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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
ý☒Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended SeptemberJune 30, 20182019
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: 1-9518001-09518
 
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) (440) 461-5000
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Shares, $1.00 Par ValuePGRNew York Stock Exchange

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.    Yesý☒    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).    Yesý☒    No  ¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý☒  Accelerated filer ¨☐
Non-accelerated filer 
¨ (Do not check if a smaller reporting company)
☐		  Smaller reporting company ¨☐
    Emerging growth company ¨☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨☐    No  ý☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Shares, $1.00 par value: 583,144,753584,647,532 outstanding at September 30, 2018July 31, 2019
 




PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
The Progressive Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
(unaudited)
 Three Months Six Months
Periods Ended June 30,2019
 2018
 2019
 2018
(millions — except per share amounts)       
Revenues       
Net premiums earned$8,824.7
 $7,634.2
 $17,284.5
 $14,808.2
Investment income261.3
 192.1
 514.2
 358.4
Net realized gains (losses) on securities:       
Net realized gains (losses) on security sales67.5
 (9.6) 113.6
 97.4
Net holding period gains (losses) on securities112.4
 53.5
 505.1
 (101.7)
Net impairment losses recognized in earnings0
 (11.1) (24.3) (11.1)
Total net realized gains (losses) on securities179.9
 32.8
 594.4
 (15.4)
Fees and other revenues134.8
 116.0
 265.0
 219.8
Service revenues50.0
 42.9
 92.6
 77.1
Total revenues9,450.7
 8,018.0
 18,750.7
 15,448.1
Expenses       
Losses and loss adjustment expenses6,138.1
 5,375.3
 11,897.1
 10,246.1
Policy acquisition costs738.6
 630.8
 1,449.2
 1,227.0
Other underwriting expenses1,231.5
 1,046.9
 2,402.7
 2,027.1
Investment expenses6.2
 6.2
 12.4
 12.2
Service expenses45.3
 37.0
 83.4
 66.3
Interest expense47.4
 41.7
 94.8
 78.5
Total expenses8,207.1
 7,137.9
 15,939.6
 13,657.2
Net Income       
Income before income taxes1,243.6
 880.1
 2,811.1
 1,790.9
Provision for income taxes264.6
 178.9
 749.3
 359.9
Net income979.0
 701.2
 2,061.8
 1,431.0
Net (income) loss attributable to noncontrolling interest (NCI)0.4
 3.0
 (4.0) (8.8)
Net income attributable to Progressive979.4

704.2
 2,057.8
 1,422.2
Other Comprehensive Income (Loss)       
Changes in:       
Total net unrealized gains (losses) on fixed-maturity securities277.4
 (50.1) 578.5
 (204.6)
Net unrealized losses on forecasted transactions0.2
 0.2
 0.4
 0.4
Other comprehensive income (loss)277.6
 (49.9) 578.9
 (204.2)
Other comprehensive (income) loss attributable to NCI(2.6) 0.6
 (4.9) 4.6
Comprehensive income attributable to Progressive$1,254.4
 $654.9
 $2,631.8
 $1,222.6
Computation of Earnings Per Common Share       
Net income attributable to Progressive$979.4
 $704.2
 $2,057.8
 $1,422.2
Less: Preferred share dividends6.7
 6.7
 13.4
 7.9
Net income available to common shareholders$972.7
 $697.5
 $2,044.4
 $1,414.3
Average common shares outstanding - Basic583.6
 582.0
 583.5
 582.0
Net effect of dilutive stock-based compensation3.3
 3.8
 3.2
 3.6
Total average equivalent common shares - Diluted586.9
 585.8
 586.7
 585.6
Basic: Earnings per common share$1.67
 $1.20
 $3.50
 $2.43
Diluted: Earnings per common share$1.66
 $1.19
 $3.48
 $2.42
 Three Months Nine Months
Periods Ended September 30,2018
 2017
 % Change 2018
 2017
 % Change
(millions — except per share amounts)           
Revenues           
Net premiums earned$7,930.5
 $6,544.0
 21 $22,738.7
 $18,884.0
 20
Investment income218.1
 142.9
 53 576.5
 410.9
 40
Net realized gains (losses) on securities:           
Net realized gains (losses) on security sales108.4
 19.2
 465 205.8
 116.8
 76
Net holding period gains (losses) on securities95.8
 (0.9) NM (5.9) 0.3
 NM
Net impairment losses recognized in earnings(22.1) (43.0) (49) (33.2) (57.8) (43)
Total net realized gains (losses) on securities182.1
 (24.7) NM 166.7
 59.3
 181
Fees and other revenues122.6
 96.3
 27 342.4
 270.3
 27
Service revenues42.5
 33.3
 28 119.6
 94.5
 27
Other gains (losses)0
 0
 NM 0
 0.2
 (100)
Total revenues8,495.8
 6,791.8
 25 23,943.9
 19,719.2
 21
Expenses    
      
Losses and loss adjustment expenses5,523.1
 5,050.5
 9 15,769.2
 13,928.8
 13
Policy acquisition costs662.7
 540.1
 23 1,889.7
 1,557.2
 21
Other underwriting expenses1,095.9
 877.7
 25 3,123.0
 2,568.3
 22
Investment expenses5.8
 5.8
 0 18.0
 18.0
 0
Service expenses35.8
 28.9
 24 102.1
 81.8
 25
Interest expense42.0
 37.4
 12 120.5
 117.6
 2
Total expenses7,365.3
 6,540.4
 13 21,022.5
 18,271.7
 15
Net Income    
      
Income before income taxes1,130.5
 251.4
 350 2,921.4
 1,447.5
 102
Provision for income taxes200.3
 36.6
 447 560.2
 429.7
 30
Net income930.2
 214.8
 333 2,361.2
 1,017.8
 132
Net (income) loss attributable to noncontrolling interest (NCI)(1.8) 9.2
 (120) (10.6) (1.9) 458
Net income attributable to Progressive$928.4

$224.0
 314 $2,350.6
 $1,015.9
 131
Other Comprehensive Income (Loss)    
      
Changes in:           
Total net unrealized gains (losses) on securities$(39.0) $75.5
 (152) $(243.6) $300.5
 (181)
Net unrealized losses on forecasted transactions0.2
 0.1
 100 0.6
 (5.6) (111)
Foreign currency translation adjustment0
 0.6
 (100) 0
 0.8
 (100)
Other comprehensive income (loss)(38.8) 76.2
 (151) (243.0) 295.7
 (182)
Other comprehensive (income) loss attributable to NCI0.4
 (0.7) (157) 5.0
 (2.9) (272)
Comprehensive income attributable to Progressive$890.0
 $299.5
 197 $2,112.6
 $1,308.7
 61
Computation of Per Share Earnings Available to Progressive Common Shareholders    
     
Net income attributable to Progressive$928.4
 $224.0
 314 $2,350.6
 $1,015.9
 131
Less: Preferred share dividends6.7
 0
 NM 14.6
 0
 NM
Net income available to common shareholders$921.7
 $224.0
 311 $2,336.0
 $1,015.9
 130
Average common shares outstanding - Basic582.7
 581.3
 0 582.2
 580.7
 0
Net effect of dilutive stock-based compensation3.9
 4.3
 (9) 4.5
 5.0
 (10)
Total average equivalent common shares - Diluted586.6
 585.6
 0 586.7
 585.7
 0
Basic: Earnings per common share$1.58
 $0.39
 310 $4.01
 $1.75
 129
Diluted: Earnings per common share$1.57
 $0.38
 311 $3.98
 $1.73
 130
Dividends declared per common share1
$0
 $0
 NM $0
 $0
 NM

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




The Progressive Corporation and Subsidiaries
Consolidated Balance Sheets
(unaudited)
 June 30, December 31,
(millions — except per share amounts)2019
 2018
 2018
Assets     
Available-for-sale securities, at fair value:     
Fixed maturities (amortized cost: $30,588.2, $24,061.8, and $28,255.9)$31,188.2
 $23,789.2
 $28,111.5
Short-term investments (amortized cost: $1,360.9, $3,231.2, and $1,795.9)1,360.9
 3,231.2
 1,795.9
Total available-for-sale securities32,549.1
 27,020.4
 29,907.4
Equity securities, at fair value:     
Nonredeemable preferred stocks (cost: $1,060.3, $677.0, and $1,002.6)1,130.0
 758.6
 1,033.9
Common equities (cost: $1,203.7, $1,314.0, and $1,148.9)3,135.5
 3,142.2
 2,626.1
Total equity securities4,265.5
 3,900.8
 3,660.0
Total investments36,814.6
 30,921.2
 33,567.4
Cash and cash equivalents91.9
 154.8
 69.5
Restricted cash1.0
 2.9
 5.5
Total cash, cash equivalents, and restricted cash92.9
 157.7
 75.0
Accrued investment income187.5
 146.3
 190.8
Premiums receivable, net of allowance for doubtful accounts of $240.7, $210.5, and $252.17,167.1
 6,230.2
 6,497.1
Reinsurance recoverables3,051.5
 2,410.7
 2,696.1
Prepaid reinsurance premiums338.0
 289.8
 309.7
Deferred acquisition costs1,047.4
 895.7
 951.6
Property and equipment, net of accumulated depreciation of $1,105.6, $984.7, and $1,033.21,174.9
 1,116.4
 1,131.7
Goodwill452.7
 452.7
 452.7
Intangible assets, net of accumulated amortization of $283.6, $211.7, and $247.7258.7
 330.6
 294.6
Net deferred income taxes0
 0
 43.2
Other assets738.9
 412.2
 365.1
Total assets$51,324.2
 $43,363.5
 $46,575.0
Liabilities     
Unearned premiums$11,796.7
 $10,245.9
 $10,686.5
Loss and loss adjustment expense reserves16,568.6
 14,070.8
 15,400.8
Net deferred income taxes134.5
 46.0
 0
Accounts payable, accrued expenses, and other liabilities4,867.5
 3,922.3
 5,046.5
Debt1
4,406.0
 3,859.5
 4,404.9
Total liabilities37,773.3
 32,144.5
 35,538.7
Redeemable noncontrolling interest (NCI)2
220.1
 218.2
 214.5
Shareholders’ Equity
     
Serial Preferred Shares (authorized 20.0)     
Serial Preferred Shares, Series B, no par value (cumulative, liquidation preference $1,000 per share) (authorized, issued, and outstanding 0.5)493.9
 493.9
 493.9
Common shares, $1.00 par value (authorized 900.0; issued 797.5, including treasury shares of 213.4, 215.0, and 214.3)584.1

582.5

583.2
Paid-in capital1,523.3

1,425.9

1,479.0
Retained earnings10,276.4

8,720.4

8,386.6
Accumulated other comprehensive income (loss):




Net unrealized gains (losses) on fixed-maturity securities472.9
 (210.9) (105.6)
Net unrealized losses on forecasted transactions(16.8) (17.6) (17.2)
Accumulated other comprehensive (income) loss attributable to NCI(3.0) 6.6
 1.9
Total accumulated other comprehensive income (loss) attributable to Progressive453.1
 (221.9) (120.9)
Total shareholders’ equity13,330.8
 11,000.8
 10,821.8
Total liabilities, redeemable NCI, and shareholders’ equity$51,324.2
 $43,363.5
 $46,575.0

 September 30, December 31,
(millions)2018
 2017
 2017
Assets     
Available-for-sale securities, at fair value:     
Fixed maturities (amortized cost: $25,963.4, $18,583.1, and $20,209.9)$25,642.7
 $18,660.0
 $20,201.7
Short-term investments (amortized cost: $2,809.7, $4,311.5, and $2,869.4)2,809.7
 4,311.5
 2,869.4
Total available-for-sale securities28,452.4
 22,971.5
 23,071.1
Equity securities, at fair value:     
Nonredeemable preferred stocks (cost: $758.9, $700.6, and $698.6)840.9
 813.7
 803.8
Common equities (cost: $1,135.0, $1,485.5, and $1,499.0)3,057.3
 3,209.5
 3,399.8
Total equity securities3,898.2
 4,023.2
 4,203.6
Total investments32,350.6
 26,994.7
 27,274.7
Cash and cash equivalents121.9
 224.9
 265.0
Restricted cash0.8
 31.4
 10.3
Total cash, cash equivalents, and restricted cash122.7
 256.3
 275.3
Accrued investment income159.5
 113.0
 119.7
Premiums receivable, net of allowance for doubtful accounts of $230.1, $189.3, and $210.96,776.6
 5,519.9
 5,422.5
Reinsurance recoverables, including $114.1, $76.4, and $103.3 on paid losses and loss adjustment expenses2,490.5
 2,701.1
 2,273.4
Prepaid reinsurance premiums379.6
 211.7
 203.3
Deferred acquisition costs962.7
 782.6
 780.5
Property and equipment, net of accumulated depreciation of $1,004.6, $908.4, and $940.61,139.3
 1,129.4
 1,119.6
Goodwill452.7
 452.7
 452.7
Intangible assets, net of accumulated amortization of $229.7, $157.7, and $175.7312.6
 384.6
 366.6
Other assets396.9
 386.6
 412.9
Total assets$45,543.7
 $38,932.6
 $38,701.2
Liabilities     
Unearned premiums$11,009.2
 $9,005.3
 $8,903.5
Loss and loss adjustment expense reserves14,620.8
 13,353.3
 13,086.9
Net deferred income taxes53.5
 201.5
 135.0
Accounts payable, accrued expenses, and other liabilities3,924.1
 3,272.7
 3,481.0
Debt1
3,859.9
 3,312.2
 3,306.3
Total liabilities33,467.5
 29,145.0
 28,912.7
Redeemable noncontrolling interest (NCI)2
217.4
 498.2
 503.7
Shareholders’ Equity
     
Serial Preferred Shares (authorized 20.0)     
Serial Preferred Shares, Series B, no par value (cumulative, liquidation preference $1,000 per share) (authorized, issued, and outstanding 0.5, 0, and 0)493.9
 0
 0
Common shares, $1.00 par value (authorized 900.0; issued 797.5, including treasury shares of 214.4, 215.9, and 215.8)583.1

581.6

581.7
Paid-in capital1,443.4

1,365.1

1,389.2
Retained earnings9,602.1

6,116.5

6,031.7
Accumulated other comprehensive income (loss):




Net unrealized gains (losses) on securities(249.9) 1,240.1
 1,295.0
Net unrealized losses on forecasted transactions(17.4) (15.0) (14.8)
Foreign currency translation adjustment0
 (0.3) 0
Accumulated other comprehensive (income) loss attributable to NCI3.6
 1.4
 2.0
Total accumulated other comprehensive income (loss) attributable to Progressive(263.7) 1,226.2
 1,282.2
Total shareholders’ equity11,858.8
 9,289.4
 9,284.8
Total liabilities, redeemable NCI, and shareholders’ equity$45,543.7
 $38,932.6
 $38,701.2
1 Consists of long-term debt. See Note 4 – Debt for further discussion.
2 See Note 12 – 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)
 
Periods Ended June 30,Three Months Six Months
(millions — except per share amounts)2019
 2018
 2019
 2018
Serial Preferred Shares, No Par Value       
Balance, Beginning of period$493.9
 $493.9
 $493.9
 $0
Issuance of Serial Preferred Shares, Series B0
 0
 0
 493.9
Balance, End of period493.9
 493.9
 493.9
 493.9
Common Shares, $1.00 Par Value       
Balance, Beginning of period584.0
 582.4
 583.2
 581.7
Treasury shares purchased(0.1) 0
 (0.5) (0.7)
Net restricted equity awards issued/vested0.2
 0.1
 1.4
 1.5
Balance, End of period584.1
 582.5
 584.1
 582.5
Paid-In Capital       
Balance, Beginning of period1,496.6
 1,401.6
 1,479.0
 1,389.2
Amortization of equity-based compensation26.5
 20.3
 46.1
 37.5
Treasury shares purchased0
 (0.1) (1.1) (1.7)
Net restricted equity awards issued/vested(0.2) (0.1) (1.4) (1.5)
Reinvested dividends on restricted stock units0.6
 (0.3) 0.9
 (0.8)
Adjustment to carrying amount of redeemable noncontrolling interest(0.2) 4.5
 (0.2) 3.2
Balance, End of period1,523.3
 1,425.9
 1,523.3
 1,425.9
Retained Earnings       
Balance, Beginning of period9,358.1
 8,017.9
 8,386.6
 6,031.7
Net income attributable to Progressive979.4
 704.2
 2,057.8
 1,422.2
Treasury shares purchased(2.2) (2.1) (26.8) (37.0)
Cash dividends declared on common shares ($0.10, $0, $0.20, and $0 per share)(58.3) 0
 (116.6) 0
Cash dividends declared on Serial Preferred Shares, Series B ($0, $0, $26.875, and $0 per share)0
 0
 (13.4) 0
Reinvested dividends on restricted stock units(0.6) 0.3
 (0.9) 0.8
Cumulative effect of change in accounting principle0
 0
 0
 1,300.2
Reclassification of disproportionate tax effects0
 0
 0
 4.3
Other, net0
 0.1
 (10.3) (1.8)
Balance, End of period10,276.4
 8,720.4
 10,276.4
 8,720.4
Accumulated Other Comprehensive Income (Loss) Attributable to Progressive       
Balance, Beginning of period178.1
 (172.6) (120.9) 1,282.2
Attributable to noncontrolling interest(2.6) 0.6
 (4.9) 4.6
Other comprehensive income277.6
 (49.9) 578.9
 (204.2)
Cumulative effect of change in accounting principle0
 0
 0
 (1,300.2)
Reclassification of disproportionate tax effects0
 0
 0
 (4.3)
Balance, End of period453.1
 (221.9) 453.1
 (221.9)
Total Shareholders’ Equity$13,330.8
 $11,000.8
 $13,330.8
 $11,000.8
Nine Months Ended September 30,   
(millions — except per share amounts)2018
 2017
Serial Preferred Shares, No Par Value   
Balance, Beginning of period$0
 $0
Issuance of Serial Preferred Shares, Series B493.9
 0
Balance, End of period$493.9
 $0
Common Shares, $1.00 Par Value   
Balance, Beginning of period$581.7
 $579.9
Treasury shares purchased(1.4) (1.5)
Net restricted equity awards issued/vested2.8
 3.2
Balance, End of period$583.1
 $581.6
Paid-In Capital   
Balance, Beginning of period$1,389.2
 $1,303.4
Treasury shares purchased(3.3) (3.4)
Net restricted equity awards issued/vested(2.8) (3.2)
Amortization of equity-based compensation53.3
 74.3
Reinvested dividends on restricted stock units(0.8) 0.3
Adjustment to carrying amount of redeemable noncontrolling interest7.8
 (6.3)
Balance, End of period$1,443.4
 $1,365.1
Retained Earnings   
Balance, Beginning of period$6,031.7
 $5,140.4
Net income attributable to Progressive2,350.6
 1,015.9
Treasury shares purchased(74.0) (57.2)
Cash dividends declared on Serial Preferred Shares, Series B ($27.024 per share and $0)(13.5) 0
Reinvested dividends on restricted stock units0.8
 (0.3)
Cumulative effect of change in accounting principle1 
1,300.2
 0
Reclassification of disproportionate tax effects1 
4.3
 0
Other, net2.0
 17.7
Balance, End of period$9,602.1
 $6,116.5
Accumulated Other Comprehensive Income (Loss) Attributable to Progressive   
Balance, Beginning of period$1,282.2
 $933.4
Attributable to noncontrolling interest1.6
 (2.9)
Other comprehensive income(243.0) 295.7
Cumulative effect of change in accounting principle1 
(1,300.2) 0
Reclassification of disproportionate tax effects1 
(4.3) 0
Balance, End of period$(263.7) $1,226.2
Total Shareholders’ Equity$11,858.8
 $9,289.4
1 See Note 14 – New Accounting Standards for further discussion.
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)
Six Months Ended June 30,2019
 2018
(millions)   
Cash Flows From Operating Activities   
Net income$2,061.8
 $1,431.0
Adjustments to reconcile net income to net cash provided by operating activities:   
Depreciation114.6
 86.6
         Amortization of intangible assets35.9
 36.0
Net amortization of fixed-income securities1.9
 23.2
Amortization of equity-based compensation46.0
 38.5
Net realized (gains) losses on securities(594.4) 15.4
Net (gains) losses on disposition of property and equipment(1.6) 1.7
Changes in:   
Premiums receivable(670.0) (807.7)
Reinsurance recoverables(355.4) (137.3)
Prepaid reinsurance premiums(28.3) (86.5)
Deferred acquisition costs(95.8) (115.2)
Income taxes157.4
 2.0
Unearned premiums1,110.2
 1,342.4
Loss and loss adjustment expense reserves1,167.8
 983.9
Accounts payable, accrued expenses, and other liabilities605.8
 700.4
Other, net(181.2) (31.1)
Net cash provided by operating activities3,374.7
 3,483.3
Cash Flows From Investing Activities   
Purchases:   
Fixed maturities(13,008.4) (10,780.0)
Equity securities(230.7) (136.4)
Sales:   
Fixed maturities8,162.1
 3,916.1
Equity securities131.6
 460.0
Maturities, paydowns, calls, and other:   
Fixed maturities2,589.0
 2,936.2
Equity securities0
 15.0
Net sales (purchases) of short-term investments458.3
 (343.8)
Net unsettled security transactions297.6
 367.9
Purchases of property and equipment(203.2) (102.0)
Sales of property and equipment24.6
 6.7
Acquisition of additional shares of ARX Holding Corp.(11.2) (295.9)
Net cash used in investing activities(1,790.3) (3,956.2)
Cash Flows From Financing Activities   
Dividends paid to common shareholders(1,526.3) (654.9)
Dividends paid to preferred shareholders(13.4) 0
Acquisition of treasury shares for restricted stock tax liabilities(28.4) (39.0)
Acquisition of treasury shares acquired in open market0
 (0.4)
Proceeds from exercise of equity options1.6
 3.3
Net proceeds from issuance of Serial Preferred Shares, Series B0
 493.9
Net proceeds from debt issuances0
 589.5
Payments of debt0
 (37.1)
Net cash provided by (used in) financing activities(1,566.5) 355.3
Increase (decrease) in cash, cash equivalents, and restricted cash17.9
 (117.6)
Cash, cash equivalents, and restricted cash – January 1
75.0
 275.3
Cash, cash equivalents, and restricted cash – June 30
$92.9
 $157.7
Nine Months Ended September 30,2018
 2017
(millions)   
Cash Flows From Operating Activities   
Net income$2,361.2
 $1,017.8
Adjustments to reconcile net income to net cash provided by operating activities:   
Depreciation137.8
 126.7
         Amortization of intangible assets54.0
 48.2
Net amortization of fixed-income securities29.7
 67.5
Amortization of equity-based compensation54.0
 76.6
Net realized (gains) losses on securities(166.7) (59.3)
Net (gains) losses on disposition of property and equipment7.4
 5.3
Other (gains) losses0
 (0.2)
Changes in:   
Premiums receivable(1,354.1) (1,010.3)
Reinsurance recoverables(217.1) (816.1)
Prepaid reinsurance premiums(176.3) (41.2)
Deferred acquisition costs(182.2) (131.4)
Income taxes25.0
 (111.2)
Unearned premiums2,105.7
 1,536.7
Loss and loss adjustment expense reserves1,533.9
 1,985.1
Accounts payable, accrued expenses, and other liabilities1,032.8
 622.1
Other, net(43.6) (93.2)
Net cash provided by operating activities5,201.5
 3,223.1
Cash Flows From Investing Activities   
Purchases:   
Fixed maturities(14,430.6) (9,623.6)
Equity securities(234.9) (155.2)
Sales:   
Fixed maturities4,659.6
 3,431.7
Equity securities773.5
 150.6
Maturities, paydowns, calls, and other:   
Fixed maturities3,911.5
 3,872.5
Equity securities15.0
 50.0
Net sales (purchases) of short-term investments91.9
 (721.8)
Net unsettled security transactions11.0
 210.5
Purchases of property and equipment(164.8) (109.7)
Sales of property and equipment8.1
 13.8
Acquisition of additional shares of ARX Holding Corp.(296.9) 0
Acquisition of an insurance company, net of cash acquired0
 (18.1)
Net cash used in investing activities(5,656.6) (2,899.3)
Cash Flows From Financing Activities   
Net proceeds from issuance of Serial Preferred Shares, Series B493.9
 0
Net proceeds from debt issuances589.5
 841.1
Payments of debt(37.1) (42.8)
Redemption/reacquisition of subordinated debt0
 (635.6)
Dividends paid to common shareholders(654.9) (395.4)
Dividends paid to preferred shareholders(13.5) 0
Proceeds from exercise of equity options3.3
 0.5
Acquisition of treasury shares for restricted stock tax liabilities(78.3) (57.2)
Acquisition of treasury shares acquired in open market(0.4) (4.9)
Net cash provided by (used in) financing activities302.5
 (294.3)
Effect of exchange rate changes on cash0
 0.4
Increase (decrease) in cash, cash equivalents, and restricted cash(152.6) 29.9
Cash, cash equivalents, and restricted cash �� January 1
275.3
 226.4
Cash, cash equivalents, and restricted cash – September 30
$122.7
 $256.3

See notes to consolidated financial statements.




The Progressive Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
Note 1Basis 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 86.8%87.1% of the outstanding capital stock of ARX at SeptemberJune 30, 2019, 86.7% at June 30, 2018, and 69.0%86.8% at September 30, 2017 and December 31, 2017. The increase in Progressive’s ownership of ARX at September 30, 2018, is primarily due to the "put" by minority ARX shareholders of 204,527 of their ARX shares during the second quarter 2018, including exercised stock options, to Progressive pursuant to the stockholders’ agreement. All intercompany accounts and transactions are eliminated in consolidation.respectively.
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 SeptemberJune 30, 2018,2019, 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, 20172018 (“20172018 Annual Report to Shareholders”).
Other assets on the consolidated balance sheets include propertiescertain long-lived assets that are considered “held for sale,sale.” if any. The fair value of these properties,held for sale assets, less the estimated cost to sell them,sales costs, was $20.5$57.2 million at SeptemberJune 30, 2019, $17.4 million at June 30, 2018, and $5.3$39.3 million at both September 30, 2017 and December 31, 2017.2018.


Note 2Investments — The following tables present the composition of our investment portfolio by major security type, consistent with our classification of how we manage, monitor, and measure the portfolio. Our securities are reported in our Consolidated Balance Sheets at fair value. The changes in fair value for our fixed-maturity securities (other than hybrid securities) are reported as a component of accumulated other comprehensive income, net of deferred income taxes, in our Consolidated Balance Sheets.
The net holding period gains (losses) reported below represent the inception-to-date changes in fair value.value of the securities. The changes in the net holding period gains (losses) between periods for the hybrid securities and beginning in 2018, equity securities are recorded as a component of net realized gains (losses) on securities in our Consolidated Statements of Comprehensive Income. Prior to 2018, the change in fair value of our equity securities was part of accumulated other comprehensive income (see Note 14 – New Accounting Standards for further discussion).

($ in millions)Cost
 
Gross
Unrealized Gains

 
Gross
Unrealized
Losses

 
Net
Holding Period Gains
(Losses)

 
Fair
Value

 
% of
Total
Fair
Value

Cost
 
Gross
Unrealized Gains

 
Gross
Unrealized
Losses

 
Net
Holding Period Gains
(Losses)

 
Fair
Value

 
% of
Total
Fair
Value

September 30, 2018           
June 30, 2019           
Available-for-sale securities:                      
Fixed maturities:                      
U.S. government obligations$9,942.0
 $0
 $(189.5) $0
 $9,752.5
 30.2%$12,121.9
 $259.7
 $(2.2) $0
 $12,379.4
 33.6%
State and local government obligations1,610.1
 1.9
 (23.2) 0
 1,588.8
 4.9
1,563.6
 27.4
 (1.3) 0
 1,589.7
 4.3
Foreign government obligations0
 0
 0
 0
 0
 0
Corporate debt securities7,229.1
 4.9
 (85.2) (2.0) 7,146.8
 22.1
7,176.7
 210.1
 (1.8) 0.7
 7,385.7
 20.1
Residential mortgage-backed securities767.8
 7.6
 (5.6) 0
 769.8
 2.4
660.4
 6.2
 (1.4) 0
 665.2
 1.8
Commercial mortgage-backed securities2,986.5
 3.3
 (30.5) 0
 2,959.3
 9.1
4,361.2
 83.3
 (2.6) 0
 4,441.9
 12.1
Other asset-backed securities3,205.0
 1.4
 (13.6) 0.1
 3,192.9
 9.9
4,478.2
 19.9
 (1.0) 0.1
 4,497.2
 12.2
Redeemable preferred stocks222.9
 13.2
 (1.4) (2.1) 232.6
 0.7
226.2
 3.4
 (1.6) 1.1
 229.1
 0.6
Total fixed maturities25,963.4
 32.3
 (349.0) (4.0) 25,642.7
 79.3
30,588.2
 610.0
 (11.9) 1.9
 31,188.2
 84.7
Short-term investments2,809.7
 0
 0
 0
 2,809.7
 8.7
1,360.9
 0
 0
 0
 1,360.9
 3.7
Total available-for-sale securities28,773.1
 32.3
 (349.0) (4.0) 28,452.4
 88.0
31,949.1
 610.0
 (11.9) 1.9
 32,549.1
 88.4
Equity securities:                      
Nonredeemable preferred stocks758.9
 0
 0
 82.0
 840.9
 2.6
1,060.3
 0
 0
 69.7
 1,130.0
 3.1
Common equities1,135.0
 0
 0
 1,922.3
 3,057.3
 9.4
1,203.7
 0
 0
 1,931.8
 3,135.5
 8.5
Total equity securities1,893.9
 0
 0
 2,004.3
 3,898.2
 12.0
2,264.0
 0
 0
 2,001.5
 4,265.5
 11.6
Total portfolio1,2
$30,667.0
 $32.3
 $(349.0) $2,000.3
 $32,350.6
 100.0%$34,213.1
 $610.0
 $(11.9) $2,003.4
 $36,814.6
 100.0%





($ in millions)Cost
 
Gross
Unrealized Gains

 
Gross
Unrealized
Losses

 
Net
Holding Period Gains
(Losses)

 
Fair
Value

 
% of
Total
Fair
Value

Cost
 
Gross
Unrealized Gains

 
Gross
Unrealized
Losses

 
Net
Holding Period Gains
(Losses)

 
Fair
Value

 
% of
Total
Fair
Value

September 30, 2017           
June 30, 2018           
Available-for-sale securities:           
Fixed maturities:                      
U.S. government obligations$4,612.2
 $3.0
 $(20.2) $0
 $4,595.0
 17.0%$8,005.8
 $0.9
 $(141.3) $0
 $7,865.4
 25.4%
State and local government obligations2,332.2
 35.0
 (3.1) 0.1
 2,364.2
 8.7
1,678.9
 4.3
 (15.9) 0
 1,667.3
 5.4
Foreign government obligations24.2
 0
 0
 0
 24.2
 0.1
Corporate debt securities5,195.7
 32.7
 (4.2) 1.4
 5,225.6
 19.4
7,422.4
 4.2
 (94.3) (2.0) 7,330.3
 23.7
Residential mortgage-backed securities947.0
 12.2
 (3.6) 0
 955.6
 3.5
819.6
 8.4
 (5.4) 0
 822.6
 2.7
Commercial mortgage-backed securities2,763.7
 17.0
 (12.8) 0
 2,767.9
 10.3
2,725.5
 2.9
 (31.5) 0
 2,696.9
 8.7
Other asset-backed securities2,485.6
 6.4
 (2.0) 0.2
 2,490.2
 9.2
3,189.2
 2.0
 (13.7) 0.1
 3,177.6
 10.3
Redeemable preferred stocks222.5
 16.4
 (2.0) 0.4
 237.3
 0.9
220.4
 14.1
 (2.0) (3.4) 229.1
 0.7
Total fixed maturities18,583.1
 122.7
 (47.9) 2.1
 18,660.0
 69.1
24,061.8
 36.8
 (304.1) (5.3) 23,789.2
 76.9
Short-term investments3,231.2
 0
 0
 0
 3,231.2
 10.5
Total available-for-sale securities27,293.0
 36.8
 (304.1) (5.3) 27,020.4
 87.4
Equity securities:                      
Nonredeemable preferred stocks700.6
 120.4
 (7.3) 0
 813.7
 3.0
677.0
 0
 0
 81.6
 758.6
 2.4
Common equities1,485.5
 1,729.5
 (5.5) 0
 3,209.5
 11.9
1,314.0
 0
 0
 1,828.2
 3,142.2
 10.2
Short-term investments4,311.5
 0
 0
 0
 4,311.5
 16.0
Total equity securities1,991.0
 0
 0
 1,909.8
 3,900.8
 12.6
Total portfolio1,2
$25,080.7
 $1,972.6
 $(60.7) $2.1
 $26,994.7
 100.0%$29,284.0
 $36.8
 $(304.1) $1,904.5
 $30,921.2
 100.0%
 
