What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-02 compared with 2022-11-01 · 394 added, 406 removed, 495 unchanged (62% of the section changed)

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

The Progressive Corporation’s insurance subsidiaries recognized growth in both premiums written and policies in force during the third quarter 2022, compared to the same period last year.

For the third quarter 2022, our underwriting profit margin of 0.8% fell short of our targets in large part due to the impact from Hurricane Ian and was better than the underwriting loss margin of 0.4% recognized during the same period last year.

For the third quarter 2022, our underwriting profit was $94.3 million, compared to an underwriting loss of $46.9 million for the third quarter last year.

The increase in underwriting profitability contributed to the 5% increase in net income on a year-over-year basis.

Our comprehensive loss for the third quarter 2022 was $785 million greater than the comprehensive loss incurred in the third quarter 2021, due to the significant decline in the market value of our fixed-maturity securities, reflecting higher interest rates and wider credit spreads over the last 12 months.

Total capital (debt plus shareholders’ equity) at September 30, 2022, was $21.2 billion, which was down $2.0 billion from year-end 2021, primarily due to our $3.3 billion comprehensive loss for the first nine months of 2022, in part offset by our $1.5 billion debt issuance in the first quarter 2022.

During the third quarter, we generated $13.0 billion of net premiums written, which is an increase of $0.6 billion, or 5%, compared to third quarter 2021, primarily reflecting rate increases taken during 2021 and the first nine months of 2022.

We ended the third quarter 2022 with 26.9 million companywide policies in force, which is 300,000 more policies than were in force at September 30, 2021.

Personal auto policies in force decreased 1% year over year, while our Commercial Lines, special lines, and Property products grew policies 9%, 5%, and 4%, respectively.

On a year-over-year basis, new personal auto applications increased for the third quarter and were down the first nine months of 2022.

During the quarter, we believe targeted advertising spend and competitor rate increases spurred the new personal auto application growth, which partially offset the decreases in renewal applications during the quarter and the decreases in new auto applications experienced during the first half of 2022 that reflected rate increases and decreased advertising spend during that period.

During the third quarter 2022, we generated an underwriting profit margin of 0.8%, which was below our 4.0% underwriting target profit goal.

Catastrophe losses reduced our profit margin by about seven loss ratio points for the third quarter with Hurricane Ian, which mostly impacted Florida, accounting for 86% of catastrophe losses during the period.

Excluding loss adjustment expenses, we incurred $585 million of vehicle losses and $175 million of net Property losses after reflecting the catastrophe reinsurance coverage we have on our Property business.

Special Lines catastrophe losses, primarily boat losses, accounted for nearly $290 million of the total vehicle losses and personal auto accounted for about $285 million.

The balance of the vehicle losses from the storm were minimal and were incurred in our commercial auto products.

On the Property side, we retained $25 million of allocated loss adjustment expenses.

Under our excess of loss reinsurance program, our total retention for combined losses and allocated loss adjustment expenses is $200 million.

During the first quarter 2023, The Progressive Corporation’s insurance subsidiaries recognized strong growth in both premiums written and policies in force, compared to the same period last year, but the underwriting margin fell short of our goal to earn 4% on an aggregate calendar-year basis.

Our combined ratio of 99.0 for the first quarter 2023 was 4.5 points higher than the same period last year.

The variance from the prior year was due, in large part, to unfavorable prior accident years reserve development of 4.6 points for the first quarter 2023, compared to 1.6 points in the prior year first quarter.

The development during the first quarter 2023 was primarily in our personal auto products and reflected higher than anticipated severity, more late reported injury claims than expected, and increased loss costs in Florida due, in part, to recently passed legislation in the state, as discussed below.

During the first quarter 2023, companywide net premiums written grew 22% over the first quarter last year with all operating segments contributing to the growth.

We generated $16.1 billion of net premiums written, which was an increase of $2.9 billion, compared to first quarter 2022.

We ended the quarter with 28.8 million policies in force, which was an increase of 2.3 million policies, or 9%, over March 2022, and 1.4 million, or 5%, over year-end 2022.

We believe that the growth during the quarter, in part, reflected our price competitiveness as many competitors continued to take rate increases.

While growth is an important objective, achieving our target profit margin takes precedence over growing premiums.

As discussed below, we plan to take actions that we believe are necessary to allow us to achieve our calendar-year underwriting profitability goal of 4%, which could result in less premium and policy growth.

On a year-over-year basis, net income increased 43% for the first quarter 2023.

This growth reflected increases in both our recurring investment income, which grew 73% over the first quarter last year, as well as recognizing $104.4 million of net holding period gains on our common equity portfolio this quarter, compared to $388.6 million of net holding period losses for the first quarter last year.

These strong investment results were offset, in part, by a 78% decrease in our underwriting profit due to the reasons discussed above.

For the first quarter 2023, we recognized comprehensive income of $1.1 billion, compared to a comprehensive loss of $1.1 billion in the same period last year.

The fair value of our fixed-maturity securities increased by $0.6 billion during the first quarter, compared to a decrease in fair value of $1.4 billion for the first quarter 2022.

The change in fair value reflected a modest decline in interest rates

during the first quarter 2023, compared to a significant rise in interest rates in the first quarter last year.

Total capital (debt plus shareholders’ equity) at March 31, 2023, was $23.3 billion, which was up $1.0 billion from year-end 2022, primarily due to our comprehensive income earned in the first quarter 2023.

Insurance Operations

For the third quarter 2022, we experienced a companywide underwriting profit margin of 0.8%, compared to our target profit margin of 4% and an underwriting loss margin of 0.4% for the same period last year.

Net premiums written grew 5% over the third quarter last year, reflecting rate increases that began in the second quarter of 2021 and continued through the third quarter 2022, while policies in force increased 1% on a companywide basis.

The distribution of profitability and growth varied by segment during the third quarter 2022 as discussed below.

During the third quarter 2022, Commercial Lines was our only profitable operating segment, generating an underwriting profit margin of 10.3%, while our Personal Lines business broke even and our Property operating segment generated a 25.1% underwriting loss margin due to the significant losses incurred from Hurricane Ian during the quarter.

Special lines products contributed about 3 points of underwriting loss to the Personal Lines results for the third quarter.

In total for the third quarter, catastrophe losses were up 0.7 points on a year-over-year basis with catastrophe losses up nearly 60% in Personal Lines and down about 35% in our Property business.

Our Commercial Lines business represented less than 2% of our total catastrophe losses given the nature of the business and that most commercial auto customers move their vehicles out of the path of the storms to protect their businesses.

For the third quarter 2022, our personal auto incurred accident frequency was down about 9%, 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, which led to an increase in severity of about 13% over the third quarter last year.

In the aggregate, we raised our personal auto rates during 2021 by about 8% and for the first half of 2022 by 9%.

During the third quarter, in addition to raising personal auto rates about 2% in the aggregate countrywide, we shifted our focus to evaluating underwriting restrictions, bill plans, and media spend to identify growth opportunities.

During the quarter, quotes increased more than 20% in both the Agent and Direct auto channels and total personal auto new business applications

increased 20%.

Our competitors continued to raise rates to address their underwriting profitability issues, which also had a positive impact on our competitive positioning and we believe contributed to our new business application growth.

We currently believe that, with the exception of a few key states, the major personal auto rate increases are behind us for the remainder of 2022.

However, management continues to assess new and used car prices, miles driven, driving patterns, loss severity, weather events, inflation, and other components of expected loss costs on a state-by-state basis for our personal auto business and will file for rate adjustments where deemed necessary.

During the first quarter 2023, our Personal Lines and Commercial Lines businesses generated an underwriting profit margin of 1.3% and 1.6%, respectively.

Our Property operating segment recognized a 5.5% underwriting loss margin during the quarter, which included 24.3 points due to the significant losses incurred from tornado, wind, and thunderstorm catastrophe losses.

The special lines products profitability during the first quarter 2023 contributed about a favorable 2 points to the Personal Lines underwriting margin for the quarter.

