# PROGRESSIVE CORP/OH/ (PGR) FY 2022 MD&A Verbatim Item 7 Management's Discussion and Analysis from PROGRESSIVE CORP/OH/'s 10-K for fiscal year 2022. SEC filing source: https://www.sec.gov/Archives/edgar/data/80661/000008066123000006/pgr-20221231.htm Accession: 0000080661-23-000006 Filing date: 2023-02-27 Report date: 2022-12-31 Extracted from a later financial-section MD&A body after the formal Item 7 span was a short reference. Source document followed from filing index: pgr-20221231_d2.htm. Confidence: high Company profile: /company/PGR/ All MD&A years: /company/PGR/mda/ Previous year: /company/PGR/mda/fy2021/ (FY 2021) Next year: /company/PGR/mda/fy2023/ (FY 2023) Management’s Discussion and Analysis of Financial Condition and Results of Operations Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand our financial condition and results of operations. MD&A should be read in conjunction with the consolidated financial statements and the related notes, and supplemental information. I. OVERVIEW The Progressive insurance organization has been offering insurance to consumers since 1937. The Progressive Corporation is a holding company that does not have any revenue producing operations, physical property, or employees of its own. The Progressive Corporation, together with its insurance and non-insurance subsidiaries and affiliates, comprise what we refer to as Progressive. We report three operating segments. Our Personal Lines segment writes insurance for personal autos and recreational vehicles (referred to as our special lines products). Our Commercial Lines segment writes auto-related liability and physical damage insurance, workers’ compensation insurance primarily for the transportation industry, and business-related general liability and property insurance, predominately for small businesses. Our Property segment writes residential property insurance for homeowners, other property owners, and renters. We operate throughout the United States through both the independent agency and direct distribution channels. We are the third largest private passenger auto insurer in the country, the number one writer of commercial auto insurance, and one of the top 15 homeowners insurance carriers, in each case based on 2021 premiums written. Our underwriting operations, combined with our service and investment operations, make up the consolidated group. A. Operating Results On a year-over-year basis, net income and comprehensive income decreased 78% and 186%, respectively, primarily due to significant valuation declines in both our equity and fixed-maturity security portfolios during 2022. Net holding period losses, primarily from our equity security portfolio, were $2.1 billion in 2022, compared to net holding period gains of $0.9 billion in 2021. The market value of our fixed-maturity securities decreased $2.8 billion during 2022 due to the rise in interest rates throughout the year, compared to valuation declines of $0.9 billion during 2021. Another factor contributing to the decrease in net income was the write off of $224.8 million of goodwill related to the 2015 acquisition of ARX Holding Corp. and its subsidiaries (ARX) during the year. Based on our analysis, we concluded that the fair value of our Property segment was less than the carrying value at the time of the review, primarily based on changes in forecasted expectations relative to the magnitude of weather events during the first half of 2022, as well as other factors impacting our plans to restore our Property business to target profitability in a timely fashion. There was no other indication of impairment on the remaining goodwill. While the rise in interest rates decreased valuations, it also contributed to the 46% increase in our recurring investment income during the year. For 2022, our pretax recurring book yield was 2.4%, compared to 1.9% for 2021, reflecting an increase in interest rates on our floating-rate securities and the investment of cash and maturities at relatively higher interest rates. Our underwriting income was $2.1 billion for both 2022 and 2021. During 2022, we had an underwriting profit margin of 4.2%, which was above our companywide target profit margin of 4%, compared to 4.7% in 2021. Throughout the year, we continued to see volatility in our severity trends as inflation continued to increase the average costs to settle a claim over last year, while frequency trends continued to be favorable. In 2022, we experienced the largest hurricane in our history when Hurricane Ian made landfall multiple times on the Gulf and Atlantic coasts. In total, catastrophe losses were 0.4 points greater in 2022 than 2021. Although net income was lower in 2022, we did generate top-line growth. Net premiums written and earned increased 10% and 11%, respectively, over 2021. During the year, we surpassed $50 billion in net premiums written to end 2022 at $51.1 billion. Companywide policies in force increased 0.9 million, or 3%, over last year to reach 27.4 million at December 31, 2022. As expected, the rate and non-rate actions described below, which began in 2021 and continued into 2022, slowed volume growth on a year-over-year basis, primarily in the first half of 2022. We ended 2022 with total capital (debt plus shareholders’ equity) of $22.3 billion, which was down $0.9 billion from year-end 2021. The year-over-year decrease primarily reflects our comprehensive loss for 2022, in part offset by our $1.5 billion debt issuance during the year. B. Insurance Operations Our Personal Lines and Commercial Lines operating segments were profitable with underwriting margins of 4.0% and 8.9%, respectively, while our Property segment had an underwriting loss margin of 10.5% for the year, which included 25.6 points of catastrophe losses. App.-A-51 While growth is an important objective, we strongly believe that achieving our target profit margin takes precedence over growing premiums when we are challenged to achieve both. With focus on achieving our underwriting profitability target of 4%, we increased personal auto rates in 49 states during 2022, with an aggregate increase of about 13%. We took countrywide net increases of 9% during the first half of 2022, which followed the personal auto rate increases we took during 2021 of about 8%. The rate increases taken during the second half of 2022 were much smaller and at a pace closer to the inflationary pressure we were then experiencing. We will continue to monitor the factors that could impact our loss costs for our personal auto business, which can include new and used car prices, miles driven, driving patterns, loss severity, weather events, inflation, and other components, on a state-by-state basis, and will file for rate adjustments where we deem it necessary. We believe a key element in improving the accuracy of our personal auto rating is Snapshot®, our usage-based insurance offering. During 2022, the adoption rates for consumers enrolling in the program increased about 25% in Agency auto and nearly 15% in Direct auto, compared to 2021. Snapshot is available in all states, other than California, and our latest segmentation model is available in states that represented about 25% of our countrywide personal auto premium at year-end 2022. We continue to invest in our mobile application, with mobile devices being chosen for Snapshot monitoring for the majority of new enrollments. In addition to rate actions to achieve our target profit margin in Personal Lines, we maintained discipline in our media budget and reduced targeted media spend in certain types of advertising, based on performance against our media and underwriting targets. Our total advertising spend was 5% lower in 2022, compared to the prior year. Consistent with rate actions, management will continue to assess where additional non-rate actions, including adjusting underwriting criteria, bill plans, or advertising spend, may be needed. During 2022, our overall incurred frequency in our personal auto business decreased about 6%, while severity increased about 13%, compared to the prior year. We continued to see inflationary pressure in the average costs to settle a claim, driven primarily by the increase in the valuation of new and used vehicles on a year-over-year basis. During the year, on a companywide basis, we recognized 3.4 loss ratio points related to catastrophe losses, compared to 3.0 points in 2021. Hurricane Ian contributed 1.6 points in total, with 1.5 points attributable to our Personal Lines business and 8.8 points to our Property business. The remaining catastrophe losses were attributable to other hurricanes, wind, hail, tornadoes, and winter storms throughout the United States. Improving profitability continues to be our top priority for our Property business. Due to our concentration of policies in catastrophe-exposed states, severe weather events generally have greater impact on our results compared to other national carriers. In response, we began implementing underwriting changes during the second half of 2021, which continued during 2022, to focus on improving profitability in the Property business. In addition, we increased rates an average of about 19% in our Property segment during 2022, with some of the larger increases in Florida and in hail-prone states, such as Colorado and Oklahoma. About half of this increase occurred in late 2022. Our companywide net premiums written grew 10% with growth in each of our segments on a year-over-year basis. Personal Lines grew 9%, Commercial Lines 17%, and Property 8%. The Personal Lines increase reflected growth in both our Agency and Direct businesses. The increase in net premiums written in our Commercial Lines business reflected growth in all of our business market targets, but especially in our contractor and auto business market targets. The Commercial Lines growth was also aided, to a lesser extent, by an increase in our transportation network company (TNC) business, due to an increase in the miles driven (which is the basis for determining premiums written for this business), as well as increased rates to address profitability issues in the TNC business. The Property business growth was primarily due to renewal business since, during 2022, we restricted new business growth, especially in Florida. Changes in net premiums written are a function of new business applications (i.e., policies sold), premium per policy, and retention. Policies in force grew 3% companywide, with Personal Lines, Commercial Lines, and Property growing 3%, 8%, and 3%, respectively. On a year-over-year basis, for 2022, Personal Lines new applications grew 1%. Through the first six months of 2022, Personal Lines new applications decreased 18%, reflecting the significant rate increases taken during 2021 and the first half of 2022. As our competitors raised rates during 2022, our new applications started to grow significantly in the latter part of the year, resulting in the overall growth in new applications for 2022. New personal auto applications grew 2% on a year-over-year basis, with our Agency auto decreasing 3% and Direct auto increasing 6%. While total new application growth was up for the year, Agency auto new applications were down compared to the prior year, as a result of the actions taken to address profitability, as discussed above. For our Commercial Lines business, [excluding our TNC, business owners’ policy (BOP), and Protective Insurance Corporation and subsidiaries (Protective Insurance) products], which we refer to as our core commercial auto product, new applications decreased 1% for 2022, compared to the prior year, mainly driven by decreased App.-A-52 demand, primarily in the second half of 2022, in our for-hire transportation product, due to the general weakening of the economy, and the significant new application growth experienced during 2021. Our Property business new applications decreased 8% for the year, primarily due to rate and other actions taken to address the profitability concerns as discussed above. During 2022, our written premiums per policy increased in all of our operating segments primarily due to the rate increases taken during the year as discussed above. On a year-over-year basis, written premium per policy increased 11% in Agency personal auto, 8% in Direct personal auto, and 5% for our special lines products, compared to the prior year. In our core commercial auto products, we experienced an 11% increase in written premium per policy, reflecting rate increases of about 6%, in the aggregate, in 2022. The 6% increase in our Property business written premium per policy is substantially less than the 19% rate increases discussed above as a result of taking a portion of the increases later in the year, a shift in the mix of business to a larger share of renters policies, which have lower written premium per policy, and slower homeowners growth in volatile states that have higher average premiums. We realize that to grow policies in force, it is critical that we retain our customers for longer periods. Consequently, increasing retention continues to be one of our most important priorities. A key initiative to lengthening our retention is to increase our share of multi-product households. We will continue to make investments to improve the customer experience in order 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, Commercial Lines, and Property businesses. We evaluate personal auto retention using a trailing 12-month policy life expectancy and a trailing 3-month policy life expectancy. The latter can reflect more volatility and is more sensitive to seasonality. On a trailing 3-month basis, our personal auto policy life expectancy was down 9% year over year, which is an improvement from the 32% decrease in policy life expectancy we reported at June 30, 2022. Our trailing 12-month total personal auto policy life expectancy was down 22% year over year, with Agency down 24% and Direct down 19%. Our trailing 12-month policy life expectancy increased 3% for special lines, and decreased 12% for Commercial Lines and 7% for Property. C. Investments The fair value of our investment portfolio was $53.5 billion at December 31, 2022, compared to $51.5 billion at December 31, 2021. The increase in value from year-end 2021, primarily reflected the proceeds of the $1.5 billion debt issuance in March 2022 and positive cash flows from our underwriting operations, offset by declines in the valuations of our portfolio, as discussed below. 