($ in millions)Cost
 
Gross
Unrealized Gains

 
Gross
Unrealized
Losses

 
Net
Holding Period Gains
(Losses)

 
Fair
Value

 
% of
Total
Fair
Value

December 31, 2018           
Available-for-sale securities:           
Fixed maturities:           
U.S. government obligations$9,897.4
 $71.2
 $(52.1) $0
 $9,916.5
 29.5%
State and local government obligations1,654.6
 7.3
 (12.8) 0
 1,649.1
 4.9
Corporate debt securities8,808.5
 13.6
 (125.3) (2.5) 8,694.3
 25.9
Residential mortgage-backed securities733.5
 6.0
 (5.1) 0
 734.4
 2.2
Commercial mortgage-backed securities3,332.8
 7.8
 (39.0) 0
 3,301.6
 9.8
Other asset-backed securities3,585.4
 3.6
 (11.8) 0.1
 3,577.3
 10.7
Redeemable preferred stocks243.7
 5.9
 (3.5) (7.8) 238.3
 0.7
Total fixed maturities28,255.9
 115.4
 (249.6) (10.2) 28,111.5
 83.7
Short-term investments1,795.9
 0
 0
 0
 1,795.9
 5.4
       Total available-for-sale securities30,051.8
 115.4
 (249.6) (10.2) 29,907.4
 89.1
Equity securities:           
Nonredeemable preferred stocks1,002.6
 0
 0
 31.3
 1,033.9
 3.1
Common equities1,148.9
 0
 0
 1,477.2
 2,626.1
 7.8
       Total equity securities2,151.5
 0
 0
 1,508.5
 3,660.0
 10.9
  Total portfolio1,2
$32,203.3
 $115.4
 $(249.6) $1,498.3
 $33,567.4
 100.0%

($ in millions)Cost
 
Gross
Unrealized Gains

 
Gross
Unrealized
Losses

 
Net
Holding Period Gains
(Losses)

 
Fair
Value

 
% of
Total
Fair
Value

December 31, 2017           
Fixed maturities:           
U.S. government obligations$6,688.8
 $1.1
 $(44.0) $0
 $6,645.9
 24.4%
State and local government obligations2,285.6
 20.7
 (9.3) 0.1
 2,297.1
 8.4
Foreign government obligations0
 0
 0
 0
 0
 0
Corporate debt securities4,997.2
 14.8
 (14.4) 0.1
 4,997.7
 18.3
Residential mortgage-backed securities828.8
 11.3
 (3.4) 0
 836.7
 3.1
Commercial mortgage-backed securities2,760.1
 11.8
 (13.3) 0
 2,758.6
 10.1
Other asset-backed securities2,454.5
 4.5
 (4.5) 0.2
 2,454.7
 9.0
Redeemable preferred stocks194.9
 17.8
 (1.5) (0.2) 211.0
 0.8
Total fixed maturities20,209.9
 82.0
 (90.4) 0.2
 20,201.7
 74.1
Equity securities:           
Nonredeemable preferred stocks698.6
 114.0
 (8.8) 0
 803.8
 2.9
Common equities1,499.0
 1,901.0
 (0.2) 0
 3,399.8
 12.5
Short-term investments2,869.4
 0
 0
 0
 2,869.4
 10.5
Total portfolio1,2
$25,276.9
 $2,097.0
 $(99.4) $0.2
 $27,274.7
 100.0%
1Our portfolio reflects the effect of unsettled security transactions; at SeptemberJune 30, 2018 and 2017,2019, we had $5.2$303.5 million and $238.3 million, respectively, included in “other liabilities,” compared to $5.8$362.1 million included in “other assets”and $5.9 million at June 30, 2018 and December 31, 2017.2018, respectively.
2The total fair value of the portfolio at SeptemberJune 30, 20182019 and 2017,2018, and December 31, 2017,2018, included $1.8$1.2 billion, $1.1$1.7 billion, and $1.6$2.9 billion, respectively, of securities held in a consolidated, non-insurance subsidiary of the holding company, net of any unsettled security transactions.






At June 30, 2019, bonds and certificates of deposit in the principal amount of $251.0 million were on deposit to meet state insurance regulatory requirements.





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


WeAlthough we did invest in repurchase and reverse repurchase transactions during the first six months of 2019 and at various times during 2018, we did not have any open repurchase or reverse repurchase transactions in our short-term investment portfolio at SeptemberJune 30, 20182019 and 2017,2018, or December 31, 2017.2018. To the extent we enter into repurchase or reverse repurchase transactions, and consistent with past practice, we would elect not to offset these transactions and would report them on a gross basis on our balance sheets, despite the option to elect to offset these transactions as long as they were with the same counterparty and subject to an enforceable master netting arrangement.


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


 June 30,  
(millions)2019
 2018
 December 31, 2018
Fixed maturities:     
State and local government obligations$3.5
 $3.6
 $3.6
Corporate debt securities91.3
 170.3
 158.9
Other asset-backed securities3.5
 5.5
 4.5
Redeemable preferred stocks86.7
 67.3
 77.7
Total hybrid securities$185.0
 $246.7
 $244.7

 September 30,  
(millions)2018
 2017
 December 31, 2017
Fixed maturities:     
State and local government obligations$3.6
 $2.4
 $6.1
Corporate debt securities159.7
 114.9
 99.8
Other asset-backed securities5.0
 7.1
 6.7
Redeemable preferred stocks72.0
 35.5
 30.3
Total hybrid securities$240.3
 $159.9
 $142.9


Certain securities in our portfolio are accounted for as hybrid securities because they contain embedded derivatives that are not deemed to be clearly and closely related to the host investments. Since the embedded derivatives (e.g., change-in-control put option, debt-to-equity conversion, or any other feature unrelated to the credit quality or risk of default of the issuer that could impact the amount or timing of our expected future cash flows) do not have observable intrinsic values, we have elected to record the changes in fair value of these securities through income as realized gains or losses.
Fixed Maturities The composition of fixed maturities by maturity at SeptemberJune 30, 20182019, was:
 
(millions)Cost
 Fair Value
Less than one year$5,388.1
 $5,394.3
One to five years18,518.4
 18,833.0
Five to ten years6,551.9
 6,829.2
Ten years or greater129.8
 131.7
Total$30,588.2
 $31,188.2
(millions)Cost
 Fair Value
Less than one year$4,192.3
 $4,196.4
One to five years16,545.0
 16,315.6
Five to ten years5,123.1
 5,028.3
Ten years or greater103.0
 102.4
Total$25,963.4
 $25,642.7

 
Asset-backed securities are classified in the maturity distribution table based upon their projected cash flows. All other securities which do not have a single maturity date are reported based upon expected average maturity. Contractual maturities may differ from expected maturities because the issuers of the securities may have the right to call or prepay obligations.









Gross Unrealized Losses As of September 30, 2018, we had $349.0 millionThe following tables show the composition of gross unrealized losses by major security type and by the length of time that individual securities have been in a continuous unrealized loss position:
 Total No. of Sec.
Total
Fair
Value
Gross Unrealized Losses
Less than 12 Months 12 Months or Greater
($ in millions)No. of Sec.
Fair
Value
Unrealized Losses
 No. of Sec.
Fair
Value
Unrealized Losses
June 30, 2019          
Fixed maturities:          
U.S. government obligations16
$572.8
$(2.2)0
$0
$0
 16
$572.8
$(2.2)
State and local government obligations85
398.3
(1.3)11
133.6
(0.1) 74
264.7
(1.2)
Corporate debt securities68
928.9
(1.8)4
42.3
(0.1) 64
886.6
(1.7)
Residential mortgage-backed securities43
203.8
(1.4)8
24.5
0
 35
179.3
(1.4)
Commercial mortgage-backed securities57
963.7
(2.6)26
485.5
(1.1) 31
478.2
(1.5)
Other asset-backed securities92
674.6
(1.0)23
265.6
(0.2) 69
409.0
(0.8)
Redeemable preferred stocks2
26.3
(1.6)1
15.0
(0.5) 1
11.3
(1.1)
Total fixed maturities363
$3,768.4
$(11.9)73
$966.5
$(2.0) 290
$2,801.9
$(9.9)
 Total No. of Sec.
Total
Fair
Value
Gross Unrealized Losses
Less than 12 Months 12 Months or Greater
($ in millions)No. of Sec.
Fair
Value
Unrealized Losses
 No. of Sec.
Fair
Value
Unrealized Losses
June 30, 2018          
Fixed maturities:          
U.S. government obligations70
$7,503.2
$(141.3)33
$4,543.5
$(73.6) 37
$2,959.7
$(67.7)
State and local government obligations355
1,050.9
(15.9)219
631.9
(7.1) 136
419.0
(8.8)
Corporate debt securities391
6,153.5
(94.3)322
5,439.3
(77.2) 69
714.2
(17.1)
Residential mortgage-backed securities227
380.3
(5.4)52
188.6
(0.9) 175
191.7
(4.5)
Commercial mortgage-backed securities142
2,300.9
(31.5)85
1,371.4
(14.4) 57
929.5
(17.1)
Other asset-backed securities219
2,479.7
(13.7)148
2,055.1
(8.5) 71
424.6
(5.2)
Redeemable preferred stocks3
30.2
(2.0)1
4.6
(0.2) 2
25.6
(1.8)
Total fixed maturities1,407
$19,898.7
$(304.1)860
$14,234.4
$(181.9) 547
$5,664.3
$(122.2)
 Total No. of Sec.
Total
Fair
Value
Gross Unrealized Losses
Less than 12 Months 12 Months or Greater
($ in millions)No. of Sec.
Fair
Value
Unrealized Losses
 No. of Sec.
Fair
Value
Unrealized Losses
December 31, 2018          
Fixed maturities:          
U.S. government obligations51
$4,438.0
$(52.1)2
$126.6
$(0.1) 49
$4,311.4
$(52.0)
State and local government obligations299
972.4
(12.8)49
192.7
(0.3) 250
779.7
(12.5)
Corporate debt securities368
6,723.3
(125.3)133
2,613.3
(33.4) 235
4,110.0
(91.9)
Residential mortgage-backed securities228
450.2
(5.1)32
248.8
(0.8) 196
201.4
(4.3)
Commercial mortgage-backed securities140
2,328.5
(39.0)48
741.2
(8.9) 92
1,587.3
(30.1)
Other asset-backed securities203
2,691.3
(11.8)84
1,551.7
(3.2) 119
1,139.6
(8.6)
Redeemable preferred stocks3
48.5
(3.5)1
18.9
(0.6) 2
29.6
(2.9)
Total fixed maturities1,292
$17,652.2
$(249.6)349
$5,493.2
$(47.3) 943
$12,159.0
$(202.3)


Since both June 30, 2018 and December 31, 2018, the number of securities in our fixed-maturity securities.portfolio with unrealized losses decreased, primarily due to valuation increases in nearly all sectors since interest rates declined and credit spreads tightened. We had no material decreases in valuation as a result of credit rating downgrades. A review of our fixed-maturitythe securities in the table above indicated that the issuers were current with respect to their interest obligations and that there was no evidence of deterioration of the current cash flow projections that would indicate we would not receive the remaining principal at maturity.












The following tables show the composition of gross unrealized losses by major security type and by the length of time that individual securities have been in a continuous unrealized loss position:
 Total No. of Sec.
Total
Fair
Value
Gross Unrealized Losses
Less than 12 Months 12 Months or Greater
($ in millions)No. of Sec.
Fair
Value
Unrealized Losses
 No. of Sec.
Fair
Value
Unrealized Losses
September 30, 2018          
Fixed maturities:          
U.S. government obligations91
$9,752.5
$(189.5)39
$5,025.0
$(67.2) 52
$4,727.5
$(122.3)
State and local government obligations459
1,394.3
(23.2)227
680.5
(6.4) 232
713.8
(16.8)
Corporate debt securities369
5,959.2
(85.2)221
3,963.9
(45.3) 148
1,995.3
(39.9)
Residential mortgage-backed securities234
521.7
(5.6)44
325.0
(0.6) 190
196.7
(5.0)
Commercial mortgage-backed securities151
2,392.7
(30.5)80
1,164.2
(8.3) 71
1,228.5
(22.2)
Other asset-backed securities219
2,828.6
(13.6)111
1,821.8
(4.0) 108
1,006.8
(9.6)
Redeemable preferred stocks3
30.8
(1.4)1
4.7
(0.1) 2
26.1
(1.3)
Total fixed maturities1,526
$22,879.8
$(349.0)723
$12,985.1
$(131.9) 803
$9,894.7
$(217.1)
 Total No. of Sec.
Total
Fair
Value
Gross Unrealized Losses
Less than 12 Months 12 Months or Greater
($ in millions)No. of Sec.
Fair
Value
Unrealized Losses
 No. of Sec.
Fair
Value
Unrealized Losses
September 30, 2017          
Fixed maturities:          
U.S. government obligations54
$3,804.0
$(20.2)31
$2,302.2
$(7.1) 23
$1,501.8
$(13.1)
State and local government obligations169
610.4
(3.1)40
141.0
(0.7) 129
469.4
(2.4)
Corporate debt securities113
1,523.8
(4.2)59
636.0
(1.1) 54
887.8
(3.1)
Residential mortgage-backed securities191
341.5
(3.6)26
39.2
(0.1) 165
302.3
(3.5)
Commercial mortgage-backed securities105
1,588.9
(12.8)61
1,073.5
(4.6) 44
515.4
(8.2)
Other asset-backed securities148
1,393.2
(2.0)103
920.8
(1.0) 45
472.4
(1.0)
Redeemable preferred stocks2
21.4
(2.0)1
10.9
0
 1
10.5
(2.0)
Total fixed maturities782
9,283.2
(47.9)321
5,123.6
(14.6) 461
4,159.6
(33.3)
Equity securities:          
Nonredeemable preferred stocks3
72.4
(7.3)0
0
0
 3
72.4
(7.3)
Common equities67
52.0
(5.5)62
49.3
(4.9) 5
2.7
(0.6)
Total equity securities70
124.4
(12.8)62
49.3
(4.9) 8
75.1
(7.9)
Total portfolio852
$9,407.6
$(60.7)383
$5,172.9
$(19.5) 469
$4,234.7
$(41.2)
 Total No. of Sec.
Total
Fair
Value
Gross Unrealized Losses
Less than 12 Months 12 Months or Greater
($ in millions)No. of Sec.
Fair
Value
Unrealized Losses
 No. of Sec.
Fair
Value
Unrealized Losses
December 31, 2017          
Fixed maturities:          
U.S. government obligations58
$5,817.0
$(44.0)41
$4,869.3
$(34.6) 17
$947.7
$(9.4)
State and local government obligations358
1,200.3
(9.3)230
737.6
(4.4) 128
462.7
(4.9)
Corporate debt securities222
2,979.4
(14.4)171
2,072.9
(9.1) 51
906.5
(5.3)
Residential mortgage-backed securities201
300.9
(3.4)30
75.1
(0.2) 171
225.8
(3.2)
Commercial mortgage-backed securities105
1,682.3
(13.3)63
1,221.2
(5.9) 42
461.1
(7.4)
Other asset-backed securities197
1,837.3
(4.5)134
1,377.8
(3.3) 63
459.5
(1.2)
Redeemable preferred stocks2
21.8
(1.5)1
10.8
(0.1) 1
11.0
(1.4)
Total fixed maturities1,143
13,839.0
(90.4)670
10,364.7
(57.6) 473
3,474.3
(32.8)
Equity securities:          
Nonredeemable preferred stocks4
127.8
(8.8)1
56.5
(0.5) 3
71.3
(8.3)
Common equities19
13.4
(0.2)18
13.4
(0.2) 1
0
0
Total equity securities23
141.2
(9.0)19
69.9
(0.7) 4
71.3
(8.3)
Total portfolio1,166
$13,980.2
$(99.4)689
$10,434.6
$(58.3) 477
$3,545.6
$(41.1)



Since both September 30, 2017 and December 31, 2017, the number of securities in our fixed-maturity portfolio with unrealized losses increased as a result of rising interest rates. We had no material decreases in valuation as a result of credit rating downgrades and all of the securities in the table above are current with respect to required principal and interest payments.

Other-Than-Temporary Impairment (OTTI) The following table shows the total non-credit portion of the OTTI recorded in accumulated other comprehensive income, reflecting the original non-credit loss at the time the credit impairment was determined (i.e., unadjusted for valuation changes subsequent to the original write-down):
 June 30, December 31,
2018
(millions)2019
 2018
 
Fixed maturities:     
Residential mortgage-backed securities$(19.7) $(19.7) $(19.7)
Commercial mortgage-backed securities(0.1) (0.3) (0.1)
Total fixed maturities$(19.8) $(20.0) $(19.8)

 September 30, December 31,
2017
(millions)2018
 2017
 
Fixed maturities:     
Residential mortgage-backed securities$(19.7) $(19.7) $(19.7)
Commercial mortgage-backed securities(0.1) (0.4) (0.3)
Total fixed maturities$(19.8) $(20.1) $(20.0)


The following tables provide rollforwards of the amounts related to credit losses recognized in earnings for the periods ended SeptemberJune 30, 20182019 and 20172018, for which a portion of the OTTI losses were also recognized in accumulated other comprehensive income at the time the credit impairments were determined and recognized:
 Three Months Ended September 30, 2018
 Mortgage-Backed  
(millions)Residential 
 Commercial 
 Total
Balance at June 30, 2018$0.3
 $0.5
 $0.8
Credit losses for which an OTTI was not previously recognized0
 0
 0
Reductions for securities sold/matured0
 0
 0
Change in recoveries of future cash flows expected to be collected1
0
 0
 0
Balance at September 30, 2018$0.3
 $0.5
 $0.8
      
 Nine Months Ended September 30, 2018
 Mortgage-Backed  
(millions)Residential 
 Commercial 
 Total
Balance at December 31, 2017$0
 $0.5
 $0.5
Credit losses for which an OTTI was not previously recognized0
 0
 0
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 September 30, 2018$0.3
 $0.5
 $0.8


 Three Months Ended June 30, 2019
 Mortgage-Backed  
(millions)Residential 
 Commercial 
 Total
Balance at March 31, 2019$0
 $0.5
 $0.5
Change in recoveries of future cash flows expected to be collected1
0
 0
 0
Balance at June 30, 2019$0
 $0.5
 $0.5
      
 Six Months Ended June 30, 2019
 Mortgage-Backed  
(millions)Residential 
 Commercial 
 Total
Balance at December 31, 2018$0
 $0.5
 $0.5
Change in recoveries of future cash flows expected to be collected1
0
 0
 0
Balance at June 30, 2019$0
 $0.5
 $0.5
 Three Months Ended September 30, 2017
 Mortgage-Backed  
(millions)Residential 
 Commercial 
 Total
Balance at June 30, 2017$0.2
 $0.1
 $0.3
Credit losses for which an OTTI was not previously recognized0
 0.4
 0.4
Reductions for securities sold/matured0
 0
 0
Change in recoveries of future cash flows expected to be collected1
0
 0
 0
Balance at September 30, 2017$0.2
 $0.5
 $0.7
      
 Nine Months Ended September 30, 2017
 Mortgage-Backed  
(millions)Residential 
 Commercial 
 Total
Balance at December 31, 2016$11.1
 $0.4
 $11.5
Credit losses for which an OTTI was not previously recognized0
 0.4
 0.4
Reductions for securities sold/matured(10.9) (0.3) (11.2)
Change in recoveries of future cash flows expected to be collected1
0
 0
 0
Balance at September 30, 2017$0.2
 $0.5
 $0.7
 Three Months Ended June 30, 2018
 Mortgage-Backed  
(millions)Residential 
 Commercial 
 Total
Balance at March 31, 2018$0
 $0.5
 $0.5
Change in recoveries of future cash flows expected to be collected1
0.3
 0
 0.3
Balance at June 30, 2018$0.3
 $0.5
 $0.8
      
 Six Months Ended June 30, 2018
 Mortgage-Backed  
(millions)Residential 
 Commercial 
 Total
Balance at December 31, 2017$0
 $0.5
 $0.5
Change in recoveries of future cash flows expected to be collected1
0.3
 0
 0.3
Balance at June 30, 2018$0.3
 $0.5
 $0.8
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 morenot likely that we will not be required to sell the securities prior to the recovery of their respective cost bases (which could be maturity), we are required to measure the amount of potential credit losses on the securities that were in an unrealized loss position. In that process, we considered a number of factors and inputs related to the individual securities. The methodology and significant inputs used to measure the amount of credit losses in our portfolio included: current performance indicators on the business model or underlying assets (e.g., delinquency rates, foreclosure rates, and default rates); credit support (via current levels of subordination); historical credit ratings; and updated cash flow expectations based upon these performance indicators. In order to determine the amount of credit loss, if any, the net present value of the cash flows expected (i.e., expected recovery value) was calculated using the current book yield for each security, and was compared to its current amortized value. In the event that the net present value was below the amortized value, a credit loss would be deemed to exist,


and the security would be written down. We did not have any credit impairment write-downs for the ninesix months ended SeptemberJune 30, 2019 or 2018.



Realized Gains (Losses) The components of net realized gains (losses) for the three and ninesix months ended SeptemberJune 30, were:
 Three Months Six Months
(millions)2019
 2018
 2019
 2018
Gross realized gains on security sales       
Available-for-sale securities:       
U.S. government obligations$34.9
 $1.7
 $71.5
 $1.7
State and local government obligations0.6
 0.6
 2.2
 9.2
Corporate and other debt securities31.1
 0.3
 47.2
 0.4
Residential mortgage-backed securities0.2
 0
 0.2
 0
Commercial mortgage-backed securities2.9
 0.3
 3.6
 2.0
Other asset-backed securities0.7
 0.1
 0.7
 0.1
Redeemable preferred stocks0
 3.2
 0
 4.3
Total available-for-sale securities70.4
 6.2
 125.4
 17.7
Equity securities:       
Nonredeemable preferred stocks11.7
 0
 16.6
 3.6
Common equities0.2
 18.5
 4.7
 138.4
Total equity securities11.9
 18.5
 21.3
 142.0
   Subtotal gross realized gains on security sales82.3
 24.7
 146.7

159.7
Gross realized losses on security sales       
Available-for-sale securities:       
U.S. government obligations(5.3) (29.9) (12.4) (38.8)
State and local government obligations(0.1) (0.6) (0.7) (1.9)
Corporate and other debt securities(1.4) (1.0) (7.5) (4.1)
Residential mortgage-backed securities0
 0
 (2.3) 0
Commercial mortgage-backed securities0
 0
 (2.1) (6.3)
Other asset-backed securities0
 (0.9) (0.1) (1.0)
Redeemable preferred stocks(0.1) 0
 (0.1) 0
Total available-for-sale securities(6.9) (32.4) (25.2) (52.1)
Equity securities:       
Nonredeemable preferred stocks0
 (1.9) 0
 (2.3)
Common equities(7.9) 0
 (7.9) (7.9)
Total equity securities(7.9) (1.9) (7.9) (10.2)
   Subtotal gross realized losses on security sales(14.8) (34.3) (33.1) (62.3)
Net realized gains (losses) on security sales       
Available-for-sale securities:       
U.S. government obligations29.6
 (28.2) 59.1
 (37.1)
State and local government obligations0.5
 0
 1.5
 7.3
Corporate and other debt securities29.7
 (0.7) 39.7
 (3.7)
Residential mortgage-backed securities0.2
 0
 (2.1) 0
Commercial mortgage-backed securities2.9
 0.3
 1.5
 (4.3)
Other asset-backed securities0.7
 (0.8) 0.6
 (0.9)
Redeemable preferred stocks(0.1) 3.2
 (0.1) 4.3
Total available-for-sale securities63.5
 (26.2) 100.2
 (34.4)
Equity securities:       
Nonredeemable preferred stocks11.7
 (1.9) 16.6
 1.3
Common equities(7.7) 18.5
 (3.2) 130.5
Total equity securities4.0
 16.6
 13.4
 131.8
  Subtotal net realized gains (losses) on security sales67.5
 (9.6) 113.6
 97.4
Net holding period gains (losses)       
Hybrid securities1.4
 (2.3) 12.1
 (5.5)
Equity securities111.0
 55.8
 493.0
 (96.2)
  Subtotal net holding period gains (losses)112.4
 53.5
 505.1
 (101.7)
Other-than-temporary impairment losses       
Other asset impairment0
 (11.1) (24.3) (11.1)
  Subtotal other-than-temporary impairment losses0
 (11.1) (24.3) (11.1)
     Total net realized gains (losses) on securities$179.9
 $32.8
 $594.4
 $(15.4)

 Three Months Nine Months
(millions)2018
 2017
 2018
 2017
Gross realized gains on security sales       
Available-for-sale securities:       
U.S. government obligations$0.1
 $0.9
 $1.8
 $5.8
State and local government obligations0.2
 4.0
 9.4
 7.1
Corporate and other debt securities1.7
 5.1
 2.1
 16.5
Residential mortgage-backed securities0
 2.8
 0
 23.8
Commercial mortgage-backed securities0
 0
 2.0
 2.4
Other asset-backed securities0
 0
 0.1
 0.3
Redeemable preferred stocks0.2
 7.7
 4.5
 8.0
Total available-for-sale securities2.2
 20.5
 19.9
 63.9
Equity securities:       
Nonredeemable preferred stocks0.1
 3.0
 3.7
 54.6
Common equities126.8
 5.7
 265.2
 23.0
Total equity securities126.9
 8.7
 268.9
 77.6
   Subtotal gross realized gains on security sales129.1
 29.2
 288.8

141.5
Gross realized losses on security sales       
Available-for-sale securities:       
U.S. government obligations(7.6) (1.0) (46.4) (4.6)
State and local government obligations(0.6) 0
 (2.5) (0.1)
Corporate and other debt securities(3.2) (1.8) (7.3) (4.6)
Residential mortgage-backed securities0
 (0.1) 0
 (0.4)
Commercial mortgage-backed securities0
 (0.5) (6.3) (3.6)
Other asset-backed securities(0.1) 0
 (1.1) 0
Redeemable preferred stocks0
 (6.4) 0
 (6.4)
Total available-for-sale securities(11.5) (9.8) (63.6) (19.7)
Equity securities:       
Nonredeemable preferred stocks0
 (0.1) (2.3) (5.9)
Common equities(9.2) (0.2) (17.1) (0.3)
Total equity securities(9.2) (0.3) (19.4) (6.2)
   Subtotal gross realized losses on security sales(20.7) (10.1) (83.0) (25.9)
Net realized gains (losses) on security sales       
Available-for-sale securities:       
U.S. government obligations(7.5) (0.1) (44.6) 1.2
State and local government obligations(0.4) 4.0
 6.9
 7.0
Corporate and other debt securities(1.5) 3.3
 (5.2) 11.9
Residential mortgage-backed securities0
 2.7
 0
 23.4
Commercial mortgage-backed securities0
 (0.5) (4.3) (1.2)
Other asset-backed securities(0.1) 0
 (1.0) 0.3
Redeemable preferred stocks0.2
 1.3
 4.5
 1.6
Total available-for-sale securities(9.3) 10.7
 (43.7) 44.2
Equity securities:       
Nonredeemable preferred stocks0.1
 2.9
 1.4
 48.7
Common equities117.6
 5.5
 248.1
 22.7
Total equity securities117.7
 8.4
 249.5
 71.4
Litigation settlements and other gains (losses)0
 0.1
 0
 1.2
  Subtotal net realized gains (losses) on security sales108.4
 19.2
 205.8
 116.8
Net holding period gains (losses)       
Hybrid securities1.3
 (0.9) (4.2) 0.3
Equity securities94.5
 0
 (1.7) 0
  Subtotal net holding period gains (losses)95.8
 (0.9) (5.9) 0.3
Other-than-temporary impairment losses       
Fixed maturities:       
Commercial mortgage-backed securities0
 (0.4) 0
 (0.4)
Total fixed maturities0
 (0.4) 0
 (0.4)
Equity securities:       
Common equities0
 (8.9) 0
 (12.5)
Subtotal investment other-than-temporary impairment losses0
 (9.3) 0
 (12.9)
Other asset impairment(22.1) (33.7) (33.2) (44.9)
  Subtotal other-than-temporary impairment losses(22.1) (43.0) (33.2) (57.8)
     Total net realized gains (losses) on securities$182.1
 $(24.7) $166.7
 $59.3




Gross realized gains were predominantlyFor both 2019 and 2018, the result of sales in our indexed common stock portfolio in order to reduce the overall portfolio risk, while gross realized losses were predominantly in our available-for-sale securities and were largely the result of an increase in interest rates. Also included are holding period change in valuation gains and losses on equity securities and hybrid securities, recoveries from litigation settlements related to investments, and write-downs for securities determined to be other-than-temporarily impaired. The other asset impairment relateslosses related to federal renewable energy tax credit fund investments, which are reflectedwere reported in “other assets” on the balance sheet, under whichbased on an analysis that our investments in those funds will not generate the future pretax cash flows are expectedthat we anticipated. See Note 5 – Income Taxes for additional discussion related to be less than the carrying value of the assets.2019 activity.





The following table reflects our holding period realized gains (losses) on equity securities recognized for the three and ninesix months ended SeptemberJune 30, 2019 and 2018, for equity securities held at quarter end:
Three Months
Nine Months
Three Months Six Months
(millions)2018
2018
2019
2018
 2019
2018
Total net gains (losses) recognized during the period on equity securities$212.2
$247.8
$115.0
$72.4
 $506.4
$35.6
Less: Net gains (losses) recognized on equity securities sold during the period117.7
249.5
4.0
16.6
 13.4
131.8
Net holding period gains (losses) recognized during the period on equity securities held at period end$94.5
$(1.7)$111.0
$55.8
 $493.0
$(96.2)
Note: Comparative disclosure for the prior year period is not meaningful.
Net Investment Income  The components of net investment income for the three and ninesix months ended SeptemberJune 30, were:
 Three Months Six Months
(millions)2019
2018
 2019
2018
Available-for-sale securities:     
   Fixed maturities:     
U.S. government obligations$69.2
$45.9
 $122.9
$85.7
State and local government obligations8.9
9.1
 18.2
19.1
Corporate debt securities67.5
51.8
 144.7
88.0
Residential mortgage-backed securities4.6
6.6
 11.2
13.5
Commercial mortgage-backed securities33.4
20.2
 65.1
41.4
Other asset-backed securities28.1
16.1
 54.1
29.7
Redeemable preferred stocks8.5
2.9
 12.2
5.5
Total fixed maturities220.2
152.6
 428.4
282.9
   Short-term investments11.2
14.9
 27.2
25.0
    Total available-for-sale securities231.4
167.5
 455.6
307.9
Equity securities:     
Nonredeemable preferred stocks15.9
10.4
 31.4
21.3
Common equities14.0
14.2
 27.2
29.2
    Total equity securities29.9
24.6
 58.6
50.5
    Investment income261.3
192.1
 514.2
358.4
    Investment expenses(6.2)(6.2) (12.4)(12.2)
Net investment income$255.1
$185.9
 $501.8
$346.2

 Three Months Nine Months
(millions)2018
2017
 2018
2017
Available-for-sale securities:     
   Fixed maturities:     
U.S. government obligations$47.7
$18.4
 $133.4
$48.1
State and local government obligations9.0
12.9
 28.1
39.3
Foreign government obligations0
0.1
 0
0.3
Corporate debt securities62.1
32.2
 150.1
93.1
Residential mortgage-backed securities6.9
8.0
 20.4
27.9
Commercial mortgage-backed securities24.1
20.0
 65.5
57.1
Other asset-backed securities21.2
12.1
 50.9
33.8
Redeemable preferred stocks3.3
2.8
 8.8
9.1
Total fixed maturities174.3
106.5
 457.2
308.7
   Short-term investments15.7
10.6
 40.7
26.4
    Total available-for-sale securities190.0
117.1
 497.9
335.1
Equity securities:     
Nonredeemable preferred stocks11.2
10.9
 32.5
33.0
Common equities16.9
14.9
 46.1
42.8
    Total equity securities28.1
25.8
 78.6
75.8
    Investment income218.1
142.9
 576.5
410.9
    Investment expenses(5.8)(5.8) (18.0)(18.0)
Net investment income$212.3
$137.1
 $558.5
$392.9


The amount of investment income (interest and dividends) we recognize varies based on the average assets held during the year and the book yields of the securities in our portfolio. The increase in net investment income on a year-over-year basis for the three and ninesix months ended SeptemberJune 30, 2018,2019, was due to a combination of an increase in average assets and an increase in portfolio yields. The increase in average assets was due to strong underwriting growth and profitability, as well as the $600 millionproceeds from debt and $500 million preferred stock issuances induring 2018, partially offset by our common and preferred share dividend payments during the first quarterhalf of 2018.2019. The increase in portfolio yields was a result of our decisionsdecision to hold a short-duration portfolio, which allowed us to reinvest significanttake advantage of opportunities to invest in higher yielding securities with cash from operations and portfolio maturities and paydowns of principal at higher yields, and to increase thepaydowns. The portfolio duration from 2.2at June 30, 2019 was 2.7 years, at the end of the third quarter 2017compared to 2.6 years at the end of the third quarterJune 30, 2018.

