0
 0
 0
 0
 0
Total write-downs$0.2
 $0
 $0.2
 $0.2
 $0
 $0.2
1Reflects an impairment of a renewable energy investment under which the future pretax cash flows are expected to be less than the carrying value of the asset.
The following table stratifies the gross unrealized losses in our fixed-income and common equity portfolios at June 30, 20162017, by duration in a loss position and magnitude of the loss as a percentage of the cost of the security:
 
 
 
Total Gross
Unrealized
Losses

 Decline of Investment Value 
 
Total Gross
Unrealized
Losses

 Decline of Investment Value
(millions)
Fair
Value

 >15%
 >25%
 >35%
 >45%
Fair
Value

 >15%
 >25%
 >35%
 >45%
Fixed Income:                      
Unrealized loss for less than 12 months$751.5
 $3.5
 $0
 $0
 $0
 $0
$7,505.6
 $32.4
 $0
 $0
 $0
 $0
Unrealized loss for 12 months or greater2,318.1
 93.9
 39.6
 17.7
 0
 0
1,603.1
 23.2
 0
 0
 0
 0
Total$3,069.6
 $97.4
 $39.6
 $17.7
 $0
 $0
$9,108.7
 $55.6
 $0
 $0
 $0
 $0
Common Equity:                      
Unrealized loss for less than 12 months$100.7
 $8.1
 $3.4
 $1.5
 $0
 $0
$72.3
 $6.5
 $1.3
 $0.3
 $0.2
 $0.2
Unrealized loss for 12 months or greater6.3
 0.2
 0
 0
 0
 0
0.8
 0
 0
 0
 0
 0
Total$107.0
 $8.3
 $3.4
 $1.5
 $0
 $0
$73.1
 $6.5
 $1.3
 $0.3
 $0.2
 $0.2
We completed a thorough review of the existing securities in these loss categories and determined that, applying the procedures and criteria discussed above, these securities were not other-than-temporarily impaired. We do not intend to sell these securities. We also determined that it is more likely that we will not be required to sell these securities, for the periods of time necessary to recover the respective cost bases of these securities, and that there are no additional credit-related impairments on our debt securities.
Since total unrealized losses are already a component of other comprehensive income and included in shareholders’ equity, any recognition of these losses as additional OTTI losses would have no effect on our comprehensive income, book value, or reported investment total return.


Fixed-Income Securities
The fixed-income portfolio is managed internally and includes fixed-maturity securities, short-term investments, and nonredeemable preferred stocks. The fixed-maturity securities and short-term investments, as reported on the balance sheets, were comprised of the following:
June 30, 2016 June 30, 2015 December 31, 2015June 30, 2017 June 30, 2016 December 31, 2016
($ in millions)
Fair
Value

 
% of
Total

 
Fair
Value

 
% of
Total

 
Fair
Value

 
% of
Total

Fair
Value

 
% of
Total

 
Fair
Value

 
% of
Total

 
Fair
Value

 
% of
Total

Investment-grade fixed maturities:1
                      
Short/intermediate term$17,524.2
 93.4% $15,532.0
 90.0% $16,136.0
 92.2%$21,215.7
 95.9% $17,524.2
 93.4% $18,883.7
 95.3%
Long term138.8
 0.7
 160.4
 0.9
 109.3
 0.6
71.6
 0.3
 138.8
 0.7
 49.6
 0.2
Non-investment-grade fixed maturities:1,2
  

   

   

  

   

   

Short/intermediate term1,082.6
 5.8
 1,525.9
 8.9
 1,246.3
 7.1
824.2
 3.8
 1,082.6
 5.8
 866.8
 4.4
Long term10.3
 0.1
 40.0
 0.2
 12.6
 0.1
6.3
 0
 10.3
 0.1
 16.6
 0.1
Total$18,755.9
 100.0% $17,258.3
 100.0% $17,504.2
 100.0%$22,117.8
 100.0% $18,755.9
 100.0% $19,816.7
 100.0%
1Long term includes securities with expected liquidation dates of 10 years or greater. Asset-backed securities are reported at their weighted average maturity based upon their projected cash flows, with the cash flows expected in periods of 10 years or greater reported as part of the long-term category. All other securities that do not have a single expected maturity date are reported at average maturity.
2Non-investment-grade fixed-maturity securities are non-rated or have a credit quality rating of an equivalent BB+ or lower, classified by ratings from NRSROs. The non-investment-grade securities based upon NAIC ratings and our Group I modeling were $469.9 million, $583.3 million, $750.7 million, and $687.6$434.9 million at June 30, 20162017 and 2015,2016, and December 31, 2015,2016, respectively.
A primary exposure for the fixed-income portfolio is interest rate risk, which includes the change in value resulting from movements in the underlying market rates of debt securities held. We manage this risk by maintaining the portfolio'sportfolio’s duration (a measure of the portfolio'sportfolio’s exposure to changes in interest rates) between 1.5 and 5 years. The duration of the fixed-income portfolio was 1.82.3 years at June 30, 20162017, compared to 1.91.8 years at both June 30, 20152016 and 2.2 years at December 31, 20152016, reflecting our preference for shorter duration positioning during times of low interest rates. The distribution of duration and convexity (i.e., a measure of the speed at which the duration of a security is expected to change based on a rise or fall in interest rates) is monitored on a regular basis.
The duration distribution of our fixed-income portfolio, excluding short-term investments, represented by the interest rate sensitivity of the comparable benchmark U.S. Treasury Notes, was:
Duration DistributionJune 30, 2016
 June 30, 2015
 December 31, 2015
June 30, 2017
 June 30, 2016
 December 31, 2016
1 year28.3 % 31.7% 28.4 %24.1 % 28.3 % 25.9 %
2 years14.5
 14.9
 15.6
14.5
 14.5
 13.4
3 years22.0
 15.2
 18.1
25.9
 22.0
 24.2
5 years26.3
 27.9
 27.7
27.4
 26.3
 25.8
10 years9.1
 9.5
 10.4
8.2
 9.1
 10.9
20 years(0.4) 0.7
 0.1
(0.1) (0.4) (0.2)
30 years0.2
 0.1
 (0.3)0
 0.2
 0
Total fixed-income portfolio100.0 % 100.0% 100.0 %100.0 % 100.0 % 100.0 %

The negative duration in the 20-year and 30-year categoriescategory 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 lower floating rate, which could cause these securities to trade at a discount and, therefore, with a negative duration as the securities'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 weighted average portfolio credit quality rating, as defined by NRSROs.NRSROs, which was successfully maintained during the first six months of both 2017 and 2016.