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 December 31, 2022, 10% of our portfolio was allocated to Group I securities and 90% to Group II securities, compared to 17% and 83%, respectively, at December 31, 2021. The decrease in the percentage of Group I securities since year end 2021 was primarily driven by sales in our common equity portfolio and, to a lesser extent, high-yield bonds and preferred stocks with proceeds reinvested in Group II short-term investments. Our recurring investment income generated a pretax book yield of 2.4% for 2022, compared to 1.9% for 2021, due to the increase in interest rates on our floating-rate securities and the investment of cash and maturities at relatively higher interest rates. Our investment portfolio produced a fully taxable equivalent (FTE) total return of (7.8)% for 2022 and of 2.6% for 2021. Our fixed-income and common stock portfolios had FTE total returns of (6.6)% and (19.4)%, respectively, for 2022, compared to (0.1)% and 33.4%, for 2021. The year-over-year decrease in the fixed-income return reflected lower valuations primarily due to the market impact of higher interest rates and wider credit spreads during the last twelve months. The common stock return decline reflected general market conditions during 2022. At December 31, 2022, the fixed-income portfolio had a weighted average credit quality of AA and a duration of 2.9 years, compared to AA- and 3.0 years at December 31, 2021. We have shortened our portfolio duration during the year, which we believe provides some protection against further increases in interest rates. The end of the London Interbank Offered Rate (LIBOR) as an official reference rate will be June 30, 2023. The Federal Reserve Board identified the Secured Overnight Financing Rate (SOFR) as the recommended replacement to U.S. LIBOR. As of December 31, 2022, we owned 175 unique securities with an aggregate par value of $3.6 billion that are still based on LIBOR, with our other asset-backed securities, mainly collateralized loan obligations, making up the majority of these securities. Due to the provisions in the terms of the securities, which allows a change in the underlying rate if a rate is discontinued, we are expecting a relatively smooth transition to an alternate reference rate. App.-A-53 II.  FINANCIAL CONDITION A. Liquidity and Capital Resources The Progressive Corporation receives cash through subsidiary dividends, capital raising and other transactions, and uses these funds to contribute to its subsidiaries (e.g., to support growth), to make payments to shareholders and debt holders (e.g., dividends and interest, respectively), to repurchase its common shares, and to redeem or pay off debt, as well as for acquisitions and other business purposes that may arise. During 2022, The Progressive Corporation received cash from the following sources: •Debt issuance - issued $500 million of 2.50% Senior Notes due 2027, $500 million of 3.00% Senior Notes due 2032, and $500 million of 3.70% Senior Notes due 2052, in an underwritten public offering. •Dividends from subsidiaries - received $538.6 million from its insurance and non-insurance subsidiaries. The Progressive Corporation deployed capital through the following actions in 2022: •Dividends ◦Common shares - declared aggregate dividends of $0.40 per common share, or $233.7 million. ◦Preferred shares - declared aggregate Series B Preferred dividends of $26.8 million. •Common Share Repurchases - acquired 0.9 million of our common shares at a total cost of $99.0 million either in the open market or to satisfy tax withholding obligations in connection with the vesting of equity awards under our employee equity compensation plan. Pursuant to our financial policies, we repurchase common shares to neutralize dilution from equity-based compensation granted during the year and opportunistically when we believe our shares are trading below our determination of long-term fair value. •Capital Contributions - contributed a net $797.8 million to its insurance and non-insurance subsidiaries. The Board decided not to declare an annual-variable dividend for 2022 after assessing our capital position, existing capital resources, and expected future capital needs, including the then current market conditions that could present opportunities for further growth in 2023. Over the last three years, The Progressive Corporation received dividends from its subsidiaries, net of capital contributions, of $6.2 billion, and issued $2.5 billion, in the aggregate, of senior notes. The covenants on The Progressive Corporation’s existing debt securities do not include any rating or credit triggers that would require an adjustment of the interest rate or an acceleration of principal payments in the event that our debt securities are downgraded by a rating agency. While we had an unsecured discretionary line of credit available to us during each of the last three years in the amount of $250 million, we did not borrow under this arrangement, or engage in other short-term borrowings, to fund our operations or for liquidity purposes. In the aggregate for the last three years, we made the following payments: •$5.5 billion for common share dividends and $0.1 billion for preferred share dividends; •$0.7 billion for interest on our outstanding debt; •$0.6 billion related to acquisitions; •$0.5 billion for the maturity of debt; and •$0.4 billion to repurchase our common shares. For the three years ended December 31, 2022, operations generated positive cash flows of about $21.5 billion. In 2022, operating cash flows decreased $0.9 billion, compared to 2021. While we continued to collect premiums at a faster rate than losses were paid, the decrease in operating cash flow for the year was primarily driven by higher paid losses, compared to last year. We believe cash flows will remain positive in the reasonably foreseeable future and do not expect we will have a need to raise capital to support our operations in that timeframe, although changes in market or regulatory conditions affecting the insurance industry, or other unforeseen events, may necessitate otherwise. As of December 31, 2022, we held $28.0 billion in short-term investments and U.S. Treasury securities, which represented 52% of our total portfolio at year end. Based on our portfolio allocation and investment strategies, we believe that we have sufficient readily available marketable securities to cover our claims payments and short-term obligations in the event our cash flow from operations were to be negative. While U.S. Treasury securities are viewed as having lower risk than many other investment opportunities, the U.S. Treasury recently announced it had reached its authorized borrowing limit and defaults under government obligations, including payments related to U.S. Treasury securities, could occur as soon as this summer. Although perhaps unlikely, it is possible that the federal government could fail to raise the federal debt ceiling to avoid default. Any such default would likely have a materially adverse impact on our cash flows and the value of our portfolio and our capital position. See Item 1A, Risk Factors in our 2022 Form 10-K filed with the U.S. Securities and Exchange Commission for a discussion of certain matters that may affect our portfolios and capital position. Progressive’s insurance operations create liquidity by collecting and investing premiums from new and renewal business in advance of paying claims. As primarily an auto insurer, our claims liabilities are generally short in duration. At December 31, 2022, our loss and loss adjustment expense (LAE) reserves were $30.4 billion. Typically, at any point in time, approximately 50% of our outstanding loss and LAE reserves are paid within the App.-A-54 following twelve months and only about 20% are still outstanding after three years. See Note 6 – Loss and Loss Adjustment Expense Reserves for further information on the timing of claims payments. Insurance companies are required to satisfy regulatory surplus and premiums-to-surplus ratio requirements. As of December 31, 2022, our consolidated statutory surplus was $17.9 billion, compared to $16.4 billion at December 31, 2021. Our net premiums written-to-surplus ratio was 2.9 to 1 at year-end 2022, 2.8 to 1 at year-end 2021, and 2.7 to 1 at year-end 2020. At year-end 2022, we also had access to $4.4 billion of securities held in a non-insurance subsidiary, portions of which could be contributed to the capital of our insurance subsidiaries to support growth or for other purposes. Insurance companies are also required to satisfy risk-based capital ratios. These ratios are determined by a series of dynamic surplus-related calculations required by the laws of various states that contain a variety of factors that are applied to financial balances based on the degree of certain risks (e.g., asset, credit, and underwriting). Our insurance subsidiaries’ risk-based capital ratios were in excess of applicable minimum regulatory requirements at year-end 2022. Nonetheless, the payment of dividends by our insurance subsidiaries are subject to certain limitations. See Note 8 – Statutory Financial Information for additional information on insurance subsidiary dividends. We seek to deploy our capital in a prudent manner and use multiple data sources and modeling tools to estimate the frequency, severity, and correlation of identified exposures, including, but not limited to, catastrophic and other insured losses, natural disasters, and other significant business interruptions, to estimate our potential capital needs. Management views our capital position as consisting of three layers, each with a specific size and purpose: •The first layer of capital is the amount of capital we need to satisfy state insurance regulatory requirements and support our objective of writing all the business we can write and service, consistent with our underwriting discipline of achieving a combined ratio of 96 or better. This first layer of capital, which we refer to as “regulatory capital,” is held by our various insurance entities. •While our regulatory capital layer is, by definition, a cushion for absorbing financial consequences of adverse events, such as loss reserve development, litigation, weather catastrophes, and investment market changes, we view that as a base and hold a second layer of capital for even more extreme conditions. The modeling used to quantify capital needs for these conditions is extensive, including tens of thousands of simulations, representing our best estimates of such contingencies based on historical experience. This capital is held either at a non-insurance subsidiary of the holding company or in our insurance entities, where it is potentially eligible for a dividend to the holding company. •The third layer is capital in excess of the sum of the first two layers and provides maximum flexibility to fund other business opportunities, repurchase stock or other securities, and pay dividends to shareholders, among other purposes. This capital is largely held at a non-insurance subsidiary of the holding company. We monitor our total capital position regularly throughout the year to ensure we have adequate capital to support our insurance operations. At December 31, 2022, we held total capital (debt plus shareholders’ equity) of $22.3 billion, compared to $23.1 billion at December 31, 2021. Our debt-to-total capital ratios at December 31, 2022, 2021, and 2020, were 28.7%, 21.2%, and 24.1%, respectively, and were consistent with our financial policy of maintaining a ratio of less than 30%. While our financial policies include a goal of maintaining debt below 30% of total capital at book value, we recognize that various factors, including rising interest rates, widening credit spreads, declines in the equity markets, or erosion in operating results, may result in that ratio exceeding 30% at times, as it did at the end of a couple of months during 2022. In such a situation, as we did during 2022, we may choose to remain above 30% for some time, dependent upon market conditions and the capital needs of our operating businesses. We will continue to monitor this ratio, market conditions, and our capital needs going forward. At December 31, 2022, we had various noncancelable contractual obligations that were outstanding. We held $6.5 billion of Senior Notes with maturity dates ranging from 2027 through 2052, with $4.2 billion of future interest payment obligations related to our outstanding debt. The next debt repayment of $1.0 billion, in the aggregate, is due upon the maturity of our 2.45% Senior Notes due 2027 and our 2.50% Senior Notes due 2027. See Note 4 – Debt for additional information on our long-term debt. At year-end 2022, we also had $1.0 billion of purchase obligations that are noncancelable commitments for goods and services (e.g., software licenses, maintenance on information technology equipment, and media placements). About 90% of our purchase obligations are payable within one year and less than 1% will be outstanding for longer than three years. In addition, our Property business has App.-A-55 $205.4 million of minimum commitments under several multiple-layer property catastrophe reinsurance contracts with various reinsurers with terms ranging from one to three years. During 2022, we funded $3.1 million to limited partnership investments, which are included in our common equity investments in our consolidated balance sheets, and have funding commitments related to these investments of $15.7 million at December 31, 2022. See Note 1 – Reporting and Accounting Policies, Commitments and Contingencies for a discussion of these obligations. We do not have, and do not expect to enter into, any material commitments for capital expenditures in the reasonably foreseeable future. At least annually, we perform recoverability tests to determine if any of our assets are impaired. We test our goodwill balance for impairment at the reporting unit level annually as of October 1, or more frequently if indicators of impairment exist. As discussed above, in conjunction with the preparation of our second quarter 2022 financial results, we performed a quantitative analysis of the goodwill attributable to our Property segment based on indications that impairment might exist. Based on this analysis, we wrote down the entire $224.8 million of goodwill attributable to our Property segment during the second quarter 2022. See Note 15 – Goodwill and Intangible Assets for further discussion. Based upon our capital planning and forecasting efforts, we believe we have sufficient capital resources and cash flows from operations to support our current business, scheduled principal and interest payments on our debt, anticipated quarterly dividends on our common shares and dividends on our Series B Preferred Shares, our contractual obligations, and other expected capital requirements for the foreseeable future. Nevertheless, we may decide to raise additional capital to take advantage of attractive terms in the market and provide additional financial flexibility. We have an effective shelf registration with the U.S. Securities and Exchange Commission so that we may periodically offer and sell an indeterminate aggregate amount of senior or subordinated debt securities, preferred stock, depositary shares, common stock, purchase contracts, warrants, and units. The shelf registration enables us to raise funds from the offering of any securities covered by the shelf registration as well as any combination thereof, subject to market conditions. III.  