During the first quarter 2023, we experienced companywide unfavorable prior accident years reserve development of $621.2 million, or 4.6 points, as a result of claims settling for more than reserved and changes in our reserve estimates.

Throughout the quarter, we continued to see volatility in our severity trends as the average costs to settle a claim increased over the same period last year.

Nearly 70% of the unfavorable development was in our personal auto products and primarily resulted from higher than anticipated severity and increases in incurred losses on previously closed claims.

For the first quarter 2023, our personal auto incurred severity was up about 10%, while accident frequency was relatively flat on a year-over-year basis.

In addition, to a lesser extent, the unfavorable personal auto development reflected the impact of the recently passed legislation in Florida that resulted in a significant number of lawsuits being filed prior to its March 2023 effective date.

While this tort reform could have a positive impact on the insurance industry in Florida in the long term, during the first quarter we increased our reserves for the potential exposure on existing claims, which had less than a one-point impact on our companywide combined ratio for the first quarter 2023.

Since its passage, legislative efforts have arisen that, if adopted, could undo or dilute the potentially positive long-term benefits of the March legislation.

We will continue to monitor the ever-changing regulatory environment and will respond as necessary.

Our Commercial Lines business represented almost 25% of the unfavorable development and was mainly due to late reported claims from prior accident periods and changes in reserve estimates (e.g., aging of the reserves, changes to estimates by adjusters, and inflation factors).

remaining unfavorable development was primarily in our Property business with our special lines products experiencing minor unfavorable development during the quarter.

During the first quarter 2023, we increased personal auto rates in 31 states, with an aggregate countrywide increase of about 4% and we continue to earn in the aggregate countrywide net increases of 13% that we took during 2022.

Returning to profitability in our Property business continues to remain a priority for us.

In addition to our focus on shifting our concentration mix between states, we continued to adjust rates to address profitability concerns.

In the first quarter 2023, we increased rates by about 3% across our Property product lines, bringing the trailing four quarters close to an aggregate rate increase of about 20%.

As stated above, we strongly believe that achieving our target profit margin takes precedence over growing premiums.

With focus on achieving our calendar-year underwriting profitability goal of 4% and the fact that inflation has not abated, we are re-evaluating our rate plans and intend to be aggressive with raising rates over the remainder of the year in both our personal and commercial auto products.

Of course, some of these rate increases will be subject to regulatory approval.

We will also continue to monitor the factors that could impact our loss costs for both our vehicle and Property businesses, which can include new and used car prices, miles driven, driving patterns, loss severity, weather events, building materials, constructions costs, inflation, and other components, on a state-by-state basis, and these factors could change our current plans for rate increases.

In addition, we routinely monitor our advertising spend and have recently begun to reduce these costs based on performance against our underwriting targets in certain markets and in certain types of advertising.

As a result of these actions to address profitability, growth in premiums and/or policies in force could be adversely impacted.

For the first quarter 2023, net premiums written grew 22% on a companywide basis over the same period last year, primarily driven by new business applications and rate increases that continued through the first quarter 2023.

Personal Lines grew 25%, Commercial Lines 15%, and Property 17%.

Changes in net premiums written are a function of new business applications (i.e., policies sold), premium per policy, and retention.

The Personal Lines increase reflected growth in both our Agency and Direct businesses.

On a year-over-year basis, new personal auto applications grew 83% for the first quarter 2023, compared to the first quarter 2022.

During the quarter, we believe increased advertising spend and competitor rate increases spurred the new personal auto application growth, compared to the decreases in new auto applications experienced during the first half of 2022 when we took significant rate increases and reduced our advertising spend to focus on profitability.

The increase in net premiums written in our Commercial Lines business reflected growth in our transportation network company (TNC) business, due to rate increases on the renewal of certain TNC policies, an increase in projected mileage (which is the basis for determining premiums written for this business), and writing new TNC policies in three additional states.

Excluding the growth from the TNC business, our Commercial Lines net premiums written growth was relatively flat for the first quarter 2023, compared to the same period last year.

All of our business market targets (BMTs) experienced growth during the quarter, except our for-hire transportation BMT that reflected the continued slowdown in the rate of economic activity and deteriorating freight market conditions.

We have concentrated our recent growth in the Property business in markets that are less susceptible to catastrophes and have lower exposure to coastal and hail-prone states.

New applications in the states where we are focused on growth were up about 30% over the first quarter last year.

In regions where our appetite to write new business is limited, we are prioritizing Progressive auto bundles, as well as lower risk properties, such as new construction or homes with newer roofs.

New applications were down about 10% in these more volatile weather states.

In addition, the Property business benefited from growth in Robinsons, our bundled auto and home policies.

In total, Property new applications were up 12% over the first quarter 2022.

During the quarter, the number of quotes and the rate of conversion increased in both the Direct auto and Agency auto channels, which contributed to the 83% increase in total personal auto new business applications on a year-over-year basis.

This growth reflects that our competitors continued to raise rates to address their underwriting profitability issues.

In addition, during the first quarter 2023, we increased advertising spend, which had a positive impact on our competitive positioning that we believe contributed to our new business application growth.

We believe a key element in improving the accuracy of our rating is Snapshot ® , our usage-based insurance offering.

During the first nine months of 2022, the adoption rates for consumers enrolling in the program, when given the option, increased nearly 20% in Agency auto and nearly 15% in Direct auto, compared to the same period last year.

Our latest model is available in states that represented about 11% of our countrywide personal auto premium.

During the first quarter 2023, the adoption rates for consumers enrolling in the program increased about 40% in Agency auto and nearly 20% in Direct auto, compared to the first quarter 2022.

Snapshot is available in all states, other than California, and our latest segmentation model was available in states that represented about 45% of our countrywide personal auto premium at March 31, 2023.

We continue to invest in our mobile application, with mobile devices being chosen for Snapshot monitoring for the majority of new enrollments.

During the third quarter 2022, we remained focused on taking rate and non-rate actions in our Property business to reduce volatility in our underwriting results, as discussed below.

We increased rates in our Property businesses about 2% and 9% during the third quarter and first nine months of 2022, respectively, and 9% during the last 12 months.

These targeted rate increases are continuing to be earned into the book of business.

We continue to focus our Property growth efforts in states with traditionally less catastrophe exposure and limit growth in the coastal and hail-prone states.

In response to this effort, in 2021, we announced plans to non-renew about 60,000 policies in Florida, which we started doing in the second quarter 2022.

This effort to non-renew Florida policies was curtailed, in part, as new legislation was introduced in Florida potentially prohibiting the non-renewal of certain policies based on the age of the roof of the insured structure.

We believe there is a potential we may non-renew less of the policies than previously intended.

While the extent to which the legislation will impact our intentions to non-renew policies is not fully known, we are identifying other opportunities to reduce weather-related volatility in Property underwriting results, including actively managing the new business we will write.

In addition, in response to Hurricane Ian, a moratorium suspending non-renewals and cancellations of policies for nonpayment was put into place in Florida, which will also have a temporary impact on our plans to limit our growth in the coastal states until the moratorium is lifted.

We evaluate growth in terms of both net premiums written and policies in force growth.

The rate and non-rate actions that began in 2021, and continued into the third quarter 2022, impacted premium and volume growth on a year-over-year basis.

For the third quarter 2022, our companywide net premiums written grew 5%, with Personal Lines growing 9% and Property 3%, primarily reflecting higher average written premium per policy, on a year-over-year basis.

In our Commercial Lines business, net premiums written decreased 13% during the third quarter 2022, primarily reflecting the timing of renewal events for certain transportation network company (TNC) policies on a year-over-year basis and a shift in the length of the policy terms.

During October 2022, we renewed certain TNC policies that were previously renewed in September 2021.

During the first quarter 2022, we renewed certain TNC polices on a 12-month basis that were previously written on a 6-month basis and, therefore, had renewed in prior years during the third quarter.

As a result, Commercial Lines premiums written growth was positively impacted in the first quarter 2022, while the third quarter 2022 premium growth experienced an unfavorable impact.