The credit quality distribution of the fixed-income portfolio was: 
RatingJune 30, 2016
 June 30, 2015
 December 31, 2015
AAA40.3% 40.3% 37.2%
AA16.8
 15.9
 14.2
A13.6
 13.0
 15.3
BBB22.1
 20.1
 24.7
Non-investment grade/non-rated1
7.2
 10.7
 8.6
Total fixed-income portfolio100.0% 100.0% 100.0%
RatingJune 30, 2017
 June 30, 2016
 December 31, 2016
AAA40.8% 40.3% 35.7%
AA17.7
 16.8
 19.1
A12.1
 13.6
 15.3
BBB24.6
 22.1
 24.3
Non-investment grade/non-rated1
4.8
 7.2
 5.6
Total fixed-income portfolio100.0% 100.0% 100.0%
1The ratings in the table above are assigned by NRSROs. The non-investment-grade fixed-income securities based upon our Group I classification represented 4.6%3.3% of the total fixed-income portfolio at June 30, 2016,2017, compared to 6.2%4.6% at June 30, 20152016 and 3.8%3.4% at December 31, 2015.2016.

The changes in credit quality profile from June 30, 20152016 were the result of transactions in our portfolio that shifted the mix within the various credit categories.

Our portfolio is also exposed to concentration risk. Our investment constraints limit investment in a single issuer, other than U.S. Treasury Notes or a state’s general obligation bonds, to 2.5% of shareholders’ equity, while the single issuer guideline on preferred stocks and/or non-investment-grade debt is 1.25% of shareholders’ equity. Additionally, the guideline applicable to any state’s general obligation bonds is 6% of shareholders’ equity. We also consider sector concentration a risk, and we frequently evaluate the portfolio’s sector allocation with regard to internal requirements and external market factors. We consider concentration risk both overall and in the context of individual asset classes, including but not limited to common equities, residential and commercial mortgage-backed securities, municipal bonds, and high-yield bonds. At June 30, 2016, weWe were within all of the constraints described above.above during the first six months of 2017.
We monitor prepayment and extension risk, especially in our structured product and preferred stock portfolios. Prepayment risk includes the risk of early redemption of security principal that may need to be reinvested at less attractive rates. Extension risk includes the risk that a security will not be redeemed when anticipated, and that the security that is extended will have a lower yield than a security we might be able to obtain by reinvesting the expected redemption principal. Our holdings of different types of structured debt and preferred securities help manage this risk. During the first six months of 20162017, we did not experience significant prepayment or extension of principal relative to our cash flow expectations in the portfolio.
Liquidity risk is another risk factor we monitor. Our overall portfolio remains very liquid and we believe that it is sufficient to meet expected near-term liquidity requirements. The short-to-intermediate duration of our portfolio provides a source of liquidity, as we expect approximately $1.4$2.2 billion, or 10%14%, of principal repayment from our fixed-income portfolio, excluding U.S. Treasury Notes and short-term investments, during the remainder of 20162017. Cash from interest and dividend payments provides an additional source of recurring liquidity.

IncludedThe duration of our U.S. government obligations, which are included in the fixed-income portfolio, are U.S. government obligations, which include U.S. Treasury Notes and interest rate swaps. Although the interest rate swaps are not obligations of the U.S. government, they are recorded in this portfolio as the change in fair value is correlated to movements in the U.S. Treasury market. The duration of these securities was comprised of the following at June 30, 20162017:
($ in millions)
Fair
Value

 
Duration
(years)

Fair
Value

 
Duration
(years)

U.S. Treasury Notes      
Less than two years$457.5
 0.3
$217.4
 1.4
Two to five years529.3
 4.5
3,376.6
 3.7
Five to ten years309.2
 6.7
561.0
 6.2
Total U.S. Treasury Notes1,296.0
 3.5
$4,155.0
 3.9
Interest Rate Swaps   
Five to ten years ($565 notional value)0
 (6.8)
Total U.S. government obligations$1,296.0
 0.5
The interest rate swap positions show a fair value of zero as they are in an overall liability position of $27.9 million, which is fully collateralized by cash payments to the counterparty. The positions are reported in the “other liabilities” section of the consolidated balance sheets. As of June 30, 2016,2017, we had no treasury futures. The negative duration of the interest rate swaps isor treasury futures.


due to the positions being short interest-rate exposure (i.e., receiving a variable-rate coupon on the interest rate swaps). In determining duration, we add the interest rate sensitivity of our interest rate swap positions to that of our Treasury holdings, but do not add the notional value of the swaps to our Treasury holdings in order to calculate an unlevered duration for the portfolio.
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)
Fair
Value

 
Net Unrealized
Gains (Losses)

 
% of Asset-
Backed
Securities

 
Duration
(years)