RESULTS OF OPERATIONS – UNDERWRITING A. Segment Overview We report our underwriting operations in three operating segments: Personal Lines, Commercial Lines, and Property. As a component of our Personal Lines segment, we report our Agency and Direct business results to provide further understanding of our products by distribution channel. The following table shows the composition of our companywide net premiums written, by segment, for the years ended December 31: [[GREPCENT_TABLE]] [["","2022","","2021","","2020"],["Personal Lines"],["Agency","36","%","","37","%","","40","%"],["Direct","41","","","41","","","42"],["Total Personal Lines","77","","","78","","","82"],["Commercial Lines","18","","","17","","","13"],["Property","5","","","5","","","5"],["Total underwriting operations","100","%","","100","%","","100","%"]] [[/GREPCENT_TABLE]] Our Personal Lines business writes insurance for personal autos (which accounts for about 94% of the segment’s net premiums written) and special lines products (e.g., motorcycles, RVs, watercraft, and snowmobiles). Within Personal Lines, we often refer to our four consumer segments, which we refer to as: •Sam - inconsistently insured; •Diane - consistently insured and maybe a renter; •Wrights - homeowners who do not bundle auto and home; and •Robinsons - homeowners who bundle auto and home. While our personal auto policies are primarily written for 6-month terms, we write 12-month auto policies in our Platinum agencies to promote bundled auto and home growth. At year-end 2022 and 2021, 14% of our Agency auto policies in force were 12-month policies. To the extent our Agency application mix of annual policies grows, the shift in policy term could increase our written premium mix by channel as 12-month policies have about twice the amount of net premiums written compared to 6-month policies. Our special lines products are written for 12-month terms. App.-A-56 Our Commercial Lines business writes auto-related liability and physical damage insurance, business-related general liability and property insurance predominately for small businesses, and workers’ compensation insurance primarily for the transportation industry. The majority of our Commercial Lines business is written through the independent agency channel although we continue to focus on growing our direct business. To serve our direct channel customers, we continue to expand our product offerings, including adding states where we offer BOP and including it on our digital platform serving direct small business consumers (BusinessQuote Explorer®). The direct commercial auto business, excluding our TNC business, represented about 10% of premiums written for 2022 and 2021, compared to 9% for 2020. About 90% of our Commercial Lines auto policies are written for 12-month terms. Our Property business writes residential property insurance for homeowners, other property owners, and renters. We write the majority of our Property business through the independent agency channel; however, we continue to expand the distribution of our Property product offerings in the direct channel, which represented about 25% of premiums written for 2022, compared to 23% and 18% for 2021 and 2020, respectively. Property policies are written for 12-month terms. B. Profitability Profitability for our underwriting operations is defined by pretax underwriting profit or loss, which is calculated as net premiums earned plus fees and other revenues less losses and loss adjustment expenses, policy acquisition costs, other underwriting expenses, and for 2020, policyholder credits. We also use underwriting margin, which is underwriting profit or loss expressed as a percentage of net premiums earned, to analyze our results. For the three years ended December 31, our underwriting profitability was as follows: [[GREPCENT_TABLE]] [["","2022","","2021","","2020"],["Underwriting Profit (Loss)","","Underwriting Profit (Loss)","","Underwriting Profit (Loss)"],["($ in millions)","$","Margin","","$","Margin","","$","Margin"],["Personal Lines"],["Agency","$","734.1","","4.1","%","","$","992.1","","5.9","%","","$","2,236.5","","14.2","%"],["Direct","769.4","","3.8","","","619.2","","3.4","","","2,076.5","","12.3"],["Total Personal Lines","1,503.5","","4.0","","","1,611.3","","4.6","","","4,313.0","","13.2"],["Commercial Lines","810.3","","8.9","","","767.8","","11.1","","","634.8","","13.0"],["Property1","(238.4)","","(10.5)","","","(312.3)","","(15.3)","","","(125.1)","","(7.1)"],["Other indemnity2","(11.4)","","NM","","(1.4)","","NM","","0","","NM"],["Total underwriting operations","$","2,064.0","","4.2","%","","$","2,065.4","","4.7","%","","$","4,822.7","","12.3","%"]] [[/GREPCENT_TABLE]] 1 During 2022, 2021, and 2020, pretax profit (loss) includes $29.1 million, $56.6 million, and $56.9 million, respectively, of amortization expense associated with acquisition-related intangible assets attributable to our Property segment. The year-over-year decrease in amortization expense reflects intangible assets that were fully amortized during the first quarter 2022. 2 Underwriting margins for our other indemnity businesses are not meaningful (NM) due to the low level of premiums earned by, and the variability of loss costs in, such businesses. We have taken significant rate increases since the first quarter of 2021 and through 2022. In spite of the rate increases, our underwriting profit margin decreased in 2022, compared to 2021, primarily driven by higher catastrophe losses and higher loss severity. See the Losses and Loss Adjustment Expenses (LAE) section below for further discussion of our frequency and severity trends and catastrophe losses incurred during the period. The onset and continuation of the COVID-19 pandemic shifted consumer behavior and impacted general economic conditions through 2022. We have seen volatility in our severity trends as inflation continued to influence higher vehicle prices and costs to repair vehicles. We have responded, and will continue to respond when necessary, to these market changes through rate increases, underwriting restrictions, and other non-rate actions. Our focus on achieving our target underwriting profitability takes precedence over growth. App.-A-57 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:  [[GREPCENT_TABLE]] [["Underwriting Performance1","2022","2021","2020"],["Personal Lines \u2013 Agency"],["Loss & loss adjustment expense ratio","78.1","","75.6","","63.5"],["Underwriting expense ratio","17.8","","18.5","","22.3"],["Combined ratio","95.9","","94.1","","85.8"],["Personal Lines \u2013 Direct"],["Loss & loss adjustment expense ratio","78.6","","77.2","","62.9"],["Underwriting expense ratio","17.6","","19.4","","24.8"],["Combined ratio","96.2","","96.6","","87.7"],["Total Personal Lines"],["Loss & loss adjustment expense ratio","78.3","","76.4","","63.2"],["Underwriting expense ratio","17.7","","19.0","","23.6"],["Combined ratio","96.0","","95.4","","86.8"],["Commercial Lines"],["Loss & loss adjustment expense ratio","71.5","","69.3","","64.5"],["Underwriting expense ratio","19.6","","19.6","","22.5"],["Combined ratio","91.1","","88.9","","87.0"],["Property"],["Loss & loss adjustment expense ratio","83.3","","86.4","","77.3"],["Underwriting expense ratio2","27.2","","28.9","","29.8"],["Combined ratio2","110.5","","115.3","","107.1"],["Total Underwriting Operations"],["Loss & loss adjustment expense ratio","77.3","","75.7","","64.0"],["Underwriting expense ratio","18.5","","19.6","","23.7"],["Combined ratio","95.8","","95.3","","87.7"],["Accident year \u2013 Loss & loss adjustment expense ratio3","77.5","","75.7","","63.5"]] [[/GREPCENT_TABLE]] 1 Ratios are expressed as a percentage of net premiums earned. The portion of fees and other revenues related to our loss adjustment activities are netted against loss adjustment expenses and the portion of fees and other revenues related to our underwriting operations are netted against underwriting expenses in the ratio calculations. 2 Included in 2022, 2021, and 2020, are 1.3 points, 2.8 points, and 3.2 points, respectively, of amortization expense on acquisition-related intangible assets attributable to our Property segment. Excluding this expense, the Property business would have reported expense ratios of 25.9, 26.1, and 26.6, and combined ratios of 109.2, 112.5, and 103.9, for 2022, 2021, and 2020, respectively. 3 The accident year ratios include only the losses that occurred during the period noted. As a result, accident period results will change over time, either favorably or unfavorably, as we revise our estimates of loss costs when payments are made or reserves for that accident period are reviewed. App.-A-58 Losses and Loss Adjustment Expenses (LAE) [[GREPCENT_TABLE]] [["(millions)","2022","2021","2020"],["Change in net loss and LAE reserves","$","3,369.6","","$","4,233.7","","$","1,574.4"],["Paid losses and LAE","34,753.1","","29,393.9","","23,547.4"],["Total incurred losses and LAE","$","38,122.7","","$","33,627.6","","$","25,121.8"]] [[/GREPCENT_TABLE]] Claims costs, our most significant expense, represent payments made, and estimated future payments to be made, to or on behalf of our policyholders, including expenses needed to adjust or settle claims. Claims costs are a function of loss severity and frequency and, for our vehicle businesses, are influenced by inflation and driving patterns, among other factors, some of which are discussed below. In our Property business, severity is primarily a function of construction costs and the age of the structure. Accordingly, anticipated changes in these factors are taken into account when we establish premium rates and loss reserves. Loss reserves are estimates of future costs and our reserves are adjusted as underlying assumptions change and information develops. See Critical Accounting Policies – A. Loss and LAE Reserves for a discussion of the effect of changing estimates. Our total loss and LAE ratio increased 1.6 points in 2022 and 11.7 points in 2021, each compared to the prior year. Our accident year loss and LAE ratio, which excludes the impact of prior accident year reserve development during each calendar year, increased 1.8 points in 2022 and 12.2 points in 2021. Several factors that contributed to the year-over-year changes are discussed below and include the impact of catastrophe losses, changes in severity and frequency, and prior accident year reserve development. We experienced severe weather conditions in several areas of the country during each of the last three years. Hurricanes, hail storms, tornadoes, and wind activity contributed to catastrophe losses each year. The following table shows our consolidated catastrophe losses and related combined ratio point impact, excluding loss adjustment expenses, for the years ended December 31: [[GREPCENT_TABLE]] [["","2022","","2021","","2020"],["($ in millions)","$","Point1","","$","Point1","","$","Point1"],["Personal Lines","$","1,045.6","","2.8","","","$","652.0","","1.8","","","$","439.4","","1.3"],["Commercial Lines","34.4","","0.4","","","26.7","","0.4","","","14.8","","0.3"],["Property","580.4","","25.6","","","633.4","","31.0","","","423.8","","24.0"],["Total catastrophe losses incurred","$","1,660.4","","3.4","pts.","","$","1,312.1","","3.0","pts.","","$","878.0","","2.2","pts."]] [[/GREPCENT_TABLE]] 1 Represents catastrophe losses incurred during the period, including the impact of reinsurance, as a percentage of net premiums earned for each segment. Hurricane Ian accounted for approximately 45% of the catastrophe losses in 2022, while Hurricane Ida accounted for about 30% of the 2021 losses. The remainder of the catastrophe losses were generally attributable to other hurricanes, wind and hail storms, and other severe weather events throughout the United States. In total, our Personal Lines and Commercial Lines businesses incurred $575 million of losses from Hurricane Ian. About half of the vehicle losses were on our special lines products, including boats and recreational vehicles with boat losses comprising nearly 70% of all the special lines losses. In our boat product, we mitigate hurricane/coastal exposure with a) underwriting restrictions that limit the insured value and length of the boats, compared to non-hurricane exposed areas, and b) increased deductibles for named storms. Additionally, we segment and price our hurricane risk by territory and set rate levels with a catastrophe load based on historical losses. For our Property business, we retained $200 million of losses and allocated loss adjustment expenses (ALAE), net of reinsurance, related to Hurricane Ian. On a gross basis, prior to giving effect to our excess of loss reinsurance contract, we estimated our Property catastrophe losses and ALAE from Hurricane Ian were $1.0 billion at the end of 2022. We have responded, and plan to continue to respond, promptly to catastrophic events when they occur in order to provide exemplary claims service to our customers. Changes in our estimate of our ultimate losses on current catastrophes along with potential future catastrophes could have a material impact on our financial condition, cash flows, or results of operations. We reinsure various risks, including, but not limited to, catastrophic losses. We do not have catastrophe-specific reinsurance for our Personal Lines or commercial auto businesses, but we reinsure portions of our Property business. The Property business reinsurance programs include catastrophe occurrence excess of loss contracts and aggregate excess of loss contracts. We also purchase excess of loss reinsurance on our Protective Insurance workers’ compensation insurance. We evaluate our reinsurance programs during the renewal process, if not more frequently, to ensure our programs continue to effectively address the company’s risk tolerance. As a result, during 2022, we entered into new reinsurance contracts under our occurrence excess of loss program for our Property business. The reinsurance program provides coverage, net of retention, of up to $2.5 billion if the first covered event occurs in Florida and up to $2.0 billion if the first covered event occurs outside of App.