Trading Securities At June 30, 2019 and 2018, as interest rates generally rose.

Trading Securities At September 30, 2018and 2017, and December 31, 20172018, we did not hold any trading securities and did not have any net realized gains (losses) on trading securities for the three and ninesix months ended SeptemberJune 30, 20182019 and 20172018.



Derivative Instruments
At SeptemberJune 30, 20182019 and 2017,2018, and December 31, 2017,2018, we had no open derivative positions. During March 2017, we entered into a forecasted debt issuance hedge, against a possible rise in interest rates, in conjunction with the $850 million of 4.125% Senior Notes due 2047 issued in April 2017. Upon issuance, we closed the hedge and recognized, as part of accumulated other comprehensive income, a pretax unrealized loss of $8.0 million in April 2017.
See Note 4 – Debt for further discussion.
Note 3Fair Value — We have categorized our financial instruments, based on the degree of subjectivity inherent in the method by which they are valued, into a fair value hierarchy of three levels, as follows:
•
Level 1: Inputs are unadjusted quoted prices in active markets for identical instruments at the measurement date (e.g., U.S. government obligations, which are continually priced on a daily basis, active exchange-traded equity securities, and certain short-term securities).

•
Level 2: Inputs (other than quoted prices included within Level 1) that are observable for the instrument either directly or indirectly (e.g., certain corporate and municipal bonds and certain preferred stocks). This includes: (i) quoted prices for similar instruments in active markets, (ii) quoted prices for identical or similar instruments in markets that are not active, (iii) inputs other than quoted prices that are observable for the instruments, and (iv) inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 1: Inputs are unadjusted quoted prices in active markets for identical instruments at the measurement date (e.g., U.S. government obligations, which are continually priced on a daily basis, active exchange-traded equity securities, and certain short-term securities).

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

Level 3: Inputs that are unobservable. Unobservable inputs reflect our subjective evaluation about the assumptions market participants would use in pricing the financial instrument (e.g., certain structured securities and privately held investments).
•
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
September 30, 2018         
June 30, 2019         
Fixed maturities:                  
U.S. government obligations$9,752.5
 $0
 $0
 $9,752.5
 $9,942.0
$12,379.4
 $0
 $0
 $12,379.4
 $12,121.9
State and local government obligations0
 1,588.8
 0
 1,588.8
 1,610.1
0
 1,589.7
 0
 1,589.7
 1,563.6
Foreign government obligations0
 0
 0
 0
 0
Corporate debt securities0
 7,146.8
 0
 7,146.8
 7,229.1
0
 7,385.7
 0
 7,385.7
 7,176.7
Subtotal9,752.5
 8,735.6
 0
 18,488.1
 18,781.2
12,379.4
 8,975.4
 0
 21,354.8
 20,862.2
Asset-backed securities:                  
Residential mortgage-backed0
 769.8
 0
 769.8
 767.8
0
 665.2
 0
 665.2
 660.4
Commercial mortgage-backed0
 2,959.3
 0
 2,959.3
 2,986.5
0
 4,441.9
 0
 4,441.9
 4,361.2
Other asset-backed0
 3,192.9
 0
 3,192.9
 3,205.0
0
 4,497.2
 0
 4,497.2
 4,478.2
Subtotal asset-backed securities0
 6,922.0
 0
 6,922.0
 6,959.3
0
 9,604.3
 0
 9,604.3
 9,499.8
Redeemable preferred stocks:                  
Financials0
 67.8
 0
 67.8
 65.2
0
 51.4
 0
 51.4
 51.7
Utilities0
 4.7
 0
 4.7
 4.8
0
 10.3
 0
 10.3
 10.0
Industrials10.1
 150.0
 0
 160.1
 152.9
10.4
 157.0
 0
 167.4
 164.5
Subtotal redeemable preferred stocks10.1
 222.5
 0
 232.6
 222.9
10.4
 218.7
 0
 229.1
 226.2
Total fixed maturities9,762.6
 15,880.1
 0
 25,642.7
 25,963.4
12,389.8
 18,798.4
 0
 31,188.2
 30,588.2
Short-term investments2,573.4
 236.3
 0
 2,809.7
 2,809.7
1,287.0
 73.9
 0
 1,360.9
 1,360.9
Total available-for-sale securities12,336.0
 16,116.4
 0
 28,452.4
 28,773.1
13,676.8
 18,872.3
 0
 32,549.1
 31,949.1
Equity securities:                  
Nonredeemable preferred stocks:                  
Financials76.3
 724.0
 0
 800.3
 718.9
82.2
 974.3
 27.1
 1,083.6
 1,015.4
Utilities0
 35.6
 0
 35.6
 35.0
0
 41.4
 0
 41.4
 39.9
Industrials0
 0
 5.0
 5.0
 5.0
0
 0
 5.0
 5.0
 5.0
Subtotal nonredeemable preferred stocks76.3
 759.6
 5.0
 840.9
 758.9
82.2
 1,015.7
 32.1
 1,130.0
 1,060.3
Common equities:                  
Common stocks3,057.0
 0
 0
 3,057.0
 1,134.7
3,135.2
 0
 0
 3,135.2
 1,203.4
Other risk investments0
 0
 0.3
 0.3
 0.3
0
 0
 0.3
 0.3
 0.3
Subtotal common equities3,057.0
 0
 0.3
 3,057.3
 1,135.0
3,135.2
 0
 0.3
 3,135.5
 1,203.7
Total equity securities3,133.3
 759.6
 5.3

3,898.2
 1,893.9
3,217.4
 1,015.7
 32.4

4,265.5
 2,264.0
Total portfolio$15,469.3
 $16,876.0
 $5.3
 $32,350.6
 $30,667.0
$16,894.2
 $19,888.0
 $32.4
 $36,814.6
 $34,213.1
Debt$0
 $3,926.9
 $0
 $3,926.9
 $3,859.9
$0
 $4,955.2
 $0
 $4,955.2
 $4,406.0



Fair Value  Fair Value  
(millions)Level 1
 Level 2
 Level 3
 Total
 Cost
Level 1
 Level 2
 Level 3
 Total
 Cost
September 30, 2017         
June 30, 2018         
Fixed maturities:      
        
  
U.S. government obligations$4,595.0
 $0
 $0
 $4,595.0
 $4,612.2
$7,865.4
 $0
 $0
 $7,865.4
 $8,005.8
State and local government obligations0
 2,364.2
 0
 2,364.2
 2,332.2
0
 1,667.3
 0
 1,667.3
 1,678.9
Foreign government obligations24.2
 0
 0
 24.2
 24.2
Corporate debt securities0
 5,225.6
 0
 5,225.6
 5,195.7
0
 7,330.3
 0
 7,330.3
 7,422.4
Subtotal4,619.2
 7,589.8
 0
 12,209.0
 12,164.3
7,865.4
 8,997.6
 0
 16,863.0
 17,107.1
Asset-backed securities:                  
Residential mortgage-backed0
 955.6
 0
 955.6
 947.0
0
 822.6
 0
 822.6
 819.6
Commercial mortgage-backed0
 2,767.9
 0
 2,767.9
 2,763.7
0
 2,696.9
 0
 2,696.9
 2,725.5
Other asset-backed0
 2,490.2
 0
 2,490.2
 2,485.6
0
 3,177.6
 0
 3,177.6
 3,189.2
Subtotal asset-backed securities0
 6,213.7
 0
 6,213.7
 6,196.3
0
 6,697.1
 0
 6,697.1
 6,734.3
Redeemable preferred stocks:                  
Financials0
 63.8
 0
 63.8
 61.4
0
 67.7
 0
 67.7
 65.3
Utilities0
 31.9
 0
 31.9
 30.5
0
 4.6
 0
 4.6
 4.8
Industrials0
 141.6
 0
 141.6
 130.6
10.1
 146.7
 0
 156.8
 150.3
Subtotal redeemable preferred stocks0
 237.3
 0
 237.3
 222.5
10.1
 219.0
 0
 229.1
 220.4
Total fixed maturities4,619.2
 14,040.8
 0
 18,660.0
 18,583.1
7,875.5
 15,913.7
 0
 23,789.2
 24,061.8
Short-term investments2,954.2
 277.0
 0
 3,231.2
 3,231.2
Total available-for-sale securities10,829.7
 16,190.7
 0
 27,020.4
 27,293.0
Equity securities:                  
Nonredeemable preferred stocks:                  
Financials82.2
 726.5
 0
 808.7
 695.6
77.4
 676.2
 0
 753.6
 672.0
Utilities0
 0
 0
 0
 0
0
 0
 0
 0
 0
Industrials0
 0
 5.0
 5.0
 5.0
0
 0
 5.0
 5.0
 5.0
Subtotal nonredeemable preferred stocks82.2
 726.5
 5.0
 813.7
 700.6
77.4
 676.2
 5.0
 758.6
 677.0
Common equities:                  
Common stocks3,209.2
 0
 0
 3,209.2
 1,485.2
3,141.9
 0
 0
 3,141.9
 1,313.7
Other risk investments0
 0
 0.3
 0.3
 0.3
0
 0
 0.3
 0.3
 0.3
Subtotal common equities3,209.2
 0
 0.3
 3,209.5
 1,485.5
3,141.9
 0
 0.3
 3,142.2
 1,314.0
Total fixed maturities and equity securities7,910.6
 14,767.3
 5.3
 22,683.2
 20,769.2
Short-term investments3,175.4
 1,136.1
 0
 4,311.5
 4,311.5
Total equity securities3,219.3
 676.2

5.3
 3,900.8
 1,991.0
Total portfolio$11,086.0
 $15,903.4
 $5.3
 $26,994.7
 $25,080.7
$14,049.0
 $16,866.9
 $5.3
 $30,921.2
 $29,284.0
Debt$0
 $3,574.6
 $43.3
 $3,617.9
 $3,312.2
$0
 $3,959.0
 $0
 $3,959.0
 $3,859.5



 Fair Value  
(millions)Level 1
 Level 2
 Level 3
 Total
 Cost
December 31, 2018         
Fixed maturities:         
U.S. government obligations$9,916.5
 $0
 $0
 $9,916.5
 $9,897.4
State and local government obligations0
 1,649.1
 0
 1,649.1
 1,654.6
Corporate debt securities0
 8,694.3
 0
 8,694.3
 8,808.5
Subtotal9,916.5
 10,343.4
 0
 20,259.9
 20,360.5
Asset-backed securities:         
Residential mortgage-backed0
 734.4
 0
 734.4
 733.5
Commercial mortgage-backed0
 3,301.6
 0
 3,301.6
 3,332.8
Other asset-backed0
 3,577.3
 0
 3,577.3
 3,585.4
Subtotal asset-backed securities0
 7,613.3
 0
 7,613.3
 7,651.7
Redeemable preferred stocks:         
Financials0
 78.2
 0
 78.2
 79.3
Utilities0
 0
 0
 0
 0
Industrials9.5
 150.6
 0
 160.1
 164.4
Subtotal redeemable preferred stocks9.5
 228.8
 0
 238.3
 243.7
Total fixed maturities9,926.0
 18,185.5
 0
 28,111.5
 28,255.9
Short-term investments1,722.1
 73.8
 0
 1,795.9
 1,795.9
    Total available-for-sale securities11,648.1
 18,259.3
 0
 29,907.4
 30,051.8
Equity securities:         
Nonredeemable preferred stocks:         
Financials71.9
 887.1
 25.1
 984.1
 951.6
Utilities0
 44.8
 0
 44.8
 46.0
Industrials0
 0
 5.0
 5.0
 5.0
Subtotal nonredeemable preferred stocks71.9
 931.9
 30.1
 1,033.9
 1,002.6
Common equities:         
Common stocks2,625.8
 0
 0
 2,625.8
 1,148.6
Other risk investments0
 0
 0.3
 0.3
 0.3
Subtotal common equities2,625.8
 0
 0.3
 2,626.1
 1,148.9
    Total equity securities2,697.7
 931.9
 30.4
 3,660.0
 2,151.5
Total portfolio$14,345.8
 $19,191.2
 $30.4
 $33,567.4
 $32,203.3
Debt$0
 $4,532.3
 $0
 $4,532.3
 $4,404.9

 Fair Value  
(millions)Level 1
 Level 2
 Level 3
 Total
 Cost
December 31, 2017         
Fixed maturities:         
U.S. government obligations$6,645.9
 $0
 $0
 $6,645.9
 $6,688.8
State and local government obligations0
 2,297.1
 0
 2,297.1
 2,285.6
Foreign government obligations0
 0
 0
 0
 0
Corporate debt securities0
 4,997.7
 0
 4,997.7
 4,997.2
Subtotal6,645.9
 7,294.8
 0
 13,940.7
 13,971.6
Asset-backed securities:         
Residential mortgage-backed0
 836.7
 0
 836.7
 828.8
Commercial mortgage-backed0
 2,758.6
 0
 2,758.6
 2,760.1
Other asset-backed0
 2,454.7
 0
 2,454.7
 2,454.5
Subtotal asset-backed securities0
 6,050.0
 0
 6,050.0
 6,043.4
Redeemable preferred stocks:         
Financials0
 64.1
 0
 64.1
 61.3
Utilities0
 11.4
 0
 11.4
 10.1
Industrials0
 135.5
 0
 135.5
 123.5
Subtotal redeemable preferred stocks0
 211.0
 0
 211.0
 194.9
Total fixed maturities6,645.9
 13,555.8
 0
 20,201.7
 20,209.9
Equity securities:         
Nonredeemable preferred stocks:         
Financials80.6
 718.2
 0
 798.8
 693.6
Utilities0
 0
 0
 0
 0
Industrials0
 0
 5.0
 5.0
 5.0
Subtotal nonredeemable preferred stocks80.6
 718.2
 5.0
 803.8
 698.6
Common equities:         
Common stocks3,399.5
 0
 0
 3,399.5
 1,498.7
Other risk investments0
 0
 0.3
 0.3
 0.3
Subtotal common equities3,399.5
 0
 0.3
 3,399.8
 1,499.0
Total fixed maturities and equity securities10,126.0
 14,274.0
 5.3
 24,405.3
 22,407.5
Short-term investments1,824.4
 1,045.0
 0
 2,869.4
 2,869.4
Total portfolio$11,950.4
 $15,319.0
 $5.3
 $27,274.7
 $25,276.9
Debt$0
 $3,606.5
 $37.1
 $3,643.6
 $3,306.3
Our portfolio valuations, excluding short-term investments, classified as either Level 1 or Level 2 in the above tables are priced exclusively by external sources, including: pricing vendors, dealers/market makers, and exchange-quoted prices. We did not have any transfers between Level 1 and Level 2 during 2018 or 2017.
Our short-term security holdings classified as Level 1 are highly liquid, actively marketed, and have a very short duration, primarily 90 days or less to redemption. These securities are held at their original cost, adjusted for any accretion of discount, since that value very closely approximates what an active market participant would be willing to pay for such securities. The remainder of our short-term securities are classified as Level 2 and are not priced externally since these securities continually trade at par value. These securities are classified as Level 2 since they are primarily longer-dated securities issued by municipalities that contain either liquidity facilities or mandatory put features within one year.
At SeptemberJune 30, 20182019, vendor-quoted prices represented 76%80% of our Level 1 classifications (excluding short-term investments), compared to 59%72% and 66%79% at SeptemberJune 30, 20172018 and December 31, 2017,2018, respectively. The securities quoted by vendors in Level 1 primarily represent our holdings in U.S. Treasury Notes, which are frequently traded, and the quotes are considered similar to exchange-traded quotes. The balance of our Level 1 pricing comes from quotes obtained directly from trades made on active exchanges.



At Septemberboth June 30, 20182019 and 2017, and December 31, 2017,2018, vendor-quoted prices comprised 99%, 98%, and 98%, respectively, of our Level 2 classifications in each period (excluding short-term investments), while dealer-quoted prices represented 1%,the remaining 2%, compared to 99% and 2%, respectively.1% at December 31, 2018. In our process for selecting a source (e.g., dealer or pricing service) to provide pricing for securities in our portfolio, we reviewed documentation from the sources that detailed the pricing techniques and methodologies used by these sources and determined if their policies adequately considered market activity, either based on specific transactions for the particular security type or based on modeling of securities with similar credit quality, duration, yield, and structure that were recently transacted. Once a source is chosen, we continue to monitor any changes or modifications to their processes by reviewing their documentation on internal controls for pricing and market reviews. We review quality control measures of our sources as they become available to determine if any significant changes have occurred from period to period that might indicate issues or concerns regarding their evaluation or market coverage.
As part of our pricing procedures, we obtain quotes from more than one source to help us fully evaluate the market price of securities. However, our internal pricing policy is to use a consistent source for individual securities in order to maintain the integrity of our valuation process. Quotes obtained from the sources are not considered binding offers to transact. Under our policy, when a review of the valuation received from our selected source appears to be outside of what is considered market level activity (which is defined as trading at spreads or yields significantly different than those of comparable securities or outside the general sector level movement without a reasonable explanation), we may use an alternate source’s price. To the extent we determine that it may be prudent to substitute one source’s price for another, we will contact the initial source to obtain an understanding of the factors that may be contributing to the significant price variance, which often leads the source to adjust their pricing input data for future pricing.
To allow us to determine if our initial source is providing a price that is outside of a reasonable range, we review our portfolio pricing on a weekly basis. When necessary, we challenge prices from our sources when a price provided does not match our expectations based on our evaluation of market trends and activity. Initially, we perform a review of our portfolio by sector to identify securities whose prices appear outside of a reasonable range. We then perform a more detailed review of fair values for securities disclosed as Level 2. We review dealer bids and quotes for these and/or similar securities to determine the market level context for our valuations. We then evaluate inputs relevant for each class of securities disclosed in the preceding hierarchy tables.
For our structured debt securities, including commercial, residential, and asset-backed securities, we evaluate available market-related data for these and similar securities related to collateral, delinquencies, and defaults for historical trends and reasonably estimable projections, as well as historical prepayment rates and current prepayment assumptions and cash flow estimates. We further stratify each class of our structured debt securities into more finite sectors (e.g., planned amortization class, first pay, second pay, senior, subordinated, etc.) and use duration, credit quality, and coupon to determine if the fair value is appropriate.


For our corporate debt and preferred stock (redeemable and nonredeemable) portfolios, as well as the notes and debentures issued by The Progressive Corporation (see Note 4 – Debt), we review securities by duration, coupon, and credit quality, as well as changes in interest rate and credit spread movements within that stratification. The review also includes recent trades, including: volume traded at various levels that establish a market, issuer specific fundamentals, and industry specific economic news as it comes to light.
For our municipal securities (e.g., general obligations, revenue, and housing), we stratify the portfolio to evaluate securities by type, coupon, credit quality, and duration to review price changes relative to credit spread and interest rate changes. Additionally, we look to economic data as it relates to geographic location as an indication of price-to-call or maturity predictors. For municipal housing securities, we look to changes in cash flow projections, both historical and reasonably estimable projections, to understand yield changes and their effect on valuation.
Lastly, for our short-term securities, we look at acquisition price relative to the coupon or yield. Since our short-term securities are typically 90 days or less to maturity, with the majority listed in Level 2 being 30 days or less to redemption, we believe that acquisition price is the best estimate of fair value.
We also review data assumptions as supplied by our sources to determine if that data is relevant to current market conditions. In addition, we independently review each sector for transaction volumes, new issuances, and changes in spreads, as well as the overall movement of interest rates along the yield curve to determine if sufficient activity and liquidity exists to provide a credible source for our market valuations.
During each valuation period, we create internal estimations of portfolio valuation (performance returns), based on current market-related activity (i.e., interest rate and credit spread movements and other credit-related factors) within each major sector of our portfolio. We compare our internally generated portfolio results with those generated based on quotes we receive externally and research material valuation differences. We compare our results to index returns for each major sector adjusting



for duration and credit quality differences to better understand our portfolio’s results. Additionally, we review on a monthly basis our external sales transactions and compare the actual final market sales prices to previous market valuation prices. This review provides us further validation that our pricing sources are providing market level prices, since we are able to explain significant price changes (i.e., greater than 2%) as known events occur in the marketplace and affect a particular security’s price at sale.
This analysis provides us with additional comfort regarding the source’s process, the quality of its review, and its willingness to improve its analysis based on feedback from clients. We believe this effort helps ensure that we are reporting the most representative fair values for our securities.
Except as described below, our Level 3 securities are also priced externally; however, due to several factors (e.g., nature of the securities, level of activity, and lack of similar securities trading to obtain observable market level inputs), these valuations are more subjective in nature. Certain private equity investments and fixed-income investments included in the Level 3 category are valued using external pricing supplemented by internal review and analysis.
After all the valuations are received and our review is complete, if the inputs used by vendors are determined to not contain sufficient observable market information, we will reclassify the affected security valuations to Level 3. At SeptemberJune 30, 20182019 and 2017,2018, and December 31, 2017,2018, we did not have any securities in our fixed-maturity portfolio listed as Level 3.
At SeptemberJune 30, 2018 and 2017,2019 and December 31, 2017,2018, we held two private nonredeemable preferred securities with a combined value of $32.1 million and $30.1 million, respectively, that were priced internally, and held one private nonredeemable preferred security with a value of $5.0 million that was priced internally. The security was purchased duringinternally at June 30, 2018. At June 30, 2019 and 2018, and December 31, 2018, we held one Level 3 other risk investment with a value of $0.3 million.
To the third quarter 2017 and the value at all periods equals the cost at acquisition. A review of their latest available financial statements did not reveal any significant changes that would impact the security’s fair value.
We review theextent we receive prices from our external sources for the Level 3 securities, we would review those prices for reasonableness using internally developed assumptions to deriveand then compare our derived prices for the securities, which are then compared to the prices we received. During 2019 and 2018, or 2017, there were no material assets or liabilities measured at fair value on a nonrecurring basis. Based on our review, all prices received from external sources remained unadjusted.

We did not have any material changes in fair value associated with Level 3 assets for the three and nine months ended September 30, 2018 and 2017. Due to the relative size of the Level 3 securities’ fair values compared to the total portfolio’s fair value, any changes in pricing methodology would not have a significant change in valuation that would materially impact net or comprehensive income.
The following tables provide a summary of changes in fair value associated with Level 3 assets for the three and six months ended June 30, 2019 and 2018:
 Level 3 Fair Value
(millions)Fair Value at March 31, 2019
Calls/
Maturities/
Paydowns

Purchases
Sales
Net Realized
(Gain)/Loss
on Sales

Change in
Valuation

Net
Transfers
In (Out) 

Fair Value at June 30, 2019
Equity securities:        
Nonredeemable preferred stocks:        
Financials$25.1
$0
$2.0
$0
$0
$0
$0
$27.1
Industrials5.0
0
0
0
0
0
0
5.0
Common equities:        
Other risk investments0.3
0
0
0
0
0
0
0.3
Total Level 3 securities$30.4
$0
$2.0
$0
$0
$0
$0
$32.4


 Level 3 Fair Value
(millions)Fair Value at Dec. 31, 2018
Calls/
Maturities/
Paydowns

Purchases
Sales
Net Realized
(Gain)/Loss
on Sales

Change in
Valuation

Net
Transfers
In (Out) 

Fair Value at June 30, 2019
Equity securities:        
Nonredeemable preferred stocks:        
Financials$25.1
$0
$2.0
$0
$0
$0
$0
$27.1
Industrials5.0
0
0
0
0
0
0
5.0
Common equities:        
Other risk investments0.3
0
0
0
0
0
0
0.3
Total Level 3 securities$30.4
$0
$2.0
$0
$0
$0
$0
$32.4

  Level 3 Fair Value
(millions)Fair Value at March 31, 2018
Calls/
Maturities/
Paydowns

Purchases
Sales
Net Realized
(Gain)/Loss
on Sales

Change in
Valuation

Net
Transfers
In (Out)

Fair Value at June 30, 2018
Equity securities:        
Nonredeemable preferred stocks:        
Financials$0
$0
$0
$0
$0
$0
$0
$0
Industrials5.0
0
0
0
0
0
0
5.0
Common equities:        
Other risk investments0.3
0
0
0
0
0
0
0.3
Total Level 3 securities$5.3
$0
$0
$0
$0
$0
$0
$5.3


  Level 3 Fair Value
(millions)Fair Value at Dec. 31, 2017
Calls/
Maturities/
Paydowns

Purchases
Sales
Net Realized
(Gain)/Loss
on Sales

Change in
Valuation

Net
Transfers
In (Out)

Fair Value at June 30, 2018
Equity securities:        
Nonredeemable preferred stocks:        
Financials$0
$0
$0
$0
$0
$0
$0
$0
Industrials5.0
0
0
0
0
0
0
5.0
Common equities:        
Other risk investments0.3
0
0
0
0
0
0
0.3
Total Level 3 securities$5.3
$0
$0
$0
$0
$0
$0
$5.3



The following tables provide a summary of the quantitative information about Level 3 fair value measurements for our applicable securities at June 30, 2019 and 2018, and December 31, 2018:

 Quantitative Information about Level 3 Fair Value Measurements
($ in millions)Fair Value at June 30, 2019
Valuation TechniqueUnobservable InputUnobservable Input Assumption
Equity securities:    
Nonredeemable preferred stocks:    
Financials1
$27.1
internal priceunadjusted purchase price per share9.0
Industrials2
5.0
internal priceprice-to-sales ratio5.5
Subtotal Level 3 securities32.1
   
Pricing exemption securities3
0.3
   
Total Level 3 securities$32.4
   
1The security was internally-priced since it is privately held. The security was initially purchased during December 2018 and additional shares were purchased during second quarter 2019. The value at June 30, 2019 reflects the unadjusted purchase price per share (all purchases were at the same price).
2 The security was internally-priced since it is privately held. The price at June 30, 2019, was calculated using a price-to-sales ratio.
3The unobservable input is not reasonably available to us.
 Quantitative Information about Level 3 Fair Value Measurements
($ in millions)Fair Value at June 30, 2018
Valuation TechniqueUnobservable InputUnobservable Input Assumption
Equity securities:    
Nonredeemable preferred stocks:    
Financials$0
NANANA
Industrials1
5.0
internal priceunadjusted purchase price per share3.9
Subtotal Level 3 securities5.0
   
Pricing exemption securities2
0.3
   
Total Level 3 securities$5.3
   
NA= Not Available
1The security was internally-priced since it is privately held. The value at June 30, 2018 reflects the unadjusted purchase price per share.
2The unobservable input is not reasonably available to us.
 Quantitative Information about Level 3 Fair Value Measurements
($ in millions)Fair Value at Dec. 31, 2018
Valuation TechniqueUnobservable InputUnobservable Input Assumption
Equity securities:    
Nonredeemable preferred stocks:    
Financials1
$25.1
internal priceunadjusted purchase price per share9.0
Industrials2
5.0
internal priceprice-to-sales ratio5.5
Subtotal Level 3 securities30.1
   
Pricing exemption securities3
0.3
   
Total Level 3 securities$30.4
   
1The security was internally-priced since it is privately held. The security was purchased during December 2018 and the value at December 31, 2018 reflects the unadjusted purchase price per share.
2 The security was internally-priced since it is privately held. The price at December 31, 2018, was calculated using a price-to-sales ratio.
3The unobservable input is not reasonably available to us.