 
Rating
(at period end)
June 30, 2016        
June 30, 2017        
Residential mortgage-backed securities:                
Prime collateralized mortgage obligations$672.3
 $(3.0) 12.2% 0.7
  A$544.6
 $(1.5) 8.4% 0.6
  A+
Alt-A collateralized mortgage obligations1
213.8
 (1.3) 3.9
 1.2
  BBB133.8
 0.4
 2.0
 0.8
  BBB-
Collateralized mortgage obligations886.1
 (4.3) 16.1
 0.8
  A-678.4
 (1.1) 10.4
 0.7
  A
Home equity (sub-prime bonds)788.8
 5.2
 14.3
  <0.1
  BBB-552.2
 6.6
 8.5
 0.3
  BBB
Residential mortgage-backed securities1,674.9
 0.9
 30.4
 0.4
  BBB+1,230.6
 5.5
 18.9
 0.5
  A-
Agency residential pass-through obligations46.9
 0.5
 0.8
 3.0
  AAA37.0
 (0.5) 0.6
 3.5
  AAA
Commercial mortgage-backed securities:                
Commercial mortgage-backed securities2,051.5
 30.7
 37.3
 3.5
  A2,249.0
 8.5
 34.7
 3.6
  A-
Commercial mortgage-backed securities: interest only158.9
 2.4
 2.9
 2.6
  AAA-126.0
 1.6
 1.9
 2.2
  AAA-
Commercial mortgage-backed securities2,210.4
 33.1
 40.2
 3.5
  A2,375.0
 10.1
 36.6
 3.6
  A
Other asset-backed securities:                
Automobile831.3
 2.1
 15.1
 1.0
  AAA-1,288.7
 (0.5) 19.9
 0.6
  AAA-
Credit card86.0
 0
 1.6
 0.4
  AAA366.4
 (0.1) 5.6
 0.4
  AAA
Student loan609.4
 4.7
 9.4
 1.2
  AA-
Other2
654.3
 1.4
 11.9
 0.9
  AA582.9
 (0.2) 9.0
 2.2
  AA-
Other asset-backed securities1,571.6
 3.5
 28.6
 0.9
  AAA-2,847.4
 3.9
 43.9
 1.0
  AA+
Total asset-backed securities$5,503.8
 $38.0
 100.0% 1.8
  A+$6,490.0
 $19.0
 100.0% 1.9
  A+

($ in millions)
Fair
Value

 
Net Unrealized
Gains (Losses)

 
% of Asset-
Backed
Securities

 
Duration
(years)

 
Rating
(at period end)
Fair
Value

 
Net Unrealized
Gains (Losses)

 
% of Asset-
Backed
Securities

 
Duration
(years)

 
Rating
(at period end)
June 30, 2015        
June 30, 2016        
Residential mortgage-backed securities:                
Prime collateralized mortgage obligations$625.3
 $(1.4) 9.5% 1.1
  A$672.3
 $(3.0) 12.2% 0.7
  A
Alt-A collateralized mortgage obligations1
306.6
 1.4
 4.6
 1.2
  BBB213.8
 (1.3) 3.9
 1.2
  BBB
Collateralized mortgage obligations931.9
 0
 14.1
 1.1
  A-886.1
 (4.3) 16.1
 0.8
  A-
Home equity (sub-prime bonds)960.6
 13.5
 14.5
  <0.1
  BB+788.8
 5.2
 14.3
  <0.1
  BBB-
Residential mortgage-backed securities1,892.5
 13.5
 28.6
 0.5
  BBB1,674.9
 0.9
 30.4
 0.4
  BBB+
Agency residential pass-through obligations114.3
 (1.7) 1.7
 5.5
  AAA46.9
 0.5
 0.8
 3.0
  AAA
Commercial mortgage-backed securities:                
Commercial mortgage-backed securities2,362.9
 7.1
 35.8
 3.0
  AA-2,051.5
 30.7
 37.3
 3.5
  A
Commercial mortgage-backed securities: interest only197.2
 4.7
 3.0
 2.8
  AAA-158.9
 2.4
 2.9
 2.6
  AAA-
Commercial mortgage-backed securities2,560.1
 11.8
 38.8
 3.0
  AA-2,210.4
 33.1
 40.2
 3.5
  A
Other asset-backed securities:                
Automobile1,001.9
 0.9
 15.1
 1.1
  AAA-831.3
 2.1
 15.1
 1.0
  AAA-
Credit card301.9
 0.1
 4.6
 0.4
  AAA86.0
 0
 1.6
 0.4
  AAA
Student loan407.7
 1.3
 7.4
 1.1
 AA-
Other2
737.7
 1.9
 11.2
 0.8
  AA+246.6
 0.1
 4.5
 0.6
 AAA-
Other asset-backed securities2,041.5
 2.9
 30.9
 0.9
  AAA-1,571.6
 3.5
 28.6
 0.9
  AAA-
Total asset-backed securities$6,608.4
 $26.5
 100.0% 1.7
  AA-$5,503.8
 $38.0
 100.0% 1.8
  A+
 


($ in millions)
Fair
Value

 
Net Unrealized
Gains (Losses)

 
% of Asset-
Backed
Securities

 
Duration
(years)

 
Rating
(at period end)
Fair
Value

 
Net Unrealized
Gains (Losses)

 
% of Asset-
Backed
Securities

 
Duration
(years)