-A-59 Florida. Coverage for a second event (and, potentially, for subsequent covered events) would depend on several factors, including the location and the extent of covered losses of the earlier events in the contract period. The per occurrence excess of loss program had a retention threshold for losses and ALAE from the first catastrophic event of $200 million, which is unchanged from the prior contracts, and a retention threshold for a second catastrophic event of $100 million. For 2023, the second catastrophic event retention for this coverage has been increased to $200 million. Portions of our reinsurance programs include reinstatement limits providing coverage for subsequent events, with some portions having an obligatory reinstatement of coverage. Reinstatement premiums would have no effect on our results of operations since, per our contracts, we have separate reinsurance to cover these situations. For 2023, we entered into a new aggregate excess of loss reinsurance contract that has multiple layers of coverage, with the first retention layer threshold ranging from $500 million to $575 million, excluding named tropical storms and hurricanes, and the second retention layer threshold of $600 million, including named tropical storms and hurricanes. The first and second layers provide coverage up to $100 million and $85 million, respectively. While the total coverage limit and per-event retention will evolve to fit the growth of our business, we expect to remain a consistent purchaser of reinsurance coverage. We were able to place our desired coverage at both June 1, 2022 and January 1, 2023 renewal events. While the cost of reinsurance in the markets in which we participate has continued to increase over the last two years and the availability of reinsurance is subject to many forces outside of our control, we did not, and do not expect to in the near term, experience a significant lack of availability of any of the types of reinsurance that we typically purchase. See Item 1A, Risk Factors in our 2022 Form 10-K filed with the U.S. Securities and Exchange Commission, for the year ended December 31, 2022, for a discussion of certain risks related to catastrophe events and the potential impact of climate change. See Item 1, Business–Reinsurance on Form 10-K and Note 7 – Reinsurance for a discussion of our various reinsurance programs. The following discussion of our severity and frequency trends in our personal auto business excludes comprehensive coverage because of its inherent volatility, as it is typically linked to catastrophic losses generally resulting from adverse weather. For our commercial auto products, the reported frequency and severity trends include comprehensive coverage. Comprehensive coverage insures against damage to a customer’s vehicle due to various causes other than collision, such as windstorm, hail, theft, falling objects, and glass breakage. Total personal auto incurred severity (i.e., average cost per claim, including both paid losses and the change in case reserves) on a calendar-year basis, over the prior-year periods was as follows: [[GREPCENT_TABLE]] [["","Growth Over Prior Year"],["Coverage Type","2022","20211","2020"],["Bodily injury","8","%","11","%","12","%"],["Collision","16","","11","","5"],["Personal injury protection","(9)","","7","","14"],["Property damage","20","","8","","9"],["Total","13","","9","","10"],["1Annualized year-over-2019 year"]] [[/GREPCENT_TABLE]] The year-over-year increase for 2022, compared to 2021, in part, reflects the impact of inflation, which continues to increase the valuation of used vehicles and total loss, repair, and medical costs. Consistent with our prior year reporting, the year-over-year changes for 2021 are compared to 2019 on a two-year annualized basis, which we believe is more insightful when trying to understand our loss results. We believe that the 2021 trends compared to 2020 would not be meaningful for our personal auto business due to the significant impacts that COVID-19 had on our 2020 trends as a result of many factors, including shelter-in-place requirements and the timing of salvage and subrogation collections. On a calendar-year basis, our commercial auto products’ incurred severity, excluding Protective Insurance and our TNC business, increased 6% in 2022, compared to 14% in 2021 and 10% in 2020. In addition to general trends in the marketplace, the increase in our commercial auto products’ severity primarily reflects shifts in the mix of business to for-hire transportation, which has higher average severity than the business auto and contractor business market targets. Since the loss patterns in the TNC business are not indicative of our other commercial auto products, disclosing severity and frequency trends excluding that business is more representative of our overall experience for the majority of our commercial auto products. It is a challenge to estimate future severity, but we continue to monitor changes in the underlying costs, such as general inflation, used car prices, vehicle repair costs, medical costs, health care reform, court decisions, and jury verdicts, along with regulatory changes and other factors that may affect severity. App.-A-60 Our personal auto incurred frequency on a calendar-year basis, over the prior-year periods was as follows: [[GREPCENT_TABLE]] [["","Growth Over Prior Year"],["Coverage Type","2022","20211","20202"],["Bodily injury","(4)","%","(11)","%","(25)","%"],["Collision","(8)","","(3)","","(23)"],["Personal injury protection","(5)","","(10)","","(28)"],["Property damage","(5)","","(11)","","(27)"],["Total","(6)","","(7)","","(24)"],["1Annualized year-over-2019 year"],["2 Significant decreases reflected the decrease in vehicle miles traveled as a result of the shelter-in-place restrictions put in place to help stop the spread of COVID-19."]] [[/GREPCENT_TABLE]] As with our personal auto severity trends, comparing 2021 to 2019 instead of 2020 provides more meaningful comparisons due to the significant impact that the COVID-19 pandemic had on frequency during 2020. For example, our total personal auto frequency increased 14% for 2021, compared to 2020, reflecting the decrease in vehicle miles travelled during 2020 that significantly reduced auto accident frequency. On a calendar-year basis, our commercial auto products’ incurred frequency, excluding Protective Insurance and our TNC business, saw an increase of about 3% in 2022 and 9% in 2021, compared to a decrease of about 15% in 2020. On a calendar-year annualized basis, for 2021, incurred frequency decreased 4% compared to 2019. The frequency increase in 2022 was in part due to an uneven recovery across different commercial auto business markets in 2021, some of which have not yet returned to pre-pandemic levels and are continuing to recover at varying rates since the COVID-19 pandemic lows. We closely monitor the changes in frequency, but the degree or direction of near-term frequency change is not something that we are able to predict with any degree of confidence, and this challenge is exacerbated by the uncertainty of the current environment. We will continue to analyze trends to distinguish changes in our experience from other external factors, such as changes in the number of vehicles per household, miles driven, vehicle usage, gasoline prices, advances in vehicle safety, and unemployment rates, versus those resulting from shifts in the mix of our business or changes in driving patterns, to allow us to react quickly to price for these trends and to reserve more accurately for our loss exposures. The table below presents the actuarial adjustments implemented and the loss reserve development experienced on a companywide basis in the years ended December 31:  [[GREPCENT_TABLE]] [["($ in millions)","2022","2021","2020"],["ACTUARIAL ADJUSTMENTS"],["Reserve decrease (increase)"],["Prior accident years","$","(105.5)","","$","(78.5)","","$","(27.5)"],["Current accident year","(83.8)","","103.9","","68.4"],["Calendar year actuarial adjustments","$","(189.3)","","$","25.4","","$","40.9"],["PRIOR ACCIDENT YEARS DEVELOPMENT"],["Favorable (unfavorable)"],["Actuarial adjustments","$","(105.5)","","$","(78.5)","","$","(27.5)"],["All other development","191.8","","83.2","","(167.8)"],["Total development","$","86.3","","$","4.7","","$","(195.3)"],["(Increase) decrease to calendar year combined ratio","0.2","pts.","0","pts.","(0.5)","pts."]] [[/GREPCENT_TABLE]] Total development consists of both actuarial adjustments and “all other development” on prior accident years. The actuarial adjustments represent the net changes made by our actuarial staff to both current and prior accident year reserves based on regularly scheduled reviews. Through these reviews, our actuaries identify and measure variances in the projected frequency and severity trends, which allow them to adjust the reserves to reflect the current cost trends. For our Property business, 100% of catastrophe losses are reviewed monthly, and any development on catastrophe reserves are included as part of the actuarial adjustments. For the Personal Lines and Commercial Lines businesses, development for catastrophe losses in the vehicle businesses would be reflected in “all other development,” discussed below, to the extent they relate to prior year reserves. We report these actuarial adjustments separately for the current and prior accident years to reflect these adjustments as part of the total prior accident years development. “All other development” represents claims settling for more or less than reserved, emergence of unrecorded claims at rates different than anticipated in our incurred but not recorded (IBNR) reserves, and changes in reserve estimates on specific claims. Although we believe the development from both the actuarial adjustments and “all other development” generally results from the same factors, we are unable to quantify the portion of the reserve development that might be applicable to any one or more of those underlying factors. App.-A-61 Our objective is to establish case and IBNR reserves that are adequate to cover all loss costs, while incurring minimal variation from the date the reserves are initially established until losses are fully developed. Our ability to meet this objective is impacted by many factors. Changes in case law, particularly related to personal injury protection (PIP), can make it difficult to estimate reserves timely and with minimal variation. As reflected in the table above, we experienced favorable prior year development during both 2022 and 2021, compared to unfavorable prior year development in 2020. Reserve development primarily related to the following: •2022- Favorable development of $169 million in our Personal Lines segment was partially offset by unfavorable development of $82 million in Commercial Lines. The Personal Lines favorable development was primarily attributable to more subrogation and salvage recoveries and lower LAE than originally anticipated, partially offset by the higher than anticipated severity and frequency of auto property damage payments on previously closed claims and late reported injury claims. The unfavorable development in Commercial Lines was mostly driven by our TNC business, due to higher than anticipated severity of injury case reserves and higher than anticipated severity and frequency of late reported claims. •2021- Favorable development of $127 million in our Personal Lines segment was offset by unfavorable development of $87 million in Commercial Lines and $36 million in Property. The Personal Lines development primarily reflected revised estimates of our per claim settlement costs, favorable PIP reform and litigation, partially offset by higher than anticipated bodily injury severity in our personal auto business. The unfavorable development in Commercial Lines was mostly due to an increase in bodily injury severity and the emergence of large bodily injury claims, while the Property business saw more previously closed claims reopen. •2020 - Personal and Commercial Lines recognized unfavorable development of $111 million and $98 million, respectively, while our Property business had $14 million of favorable development. Higher than anticipated frequency of reopened PIP claims in our personal auto business and an increase in bodily injury severity and the emergence of large bodily injury claims in our Commercial Lines business drove the unfavorable development. See Note 6 – Loss and Loss Adjustment Expense Reserves, for a more detailed discussion of our prior accident years development. Underwriting Expenses Underwriting expenses include policy acquisition costs, other underwriting expenses, and, for 2020 only, policyholder credits. The underwriting expense ratio is our underwriting expenses, net of certain fees and other revenues, expressed as a percentage of net premiums earned. For 2022, our underwriting expense ratio was down 1.1 points, compared to the prior year. The decrease in the point impact reflects a year-over-year decrease in advertising spend during 2022 and a decrease in the costs related to our annual cash-incentive program (Gainshare), which measures segment profitability and growth in policies in force. In total, our advertising spend decreased 5% during 2022, compared to the prior year, as a result of an effort to improve profitability to reach our 96 combined ratio goal. To analyze underwriting expenses, we also review our non-acquisition expense ratio (NAER), which excludes costs related to policy acquisition, including advertising and agency commissions, from our underwriting expense ratio. By excluding acquisition costs from our underwriting expense ratio, we are able to understand costs other than those necessary to acquire new policies and grow the business. In 2022, our NAER decreased 0.2 points and 0.3 points in our Personal Lines and Property businesses, respectively, and increased 0.2 points in our Commercial Lines business, compared to 2021. App.-A-62 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. [[GREPCENT_TABLE]] [["For the years ended December 31,","2022","","2021","","2020"],["($ in millions)","$","% Growth","","$","% Growth","","$","% Growth"],["NET PREMIUMS WRITTEN"],["Personal Lines"],["Agency","$","18,334.2","","6","%","","$","17,257.9","","7","%","","$","16,133.8","","5","%"],["Direct","20,944.3","","11","","","18,910.9","","10","","","17,208.8","","9"],["Total Personal Lines","39,278.5","","9","","","36,168.8","","8","","","33,342.6","","7"],["Commercial Lines","9,398.8","","17","","","8,015.9","","51","","","5,315.3","","11"],["Property","2,401.7","","8","","","2,216.2","","16","","","1,910.8","","13"],["Other indemnity1","2.1","","(51)","","","4.3","","NM","","0","","0"],["Total underwriting operations","$","51,081.1","","10","%","","$","46,405.2","","14","%","","$","40,568.7","","8","%"],["NET PREMIUMS EARNED"],["Personal Lines"],["Agency","$","17,744.7","","5","%","","$","16,881.0","","7","%","","$","15,789.5","","6","%"],["Direct","20,135.5","","9","","","18,492.3","","10","","","16,830.6","","10"],["Total Personal Lines","37,880.2","","7","","","35,373.3","","8","","","32,620.1","","8"],["Commercial Lines","9,088.3","","31","","","6,945.2","","42","","","4,875.8","","10"],["Property","2,270.0","","11","","","2,042.5","","16","","","1,765.7","","14"],["Other indemnity1","2.7","","(65)","","","7.7","","NM","","0","","0"],["Total underwriting operations","$","49,241.2","","11","%","","$","44,368.7","","13","%","","$","39,261.6","","8","%"],["NM = Not meaningful"],["1 Includes other underwriting business and run-off operations."],["December 31,","2022","","2021","","2020"],["(# in thousands)","#","% Growth","","#","% Growth","","#","% Growth"],["POLICIES IN FORCE"],["Agency auto","7,766.3","","(1)","%","","7,879.0","","3","%","","7,617.0","","9","%"],["Direct auto","10,131.0","","6","","","9,568.2","","8","","","8,881.4","","13"],["Total auto","17,897.3","","3","","","17,447.2","","6","","","16,498.4","","11"],["Special lines1","5,558.1","","5","","","5,288.5","","8","","","4,915.1","","8"],["Personal Lines \u2014 total","23,455.4","","3","","","22,735.7","","6","","","21,413.5","","10"],["Commercial Lines","1,046.4","","8","","","971.2","","18","","","822.0","","9"],["Property","2,851.3","3","","","2,776.2","12","","","2,484.4","13"],["Companywide total","27,353.1","3","%","","26,483.1","7","%","","24,719.9","11","%"]] [[/GREPCENT_TABLE]] 1 Includes insurance for motorcycles, watercraft, RVs, and similar items. To analyze growth, we review new policies, rate levels, and the retention characteristics of our segments. Although new policies are necessary to maintain a growing book of business, we recognize the importance of retaining our current customers as a critical component of our continued growth. As shown in the tables below, we measure retention by policy life expectancy. We review our customer retention for our personal auto products using both a trailing 3- month and a trailing 12-month period. We believe change in policy life expectancy using a trailing 12-month period measure is indicative of recent experience, mitigates the effects of month-to-month variability, and addresses seasonality. Although using a trailing 3-month measure is sensitive to seasonality and can reflect more volatility, this measure is more responsive to current experience and generally can be an indicator of how retention rates are moving. App.