Excluding the impact of TNC, Commercial Lines net premiums written grew 2% during the third quarter 2022 and 16% year to date, compared to the prior year.

The lower growth during the third quarter relative to the year-to-date growth primarily reflected a decrease in our for-hire transportation business market target due to less demand for the product than last year, driven by the general weakening of the economy.

On a companywide basis, as of September 30, 2022, policies in force grew 1%, with Commercial Lines and Property growing 9% and 4%, respectively, compared to the prior year, and very minimal growth in our Personal Lines business.

Within Personal Lines, policies in force decreased 5% in Agency auto, increased 2% in Direct auto, and increased 5% in special lines on a year-over-year basis.

The overall decrease in our personal auto policy in force growth is attributable to the decrease in the growth of new applications during the nine months ended September 30, 2022, compared to the prior year, and a decline in renewal applications during the third quarter 2022.

During the third quarter 2022, on a year-over-year basis, average written premiums grew 10% in personal auto, 8% in commercial auto [excluding our TNC, business owners policy (BOP), and Protective Insurance Corporation and subsidiaries (Protective Insurance) products], and 5% in Property, reflecting rate increases taken beginning in 2021 and continuing into 2022, in response to rising loss costs.

Growth may continue to be impacted by the actions we are taking to address profitability and volatility in our results.

Given that our Property policies are 12-month terms, compared to primarily 6-month policies in our personal auto business, these rate actions take longer to earn in.

During the third quarter 2022, new applications (i.e., issued policies) increased 16% in our Personal Lines segment, with total new personal auto applications increasing 20%.

Agency auto new applications increased 9% and Direct auto increased 26%, as

we continued to experience improvement in new business auto applications, as our competitors continued to raise rates and we re-evaluated our media spend to identify growth opportunities.

Despite the strong new application growth during the quarter, our personal auto new applications are still down in both the Agency and Direct channels for the first nine months of 2022, compared to the same period last year.

New applications for our special lines products were flat during the third quarter 2022, primarily reflecting the significant new application growth experienced during 2021, due to growth in RV, boat, and motorcycle demand.

On a year-over-year basis for the third quarter 2022, renewal applications decreased 2% in Personal Lines, with total personal auto renewal applications down 3% over the third quarter last year, primarily due to rate increases taken beginning in 2021.

For the third quarter 2022, our Commercial Lines business (excluding our TNC, BOP, and Protective Insurance products) new applications decreased 6% and renewal applications increased 10%, on a year-over-year basis.

The decrease during the quarter was primarily driven by a decreased demand in our for-hire transportation product, as the transportation freight market softened, and the significant new application growth experienced during 2021.

We have observed declining trends in several macroeconomic factors that could impact our business, with home sales, freight tonnage, and aggregate deliveries all experiencing a decrease in activity compared to the prior year.

We will continue to monitor these and other economic factors.

On a year-over-year basis, new applications in our Property business decreased 9% and renewal applications increased 7% for the third quarter.

While we remain focused on growth, we strongly believe that achieving our target profit margin takes precedence over growing premiums.

During the first quarter 2023, on a year-over-year basis, average written premiums per policy grew 8% in personal auto, 1% in commercial auto, and 10% in Property.

The growth primarily reflected rate increases taken throughout 2022 that continued into the first quarter 2023, in response to rising loss costs.

Given that our commercial auto and

Property policies are predominately written for 12-month terms, compared to primarily 6-month policies in our personal auto business, rate actions take longer to earn in for these products.

We realize that to grow policies in force, it is critical that we retain our customers for longer periods.

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The latter can reflect more volatility and is more sensitive to seasonality.

As of the end of the third quarter 2022, our trailing 12-month total personal auto policy life expectancy decreased 21%, compared to last year, with the Agency channel down 23% and the Direct channel down 18%, respectively.

Our trailing 3-month policy life expectancy for total personal auto was down 30% compared to the same period last year.

We believe that the decreases in policy life expectancy primarily reflect the impact of the rate actions we have taken, beginning in the second quarter 2021.

Our special lines trailing 12-month policy life expectancy increased 4%, year over year, while Commercial Lines and Property both decreased 9%, primarily due to a decrease in for-hire transportation business market target demand and rate increases taken in 2021 and 2022, respectively.

The fair value of our investment portfolio was $52.3 billion at September 30, 2022, compared to $51.5 billion at December 31, 2021.

Declines in valuations of our portfolio nearly offset the increase in invested assets generated from the cash flows from our underwriting operations and the proceeds of the $1.5 billion debt offering in March.

As of the end of the first quarter 2023, our trailing 12-month total personal auto policy life expectancy decreased 16%, compared to last year.

The Agency channel trailing 12-month measure was down 19% and the Direct channel was down 14%.

We believe that the decreases in our trailing 12-month policy life expectancy primarily reflects the impact of the rate actions we have taken in prior years.

Future rate increases could also adversely impact our retention.

Although retention is still down from the prior year, we have seen improvement in our trailing 12-month policy life expectancy over the last several months.

Our trailing 3-month policy life expectancy for total personal auto was up 10%, compared to the same period last year.

At the end of the first quarter 2023, our special lines trailing 12-month policy life expectancy increased 3%, Commercial Lines decreased 14%, and Property was flat, compared to the same period last year.

The decrease in Commercial Lines was across all BMTs, but was primarily due to a decrease in for-hire transportation BMT demand.

The fair value of our investment portfolio was $56.7 billion at March 31, 2023, compared to $53.5 billion at

December 31, 2022.

The increase from year-end 2022 reflects solid cash flows from operations and valuation increases in nearly all portfolio sectors.

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 September 30, 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 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 2.5% for the third quarter 2022, compared to 1.8% for the same period in 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 (1.9)% and 0.2% for the third quarter 2022 and 2021, respectively.

Our fixed-income and common stock portfolios had FTE total returns of (1.8)% and (4.5)%, respectively, for the third quarter 2022, compared to 0.2% and 0.2%, respectively, last year.

The decrease in the fixed-income return reflected 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.

At September 30, 2022, the fixed-income portfolio had a weighted average credit quality of AA and a duration of 2.7 years, compared to AA- and 3.0 years at both September 30, 2021 and December 31, 2021.

We have shortened our portfolio duration during the first nine months of 2022, which we believe provides some protection against further increases in interest rates.

At March 31, 2023, 9% of our portfolio was allocated to Group I securities and 91% to Group II securities, compared to 10% and 90%, respectively, at December 31, 2022.

Our recurring investment income generated a pretax book yield of 3.0% for the first quarter 2023, compared to 2.0% for the same period in 2022, 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 2.3% and (3.8)% for the first quarter 2023 and 2022, respectively.

Our fixed-income and common stock portfolios had FTE total returns of 2.0% and 7.3%, respectively, for the first quarter 2023, compared to (3.6)% and (4.9)%, respectively, last year.

The increase in the fixed-income return reflected portfolio valuation increases as interest rates declined during first quarter 2023.

The common stock return increase reflected general market conditions.

At March 31, 2023, the fixed-income portfolio had a weighted average credit quality of AA and a duration of 3.0 years, compared to AA- and 3.1 years at March 31, 2022, and AA and 2.9 years at December 31, 2022.

The London Interbank Offered Rate (LIBOR) will cease as an official reference rate on June 30, 2023.

The Federal Reserve Board identified the Secured Overnight Financing Rate (SOFR) as the recommended replacement to U.S.

As of March 31, 2023, we owned 164 unique securities with an aggregate par value of $3.3 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.

FINANCIAL CONDITION

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As primarily an auto insurer, our claims liabilities generally have a short-term duration.

Operations generated positive cash flows of $5.9 billion and $7.3 billion for the nine months ended September 30, 2022 and 2021, respectively.

While we continued to collect premiums at a faster rate than losses were paid, the decrease in operating cash flow for the nine months ended September 30, 2022, is primarily driven by higher paid losses as the costs of losses continue to rise, compared to last year.

We expect cash flows to 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.

Our total capital (debt plus shareholders’ equity) was $21.2 billion, at book value, at September 30, 2022, compared to $23.5 billion at September 30, 2021, and $23.1 billion at December 31, 2021.