 
Rating
(at period end)
December 31, 2015        
December 31, 2016        
Residential mortgage-backed securities:                
Prime collateralized mortgage obligations$583.2
 $(3.1) 9.4% 0.9
  A-$609.9
 $(3.9) 10.0% 0.9
  A
Alt-A collateralized mortgage obligations1
269.2
 0.2
 4.3
 1.2
  BBB170.8
 (0.4) 2.8
 1.0
  BBB-
Collateralized mortgage obligations852.4
 (2.9) 13.7
 1.0
  A-780.7
 (4.3) 12.8
 0.9
  A-
Home equity (sub-prime bonds)874.3
 4.4
 14.0
  <0.1
  BBB-678.0
 13.0
 11.1
  <0.1
  BBB
Residential mortgage-backed securities1,726.7
 1.5
 27.7
 0.4
  BBB1,458.7
 8.7
 23.9
 0.4
  BBB+
Agency residential pass-through obligations89.3
 (1.0) 1.4
 4.8
  AAA40.6
 (0.6) 0.7
 4.1
  AAA
Commercial mortgage-backed securities:                
Commercial mortgage-backed securities2,476.7
 (13.8) 39.7
 3.4
  A+2,115.2
 (13.7) 34.6
 3.7
  A-
Commercial mortgage-backed securities: interest only176.5
 1.3
 2.9
 2.6
  AAA-138.2
 0.2
 2.3
 2.4
  AAA-
Commercial mortgage-backed securities2,653.2
 (12.5) 42.6
 3.3
  A+2,253.4
 (13.5) 36.9
 3.7
  A
Other asset-backed securities:                
Automobile925.4
 (2.2) 14.8
 1.0
  AAA-1,074.9
 (0.4) 17.6
 0.8
  AAA-
Credit card140.0
 (0.2) 2.2
 0.5
  AAA435.3
 (0.4) 7.1
 0.5
  AAA
Student loan526.4
 2.4
 8.6
 1.0
 AA-
Other2
702.5
 (1.3) 11.3
 0.7
  AA+314.5
 (1.4) 5.2
 1.5
 AA+
Other asset-backed securities1,767.9
 (3.7) 28.3
 0.8
  AAA-2,351.1
 0.2
 38.5
 0.9
  AAA-
Total asset-backed securities$6,237.1
 $(15.7) 100.0% 1.8
  A+$6,103.8
 $(5.2) 100.0% 1.8
  A+
1Represents 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.
2Includes equipment leases, manufactured housing, and other types of structured debt.

The decreaseincrease in asset-backed securities since December 31, 20152016, is primarily the resultdue to purchases of sales in our commercial mortgage-backed securities, automobile receivables, student loan receivables, and other asset-backed sectors due to tighter spreadssecurities which were of high credit quality, partially offset by a combination of maturities and security sales in higher-rated securities. The decrease in ourthe residential mortgage-backed sector was due to sales and amortization of principle, which was slightly offset by purchases of prime collateralized mortgage obligations.sectors.

Collateralized Mortgage Obligations (CMO) The following table details the credit quality rating and fair value of our CMOs, along with the loan classification and a comparison of the fair value at June 30, 2016,2017, to our original investment value (adjusted for returns of principal, amortization, and write-downs):
Collateralized Mortgage Obligations (at June 30, 2016)
Collateralized Mortgage Obligations (at June 30, 2017)Collateralized Mortgage Obligations (at June 30, 2017)
($ in millions)
Rating1
 Non-Agency Prime        Alt-A 
Government/GSE2

     Total % of Total
 Non-Agency Prime        Alt-A 
Government/GSE2

     Total % of Total
AAA$174.2
 $32.6
 $89.3
 $296.1
 33.4%$154.2
 $10.5
 $65.9
 $230.6
 34.0%
AA40.4
 38.9
 1.2
 80.5
 9.1
49.9
 24.1
 1.1
 75.1
 11.1
A77.1
 22.2
 25.9
 125.2
 14.1
24.2
 22.0
 42.1
 88.3
 13.0
BBB39.4
 38.1
 147.4
 224.9
 25.4
17.8
 8.8
 147.6
 174.2
 25.7
Non-investment grade77.4
 82.0
 0
 159.4
 18.0
41.8
 68.4
 0
 110.2
 16.2
Total$408.5
 $213.8
 $263.8
 $886.1
 100.0%$287.9
 $133.8
 $256.7
 $678.4
 100.0%
Increase (decrease) in value(1.0)% (0.6)% 0.8% (0.3)%  
Increase (decrease) in value3
(0.4)% 0.3% 0.7% 0.2%  
1The credit quality ratings in the table above are assigned by NRSROs; when we assign the NAIC ratings for our CMOs, $125.1$76.6 million of our non-investment gradenon-investment-grade securities are rated investment-grade and classified as Group II and $34.3$33.6 million, or 3.9%4.9% of our total CMOs, are not rated by the NAIC and are classified as Group I.
2The securities in this category are insured by a Government Sponsored Entity (GSE) and/or collateralized by mortgage loans insured by the Federal Housing Administration (FHA) or the U.S. Department of Veteran Affairs (VA).
3Excludes net holding period gains and losses on certain hybrid securities.

The majority of our CMO portfolio is composed of non-GSE/FHA/VA mortgage securities. In the largest part of this portfolio, we took advantage of the securitization structure to have an underlying bond split into senior and subordinated classes. We own the senior classes, which provide extra credit support to our position. Most ofAs spreads in the additions toresidential mortgage-backed sector reached their tightest levels post 2008, we sold exposure in our CMO portfolio during the year were in securities backed by prime mortgages.positions which either had longer durations with spreads


that did not compensate for the risks taken or did not have adequate credit support and were sensitive to prepay or default assumptions.
Home-Equity Securities The following table shows the credit quality rating of our home-equity securities, along with a comparison of the fair value at June 30, 20162017, to our original investment value (adjusted for returns of principal, amortization, and write-downs):
Home-Equity Securities (at June 30, 2016)
Home-Equity Securities (at June 30, 2017)Home-Equity Securities (at June 30, 2017)
($ in millions)
Rating1
 Total % of Total
 Total % of Total
AAA$38.1
 4.8%$35.0
 6.3%
AA6.2
 0.8
42.3
 7.7
A269.3
 34.1
193.7
 35.1
BBB115.8
 14.7
50.0
 9.0
Non-investment grade359.4
 45.6
231.2
 41.9
Total$788.8
 100.0%$552.2
 100.0%
Increase (decrease) in value0.7%  1.2%  
1The credit quality ratings in the table above are assigned by NRSROs; when we assign the NAIC ratings for our home-equity securities, $296.4$188.4 million of our non-investment gradenon-investment-grade securities are rated investment-grade and classified as Group II and $63.0$42.8 million, or 8.0%7.8% of our total home-equity securities, are not rated by the NAIC and are classified as Group I.

In our view, the market forOur home-equity loan-backed bonds continued to tradesecurity portfolio decreased in value during the quarter with greater return potential than other sectors with comparable risk characteristics. We lookdue to add securities whereboth returns of principal and sales of some of our positions, which we expect a very low potentialdeemed to be inadequately compensating us for lossesthe risks given the substantial credit support.tight spread levels. We were unable to meaningfully addhave not been adding to this portfolio during the quarter because of decreased supply and increased investor interest. Moreover, the marketas current pricing is shrinking due to amortization and pay downs of underlying loans.not offering meaningful potential returns.