Note 4Debt — Debt at each of the balance sheet periods consisted of:
 June 30, 2019 June 30, 2018 December 31, 2018
(millions)
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
3.75% Senior Notes due 2021$499.2
 $516.5
 $498.9
 $506.4
 $499.1
 $506.5
2.45% Senior Notes due 2027496.7
 494.7
 496.3
 451.3
 496.5
 455.5
6 5/8% Senior Notes due 2029296.5
 385.7
 296.2
 364.4
 296.4
 368.5
4.00% Senior Notes due 2029544.8
 608.9
 0
 0
 544.5
 562.4
6.25% Senior Notes due 2032395.6
 531.3
 395.4
 492.5
 395.5
 496.6
4.35% Senior Notes due 2044346.6
 392.5
 346.6
 356.7
 346.6
 350.2
3.70% Senior Notes due 2045395.4
 411.1
 395.3
 363.9
 395.3
 366.7
4.125% Senior Notes due 2047841.5
 943.0
 841.3
 831.5
 841.4
 831.9
4.20% Senior Notes due 2048589.7
 671.5
 589.5
 592.3
 589.6
 594.0
Total$4,406.0
 $4,955.2
 $3,859.5
 $3,959.0
 $4,404.9
 $4,532.3
 September 30, 2018 September 30, 2017 December 31, 2017
(millions)
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
3.75% Senior Notes due 2021$499.0
 $503.9
 $498.7
 $525.7
 $498.8
 $520.7
2.45% Senior Notes due 2027496.4
 453.3
 496.0
 475.3
 496.1
 477.9
6 5/8% Senior Notes due 2029296.3
 360.3
 296.0
 388.3
 296.1
 382.3
6.25% Senior Notes due 2032395.4
 481.8
 395.3
 518.7
 395.3
 516.9
4.35% Senior Notes due 2044346.6
 349.7
 346.5
 379.8
 346.5
 388.7
3.70% Senior Notes due 2045395.3
 359.1
 395.2
 392.6
 395.2
 402.9
4.125% Senior Notes due 2047841.3
 828.4
 841.2
 894.2
 841.2
 917.1
4.20% Senior Notes due 2048589.6
 590.4
 0
 0
 0
 0
Other debt instruments0
 0
 43.3
 43.3
 37.1
 37.1
Total$3,859.9
 $3,926.9
 $3,312.2
 $3,617.9
 $3,306.3
 $3,643.6

The Progressive Corporation issued $600$550 million of 4.20%4.00% Senior Notes due 20482029 (the “4.20%“4.00% Senior Notes”) in MarchOctober 2018, and $850 million of 4.125% Senior Notes due 2047 (the “4.125% Senior Notes”) in April 2017, inan underwritten public offerings.offering. The net proceeds from these issuances,the issuance, after deducting underwriters’ discounts, commissions, and other issuance costs, were approximately $589.5 million and $841.1 million, respectively. In addition, upon issuance of the 4.125% Senior Notes, we closed a forecasted debt issuance hedge, which was entered into to hedge against a possible rise in interest rates, and recognized an $8.0 million pretax unrealized loss as part of accumulated other comprehensive income (loss), which is being amortized as an adjustment to interest expense over the life of the 4.125% Senior Notes.$544.5 million. Consistent with the other senior notes


issued by Progressive, interest on the 4.20% Senior Notes and 4.125%4.00% Senior Notes is payable semiannually, principal is due at maturity, and both arethe note is redeemable, in whole or in part, at any time. See Note 16 – Subsequent Event, fortime, subject to a discussion of senior notes issued in October 2018.
During the first quarter 2018, ARX repaid its term loans, in their entirety, in the aggregate principal amount of $37.1 million and, during the third quarter 2017, redeemed its junior subordinated notes and senior notes, in their entirety, in the aggregate principal amount of $65.2 million. Both the repayment and the redemptions were funded in part with proceeds from fixed-rate loans made by The Progressive Corporation. These intercompany transactions were eliminated in consolidation.

treasury “make whole” provision.
During the second quarter 2018,2019, The Progressive Corporation entered into a newrenewed its line of credit with PNC Bank, National Association (PNC) in the maximum principal amount of $250 million. The prior line of credit, entered into in April 2017, had expired. The line of credit ismillion on the same terms and conditions as the previous line of credit.conditions. Subject to the terms and conditions of the line of credit documents, advances under the line of credit (if any) will bear interest at a variable rate equal to the higher of PNC’s Prime Rate or the sum of the Federal Funds Open Rate plus 50 basis points. Each advance must be repaid on the 30th day after the advance or, if earlier, on April 30, 2019,2020, the expiration date of the line of credit. Prepayments are permitted without penalty. The line of credit is uncommitted and, as such, all advances are subject to PNC’s discretion. We had no borrowings under either line of credit during any of the periods presented.
Note 5Income Taxes — Deferred tax assets and liabilities are recorded based on the difference between the financial statement and tax bases of assets and liabilities at the enacted tax rates. We review our deferred tax assets regularly for recoverability. At SeptemberJune 30, 20182019 and 2017,2018, and December 31, 2017,2018, 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 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 deferred taxes on items that are reported in accumulated other comprehensive income, our policy is to release the income tax effects related to these items on an aggregate portfolio approach. For this purpose, we consider our available-for-sale fixed maturity securities and hedges on forecasted transactions as separate portfolios.
For the three and ninesix months ended SeptemberJune 30, 2018,2019, there have been no material changes in our reserve for uncertain tax positions.
For the third quarter 2018, ourThe effective tax rate was 17.7%rates for the three and six months ended June 30, 2019 were 21.3% and 26.7%, respectively, compared to 14.6%20.3% and 20.1% for the same periodperiods last year. On a year-to-date basis,During the effective tax rate was 19.2%, compared to 29.7%first quarter 2019, we increased our provision for income taxes $156.1 million, principally reflecting the same period last year. The federal corporate income tax rate decreased to 21% in 2018, from the previous rate of 35%, under the legislation commonly known as the Tax Cuts and Jobs Act of 2017. Despite the decrease in the federal rate, the effective tax rate for the third quarter 2018 was higher than the prior year quarter as the relative impacttotal reversal of the tax credits and other tax benefits decreased as pre-tax income increased quarter-over-prior-year quarter.
As of September 30,previously recognized from certain renewable energy investments, plus interest. From 2016 to 2018, we have not fully completedinvested in federal renewable energy tax credit funds. In late December 2018 and during the first two months of 2019, we learned of allegations of potential fraudulent conduct by the sponsor of three of these tax credit fund investments, including information about ongoing federal investigations. Based on our accounting forcontinuing investigations and information that became available to us beginning late in the first quarter, we believe that the sponsor committed fraud through these tax credit funds and that all of the tax effects of the enactment of the legislation commonly known as the Tax Cutscredits and Jobs Act of 2017, with regard to the deductibility of compensation expense for certain covered executives, due to uncertainty surrounding the appropriateother tax treatment of outstanding performance-based awards, and with regard to loss reserve discounting due to uncertainty surrounding the discount factors to be applied. Based on an Internal Revenue Service issued notice of proposed rule-making,benefits related to the compensation issue, we determined no adjustment was necessary during the nine months ended September 30, 2018; however, wethose investments are waiting for definitive guidance to be published on both items.not valid.





Note 6Loss and Loss Adjustment Expense Reserves — Activity in the loss and loss adjustment expense reserves is summarized as follows:
 June 30,
(millions)2019 2018
Balance, Beginning of period$15,400.8
 $13,086.9
Less reinsurance recoverables on unpaid losses2,572.7
 2,170.1
Net balance, Beginning of period12,828.1
 10,916.8
Incurred related to:
 
Current year11,687.1
 10,164.6
Prior years210.0
 81.5
Total incurred11,897.1
 10,246.1
Paid related to:
 
Current year6,407.5
 5,533.7
Prior years4,664.1
 3,851.5
Total paid11,071.6
 9,385.2
Net balance, End of period13,653.6
 11,777.7
Plus reinsurance recoverables on unpaid losses2,915.0
 2,293.1
Balance, End of period$16,568.6
 $14,070.8

 September 30,
(millions)2018 2017
Balance, Beginning of period$13,086.9
 $11,368.0
Less reinsurance recoverables on unpaid losses2,170.1
 1,801.0
Net balance, Beginning of period10,916.8
 9,567.0
Incurred related to:
 
Current year15,722.2
 13,886.3
Prior years47.0
 42.5
Total incurred15,769.2
 13,928.8
Paid related to:
 
Current year9,409.7
 8,379.4
Prior years5,031.9
 4,387.8
Total paid14,441.6
 12,767.2
Net balance, End of period12,244.4
 10,728.6
Plus reinsurance recoverables on unpaid losses2,376.4
 2,624.7
Balance, End of period$14,620.8
 $13,353.3


We experienced unfavorable reserve development of $47.0$210.0 million and $42.5$81.5 million for the first ninesix months of 20182019 and 2017,2018, respectively, which is reflected as “Incurred related to prior years” in the table above.
Year-to-date SeptemberJune 30, 20182019
Accident year 2016 had approximately $52 millionAbout 50% of the unfavorable prior year reserve development which was in part offset by favorable development inattributable to accident year 2018, with the remainder split evenly between accident year 2017 as well as 2015 and prior accident years.years 2016 and prior.
Our personal auto businessproducts incurred about $41$116 million of unfavorable loss and loss adjustment expense (LAE) reserve development, with the Agency and Direct auto businesses each contributing about $30half. The unfavorable development was primarily attributable to increased injury severity, a higher than anticipated frequency of reopened personal injury protection (PIP) claims, primarily in Florida, and late reported losses occurring late 2018 but not reported until 2019.
Our Commercial Lines business experienced about $57 million of unfavorable development primarily due to increased injury severity and more emergence of large injury claims than originally anticipated.
•
Our Property business experienced about $20 million of unfavorable development, primarily due to higher than originally anticipated homeowner and dwelling, and fire liability costs.
Our special lines business experienced about $17 million of unfavorable development primarily due to less salvage and subrogation recoveries than originally anticipated.
Year-to-date June 30, 2018
Approximately $72 million of the unfavorable prior year reserve development was attributable to accident years 2017 and 2016.
Our personal auto business incurred about $57 million of unfavorable loss and LAE reserve development, with the Agency and Direct auto businesses contributing about $36 million and $11$21 million, respectively, of unfavorable development. The unfavorable development was primarily due to an increase in reopened personal injury protectionPIP claims.
Our Commercial Lines business experienced about $17 million of unfavorable development primarily due to late reported losses and higher LAE than anticipated.
Our Property business recognized unfavorable development of about $5 million.
Our$7 million, while our special lines products and Commercial Lines business had minimal development during the first nine monthshalf of the year.
Year-to-date September 30, 2017
Accident years 2016 and 2015 combined has approximately $51 million of unfavorable prior year reserve development. This unfavorable development was partially offset by $8 million of favorable development attributable to accident year 2014 and prior accident years.
Our personal auto businesses incurred $76 million of unfavorable LAE reserve development for the first nine months of 2017, primarily in the Agency business, in part reflecting an increase in costs related to property damage and higher LAE costs.

Our Property business experienced $24 million in favorable development primarily due to the identification of prior year losses eligible to be ceded under our catastrophe bond reinsurance program and lower severity and frequency than anticipated for accident year 2016.
The remaining favorable development for the first nine months was attributable to both our special lines and commercial auto products.



Note 7Supplemental Cash Flow Information — Cash and cash equivalents include bank demand deposits and daily overnight reverse repurchase commitments of funds held in bank demand deposit accounts on ARX’s subsidiaries, which are primarily collateralized by U.S. Treasury notes.subsidiaries. The amount of reverse repurchase commitments held by ARX’s subsidiaries at SeptemberJune 30, 20182019 and 2017,2018, and December 31, 2017,2018, were $152.4$138.2 million, $189.2$155.9 million, and $247.2$117.3 million, respectively.
Restricted cash on our consolidated balance sheets represents cash that is restricted to pay flood claims under the National Flood Insurance Program’s “Write Your Own” program, for which American Strategic Insurance and other subsidiaries of ARX (ASI) are administrators.
During the six months ended June 30, 2019, non-cash activity includes declared but unpaid common share dividends of $58.4 million (see Note 9 – Dividends for further discussion) and operating lease liabilities arising from obtaining right-of-use assets of $21.0 million (see Note 14 – Leases for further discussion).
We paid the following in the respective periods:
 Six Months Ended June 30,
(millions)2019
 2018
Income taxes$592.8
 $358.9
Interest90.9
 70.9
Operating lease liabilities37.4
 NA

 Nine Months Ended September 30,
(millions)2018
 2017
Income taxes$535.8
 $538.7
Interest116.4
 107.4
NA - Not applicable



Note 8Segment Information — Our Personal Lines segment writes insurance for personal autos and recreational vehicles (our special lines products). Our Commercial Lines segment writes primary liability, and physical damage, and other auto-related insurance for automobiles and trucks owned and/or operated predominantly by small businesses in the business auto, for-hire transportation, contractor, for-hire specialty, tow, and for-hire livery markets. Our Property segment writes residential property insurance for homeowners, other property owners, and renters. Our other indemnity businesses include our run-off businesses. Our service businesses provide insurance-related services, including processing Commercial Automobile Insurance Procedures/Plans (CAIP) business and serving as an agent for homeowners, general liability, and workers’ compensation insurance, among other products, through our programs with ASI and unaffiliated insurance companies. All segment revenues are generated from external customers; all intercompany transactions including those between Progressive and ASI, are eliminated in consolidation.



Following are the operating results for the respective periods:
 Three Months Ended June 30, Six Months Ended June 30,
 2019 2018 2019 2018
(millions)Revenues 
Pretax
Profit (Loss)
 Revenues 
Pretax
Profit (Loss)
 Revenues Pretax Profit (Loss) Revenues Pretax Profit (Loss)
Personal Lines               
Agency$3,639.6
 $434.7
 $3,225.7
 $360.9
 $7,148.1
 $887.7
 $6,289.5
 $770.0
Direct3,733.4
 326.6
 3,211.8
 287.9
 7,309.7
 648.5
 6,228.1
 585.9
Total Personal Lines1
7,373.0
 761.3
 6,437.5
 648.8
 14,457.8
 1,536.2
 12,517.6
 1,355.9
Commercial Lines1,070.5
 124.4
 884.3
 100.3
 2,083.5
 291.0
 1,692.9
 195.1
Property2
381.2
 (34.4) 312.4
 (51.9) 743.2
 (26.7) 597.7
 (23.4)
Other indemnity0
 0
 0
 0
 0
 0
 0
 0.2
Total underwriting operations8,824.7
 851.3
 7,634.2
 697.2
 17,284.5
 1,800.5
 14,808.2
 1,527.8
Fees and other revenues3
134.8
 NA
 116.0
 NA
 265.0
 NA
 219.8
 NA
Service businesses50.0
 4.7
 42.9
 5.9
 92.6
 9.2
 77.1
 10.8
Investments4
441.2
 435.0
 224.9
 218.7
 1,108.6
 1,096.2
 343.0
 330.8
Interest expenseNA
 (47.4) NA
 (41.7) NA
 (94.8) NA
 (78.5)
Consolidated total$9,450.7
 $1,243.6
 $8,018.0
 $880.1
 $18,750.7
 $2,811.1
 $15,448.1
 $1,790.9
 Three Months Ended September 30, Nine Months Ended September 30,
 2018 2017 2018 2017
(millions)Revenues 
Pretax
Profit (Loss)
 Revenues 
Pretax
Profit (Loss)
 Revenues 
Pretax
Profit
(Loss)
 Revenues 
Pretax
Profit
(Loss)
Personal Lines               
Agency$3,318.2
 $372.2
 $2,840.0
 $69.5
 $9,607.7
 $1,142.2
 $8,224.0
 $524.7
Direct3,337.2
 294.4
 2,734.8
 128.7
 9,565.3
 880.3
 7,908.5
 466.7
Total Personal Lines1
6,655.4
 666.6
 5,574.8
 198.2
 19,173.0
 2,022.5
 16,132.5
 991.4
Commercial Lines939.6
 112.7
 714.0
 42.8
 2,632.5
 307.8
 2,031.2
 166.4
Property2
335.5
 (7.8) 255.2
 (69.0) 933.2
 (31.2) 720.3
 (57.5)
Other indemnity0
 (0.1) 0
 0
 0
 0.1
 0
 (0.3)
Total underwriting operations7,930.5
 771.4
 6,544.0
 172.0
 22,738.7
 2,299.2
 18,884.0
 1,100.0
Fees and other revenues3
122.6
 NA
 96.3
 NA
 342.4
 NA
 270.3
 NA
Service businesses42.5
 6.7
 33.3
 4.4
 119.6
 17.5
 94.5
 12.7
Investments4
400.2
 394.4
 118.2
 112.4
 743.2
 725.2
 470.2
 452.2
Other gains (losses)0
 0
 0
 0
 0
 0
 0.2
 0.2
Interest expenseNA
 (42.0) NA
 (37.4) NA
 (120.5) NA
 (117.6)
Consolidated total$8,495.8
 $1,130.5
 $6,791.8
 $251.4
 $23,943.9
 $2,921.4
 $19,719.2
 $1,447.5
NA =- Not applicable
1 Personal auto insurance accounted for 94% of the total Personal Lines segment net premiums earned during the three and ninesix months ended SeptemberJune 30, 2018,2019 and 93% for the same periods in 2017;2018; insurance for our special lines products (e.g., motorcycles, ATVs, RVs, watercraft, and snowmobiles) accounted for the balance of the Personal Lines net premiums earned.
2 For the three and ninesix months ended SeptemberJune 30, 2018,2019, pretax profit (loss) includes $18.0 millionand $54.0$35.9 million, respectively, of amortization expense predominately associated with the acquisition of a controlling interest in ARX and $17.2$18.0 million and $48.2$36.0 million for the same periods in 2017.2018. Although this expense is included in our Property segment, it is not reported in the consolidated results of ARX and, therefore, willdoes not affect the value of net income (loss) attributable to noncontrolling interest.
3 Pretax profit (loss) for fees and other revenues is attributable to operating segments.
4 Revenues represent recurring investment income and total net realized gains (losses) on securities; pretax profit is net of investment expense.




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/margins and combined ratios for our underwriting operations for the respective periods:
 Three Months Ended June 30, Six Months Ended June 30,
 2019 2018 2019 2018
 Under-writing
Margin		 
Combined
Ratio
 Under-writing
Margin		 
Combined
Ratio
 Under-writing
Margin		 
Combined
Ratio
 Under-writing
Margin		 
Combined
Ratio
Personal Lines               
Agency11.9 % 88.1 11.2 % 88.8
 12.4 % 87.6 12.2 % 87.8
Direct8.7
 91.3 9.0
 91.0
 8.9
 91.1 9.4
 90.6
Total Personal Lines10.3
 89.7 10.1
 89.9
 10.6
 89.4 10.8
 89.2
Commercial Lines11.6
 88.4 11.3
 88.7
 14.0
 86.0 11.5
 88.5
Property1
(9.0) 109.0 (16.6) 116.6
 (3.6) 103.6 (3.9) 103.9
Total underwriting operations9.6
 90.4 9.1
 90.9
 10.4
 89.6 10.3
 89.7

 Three Months Ended September 30, Nine Months Ended September 30,
 2018 2017 2018 2017
 Under-writing
Margin		 
Combined
Ratio
 Under-writing
Margin		 
Combined
Ratio
 
Under-writing
Margin
 
Combined
Ratio
 
Under-writing
Margin
 
Combined
Ratio
Personal Lines               
Agency11.2 % 88.8 2.4 % 97.6
 11.9 % 88.1 6.4 % 93.6
Direct8.8
 91.2 4.7
 95.3
 9.2
 90.8 5.9
 94.1
Total Personal Lines10.0
 90.0 3.6
 96.4
 10.5
 89.5 6.1
 93.9
Commercial Lines12.0
 88.0 6.0
 94.0
 11.7
 88.3 8.2
 91.8
Property1
(2.3) 102.3 (27.0) 127.0
 (3.3) 103.3 (8.0) 108.0
Total underwriting operations9.7
 90.3 2.6
 97.4
 10.1
 89.9 5.8
 94.2
1 Included in the three and ninesix months ended SeptemberJune 30, 2018,2019, is 5.44.7 points and 5.84.8 points, respectively, of amortization expense predominately associated with the acquisition of a controlling interest in ARX and 6.75.8 points and 6.0 points, respectively, for the three and ninesix months ended SeptemberJune 30, 2017.2018.




Note 9Dividends
Common Share Dividends
We maintainThe Board of Directors expects to declare regular, quarterly common share dividends and, on at least an annual basis, to consider declaring an additional common share dividend. Prior to 2019, we had a policy of paying an annual variable dividend on our common shares 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 the statutory tax rate) multiplied by a performance factor (Gainshare factor), which is determined based on the results of the Agency auto, Direct auto, special lines, Commercial Lines, and Property business units, with minor exclusions and adjustments, and subject to the limitations discussed below. The target percentage is determined by our Board of Directors on an annual basis as part of their review of the dividend policy and announced to shareholders and the public. In December 2017, the Board determined the target percentage for 2018 to be 33-1/3% of annual after-tax underwriting income.
The Gainshare factor can range from zero to two and is determined by comparing our operating performance for the specified business units for the year to certain predetermined profitability and growth objectives approved by the Compensation Committee of the Board. This Gainshare factor is also used in the annual cash incentive program currently in place for our employees (our “Gainsharing program”). On a year-to-date basis, as of September 30, 2018, the Gainshare factor was 1.91. 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 2018 dividend program is 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. In addition, the ultimate decision on whether or not a dividend will be paid is in the discretion of the Board of Directors. The Board could decide to alter our policy, or not to pay the annual variable dividend, at any time prior to the declaration of the dividend for the year. Such an action by the Board could result from, among other reasons, changes in the insurance marketplace, changes(see Note 14 – Dividends in our performance or capital needs, changes in the U.S. federal income tax laws, disruptions of national or international capital markets, or other events affecting our business, liquidity, or financial position.
2018 Annual Report to Shareholders). Following is a summary of our common shareholdershare dividends


that were declared inor paid during the last two years:six months ended June 30, 2019 and 2018:
(millions, except per share amounts)(millions, except per share amounts) Amount of Common Share Dividends(millions, except per share amounts) Amount of Common Share Dividends
Dividend TypeDeclaredPaidPer Share
Accrued1

Paid1

DeclaredPaidPer Share
Accrued1

Paid1

QuarterlyMay 2019NA$0.10
$58.4
$ NA
QuarterlyFebruary 2019April 20190.10
58.4
58.4
Annual – VariableDecember 2017February 2018$1.1247
$655.1
$654.9
December 2018February 20192.5140
1,467.9
1,467.9
Annual – VariableDecember 2016February 20170.6808
395.4
395.4
December 2017February 20181.1247
655.1
654.9
NA - Dividend not paid as of June 30, 2019.
1 Variance between accrued and paid, if any, reflects the difference between the number of estimated and actual shares outstanding as of the record date.
Preferred Share Dividends
InDuring the first quarter 2018,of 2019, the Board declared, and we issued 500,000paid, a $26.875 per share, or $13.4 million, dividend on our Series B Fixed-to-Floating Rate Cumulative Perpetual Serial Preferred Shares, without par value (the “Series B Preferred Shares”), with. There are 500,000 Series B Preferred Shares outstanding, which are cumulative and have a liquidation preference of $1,000 per share (the “stated amount”). Holders of the Series B Preferred Shares will be entitled to receive cumulative cash dividends semi-annually in March and September, if and when declared by the Board of Directors. Until March 15, 2023 (the “fixed-rate period”), the annual dividend rate is fixed at 5.375% of the stated amount per share. Beginning March 15, 2023, the annual dividend rate switches to a floating rate equal to the three-month LIBOR rate (or, if LIBOR is not available, a substitute rate determined in accordance with the terms of the Series B Preferred Shares) plus a spread of 2.539% applied to the stated amount per share. After the fixed-rate period and up until redemption of the Series B Preferred Shares, the dividends would be payable quarterly, if and when declared by the Board of Directors. The Series B Preferred Shares are perpetual and have no stated maturity date. After the fixed-rate period, we may redeem the Series B Preferred Shares at the stated amount plus all accrued and unpaid dividends.
During the third quarter of 2018, the Board declared a $27.024 per share, or $13.5 million, dividend on the Series B Preferred Shares, which was paid within the quarter.


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

 
Total tax
(provision)
benefit

 
After tax total
accumulated
other
comprehensive
income (loss)

 
Total net
unrealized
gains
 (losses)
on securities

 
Net
unrealized
gains
(losses) on
forecasted
transactions

 
Foreign
currency
translation
adjustment

 (Income) loss attributable to NCI
Balance at June 30, 2018$(280.8) $58.9
 $(221.9) $(210.9) $(17.6) $0
 $6.6
Reclassification of disproportionate amounts1
(4.3) 0.9
 (3.4) 0
 0
 0
 (3.4)
Adjusted balance at June 30, 2018(285.1) 59.8
 (225.3) (210.9) (17.6) 0
 3.2
Other comprehensive income (loss) before reclassifications:             
Investment securities(58.7) 12.3
 (46.4) (46.4) 0
 0
 0
Forecasted transactions0
 0
 0
 0
 0
 0
 0
Foreign currency translation adjustment0
 0
 0
 0
 0
 0
 0
Loss attributable to noncontrolling interest (NCI)0.6
 (0.2) 0.4
 0
 0
 0
 0.4
Total other comprehensive income (loss) before reclassifications(58.1) 12.1
 (46.0) (46.4) 0
 0
 0.4
Less: Reclassification adjustment for amounts realized in net income by income statement line item:             
Net impairment losses recognized in earnings0
 0
 0
 0
 0
 0
 0
Net realized gains (losses) on securities(9.3) 1.9
 (7.4) (7.4) 0
 0
 0
Interest expense(0.2) 0
 (0.2) 0
 (0.2) 0
 0
Total reclassification adjustment for amounts realized in net income(9.5) 1.9
 (7.6) (7.4) (0.2) 0
 0
Total other comprehensive income (loss)(48.6) 10.2
 (38.4) (39.0) 0.2
 0
 0.4
Balance at September 30, 2018$(333.7) $70.0
 $(263.7) $(249.9) $(17.4) $0
 $3.6
1Reflects the change in value on (income) loss attributable to NCI in conjunction with the "put" transaction (See Note 12 – Redeemable Noncontrolling Interest for additional information).
       
Components of Changes in
Accumulated Other
Comprehensive Income (after tax)
(millions)
Pretax total
accumulated
other
comprehensive
income (loss)

 
Total tax
(provision)
benefit

 
After tax total
accumulated
other
comprehensive
income (loss)

 
Total net
unrealized
gains
 (losses)
on securities

 
Net
unrealized
gains
(losses) on
forecasted
transactions

 (Income) loss attributable to NCI
Balance at March 31, 2019$225.5
 $(47.4) $178.1
 $195.5
 $(17.0) $(0.4)
Other comprehensive income (loss) before reclassifications:           
Investment securities404.7
 (85.0) 319.7
 319.7
 0
 0
Loss attributable to noncontrolling interest (NCI)(3.3) 0.7
 (2.6) 0
 0
 (2.6)
Total other comprehensive income (loss) before reclassifications401.4
 (84.3) 317.1
 319.7
 0
 (2.6)
Less: Reclassification adjustment for amounts realized in net income by income statement line item:           
Net realized gains (losses) on securities53.5
 (11.2) 42.3
 42.3
 0
 0
Interest expense(0.2) 0
 (0.2) 0
 (0.2) 0
Total reclassification adjustment for amounts realized in net income53.3
 (11.2) 42.1
 42.3
 (0.2) 0
Total other comprehensive income (loss)348.1
 (73.1) 275.0
 277.4
 0.2
 (2.6)
Balance at June 30, 2019$573.6
 $(120.5) $453.1
 $472.9
 $(16.8) $(3.0)







      
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 (loss)

 
Total tax
(provision)
benefit

 
After tax total
accumulated
other
comprehensive
income (loss)

 
Total net
unrealized
gains
 (losses)
on securities

 
Net
unrealized
gains
(losses) on
forecasted
transactions

 
Foreign
currency
translation
adjustment

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

 
Total tax
(provision)
benefit

 
After tax total
accumulated
other
comprehensive
income (loss)

 
Total net
unrealized
gains
 (losses)
on securities

 
Net
unrealized
gains
(losses) on
forecasted
transactions

 (Income) loss attributable to NCI
Balance at December 31, 2017$1,977.8
 $(695.6) $1,282.2
 $1,295.0
 $(14.8) $0
 $2.0
Cumulative effect adjustment1
(2,006.0) 705.8
 (1,300.2) (1,300.2) 0
 0
 0
Reclassification of disproportionate amounts2
(4.3) (3.4) (7.7) (1.1) (3.2) 0
 (3.4)
Adjusted balance at December 31, 2017(32.5) 6.8
 (25.7) (6.3) (18.0) 0
 (1.4)
Balance at December 31, 2018$(153.0) $32.1
 $(120.9) $(105.6) $(17.2) $1.9
Other comprehensive income (loss) before reclassifications:                        
Investment securities(352.5) 73.9
 (278.6) (278.6) 0
 0
 0
819.2
 (172.0) 647.2
 647.2
 0
 0
Forecasted transactions0
 0
 0
 0
 0
 0
 0
Foreign currency translation adjustment0
 0
 0
 0
 0
 0
 0
Loss attributable to noncontrolling interest (NCI)6.4
 (1.4) 5.0
 0
 0
 0
 5.0
(6.2) 1.3
 (4.9) 0
 0
 (4.9)
Total other comprehensive income (loss) before reclassifications(346.1) 72.5
 (273.6) (278.6) 0
 0
 5.0
813.0
 (170.7) 642.3
 647.2
 0
 (4.9)
Less: Reclassification adjustment for amounts realized in net income by income statement line item:                        
Net impairment losses recognized in earnings0
 0
 0
 0
 0
 0
 0
Net realized gains (losses) on securities(44.2) 9.2
 (35.0) (35.0) 0
 0
 0
86.9
 (18.2) 68.7
 68.7
 0
 0
Interest expense(0.7) 0.1
 (0.6) 0
 (0.6) 0
 0
(0.5) 0.1
 (0.4) 0
 (0.4) 0
Total reclassification adjustment for amounts realized in net income(44.9) 9.3
 (35.6) (35.0) (0.6) 0
 0
86.4
 (18.1) 68.3
 68.7
 (0.4) 0
Total other comprehensive income (loss)(301.2) 63.2
 (238.0) (243.6) 0.6
 0
 5.0
726.6
 (152.6) 574.0
 578.5
 0.4
 (4.9)
Balance at September 30, 2018$(333.7) $70.0
 $(263.7) $(249.9) $(17.4) $0
 $3.6
Balance at June 30, 2019$573.6
 $(120.5) $453.1
 $472.9
 $(16.8) $(3.0)
1Reflects the fair value changes on equity securities as of December 31, 2017, which are reported as realized gains (losses) under the new accounting guidance. See Note 14 – New Accounting Standards for additional information.
2Reflects the effect of the change in the U.S. federal tax rate on our available-for-sale fixed-maturity securities and our hedges on forecasted transactions as of December 31, 2017 (See Note 14 – New Accounting Standards for additional information) and the adjustment to reflect the change in value on (income) loss attributable to NCI in conjunction with the "put" transaction (See Note 12 – Redeemable Noncontrolling Interest for additional information).