The decrease from the prior periods primarily reflected the comprehensive losses recognized over the last nine months and trailing 12-months, driven by the negative market impact on the valuation of our investment portfolio, in part offset by the issuance in March 2022 of $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.

Our debt-to-total capital ratio was 30.2% at September 30, 2022, 20.9% at September 30, 2021, and 21.2% at December 31, 2021.

While our financial policies include a goal of maintaining debt below 30% of total capital at book value, which we did not meet at the end of the third quarter 2022, we recognize that various factors, including rising interest rates, widening credits spreads, declines in the equity markets, or erosion in operating results, may result in that ratio exceeding 30% at times.

As we have previously stated, in such a situation we may choose to remain above 30% for some time, dependent upon market conditions and the capital needs of our operating businesses.

Accordingly, we do not currently anticipate taking specific actions to address this variance.

Operations generated positive cash flows of $2.4 billion and $2.5 billion for the three months ended March 31, 2023 and 2022, respectively.

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 March 31, 2023, we held $29.9 billion in short-term investments and U.S.

Treasury securities, which represented 53% of our total portfolio.

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.

Treasury securities are viewed as having lower risk than many other investment opportunities, the U.S.

Treasury 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 Form 10-K filed with the U.S.

Securities and Exchange Commission for the year ended December 31, 2022 for a discussion of certain matters that may affect our portfolio and capital position.

Our total capital (debt plus shareholders’ equity) was $23.3 billion, at book value, at March 31, 2023, compared to $23.4 billion at March 31, 2022, and $22.3 billion at December 31, 2022.

The increase from December primarily reflected the comprehensive income recognized during the first quarter 2023, primarily driven by the market impact on the valuation of our investment portfolio.

Our debt-to-total capital ratio was 27.5% at March 31, 2023, 27.2% at March 31, 2022, and 28.7% at December 31, 2022, and, in each case, 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 credits spreads, declines in the equity markets, or erosion in operating results, may result in that ratio exceeding 30% at times.

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.

None of the covenants on our outstanding debt securities include rating or credit triggers that would require an adjustment of interest rates or an acceleration of principal payments in the event that our debt securities are downgraded by a rating agency.

In April 2022, we renewed the unsecured discretionary line of credit (the “Line of Credit”) with PNC Bank, National Association, in the maximum principal amount of $250 million.

In April 2023, we amended the unsecured discretionary line of credit (the Line of Credit) with PNC Bank, National Association, and raised the maximum principal amount to $300 million from the previous amount of $250 million, with a new interest rate of 1-month term SOFR plus 1.10%.

We did not engage in short-term borrowings, including any borrowings under our Line of Credit, to fund our operations or for liquidity purposes during the reported periods.

During the first nine months of 2022, we returned capital to shareholders primarily through common share dividends and common share repurchases.

Our Board of Directors declared a $0.10 per common share dividend in the first, second, and third quarters of 2022.

These dividends, which were each $58.5 million in the aggregate per quarter, or $175.5 million on a year-to-date basis, were paid in April 2022, July 2022, and October 2022.

During the first three months of 2023, we returned capital to shareholders primarily through common share dividends and common share repurchases.

In March 2023, our Board

of Directors declared a $0.10 per common share dividend, or $58.5 million in the aggregate, that was paid in April 2023.

In January 2023, we also paid common share dividends declared in the fourth quarter 2022, in the aggregate amount of $58.5 million, or $0.10 per share (see Note 9 – Dividends for further discussion).

In addition to the common share dividends, in March 2022 and September 2022, we paid Series B Preferred Share dividends in the aggregate amount of $26.8 million.

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.

During the first nine months of 2022, we repurchased 0.7 million common shares, at a total cost of $78.6 million, including 0.4 million shares in the third quarter 2022, either in the open market or to satisfy tax withholding obligations in connection with the vesting of equity awards under our equity compensation plans.

In addition to the common share dividends, in March 2023, we paid Series B Preferred Share dividends in the aggregate amount of $13.4 million.

Consistent with 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.

During the first quarter 2023, we repurchased 0.2 million common shares, at a total cost of $32.7 million, to satisfy tax withholding obligations in connection with the vesting of equity awards under our equity compensation plans.

We will continue to make decisions on returning capital to shareholders based on the strength of our overall capital position, the capital strength of our subsidiaries, and potential capital needs to expand our business operations.

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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.

At September 30, 2022, we had $4.2 billion in a consolidated, non-insurance subsidiary of the holding company that can be used to fund corporate obligations and provide additional capital to the insurance subsidiaries to fund potential future growth.

During the first nine months of 2022, we did not experience a significant change in our liquidity needs.

At all times measured during the first nine months of 2022 and during 2021, which at a minimum occurs at the end of each month, our total capital exceeded the sum of our regulatory capital layer plus our self-constructed extreme contingency layer, as described in Exhibit 13 to our Annual Report on Form 10-K for the year ended December 31,

2021 (2021 Annual Report to Shareholders).

As of September 30, 2022, our estimated consolidated statutory surplus was $17.2 billion.

During the first nine months of 2022, our contractual obligations and critical accounting policies have not changed materially from those discussed in our 2021 Annual Report to Shareholders.

Pursuant to our critical accounting policy for goodwill, 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.

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 $224.8 million of goodwill during the second quarter 2022.

See Note 12 – Goodwill and Intangible Assets for further discussion.

During the second quarter 2022, we renewed our catastrophe excess of loss per risk reinsurance contract, which increased our noncancellable purchase obligation commitments about $160 million, bringing our total commitments related to the excess of loss contracts to $291.6 million at September 30, 2022.

There have not been any other material changes in off-balance-sheet leverage, which includes purchase obligations and catastrophe excess of loss reinsurance contracts, from those discussed in our 2021 Annual Report to Shareholders.

At March 31, 2023, we had $4.1 billion in a consolidated, non-insurance subsidiary of the holding company that can be used to fund corporate obligations and provide additional capital to the insurance subsidiaries to fund potential future growth.

As of March 31, 2023, our estimated consolidated statutory surplus was $18.5 billion.

During the first three months of 2023, our contractual obligations and critical accounting policies have not changed materially from those discussed in our 2022 Annual Report to Shareholders.

There have not been any material changes in off-balance-sheet leverage, which includes purchase obligations and catastrophe excess of loss reinsurance contracts, from those disclosed in our 2022 Annual Report to Shareholders.

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, depository 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.

RESULTS OF OPERATIONS – UNDERWRITING

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The following table shows the composition of our companywide net premiums written, by segment, for the respective periods:

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

Three Months Ended March 31,

Personal Lines

Agency 34 % 34 %

Direct 43 40 41 41

Total Personal Lines 1

Commercial Lines 21 22

Property 5 5 5 5

Total underwriting operations 100 % 100 %

1 Personal auto products accounted for 93% of the total Personal Lines segment net premiums written during the three and nine months ended September 30, 2022 and 2021, and our special lines products accounted for the balance.

Our Personal Lines business writes insurance for personal autos and special lines products (e.g., motorcycles, watercraft, and RVs).

Within Personal Lines, we often refer to our four consumer segments, which include:

1 Personal auto products accounted for 95% of the total Personal Lines segment net premiums written during the three months ended March 31, 2023 and 2022, and our special lines products accounted for the balance.

Our Personal Lines business writes insurance for personal autos 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;

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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 September 30, 2022, 14% of our Agency auto policies in force were 12-month policies, compared to 13% a year earlier.

While the shift to 12-month policies is slow, to the extent our Agency application mix of annual policies grows, that shift in policy term could increase our written premium mix by channel as 12-month policies have about twice the amount of net premiums written compared to 6-month policies.

At March 31, 2023 and 2022, 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.

Our Commercial Lines business writes auto-related liability and physical damage insurance, workers’ compensation insurance primarily for the transportation industry, and business-related general liability and property insurance, predominately for small businesses.

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 include the product on our digital platform serving direct small business consumers (BusinessQuote Explorer ® ).