Commercial Mortgage-Backed Securities (CMBS) The following table details the credit quality rating and fair value of our CMBS bond and interest only (IO) portfolios:
Commercial Mortgage-Backed Securities (at June 30, 2016)1
Commercial Mortgage-Backed Securities (at June 30, 2017)1
Commercial Mortgage-Backed Securities (at June 30, 2017)1
($ in millions)
Category
       AAA          AA             A       BBB 
Non-Investment
Grade

       Total % of Total
       AAA          AA             A       BBB 
Non-Investment
Grade

       Total % of Total
Multi-borrower$222.1
 $23.9
 $14.3
 $10.9
 $19.6
 $290.8
 13.2%$101.5
 $8.7
 $0
 $0
 $10.4
 $120.6
 5.1%
Single-borrower292.3
 227.1
 350.5
 822.2
 68.6
 1,760.7
 79.6
270.3
 392.3
 581.9
 770.4
 113.5
 2,128.4
 89.6
Total CMBS bonds514.4
 251.0
 364.8
 833.1
 88.2
 2,051.5
 92.8
371.8
 401.0
 581.9
 770.4
 123.9
 2,249.0
 94.7
IO157.2
 0
 0
 0
 1.7
 158.9
 7.2
123.7
 1.1
 0
 0
 1.2
 126.0
 5.3
Total fair value$671.6
 $251.0
 $364.8
 $833.1
 $89.9
 $2,210.4
 100.0%$495.5
 $402.1
 $581.9
 $770.4
 $125.1
 $2,375.0
 100.0%
% of Total fair value30.4% 11.3% 16.5% 37.7% 4.1% 100.0%  20.9% 16.9% 24.5% 32.4% 5.3% 100.0%  
1The credit quality ratings in the table above are assigned by NRSROs; when we assign the NAIC ratings, all$95.6 million of our non-investment-grade CMBS bondssecurities are rated investment gradeinvestment-grade and classified as Group II.II and $28.3 million, or 1.3% of our total CMBS bonds, are not rated by the NAIC and are classified as Group I, and all non-investment-grade IO securities are classified as Group I.

We continue to focus on single-borrower CMBS because we believe these transactions provide an opportunity to select investments based on real estate and underwriting criteria that fit our preferred credit risk and duration profile. Our multi-borrower, fixed-rate CMBS portfolio is concentrated in vintages with conservative underwriting. During the quarter, we reducedincreased our CMBS bond portfolio by $232.3$153.5 million, through security sales, principal payments, and maturities which slightly increased our allocation of single-borrower CMBS from 79.5%86.4% to 79.6%89.6% and reduced our allocation of multi-borrower CMBS from 13.6%7.7% to 13.2%5.1%. Duration increased from 3.1 to 3.5At June 30, 2017, the duration was 3.6 years duringand the quarter. Theweighted average credit quality was A at June 30, 2016 and March 31, 2016.A-, which were unchanged from the end of the first quarter 2017.

With the exception of $154.3$122.5 million in Freddie Mac senior multi-family IOs, we have no multi-borrower deal IOs originated after 2006.


MUNICIPAL SECURITIES
Included in the fixed-income portfolio at June 30, 20162017 and 20152016, and December 31, 20152016, were $2,500.1 million, $2,617.6 million, $3,192.3 million, and $2,721.42,502.6 million, respectively, of state and local government obligations. These securities had a duration of 3.02.9 years at June 30, 20162017, compared to 3.53.0 years at both June 30, 20152016 and 3.2 years at December 31, 20152016, respectively;; the overallweighted average credit quality rating (excluding the benefit of credit support from bond insurance) was AA for all three periods. These securities had a net unrealized gaingains of $26.6 million at June 30, 2017, compared to net unrealized gains of $72.1 million at June 30, 2016, compared to and net unrealized losses of $15.1 million and $43.86.9 million at June 30, 2015 and December 31, 20152016, respectively..

The following table details the credit quality rating of our municipal securities at June 30, 20162017, without the benefit of credit or bond insurance:
Municipal Securities (at June 30, 2016)
Municipal Securities (at June 30, 2017)Municipal Securities (at June 30, 2017)
(millions)
Rating
General
Obligations

 
Revenue
Bonds

 Total
General
Obligations

 
Revenue
Bonds

 Total
AAA$371.2
 $556.9
 $928.1
$345.0
 $549.0
 $894.0
AA457.5
 856.4
 1,313.9
371.4
 872.2
 1,243.6
A1.8
 358.4
 360.2
2.1
 319.7
 321.8
BBB5.8
 9.6
 15.4
37.9
 2.8
 40.7
Total$836.3
 $1,781.3
 $2,617.6
$756.4
 $1,743.7
 $2,500.1

Included in revenue bonds were $797.4$952.7 million of single family housing revenue bonds issued by state housing finance agencies, of which $529.5$697.0 million were supported by individual mortgages held by the state housing finance agencies and $267.9$255.7 million were supported by mortgage-backed securities. Of the programs supported by mortgage-backed securities, approximately 20% were collateralized by Fannie Mae and Freddie Mac mortgages; the remaining 80% were collateralized by Ginnie Mae loans, which are fully guaranteed by the U.S. government. Of the programs supported by individual mortgages held by the state housing finance agencies, the overallweighted average credit quality rating was AA+. Most of these mortgages were supported by FHA, VA, or private mortgage insurance providers.