-A-63 D. Personal Lines The following table shows our year-over-year changes for our Personal Lines business: [[GREPCENT_TABLE]] [["","Growth Over Prior Year"],["","2022","2021","2020"],["Applications"],["New","1","%","(2)","%","3","%"],["Renewal","1","","11","","8"],["Written premium per policy - Auto","9","","0","","(1)"],["Policy life expectancy - Auto"],["Trailing 3 months","(9)","","(1)","","7"],["Trailing 12 months","(22)","","2","","10"]] [[/GREPCENT_TABLE]] New application growth in our Personal Lines products was up 1% during 2022, in part driven by competitor rate increases, primarily during the second half of the year, and targeted media spend. Our personal auto new application growth was up 2% and our special lines new application growth was down 5% during the year, with the special lines decrease primarily reflecting the significant new application growth experienced during 2021, due to growth in boat, RV, and motorcycle demand. During the year, our personal auto renewal applications were relatively unchanged from the prior year and our special lines products recorded an 8% increase in renewal applications. Results varied by consumer segment. Personal auto policies in force grew by single digits across all segments except Sam, which experienced a single digit decline. New business application growth was also up across all segments except Sam during 2022. Quote volume increased in all consumer segments, with all consumer segments seeing a decreased rate of conversion. The increases we experienced in our quote volume primarily reflected competitors raising rates. During 2022, we implemented personal auto rate increases in 49 states that, in the aggregate, on a countrywide basis, increased rates about 13% for the year. The rate increases, which started in the second quarter 2021 and continued throughout 2022, had a negative impact on our new and renewal business applications and policy life expectancy during 2022. During the second half of 2022, our trailing 3-month policy life expectancy, while still below the prior year, began to show signs of improvement. Our written premium per policy increased during 2022, primarily due to the rate increases previously discussed. Our focus on achieving our target underwriting profitability takes precedence over growth. We will continue to manage growth and profitability in accordance with our long-standing goal of growing as fast as we can as long as we can provide high-quality customer service at or below a companywide 96 combined ratio on a calendar-year basis. We report our Agency and Direct business results separately as components of our Personal Lines segment to provide further understanding of our products by distribution channel. The channel discussions below are focused on personal auto insurance since this product accounted for 94% of the Personal Lines segment net premiums written during 2022. The Agency Business [[GREPCENT_TABLE]] [["","Growth Over Prior Year"],["","2022","2021","2020"],["Applications - Auto"],["New","(3)","%","(8)","%","(5)","%"],["Renewal","(3)","","8","","7"],["Written premium per policy - Auto","11","","1","","0"],["Policy life expectancy - Auto"],["Trailing 3 months","(11)","","(3)","","6"],["Trailing 12 months","(24)","","1","","10"]] [[/GREPCENT_TABLE]] The Agency business includes business written by more than 40,000 independent insurance agencies that represent Progressive, as well as brokerages in New York and California. During 2022, 19 states generated new Agency auto application growth, including 3 of our top 10 largest Agency states. New applications decreased for the Sam and Robinsons consumer segments by low double and single digits, respectively, and increased for the Wrights and Diane by single digits through the Agency channel. Policies in force decreased in all consumer segments except the Wrights. During 2022, we experienced a 15% year-over-year increase in Agency auto quotes and a 15% decrease in the rate of conversion, primarily due to the rate increases taken during 2021 and the first half of 2022. During the fourth quarter 2022, our rate of conversion increased over the same period in 2021, reflecting the rate increases that our competitors took during 2022. All consumer segments saw an increase in quote volume and a decrease in conversion compared to the prior year. Written premium per policy for new and renewal Agency auto business increased 9% and 11%, respectively, compared to 2021. The decreases in policy life expectancy were expected given the rate actions taken over the last year. App.-A-64 The Direct Business [[GREPCENT_TABLE]] [["","Growth Over Prior Year"],["","2022","2021","2020"],["Applications - Auto"],["New","6","%","0","%","5","%"],["Renewal","3","","13","","11"],["Written premium per policy - Auto","8","","(1)","","(1)"],["Policy life expectancy - Auto"],["Trailing 3 months","(6)","","2","","6"],["Trailing 12 months","(19)","","3","","10"]] [[/GREPCENT_TABLE]] The Direct business includes business written directly by Progressive online, through our Progressive mobile app, and over the phone. During 2022, we generated new Direct auto application growth in 30 states and the District of Columbia, including 3 of our top 10 largest Direct states. Total auto applications increased 3% due to growth in both new and renewal applications, primarily in the second half of 2022. New applications and policies in force increased across all consumer segments except Sam. During 2022, we experienced an increase in Direct auto quote volume of 8%, while our rate of conversion decreased 2% for the year but began increasing toward the end of the third quarter of 2022. In addition to competitors raising rates, we also experienced gains in the efficiency of our media spend during the second half of the year, which contributed to the increase in quotes and new applications. All consumer segments saw an increase in quotes. Sam and Diane saw declines in the rate of conversion, while Wrights and Robinsons saw low single digit increases. Written premium per policy for new and renewal Direct auto business increased 6% and 8%, respectively, during 2022, compared to last year, primarily driven by rate increases. Consistent with our Agency business, the Direct business decrease in policy life expectancy reflected the rate actions taken over the last year. E. Commercial Lines Our Commercial Lines business operates in five traditional business markets, which include business auto, for-hire transportation, contractor, for-hire specialty, and tow markets, primarily written through the agency channel. We also write TNC business and BOP insurance. With the acquisition of Protective Insurance during 2021, we expanded our portfolio of offerings to larger fleet and workers’ compensation insurance for trucking, along with trucking industry independent contractors, and affinity programs. The following table and discussion shows our Commercial Lines business, excluding our TNC, BOP, and Protective Insurance products, which we refer to as our commercial auto product. Year-over-year changes in our commercial auto product were as follows: [[GREPCENT_TABLE]] [["","Growth Over Prior Year"],["","2022","2021","2020"],["Applications"],["New","(1)","%","27","%","5","%"],["Renewal","12","","12","","6"],["Written premium per policy","11","","17","","4"],["Policy life expectancy Trailing 12 months","(12)","","11","","5"]] [[/GREPCENT_TABLE]] Our commercial auto product experienced a year-over-year decline in new application growth in 2022, primarily reflecting a slow down from the significant amount of growth experienced in 2021, mainly in our for-hire transportation and for-hire specialty business markets, and the softening of the freight market during the year. We experienced a 3% decrease in quote volume and a 3% increase in the rate of conversion in our commercial auto business during 2022, compared to 2021, primarily driven by the for-hire transportation market. Written premium per policy for our new and renewal commercial auto policies increased 6% and 16%, respectively, in 2022, compared to last year. The increases were primarily due to rate increases. In aggregate, rate increases for commercial auto were about 6% in 2022. Our policy life expectancy decreased compared to 2021, mainly driven by our for-hire transportation business market. Given the rise in costs to operate a trucking business, many independent owner/operators have begun to migrate back to leasing with larger motor carriers. App.-A-65 F. Property The following table shows our year-over-year changes for our Property business: [[GREPCENT_TABLE]] [["","Growth Over Prior Year"],["","2022","2021","2020"],["Applications"],["New","(8)","%","20","%","12","%"],["Renewal","8","","10","","14"],["Written premium per policy","6","","1","","0"],["Policy life expectancy Trailing 12 months","(7)","","(9)","","(3)"]] [[/GREPCENT_TABLE]] Our Property business writes residential property insurance for homeowners, other property owners, and renters, in the agency and direct channels. During 2022, the Property business experienced a decrease in new applications, primarily due to rate increases and other non-rate actions taken to address the profitability concerns. Improving profitability and reducing concentration exposure continued to be the top priority for our Property business during 2022. Due to our concentration of policies in catastrophe-exposed states, severe weather events generally have greater impact on our results compared to other national carriers. In response, we began implementing underwriting changes during the second half of 2021, which continued during 2022, to focus on improving profitability and reducing growth in coastal and hail-prone states. In addition, we increased rates an average of about 19% in our Property segment during 2022, with some of the larger increases in Florida and in hail-prone states, such as Colorado and Oklahoma. The targeted rate increases taken during the year are beginning to be earned into the book of business; however, we realize that our rate actions and underwriting activities to limit growth in the coastal and hail-prone states and to increase our exposure in states with traditionally less catastrophe exposure will require more time than originally anticipated. Combined with the continued extent of the weather-related losses, this prompted us to reevaluate the portion of goodwill related to our 2015 acquisition of ARX and assigned to our Property business for impairment during the year, resulting in a non-cash goodwill impairment charge of $224.8 million, which represented the entire amount of goodwill assigned to the Property business. Our written premium per policy increased on a year-over-year basis, primarily attributable to rate increases, a portion of which were taken later in the year, and providing higher premium coverages to account for inflation. The written premium per policy increase was partially offset by a shift in the mix of business to a larger share of renters policies, which have lower written premiums per policy, and slower homeowners growth in volatile states that have higher average premiums. Our policy life expectancy decreased compared to last year, primarily due to the targeted rate increases in states where we were not achieving our profitability targets. We intend to continue to make targeted rate increases in states where we believe it is necessary to achieve our profitability targets. G. Litigation The Progressive Corporation and/or its insurance subsidiaries are named as defendants in various lawsuits arising out of claims made under insurance policies issued by its subsidiaries in the ordinary course of business. We consider all legal actions relating to such claims in establishing our loss and loss adjustment expense reserves. In addition, various Progressive entities are named as defendants in a number of alleged class/collective/representative actions or individual lawsuits arising out of the operations of the insurance subsidiaries. These cases include those alleging damages as a result of, among other things, our practices in evaluating or paying medical or injury claims or benefits, including, but not limited to, personal injury protection, medical payments, uninsured motorist/underinsured motorist, bodily injury benefits, and workers’ compensation, and for reimbursing medical costs incurred by Medicare/Medicaid beneficiaries; our practices in evaluating or paying physical damage claims, including, but not limited to, our payment of total loss claims, application of a negotiation adjustment in calculating total loss valuations, and labor rates paid to auto body repair shops; our insurance product design, including our response to the COVID-19 pandemic; employment matters; commercial disputes, including breach of contract; and cases challenging other aspects of our claims or marketing practices or other business operations. Other insurance companies and/or large employers face many of these same issues. During the last three years, we have settled several class/collective action and individual lawsuits. These settlements did not have a material effect on our financial condition, cash flows, or results of operations. See Note 12 – Litigation for a more detailed discussion. H. Income Taxes At December 31, 2022, we had net current income taxes payable of $10.9 million, which were reported in accounts payable, accrued expenses, and other liabilities, compared to recoverable income taxes of $19.2 million at December 31, 2021, which were reported in other assets on our consolidated balance sheets. This balance may fluctuate between an asset and a liability from period to period due to normal timing differences. See Note 5 – Income Taxes for further information. A deferred tax asset or liability is a tax benefit or expense, respectively, that is expected to be realized in a future tax return. At December 31, 2022, we reported a net deferred tax asset, compared to a net deferred tax liability at December 31, 2021. The change to a deferred asset from a App.