The direct commercial auto business, excluding our TNC business, represented

10% of our commercial auto premiums, for both the third quarter 2022 and 2021.

To serve our direct channel customers, we continue to expand our product offerings, including adding states where we offer our business owners policy (BOP) product, as well as adding these product offerings to our digital platform that serves direct small business consumers (BusinessQuote Explorer ® ).

The direct commercial auto business, excluding our TNC business and Protective Insurance Corporation and subsidiaries (Protective Insurance), represented 11% of our commercial auto premiums written for the first quarter 2023, compared to 10% for the first quarter 2022.

We write about 90% of Commercial Lines policies for 12-month terms.

Our Property business writes residential property insurance for homeowners, other property owners, and renters.

Our Property business writes residential property insurance for homeowners, other property owners, renters, and umbrella products.

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 27% of premiums written for the third quarter 2022, compared to 24% for the same period last year.

Property policies are written for 12-month terms.

We continue to expand the direct distribution of our Property product offerings and, for the first quarter 2023, about a quarter of our Property business premiums were written in the direct channel.

All of our Property policies are written for 12-month terms.

Profitability

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We also use underwriting margin, which is underwriting profit or loss expressed as a percentage of net premiums earned, to analyze our results.

For the respective periods, our underwriting profitability was as follows:

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

Profit (Loss) Underwriting

For the respective periods, our underwriting profitability results were as follows:

Three Months Ended March 31,

Profit (Loss) Underwriting

Profit (Loss)

($ in millions) $ Margin $ Margin $ Margin $ Margin

($ in millions) $ Margin $ Margin

Personal Lines

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Other indemnity 2

(2.1) NM (0.3) NM (9.3) NM (0.2) NM

Total underwriting operations $ 141.6 1.0 % $ 648.8 5.5 %

1 For the three and nine months ended September 30, 2022, underwriting profit (loss) includes $5.0 million and $24.1 million, respectively, of amortization expense associated with acquisition-related intangible assets attributable to our Property segment, compared to $14.2 million and $42.5 million for the respective periods last year.

The year-over-year decreases in amortization expense reflects intangible assets that were fully amortized during the first quarter 2022.

2 Underwriting margins for our other indemnity business are not meaningful (NM) due to the low level of premiums earned by, and the variability of loss costs in, such business.

For the three months ended September 30, 2022 and 2021, the pretax underwriting profit (loss) reflects the significant amount of catastrophe losses incurred.

During the third quarter 2022, our Personal Lines business recognized about $570 million of losses related to Hurricane Ian and our Property business retained $200 million of losses and allocated loss adjustment expenses.

About 50% of the Personal Lines catastrophe losses from Hurricane Ian were incurred on our special lines products, mainly boats.

Since the majority of our boat policies are written through independent agents, the Agency Personal Lines channel recognized an underwriting loss during the quarter, compared to an underwriting profit in the Direct channel.

During the third quarter 2021, the Direct channel was more significantly impacted by the personal auto catastrophe losses that we incurred, mainly from Hurricane Ida.

We have taken significant rate increases since the first quarter of 2021 and through the third quarter 2022.

In spite of the rate increases, on a year-over-year basis for the first nine months of 2022, our underwriting profitability decreased, primarily driven by higher accident severity and catastrophe losses.

See the Losses and Loss Adjustment Expenses (LAE) section below for further discussion of our frequency and severity trends and catastrophe losses incurred during the periods.

The COVID-19 pandemic has shifted consumer behavior and impacted general economic conditions.

We have seen volatility in our severity trends as inflation continued to influence higher vehicle prices and costs to repair vehicles.

We have responded, and will continue to respond when necessary, to these market changes through rate increases, underwriting restrictions, and other non-rate actions.

1 For the three months ended March 31, 2023 and 2022, pretax profit (loss) includes $5.0 million and $14.1 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.

For the three months ended March 31, 2023, the lower pretax underwriting profit, compared to the same period last year, primarily reflects the impact from unfavorable prior accident years reserve development and catastrophe losses incurred.

During the first quarter 2023, we experienced unfavorable prior accident years reserve development of 4.6 points, compared to 1.6 points for the first quarter last year.

We have continued to see volatility in our severity trends as inflation continued to influence higher vehicle prices and costs to repair vehicles.

catastrophe losses reduced our underwriting profitability 1.8 points for the quarter, compared to 1.2 points in the first quarter 2022.

See the Losses and Loss Adjustment Expenses (LAE) section below for further discussion of our frequency and severity trends, reserve development and catastrophe losses incurred during the periods.

Further underwriting results for our Personal Lines business, including results by distribution channel, the Commercial Lines business, the Property business, and our underwriting operations in total, were as follows:

Three Months Ended September 30, Nine Months Ended September 30,

Three Months Ended March 31,

Underwriting Performance 1

2022 2021 Change 2022 2021 Change

2023 2022 Change

Personal Lines – Agency

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The portion of fees and other revenues related to our loss adjustment activities are netted against loss adjustment expenses and the portion of fees and other revenues related to our underwriting operations are netted against underwriting expenses in the ratio calculations.

2 Included in the three and nine months ended September 30, 2022, are 0.9 points and 1.4 points, respectively, of amortization expense on acquisition-related intangible assets attributable to our Property segment, and 2.7 points and 2.8 points for the respective periods last year.

Excluding this expense, for the three months ended September 30, 2022 and 2021, the Property business would have reported expense ratios of 27.0 and 25.7, respectively, and combined ratios of 124.2 and 139.6, respectively.

For the nine months ended September 30, 2022 and 2021, excluding this expense, the Property business would have reported expense ratios of 25.8 and 26.4, respectively, and combined ratios of 115.7 and 122.3, respectively.

2 Included in the three months ended March 31, 2023 and 2022, are 0.8 points and 2.5 points, respectively, of amortization expense on acquisition-related intangible assets attributable to our Property segment.

3 The accident year ratios include only the losses that occurred during the period noted.

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Losses and Loss Adjustment Expenses (LAE)

Three Months Ended September 30, Nine Months Ended September 30,

Three Months Ended March 31,

(millions) 2023 2022

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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.

In our Property business, severity is primarily a function of

construction costs and the age of the structure.

Accordingly, anticipated changes in these factors are taken into account when we establish premium rates and loss reserves.

Loss reserves are estimates of future costs and our reserves are adjusted as underlying assumptions change and information develops.

Our total loss and LAE ratio decreased 0.8 points for the third quarter 2022, compared to the same period last year, and increased 2.1 points on a year-to-date basis.

The decrease in the third quarter 2022, in part reflects higher earned premiums and a decrease in the point impact of personnel costs related to our annual cash-incentive Gainshare program accrual.

The year-to-date increase was primarily due to increased accident severity in both our personal and commercial auto businesses and higher catastrophe losses, partially offset by lower accident frequency in our personal auto business and the higher premium per policy due to rate increases in both our personal and commercial auto businesses.

Our total loss and LAE ratio increased 3.4 points for the first quarter 2023, compared to the same period last year, primarily due to increased severity, unfavorable prior accident years reserve development, and higher catastrophe losses, in all of our operating segments, partially offset by the higher premium per policy due to rate increases.

On an accident year basis, our first quarter loss and LAE ratio was 0.4 points higher than the first quarter 2022.

The following table shows our consolidated catastrophe losses and related combined ratio point impact, excluding loss adjustment expenses, incurred during the periods:

Three Months Ended September 30, 2022 Nine Months Ended September 30, 2022

2022 2021 2022 2021

Three Months Ended March 31,

($ in millions) $ Point 1

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1 Represents catastrophe losses incurred during the period, including the impact of reinsurance, as a percent of net premiums earned for each segment.

We incurred $760 million of catastrophe losses, or 6.1 loss ratio points, during the third quarter 2022 as a result of Hurricane Ian, compared to $510 million, or 4.5 loss ratio points, for the same period last year from Hurricane Ida.

About 38% of the incurred catastrophe losses from Hurricane Ian during the three months ended September 30, 2022, were from losses on our special lines products, with boats making up nearly 60% of the special lines losses.