The decrease in municipal securities since December 31, 2015 was due to sales activity, as municipal valuations rose, allowing us to capture realized gains and deploy capital to other sectors.
CORPORATE SECURITIES
Included in our fixed-income securities at June 30, 20162017 and 2015,2016, and December 31, 2015,2016, were $5,013.8 million, $3,911.0 million, $3,434.8 million, and $3,691.6$4,550.9 million, respectively, of corporate securities. These securities had a duration of 2.4 years at June 30, 2017, compared to 3.5 years at both June 30, 2016 and 2.7 years at December 31, 2015, compared to 3.6 years at June 30, 20152016, and an overalla weighted average credit quality rating of BBB at June 30, 2017 and 2016, and December 31, 2015, and June 30, 2015.2016. These securities had net unrealized gains of $76.5$21.8 million and $0.7$76.5 million at June 30, 20162017 and 2015,2016, respectively, and net unrealized losses of $21.7$7.0 million at December 31, 2015.2016.

We increased ourOur allocation to corporate securities throughoutbonds decreased during the second quarter dueof 2017 as many of the shorter maturity bonds that we added in mid-2016 began to attractive valuations. The combination of many large acquisition related financings in the investment-grade market, along with an increase in overall market volatility, gave us the opportunity to add securities with a strong risk/return profile.


mature.

The table below shows the exposure break-down by sector and rating: 
Corporate Securities (at June 30, 2016)
Corporate Securities (at June 30, 2017)Corporate Securities (at June 30, 2017)
(millions)
Sector
AAA
 AA    
 A    
 BBB    
 
Non-Investment
Grade/Non-Rated

 Total
AAA
 AA    
 A    
 BBB    
 
Non-Investment
Grade/Non-Rated

 Total
Consumer$0.2
 $0.8
 $355.4
 $1,023.5
 $140.6
 $1,520.5
$0
 $0
 $348.7
 $1,713.7
 $84.4
 $2,146.8
Industrial0
 0
 84.9
 698.0
 83.3
 866.2
0
 0
 138.2
 947.1
 51.3
 1,136.6
Communications0
 0
 35.0
 280.6
 39.7
 355.3
0
 0
 46.3
 242.2
 59.0
 347.5
Financial Services51.4
 31.8
 250.3
 293.2
 148.0
 774.7
57.6
 75.3
 312.8
 384.0
 36.8
 866.5
Agency0.5
 1.0
 0
 0
 0
 1.5
0.5
 1.7
 0
 0
 0
 2.2
Technology0
 11.9
 27.1
 61.8
 0
 100.8
0
 0.1
 5.2
 166.7
 0.9
 172.9
Basic Materials0
 0
 0
 49.5
 0
 49.5
0
 0
 21.6
 106.8
 9.7
 138.1
Energy0
 69.5
 106.5
 66.5
 0
 242.5
0
 33.0
 43.2
 127.0
 0
 203.2
Total$52.1
 $115.0
 $859.2
 $2,473.1
 $411.6
 $3,911.0
$58.1
 $110.1
 $916.0
 $3,687.5
 $242.1
 $5,013.8
At June 30, 2016,2017, we held $761.8$822.7 million of U.S. dollar-denominated corporate bonds issued by companies that are domiciled,


or whose parent companies are domiciled, in the U.K. ($180.5 million) and other European countries ($642.2 million), primarily in the consumer, financial, and communications industries. We had no direct exposure to southern European-domiciled companies at June 30, 2016.2017.
PREFERRED STOCKS – REDEEMABLE AND NONREDEEMABLE
We hold both redeemable (i.e., mandatory redemption dates) and nonredeemable (i.e., perpetual with call dates) preferred stocks. At June 30, 20162017, we held $236.1206.7 million in redeemable preferred stocks and $858.5783.1 million in nonredeemable preferred stocks, compared to $271.7236.1 million and $772.3858.5 million, respectively, at June 30, 20152016, and $234.3191.9 million and $782.6853.5 million at December 31, 20152016.
Our preferred stock portfolio had net unrealized gains of $82.8134.4 million, $150.682.8 million, and $81.4122.4 million, at June 30, 20162017 and 20152016, and December 31, 20152016, respectively.

Our preferred stock securities hadcontinued to produce strong returns in the second quarter 2016. After falling in the first quarter of the year, most preferred2017.  Preferred yields are higher than other sectors and prices had rebounded by June 30, 2016. Despite their higher volatility,increased as well.  Although we continue to view preferred stocks as ana relatively attractive sector.  We addedsector, the increase in prices this year has diminished the attractiveness somewhat. Our preferred stock portfolio decreased in size due to a combination of security sales and one of our portfolio early in the quarter, but sold some later as prices rebounded. This activity resulted in a small net addition during the second quarter 2016.security holdings being called by its issuer.

Approximately 75%83% of our preferred stock securities are fixed-rate securities, and 25%17% are floating-rate securities. All of our preferred securities have call or mandatory redemption features. OfAll of our fixed-rate securities approximately 97% will convert to floating-rate dividend payments if not called at their initial call date, providing some protection against extension risk in the event the issuer elects not to call such securities at their initial call date.


Our preferred stock portfolio had a duration of 2.8 years at June 30, 2017, compared to 1.9 years at June 30, 2016, compared to 2.1and 2.4 years at both June 30, 2015 and December 31, 2015.2016. The interest rate duration of our preferred securities is calculated to reflect the call, floor, and floating rate features. Although a preferred security will remain outstanding if not called, its interest rate duration will reflect the variable nature of the dividend. The overallweighted average credit quality rating was BBB- at both June 30, 20162017, June 30, 2016, and December 31, 2015, compared to BB+ at June 30, 2015.2016. Our non-investment-grade preferred stocks were primarily with issuers that maintain investment-grade senior debt ratings.
The table below shows the exposure break-down by sector and rating at quarter end:
Preferred Stocks (at June 30, 2016)
Preferred Stocks (at June 30, 2017)Preferred Stocks (at June 30, 2017)
(millions)
Sector
A
BBB
 