      
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 (loss)

 
Total tax
(provision)
benefit

 
After tax total
accumulated
other
comprehensive
income (loss)

 
Total net
unrealized
gains
 (losses)
on securities

 Net
unrealized
gains
(losses) on
forecasted
transactions
 
Foreign
currency
translation
adjustment

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

 
Total tax
(provision)
benefit

 
After tax total
accumulated
other
comprehensive
income (loss)

 
Total net
unrealized
gains
 (losses)
on securities

 Net
unrealized
gains
(losses) on
forecasted
transactions
 (Income) loss attributable to NCI
Balance at June 30, 2017$1,774.1
 $(623.4) $1,150.7
 $1,164.6
 $(15.1) $(0.9) $2.1
Balance at March 31, 2018$(218.6) $46.0
 $(172.6) $(160.8) $(17.8) $6.0
Other comprehensive income (loss) before reclassifications:                        
Investment securities122.7
 (43.0) 79.7
 79.7
 0
 0
 0
(90.4) 18.8
 (71.6) (71.6) 0
 0
Forecasted transactions0
 0
 0
 0
 0
 0
 0
Foreign currency translation adjustment0.9
 (0.3) 0.6
 0
 0
 0.6
 0
Loss attributable to noncontrolling interest (NCI)(1.1) 0.4
 (0.7) 0
 0
 0
 (0.7)0.7
 (0.1) 0.6
 0
 0
 0.6
Total other comprehensive income (loss) before reclassifications122.5
 (42.9) 79.6
 79.7
 0
 0.6
 (0.7)(89.7) 18.7
 (71.0) (71.6) 0
 0.6
Less: Reclassification adjustment for amounts realized in net income by income statement line item:                        
Net impairment losses recognized in earnings(9.3) 3.3
 (6.0) (6.0) 0
 0
 0
Net realized gains (losses) on securities15.7
 (5.5) 10.2
 10.2
 0
 0
 0
(27.2) 5.7
 (21.5) (21.5) 0
 0
Interest expense(0.2) 0.1
 (0.1) 0
 (0.1) 0
 0
(0.3) 0.1
 (0.2) 0
 (0.2) 0
Total reclassification adjustment for amounts realized in net income6.2
 (2.1) 4.1
 4.2
 (0.1) 0
 0
(27.5) 5.8
 (21.7) (21.5) (0.2) 0
Total other comprehensive income (loss)116.3
 (40.8) 75.5
 75.5
 0.1
 0.6
 (0.7)(62.2) 12.9
 (49.3) (50.1) 0.2
 0.6
Balance at September 30, 2017$1,890.4
 $(664.2) $1,226.2
 $1,240.1
 $(15.0) $(0.3) $1.4
Balance at June 30, 2018$(280.8) $58.9
 $(221.9) $(210.9) $(17.6) $6.6
       
Components of Changes in
Accumulated Other
Comprehensive Income (after tax)
(millions)
Pretax total
accumulated
other
comprehensive
income (loss)

 
Total tax
(provision)
benefit

 
After tax total
accumulated
other
comprehensive
income (loss)

 
Total net
unrealized
gains
 (losses)
on securities

 Net
unrealized
gains
(losses) on
forecasted
transactions
 (Income) loss attributable to NCI
Balance at December 31, 2017$1,977.8
 $(695.6) $1,282.2
 $1,295.0
 $(14.8) $2.0
Cumulative effect adjustment(2,006.0) 705.8
 (1,300.2) (1,300.2) 0
 0
Reclassification of disproportionate amounts0
 (4.3) (4.3) (1.1) (3.2) 0
Adjusted balance at December 31, 2017(28.2) 5.9
 (22.3) (6.3) (18.0) 2.0
Other comprehensive income (loss) before reclassifications:           
Investment securities(293.8) 61.6
 (232.2) (232.2) 0
 0
Loss attributable to noncontrolling interest (NCI)5.8
 (1.2) 4.6
 0
 0
 4.6
Total other comprehensive income (loss) before reclassifications(288.0) 60.4
 (227.6) (232.2) 0
 4.6
Less: Reclassification adjustment for amounts realized in net income by income statement line item:           
Net realized gains (losses) on securities(34.9) 7.3
 (27.6) (27.6) 0
 0
Interest expense(0.5) 0.1
 (0.4) 0
 (0.4) 0
Total reclassification adjustment for amounts realized in net income(35.4) 7.4
 (28.0) (27.6) (0.4) 0
Total other comprehensive income (loss)(252.6) 53.0
 (199.6) (204.6) 0.4
 4.6
Balance at June 30, 2018$(280.8) $58.9
 $(221.9) $(210.9) $(17.6) $6.6

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

 
Total tax
(provision)
benefit

 
After tax total
accumulated
other
comprehensive
income (loss)

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

 
Foreign
currency
translation
adjustment

 (Income) loss attributable to NCI
Balance at December 31, 2016$1,439.5
 $(506.1) $933.4
 $939.6
 $(9.4) $(1.1) $4.3
Other comprehensive income (loss) before reclassifications:             
Investment securities554.4
 (194.3) 360.1
 360.1
 0
 0
 0
Forecasted transactions(8.0) 2.8
 (5.2) 0
 (5.2) 0
 0
Foreign currency translation adjustment1.2
 (0.4) 0.8
 0
 0
 0.8
 0
Loss attributable to noncontrolling interest (NCI)(4.5) 1.6
 (2.9) 0
 0
 0
 (2.9)
Total other comprehensive income (loss) before reclassifications543.1
 (190.3) 352.8
 360.1
 (5.2) 0.8
 (2.9)
Less: Reclassification adjustment for amounts realized in net income by income statement line item:             
Net impairment losses recognized in earnings(12.9) 4.6
 (8.3) (8.3) 0
 0
 0
Net realized gains (losses) on securities104.5
 (36.6) 67.9
 67.9
 0
 0
 0
Interest expense0.6
 (0.2) 0.4
 0
 0.4
 0
 0
Total reclassification adjustment for amounts realized in net income92.2
 (32.2) 60.0
 59.6
 0.4
 0
 0
Total other comprehensive income (loss)450.9
 (158.1) 292.8
 300.5
 (5.6) 0.8
 (2.9)
Balance at September 30, 2017$1,890.4
 $(664.2) $1,226.2
 $1,240.1
 $(15.0) $(0.3) $1.4
In an effort to manage interest rate risk, we often enter into forecasted transactions on Progressive’s debt issuances. We expect to reclassify $1.0 million (pretax) into interest expense during the next 12 months, related to net unrealized losses on forecasted transactions (see Note 4 – Debt in our 2018 Annual Report to Shareholders for further discussion).
Note 11Litigation — The Progressive Corporation and/or its insurance subsidiaries are named as defendants in various lawsuits arising out of claims made under insurance policies written by our insurance subsidiaries in the ordinary course of business. We consider all legal actions relating to such claims in establishing our loss and loss adjustment expense reserves. In


addition, The Progressive Corporation and/or its subsidiaries are named as defendants in a number of class action or individual lawsuits that challenge certain of the operations of the subsidiaries.
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, marketing, or sales 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 20172018 Annual Report to Shareholders.
We plan to contest the pending lawsuits vigorously, but may pursue settlement negotiations in some cases, ifas we deem appropriate. The outcomes of pending cases are uncertain at this time. We establish accruals for these lawsuits when it is probable that a loss has been or will be incurred and we can reasonably estimate potential loss exposure, which may include a range of loss. As to lawsuits for which the loss is considered neither probable or estimable, or is considered probable but not estimable, we do not establish an accrual. Nevertheless, we continue to evaluate this pending litigation to determine if any losses not deemed probable and estimable become so, at which point we would establish an accrual at our best estimate of the loss or range of loss.


With respect to our pending lawsuits that are not related to claims under insurance policies, the accruals that we have established, if any, were not material at SeptemberJune 30, 20182019 or 2017,2018, and there were no material settlements during 2018 or the first ninesix months of 2018 or 2017.2019. For most of these lawsuits, we do not consider any losses to be both probable and estimable, and we are unable to estimate a meaningful range of loss, if any, at this time, due to the factors discussed in Note 12 – Litigation in our 20172018 Annual Report to Shareholders.In the event that any one or more of these lawsuits results in a substantial judgment against or settlement by us, or if our accruals (if any) prove to be inadequate by a significant amount, the resulting liability could have a material adverse effect on our consolidated financial condition, cash flows, and/or results of operations. For a further discussion on our pending litigation and related reserving policies, see Note 12 – Litigation in our 20172018 Annual Report to Shareholders.
Note 12 Redeemable Noncontrolling Interest — In connection with the April 2015 acquisition of a controlling interest in ARX, The Progressive Corporation entered into a stockholders’ agreement with the other ARX stockholders. As part ofPursuant to the stockholders’ agreement, the minority ARX stockholders had the right to “put” a portion of their ARX shares to Progressive in 2018, and have the right to put all of their remaining shares to Progressive in 2021. During the second quarter 2018, minority ARX stockholders put 204,527 shares, including 5,483 shares that were issued upon the exercise of outstanding stock options. Progressive acquired these additional shares, in a cash transaction, for a total cost of $295.9 million. If ARX stockholders do not put all of their shares to Progressive in 2021, Progressive has the ability to “call” all of the outstanding shares shortly thereafter and to bring its ownership stake to 100% in 2021. See Note 15 – Redeemable Noncontrolling Interest in our 20172018 Annual Report to Shareholders for a discussion of the purchase price for shares to be purchased by Progressive pursuant to these put or call rights. At SeptemberJune 30, 2018,2019, Progressive’s share ownership interest in ARX was 86.8%87.1%.
Since these securities are redeemable upon the occurrence of an event that is not solely within the control of Progressive, we have recorded the redeemable noncontrolling interest (NCI) as mezzanine equity on our consolidated balance sheets, which represents the minority shares at the current estimated purchase price pursuant to the put and call provisions of the stockholders’ agreement. The estimated purchase price is based, in part, on the change in tangible net book value of ARX from December 31, 2014, to the balance sheet dates.
In addition to these minority shares, at SeptemberJune 30, 2018,2019, ARX employees held options to purchase 16,06710,438 ARX shares. These options and any shares issued upon exercise are subject to the stockholders’ agreement, including the “put” and “call” rights described above. Until the options are exercised, the underlying obligation of approximately $23.4$15.6 million is not recorded as part of redeemable NCI. See Note 9 – Employee Benefit Plans in our 20172018 Annual Report to Shareholders for a discussion of ourARX employee stock options.


The changes in the components of redeemable NCI during the nine months ended September 30, 2018 and 2017, and the year ended December 31, 2017, were:
(millions)September 30, 2018
 September 30, 2017
 December 31, 2017
June 30, 2019
 June 30, 2018
 December 31, 2018
Balance, Beginning of period$503.7
 $483.7
 $483.7
$214.5
 $503.7
 $503.7
Net income attributable to NCI10.6
 1.9
 5.9
4.0
 8.8
 5.7
Other comprehensive income (loss) attributable to NCI1
(5.0) 2.9
 2.3
4.9
 (4.6) (3.3)
Exercise of employee stock options9.4
 3.4
 3.4
7.7
 9.4
 9.4
Purchase/change of ARX minority shares(298.2) 0
 0
(11.2) (295.9) (298.2)
Change in redemption value of NCI(3.1) 6.3
 8.4
0.2
 (3.2) (2.8)
Balance, End of period$217.4
 $498.2
 $503.7
$220.1
 $218.2
 $214.5

1Amount represents the other comprehensive income (loss) attributable to NCI, as reflected on the the Consolidated Statements of Comprehensive Income; any reclassification tochanges in accumulated other comprehensive income (loss) attributable to NCI due to a change in the minority ownership percentage does not impact the amount of redeemable NCI.



Note 13 Goodwill and Intangible Assets
Goodwill
During the ninesix months ended SeptemberJune 30, 2018,2019, there were no changes to the carrying amount of goodwill. No accumulated goodwill impairment losses exist.
Intangible Assets
The following table is a summary of the net carrying amount of other intangible assets as of September 30, 2018 and 2017, and December 31, 2017:assets:
(millions)June 30, 2019
 June 30, 2018
 December 31, 2018
Intangible assets subject to amortization$246.3
 $318.2
 $282.2
Indefinite-lived intangible assets1
12.4
 12.4
 12.4
Total$258.7
 $330.6
 $294.6

(millions)September 30, 2018
 September 30, 2017
 December 31, 2017
Intangible assets subject to amortization$300.2
 $372.2
 $354.2
Indefinite-lived intangible assets1
12.4
 12.4
 12.4
Total$312.6
 $384.6
 $366.6
1 Indefinite-lived intangible assets are comprised of state insurance and agent licenses. State insurance licenses were previously subject to amortization under superseded accounting guidance and includehave $0.6 million of accumulated amortization for all periods presented.


Intangible assets subject to amortization consisted of the following:
(millions)June 30, 2019 June 30, 2018 December 31, 2018
CategoryGross 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
$155.6
$100.6
 $256.2
$119.0
$137.2
 $256.2
$137.3
$118.9
Agency relationships159.2
48.3
110.9
 159.2
37.0
122.2
 159.2
42.6
116.6
Software rights79.1
45.4
33.7
 79.1
34.7
44.4
 79.1
40.1
39.0
Trade name34.8
33.7
1.1
 34.8
20.4
14.4
 34.8
27.1
7.7
Total$529.3
$283.0
$246.3
 $529.3
$211.1
$318.2
 $529.3
$247.1
$282.2
(millions)September 30, 2018 September 30, 2017 December 31, 2017
CategoryGross 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
$128.1
$128.1
 $256.2
$91.5
$164.7
 $256.2
$100.7
$155.5
Agency relationships159.2
39.8
119.4
 159.2
28.4
130.8
 159.2
31.3
127.9
Software rights79.1
37.4
41.7
 79.1
26.8
52.3
 79.1
29.4
49.7
Trade name34.8
23.8
11.0
 34.8
10.4
24.4
 34.8
13.7
21.1
Total$529.3
$229.1
$300.2
 $529.3
$157.1
$372.2
 $529.3
$175.1
$354.2

Amortization expense was $18.0 million and $54.0$35.9 million for the three and ninesix months ended SeptemberJune 30, 2018,2019, respectively, compared to $17.2$18.0 million and $48.2$36.0 million during the same periods last year.
During the third quarter 2017, we revised our estimate of the economic useful life of our trade name intangible asset from an original life of 10 years to a remaining life of 2 years. The decrease in the useful life represents the estimated length of time that it is expected to transition the branding of our Property products from the ASI trade name to the Progressive brand. As of SeptemberJune 30, 2018,2019, the remaining average life of all of our intangible assets is 4.23.4 years.


Note 14 Leases — Included in our consolidated balance sheet for the period ended June 30, 2019, are certain noncancelable operating leases for office space, computer equipment, and vehicles, all with expected terms greater than one year, that are reported as a component of “other assets” and “accounts payable, accrued expenses, and other liabilities.” The leased assets represent our right to use an underlying asset for the lease term and the lease liabilities represent our obligation to make lease payments arising from the lease. We use an incremental borrowing rate to calculate the present value of the remaining lease payments. At June 30, 2019, we had operating lease assets of $189.1 million and operating lease liabilities of $204.2 million.
At June 30, 2019, the following table shows our operating lease liabilities, on an undiscounted basis for the periods indicated, along with key inputs used to discount our lease liabilities, in accordance with the new accounting standard adopted on January 1, 2019 (see Note 15 – New Accounting Standards for further discussion):
($ in millions) 
2019 (excluding the six months ended June 30, 2019)$39.4
202073.2
202157.3
202227.6
202311.8
Thereafter5.8
   Total215.1
Interest(10.9)
Present value of lease liabilities$204.2
Weighted-average remaining term3.1 years
Weighted-average discount rate3.5%

We had certain noncancelable operating lease commitments with lease terms greater than one year for property and computer equipment. The minimum commitments under these agreements at December 31, 2018, were as follows:
(millions)Commitments
2019$64.1
202065.5
202152.8
202224.3
20238.5
Thereafter3.8
Total$219.0

We review each contract at inception to determine if it contains a lease and whether the lease qualifies as an operating or financing lease. Operating leases are expensed on a straight-line basis over the term of the lease. For the six months ended June 30, 2019, we incurred operating lease costs of $52.5 million. In determining the lease term, we consider the probability of exercising renewal options. We elected to account for leases with both lease and non-lease components as a single lease component and to apply a portfolio approach to account for our vehicle leases.
Note 14 15 New Accounting Standards


Issued

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

In August 2018, the FASB issued an ASU, which amends the disclosure requirements for fair value measurements. The ASU requires companies to disclose the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The ASU also removes current


disclosure requirements for the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. The ASU is effective for fiscal years beginning after December 15, 2019, and should be applied prospectively for the additions to the disclosure requirements and applied retrospectively to all periods presented for all other amendments. Early adoption of thisAs permitted by the ASU, is permitted, including the abilitywe elected to partially early adopt the removal of current disclosures while delayingdisclosure requirements and will adopt the adoptionnew disclosure requirements as of new disclosures until the effective date. We do not expect this standard to have an impact on our financial condition, cash flows, or results of operations.


In July 2018, the FASB issued an ASU, which provides targeted improvements to the new lease accounting guidance issued by the FASB in February 2016. The ASU, which eliminates the off-balance-sheet accounting for leases, will require lessees to report their operating leases as both an asset and liability on the statement of financial position and to disclose key information about leasing arrangements in the financial statement footnotes. Under the ASU, there will be no change to the recognition of lease expense in our results of operations. The ASU will be effective for fiscal years (including interim periods within those fiscal years) beginning after December 15, 2018 (2019 for calendar-year companies). Under the ASU, companies will have the option to apply the new lease requirements either as of the effective date (i.e., January 1, 2019), with comparative information presented in accordance with the previous standard, or on a modified retrospective basis, which would restate all financial statement information as of the beginning of the earliest period presented. Based on our lease portfolio at September 30, 2018, and in accordance with the accounting elections available in the ASU, we would have recorded an increase to assets and liabilities of approximately $160 million, and there would have been no impact on our results of operations or cash flows. Therefore, we do not expect this standard to have a material impact on our financial condition.
In March 2017, the FASB issued an ASU related to premium amortization on purchased callable debt securities. The intent of the standard is to shorten the amortization period for certain purchased callable debt securities held at a premium. Under the ASU, the premium is required to be amortized to the earliest call date. The ASU more closely aligns interest income recorded on bonds held at a premium with the economics of the underlying instrument. The ASU, which is required to be applied on a modified retrospective basis, is effective for fiscal years beginning after December 15, 2018 (2019 for calendar-year companies), and interim periods within those fiscal years. Since we have historically used a yield-to-worst scenario for our securities that were purchased at a premium, and the first call on a premium security most often produces the lowest and most conservative yield, we do not expect this standard to have a significant impact on our financial condition, cash flows, or results of operations.
In January 2017, the FASB issued an ASU, which eliminates the requirement to determine the implied fair value of goodwill in measuring an impairment loss. Upon adoption, the measurement of a goodwill impairment will represent the excess of the reporting unit’s carrying value over fair value, limited to the carrying value of goodwill. This ASU is effective for goodwill impairment tests in fiscal years beginning after December 15, 2019 (2020 for calendar-year companies), with early adoption permitted. We do not expect this standard to have a material impact on our financial position or results of operations.


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


Adopted

On January 1, 2018,2019, we adopted the ASU, intendedwhich required lessees to improvereport their operating leases as both an asset and liability on the recognition and measurementstatement of financial instruments. Under this update,position and to disclose key information about leasing arrangements in the changes in fair value of equity securitiesfinancial statement footnotes. We are recognizedreporting our operating leased assets and liabilities as a component of net income.“other assets” and “accounts payable, accrued expenses, and other liabilities,” respectively. We did not restate prior year information. Upon adoption of the ASU, based on our lease portfolio on January 1, 2019, and after applying the practical expedient under which we were not required to reassess any of our existing contracts, classification of our leases, or the initial direct costs for existing leases, we recorded a cumulative-effecttransition adjustment of $1.3 billion, which is net of taxes. The cumulative-effect adjustment represents the amount of after-tax net unrealized gains on equity securities that was recorded as part of accumulated other comprehensive income at December 31, 2017.$213.0 million for leased assets and $217.6 million for liabilities. The adoption of this ASU had no impact on comprehensive income. Consistent with our historical presentation,results of operations or cash flows on equity securities will be reflected as investing activities in the Consolidated Statements of Cash Flows.flows. See Note 14 – Leases for further information.


In the first quarter 2018,On January 1, 2019, we adopted the ASU related to premium amortization on purchased callable debt securities. Under the reclassification of certain tax effects from accumulated other comprehensive income. This update provided companiesASU, the premium is required to be amortized to the earliest call date, which more closely aligns interest income recorded on bonds held at a premium with the option to reclassify disproportionate tax effects in accumulated other comprehensive income caused by the legislation commonly known as the Tax Cuts and Jobs Act of 2017 to retained earnings. We opted to make the reclassification, which resulted in a decrease to accumulated other comprehensive income and an offsetting increase to retained earnings of $4.3 million. This reclass was solely due to the effecteconomics of the change inunderlying instrument. We applied the U.S. federal tax rateASU on a modified retrospective basis, as required under the standard. Since we have historically used a yield-to-worst scenario for our securities that were purchased at a premium, and the first call on a premium security most often produces the lowest and most conservative yield, the adoption of this standard did not have an impact on our available-for-sale fixed-maturity securities and our hedges on forecasted transactions. There were no disproportionate tax effects related to our equity securities subsequent to adopting the ASU related to classification and measurement discussed above.


Note 15 Reclassification — For the three and nine months ended September 30, 2017, we reclassified the change in the net holding period gains (losses) on hybrid securities held at September 30, 2017 to “net holding period gains (losses) on securities” outfinancial condition, cash flows, or results of “net realized gains (losses) on security sales” to conform with the current-year Consolidated Statements of Comprehensive Income presentation. There was no overall impact on total net realized gains (losses) on securities. We also reclassified the classification and presentation of restricted cash in our Consolidated Statements of Cash Flows in accordance with the accounting guidance we adopted for the year ended December 31, 2017 relating to this item; there was no overall impact on the increase in cash, cash equivalents, and restricted cash as a result of this reclassification. In addition, on our Consolidated Balance Sheets for December 31, 2017, we reclassified our “dividends payable” into “accounts payable, accrued expenses, and other liabilities” to be consistent with the current period presentation.operations.
Note 16 Subsequent Event — On October 18, 2018, we issued $550.0 million of 4.00% Senior Notes due 2029 (the “4.00% Senior Notes”) in an underwritten public offering. We received net proceeds, which will be used for general corporate purposes, of about $544.5 million, after deducting underwriters’ discounts, commissions, and other issuance costs.





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


I. OVERVIEW
The Progressive Corporation’s insurance subsidiaries recognized strong growth in both premiums and policies in force in the thirdsecond quarter 2018,2019, compared to the same period last year. During the quarter, we generated $8.6$9.1 billion of net premiums written, 20% more thanwhich is an increase of $1.0 billion, or 13%, compared to the thirdsecond quarter last year, and crossed over $30 billion of net premiums written2018. In addition, on a trailing 12-month basis. On a quarter-over-prior-year-quarter basis, companywide net premiums earned increased 21%16% and policies in force grew 10%. We ended September 2018the quarter with over 2021.6 million companywidetotal policies in force, a 13% increase over the same period last year.which is 2.0 million more policies than were in force on June 30, 2018.
On a year-over-year basis, for the third quarter, both net income and comprehensive income attributable to Progressive increased substantially. We produced an39% for the second quarter and 45% for the first six months. The underwriting margin was 9.6% and 10.4% for the second quarter and first six months of 9.7%, which is 7.1 points better2019, respectively, a 0.5 point and 0.1 point improvement on a year-over-year basis. In addition to the increases in underwriting income, we recognized a significant increase in net realized gains on securities year-over-year for both the second quarter and first six months of 2019, due to greater net holding period gains on our equity securities and, for the second quarter net realized gains on security sales. Comprehensive income increased at a greater rate than net income for both the thirdsecond quarter last year, primarilyand first six months of 2019, reflecting a decrease in year-over-year catastrophe losses. The remainder of the underwriting profit increase reflects an increase in average written premium per policy and a decrease in our auto claims frequency compared to 2017. Net income also benefited from the change in the statutory federal income tax rate to 21% from 35% last year. 
For the third quarter 2018, comprehensive income included a decrease in the value of our investment portfolio,fixed-maturity securities during 2019, compared to an increasea decrease in the portfolio valuationvalue of these securities during the same periodperiods last year. Due to a change in accounting guidance, as of January 1, 2018, the change in value of our equity securities is reported as a component of net income, instead of being a component of other comprehensive income, while the change in value of fixed-maturity securities remains part of other comprehensive income. This accounting change may cause more volatility in net income based on equity market conditions. Therefore, comprehensive income may be a more beneficial measure of our overall performance.
During the thirdsecond quarter 2018,2019, our total capital (debt plus shareholders’ equity) increased $0.9$1.2 billion, to $15.7$17.7 billion, primarily reflecting income during the quarter.
A. Insurance Operations
Our Personal and Commercial Lines operating segments were profitable during the thirdsecond quarter 2018,2019, while our Property business generated an underwriting loss. loss, primarily due to catastrophe losses incurred during the quarter.
Our Personal Lines underwriting profit margin was 10.3% and Commercial Lines was 11.6%, both of which were slightly better than the second quarter last year. Our Property segment had an underwriting loss margin of 9.0%, which was 7.6 points better than the second quarter last year, reflecting 4.6 points less catastrophe losses in the second quarter 2019, and expenses increasing at a much lower rate than earned premiums. On a companywide basis, our catastrophe losses as a percent of premiums earned were down 0.3 points for the quarter, on a year-over-year basis. The majority of the catastrophe losses during the second quarter 2019 were due to wind and hail storms in Texas, as well as tornadoes across the United States. Our special lines products were profitable in the second quarter, however, they did not have a significant impact on our total Personal Lines combined ratio.
All three of our operating segments contributed to our solid premium and policiespolicy in force growth during the second quarter on a year-over-year basis.
Our Personal Lines and Commercial Lines underwriting profit margins in the third quarter were 10.0% and 12.0%, respectively, while the Property business had an underwriting loss margin of 2.3%, which included 9.5 points of catastrophe losses, as well as 5.4 points of amortization expense, predominately related to our acquisition of a controlling interest of ARX Holding Corp. (ARX) in 2015. Our special lines products, which are typically used more during the summer months, had an unfavorable impact on our total Personal Lines combined ratio of 0.8 points and 2.7 points for the third quarter 2018 and 2017, respectively. In addition to the normal seasonality, in 2017, the special lines products results were significantly affected by hurricane losses.
On a quarter-over-prior-year-quarter basis, our catastrophe losses decreased 70%, or 5.0 points, primarily attributable to the significant losses incurred in 2017 related to Hurricanes Harvey and Irma. In the third quarter 2018, we incurred catastrophe losses of $127.2 million, compared to $431.1 million in the same period last year. On October 10, 2018, Hurricane Michael, a category 4 hurricane, made landfall in the Florida Panhandle and over the next few days also impacted several other states. We currently estimate that our vehicle businesses will incur losses of approximately $60 million in connection with this storm. We based these estimates on claims reporting information, our experience with severity and reporting patterns from many past storms, and several assumptions, including mix of claims. Reporting patterns, mix, and otherassumptions (including those related to salvage) will likely differ from our expectations. Although it is too early to estimate the impact of Hurricane Michael on our Property business, we expect that our net losses and loss adjustment expenses will not exceed $60 million, which represents the retention level under our Property catastrophic reinsurance coverage.
For the quarter, our companywide prior accident years development had a 0.4 point favorable impact, compared to a 0.5 point favorable impact in the third quarter 2017. Our overall incurred personal auto frequency was down around 2.6%, while severity was up about 6.0%. While we largely priced for the increase in severity, we were not anticipating the magnitude of the continued decrease in frequency, which contributed to our underwriting profitability in the quarter.
Our companywide net premiums written grew 20%13%, with Personal Lines growing 18%13%, Commercial Lines 31%13%, and Property 32%15%, primarily reflecting both an increase in rate and volume.
During the second quarter, on a year-over-year basis, our written premium per policy for our personal auto businesses increased about 4%2%, primarily reflecting a shift in the mix of business toward higher premium coveragesbusiness. We continue to see signs of a softening marketplace and theare prepared to continue to take rate increases taken during the last 12 months.actions to maintain our competitive position. Written premium per policy increased 4%3% for our special lines products and increased 15%10% for our Commercial Lines business. The Commercial Lines increase reflectsreflected shifts in our mix of businesses to higher premium products,market tiers, as well as rate actions taken throughout 2017. The total written2018. We did not take significant rate actions during the first half of 2019 in our commercial auto products. Written premium per policy for the Property business decreasedincreased 3%, reflecting rate increases partially offset by an increase in the amount of renters business written, which has lower premiums per policy,


comprising a greater proportion of the total Property business. For our core Property business (e.g., home and condo insurance), the writtenaverage premium per policy increased slightly.policies. We continue to increaseearning in previous rate levelslevel increases taken in our Property business during 2018 and the first half of 2019, to help meet our profitability targets in this segment, while much of our previous rate increases have yet to be earned in.targets.
During the third quarter, total new personal auto applications (i.e., issued policies) increased 19%6% on a year-over-year basis, including a 12% and 26% increase in ourwith both Agency auto and Direct auto businesses, respectively. The significant increase in Direct autonew applications reflects, in part, increased advertising spend during the quarter, as well as competitive product offerings and position in the marketplace. We will continue to spend on marketing when we believe that it is an efficient use of our dollars.increasing 6%. We continued to generate strong new business application growth in our bundled auto and home customers (i.e., Robinsons) in both the Agency and Direct channels. We experienced solid year-over-year new application growth in our auto products in the second quarter 2019, however, the rate of growth was slightly less than the first quarter 2019 and lower than the significant growth we experienced in the second quarter last year, which is reflected in our higher growth in renewal applications. The slowdown in new application growth in part reflects competitors lowering rates. Nevertheless, we continue to believe that we are well positioned with competitive product offerings and will continue to spend on marketing when we believe that it is an efficient use of our dollars. New applications for our special lines products were up 5%4% during the thirdsecond quarter 2018,2019, compared to the same period last year.


For the Commercial Lines business, new applications increased 10%11% on a year-over-year basis during the thirdsecond quarter 2018. The majority of2019, which is consistent with the increase we saw in the first quarter 2019. We had some underwriting restrictions that were previously implementedin place during the first quarter last year, most of which were lifted during the second quarter 2018. We will continue to monitor our rate levels with a view toward continuing to manage profitably while providing high-quality customer service.
The Property business had a 51%6% decrease in new applications for the second quarter 2019, compared to an 81% increase in new applications for the third quarter 2018, compared to the same period last year, with strong growth in bothyear. Throughout 2017 and the agency and direct channels. Our home/condo products grew about 34%, while the balance was due to an increase in our renters, umbrella, and manufactured home products. We havefirst half of 2018, we increased our state footprint sincein the third quarter last year for both theProperty business and, in addition, we generated additional new applications when an unaffiliated carrier stopped offering homeowners and renters products.insurance through our in-house agency in 2018.
We ended the thirdsecond quarter 20182019 with over 20 million companywide policies in force, which included 13.114.3 million personal auto policies in force. Our Personal Lines policies in force, grew 11%, or 1.7 million policies, over the same period last year, with Agent auto and Direct auto growing 13%11% and 17%13%, respectively, and ourover the the same period last year. Our special lines products policies in force growing 1%. Ourgrew 3% over the second quarter last year, Commercial Lines businessgrew 8%, and Property grew 17%. On a year-over-year basis, Personal Lines increased policies in force grew 8%, or 53,300by about 1.7 million policies, Commercial Lines increased policies by just over 55,000, and the Property business grew 36%, or 491,400 policies.increased policies by 305,000.
To 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. Our efforts to increase our share of multi-product households continue to be a key initiative to support that goal. Policy life expectancy, which is our actuarial estimate of the average length of time that a policy will remain in force before cancellation or lapse in coverage, is our primary measure of customer retention in our Personal Lines and Commercial Lines auto businesses (referred to as our “vehicle businesses.businesses”). Our trailing 12-month total personal auto policy life expectancy increased 7%was down 2% over the third quarter last year whileand our trailing 3-month total auto policy life expectancy, which does not address seasonality and can reflect more volatility, was flat.up 1%. Our Agency auto and Direct auto trailing 12-month policy life expectancy were up 8% and 5%, respectively, and special lines decreased 2%was flat, while Direct auto was down 4%. The increases in ourOur Commercial Lines trailing 12-month policy life expectancy fordecreased 7% year over year and special lines was down 2%. The decline in policy life expectancy growth is due, in part, to targeted underwriting changes introduced during 2018. The unfavorable impact from these targeted underwriting changes continued through much of the second quarter 2019, and we are seeing our auto businesses reflect the competitive markets as well astrailing-3 measures begin to improve. We remain focused in our Destination Era initiatives, where we have experienced an increase in customers who bundle their auto coverage with other products, which tends to translate to longer relationships with these customers. Weretention efforts and are also continuing to make investments to improve the customer experience in an effort to lengthen retention. For Commercial Lines, our policy life expectancy increased 2% year over year.
B. Investments


The fair value of our investment portfolio was $32.4$36.8 billion at SeptemberJune 30, 2018.2019. Our asset allocation strategy is to maintain 0%-25% of our portfolio in Group I securities, with the balance (75%-100%) of our portfolio in Group II securities (the securities allocated to Group I and II are defined below under Results of Operations – Investments). At SeptemberJune 30, 2018, 15%2019, 13% of our portfolio was allocated to Group I securities and 85%87% to Group II securities, compared to 17%14% and 83%86%, respectively, at December 31, 2017.2018.
Our recurring investment income generated a pretax book yield of 2.9%3.2% for the thirdsecond quarter 2018,2019, compared to 2.3%2.7% for the same period in 2017.2018. Over the last 12 months, the size of our portfolio grew as a result of significant cash inflows from our issuance of debt and preferred stock during 2018, strong growth and profitability from our insurance operations, and portfolio turnover through maturities, calls, and paydowns. As interest rates rose in 2018, we opportunistically increased our duration in the fourth quarter, which enabled us to invest the available cash at yields in excess of the portfolio’s average yield. Our investment portfolio produced a fully taxable equivalent (FTE) total return of 1.2%2.2% for the thirdsecond quarter 2018,2019, compared to 1.1%0.6% for the same period in 2017.2018. Our fixed-income and common stock portfolios had FTE total returns of 0.5%2.1% and 7.4%4.0%, respectively, for the thirdsecond quarter 2018,2019, compared to 0.7%0.3% and 4.3%3.1%, respectively, last year. We generated a positive return in the fixed-income portfolio this quarter as interest rates and risk premium pricing declined resulting in valuation increases of our securities. The equity market continued its recovery from a sharp fourth quarter 2018 decline, which resulted in the positive equity return during the quarter.
At SeptemberJune 30, 2018,2019, the fixed-income portfolio had a weighted average credit quality of AA- and a duration of 2.62.7 years, compared to AA- and 2.52.8 years, respectively, at December 31, 2017.2018. We lengthenedshortened our portfolio duration modestly during the first six months of the year in response to higherlower interest rates as the risk/reward to our portfolio’s value at higher rate levels moved toward a more balanced position. However, ourrates. Our duration remains below the mid-point of our range as a means to limit a decline in portfolio value from a significant increase in rates from current levels.