-A-66 deferred liability was primarily due to unrealized losses on securities in the fixed-income and equity portfolios occurring in 2022. We are required to assess our deferred tax assets for recoverability and, based on our analysis, determined that we did not need a valuation allowance on our gross deferred tax assets for either year. Although realization of the gross deferred tax assets is not assured, management believes it is more likely than not that the gross deferred tax assets will be realized based on our expectation we will be able to fully utilize the deductions that are ultimately recognized for tax purposes. We believe our deferred tax asset related to net unrealized losses on fixed-maturity securities will be realized based on the existence of prior year capital gains, current temporary differences related to unrealized gains in our equity portfolio, and other tax planning strategies. Our effective tax rate was 22% for 2022, compared to 20% in both 2021 and 2020. The increase in the effective tax rate during 2022, compared to 2021 and 2020, was in part attributable to the goodwill impairment in 2022, which is not deductible for income tax purposes. Consistent with prior years, we had no uncertain tax positions. See Note 5 – Income Taxes for further information. IV.  RESULTS OF OPERATIONS – INVESTMENTS A. Portfolio Summary At year-end 2022, the fair value of our investment portfolio was $53.5 billion, compared to $51.5 billion at year-end 2021. The increase in value from year-end 2021 primarily reflected the proceeds of the $1.5 billion debt issuance in March 2022 and positive cash flows from our underwriting operations, offset by declines in the valuations of our portfolio. Our investment income (interest and dividends) increased 46% in 2022 and decreased 8% in 2021. This increase in 2022 was primarily due to an increase in interest rates on floating-rate securities in our portfolio and purchases of new investments with higher coupon rates, while the decrease in the prior year reflected lower yields partially offset by an increase in invested assets. B. Investment Results Our management philosophy governing the portfolio is to evaluate investment results on a total return basis. The fully taxable equivalent (FTE) total return includes recurring investment income, adjusted to a fully taxable amount for certain securities that receive preferential tax treatment (e.g., municipal securities), and total net realized, and changes in total unrealized, gains (losses) on securities. The following summarizes investment results for the years ended December 31: [[GREPCENT_TABLE]] [["","2022","2021","2020"],["Pretax recurring investment book yield","2.4","%","1.9","%","2.4","%"],["FTE total return:"],["Fixed-income securities","(6.6)","","(0.1)","","6.7"],["Common stocks","(19.4)","","33.4","","24.3"],["Total portfolio","(7.8)","","2.6","","7.9"]] [[/GREPCENT_TABLE]] The increase in the book yield during 2022 primarily reflected investing new cash from operations and proceeds from maturing bonds at higher interest rates and an increase in interest rates on our floating-rate securities. The decrease in the fixed-income total return, compared to last year, reflected the impact of rising interest rates during the last twelve months, as well as widening credit spreads, while the decrease in common stocks reflected general market conditions. A further break-down of our FTE total returns for our fixed-income portfolio for the years ended December 31, follows: [[GREPCENT_TABLE]] [["","2022","2021","2020"],["Fixed-income securities:"],["U.S. Treasury Notes","(7.8)","%","(1.2)","%","7.4","%"],["Municipal bonds","(8.3)","","(0.2)","","9.4"],["Corporate bonds","(6.0)","","(0.4)","","8.4"],["Residential mortgage-backed securities","0.6","","1.3","","3.0"],["Commercial mortgage-backed securities","(9.5)","","0.5","","4.2"],["Other asset-backed securities","(1.6)","","0.7","","2.8"],["Preferred stocks","(8.3)","","6.9","","6.6"],["Short-term investments","1.5","","0.1","","1.0"]] [[/GREPCENT_TABLE]] App.-A-67 C. Portfolio Allocation The composition of the investment portfolio at December 31, was: [[GREPCENT_TABLE]] [["($ in millions)","Fair Value","% of Total Portfolio","Duration (years)","Average Rating1"],["2022"],["U.S. government obligations","$","25,167.4","","47.0","%","3.7","AAA"],["State and local government obligations","1,977.1","","3.7","","3.5","AA+"],["Foreign government obligations","15.5","","0.1","","3.5","AAA"],["Corporate debt securities","9,412.7","","17.6","","2.8","BBB"],["Residential mortgage-backed securities","666.8","","1.2","","0.4","A"],["Commercial mortgage-backed securities","4,663.5","","8.7","","2.7","A+"],["Other asset-backed securities","4,564.6","","8.5","","1.1","AA+"],["Preferred stocks","1,397.5","","2.6","","2.8","BBB-"],["Short-term investments","2,861.7","","5.4","","0.1","AAA-"],["Total fixed-income securities","50,726.8","","94.8","","2.9","AA"],["Common equities","2,821.5","","5.2","","na","na"],["Total portfolio2","$","53,548.3","","100.0","%","2.9","AA"],["2021"],["U.S. government obligations","$","18,488.2","","35.9","%","3.6","AAA"],["State and local government obligations","2,185.3","","4.2","","3.6","AA+"],["Foreign government obligations","17.9","","0.1","","4.5","AAA"],["Corporate debt securities","10,692.1","","20.7","","2.9","BBB"],["Residential mortgage-backed securities","790.0","","1.5","","0.4","A-"],["Commercial mortgage-backed securities","6,535.6","","12.7","","3.2","A+"],["Other asset-backed securities","4,982.3","","9.7","","1.2","AA"],["Preferred stocks","1,821.6","","3.6","","3.6","BBB-"],["Short-term investments","942.6","","1.8","","0.2","AA"],["Total fixed-income securities","46,455.6","","90.2","","3.0","AA-"],["Common equities","5,058.5","","9.8","","na","na"],["Total portfolio2","$","51,514.1","","100.0","%","3.0","AA-"],["na = not applicable"]] [[/GREPCENT_TABLE]] 1 Represents ratings at period end. Credit quality ratings are assigned by nationally recognized statistical rating organizations. To calculate the weighted average credit quality ratings, we weight individual securities based on fair value and assign a numeric score of 0-5, with non-investment-grade and non-rated securities assigned a score of 0-1. To the extent the weighted average of the ratings falls between AAA and AA+, we assign an internal rating of AAA-. 2 At December 31, 2022, we had $34.4 million of net unsettled security transactions included in other assets, compared to $143.4 million included in other liabilities at December 31, 2021. The total fair value of the portfolio at December 31, 2022 and 2021, included $4.4 billion and $4.2 billion, respectively, of securities held in a consolidated, non-insurance subsidiary of the holding company, net of any unsettled security transactions. Our asset allocation strategy is to maintain 0%-25% of our portfolio in Group I securities, with the balance (75%-100%) of our portfolio in Group II securities. We define Group I securities to include:  •common equities, •nonredeemable preferred stocks, •redeemable preferred stocks, except for 50% of investment-grade redeemable preferred stocks with cumulative dividends, which are included in Group II, and •all other non-investment-grade fixed-maturity securities. Group II securities include:  •short-term securities, and •all other fixed-maturity securities, including 50% of investment-grade redeemable preferred stocks with cumulative dividends. We believe this asset allocation strategy allows us to appropriately assess the risks associated with these securities for capital purposes and is in line with the treatment by our regulators. App.-A-68 The following table shows the composition of our Group I and Group II securities at December 31: [[GREPCENT_TABLE]] [["","2022","","2021"],["($ in millions)","Fair Value","% of Total Portfolio","","Fair Value","% of Total Portfolio"],["Group I securities:"],["Non-investment-grade fixed maturities","$","1,249.2","","2.3","%","","$","2,032.4","","3.9","%"],["Redeemable preferred stocks1","92.1","","0.2","","","90.9","","0.2"],["Nonredeemable preferred stocks","1,213.2","","2.3","","","1,639.9","","3.2"],["Common equities","2,821.5","","5.2","","","5,058.5","","9.8"],["Total Group I securities","5,376.0","","10.0","","","8,821.7","","17.1"],["Group II securities:"],["Other fixed maturities","45,310.6","","84.6","","","41,749.8","","81.1"],["Short-term investments","2,861.7","","5.4","","","942.6","","1.8"],["Total Group II securities","48,172.3","","90.0","","","42,692.4","","82.9"],["Total portfolio","$","53,548.3","","100.0","%","","$","51,514.1","","100.0","%"]] [[/GREPCENT_TABLE]] 1 We held no non-investment-grade redeemable preferred stocks at December 31, 2022 or 2021. To determine the allocation between Group I and Group II, we use the credit ratings from models provided by the National Association of Insurance Commissioners (NAIC) for classifying our residential and commercial mortgage-backed securities, excluding interest-only securities, and the credit ratings from nationally recognized statistical rating organizations (NRSROs) to classify all other debt securities. NAIC ratings are based on a model that considers the book price of our securities when assessing the probability of future losses in assigning a credit rating. As a result, NAIC ratings can vary from credit ratings issued by NRSROs. Management believes NAIC ratings more accurately reflect our risk profile when determining the asset allocation between Group I and II securities. The decrease in the percentage of Group I securities in 2022 was driven by sales and valuation declines in our common equity portfolio, with the proceeds from the common equity sales and the $1.5 billion debt offering in March 2022 reinvested in Group II short-term investments. Unrealized Gains and Losses As of December 31, 2022, our fixed-maturity portfolio had pretax net unrealized losses, recorded as part of accumulated other comprehensive income, of $3,537.6 million, compared to net unrealized gains of $71.4 million at December 31, 2021. The decrease from 2021 was due to increasing interest rates across our fixed-maturity portfolio and wider credit spreads outside of our short-term and Treasury portfolios. See Note 2 – Investments for a further break-out of our gross unrealized gains (losses). App.-A-69 Holding Period Gains (Losses) The following table provides the balance and activity for both the gross and net holding period gains (losses) for 2022: [[GREPCENT_TABLE]] [["(millions)","Gross Holding Period Gains","Gross Holding Period Losses","Net Holding Period Gains (Losses)"],["Balance at December 31, 2021"],["Hybrid fixed-maturity securities","$","13.0","","$","(5.5)","","$","7.5"],["Equity securities1","3,877.2","","(14.7)","","3,862.5"],["Total holding period securities","3,890.2","","(20.2)","","3,870.0"],["Current year change in holding period securities"],["Hybrid fixed-maturity securities","(11.7)","","(70.3)","","(82.0)"],["Equity securities1","(1,850.6)","","(167.5)","","(2,018.1)"],["Total changes in holding period securities","(1,862.3)","","(237.8)","","(2,100.1)"],["Balance at December 31, 2022"],["Hybrid fixed-maturity securities","1.3","","(75.8)","","(74.5)"],["Equity securities1","2,026.6","","(182.2)","","1,844.4"],["Total holding period securities","$","2,027.9","","$","(258.0)","","$","1,769.9"]] [[/GREPCENT_TABLE]] 1Equity securities include common equities and nonredeemable preferred stocks. Changes in holding period gains (losses), similar to unrealized gains (losses) in our fixed-maturity portfolio, are the result of changes in market performance as well as sales of securities based on various portfolio management decisions. Fixed-Income Securities The fixed-income portfolio is managed internally and includes fixed-maturity securities, short-term investments, and nonredeemable preferred stocks. Following are the primary exposures for the fixed-income portfolio. Interest Rate Risk This risk includes the change in value resulting from movements in the underlying market rates of debt securities held. We manage this risk by maintaining the portfolio’s duration (a measure of the portfolio’s exposure to changes in interest rates) between 1.5 and 5 years. The duration of the fixed-income portfolio was 2.9 years at December 31, 2022, compared to 3.0 years at December 31, 2021. The distribution of duration and convexity (i.e., a measure of the speed at which the duration of a security is expected to change based on a rise or fall in interest rates) is monitored on a regular basis. The duration distribution of our fixed-income portfolio, excluding short-term investments, represented by the interest rate sensitivity of the comparable benchmark U.S. Treasury Notes, at December 31, was: [[GREPCENT_TABLE]] [["Duration Distribution","2022","2021"],["1 year","17.5","%","22.0","%"],["2 years","16.9","","18.8"],["3 years","21.3","","23.5"],["5 years","25.1","","17.6"],["7 years","14.0","","13.1"],["10 years","5.2","","5.0"],["Total fixed-income portfolio","100.0","%","100.0","%"]] [[/GREPCENT_TABLE]] Credit Risk This exposure is managed by maintaining an A+ minimum average portfolio credit quality rating, as defined by NRSROs. At December 31, 2022, our credit quality rating was AA and at December 31, 2021 our credit quality rating was AA-. The credit quality distribution of the fixed-income portfolio at December 31, was: [[GREPCENT_TABLE]] [["Average Rating","2022","2021"],["AAA","65.5","%","54.7","%"],["AA","6.4","","8.7"],["A","7.6","","8.6"],["BBB","17.2","","21.7"],["Non-investment grade/non-rated:1"],["BB","2.5","","4.8"],["B","0.5","","1.1"],["CCC and lower","0.1","","0.1"],["Non-rated","0.2","","0.3"],["Total fixed-income portfolio","100.0","%","100.0","%"]] [[/GREPCENT_TABLE]] 1 The ratings in the table above are assigned by NRSROs. 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, App.-A-70 residential and commercial mortgage-backed securities, municipal bonds, and high-yield bonds. At December 31, 2022 and 2021, we were within all of the constraints described above. Prepayment and Extension Risk We are exposed to this risk especially in our asset-backed (i.e., structured product) and preferred stock portfolios. Prepayment risk includes the risk of early redemption of security principal that may need to be reinvested at less attractive rates. Extension risk includes the risk that a security will not be redeemed when anticipated, and that the security that is extended will have a lower yield than a security we might be able to obtain by reinvesting the expected redemption principal. Our holdings of different types of structured debt and preferred securities help manage this risk. During 2022 and 2021, we did not experience significant adverse prepayment or extension of principal relative to our cash flow expectations in the portfolio. Liquidity Risk Our overall portfolio remains very liquid and we believe that it is sufficient to meet expected near-term liquidity requirements. The short-to-intermediate duration of our portfolio provides a source of liquidity, as we expect approximately $7.8 billion, or 36.0%, of principal repayment from our fixed-income portfolio, excluding U.S. Treasury Notes and short-term investments, during 2023. Cash from interest and dividend payments provides an additional source of recurring liquidity. The duration of our U.S. government obligations, which are included in the fixed-income portfolio, was comprised of the following at December 31, 2022: [[GREPCENT_TABLE]] [["($ in millions)","Fair Value","","Duration (years)"],["U.S. Treasury Notes"],["Less than one year","$","834.0","","","0.7"],["One to two years","5,565.6","","","1.5"],["Two to three years","3,984.0","","","2.5"],["Three to five years","8,303.4","","","4.1"],["Five to seven years","4,476.4","","","5.6"],["Seven to ten years","2,004.0","","","7.9"],["Total U.S. Treasury Notes","$","25,167.4","","","3.7"]] [[/GREPCENT_TABLE]] ASSET-BACKED SECURITIES Included in the fixed-income portfolio are asset-backed securities, which were comprised of the following at December 31: [[GREPCENT_TABLE]] [["($ in millions)","Fair Value","Net Unrealized Gains (Losses)","% of Asset- Backed Securities","Duration (years)","Average Rating(at period end)1"],["2022"],["Residential mortgage-backed securities","$","666.8","","$","(17.2)","","6.7","%","0.4","","A"],["Commercial mortgage-backed securities","4,663.5","","(782.5)","","47.1","","2.7","","A+"],["Other asset-backed securities","4,564.6","","(259.6)","","46.2","","1.1","","AA+"],["Total asset-backed securities","$","9,894.9","","$","(1,059.3)","","100.0","%","1.8","","AA-"],["2021"],["Residential mortgage-backed securities","$","790.0","","$","1.7","","6.4","%","0.4","","A-"],["Commercial mortgage-backed securities","6,535.6","","(25.4)","","53.1","","3.2","","A+"],["Other asset-backed securities","4,982.3","","0.9","","40.5","","1.2","","AA"],["Total asset-backed securities","$","12,307.9","","$","(22.8)","","100.0","%","2.2","","AA-"]] [[/GREPCENT_TABLE]] 1 The credit quality ratings are assigned by NRSROs. App.