Non-Investment
Grade/Non-Rated

 Total
A
BBB
 
Non-Investment
Grade/Non-Rated

 Total
Financial Services          
U.S. banks$73.2
$377.3
 $241.3
 $691.8
$47.9
$339.1
 $237.1
 $624.1
Foreign banks0
23.5
 42.3
 65.8
Insurance holdings0
39.7
 43.2
 82.9
0
52.4
 42.1
 94.5
Other financial institutions49.0
35.8
 26.4
 111.2
60.0
28.5
 40.1
 128.6
Total financial services122.2
476.3
 353.2
 951.7
107.9
420.0
 319.3
 847.2
Industrials0
55.1
 34.0
 89.1
0
70.2
 40.2
 110.4
Utilities0
53.8
 0
 53.8
0
32.2
 0
 32.2
Total$122.2
$585.2
 $387.2
 $1,094.6
$107.9
$522.4
 $359.5
 $989.8
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, 20162017, all of our preferred securities continued to pay their dividends in full and on time. Approximately 71%83% of our preferred stock securities pay dividends that have tax preferential characteristics, while the balance pay dividends that are fully taxable.
WeAt June 30, 2017, we held $65.8$43.1 million of U.S. dollar-denominated nonredeemableredeemable preferred stocks issued by financial institutions that are domiciled, or whose parent companies are domiciled, in the U.K. and other Europeanforeign countries. We had no direct exposure to U.K. or southern European-domiciled companies at June 30, 20162017.
In July 2016, we elected to participate in a newly announced cash tender offer for one of our redeemable preferred stocks and recorded a realized loss of $6.0 million during the month.

Common Equities
Common equities, as reported on the balance sheets, were comprised of the following:
 
($ in millions)June 30, 2016 June 30, 2015 December 31, 2015June 30, 2017 June 30, 2016 December 31, 2016
Indexed common stocks$2,631.3
 95.1% $2,249.0
 88.3% $2,532.3
 95.5%$2,931.5
 95.2% $2,631.3
 95.1% $2,676.2
 95.1%
Managed common stocks133.8
 4.8
 297.5
 11.6
 117.9
 4.4
145.7
 4.7
 133.8
 4.8
 135.8
 4.8
Total common stocks2,765.1
 99.9
 2,546.5
 99.9
 2,650.2
 99.9
3,077.2
 99.9
 2,765.1
 99.9
 2,812.0
 99.9
Other risk investments0.3
 0.1
 0.3
 0.1
 0.3
 0.1
0.3
 0.1
 0.3
 0.1
 0.4
 0.1
Total common equities$2,765.4
 100.0% $2,546.8
 100.0% $2,650.5
 100.0%$3,077.5
 100.0% $2,765.4
 100.0% $2,812.4
 100.0%
In our indexed common stock portfolio, our individual holdings are selected based on their contribution to the correlation with the index. For all three periods reported in the table above, the GAAP basis total return was within the desired tracking error of +/- 50 basis points when compared to the Russell 1000 Index. We held 858856 out of 999,990, or 86%, of the common stocks comprising the Russell 1000 Index at June 30, 20162017, which made up 94% of the total market capitalization of the index.
The actively managed common stock portfolio is currently managed by one external investment manager. At June 30, 2016,2017, the fair value of the actively managed portfolio was $133.8$145.7 million, compared to a cost basis of $109.1$100.5 million.
Other risk investments include private equity investments and limited partnership interests in private equity and mezzanine investment funds, which have no off-balance-sheet exposure or contingent obligations.


Derivative Instruments
We use interest rate swaps and treasury futures to manage the fixed-income portfolio. We haddid not have any interest rate swaps or treasury futures at June 30, 2017 or December 31, 2016, that were used to manage duration. At June 30, 2016, we held $565 million notional value swaps open at June 30, 2016, compared to $750 millionand we did not hold any treasury futures. We closed swaps with a notional value at both June 30, 2015of $185 million and December 31, 2015. We closed one interest rate swap positiontreasury futures with a notional value of $55 million during the first quartersix months of 2016.  For the second quarter 2016 and 2015, we recorded net realized losses of $10.9 million and net realized gains of $15.5 million, respectively, on the open positions. During the second quarter 2016, we did not enter into any treasury future contracts, compared to a net gain of $1.8 million on the open and closed treasury futures during the second quarter 2015.

During July 2016, we closed $250 million of our interest rate swap positions resulting in a $0.3 million net realized gain for the month. We have $315 million notional value swaps open at July 31, 2016. In addition,March 2017, we entered into U.S. treasury futures by selling contracts to manage duration.

We repurchased a portion of our 6.70% Fixed-to-Floating Rate Junior Subordinated Debentures due 2067 duringforecasted debt issuance hedge, against a possible rise in interest rates, in conjunction with the second quarter 2016, and we reclassified $0.1$850 million of unrealized gains on forecasted transactions to net realized gains on securities.4.125% Senior Notes due 2047 issued in April 2017. Upon issuance, we closed the hedge and recognized, as part of accumulated other comprehensive income, a pretax loss of $8.0 million in April 2017.

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



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






Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The duration of the financial instruments held in our portfolio that are subject to interest rate risk was 1.82.3 years and 1.92.2 years at June 30, 20162017 and December 31, 20152016, respectively. The weighted average beta of the equity portfolio was 1.001.03 at June 30, 20162017, compared to 0.991.02 at December 31, 20152016. Although components of the portfolio have changed, no material changes have occurred in the total interest rate or market risk since that which was reported in the tabular presentations of our interest rate and market risk sensitive instruments in our Annual Report on Form 10-K for the year ended December 31, 20152016.
Item 4. Controls and Procedures.
Progressive, under the direction of our Chief Executive Officer and our Chief Financial Officer, has established disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. The disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Our Chief Executive Officer and our Chief Financial Officer reviewed and evaluated Progressive’s disclosure controls and procedures as of the end of the period covered by this report. Based on that review and evaluation, the Chief Executive Officer and Chief Financial Officer concluded that Progressive’s disclosure controls and procedures are effectively serving the stated purposes as of the end of the period covered by this report.
During the second quarter 2015, Progressive acquired a controlling interest in ARX Holding Corp. ARX represented about 4% of our consolidated revenues and about 3% of pre-tax income for the first half of 2016 and accounted for about 6% of total assets as of June 30, 2016. As of June 30, 2016, we have fully incorporated ARX and its subsidiaries into our evaluation of internal controls over financial reporting.
Other than the acquisition mentioned above, weWe are not aware of any material change in Progressive’s internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.