II. FINANCIAL CONDITION
A. Liquidity and Capital Resources
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 $5.2$3.4 billion and $3.2$3.5 billion for the first ninesix months of 2019 and 2018, and 2017, respectively, as premiums collected increased at a faster rate than paid losses.respectively.
Our total capital (debt plus shareholders’ equity) was $15.7$17.7 billion, at book value, at SeptemberJune 30, 2019, compared to $14.9 billion at June 30, 2018, compared to $12.6and $15.2 billion at September 30, 2017 and December 31, 2017.2018. The increase since year end reflectsprimarily reflected the increase in comprehensive income during that period as well as the issuance of $600 million of 4.20% Senior Notes due 2048 and $500 million of Series B Fixed-to-Floating Rate Cumulative Perpetual Serial Preferred Shares (the “Series B Preferred Shares”), in underwritten public offerings during the first quarter 2018.period.
Our debt-to-total capital ratio remained below 30% during all reported periods, consistent with our financial policy. This ratio, which reflects debt as a percent of debt plus shareholders’ equity and excludes redeemable noncontrolling interest, was 24.6%24.8% at SeptemberJune 30, 2019, 26.0% at June 30, 2018, 26.3%and 28.9% at both September 30, 2017, and December 31, 2017.
Based on premium growth and regulatory and other capital needs, our results and current market conditions, we recently decided to raise additional capital to increase our capital flexibility. On October 18, 2018, we issued $550.0 million of our 4.00% Senior Notes due 2029 in an underwritten public offering. Net proceeds, after deducting underwriters' discounts and commissions and other expenses related to the issuance, were approximately $544.5 million, and these funds have been added to our investment portfolios. Our debt-to-total capital ratio at September 30, 2018, would have been 27.1% had this new debt issuance been outstanding at that time.
During the year, we deployed capital through share repurchases, dividends, and repayment of ARX debt. During the third quarter and first nine months of 2018, we spent $39.3 million and $78.7 million, respectively, to repurchase 661,196 and 1,363,451 common shares, primarily pursuant to our equity compensation plans. During the third quarter, we declared and paid $13.5 million of dividends on our Series B Preferred Shares. Although no dividends were declared on our common shares during the first nine months of 2018, in February, we paid $654.9 million of common share dividends, which were declared in December 2017. Also, during the first quarter 2018, ARX repaid in full its term loans in the aggregate principal amount of $37.1 million. At September 30, 2018, ARX has no external borrowings outstanding.
During the second quarter 2018, in accordance with our stockholders’ agreement related to the ARX acquisition, The Progressive Corporation increased its share ownership of ARX when minority ARX stockholders sold 204,527 shares to Progressive, at a total cost of $295.9 million. As of September 30, 2018, Progressive owns 86.8% of ARX. The Progressive Corporation has the ability to achieve 100% ownership of ARX by the end of the second quarter of 2021. See Note 12 - Redeemable Noncontrolling Interest for further discussion.2018.
We seek to deploy capital in a prudent manner and use multiple data sources and modeling tools to estimate the frequency, severity, and correlation of identified exposures, including, but not limited to, catastrophic and other insured losses, natural disasters, and other significant business interruptions, to estimate our potential capital needs.
During the year, we deployed capital primarily through dividends although we did repurchase some of our common shares. Our Board of Directors declared a $0.10 per common share dividend in both the first and second quarters 2019. These dividends, which were each $58.4 million in the aggregate, were paid in April 2019 and July 2019, respectively. In February 2019, we also paid $1.5 billion related to the $2.5140 per common share dividend declared by the Board in December 2018. In addition to the common share dividends, in February 2019, the Board also declared a Series B Preferred Share dividend of $13.4 million, which was paid during the first quarter 2019. Although we did not repurchase any common shares in the open market during 2019, we repurchased 0.5 million shares at a total cost of $28.4 million pursuant to our equity compensation plans.
During the first ninesix months of 20182019 and at all times during 2017,2018, 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, 2017.2018. Based upon our capital planning and forecasting efforts, we believe that we have sufficient capital resources and cash flows from operations to support our current business, scheduled principal and interest payments on our debt, dividends on ourcommon shares and Series B Preferred Shares, our contractual obligations, and other expected capital requirements for the foreseeable future.
We have anOur unsecured discretionary line of credit (the “Line of Credit”) with PNC Bank, National Association, in the maximum principal amount of $250 million whichwas renewed during April 2019, on the same terms and conditions, and will expire on April 30, 2019.2020. 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 reported periods.
B. Commitments and Contingencies
Contractual Obligations
During the first ninesix months of 2018,2019, our contractual obligations have not changed materially from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2017, other than the debt and preferred share issuance transactions described above.2018.
Off-Balance-Sheet Arrangements
Our off-balance-sheet leverage includes purchase obligations. Beginning January 1, 2019, we adopted new accounting guidance eliminating off-balance-sheet accounting treatment for operating leases (see Note 14 – Leasesand purchase obligations.Note 15 – New Accounting Standards for further discussion). There have been no other material changes in the off-balance-sheet items since the discussionfrom those discussed in the notes to the financial statements in Progressive’sour Annual Report on Form 10-K for the year ended December 31, 2017.2018.




III. RESULTS OF OPERATIONS – UNDERWRITING
A. Segment Overview
We report our underwriting operations in three segments: Personal Lines, Commercial Lines, and Property. As a component of our Personal Lines segment, we report our Agency and Direct business results to provide further understanding of our products by distribution channel. Our other indemnity businesses include our run-off businesses.
The following table shows the composition of our companywide net premiums written, by segment, for the respective periods:
Three Months Ended September 30, Nine months ended September 30,Three Months Ended June 30, Six months ended June 30,
2018 2017 2018 20172019 2018 2019 2018
Personal Lines              
Agency41% 42% 41% 43%41% 42% 41% 42%
Direct42
 42
 42
 42
41
 40
 42
 42
Total Personal Lines1
83
 84
 83
 85
82
 82
 83
 84
Commercial Lines12
 12
 12
 11
13
 13
 13
 12
Property5
 4
 5
 4
5
 5
 4
 4
Total underwriting operations100% 100% 100% 100%100% 100% 100% 100%
1 Personal auto insurance accounted for 93%91% of the total Personal Lines segment net premiums written during the three months and nine93% during the six months ended SeptemberJune 30, 2019, and 2018, and 93% and 92%, respectively, for the same periods in 2017;respectively; insurance for our special lines products accounted for the balance.
Our Personal Lines business writes insurance for personal autos and special lines products (e.g., motorcycles, watercraft, and RVs). We currently write our Personal Lines products in all 50 states. We also offer our personal auto productproducts (not special lines products) in the District of Columbia. Our personal auto policies are primarily written for 6-month terms, while the special lines products are written for 12-month terms.
Our Commercial Lines business writes primary liability, physical damage, and other auto-related insurance for automobiles and trucks owned and/or operated predominantly by small businesses. The majority of our Commercial Lines business is written through the independent agency channel. The amount of business written through the direct channel continues to grow and represented about 12%11% of premiums written for the first ninesix months of 2018.2019. We write Commercial Lines business in all 50 states and the majority of our policies are primarily written for 12-month terms.
Our Property business writes residential property insurance (singlefor single family homes, condominium unit owners, rental coverage,renters, etc.) for homeowners, other property owners,, and renters. Our Property business primarily consists of the operations of the ARX organization. ARX wholly owns or controls the insurance companies that we refer to in the aggregate as “ASI.” We write the majority of our Property business through the independent agency channel; however, we continue to expand the distribution of our Property product offerings in the direct channel. Property policies are written for a 12-month term. ASI writesterms. We write residential property insurance in 4344 states and the District of Columbia. ASI also writesColumbia, renters insurance in 45 states and the District of Columbia, and flood insurance in 44 states and the District of Columbia, and ASI and Progressive write rentersColumbia. Our flood insurance in 44 states andis written primarily through the District of Columbia.National Flood Insurance Program. Florida and Texas remain the largest states for the Property business, together comprising just overabout 40% of the year-to-date written premium volume. We continue to transition ASI products from the ASI trade name to the Progressive brand. We expect to complete the transition in both our agency and direct channels over the next year.




B. Profitability
Profitability for our underwriting operations is defined by pretax underwriting profit, which is calculated as net premiums earned plus fees and other revenues less losses and loss adjustment expenses, policy acquisition costs, and other underwriting expenses. We also use underwriting margin, which is underwriting profit or loss expressed as a percentage of net premiums earned, to analyze our results. For the respective periods, our underwriting profitability results were as follows:
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended June 30, Six Months Ended June 30,
2018 2017 2018 20172019 2018 2019 2018
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$372.2
 11.2 % $69.5
 2.4 % $1,142.2
 11.9 % $524.7
 6.4 %$434.7
 11.9 % $360.9
 11.2 % $887.7
 12.4 % $770.0
 12.2 %
Direct294.4
 8.8
 128.7
 4.7
 880.3
 9.2
 466.7
 5.9
326.6
 8.7
 287.9
 9.0
 648.5
 8.9
 585.9
 9.4
Total Personal Lines666.6
 10.0
 198.2
 3.6
 2,022.5
 10.5
 991.4
 6.1
761.3
 10.3
 648.8
 10.1
 1,536.2
 10.6
 1,355.9
 10.8
Commercial Lines112.7
 12.0
 42.8
 6.0
 307.8
 11.7
 166.4
 8.2
124.4
 11.6
 100.3
 11.3
 291.0
 14.0
 195.1
 11.5
Property1
(7.8) (2.3) (69.0) (27.0) (31.2) (3.3) (57.5) (8.0)(34.4) (9.0) (51.9) (16.6) (26.7) (3.6) (23.4) (3.9)
Other indemnity2
(0.1) NM
 0
 NM
 0.1
  NM
 (0.3)  NM
0
 NM
 0
 NM
 0
  NM
 0.2
  NM
Total underwriting operations$771.4
 9.7 % $172.0
 2.6 % $2,299.2
 10.1 % $1,100.0
 5.8 %$851.3
 9.6 % $697.2
 9.1 % $1,800.5
 10.4 % $1,527.8
 10.3 %
1 For the three and ninesix months ended SeptemberJune 30, 2018, amounts include2019, pretax profit (loss) includes $18.0 million and $54.0$35.9 million, respectively, of amortization expense predominately associated with the acquisition of a controlling interest in ARX, and $17.2$18.0 million and $48.2$36.0 million for the respective periods last year. The increase in amortization expense reflects a change in the economic useful life of the trade name intangible asset; see Note 13 – Goodwill and Intangible Assets for further discussion.
2 Underwriting margins for our other indemnity businesses are not meaningful (NM) due to the lack of premiums earned by, and the variability of loss costs in, such businesses.
OurThe increases in the underwriting profit margin increasedmargins were driven primarily by premium growth exceeding the increases in both the third quarterour loss and first nine months of 2018,LAE costs, primarily reflecting lower auto frequency experienced in 2019 compared to the same periods last year. The increase in the profit margin was primarily due to lower catastrophe losses in 2018, compared to 2017. In addition, higher written premium per policy on both our personal and commercial auto products and lower than anticipated frequency contributed to the improved profitability.2018.



Further underwriting results for our Personal Lines business, including results by distribution channel, the Commercial Lines business, the Property business, and our underwriting operations in total, were as follows:
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended June 30, Six Months Ended June 30,
Underwriting Performance1
2018
 2017
 Change
 2018
 2017
 Change
2019
 2018
 Change
 2019
 2018
 Change
Personal Lines—Agency                      
Loss & loss adjustment expense ratio69.5
 78.3
 (8.8) pts. 68.8
 74.1
 (5.3) pts.68.9
 69.4
 (0.5) 68.3
 68.6
 (0.3)
Underwriting expense ratio19.3
 19.3
 0 pts. 19.3
 19.5
 (0.2) pts.19.2
 19.4
 (0.2) 19.3
 19.2
 0.1
Combined ratio88.8
 97.6
 (8.8) pts. 88.1
 93.6
 (5.5) pts.88.1
 88.8
 (0.7) 87.6
 87.8
 (0.2)
Personal Lines—Direct                      
Loss & loss adjustment expense ratio70.4
 75.7
 (5.3) pts. 70.3
 74.4
 (4.1) pts.70.1
 70.9
 (0.8) 70.0
 70.3
 (0.3)
Underwriting expense ratio20.8
 19.6
 1.2 pts. 20.5
 19.7
 0.8 pts.21.2
 20.1
 1.1
 21.1
 20.3
 0.8
Combined ratio91.2
 95.3
 (4.1) pts. 90.8
 94.1
 (3.3) pts.91.3
 91.0
 0.3
 91.1
 90.6
 0.5
Total Personal Lines                      
Loss & loss adjustment expense ratio69.9
 76.9
 (7.0) pts. 69.6
 74.3
 (4.7) pts.69.5
 70.2
 (0.7) 69.2
 69.4
 (0.2)
Underwriting expense ratio20.1
 19.5
 0.6 pts. 19.9
 19.6
 0.3 pts.20.2
 19.7
 0.5
 20.2
 19.8
 0.4
Combined ratio90.0
 96.4
 (6.4) pts. 89.5
 93.9
 (4.4) pts.89.7
 89.9
 (0.2) 89.4
 89.2
 0.2
Commercial Lines                      
Loss & loss adjustment expense ratio67.6
 72.2
 (4.6) pts. 67.9
 69.8
 (1.9) pts.67.3
 68.7
 (1.4) 65.0
 68.0
 (3.0)
Underwriting expense ratio20.4
 21.8
 (1.4) pts. 20.4
 22.0
 (1.6) pts.21.1
 20.0
 1.1
 21.0
 20.5
 0.5
Combined ratio88.0
 94.0
 (6.0) pts. 88.3
 91.8
 (3.5) pts.88.4
 88.7
 (0.3) 86.0
 88.5
 (2.5)
Property        
          
  
Loss & loss adjustment expense ratio69.8
 95.0
 (25.2) pts. 68.6
 73.4
 (4.8) pts.77.7
 79.9
 (2.2) 73.0
 68.0
 5.0
Underwriting expense ratio2
32.5
 32.0
 0.5 pts. 34.7
 34.6
 0.1 pts.31.3
 36.7
 (5.4) 30.6
 35.9
 (5.3)
Combined ratio2
102.3
 127.0
 (24.7) pts. 103.3
 108.0
 (4.7) pts.109.0
 116.6
 (7.6) 103.6
 103.9
 (0.3)
Total Underwriting Operations3
                      
Loss & loss adjustment expense ratio69.7
 77.2
 (7.5) pts. 69.4
 73.8
 (4.4) pts.69.6
 70.4
 (0.8) 68.8
 69.2
 (0.4)
Underwriting expense ratio20.6
 20.2
 0.4 pts. 20.5
 20.4
 0.1 pts.20.8
 20.5
 0.3
 20.8
 20.5
 0.3
Combined ratio90.3
 97.4
 (7.1) pts. 89.9
 94.2
 (4.3) pts.90.4
 90.9
 (0.5) 89.6
 89.7
 (0.1)
Accident year loss & loss adjustment expense ratio4
70.1
 77.7
 (7.6) pts. 69.2
 73.6
 (4.4) pts.
Accident year — Loss & loss adjustment expense ratio4
68.8
 70.1
 (1.3) 67.6
 68.6
 (1.0)
1 Ratios are expressed as a percentage of net premiums earned; fees and other revenues are netted with underwriting expenses in the ratio calculations.
2 Included in the three and ninesix months ended SeptemberJune 30, 20182019, are 5.44.7 points and 5.84.8 points, respectively, of amortization expense predominately associated with our acquisition of a controlling interest in ARX, and 6.75.8 points and 6.0 points for boththe respective periods last year. Excluding these additional expenses, for the three months ended SeptemberJune 30, 20182019 and 2017,2018, the Property business would have reported expense ratios of 27.126.6 and 25.3,30.9, respectively, and combined ratios of 96.9104.3 and 120.3.110.8. For the ninesix months ended SeptemberJune 30, 20182019 and 2017,2018, excluding these additional expenses, the Property business would have reported expense ratios of 28.925.8 and 27.9,29.9, respectively, and combined ratios of 97.598.8 and 101.3.97.9.
3 Combined ratios for the other indemnity businesses are not presented separately due to the low level of premiums earned by, and the variability of loss costs in, such businesses.
4 The accident year ratios include only the losses that occurred during the period noted. As a result, accident period results will change over time, either favorably or unfavorably, as we revise our estimates of loss costs when payments are made or reserves for that accident period are reviewed.




Losses and Loss Adjustment Expenses (LAE)
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended June 30, Six Months Ended June 30,
(millions)2018
 2017
 2018
 2017
2019
 2018
 2019
 2018
Change in net loss and LAE reserves$466.7
 $616.1
 $1,327.6
 $1,161.6
$485.4
 $585.7
 $825.5
 $860.9
Paid losses and LAE5,056.4
 4,434.4
 14,441.6
 12,767.2
5,652.7
 4,789.6
 11,071.6
 9,385.2
Total incurred losses and LAE$5,523.1
 $5,050.5
 $15,769.2
 $13,928.8
$6,138.1
 $5,375.3
 $11,897.1
 $10,246.1
Claims costs, our most significant expense, represent payments made, and estimated future payments to be made, to or on behalf of our policyholders, including expenses needed to adjust or settle claims. Claims costs are a function of loss severity and frequency and, for our vehicle businesses, are influenced by inflation and driving patterns, among other factors, some of which are discussed below. In our Property business, severity is primarily a function of construction costs and the age of the structure. Accordingly, anticipated changes in these factors are taken into account when we establish premium rates and loss reserves. Loss reserves are estimates of future costs and our reserves are adjusted as underlying assumptions change and information develops.
Our total loss and LAE ratio decreased 7.50.8 points for the thirdsecond quarter 2018,2019, compared to the third quarter 2017,same period last year, and 4.40.4 points on a year-to-date basis,basis. The decreases were primarily due to lower catastrophe losses, higher average premiums and lower auto frequency, partially offset by higher prior year accident development and concerted expense management.higher severity.
The following table shows our consolidated catastrophe losses, excluding loss adjustment expenses, incurred during the periods:
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended June 30, Six Months Ended June 30,
($ in millions)2018 2017 2018 20172019 2018 2019 2018
Vehicle businesses$95.4
 $334.2
 $245.8
 $557.6
$129.8
 $124.9
 $176.1
 $150.4
Property business, net of reinsurance (excluding ASL)28.8
 81.2
 176.2
 306.3
131.4
 122.8
 193.0
 147.4
Reinsurance (recoverable)/reversal on ASL1
3.0
 15.7
 (39.0) (86.2)(49.5) (41.2) (85.5) (42.0)
Property business, net31.8
 96.9
 137.2
 220.1
81.9
 81.6
 107.5
 105.4
Total net catastrophe losses incurred$127.2
 $431.1
 $383.0
 $777.7
$211.7
 $206.5
 $283.6
 $255.8
Increase to combined ratio1.6 pts. 6.6 pts. 1.7 pts. 4.1 pts.2.4 pts. 2.7 pts. 1.6 pts. 1.7 pts.
1 Represents the reinsurance recoverable recorded on the losses under our aggregate stop-loss agreements (ASL); see table below for further information.
InDuring the thirdsecond quarter 2018, about 40%2019, on a gross basis, the majority of the catastrophe losses were due to tornadoes throughout the United States, as well as wind, hail, and hail storms and floodingthunderstorms in Texas and Colorado, and about 20% of the catastrophe losses were due to Hurricane Florence. The significant catastrophe losses during the third quarter 2017 were primarily due to Hurricane Harvey in Texas and Hurricane Irma, primarily in Florida.Texas. 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.
We do not have catastrophe-specific reinsurance for our vehicle businesses. We reinsure most of our Property business against various risks, including, but not limited to, catastrophic losses through excess of loss reinsurance and an aggregate stop-loss agreement.


agreements.
The table abovebelow reports the reinsurance recoverablesrecoverable activity under our aggregate stop-loss agreements (ASL) related to 20182019 accident year losses and development on 2018 and 2017 accident year losses. The aggregate stop-loss agreement for2017 and 2018 covers all accident yearASL agreements cover Property losses and a portion of LAE, known as allocated loss adjustment expenses (ALAE) that occur during 2018,, except those from named storms (both hurricanes and tropical storms) and liability claims, for Property business written by ARX subsidiaries. As such, the ASL provides protection for losses and providesALAE incurred by our Property business in the ordinary course, including those resulting from other significant severe weather events, such as hail, tornadoes, etc. These agreements provide $200 million of coverage if ASI’s applicableto the extent that the net loss and ALAE ratio for the full accident year were to exceedexceeds 63%. The aggregate stop-lossWhile the 2019 ASL agreement for 2017 hadhas substantially the same terms as those described above, the 2018 agreement. 2019 ASL agreement also covers up to $100 million of retained losses and ALAE from named storms, to the extent we are below the aggregate $200 million coverage.


The following table shows the total reinsurance recoverables activity during 2018 and 2017, under the aggregate stop-loss agreementagreements by accident year:year, for the respective periods:
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended June 30, Six Months Ended June 30,
($ in millions)2018 2017 2018 20172019 2018 2019 2018
Reinsurance recoverables on losses       
Reinsurance recoverable on ASL, Beginning of period$52.2
 $5.4
 $12.5
 $4.6
Reinsurance recoverables recognized on losses ��     
Accident year:       
201937.1
 NA
 73.4
 NA
2018$(3.6) $—
 $34.1
 $—
0
 37.7
 0
 37.7
20170.6
 (15.7) 4.9
 86.2
12.4
 3.5
 12.1
 4.3
Total(3.0) (15.7) 39.0
 86.2
49.5
 41.2
 85.5
 42.0
Reinsurance recoverables on ALAE

 

 

 

Reinsurance recoverables recognized on ALAE

 

 

 

Accident year:       
20194.9
 NA
 8.1
 NA
20180.9
 —
 5.0
 —
0
 4.1
 0
 4.1
20171.8
 (1.7) 2.3
 9.3
(0.7) 0.5
 (0.2) 0.5
Total2.7
 (1.7) 7.3
 9.3
4.2
 4.6
 7.9
 4.6
Total reinsurance recoverables       
Total reinsurance recoverables recognized       
Accident year:       
201942.0
 NA
 81.5
 NA
2018(2.7) —
 39.1
 —
0
 41.8
 0
 41.8
20172.4
 (17.4) 7.2
 95.5
11.7
 4.0
 11.9
 4.8
Total$(0.3) $(17.4) $46.3
 $95.5
53.7
 45.8
 93.4
 46.6
Reinsurance recoverable on ASL, End of period$105.9
 $51.2
 $105.9
 $51.2
DuringNA - Not applicable
In addition to the second quarter 2018, we renewed about 40% ofaggregate stop-loss agreements, our catastrophe reinsurance coverage under similar terms as the prior coverage; the remainderProperty business is covered by multi-year catastrophe reinsurance contracts, that are still in effect. Upon renewal, however, we increased ourwhich carry retention thresholdthresholds for losses and LAE from a single catastrophic event toof $60 million compared to(see Item 1 – Description of Business-Reinsurance in our Annual Report on Form 10-K for the $50 million retention level under the prior agreement. We believe that this increased retention level is appropriate given our growth in both premiums and regulatory capital.year ended December 31, 2018 for further discussion).
The following discussion of our severity and frequency trends in our personal auto businesses excludes comprehensive coverage because of its inherent volatility, as it is typically linked to catastrophic losses generally resulting from adverse weather. For our commercial auto products, the reported frequency and severity trends include comprehensive coverage. Comprehensive coverage insures against damage to a customer’s vehicle due to various causes other than collision, such as windstorm, hail, theft, falling objects, and glass breakage.
Total personal auto incurred severity (i.e., average cost per claim, including both paid losses and the change in case reserves) on a calendar-year basis increased about 6% and 4%8% for both the three and ninesix months ended SeptemberJune 30, 2018, respectively,2019, compared to the same periods last year. Following are the changes we experienced in severity in our auto coverages on a year-over-year basis:
CollisionBodily injury increased about 9% and 8% for both the thirdsecond quarter and first ninesix months of 2018, respectively,2019, in part due to increases in medical costs and actuarially determined reserve increases to reflect accelerating paid loss trends we experienced in recent quarters.
Auto property damage increased about 6% and collision coverages increased about 7% for both the second quarter and first six months of 2019, in part due to an increase in the severity and frequency of total loss claims on newer vehicles and higher costs to repair newer vehicles.
Bodily injury increased about 3% for both periods presented.
Auto property damage increased about 5% and 3% for the third quarter and first nine months of 2018, respectively.
Personal injury protection (PIP) increased about 12% and 1%4% for the thirdsecond quarter and 6% for the first ninesix months of 2018, respectively. The increase2019, which reflects more reopened claims during the first quarter is primarily2019, predominately due to the timing of adjuster set reserves and the volatile nature of PIP.changing claims environment in Florida.
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 personal auto incurred frequency, of auto accidents, on a calendar-year basis, decreased about 3%4% and 2%3% for the three and ninesix months ended September 30, 2018,June 2019, respectively, compared to the same periods last year. Following are ourthe frequency changes we experienced by coverage on a year-over-year basis:
PIP auto property damage, and bodily injury decreased about 1% to 3%6% and 5% for both periods presented.the second quarter and first six months of 2019, respectively.
Collision decreased about 5% for both periods.
Auto property damage decreased about 4% andfor both periods.
Bodily injury decreased about 2% for the thirdsecond quarter and 3% for the first ninesix months of 2018, respectively.



2019.
We closely monitor the changes in frequency, but the degree or direction of near-term frequency change is not something that we are able to predict with any certainty. We analyze trends to distinguish changes in our experience from external factors, such as changes in the number of vehicles per household, miles driven, gasoline prices, advances in vehicle safety, and unemployment rates, versus those resulting from shifts in the mix of our business, to allow us to reserve more accurately for our loss exposures.
On a year-over-year basis, our commercial auto products incurred severity increased 10% and frequency decreased 5%. We are disclosing changes in commercial auto products severity and frequency using a trailing 12-month period and excluding our transportation network company (TNC) business. Using a trailing 12-month period mitigates the effects of month-to-month variability and addresses inherent seasonality trends in the commercial auto products. Since the loss patterns in the TNC business are not indicative of our other commercial auto products, disclosing severity and frequency trends without that business is more indicative of our overall experience for the majority of our commercial auto products. In addition to general trends in the marketplace, the increase in our commercial auto products severity reflects a shift in the mix of business to for-hire trucking, which has higher average severity than the business auto and contractor market tiers. The frequency decrease was in part due to continued product segmentation and underwriting restrictions, which created a mix shift toward more preferred, lower-frequency, business.
The table below presents the actuarial adjustments implemented and the loss reserve development experienced in the following periods on a companywide basis:
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended June 30, Six Months Ended June 30,
($ in millions)2018 2017 2018 20172019 2018 2019 2018
ACTUARIAL ADJUSTMENTS              
Reserve decrease (increase)              
Prior accident years$2.1
 $21.9
 $1.3
 $92.8
$(45.8) $(7.0) $(62.5) $(0.8)
Current accident year2.1
 3.0
 16.0
 (13.4)(16.3) 6.2
 (3.0) 13.9
Calendar year actuarial adjustment$4.2
 $24.9
 $17.3
 $79.4
$(62.1) $(0.8) $(65.5) $13.1
PRIOR ACCIDENT YEARS DEVELOPMENT              
Favorable (unfavorable)              
Actuarial adjustment$2.1
 $21.9
 $1.3
 $92.8
$(45.8) $(7.0) $(62.5) $(0.8)
All other development32.4
 9.8
 (48.3) (135.3)(21.6) (18.9) (147.5) (80.7)
Total development$34.5
 $31.7
 $(47.0) $(42.5)$(67.4) $(25.9) $(210.0) $(81.5)
(Increase) decrease to calendar year combined ratio0.4 pts. 0.5 pts. (0.2) pts. (0.2) pts.(0.8) pts. (0.3) pts. (1.2) pts. (0.6) pts.
Total development consists of both actuarial adjustments and “all other development.” The actuarial adjustments represent the net changes made by our actuarial staff to both current and prior accident year reserves based on regularly scheduled reviews. Through these reviews, our actuaries identify and measure variances in the projected frequency and severity trends, which allow them to adjust the reserves to reflect the current cost trends. For our Property business, close to 100% of the outstanding catastrophe reserves are reviewed monthly and, as such, include any development on catastrophe losses are included as part of the actuarial adjustments. For the vehicle businesses, only a subset of our reserves is reviewed monthly as part of the actuarial adjustment process. Development for catastrophe losses for the vehicle businesses would be reflected in “all other development,” discussed below, to the extent they relatedrelate to prior year reserves. We report these actuarial adjustments separately for the current and prior accident years to reflect these adjustments as part of the total prior accident years development.
“All other development” represents claims settling for more or less than reserved, emergence of unrecorded claims at rates different than anticipated in our incurred but not recorded (IBNR) reserves, and changes in reserve estimates on specific claims. Although we believe the development from both the actuarial adjustments and “all other development” generally results from the same factors, we are unable to quantify the portion of the reserve development that might be applicable to any one or more of those underlying factors.


Our objective is to establish case and IBNR reserves that are adequate to cover all loss costs, while incurring minimal variation from the date that the reserves are initially established until the losses are fully developed. As reflected in the table above, we experienced unfavorable prior year development during the three and six months ended June 30, 2019. The unfavorable development was primarily attributable to higher than anticipated claims occurring in late 2018 but not reported until 2019, a higher than anticipated frequency of reopened PIP claims in our personal auto business, and increased bodily injury severity. See Note 6 – Loss and Loss Adjustment Expense Reserves, for a more detailed discussion of our prior accident years development. We continue to focus on our loss reserve analysis, attempting to enhance accuracy and to further our understanding of our loss costs.
Underwriting Expenses
Progressive’s other underwriting expenses increased 24%18% for the thirdsecond quarter and 22%19% for the first ninesix months of 2018,2019, compared to the same periods last year. Nevertheless, the underwriting expense ratio (i.e., policy acquisition costs and other underwriting expenses, net of fees and other revenues, expressed as a percentage of net premiums earned) was only 0.4 points and 0.1 points higher, respectively, for the three and nine months ended September 30, 2018, in partyear, primarily reflecting the increase in earned premium per policy we realized during the same periods. Thean increase in advertising spend was the primary driver of the increase in total underwriting expenses.spend. During the thirdsecond quarter and first ninesix months of 2018,2019, our advertising expenditures increased 45%29% and 44%30%, respectively, compared to the same periods last year. We will continue to invest in advertising as long as we generate sales at a cost below the maximum amount we are willing to spend to acquire a new customer. Despite the increase in our total underwriting expenses, the underwriting expense ratio (i.e., policy acquisition costs and other underwriting expenses, net of fees and other revenues, expressed as a percentage of net premiums earned) was only 0.3 points higher for both the three and six months ended June 30, 2019, compared to the same periods last year, in part reflecting the increase in earned premiums we realized during the year.