-A-71 Residential Mortgage-Backed Securities (RMBS) The following table details the credit quality rating and fair value of our RMBS, along with the loan classification and a comparison of the fair value at December 31, 2022, to our original investment value (adjusted for returns of principal, amortization, and write-downs): [[GREPCENT_TABLE]] [["Residential Mortgage-Backed Securities (at December 31, 2022)"],["($ in millions)Average Rating1","","","Non-Agency","","Government/GSE2","Total","% of Total"],["AAA","","","$","124.4","","","$","1.2","","$","125.6","","18.8","%"],["AA","","","24.7","","","0.4","","25.1","","3.8"],["A","","","392.2","","","0","","392.2","","58.8"],["BBB","","","115.3","","","0","","115.3","","17.3"],["Non-investment grade/non-rated:"],["BB","","","0.5","","","0","","0.5","","0.1"],["B","","","0","","","0","","0","","0"],["CCC and lower","","","2.1","","","0","","2.1","","0.3"],["Non-rated","","","6.0","","","0","","6.0","","0.9"],["Total fair value","","","$","665.2","","","$","1.6","","$","666.8","","100.0","%"],["Increase (decrease) in value","","","(4.2)","%","","(4.1)","%","(4.2)","%"]] [[/GREPCENT_TABLE]] 1 The credit quality ratings are assigned by NRSROs; when we assigned the NAIC ratings for our RMBS, 98% of our non-investment-grade securities were rated investment grade and reported as Group II securities, with the remainder classified as Group I. 2 The securities in this category are insured by a Government Sponsored Entity (GSE) and/or collateralized by mortgage loans insured by the Federal Housing Administration (FHA) or the U.S. Department of Veteran Affairs (VA). In the residential mortgage-backed sector, our portfolio consists of bonds that are backed by high-quality borrowers in the underlying mortgages or have strong structural protections. During 2022, we selectively added to our portfolio and opportunistically sold some of the securities at attractive levels. Commercial Mortgage-Backed Securities (CMBS) The following table details the credit quality rating and fair value of our CMBS, along with a comparison of the fair value at December 31, 2022, to our original investment value (adjusted for returns of principal, amortization, and write-downs): [[GREPCENT_TABLE]] [["Commercial Mortgage-Backed Securities (at December 31, 2022)"],["($ in millions)Average Rating1","Multi-Borrower","Single-Borrower","Total","% of Total"],["AAA","$","216.9","","$","1,213.9","","$","1,430.8","","30.7","%"],["AA","0","","989.2","","989.2","","21.2"],["A","0","","933.8","","933.8","","20.0"],["BBB","0","","931.6","","931.6","","20.0"],["Non-investment grade/non-rated:"],["BB","0","","378.1","","378.1","","8.1"],["B","0","","0","","0","","0"],["Total fair value","$","216.9","","$","4,446.6","","$","4,663.5","","100.0","%"],["Increase (decrease) in value","(6.4)","%","(14.7)","%","(14.4)","%"]] [[/GREPCENT_TABLE]] 1The credit quality ratings are assigned by NRSROs; when we assigned the NAIC ratings for our CMBS, 31% of our non-investment-grade securities were rated investment grade and reported as Group II securities, with the remainder classified as Group I. The CMBS portfolio experienced wider spreads and high volatility in 2022. New issuance in the single-asset single-borrower (SASB) market slowed significantly in the second half of the year due to less favorable market conditions, as well as low trading volumes and liquidity in the secondary trading market. Given ongoing uncertainty about future trajectory of the economy and its impact on real estate, we reduced certain positions that we believed would be sensitive to potential future economic weakness. App.-A-72 Other Asset-Backed Securities (OABS) The following table details the credit quality rating and fair value of our OABS, along with a comparison of the fair value at December 31, 2022, to our original investment value (adjusted for returns of principal, amortization, and write-downs): [[GREPCENT_TABLE]] [["Other Asset-Backed Securities (at December 31, 2022)"],["($ in millions) Average Rating","Automobile","Collateralized Loan Obligations","Student Loan","Whole Business Securitizations","Equipment","Other","Total","% of Total"],["AAA","$","1,007.6","","$","1,115.2","","$","41.3","","$","0","","$","535.0","","$","185.6","","$","2,884.7","","63.2","%"],["AA","96.5","","575.0","","5.2","","0","","79.7","","21.6","","778.0","","17.0"],["A","15.8","","0","","6.9","","0","","110.2","","135.1","","268.0","","5.9"],["BBB","6.7","","0","","0","","563.4","","0","","34.2","","604.3","","13.2"],["Non-investment grade/non-rated:"],["BB","0","","0","","0","","0","","0","","29.6","","29.6","","0.7"],["Total fair value","$","1,126.6","","$","1,690.2","","$","53.4","","$","563.4","","$","724.9","","$","406.1","","$","4,564.6","","100.0","%"],["Increase (decrease) in value","(1.5)","%","(5.0)","%","(10.5)","%","(13.7)","%","(1.9)","%","(10.2)","%","(5.4)","%"]] [[/GREPCENT_TABLE]] As valuations across other asset classes were more attractive, we maintained our allocation to the OABS portfolio fairly consistently over the last 12 months. MUNICIPAL SECURITIES The following table details the credit quality rating of our municipal securities at December 31, 2022, without the benefit of credit or bond insurance: [[GREPCENT_TABLE]] [["Municipal Securities (at December 31, 2022)"],["(millions) Average Rating","General Obligations","Revenue Bonds","Total"],["AAA","$","588.0","","$","238.7","","$","826.7"],["AA","432.0","","678.6","","1,110.6"],["A","0","","37.5","","37.5"],["BBB","0","","2.1","","2.1"],["Non-rated","0","","0.2","","0.2"],["Total","$","1,020.0","","$","957.1","","$","1,977.1"]] [[/GREPCENT_TABLE]] Included in revenue bonds were $480.2 million of single-family housing revenue bonds issued by state housing finance agencies, of which $314.1 million were supported by individual mortgages held by the state housing finance agencies and $166.1 million were supported by mortgage-backed securities. Of the programs supported by mortgage-backed securities, 84% were collateralized by Ginnie Mae mortgages, which are fully guaranteed by the U.S. government; the remaining 16% were collateralized by Fannie Mae and Freddie Mac mortgages. Of the programs supported by individual mortgages held by the state housing finance agencies, the overall credit quality rating was AA+. Most of these mortgages were supported by FHA, VA, or private mortgage insurance providers. Credit spreads of tax-exempt municipal bonds tightened during 2022, while spreads of taxable municipal bonds widened. Our allocation to this sector declined modestly during the year. App.-A-73 CORPORATE SECURITIES The following table details the credit quality rating of our corporate securities at December 31, 2022: [[GREPCENT_TABLE]] [["Corporate Securities (at December 31, 2022)"],["(millions) Average Rating","Consumer","Industrial","Communication","Financial Services","","Technology","Basic Materials","Energy","Total"],["AA","$","22.4","","$","0","","$","0","","$","329.0","","","$","0","","$","0","","$","41.4","","$","392.8"],["A","386.6","","281.7","","158.4","","1,066.5","","","28.5","","113.4","","183.7","","2,218.8"],["BBB","2,178.0","","1,228.8","","114.7","","935.3","","","472.9","","12.6","","901.4","","5,843.7"],["Non-investment grade/non-rated:"],["BB","204.7","","107.2","","194.5","","91.5","","","33.2","","0","","31.0","","662.1"],["B","214.7","","7.1","","0","","0","","","0","","24.4","","0","","246.2"],["CCC and lower","49.1","","0","","0","","0","","","0","","0","","0","","49.1"],["Total fair value","$","3,055.5","","$","1,624.8","","$","467.6","","$","2,422.3","","","$","534.6","","$","150.4","","$","1,157.5","","$","9,412.7"]] [[/GREPCENT_TABLE]] The size of our corporate debt portfolio decreased to $9.4 billion at December 31, 2022 from $10.7 billion at December 31, 2021. This decrease was due to securities that matured and a decline in the portfolio valuation due to the increase in interest rates. We slightly shortened the maturity profile of the corporate debt portfolio during 2022. The duration of the corporate portfolio was 2.8 years at December 31, 2022, compared to 2.9 years at December 31, 2021. Overall, our corporate securities, as a percentage of the fixed-income portfolio, decreased during 2022. At December 31, 2022, our corporate debt securities made up approximately 19% of the fixed-income portfolio, compared to approximately 23% at December 31, 2021. This decrease reflects our more conservative stance in the economic environment prevailing during the year. PREFERRED STOCKS – REDEEMABLE AND NONREDEEMABLE The table below shows the exposure break-down for our preferred stocks by sector and rating at year end: [[GREPCENT_TABLE]] [["Preferred Stocks (at December 31, 2022)"],["","Financial services"],["(millions) Average Rating","U.S. Banks","Foreign Banks","Insurance","Other Financial","Industrials","Utilities","Total"],["BBB","$","742.9","","$","34.4","","$","95.2","","$","27.9","","$","134.7","","$","42.7","","$","1,077.8"],["Non-investment grade/non-rated:"],["BB","135.4","","38.1","","0","","0","","24.8","","37.6","","235.9"],["Non-rated","0","","0","","43.8","","23.6","","16.4","","0","","83.8"],["Total fair value","$","878.3","","$","72.5","","$","139.0","","$","51.5","","$","175.9","","$","80.3","","$","1,397.5"]] [[/GREPCENT_TABLE]] The majority of our preferred securities have fixed-rate dividends until a call date and then, if not called, generally convert to floating-rate dividends. The interest rate duration of our preferred securities is calculated to reflect the call, floor, and floating-rate features. Although a preferred security will remain outstanding if not called, its interest rate duration will reflect the variable nature of the dividend. Our non-investment-grade preferred stocks were with issuers that maintain investment-grade senior debt ratings. We also face the risk that dividend payments on our preferred stock holdings could be deferred for one or more periods or skipped entirely. As of December 31, 2022, all of our preferred securities continued to pay their dividends in full and on time. Approximately 80% of our preferred stock securities pay dividends that have tax preferential characteristics, while the balance pay dividends that are fully taxable. During 2022, our preferred portfolio declined to $1.4 billion at December 31, 2022, from $1.8 billion at December 31, 2021. This decline is primarily due to a decrease in the market valuation of preferred securities as credit spreads widened and interest rates increased. App.-A-74 Common Equities Common equities, as reported on the consolidated balance sheets at December 31, were comprised of the following: [[GREPCENT_TABLE]] [["($ in millions)","2022","","2021"],["Common stocks","$","2,801.7","","99.3","%","","$","5,041.6","","99.7","%"],["Other risk investments1","19.8","","0.7","","","16.9","","0.3"],["Total common equities","$","2,821.5","","100.0","%","","$","5,058.5","","100.0","%"]] [[/GREPCENT_TABLE]] 1The other risk investments consist of limited partnership interests. The majority of our common stock portfolio consists of individual holdings selected based on their contribution to the correlation with the Russell 1000 Index. We held 789 out of 1,010, or 78%, of the common stocks comprising the index at December 31, 2022, which made up 95% of the total market capitalization of the index. At December 31, 2022 and 2021, the year-to-date total return of the indexed portfolio, based on GAAP income, was within our targeted tracking error, which is +/- 50 basis points. During 2022, we sold common equity securities, which were in a realized gain position, as part of our plan to incrementally reduce risk in the portfolio in response to the likelihood of a more difficult economic environment over the near term. The following is a summary of our indexed common stock portfolio holdings by sector compared to the Russell 1000 Index composition: [[GREPCENT_TABLE]] [["Sector","Equity Portfolio Allocation at December 31, 2022","Russell 1000 Allocation at December 31, 2022","Russell 1000 Sector Return in 2022"],["Consumer discretionary","13.5","%","14.1","%","(34.8)","%"],["Consumer staples","5.9","","6.3","","3.5"],["Financial services","12.0","","11.3","","(11.0)"],["Health care","15.1","","14.4","","(4.0)"],["Materials and processing","2.0","","2.2","","(8.8)"],["Other energy","5.1","","5.2","","61.5"],["Producer durable","13.7","","13.3","","(13.2)"],["Real estate","2.8","","3.1","","(25.4)"],["Technology","24.0","","24.1","","(34.6)"],["Telecommunications","2.9","","2.7","","(21.2)"],["Utilities","3.0","","3.3","","0.6"],["Total common stocks","100.0","%","100.0","%","(19.1)","%"]] [[/GREPCENT_TABLE]] For 2022, our common stock portfolio FTE total return was (19.4)%, compared to (19.1)% for the Russell 1000 Index, due to common stocks we hold outside of the index. App.