PART II—OTHER INFORMATION

Item 1A. Risk Factors.

The risk factors affecting our business are discussed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015.2016. There have been no material changes in the risk factors that were discussed in that report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(c) Share Repurchases
 
ISSUER PURCHASES OF EQUITY SECURITIES
2016
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

2017
Calendar
Month
Total
Number of
Shares
Purchased

 
Average
Price
Paid
Per Share

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

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

April4,020
 $35.22
 64,619,542
 10,380,458
2,358
 $39.15
 69,036,912
 5,963,088
May473,289
 33.15
 65,092,831
 9,907,169
May - prior authorization45,511
 39.74
 69,082,423
 —
May - current authorization487
 41.52
 487
 24,999,513
June804,545
 32.21
 65,897,376
 9,102,624
17,457
 42.54
 17,944
 24,982,056
Total1,281,854
 $32.57
    65,813
 $40.47
    
In June 2011, the Board of Directors approved an authorization to repurchase up to 75 million of our common shares; thisshares. In May 2017, the Board approved a new authorization to repurchase up to 25 million common shares and terminated the prior authorization. The current authorization, which does not have an expiration date. date, replaces the 5,917,577 shares that remained under the Board’s June 2011 authorization at termination.
Share repurchases under this authorizationthese authorizations may be accomplished through open market purchases, 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 second quarter 20162017, all repurchases were accomplished through the open market or in conjunction with our incentive compensation plans at the then-current market prices.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 deployuse underleveraged capital.





Item 5. Other Information.
I. GRANTS OF PLAN-BASED EQUITY AWARDS

On July 1, 2016, as reported in a Form 8-K filed July 6, 2016, S. Patricia Griffith, our Chief Executive Officer, received additional restricted stock unit (“RSU”) awards valued at $3.15 million (covering 94,767 RSUs) in the aggregate under the company’s 2015 Equity Incentive Plan. These RSUs were split among three types of awards, as described below:

31,589 time-based RSUs, which are scheduled to vest in equal installments on January 1 of 2019, 2020 and 2021, subject to earlier vesting (including upon satisfying the requirements for a qualified retirement) and forfeiture;

52,648 performance-based RSUs measuring the company’s growth in personal passenger auto and commercial auto versus industry growth during 2016-2018; and

10,530 performance-based RSUs measuring the results of the company’s fixed income portfolio versus peer companies during 2016-2018.

The other terms of these awards are consistent with the terms of the annual equity awards granted to the company’s named executive officers during 2015. See the company’s proxy statement dated March 25, 2016 for additional information regarding the terms of these awards.

II. OTHER
ThePresident and CEO Susan Patricia Griffith’s letter to shareholders with respect to our second quarter 20162017 results is included as Exhibit 99 to this Quarterly Report on Form 10-Q. The letter is also posted on Progressive’s website at progressive.com/annualreport.
Item 6. Exhibits.
See exhibit index on page 71.67.


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

                                
    THE PROGRESSIVE CORPORATION
    (Registrant)
     
Date:August 3, 20162, 2017  By: /s/ John P. Sauerland
    John P. Sauerland
    Vice President and Chief Financial Officer
     
     
     
     



EXHIBIT INDEX
 
EXHIBIT INDEX

EXHIBIT INDEX

Exhibit No.
Under
Reg. S-K,
Item 601
 
Form  10-Q
Exhibit
Number
 Description of Exhibit 
If Incorporated by Reference,
Documents with Which Exhibit was
Previously Filed with SEC
 
Form  10-Q
Exhibit
Number
 Description of Exhibit 
If Incorporated by Reference,
Documents with Which Exhibit was
Previously Filed with SEC
  
3 3.1 
Amended Articles of Incorporation of The Progressive Corporation (as amended May 16, 2016) Filed herewith

 Filed herewith
3 (ii) 3 Code of Regulations of The Progressive Corporation (as amended on May 12, 2017) Registration statement on Form S-8 (filed on May 12, 2017; Exhibit 4.2 therein)
 
10 10.1 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 10.1 Second Amendment to the Progressive Corporation Executive Separation Allowance Plan (2015 Amendment and Restatement) Filed herewith 10.2 Form of Restricted Stock Award Agreement under The Progressive Corporation 2017 Directors Equity Incentive Plan (for 2017) Filed herewith
  
31 31.1 Rule 13a-14(a)/15d-14(a) Certification of the Principal Executive Officer, S. Patricia Griffith Filed herewith 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 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, S. Patricia Griffith Furnished herewith 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 32.2 Section 1350 Certification of the Principal Financial Officer, John P. Sauerland Furnished herewith
  
99 99 Letter to Shareholders from Glenn M. Renwick, Executive Chairman of the Board of Directors (Regulation FD Disclosure) Furnished herewith 99 Letter to Shareholders from Susan Patricia Griffith, President and Chief Executive Officer (Regulation FD Disclosure) Furnished herewith
  
101 101.INS XBRL Instance Document Filed herewith 101.INS XBRL Instance Document Filed herewith
  
101 101.SCH XBRL Taxonomy Extension Schema Document Filed herewith 101.SCH XBRL Taxonomy Extension Schema Document Filed herewith
  
101 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document Filed herewith 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document Filed herewith
  
101 101.DEF XBRL Taxonomy Extension Definition Linkbase Document Filed herewith 101.DEF XBRL Taxonomy Extension Definition Linkbase Document Filed herewith
  
101 101.LAB XBRL Taxonomy Extension Label Linkbase Document Filed herewith 101.LAB XBRL Taxonomy Extension Label Linkbase Document Filed herewith
  
101 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document Filed herewith 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document Filed herewith
 


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