In our boat product, we mitigate our hurricane/coastal exposure with underwriting restrictions limiting the insured valued and the length of boats compared to non-hurricane exposed areas, and increased deductibles for named storms.

Additionally, we segment and price our hurricane risk by territory, to set rate levels with a catastrophe load based on historical losses to reduce volatile results over a longer time period.

Personal and commercial auto losses accounted for 38% and 1%, respectively, while our Property business incurred 23% of the losses, net of reinsurance.

Since the vehicle losses get paid fairly quickly, the additional loss adjustment expenses incurred from the storm is relatively small.

For our Property business, we retained $25 million of allocated loss adjustment expenses (ALAE), net of reinsurance.

On a gross basis, prior to giving effect to our excess of loss reinsurance contract, we estimate our Property catastrophe losses and ALAE from Hurricane Ian would be $1.4 billion.

To assist our customers impacted by Hurricane Ian, we have deployed over 1,500 claim representative and independent adjusters.

In the first quarter 2023, we were affected by 24 catastrophic weather events, compared to 11 events in the first quarter 2022.

During the three months ended March 31, 2023, the majority of our catastrophe losses were due to tornadoes, thunderstorms, and hail throughout the United States.

Netted against our catastrophe losses for the quarter was about a $40 million, or 0.3 points on a companywide basis, reduction to the loss estimate for Hurricane Ian in our vehicle businesses.

There was no change to our estimate of the ultimate loss and allocated loss adjustment expenses (ALAE) from Hurricane Ian for our Property business during the first quarter 2023.

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.

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We evaluate our reinsurance programs during the renewal process, if not more frequently, to ensure our programs continue to effectively address the company’s risk tolerance.

During the second quarter 2022, we entered into new reinsurance contracts

under our per occurrence excess of loss program for our Property business.

The reinsurance program provides coverage 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 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 has retention thresholds for losses and ALAE from the first catastrophic event of $200 million, which is unchanged from the prior contracts, with a retention threshold for a second catastrophic event of $100 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 reinsurance to cover these situations.

As discussed above, in the third quarter 2022, we retained approximately $175 million of losses and $25 million of ALAE incurred related to Hurricane Ian and ceded $1.2 billion of losses and ALAE under our per occurrence excess of loss program.

Under this program, we may be responsible for additional losses if we experience more than two such events or if claims incurred exceed the maximum coverage limits.

Coverage for a second event (and, potentially, for subsequent covered events) depends on several factors, including the location and the extent of the losses covered for Hurricane Ian.

Based on the estimated impact of Hurricane Ian, we anticipate we would be covered for up to approximately $2.1 billion of losses exceeding the retention threshold related to a second event.

During 2022, we also entered into a new aggregate excess of loss reinsurance contract that increased our retention from $475 million to $575 million and reduced aggregate potential coverage by $50 million, to a total of $175 million, compared to our 2021 program.

In our view, our capital position and growing balance sheet enabled us to assume more of these risks via higher retention levels.

While the total coverage limit and per-event retention will evolve to fit the growth of our business, we expect to remain a consistent purchaser of reinsurance coverage.

Consistent with this history, we were able to fully place our desired coverage at both January 1 and June 1 renewal events.

During the first quarter 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 wi ll evolve to fit the growth of our business, we expect to remain a consistent purchaser of reinsurance coverage.

See Item 1 – Description of Business-Reinsurance in our Annual Report on Form 10-K for the year ended December 31, 2022, for a discussion of our various reinsurance programs.

During the third quarter and first nine months of 2022, we did not exceed the annual retention thresholds under our 2022 catastrophe aggregate excess of loss program.

During the first quarter 2023, we did not exceed the annual retention thresholds under our 2023 catastrophe aggregate excess of loss program.

The following discussion of our severity and frequency trends in our personal auto business excludes comprehensive coverage because of its inherent volatility, as it is typically linked to catastrophic losses generally resulting from adverse weather.

For our commercial auto products, the reported frequency and severity trends include comprehensive coverage.

Comprehensive coverage insures against damage to a customer’s vehicle due to various causes other than collision, such as windstorm, hail, theft, falling objects, and glass breakage.

Total personal auto incurred severity (i.e., average cost per claim, including both paid losses and the change in case reserves) on a calendar-year basis increased about 13% and 15% during the third quarter and first nine months of 2022, respectively, compared to the same periods last year.

These increases, in part, reflect the impact of inflation, which continues to increase the valuation of used vehicles and our total loss and repair costs.

Following are the changes we experienced in severity in our auto coverages on a year-over-year basis:

• Auto property damage increased about 24% and 23% for the third quarter and first nine months of 2022, respectively, and collision increased 13% and 21%, both in part due to increased used car prices.

• Bodily injury increased about 7% and 8% for the third quarter and first nine months of 2022, respectively, due in part to increasing medical and general damage costs.

• Personal injury protection (PIP) decreased about 14% and 9% during the third quarter and first nine months of 2022, respectively, due in part to coverage reform in Michigan and high reopen activity in Florida during the first half of 2021.

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 period was as follows:

Growth Over Prior Year Quarter

Coverage Type 2023

Bodily injury 10 %

Personal injury protection 3

Property damage 15

The year-over-year increase in severity, in part, reflects the impact of inflation, which continues to increase the valuation of used vehicles and total loss, repair, and medical costs.

To address inherent seasonality trends and lessen the effects of month-to-month variability in the commercial auto products, we use a trailing 12-month period in assessing severity.

In the third quarter 2022, our commercial auto products’ incurred severity, excluding Protective Insurance and our TNC business, increased 11%, compared to the same period last year.

In addition to general trends in the marketplace, the increase in our commercial auto products’ severity primarily reflects shifts in the mix of business to for-hire transportation, which has higher average severity than the business auto and contractor business market targets.

Since the loss patterns in the TNC business are not indicative of our other commercial auto products, disclosing severity and frequency trends excluding that business is more representative of our overall experience for the majority of our commercial auto products.

It is a challenge to estimate future severity, but we continue to monitor changes in the underlying costs, such as general inflation, used car prices, vehicle repair costs, medical costs, health care reform, court decisions, and jury verdicts, along with regulatory changes and other factors that may affect severity.

Our personal auto incurred frequency, on a year-over-year basis, decreased about 9% and 6% for the third quarter and first nine months of 2022, respectively, compared to the same periods last year.

Following are the frequency changes we experienced by coverage:

• PIP and auto property damage decreased about 8% for the third quarter 2022 and 6% and 5%, respectively, for the first nine months of 2022.

• Collision and bodily injury decreased about 14% and 4%, respectively, for the third quarter and 8% and 5% for the first nine months of 2022.

On a trailing 12-month basis, our commercial auto products’ incurred frequency, excluding Protective Insurance and our TNC business, increased 3% during the third quarter 2022, compared to the same period last year.

The frequency increase was in part due to an uneven recovery across different commercial auto business markets, many of which have not yet returned to pre-pandemic levels and are continuing to 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.

In the first quarter 2023, our commercial auto products’ incurred severity, excluding Protective Insurance and our TNC business, increased 5%, compared to the same period last year.

Since the loss patterns in the TNC and Protective Insurance businesses are not indicative of our other commercial auto products, disclosing severity and frequency trends excluding those businesses is more representative of our overall experience for the majority of our commercial auto products.

It is a challenge to estimate future severity, but we continue to monitor changes in the underlying costs, such as general

inflation, used car prices, vehicle repair costs, medical costs, health care reform, court decisions, and jury verdicts, along with regulatory changes and other factors that may affect severity.

Our personal auto incurred frequency, on a calendar-year basis, over the prior-year period, was as follows:

Growth Over Prior Year Quarter

Coverage Type 2023

Bodily injury 7 %

Collision (6)

Personal injury protection 5

Property damage 2

On a trailing 12-month basis, our commercial auto products’ incurred frequency, excluding Protective Insurance and our TNC business, increased 2% during the first quarter 2023, compared to the same period last year.

We closely monitor the changes in frequency, but the degree or direction of near-term frequency change is not something that we are able to predict with any certainty.