-A-75 V. CRITICAL ACCOUNTING POLICIES Progressive is required to make certain estimates and assumptions when preparing its financial statements and accompanying notes in conformity with GAAP. Actual results could differ from those estimates in a variety of areas. The two areas we view as most critical with respect to the application of estimates and assumptions is the establishment of our loss reserves and the methods for measuring expected credit losses on financial instruments. A. Loss and LAE Reserves Loss and loss adjustment expense (LAE) reserves represent our best estimate of our ultimate liability for losses and LAE relating to events that occurred prior to the end of any given accounting period but have not yet been paid. At December 31, 2022, we had $24.8 billion of net loss and LAE reserves (net of reinsurance recoverables on unpaid losses), which included $19.7 billion of case reserves and $5.1 billion of incurred but not recorded (IBNR) reserves. Personal auto liability and commercial auto liability reserves represent approximately 90% of our total carried net reserves. For this reason, the following discussion focuses on our vehicle businesses. We do not review our loss reserves on a macro level and, therefore, do not derive a companywide range of reserves to compare to a standard deviation. Instead, we review a large majority of our reserves by product/state subset combinations on a quarterly time frame, with the remaining reserves generally reviewed on a semiannual basis. A change in our scheduled reviews of a particular subset of the business depends on the size of the subset or emerging issues relating to the product or state. By reviewing the reserves at such a detailed level, we have the ability to identify and measure variances in the trends by state, product, and line coverage that otherwise would not be seen on a consolidated basis. We believe our comprehensive process of reviewing at a subset level provides us more meaningful estimates of our aggregate loss reserves. In analyzing the ultimate accident year loss and LAE experience, our actuarial staff reviews in detail, at the subset level, frequency (number of losses per earned car year), severity (dollars of loss per each claim), and average premium (dollars of premium per earned car year), as well as the frequency and severity of our LAE costs. The loss ratio, a primary measure of loss experience, is equal to the product of frequency times severity divided by the average premium. The average premium for personal and commercial auto businesses is not estimated. The actual frequency experienced will vary depending on the change in the mix in class of drivers we insure, but the IBNR frequency projections for these lines of business are generally stable in the short term, because a large majority of the parties involved in an accident report their claims within a short time period after the occurrence. The severity experienced by Progressive is much more difficult to estimate, especially for injury claims, since severity is affected by changes in underlying costs, such as medical costs, jury verdicts, judicial interpretations, and regulatory changes. In addition, severity will vary relative to the change in our mix of business by limit. Assumptions regarding needed reserve levels made by the actuarial staff take into consideration influences on available historical data that reduce the predictiveness of our projected future loss costs. Internal considerations that are process-related, which generally result from changes in our claims organization’s activities, include claim closure rates, the number of claims that are closed without payment, and the level of the claims representatives’ estimates of the needed case reserve for each claim. These changes and their effect on the historical data are studied at the state level versus on a larger, less indicative, countrywide basis. External items considered include the litigation atmosphere, changes in medical costs, and the availability of services to resolve claims. These also are better understood at the state level versus at a more macro, countrywide level. These items, as well as additional considerations such as the type of accident and change in reporting patterns, are closely monitored. At December 31, 2022, we had $30.4 billion of carried gross reserves and $24.8 billion of net reserves. Our net reserve balance assumes that the loss and LAE severity for accident year 2022 over accident year 2021 would be 9.1% higher for personal auto liability and 8.9% higher for commercial auto liability. As discussed above, the severity estimates are influenced by many variables that are difficult to precisely quantify and which influence the final amount of claims settlements. That, coupled with changes in internal claims practices, the legal environment, and state regulatory requirements, requires significant judgment in the estimate of the needed reserves to be carried. App.-A-76 The following table highlights what the effect would be to our carried loss and LAE reserves, on a net basis, as of December 31, 2022, if during 2023 we were to experience the indicated change in our estimate of severity for the 2022 accident year (i.e., claims that occurred in 2022): [[GREPCENT_TABLE]] [["","Estimated Changes in Severity for Accident Year 2022"],["(millions)","-4%","-2%","As Reported","+2%","+4%"],["Personal auto liability","$","14,368.4","","$","14,695.0","","$","15,021.6","","$","15,348.2","","$","15,674.8"],["Commercial auto liability","7,144.1","","7,239.7","","7,335.3","","7,430.9","","7,526.5"],["Other1","2,443.2","","2,443.2","","2,443.2","","2,443.2","","2,443.2"],["Total","$","23,955.7","","$","24,377.9","","$","24,800.1","","$","25,222.3","","$","25,644.5"]] [[/GREPCENT_TABLE]] 1 Includes reserves for personal and commercial auto physical damage claims and our non-auto lines of business; no change in estimates is presented due to the immaterial level of these reserves. Note: Every percentage point change in our estimate of severity for the 2022 accident year would affect our personal auto liability reserves by $163.3 million and our commercial auto reserves by $47.8 million. Our 2022 year-end loss and LAE reserve balance also includes claims from prior years. Claims that occurred in 2022, 2021, and 2020, in the aggregate, accounted for approximately 92% of our reserve balance. If during 2023 we were to experience the indicated change in our estimate of severity for the total of the prior three accident years (i.e., 2022, 2021, and 2020), the effect to our year-end 2022 reserve balances would be as follows: [[GREPCENT_TABLE]] [["","Estimated Changes in Severity for Accident Years 2022, 2021, and 2020"],["(millions)","-4%","-2%","As Reported","+2%","+4%"],["Personal auto liability","$","13,259.2","","$","14,140.4","","$","15,021.6","","$","15,902.8","","$","16,784.0"],["Commercial auto liability","6,889.7","","7,112.5","","7,335.3","","7,558.1","","7,780.9"],["Other1","2,443.2","","2,443.2","","2,443.2","","2,443.2","","2,443.2"],["Total","$","22,592.1","","$","23,696.1","","$","24,800.1","","$","25,904.1","","$","27,008.1"]] [[/GREPCENT_TABLE]] 1 Includes reserves for personal and commercial auto physical damage claims and our non-auto lines of business; no change in estimates is presented due to the immaterial level of these reserves. Note: Every percentage point change in our estimate of severity for the 2022, 2021, and 2020 accident years would affect our personal auto liability reserves by $440.6 million and our commercial auto reserves by $111.4 million. Our best estimate of the appropriate amount for our reserves as of year-end 2022 is included in our financial statements for the year. Our goal is to ensure that total reserves are adequate to cover all loss costs, while sustaining minimal variation from the time reserves are initially established until losses are fully developed. At the point in time when reserves are set, we have no way of knowing whether our reserve estimates will prove to be high or low, or whether one of the alternative scenarios discussed above is reasonably likely to occur. The above tables show the potential favorable or unfavorable development we will realize if our estimates miss by 2% or 4%. B. Credit Losses on Financial Instruments An allowance for credit losses is established when the ultimate realization of a financial instrument is determined to be impaired due to a credit event. Measurement of expected credit losses is based on judgment when considering relevant information about past events, including historical loss experience, current conditions, and forecasts of the collectability of the reported financial instrument. The allowance for expected credit losses is measured and recorded at the point ultimate recoverability of the financial instrument is expected to be impaired, including upon the initial recognition of the financial instrument, where warranted. We evaluate financial instrument credit losses related to our available-for-sale securities, reinsurance recoverables, and premiums receivables. Due to the complex nature in evaluating credit loss for our available-for-sale financial instruments, we view the estimates and assumptions used in our analysis as critical. We routinely monitor our fixed-maturity portfolio for pricing changes that might indicate potential losses exist and perform detailed reviews of securities with unrealized losses to determine if an allowance for credit losses, a change to an existing allowance (recovery or additional loss), or a write-off for an amount deemed uncollectible needs to be recorded. In such cases, changes in fair value are evaluated to determine the extent to which such changes are attributable to: (i) credit related losses, which are specific to the issuer (e.g., financial conditions, business prospects) where the present value of cash flows expected to be collected is lower than the amortized cost basis of the security or (ii) market related factors, such as interest rates or credit spreads. If we do not expect to hold the security to allow for a potential recovery of those expected losses, we will write down the security to fair value and recognize a realized loss in the comprehensive income statement. App.-A-77 For securities whose losses are credit related losses, and for which we do not intend to sell in the near term, we will review the non-market components to determine if a potential future credit loss exists, based on available financial data related to the fixed-maturity securities. If we project that a credit loss exists, we will record an allowance for the credit loss and recognize a realized loss in the comprehensive income statement. For all securities for which an allowance for credit losses has been established, we will re-evaluate the securities, at least quarterly, to determine if further deterioration has occurred or if we project a subsequent recovery in the expected losses, which would require an adjustment to the allowance for credit losses. To the extent we determine that we will likely sell a security prior to recovery of the credit loss, or if the loss is deemed uncollectible, we will write down the security to its fair value and reverse any credit loss allowance that may have been previously recorded. For an unrealized loss that is determined to be related to current market conditions, we will not record an allowance for credit losses or a write down to fair value. We will continue to monitor these securities to determine if underlying factors other than the current market conditions are contributing to the loss in value. Based on an analysis of our fixed-maturity portfolio, we have determined our allowance for credit losses related to available-for-sale securities was not material to our financial condition or results of operations for the periods ending December 31, 2022 and 2021. App.-A-78 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,” “goal,” “target,” “anticipate,” “will,” “could,” “likely,” “may,” “should,” 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 not guarantees of future performance, are based on current expectations and projections about future events, and are subject to certain risks, assumptions and uncertainties that could cause actual events and results to differ materially from those discussed herein. These risks and uncertainties include, without limitation, uncertainties related to: •our ability to underwrite and price risks accurately and to charge adequate rates to policyholders; •our ability to establish accurate loss reserves; •the impact of severe weather, other catastrophe events and climate change; •the effectiveness of our reinsurance programs and the continued availability of reinsurance and performance by reinsurers; •the secure and uninterrupted operation of the systems, facilities and business functions and the operation of various third-party systems that are critical to our business; •the impacts of a security breach or other attack involving our technology systems or the systems of one or more of our vendors; •our ability to maintain a recognized and trusted brand and reputation; •whether we innovate effectively and respond to our competitors’ initiatives; •whether we effectively manage complexity as we develop and deliver products and customer experiences; •our ability to attract, develop and retain talent and maintain appropriate staffing levels; •the impact of misconduct or fraudulent acts by employees, agents, and third parties to our business and/or exposure to regulatory assessments; •the highly competitive nature of property-casualty insurance markets; •whether we adjust claims accurately; •compliance with complex and changing laws and regulations; •litigation challenging our business practices, and those of our competitors and other companies; •the success of our business strategy and efforts to acquire or develop new products or enter into new areas of business and navigate related risks; •how intellectual property rights affect our competitiveness and our business operations; •the performance of our fixed-income and equity investment portfolios; •the impact on our investment returns and strategies from regulations and societal pressures relating to environmental, social, governance and other public policy matters; •the elimination of the London Interbank Offered Rate; •our continued ability to access our cash accounts and/or convert investments into cash on favorable terms; •the impact if one or more parties with which we enter into significant contracts or transact business fail to perform; •legal restrictions on our insurance subsidiaries’ ability to pay dividends to The Progressive Corporation; •limitations on our ability to pay dividends on our common shares under the terms of our outstanding preferred shares; •our ability to obtain capital when necessary to support our business and potential growth; •evaluations by credit rating and other rating agencies; •the variable nature of our common share dividend policy; •whether our investments in certain tax-advantaged projects generate the anticipated returns; •the impact from not managing to short-term earnings expectations in light of our goal to maximize the long-term value of the enterprise; •the impacts of epidemics, pandemics or other widespread health risks; and •other matters described from time to time in our releases and publications, and in our periodic reports and other documents filed with the United States Securities and Exchange Commission, including, without limitation, the Risk Factors section of our Annual Report on Form 10-K for the year ending December 31, 2022. Any forward-looking statements are made only as of the date presented. Except as required by applicable law, we undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or developments or otherwise. In addition, investors should be aware that accounting principles generally accepted in the United States prescribe when a company may reserve for particular risks, including litigation exposures. Accordingly, results for a given reporting period could be significantly affected if and when we establish reserves for one or more contingencies. Also, our regular reserve reviews may result in adjustments of varying magnitude as additional information regarding claims activity becomes known. Reported results, therefore, may be volatile in certain accounting periods. App.-A-79