C. Growth
For our underwriting operations, we analyze growth in terms of both premiums and policies. Net premiums written represent the premiums from policies written during the period, less any premiums ceded to reinsurers. Net premiums earned, which are a function of the premiums written in the current and prior periods, are earned as revenue over the life of the policy using a daily earnings convention. Policies in force, our preferred measure of growth since it removes the variability due to rate changes or mix shifts, represents all policies under which coverage was in effect as of the end of the period specified.
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended June 30, Six Months Ended June 30,
($ in millions)2018 2017 % Growth 2018 2017 % Growth2019 2018 % Growth 2019 2018 % Growth
NET PREMIUMS WRITTEN                      
Personal Lines                      
Agency$3,504.3
 $3,028.8
 16% $10,224.2
 $8,765.9
 17%$3,775.5
 $3,384.6
 12% $7,541.9
 $6,719.9
 12%
Direct3,618.2
 2,987.2
 21
 10,296.0
 8,461.5
 22
3,709.8
 3,268.3
 14
 7,665.9
 6,677.8
 15
Total Personal Lines7,122.5
 6,016.0
 18
 20,520.2
 17,227.4
 19
7,485.3
 6,652.9
 13
 15,207.8
 13,397.7
 14
Commercial Lines1,083.7
 825.7
 31
 3,055.8
 2,343.7
 30
1,182.7
 1,045.2
 13
 2,347.9
 1,972.1
 19
Property397.8
 300.7
 32
 1,092.1
 808.4
 35
458.5
 397.2
 15
 810.7
 694.3
 17
Total underwriting operations$8,604.0
 $7,142.4
 20% $24,668.1
 $20,379.5
 21%$9,126.5
 $8,095.3
 13% $18,366.4
 $16,064.1
 14%
NET PREMIUMS EARNED                      
Personal Lines                      
Agency$3,318.2
 $2,840.0
 17% $9,607.7
 $8,224.0
 17%$3,639.6
 $3,225.7
 13% $7,148.1
 $6,289.5
 14%
Direct3,337.2
 2,734.8
 22
 9,565.3
 7,908.5
 21
3,733.4
 3,211.8
 16
 7,309.7
 6,228.1
 17
Total Personal Lines6,655.4
 5,574.8
 19
 19,173.0

16,132.5
 19
7,373.0
 6,437.5
 15
 14,457.8

12,517.6
 15
Commercial Lines939.6
 714.0
 32
 2,632.5
 2,031.2
 30
1,070.5
 884.3
 21
 2,083.5
 1,692.9
 23
Property335.5
 255.2
 31
 933.2
 720.3
 30
381.2
 312.4
 22
 743.2
 597.7
 24
Total underwriting operations$7,930.5
 $6,544.0
 21% $22,738.7

$18,884.0
 20%$8,824.7
 $7,634.2
 16% $17,284.5

$14,808.2
 17%
                      
      September 30,      June 30,
(thousands)      2018 2017 % Growth      2019 2018 % Growth
POLICIES IN FORCE                      
Agency auto      6,249.3
 5,515.3
 13%      6,783.7
 6,107.4
 11%
Direct auto      6,875.8
 5,889.6
 17
      7,528.4
 6,650.9
 13
Total auto      13,125.1
 11,404.9
 15
      14,312.1
 12,758.3
 12
Special lines1
      4,418.9
 4,396.1
 1
      4,510.2
 4,387.4
 3
Personal Lines — total
      17,544.0
 15,801.0
 11%      18,822.3
 17,145.7
 10
Commercial Lines      691.9
 638.6
 8%      734.2
 678.9
 8
Property      1,867.0
 1,375.6
 36%      2,071.6
 1,766.6
 17
Companywide total      21,628.1
 19,591.2
 10%
1 Includes insurance for motorcycles, watercraft, RVs, and similar items.
During the first nine months of 2018, we added 1.9 million policies in force and added approximately 2.3 million since September 30, 2017. The increases reflect both an increase in new applications and lengthening retention.
Although new policies are necessary to maintain a growing book of business, we continue to recognize the importance of retaining our current customers as a critical component of our continued growth. As shown in the tables below, we measure retention by policy life expectancy. We disclose our changes in policy life expectancy using a trailing 12-month period, since we believe this measure is indicative of recent experience, mitigates the effects of month-to-month variability, and addresses seasonality. We also review our customer retention for our personal auto products using a trailing 3-month period. Although using a trailing 3-month measure does not address seasonality and can reflect more volatility, this measure is more responsive to current experience and can be an indicator of how our retention rates are moving.
To analyze growth, we review new policies, rate levels, and the retention characteristics of our segments.




D. Personal Lines
The following table shows our year-over-year changes for our Personal Lines business:
Growth Over Prior YearGrowth Over Prior Year
Quarter Year-to-dateQuarter Year-to-date
2018
2017
 2018
2017
2019
2018
 2019
2018
APPLICATIONS      
New17%20% 19%11%5 %21% 6%21%
Renewal11%7% 10%7%11
9
 11
10
WRITTEN PREMIUM PER POLICY - AUTO4%5% 5%6%2
5
 3
5
RETENTION MEASURES - AUTO      
Policy life expectancy      
Trailing 3-months0%10%  1
5
  
Trailing 12-months7%5%  (2)10
  
In our Personal Lines business, the increase in both new and renewal applications for both periods resulted primarily from increases in our personal auto products.products although our special lines products experienced increases in applications as well. In the auto businesses, the increase in new applications was primarily attributable to our competitive product offerings and position in the marketplace and reflects our increase in advertising spend during the first nine monthshalf of 2018.2019. For the third quarter, 2018, on a year-over-year basis, our auto new applications were up 19%6% and our special lines products increase in new applications was 5%. For the first nine months of 2018, new applications were up 24% for auto4%, with the Agency and 1% for special lines. The Direct business contributed morebusinesses contributing to our autoboth products relatively evenly. We continue to experience growth, for both periods, primarily due to an increase in our advertising spend in 2018 and lower new applications in the first half of 2017, following a reduction of our advertising spendalbeit at slower rates than during the second halfsame period last year, as competitors lower rates and we are seeing signs of 2016. Ratea softening marketplace. In response to slowing new application growth, we continue to take selective rate decreases on auto business policies.
We continued to experience increases taken in our auto businesses over the trailing 12-month period, in addition to a shift in business mix, contributed to the increase we experienced in written premium per policy, forprimarily driven by a shift in mix to products and consumer segments with higher premiums during both the thirdsecond quarter and first ninesix months of 2018.2019. We believe that our Destination Era efforts, including our efforts to improve the customer experience, continue to have a positive impact on our retention andretention. During the second quarter 2019, we will continue to focussaw improvement in our efforts on retention in light of the trailing 3-month retention measure, indicating that the unfavorable impact to policy life expectancy remaining flat year-over-year.we experienced as the result of targeted underwriting changes introduced during the first half of 2018 are beginning to diminish. The year-over-year decrease experienced in our 12-month policy life expectancy continues to reflect the impact of those underwriting changes.
We report our Agency and Direct business results separately as components of our Personal Lines segment to provide further understanding of our products by distribution channel.
The Agency Business
Growth Over Prior YearGrowth Over Prior Year
Quarter Year-to-dateQuarter Year-to-date
2018
2017
 2018
2017
2019
2018
 2019
2018
Auto: new applications12%25% 17%19%6%21% 7%20%
renewal applications12%8% 12%7%11
10
 11
11
written premium per policy5%5% 5%6%3
5
 3
5
Auto retention measures:      
policy life expectancy - trailing 3-months1%10%  4
5
  
trailing 12-months8%6%  0
11
  
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 during the thirdsecond quarter and the ninefirst six months ended September 30, 2018,of 2019, primarily reflecting our competitiveness in the marketplace as a result of many of our competitors taking higher rate increases than we have overmarketplace. During both the trailing 12-month period. During the thirdsecond quarter and six months ended June 30, 2019, we continued to experience new business application growtha decrease in Agency auto quote volume of 4% and 3%, respectively, with rate of conversion (i.e., converting a quote to a sale) increasing 10% and 11%, compared to the same periods last year. We continued to experience strong policy in force growth in each of our consumer segments (e.g., inconsistently insured, consistently insured and maybe a renter, homeowners who do not bundle auto and home, and homeowners who bundle auto and home), and we continued to grow our new Agency auto applications across all consumer segments, except in our inconsistently


insured segment, with the largest percentage increase coming from our bundled auto and home product (i.e., Robinsons), albeit on a smaller base.
During the year, we generated new auto application growth in 4635 states and the District of Columbia, including ninefive of our top 10 largest Agency states.
We have continued to see an increase in demand from agents as evidenced by a quote volume increase of about 1% and 4%, on On a year-over-year basis duringfor the thirdsecond quarter and first ninesix months of 2018, respectively, compared to the same periods last year. Our2019, Agency auto rate of conversion (i.e., converting a quote to a sale) increased about 11% and 13% for the third quarter


and the nine months ended September 30, 2018, respectively, compared to last year. Writtenwritten premium per policy increased about 2%-3% for new business and 1%-4% for renewal Agency auto business, increased 6% and 5%, respectively, for both the third quarter and first nine months of 2018, as compared to the same periods last year,based on policy term, primarily reflecting rate increases previously discussed.shifts in the mix of business.
The Direct Business
Growth Over Prior YearGrowth Over Prior Year
Quarter Year-to-dateQuarter Year-to-date
2018
2017
 2018
2017
2019
2018
 2019
2018
Auto: new applications26 %25% 29%10%6 %32% 7%31%
renewal applications15 %9% 14%9%15
13
 16
13
written premium per policy4 %5% 4%5%2
5
 2
5
Auto retention measures:      
policy life expectancy - trailing 3-months(2)%8%  (2)4
  
trailing 12-months5 %2%  (4)9
  
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 six months ended June 30, 2019, primarily reflecting our competitiveness in the marketplace. During the same periods, our Direct auto quote volume was flat, with rate of conversion increases of 5% and 6%, respectively, compared to the same periods last year. During the year, we generated new Direct auto application growth in 4938 states, and the District of Columbia, including allseven of our top 10 largest Direct states. New and renewal applications increased during
During both the thirdsecond quarter and the ninesix months ended SeptemberJune 30, 2018, primarily reflecting our competitiveness in the marketplace. In addition, we increased our advertising spend, on a year-over-year basis, for the third quarter and the first nine months of 2018, which helped drive new business growth and also contributed to the total increase in our Direct business expense ratios during both periods.
Similar to our Agency business, during the third quarter,2019, we continued to grow our new Direct auto applications double digitsand policies in force across all consumer segments, and, withexcept for a slight decline of new applications in our non-bundled homeowner segment for the quarter. With the marketing investments that continued to target auto/home bundlers, we saw the greatesthighest growth in our Robinsons consumer segment. Our Direct auto quote volume increased 10% and 11%, on a year-over-year basis, for the third quarter and first nine months of 2018, respectively, and the rate of conversion increased about 13% for the third quarter and 16% for the nine months ended September 30, 2018, compared to last year. Written premium per policy for new and renewal Direct auto business increased 5%1% and 4%, respectively,2% for the thirdsecond quarter 2018, and 4%six months ended June 30, 2019, respectively, and 5%renewal business increased 2% and 3%, for the first nine months of 2018, as compared to the same periods last year, primarily reflecting rate increases previously discussed.shifts in the mix of business.
E. Commercial Lines
Growth Over Prior YearGrowth Over Prior Year
Quarter Year-to-dateQuarter Year-to-date
2018
2017
 2018
2017
2019
2018
 2019
2018
New applications10%5 % 15%(6)%11 %9% 11%17%
Renewal applications6%8 % 5%9 %7
5
 8
4
Written premium per policy15%13 % 14%10 %10
12
 12
13
Policy life expectancy - trailing 12-months2%(3)%  (7)2
  
Our Commercial Lines business operates in the business auto, for-hire transportation, contractor, for-hire specialty, tow, and for-hire livery markets and is primarily written inthrough the agency channel. Commercial Lines experienced solid year-over-year new application growth in the thirdsecond quarter and first ninesix months of 2018,2019, reflecting increasedan increase in both quote volume and conversion, a generally strong economy, and competitor rate increases. We continue to monitor the growth and profitability across all of our business market targets and will impose underwriting restrictions when we believe it is necessary to meet our profitability objectives. During 2018, we increased rates and experienced shifts in business mix, to higher premium business markets, which continued into 2019, contributing to the increase in our written premium per policy during the second quarter 2018, we removedand first six months of 2019. The decrease in policy life expectancy was primarily attributable to the majority of therate increases, prior year underwriting restrictions, previously implemented.and a shift to business market targets with lower policy life expectancy.
During the third quarter 2018,2019, we renewed the policies onexpanded our footprint in the transportation network company business by adding nine additional states, bringing the total number of states to 13 where we insure fordrivers on the three states we added in the first quarter 2018.Uber and Uber Eats platforms. We currently insure transportation network company business in four states and are continuingcontinue to increase our understanding of the pricing for this product. We have also seen greater market acceptance of Smart Haul®, our usage-based insurance program for our for-hire transportation policyholders. With the enforcement of the federal electronic logging device mandate, we believe we are well positioned to offer competitive rates to the best owners/operators and small fleets.


During the three and nine months ended September 30, 2018, we experienced shifts in business mix and increased rates, which contributed to the increase infleets though Smart Haul®, our written premium per policy. Despite higher rates, the increase in policy life expectancy was primarily attributable to a shift in business mix and competitors taking higher rate increases.usage-based insurance program for our for-hire transportation policyholders.


F. Property
Growth Over Prior YearGrowth Over Prior Year
Quarter Year-to-dateQuarter Year-to-date
2018
2017
 2018
2017
2019
2018
 2019
2018
New applications51 %46 % 70 %38 %(6)%81 % (2)%83 %
Renewal applications26 %11 % 22 %17 %23
21
 24
20
Written premium per policy(3)%(1)% (4)%(5)%3
(5) 2
(5)
Our Property business writes residential property insurance for homeowners, other property owners, and renters, primarily in the agency channel. During the second quarter and first six months of 2019, our Property business experienced a decrease in new applications, primarily reflecting the impact of targeted underwriting changes made in Texas and Colorado during the second quarter 2019 and the significant growth experienced in 2018. The significant growth in new applications is during the comparable period in 2018 was largely attributable to state expansion, that occurred during the last 12 months in both Property business written by ASI and Progressive’s renters business, more competitive product offerings, as well as momentum in growing Robinsons through our Platinum agency offering.offering, and the business we began writing when an unaffiliated carrier stopped offering homeowners’ insurance through our in-house agency during 2018.
In addition, the Property growth is benefiting from HomeQuote Explorer®(HQX),We are starting to see some improvement in our direct online homeowner insurance shopping experience that was launched in March 2017. During the second quarter 2018, ASI began offering the ability to buy Progressive Home online through the HQX platform. By the end of the third quarter 2018, the online buy button functionality was offered in three states and we plan to expand to other states over time.
The decrease inwritten premium per policy continues to reflect a relatively higher percentage of renters policies, which have lower premiums per policy. Our core Property policies (e.g., home and condo insurance) had a slight increase in written premiums per policy for both periods on a year-over-year basis.the second quarter and first six months of 2019, primarily related to rate increases we took in the first half of 2019 and during 2018, where the rate increases are still being applied as policies renew. We will continue to increase rates where needed to get us in line with our profitability target.
G. Income Taxes
A deferred tax asset or liability is a tax benefit or expense that is expected to be realized in a future tax year. At SeptemberJune 30, 20182019 and 2017, and December 31, 2017,2018, we reported net deferred tax liabilities. The decrease in ourliabilities, and a net deferred tax liability from year-end 2017, primarily reflects premium growthasset at December 31, 2018. At June 30, 2019 and the decrease in market value of our investment portfolio. In addition, the decrease from September 2017 also reflects the reduction in the federal corporate income tax rate to 21% from the previous rate of 35%, under the legislation commonly known as the Tax Cuts and Jobs Act of 2017.
At September 30, 2018, and December 31, 2017,2018, we had net current income taxes payable of $65.6$150.3 million, $60.5 million, and $23.8$16.8 million, respectively, which were reported as part of “other liabilities.” At September 30, 2017, we had net The increase in our current income taxes recoverabletax liability from the prior periods primarily reflects the reversal of $12.1 million, which were reported as "other assets."certain tax credits and other tax benefits discussed below.
For the third quarter 2018, ourOur effective tax rate was 17.7%for the three and six months ended June 30, 2019 were 21.3% and 26.7%, respectively, compared to 14.6%20.3% and 20.1% for the same periodperiods last year. On a year-to-date basis, the effective tax rate was 19.2%, compared to 29.7% for the same period last year, primarily reflecting the decreaseThe increase in the federal corporate income tax rate to 21% in 2018, from the previous rate of 35%. Despite the decrease in the federal rate, the effective tax rate for the third quarter 2018 was higher thansix months ended June 30, 2019 over the prior-year quarter assame period last year principally reflects the relative impacttotal reversal of the tax credits and other tax benefits decreased as pre-tax income increased quarter-over-prior-year quarter.
previously recognized from certain renewable energy investments, plus interest. See Note 5 – Income Taxes for furtheradditional discussion.
There were no material changes in our uncertain tax positions during the three and nine months ended September 30, 2018.




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


OurThe following table summarizes investment portfolio produced an FTE total return of 1.2%results for the three monthsperiods ended September 30, 2018, compared to 1.1% for the same period in 2017. June 30:
 Three Months Six Months
 2019
 2018
 2019
 2018
Pretax recurring investment book yield (annualized)3.2% 2.7% 3.1% 2.6%
Weighted average FTE book yield (annualized)3.2
 2.8
 3.2
 2.7
FTE total return:       
Fixed-income securities2.1
 0.3
 4.4
 0
Common stocks4.0
 3.1
 17.9
 2.7
Total portfolio2.2
 0.6
 5.5
 0.3

Our fixed-income and common stock portfolios had FTE total returns of 0.5% and 7.4%, respectively, for the three months ended September 30, 2018, and 0.7% and 4.3%, respectively, for the same period in 2017. Although interest rates rose during the quarter, we did not change our fixed-income portfolio duration of 2.6 years.was 2.7 years, which is consistent with the first quarter 2019. We generated a small positive return in the fixed-income portfolio this quarterthroughout 2019 as coupon incomeinterest rates and spread tightening were able to offset the riserisk premium pricing declined resulting in valuation increases of our securities and from interest rates.income. The equity market rosecontinued to the highs of the year during the thirdrecover from a sharp fourth quarter and ended close to those highs. We sold $300 million from our indexed portfolio during September to reduce our investment portfolio risk.drop. Our indexed portfolio return was in line with the overall market, while our actively managed portfolio laggedexceeded the overall market.

The following table summarizes investment resultsmarket for the periods ended September 30:
quarter but still lagged for the six months.
 Three Months Nine Months
 2018
 2017
 2018
 2017
Pretax recurring investment book yield (annualized)2.9% 2.3% 2.7% 2.3%
Weighted average FTE book yield (annualized)3.0% 2.5% 2.8% 2.6%
FTE total return:       
Fixed-income securities0.5% 0.7% 0.5% 2.8%
Common stocks7.4% 4.3% 10.3% 14.6%
Total portfolio1.2% 1.1% 1.5% 4.2%


A further break-down of our FTE total returns for our portfolio including any net gains (losses) on our derivative positions, for the periods ended SeptemberJune 30, follows: 
Three Months Nine MonthsThree Months Six Months
2018
 2017
 2018
 2017
2019
 2018
 2019
 2018
Fixed-income securities:              
U.S. Treasury Notes(0.1)% 0.3% (0.8)% 1.7%2.3% 0 % 3.9% (0.7)%
Municipal bonds0.1 % 1.3% 0.7 % 4.7%1.8
 0.8
 3.7
 0.6
Corporate bonds1.0 % 0.8% 0.7 % 2.8%2.6
 0.3
 6.3
 (0.3)
Residential mortgage-backed securities0.7 % 1.1% 1.9 % 4.0%1.1
 0.6
 2.0
 1.1
Commercial mortgage-backed securities0.9 % 0.6% 1.4 % 3.4%2.2
 0.5
 4.7
 0.5
Other asset-backed securities0.6 % 0.5% 1.3 % 1.5%1.1
 0.5
 2.1
 0.7
Preferred stocks1.7 % 1.5% 2.2 % 11.2%2.1
 0.5
 8.5
 0.5
Short-term investments0.5 % 0.3% 1.4 % 0.8%0.6
 0.5
 1.3
 0.9
Common stocks:              
Indexed7.6 % 4.6% 10.6 % 15.0%4.0
 3.4
 17.9
 2.8
Actively managed4.3 % 0.2% 6.7 % 7.7%5.0
 (1.5) 17.6
 2.3






B. Portfolio Allocation
The composition of the investment portfolio was:
($ in millions)
Fair
Value

 
% of
Total
Portfolio

 
Duration
(years)

 
Rating1
Fair
Value

 
% of
Total
Portfolio

 
Duration
(years)

 
Rating1
September 30, 2018      
June 30, 2019      
Fixed maturities$25,642.7
 79.3% 2.9
 AA-$31,188.2
 84.7% 2.8
 AA
Nonredeemable preferred stocks840.9
 2.6
 2.9
 BBB-1,130.0
 3.1
 2.5
 BBB-
Short-term investments2,809.7
 8.7
 0.1
 AA1,360.9
 3.7
 <0.1
 AA-
Total fixed-income securities29,293.3
 90.6
 2.6
 AA-33,679.1
 91.5
 2.7
 AA-
Common equities3,057.3
 9.4
 na
 na3,135.5
 8.5
 na
 na
Total portfolio2,3
$32,350.6
 100.0% 2.6
 AA-$36,814.6
 100.0% 2.7
 AA-
September 30, 2017      
June 30, 2018      
Fixed maturities$18,660.0
 69.1% 2.6
 A+$23,789.2
 76.9% 2.9
 AA-
Nonredeemable preferred stocks813.7
 3.0
 3.5
 BBB-758.6
 2.4
 3.1
 BBB-
Short-term investments4,311.5
 16.0
 0.1
  AA3,231.2
 10.5
 0.1
 AA-
Total fixed-income securities23,785.2
 88.1
 2.2
  A+27,779.0
 89.8
 2.6
 AA-
Common equities3,209.5
 11.9
 na
 na3,142.2
 10.2
 na
 na
Total portfolio2,3
$26,994.7
 100.0% 2.2
  A+$30,921.2
 100.0% 2.6
 AA-
December 31, 2017      
December 31, 2018      
Fixed maturities$20,201.7
 74.1% 2.8
 AA-$28,111.5
 83.7% 2.9
 AA-
Nonredeemable preferred stocks803.8
 2.9
 3.3
 BBB-1,033.9
 3.1
 2.6
 BBB-
Short-term investments2,869.4
 10.5
 <0.1
 AA-1,795.9
 5.4
 0.1
 AA
Total fixed-income securities23,874.9
 87.5
 2.5
 AA-30,941.3
 92.2
 2.8
 AA-
Common equities3,399.8
 12.5
 na
 na2,626.1
 7.8
 na
 na
Total portfolio2,3
$27,274.7
 100.0% 2.5
 AA-$33,567.4
 100.0% 2.8
 AA-
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; at SeptemberJune 30, 2018 and 2017,2019, we had $5.2$303.5 million and $238.3 million, respectively, included in “other liabilities,” compared to $5.8$362.1 million included in “other assets”and $5.9 million at June 30, 2018 and December 31, 2017.2018, respectively.
3The total fair value of the portfolio at SeptemberJune 30, 20182019 and 2017,2018, and December 31, 2017,2018, included $1.8$1.2 billion, $1.1$1.7 billion, and $1.6$2.9 billion, respectively, of securities held in a consolidated, non-insurance subsidiary of the holding company, net of any unsettled security transactions.


Our asset allocation strategy is to maintain 0%-25% of our portfolio in Group I securities, with the balance (75%-100%) of our portfolio in Group II securities.


We define Group I securities to include:
common equities
nonredeemable preferred stocks
redeemable preferred stocks, except for 50% of investment-grade redeemable preferred stocks with cumulative dividends, which are included in Group II, and
all other non-investment-grade fixed-maturity securities.
Group II securities include:
short-term securities, and
all other fixed-maturity securities, including 50% of the investment-grade redeemable preferred stocks with cumulative dividends.


We believe this asset allocation strategy allows us to appropriately assess the risks associated with these securities for capital purposes and is in line with the treatment by our regulators.





The following table shows the composition of our Group I and Group II securities:
September 30, 2018 September 30, 2017 December 31, 2017June 30, 2019 June 30, 2018 December 31, 2018
($ in millions)
Fair
Value

% of Total
Portfolio

 Fair
Value
% of Total
Portfolio
 Fair
Value
% of Total
Portfolio
Fair
Value

% of Total
Portfolio

 Fair
Value
% of Total
Portfolio
 Fair
Value
% of Total
Portfolio
Group I securities:                
Non-investment-grade fixed maturities$761.1
2.4% $445.5
1.6% $404.8
1.5%$489.5
1.3% $802.2
2.6% $754.8
2.2%
Redeemable preferred stocks1
157.8
0.5
 159.5
0.6
 147.4
0.5
133.7
0.4
 156.3
0.5
 154.1
0.5
Nonredeemable preferred stocks840.9
2.6
 813.7
3.0
 803.8
2.9
1,130.0
3.1
 758.6
2.4
 1,033.9
3.1
Common equities3,057.3
9.4
 3,209.5
11.9
 3,399.8
12.5
3,135.5
8.5
 3,142.2
10.2
 2,626.1
7.8
Total Group I securities4,817.1
14.9
 4,628.2
17.1
 4,755.8
17.4
4,888.7
13.3
 4,859.3
15.7
 4,568.9
13.6
Group II securities:                
Other fixed maturities2
24,723.8
76.4
 18,055.0
66.9
 19,649.5
72.1
30,565.0
83.0
 22,830.7
73.8
 27,202.6
81.0
Short-term investments2,809.7
8.7
 4,311.5
16.0
 2,869.4
10.5
1,360.9
3.7
 3,231.2
10.5
 1,795.9
5.4
Total Group II securities27,533.5
85.1
 22,366.5
82.9
 22,518.9
82.6
31,925.9
86.7
 26,061.9
84.3
 28,998.5
86.4
Total portfolio$32,350.6
100.0% $26,994.7
100.0% $27,274.7
100.0%$36,814.6
100.0% $30,921.2
100.0% $33,567.4
100.0%
1Includes non-investment-grade redeemable preferred stocks of $83.0$38.3 million, $81.7$83.5 million, and $83.8$69.9 million at SeptemberJune 30, 20182019 and 2017,2018, and December 31, 2017,2018, respectively.
2Includes investment-grade redeemable preferred stocks, with cumulative dividends, of $74.8$95.4 million, $77.8$72.8 million, and $63.6$84.2 million at SeptemberJune 30, 20182019 and 2017,2018, and December 31, 2017,2018, 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 SeptemberJune 30, 2018,2019, our fixed-maturity portfolio had pretax net unrealized losses,gains, recorded as part of accumulated other comprehensive income, of $316.7$598.1 million,, compared to net unrealized gainslosses of $74.8$267.3 million and $134.2 million at SeptemberJune 30, 20172018 and December 31, 2018, respectively. The change from net unrealized losses in 2018 to net unrealized gains at June 30, 2019, was predominantly the result of $8.4 million at December 31, 2017. The changes for both periods reflect valuation declinesincreases in nearly all sectors during the first ninesix months of 2018,2019, most notably in our U.S. Treasury, corporate, and corporate portfolios, reduced by net realized losses on sales of securities primarily in our U.S. Treasury portfolio.commercial mortgage-backed portfolios.
See Note 2 – Investments for a further break-out of our gross unrealized gains and losses.





Holding Period Gains and Losses


The following table provides the inception-to-date gross and net holding period gains (losses) for our hybrid fixed-maturity securitiesgain (loss) balance and our equity securities as of Septemberactivity during the six months ended June 30, 2018:

2019:
(millions)Gross Holding Period Gains
Gross Holding Period Losses
Net Holding Period Gains (Losses)
Hybrid fixed maturities:   
State and local government obligations$0
$0
$0
Corporate debt securities0
(2.0)(2.0)
Other asset-backed securities0.1
0
0.1
Redeemable preferred stocks0.4
(2.5)(2.1)
           Total hybrid fixed maturities0.5
(4.5)(4.0)
Equity securities:   
Nonredeemable preferred stocks92.7
(10.7)82.0
Common equities1,932.9
(10.6)1,922.3
           Total equity securities2,025.6
(21.3)2,004.3
    Total holding period securities at September 30, 2018$2,026.1
$(25.8)$2,000.3
    Total holding period securities at September 30, 20171
$1,852.0
$(12.8)$1,839.2
    Total holding period securities at December 31, 20171
$2,015.6
$(9.4)$2,006.2
(millions)Gross Holding Period Gains
Gross Holding Period Losses
Net Holding Period Gains (Losses)
Beginning of period   
Hybrid fixed-maturity securities$0.1
$(10.3)$(10.2)
Equity securities1,568.7
(60.2)1,508.5
Balance at December 31, 20181,568.8
(70.5)1,498.3
Year-to-date change in fair value





Hybrid fixed-maturity securities3.0
9.1
12.1
Equity securities467.4
25.6
493.0
Total holding period gains (losses) during the period470.4
34.7
505.1
End of period





Hybrid fixed-maturity securities3.1
(1.2)1.9
Equity securities2,036.1
(34.6)2,001.5
Balance at June 30, 2019$2,039.2
$(35.8)$2,003.4
1For comparative purposes, the holding period securities at September 30, 2017 and December 31, 2017 include the hybrid fixed maturities with
Changes in holding period gains (losses) and the equity securities with, similar to unrealized gains (losses). in our fixed-maturity portfolio, are the result of changes in market performance as well as sales of securities based on various portfolio management decisions.
Other-Than-Temporary Impairment (OTTI)
Net realized gains (losses) may include write-downs of fixed-maturity securities determined to have had other-than-temporary declines in fair value. In light of the new accounting guidance effective for 2018, we are no longer required to analyze our equity securities for OTTI.
We routinely monitor our fixed-maturity portfolio for pricing changes that might indicate potential impairments and perform detailed reviews of securities with unrealized losses. In such cases, changes in fair value are evaluated to determine the extent to which such changes are attributable to: (i) fundamental factors specific to the issuer, such as financial conditions, business prospects, or other factors, (ii) market-related factors, such as interest rates, or 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-maturity securities with declines attributable to issuer-specific fundamentals are reviewed to identify available evidence, circumstances, and influences to estimate the potential for, and timing of, recovery of the investment’s impairment. An other-than-temporary impairment loss is deemed to have occurred when the potential for recovery does not satisfy the criteria set forth in the current accounting guidance.
When a security in our fixed-maturity portfolio has an unrealized loss and it is more likely than not that we will be required to sell the security, we write-down the security to its current fair value and recognize the entire unrealized loss through the comprehensive income statement as a realized loss. If a fixed-maturity security has an unrealized loss and it is more likely than not that we will hold the debt security until recovery (which could be maturity), then we determine if any of the decline in value is due to a credit loss (i.e., where the present value of cash flows expected to be collected is lower than the amortized cost basis of the security) and, if so, we will recognize that portion of the impairment in net income as part of the comprehensive income statement as a realized loss; any remaining unrealized loss on the security is considered to be due to other factors (e.g., interest rate and credit spread movements) and is reflected in other comprehensive income as part of shareholders’ equity, along with unrealized gains or losses on securities that are not deemed to be other-than-temporarily impaired.
We did not record any write-downs on securities held in our investment portfolio during 2018, compared $9.3 million and $12.9 million during the third quarter and first ninesix months of 2017, respectively. We2019 or 2018. The write-downs we did however, recognize impairments oftake in 2019 and 2018 related to federal renewable energy tax credit fund investments, (which are classified as "other assets"), under which were reported in “other assets” on the future pretaxbalance sheet, based on an analysis that our investments in those funds will not generate the cash flows are expectedthat we anticipated. See Note 5 – Income Taxes for additional discussion related to be less than the carrying value of the assets, of $22.1 million and $33.2 million for the three and nine months ended September 30, 2018, respectively, compared to $33.7 million and $44.9 million last year.2019 write-downs.