We will continue to analyze trends to distinguish changes in our experience from other external factors, such as changes in the number of vehicles per household, miles driven, vehicle usage, gasoline prices, advances in vehicle safety, and unemployment rates, versus those resulting from shifts in the mix of our business or changes in driving patterns, to allow us to react quickly to price for these trends and to reserve more accurately for our loss exposures.

The table below presents the actuarial adjustments implemented and the loss reserve development experienced on a companywide basis in the following periods:

Three Months Ended September 30, Nine Months Ended September 30,

Three Months Ended March 31,

($ in millions) 2023 2022

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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.

About 70% of the total unfavorable development was in our personal auto products and primarily reflects higher than anticipated severity in auto property and physical damage coverages, higher than anticipated late reported injury claims, and increased loss costs in Florida injury and medical coverages.

Part of the changes in Florida losses are due to the impact of recently passed legislation in Florida, which had less than a 1.0 point impact on the combined ratio for the first quarter 2023.

Our Commercial Lines business represented almost 25% of the unfavorable development for the quarter and was mainly due to higher than anticipated severity of injury case reserves and higher than anticipated severity and frequency of late reported injury claims.

The remaining unfavorable development for the first quarter 2023, was primarily in our Property business, and mostly due to higher than anticipated claims expenses and higher than anticipated severity in our homeowner liability peril and umbrella products.

Our objective is to establish case and IBNR reserves that are adequate to cover all loss costs, while incurring minimal variation from the date the reserves are initially established until losses are fully developed.

Our ability to meet this objective is impacted by many factors.

Changes in case law, particularly related to PIP, can make it difficult to estimate reserves timely and with minimal variation.

See Note 6 – Loss and Loss Adjustment Expense Reserves , for a more detailed discussion of our prior accident years development.

Changes in case law, particularly in case law related to personal injury protection, can make it difficult to estimate reserves timely and with minimal variation.

See Note 6 – Loss and Loss Adjustment Expense Reserves , for a more detailed discussion of our prior accident years development and Critical Accounting Policies in our 2022 Annual Report to Shareholders for discussion of the application of estimates and assumptions in the establishment of our loss reserves.

Underwriting Expenses

The companywide underwriting expense ratio (i.e., policy acquisition costs and other underwriting expenses, net of certain fees and other revenues, expressed as a percentage of net premiums earned) decreased 0.4 points for the third quarter 2022 and 1.2 points for the first nine months, compared to the same periods last year.

A decrease in the point impact of personnel costs contributed to the decrease for both the third quarter and year to date, and a year-over-year decrease in advertising spend for the first nine months of 2022.

The decrease in personnel costs primarily resulted from a decrease in our annual cash-incentive Gainshare program accrual, reflecting lower year-to-date policies in force growth and segment profitability.

In total, our advertising spend was flat for the third quarter and decreased 5% for the first nine months of 2022, compared to the same periods last year, as a result of an effort to improve profitability to reach our 96 combined ratio goal.

Underwriting expenses include policy acquisition costs and other underwriting expenses.

The underwriting expense ratio is our underwriting expenses, net of certain fees and other revenues, expressed as a percentage of net premiums earned.

For the first quarter 2023, our underwriting expense ratio was up 1.1 points, compared to the same period last year, primarily reflecting increases in our employee-related costs and advertising spend.

In total, our companywide advertising spend increased 23%, or 0.4 points, compared to the first quarter 2022.

As we continue to focus on profitability, we monitor advertising spend and will reduce these costs based on performance against our underwriting targets in certain markets and in certain types of advertising.

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.

During the third quarter, our NAER increased 0.1 points, 0.6 points, and 0.4 points in our Personal Lines, Commercial Lines, and Property businesses, respectively, compared to the same period last year.

On a year-to-date basis, our NAER decreased 0.1 points in Personal Lines and Commercial Lines, and 0.3 points in Property, compared to the same period last year.

During the first quarter 2023, our NAER increased 0.6 points, 2.0 points, and 1.2 points in our Personal Lines, Commercial Lines, and Property businesses, respectively, compared to the same period last year.

For our underwriting operations, we analyze growth in terms of both premiums and policies.

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Policies in force, our preferred measure of growth since it removes the variability due to rate changes or mix shifts, represents all policies under which coverage was in effect as of the end of the period specified.

Three Months Ended September 30, Nine Months Ended September 30,

($ in millions) 2022 2021 % Growth 2022 2021 % Growth

Three Months Ended March 31,

($ in millions) 2023 2022 % Growth

NET PREMIUMS WRITTEN

6 unchanged sentences

Other indemnity 1

0.4 1.3 (69) 1.9 4.2 (55)

Total underwriting operations $ 16,109.7 $ 13,181.0 22 %

7 unchanged sentences

Other indemnity 1

0.7 2.8 (75) 2.0 6.8 (71)

Total underwriting operations $ 13,533.1 $ 11,802.9 15 %

1 Primarily includes run-off business operations.

September 30,

1 Includes other underwriting business and run-off operations.

(thousands) 2023 2022 % Growth

17 unchanged sentences

We believe changes in policy life expectancy using a trailing 12-month period measure is indicative of recent experience, mitigates the effects of month-to-month variability, and addresses seasonality.

Although the 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 our retention rates are moving.

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 our retention rates are moving.

Personal Lines

The following table shows our year-over-year changes for our Personal Lines business:

Growth Over Prior Year

Quarter Year-to-date

2022 2021 2022 2021

Growth Over Prior Year Quarter

New 70 % (24) %

Renewal (2) 11 2 11

Written premium per policy - Auto 8 6

2 unchanged sentences

Trailing 12 months (16) (5)

In our Personal Lines business, we experienced positive new application growth in the third quarter 2022, in part driven by competitor rate increases and targeted media spend.

The increase in new applications during the third quarter 2022 resulted from increases in our personal auto products, while our special lines products did not grow during the period.

The decrease in our renewal applications reflected the impact of the 8% rate increases that we took during 2021 and the 9% increases taken in the first half of 2022.

Results varied by consumer segment.

During the third quarter 2022, personal auto policies in force grew by single digits for the Robinsons and Wrights and decreased by single digits for the Sams and Dianes.

New auto applications experienced an increase across all four consumer segments in the third quarter, year over year.

Quote volume increased in the third quarter, on a year-over-year basis, in all of our consumer segments, with all consumer segments seeing a flat or decreased rate of conversion.

During the third quarter 2022, we began to loosen underwriting criteria in consumer segments where losses indicated rates are meeting our profitability goals.

We implemented personal auto rate increases in 20 states that, in the aggregate, on a countrywide basis, increased rates about 2% for the quarter.

The rate increases, which started in the second quarter 2021 and continued throughout the first nine months of 2022, had and may continue to have a negative impact on our renewal business applications and policy life expectancy in the near term, as indicated by the decline in the trailing 3-month and trailing 12-month policy life expectancy.

Our written premium per policy increased during the third quarter and first nine months of 2022, primarily due to the rate increases previously discussed.

In our Personal Lines business, we experienced significant quote volume and new application growth in the first quarter 2023, which we believe was, in part, driven by competitor rate increases and increased media spend.

The increase in new applications during the first quarter 2023 were primarily attributable to our personal auto products although we also had new application growth in our special lines products.

Personal auto policies in force grew between 7% and 12% across all four consumer segments during the first quarter 2023, compared to the same period last year.

New business auto application growth was also up significantly across all segments during the quarter.

During the first quarter 2023, on a countrywide basis, we implemented personal auto rate increases in 31 states that, in the aggregate, increased rates about 4%, following rate increases of 13% during 2022.

We believe that our prior year rate increases had a negative impact on our renewal business applications and trailing 12-month policy life expectancy.

As competitors raised rates, our retention started to lengthen as evidenced by the growth in our trailing 3-month policy life expectancy.

Our written premium per policy increased during the first quarter 2023, primarily due to the rate increases taken in 2022, as previously discussed.

Our focus on achieving our target underwriting profitability takes precedence over growth.