The following table stratifies the gross unrealized losses in our fixed-maturity portfolio at SeptemberJune 30, 2018,2019, by duration in a loss position:
 
 
Total Gross Unrealized Losses1

 
 
Total Gross Unrealized Losses1

(millions)Fair Value
 Fair Value
 
Unrealized loss for less than 12 months$12,985.1
 $131.9
$966.5
 $2.0
Unrealized loss for 12 months or greater9,894.7
 217.1
2,801.9
 9.9
Total$22,879.8
 $349.0
$3,768.4
 $11.9
1None of these securities had a decline in investment value greater than 15%.
We completed a thorough review of the existing securities in thesea loss categoriesposition and determined that, applying the procedures and criteria discussed above, these securities were not other-than-temporarily impaired. We also determined that it is morenot likely that we will not be required to sell these securities forduring the periodsperiod 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. A primary exposure for the fixed-income portfolio is interest rate risk, which includes the change in value resulting from movements in the underlying market rates of debt securities held. We manage this risk by maintaining the portfolio’s duration (a measure of the portfolio’s exposure to changes in interest rates) between 1.5 years and 5 years. The duration of the fixed-income portfolio was 2.7 years at June 30, 2019, compared to 2.6 years at SeptemberJune 30, 2018, compared to 2.2 and 2.8 years at September 30, 2017 and 2.5 years at December 31, 20172018. The change from September 30, 2017 through September 30, 2018 reflects our proactive monitoring and reacting to the changing interest rate environment while maintaining a conservative duration position to limit potential declines in portfolio value from increases in rates. The distribution of duration and convexity (i.e., a measure of the speed at which the duration of a security is expected to change based on a rise or fall in interest rates) is monitored on a regular basis.
The duration distribution of our fixed-income portfolio, excluding short-term investments, represented by the interest rate sensitivity of the comparable benchmark U.S. Treasury Notes, was:
Duration DistributionSeptember 30, 2018
 September 30, 2017
 December 31, 2017
June 30, 2019
 June 30, 2018
 December 31, 2018
1 year22.0% 22.3% 19.8%24.1% 21.9% 19.4 %
2 years16.9
 15.9
 15.7
20.6
 18.1
 17.0
3 years25.8
 26.8
 27.0
20.1
 24.9
 27.0
5 years20.4
 22.8
 24.1
19.8
 19.3
 22.8
7 years10.4
 8.3
 8.7
12.3
 10.2
 10.4
10 years4.5
 3.9
 4.7
3.1
 5.6
 3.5
20 years0
 0
 (0.1)
Total fixed-income portfolio100.0% 100.0% 100.0%100.0% 100.0% 100.0 %


The negative duration in the 20-year category at December 31, 2018, arose from the variable rate nature of the dividends on some of our preferred stocks. If not called at their call dates, the dividends on these securities will reset from a fixed rate to a floating rate, which could cause these securities to trade at a discount and, therefore, with a negative duration as the securities’ valuation will likely rise if the floating rate moves higher.
Another primary exposure related to the fixed-income portfolio is credit risk. This risk is managed by maintaining an A+ minimum weighted average portfolio credit quality rating, as defined by NRSROs, which was successfully maintained during the first ninesix months of 20182019 and all of 2017.2018.





The credit quality distribution of the fixed-income portfolio was:
RatingSeptember 30, 2018
 September 30, 2017
 December 31, 2017
June 30, 2019
 June 30, 2018
 December 31, 2018
AAA51.8% 41.9% 45.8%58.0% 47.3% 50.5%
AA11.5
 15.5
 13.6
10.4
 11.7
 10.8
A9.3
 12.7
 12.2
8.4
 11.1
 8.4
BBB22.7
 24.6
 23.2
20.4
 24.7
 25.9
Non-investment grade/non-rated1
          
BB3.0
 3.7
 3.6
1.9
 3.3
 3.0
B1.4
 0.9
 1.0
0.6
 1.5
 1.1
CCC and lower0.1
 0.1
 0.1
0.1
 0.1
 0.1
Non-rated0.2
 0.6
 0.5
0.2
 0.3
 0.2
Total fixed-income portfolio100.0% 100.0% 100.0%100.0% 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 3.7%2.5% of the total fixed-income portfolio at SeptemberJune 30, 2019, compared to 3.9% at June 30, 2018 compared to 3.0% at September 30, 2017 and 2.6%3.6% at December 31, 2017.2018.

The changes in credit quality profile from September 30, 2017 were the result of transactions in our portfolio that shifted the mix within the various credit categories.




Our portfolio is also exposed to concentration risk. Our investment constraints limit investment in a single issuer, other than U.S. Treasury Notes or a state’s general obligation bonds, to 2.5% of shareholders’ equity, while the single issuer guideline on preferred stocks and/or non-investment-grade debt is 1.25% of shareholders’ equity. Additionally, the guideline applicable to any state’s general obligation bonds is 6% of shareholders’ equity. We consider concentration risk both overall and in the context of individual asset classes and sectors, including but not limited to common equities, residential and commercial mortgage-backed securities, municipal bonds, and high-yield bonds. We were within all of the constraints described above during all reported periods.
We monitor prepayment and extension risk, especially in our asset-backed (i.e., structured productproduct) 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 ninesix months of 20182019 and all of 2017,2018, we did not experience significant adverse prepayment or extension of principal relative to our cash flow expectations in the portfolio.
Liquidity risk is another risk factor we monitor. Our overall portfolio remains very liquid and we believe that it is sufficient to meet expected near-term liquidity requirements. The short-to-intermediate duration of our portfolio provides a source of liquidity, as we expect approximately $5.0$2.8 billion, or 29.6%14.2%, of principal repayment from our fixed-income portfolio, excluding U.S. Treasury Notes and short-term investments, during the remainder of 2018 and all of 2019.2019. Cash from interest and dividend payments provides an additional source of recurring liquidity.


The duration of our U.S. government obligations, which are included in the fixed-income portfolio, was comprised of the following at SeptemberJune 30, 20182019:
($ in millions)
Fair
Value

 
Duration
(years)

Fair
Value

 
Duration
(years)

U.S. Treasury Notes      
Less than one year$173.5
 0.3
$371.2
 0.6
One to two years1,698.9
 1.3
3,599.1
 1.6
Two to three years2,415.0
 2.4
2,037.5
 2.3
Three to five years3,703.4
 3.8
2,970.4
 4.1
Five to seven years998.2
 5.8
2,603.7
 6.0
Seven to ten years763.5
 8.1
797.5
 8.5
Total U.S. Treasury Notes$9,752.5
 3.5
$12,379.4
 3.7
As of SeptemberJune 30, 2018,2019, we had no interest rate swaps or treasury futures.




ASSET-BACKED SECURITIES
Included in the fixed-income portfolio are asset-backed securities, which were comprised of the following at 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)
September 30, 2018        
June 30, 2019        
Residential mortgage-backed securities:                
Collateralized mortgage obligations$414.3
 $(2.3) 6.0% 1.6
  AA$388.2
 $1.4
 4.0% 1.5
  AA+
Home equity (sub-prime bonds)355.5
 4.3
 5.1
 0.4
  A-277.0
 3.4
 2.9
 0.6
  A
Residential mortgage-backed securities769.8
 2.0
 11.1
 1.1
  A+665.2
 4.8
 6.9
 1.1
  AA-
Commercial mortgage-backed securities2,959.3
 (27.2) 42.8
 2.6
  A+4,441.9
 80.7
 46.3
 2.5
  AA-
Other asset-backed securities:                
Automobile1,418.6
 (4.2) 20.5
 0.9
  AAA-2,056.8
 6.9
 21.4
 0.7
  AAA-
Credit card514.9
 (0.2) 7.4
 0.6
  AAA791.2
 1.4
 8.2
 0.5
  AAA
Student loan510.1
 (1.1) 7.4
 1.1
  AA594.3
 1.7
 6.2
 0.8
  AAA-
Other1
749.3
 (6.7) 10.8
 1.6
  AA-1,054.9
 8.9
 11.0
 1.5
  AA
Other asset-backed securities3,192.9
 (12.2) 46.1
 1.0
  AA+4,497.2
 18.9
 46.8
 0.9
  AAA-
Total asset-backed securities$6,922.0
 $(37.4) 100.0% 1.7
  AA$9,604.3
 $104.4
 100.0% 1.6
  AA


($ 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)
September 30, 2017        
June 30, 2018        
Residential mortgage-backed securities:                
Collateralized mortgage obligations$443.8
 $(0.5) 7.2% 1.1
  A+$444.9
 $(2.1) 6.7% 1.1
  AA
Home equity (sub-prime bonds)511.8
 9.1
 8.2
 0.5
  BBB377.7
 5.1
 5.6
 0.3
  BBB+
Residential mortgage-backed securities955.6
 8.6
 15.4
 0.8
  A-822.6
 3.0
 12.3
 0.7
  A+
Commercial mortgage-backed securities2,767.9
 4.2
 44.5
 2.9
  A-2,696.9
 (28.6) 40.3
 2.7
  A+
Other asset-backed securities:                
Automobile1,212.2
 (0.2) 19.5
 0.6
  AAA-1,358.6
 (4.7) 20.3
 0.9
  AAA-
Credit card72.1
 0
 1.2
 0.9
  AAA513.8
 (0.2) 7.6
 0.9
  AAA
Student loan583.7
 4.8
 9.4
 1.2
  AA-521.8
 (0.6) 7.8
 1.0
  AA
Other1
622.2
 (0.2) 10.0
 2.4
  A+783.4
 (6.2) 11.7
 1.7
  AA-
Other asset-backed securities2,490.2
 4.4
 40.1
 1.2
  AA+3,177.6
 (11.7) 47.4
 1.1
  AA+
Total asset-backed securities$6,213.7
 $17.2
 100.0% 1.9
  A+$6,697.1
 $(37.3) 100.0% 1.7
  AA-
 



($ 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, 2017        
December 31, 2018        
Residential mortgage-backed securities:                
Collateralized mortgage obligations$404.3
 $0
 6.7% 1.1
  A+$435.3
 $(2.4) 5.7% 1.5
 AA
Home equity (sub-prime bonds)432.4
 7.9
 7.1
 0.2
  BBB+299.1
 3.3
 3.9
 0.4
 A-
Residential mortgage-backed securities836.7
 7.9
 13.8
 0.7
  A-734.4
 0.9
 9.6
 1.0
 AA-
Commercial mortgage-backed securities2,758.6
 (1.5) 45.6
 2.9
  A3,301.6
 (31.2) 43.4
 2.7
 AA-
Other asset-backed securities:                
Automobile1,182.2
 (1.8) 19.5
 0.7
  AAA-1,609.0
 (3.3) 21.1
 0.9
  AAA-
Credit card95.8
 (0.1) 1.6
 0.5
  AAA644.5
 (0.5) 8.5
 0.5
  AAA
Student loan538.7
 2.3
 8.9
 1.1
  AA-475.7
 (1.0) 6.3
 1.1
 AA+
Other1
638.0
 (0.4) 10.6
 2.2
  A+848.1
 (3.4) 11.1
 1.6
 AA-
Other asset-backed securities2,454.7
 0
 40.6
 1.2
  AA+3,577.3
 (8.2) 47.0
 1.0
  AA+
Total asset-backed securities$6,050.0
 $6.4
 100.0% 1.9
  A+$7,613.3
 $(38.5) 100.0% 1.7
 AA
1Includes equipment leases, whole business securitizations, and other types of structured debt.


The increaseincreases in asset-backed securities since December 31, 2017, isare primarily due to purchases in the other asset-backed andautomobile, credit card, commercial mortgage-backed sectorsand “other” categories, partially offset by maturities and sales in the residential mortgage-backed sector. See below for a further discussion of our residential and commercial mortgage-backed securities. The other asset-backed securities category is not included in the discussions below due to the high credit quality, short duration, and security structure of those instruments.


Residential Mortgage-Backed Securities (RMBS) The following table details the credit quality rating and fair value of our RMBSs, along with the loan classification and a comparison of the fair value at SeptemberJune 30, 2018,2019, to our original investment value (adjusted for returns of principal, amortization, and write-downs):
Residential Mortgage-Backed Securities (at September 30, 2018)
Residential Mortgage-Backed Securities (at June 30, 2019)Residential Mortgage-Backed Securities (at June 30, 2019)
  Collateralized Mortgage Obligations      Collateralized Mortgage Obligations    
($ in millions)
Rating1
Home Equity
 Agency Pass-Through
 Non-Agency Prime
 
Alt-A2

 
Government/GSE3

     Total % of Total
Home Equity
 Non-Agency Prime
 
Alt-A2

 
Government/GSE3

     Total % of Total
AAA$43.3
 $28.4
 $226.7
 $6.4
 $47.0
 $351.8
 45.7%$76.9
 $311.5
 $1.6
 $2.1
 $392.1
 59.0%
AA82.7
 0
 14.0
 16.6
 0.8
 114.1
 14.8
64.1
 10.8
 8.1
 0.7
 83.7
 12.6
A92.7
 0
 0.9
 0
 0
 93.6
 12.2
57.7
 2.4
 0
 0
 60.1
 9.0
BBB29.8
 0
 7.0
 0
 0
 36.8
 4.8
6.4
 2.9
 0.9
 0
 10.2
 1.5
Non-investment grade/non-rated:          

 

        

 

BB33.4
 0
 3.0
 1.9
 0
 38.3
 5.0
28.5
 1.9
 0.7
 0
 31.1
 4.7
B41.6
 0
 2.7
 0.8
 0
 45.1
 5.8
24.4
 0
 0.8
 0
 25.2
 3.8
CCC and lower14.5
 0
 5.6
 0
 0
 20.1
 2.6
9.5
 4.1
 0
 0
 13.6
 2.0
Non-rated17.5
 0
 10.8
 41.7
 0
 70.0
 9.1
9.5
 1.9
 37.8
 0
 49.2
 7.4
Total fair value$355.5
 $28.4
 $270.7
 $67.4
 $47.8
 $769.8
 100.0%$277.0
 $335.5
 $49.9
 $2.8
 $665.2
 100.0%
Increase (decrease) in value1.2% (4.7)% (0.4)% 2.9% (3.4)% 0.3%  1.2% 0.1% 2.1% 0.2% 0.7%  
1The credit quality ratings in the table above are assigned by NRSROs; when we assign the NAIC ratings for our RMBSs, $158.3$107.9 million of our non-investment-grade securities are rated investment-grade and classified as Group II, and $15.2$11.2 million, or 2.0%1.7% of our total RMBSs, are not rated by the NAIC and are classified as Group I.
2Represents 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.
3The securities in this category are insured by a Government Sponsored Entity (GSE) and/or collateralized by mortgage loans insured by the Federal Housing Administration (FHA) or the U.S. Department of Veteran Affairs (VA).





Our collateralized mortgage obligation (CMO) portfolio is primarily composed of non-GSE/FHA/VA mortgage securities. The majority of our portfolio consists of older deals with predictable prepayment speeds, high levels of subordination,credit support, and stable delinquency trends. During the third quarter 2018, we purchased well-structured new issue positionsWe also own a number of more recent vintage securities backed by high-quality collateral. OurAlthough our RMBS portfolio decreased in valuefrom year-end 2018, it increased during the second quarter due to security maturitiespurchases of both home-equity loan-backed securities and principle repayments.non-agency prime CMO securities.


Commercial Mortgage-Backed Securities (CMBS) The following table details the credit quality rating and fair value of our CMBSs, along with a comparison of the fair value at SeptemberJune 30, 2018,2019, to our original investment value (adjusted for returns of principal, amortization, and write-downs):
Commercial Mortgage-Backed Securities (at September 30, 2018)
Commercial Mortgage-Backed Securities (at June 30, 2019)Commercial Mortgage-Backed Securities (at June 30, 2019)
($ in millions)
Rating1
Multi-Borrower
 Single-Borrower
       Total % of Total
Multi-Borrower
 Single-Borrower
       Total % of Total
AAA$245.3
 $672.7
 $918.0
 31.0%$409.9
 $1,472.0
 $1,881.9
 42.4%
AA74.0
 716.4
 790.4
 26.7
141.1
 1,153.2
 1,294.3
 29.1
A41.2
 441.7
 482.9
 16.3
130.9
 615.3
 746.2
 16.8
BBB12.7
 571.5
 584.2
 19.8
44.2
 450.6
 494.8
 11.1
Non-investment grade/non-rated:              
BB14.3
 140.1
 154.4
 5.2
0
 24.0
 24.0
 0.6
B0.8
 28.6
 29.4
 1.0
0.7
 0
 0.7
 0
Total fair value$388.3
 $2,571.0
 $2,959.3
 100.0%$726.8
 $3,715.1
 $4,441.9
 100.0%
Increase (decrease) in value(0.4)% (1.0)% (0.9)%  2.8% 1.7% 1.9%  
1The credit quality ratings in the table above are assigned by NRSROs; when we assign the NAIC ratings for our CMBSs, $152.3$2.2 million of our non-investment-grade securities are rated investment-grade and classified as Group II, and $31.5$22.5 million, or 1.1%0.5% of our total CMBSs, are not rated by the NAIC and are classified as Group I.


In ourthe CMBS bond portfolio,sector, our focus continues to be on single-borrower transactions, which represented 86.9%83.6% of the CMBS portfolio at SeptemberJune 30, 2018. During2019. We increased our CMBS bond portfolio by $535.6 million on a cost basis during the quarter, we also selectively added multifamilyquarter. The additions were primarily in bonds seasoned conduit bonds from vintages with conservative underwriting,backed by multi-family, industrial, and office collateral, and bonds defeased by U.S. Treasuries. DuringThe duration of the quarter, we increased our CMBS bond portfolio by $260.9 million on a cost basis. We decreasedwas 2.5 years and the duration in our CMBS bond portfolio from 2.7 to 2.6 years during the quarter as both seasoned fixed-rate and low-duration floating-rate securities were added to the portfolio. The average credit quality was A+AA- at both September 30, 2018 and June 30, 2018.2019 and March 31, 2019.
MUNICIPAL SECURITIES
Included in the fixed-income portfolio at SeptemberJune 30, 20182019 and 20172018, and December 31, 20172018, were $1,588.81,589.7 million, $2,364.21,667.3 million, and $2,297.11,649.1 million, respectively, of state and local government obligations. These securities had a duration of 2.82.9 years at September 30, 2018, compared to 2.9 years at September 30, 2017and 2.7 years at December 31, 2017; the weighted averagean overall credit quality rating of AA+ (excluding the benefit of credit support from bond insurance) wasat June 30, 2019, compared to 2.7 years and AA for all three periods.at June 30, 2018, and 2.9 years and AA+ at December 31, 2018. These securities had net unrealized lossesgains of $21.326.1 million at SeptemberJune 30, 20182019, compared to net unrealized gainslosses of $31.9$11.6 million at SeptemberJune 30, 20172018 and $11.45.5 million at December 31, 20172018.


The following table details the credit quality rating of our municipal securities at SeptemberJune 30, 20182019, without the benefit of credit or bond insurance:
Municipal Securities (at September 30, 2018)
Municipal Securities (at June 30, 2019)Municipal Securities (at June 30, 2019)
(millions)
Rating
General
Obligations

 
Revenue
Bonds

 Total
General
Obligations

 
Revenue
Bonds

 Total
AAA$204.9
 $381.1
 $586.0
$372.8
 $376.5
 $749.3
AA381.3
 520.9
 902.2
355.9
 451.0
 806.9
A1.0
 92.9
 93.9
0
 24.4
 24.4
BBB3.9
 2.8
 6.7
3.0
 6.1
 9.1
Total$591.1
 $997.7
 $1,588.8
$731.7
 $858.0
 $1,589.7




Included in revenue bonds were $735.1$713.0 million of single familysingle-family housing revenue bonds issued by state housing finance agencies, of which $523.3$514.4 million were supported by individual mortgages held by the state housing finance agencies and $211.8$198.6 million were supported by mortgage-backed securities. Of the programs supported by mortgage-backed securities,


approximately 25% were collateralized by Fannie Mae and Freddie Mac mortgages; the remaining 75% were collateralized by Ginnie Mae loans, which are fully guaranteed by the U.S. government. Of the programs supported by individual mortgages held by the state housing finance agencies, the weighted average credit quality rating was AA+. Most of these mortgages were supported by FHA, VA, or private mortgage insurance providers.


We reducedcontinued to reduce our holdings of tax-exempt municipal bonds during 2018, with the majority of the sales occurring during the first quarter. The newsix months of 2019, as the current corporate tax rate we use to value our tax-exempt holdingsbonds rendered these bondsthem less attractive relative to alternative taxable investments.
CORPORATE SECURITIES
Included in our fixed-income securities at SeptemberJune 30, 20182019 and 2017,2018, and December 31, 2017,2018, were $7,146.8$7,385.7 million, $5,225.6$7,330.3 million, and $4,997.7$8,694.3 million, respectively, of corporate securities. These securities had a duration of 3.23.0 years at SeptemberJune 30, 2019, compared to 3.3 years at both June 30, 2018 compared to 2.5 years at September 30, 2017 and 2.6 years at December 31, 2017,2018, and a weighted average credit quality rating of BBB for all three periods.at June 30, 2019 and 2018, and December 31, 2018. These securities had net unrealized lossesgains of $80.3$208.3 million at SeptemberJune 30, 2018,2019, compared to net unrealized gainslosses of $28.5$90.1 million at SeptemberJune 30, 20172018 and $0.4$111.7 million at December 31, 2017.2018.


Our allocation toWe decreased the size of our corporate bonds marginally declined inbond portfolio during the third quarterfirst six months of 2019, as valuations becamecontinued to become significantly less attractive.attractive than they were at December 31, 2018.


The table below shows the exposure break-down by sector and rating: 
Corporate Securities (at September 30, 2018)
Corporate Securities (at June 30, 2019)Corporate Securities (at June 30, 2019)
(millions)
Rating
Consumer
Industrial
Communication
Financial Services
Agency
Technology
Basic Materials
Energy
Total
Consumer
Industrial
Communication
Financial Services
Technology
Basic Materials
Energy
Total
AAA$0
$0
$0
$50.1
$0.5
$0
$0
$0
$50.6
$0
$0
$0
$32.8
$0
$0
$0
$32.8
AA0
0
0
237.8
1.2
0.1
0
0.1
239.2
0
0
0
271.5
36.2
0
0
307.7
A290.2
174.6
48.9
593.0
0
2.2
31.3
4.3
1,144.5
215.3
183.7
305.9
496.5
157.6
35.0
1.3
1,395.3
BBB2,327.7
940.7
333.6
650.0
0
531.7
47.4
205.7
5,036.8
2,358.5
815.4
270.1
670.5
591.7
156.6
331.3
5,194.1
Non-investment grade/non-rated: 

 

BB15.6
117.3
95.2
13.4
0
101.8
23.5
18.0
384.8
0
94.2
94.6
11.6
85.1
0
21.7
307.2
B103.8
64.8
40.0
46.1
0
9.7
17.2
9.3
290.9
73.8
12.7
0
27.9
9.8
0
24.4
148.6
Total fair value$2,737.3
$1,297.4
$517.7
$1,590.4
$1.7
$645.5
$119.4
$237.4
$7,146.8
$2,647.6
$1,106.0
$670.6
$1,510.8
$880.4
$191.6
$378.7
$7,385.7
At September 30, 2018, we held $1,441.4 million of U.S. dollar-denominated corporate bonds issued by companies that are domiciled, or whose parent companies are domiciled, in the U.K. ($266.7 million) and other European countries ($1,174.7 million), primarily in the consumer, financial, and industrial industries.
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 SeptemberJune 30, 20182019, we held $232.6229.1 million in redeemable preferred stocks and $840.91,130.0 million in nonredeemable preferred stocks, compared to $237.3229.1 million and $813.7758.6 million, respectively, at SeptemberJune 30, 20172018, and $211.0238.3 million and $803.81,033.9 million at December 31, 20172018. At SeptemberJune 30, 2018,2019, our preferred stock portfolio had net unrealized gains of $11.81.8 million and net holding period gains of $79.9$70.8 million recorded as part of net realized gains (losses), compared to $127.5$12.1 million and $121.5 million of net unrealized gains and $78.2 million of net holding period gains at SeptemberJune 30, 20172018 and $2.4 million of net unrealized gains and $23.5 million of net holdings period gains at December 31, 2017, respectively.2018.


OurThe value of our preferred stock securities had a positive returnportfolio increased in second quarter 2019, as equities continued to rally from the thirdfirst quarter of 2018 as their high level of income and some spread tightening were able to offset the effects of higher rates. Spreads are still tighttreasury yields moved lower. We increased our preferred stock portfolio by $21.8 million on a longer-term basis. We have been keeping a steady, but small allocation tocost basis during the sector in the past few quarters.quarter.


Our preferred stock portfolio had a duration of 2.5 years at June 30, 2019, compared to 2.9 years for all three periods.at June 30, 2018 and 2.4 years at December 31, 2018. The majority of our preferred securities have fixed-rate dividends until a call date and then, if not called, convert to floating-rate dividends. The interest rate duration of our preferred securities is calculated to reflect the call, floor, and floating-rate features. Although a preferred security will remain outstanding if not called, its interest rate duration will reflect the variable nature of the dividend. The overall credit quality


rating was BBB- for all three periods. Our non-investment-grade preferred stocks were primarily with issuers that maintain investment-grade senior debt ratings.


The table below shows the exposure break-down by sector and rating at quarter end:
Preferred Stocks (at September 30, 2018)
Preferred Stocks (at June 30, 2019)Preferred Stocks (at June 30, 2019)
Financial Services Financial Services 
(millions)
Rating
U.S. Banks
Foreign Banks
Insurance
Other
Industrials
Utilities
Total
U.S. Banks
Foreign Banks
Insurance
Other
Industrials
Utilities
Total
A$56.5
$0
$0
$10.2
$0
$0
$66.7
$93.5
$0
$0
$10.0
$0
$0
$103.5
BBB416.7
0
65.6
54.7
119.9
40.3
697.2
607.5
0
103.9
54.2
129.2
10.3
905.1
Non-investment grade/non-rated: 

 

BB157.9
25.6
42.7
0
40.2
0
266.4
133.4
73.1
0
0
38.2
41.4
286.1
B0
0
0
38.2
0
0
38.2
0
0
0
32.3
0
0
32.3
Non-rated0
0
0
0
5.0
0
5.0
0
0
0
27.1
5.0
0
32.1
Total fair value$631.1
$25.6
$108.3
$103.1
$165.1
$40.3
$1,073.5
$834.4
$73.1
$103.9
$123.6
$172.4
$51.7
$1,359.1
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 SeptemberJune 30, 20182019, all of our preferred securities continued to pay their dividends in full and on time. Approximately 80%81% of our preferred stock securities pay dividends that have tax preferential characteristics, while the balance pay dividends that are fully taxable.
At September 30, 2018, we held $127.2 million of U.S. dollar-denominated preferred stocks ($25.6 million nonredeemable and $101.6 million redeemable) issued by financial institutions that are domiciled, or whose parent companies are domiciled, in foreign countries.
Common Equities
Common equities, as reported on the balance sheets, were comprised of the following:
 
($ in millions)September 30, 2018 September 30, 2017 December 31, 2017June 30, 2019 June 30, 2018 December 31, 2018
Indexed common stocks$2,885.7
 94.4% $3,061.9
 95.4% $3,248.4
 95.6%$2,958.4
 94.4% $2,985.7
 95.0% $2,480.2
 94.4%
Managed common stocks171.3
 5.6
 147.3
 4.6
 151.1
 4.4
176.8
 5.6
 156.2
 5.0
 145.6
 5.6
Total common stocks3,057.0
 100.0
 3,209.2
 100.0
 3,399.5
 100.0
3,135.2
 100.0
 3,141.9
 100.0
 2,625.8
 100.0
Other risk investments0.3
 0
 0.3
 0
 0.3
 0
0.3
 0
 0.3
 0
 0.3
 0
Total common equities$3,057.3
 100.0% $3,209.5
 100.0% $3,399.8
 100.0%$3,135.5
 100.0% $3,142.2
 100.0% $2,626.1
 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 reportedRussell 1000 Index. At June 30, 2019, the year-to-date total return, based on GAAP income, was outside our tracking error due to cash held in the table above,indexed portfolio but not invested in securities at the GAAP basisend of the second quarter. This total return was within the desired tracking error of +/- 50 basis points when compared to the Russell 1000 Index.index for the other periods reported above. We held 780832 out of 985,1,002, or 79%83%, of the common stocks comprising the Russell 1000 Index at SeptemberJune 30, 20182019, which made up 92%94% of the total market capitalization of the index.
We reduced our exposure to common equities during both the first and third quarter of 2018 by approximately 10% in each quarter by selling securities in our indexed common stock portfolio and re-allocating the funds to our fixed-maturity portfolio.
The actively managed common stock portfolio, which is managed by one external investment manager. At September 30, 2018, the fair value of the actively managed portfolio was $171.3 million, compared to an adjustedmanager, had a cost basis of $130.7 million.$132.4 million at June 30, 2019, compared to $123.1 million and $131.3 million at June 30, 2018 and December 31, 2018, respectively.




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







Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The duration of the financial instruments held in our portfolio that are subject to interest rate risk was 2.62.7 years at SeptemberJune 30, 20182019 and 2.52.8 years at December 31, 20172018. The weighted average beta of the equity portfolio was 1.01 at Septemberboth June 30, 2018, compared to 1.05 at 2019 and December 31, 20172018. Although components of the portfolio have changed, no material changes have occurred in the total interest rate or market risk when compared to the tabular presentations of our interest rate and market risk sensitive instruments in our Annual Report on Form 10-K for the year ended December 31, 20172018.
Item 4. Controls and Procedures.
Progressive, under the direction of our Chief Executive Officer and our Chief Financial Officer, has established disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. The disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Our Chief Executive Officer and our Chief Financial Officer reviewed and evaluated Progressive’s disclosure controls and procedures as of the end of the period covered by this report. Based on that review and evaluation, the Chief Executive Officer and Chief Financial Officer concluded that Progressive’s disclosure controls and procedures are effectively serving the stated purposes as of the end of the period covered by this report.
We areThere have not aware ofbeen any material changechanges 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, 2017.2018. 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
2018
Calendar
Month
Total
Number of
Shares
Purchased

 
Average
Price
Paid
Per Share

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

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

July653,756
 $59.26
 657,867
 24,342,133
August4,489
 60.21
 662,356
 24,337,644
September2,951
 67.97
 665,307
 24,334,693
Total661,196
 $59.31
    
ISSUER PURCHASES OF EQUITY SECURITIES
2019
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

April1,565
 $72.94
 1,100,851
 23,899,149
May - prior authorization27,018
 77.69
 1,127,869
 —
May - current authorization295
 79.77
 295
 24,999,705
June294
 79.46
 589
 24,999,411
Total29,172
 $77.47
    


In May 2018,2019, the Board of Directors approved an authorization for the Company to repurchase up to 25 million of its common shares; this Boardshares. This authorization, which does not have an expiration date. date, terminated the 23,872,131 shares that remained under the Board’s May 2018 authorization to repurchase 25 million common shares.

Share repurchases under this authorizationthese authorizations may be accomplished through open market purchases, through privately negotiated transactions, pursuant to our equity incentive plans, or otherwise, and may include trading plans entered into with one or more brokerage firms in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934. During the thirdsecond quarter 2018,2019, all repurchases were accomplished in conjunction with our incentive compensation plans at the then-current market prices; there were no open market purchases during the quarter. Progressive’s financial policies state that we will repurchase shares to neutralize dilution from equity-based compensation in the year of issuance and as an option to effectively use underleveraged capital.
Item 5. Other Information.
a) On August 23, 2018, The Progressive Corporation reported that Jeffrey W. Basch, the company’s Chief Accounting Officer, will retire effective mid-2019. Today, the company announced internally that it intends to appoint Mariann Wojtkun Marshall to succeed Mr. Basch as Chief Accounting Officer. Ms. Marshall, 56, has been with the company for 31 years, and has been Director of Financial Reporting - GAAP and the company’s Assistant Secretary for more than 5 years. Ms. Marshall will receive salary, Gainshare target, and equity awards, and will participate in other benefit and compensation plans, at levels consistent with her seniority and scope of responsibility.
b) President and CEO Susan Patricia Griffith’s letter to shareholders with respect to our thirdsecond quarter 20182019 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 beginning on page 63.61.




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:October 31, 2018August 7, 2019  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
  
 
10 10.1 
Second Amendment to the Progressive Corporation Executive Separation Allowance Plan ( 2017 Amendment and Restatement) 
 Filed herewith
  
10 10.2 
Form of Restricted Stock Unit Award Agreement (2018 Special Time-Based Award)
 Current Report on Form 8-K (filed on August 23, 2018; Exhibit 10 therein) 10 
Form of Restricted Stock Award Agreement under The Progressive Corporation 2017 Directors Equity Incentive Plan (for 2019)
 Filed herewith
  
31 31.1 
Rule 13a-14(a)/15d-14(a) Certification of the Principal Executive Officer, Susan 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, Susan 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 Susan Patricia Griffith, President and Chief Executive Officer (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 - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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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