1 unchanged sentence

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 93% of the Personal Lines segment net premiums written during both the third quarter and first nine months of 2022.

The channel discussions below are focused on personal auto insurance since this product accounted for 95% of the Personal Lines segment net premiums written during the first quarter 2023.

The Agency Business

Growth Over Prior Year

Quarter Year-to-date

2022 2021 2022 2021

Growth Over Prior Year Quarter

Applications - Auto

6 unchanged sentences

The Agency business includes business written by more than 40,000 independent insurance agencies that represent Progressive, as well as brokerages in New York and California.

During the third quarter 2022, 33 states generated new Agency auto application growth, including seven of our top 10 largest Agency states.

During the third quarter, each of our consumer segments experienced an increase in new applications except Robinsons, which experienced a single digit decrease year over year.

Policies in force decreased in each segment, compared to the same period last year.

During the third quarter and first nine months of 2022, we experienced an increase in Agency auto quote volume of 23% and 12%, respectively.

The rate of conversion (i.e., converting a quote to a sale) decreased 10% and 23%, compared to the same periods last year, reflecting the impact of rate increases and tightened underwriting criteria.

For the third quarter and year-to-date periods, quote volume increased and conversion decreased, compared to last year, in each consumer segment.

Written premium per policy for new and renewal Agency auto business increased 9% and 12%, respectively, compared to the third quarter 2021.

The decreases in policy life expectancy were expected given the rate actions taken over the last year, and policy life expectancy may continue to be negatively impacted by our current rate actions.

During the first quarter 2023, 49 states and the District of Columbia generated new Agency auto application growth, including all of our top 10 largest Agency states.

During the first quarter 2023, total auto applications increased 8%, due to growth in new applications.

During the first quarter, each of our consumer segments experienced a significant increase in new applications year over year.

Policies in force grew by single digit percentages in each consumer segment, except Sams who were flat, compared to the same period last year.

During the first quarter 2023, we experienced an increase in Agency auto quote volume of 14% and a 49% increase in the rate of conversion (i.e., converting a quote to a sale), with both increasing in each consumer segment.

Written premium per policy for new and renewal Agency auto business increased 13% and 10%, respectively, compared to the first quarter 2022.

The decrease in the trailing 12-month policy life expectancy was expected given the rate actions taken over the last year, while the increase in the trailing 3-month policy life expectancy shows what we believe to be our increased competitiveness in the marketplace.

The Direct Business

Growth Over Prior Year

Quarter Year-to-date

2022 2021 2022 2021

Growth Over Prior Year Quarter

Applications - Auto

New 92 % (25) %

Renewal (1) 13 3 14

Written premium per policy - Auto 7 5

2 unchanged sentences

Trailing 12 months (14) (4)

The Direct business includes business written directly by Progressive online, through mobile devices, and over the phone.

During the quarter, 39 states and the District of Columbia generated new auto application growth, including five of our top 10 largest Direct states.

During the third quarter 2022, total auto applications increased 4% due to growth in new applications.

During the third quarter, new applications increased across all consumer segments, while policies in force grew in all consumer segments except Sams, which experienced a single digit decrease.

During the third quarter and first nine months of 2022, Direct auto quote volume increased 31% and 6%, respectively, while our rate of conversion decreased 2% and 10%, compared to the same periods last year.

The increase we experienced in our quote volume primarily reflected competitors raising rates.

We also experienced gains in the efficiency of our media spend during the quarter, which contributed to the increase in quotes and the significant increase in new auto applications.

During the third quarter, quote volume increased in all consumer segments and, during the first nine months, increased in all consumer segments except Sams.

Wrights and Robinsons saw an increase in conversion for the third quarter 2022, while all consumer segments experienced flat to decreased conversion during the first nine months.

During the third quarter 2022, written premium per policy for new and renewal Direct auto business increased 8% and 9%, respectively, compared to the same period last year, primarily driven by rate increases.

Consistent with our Agency business, the Direct business decrease in policy life expectancy reflects the rate actions taken over the last year.

The Direct business includes business written directly by Progressive online, through our Progressive mobile app, and over the phone.

During the first quarter 2023, 48 states and the District of Columbia generated new auto application growth, including nine of our top 10 largest Direct states.

During the first quarter 2023, total auto applications increased 19%, primarily due to growth in new applications.

During the first quarter, each of our consumer segments experienced a significant increase in new applications year over year.

Policies in force grew between 10% and 20% in each consumer segment, compared to the same period last year.

During the first quarter 2023, Direct auto quote volume increased 73% and conversion increased 13%, compared to the same period last year, with both increasing in each consumer segment.

Despite taking rate increases, the increase we experienced in our quote volume primarily reflected competitors raising rates and our increased advertising spend compared to the first quarter 2022.

During the first quarter 2023, written premium per policy for new and renewal Direct auto business increased 7% and 9%, respectively, compared to the same period last year, primarily driven by rate increases.

Consistent with our Agency business, the Direct business decrease in policy life expectancy for the trailing 12-months reflects the rate actions taken over the last year and the increase in the trailing 3-month measure shows what we believe to be our increased competitiveness in the marketplace.

Commercial Lines

The following table shows our year-over-year changes for our Commercial Lines business, excluding our TNC, BOP, and Protective Insurance products:

Growth Over Prior Year

Quarter Year-to-date

2022 2021 2022 2021

New (6) % 18 % (1) % 32 %

Renewal 10 15 13 12

Written premium per policy 8 20 14 17

Policy life expectancy - Trailing 12 months (9) 13

Our Commercial Lines business operates in five traditional business markets, which include business auto, for-hire transportation, contractor, for-hire specialty, and tow markets, primarily written through the agency channel.

We also write TNC business and BOP insurance.

In the second quarter 2021, we acquired Protective Insurance, which expanded our portfolio of offerings to larger fleet and workers’ compensation insurance for trucking, along with trucking industry independent contractors, and affinity programs;

these products are excluded from the table above.

During the third quarter 2022, the decrease in Commercial Lines new application growth primarily reflected a slow down from the significant amount of growth experienced in 2021, primarily in our for-hire transportation and for-hire specialty business markets, and the softening of the freight market during the period.

During the third quarter 2022, we experienced flat quote volume and a decrease of 6% in the rate of conversion, compared to the same period last year, primarily driven by the for-hire transportation market.

During the first nine months of 2022, quote volume increased 3%, while conversion decreased 4%, compared to the same period last year.

During the third quarter, written premium per policy for new commercial auto business increased 2%, while renewal business increased 14%, compared to the same period last year.

The increases in written premiums were primarily due to rate increases.

Our policy life expectancy decreased primarily driven by our for-hire transportation business market.

Given the rise in costs to operate a trucking business, many independent owner/operators, who were our core customers, have begun to migrate back to leasing with larger motor carriers.

We also write TNC business, BOP insurance, and, through Protective Insurance, 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 auto product, excluding our TNC, BOP, and Protective Insurance products.

Year-over-year changes in our commercial auto product were as follows:

Growth Over Prior Year Quarter

Written premium per policy 1 19

Policy life expectancy

Trailing 12 months

During the first quarter 2023, commercial auto new application growth was positive in each of our business market targets, except for the for-hire transportation market, which reflects the continued slowdown in the rate of economic activity and deteriorating freight market conditions.

During the first quarter 2023, we experienced a 3% increase in quote volume and a decrease of 1% in the rate of conversion, compared to the same period last year.

During the first quarter 2023, written premium per policy for new commercial auto business decreased 7%, while renewal business increased 6%, compared to the same period last year.

The increase in written premiums were primarily due to rate increases and were partially offset by shifts in the mix of business.

Our policy life expectancy decreased in all business market targets, primarily driven by our for-hire transportation business market.

Given the rise in costs to operate a trucking business, many independent owner/operators, who were our core customers in the for-hire transportation business market, have begun to migrate back to leasing with larger motor carriers.

The following table shows our year-over-year changes for our Property business:

Growth Over Prior Year

Quarter Year-to-date

2022 2021 2022 2021

Growth Over Prior Year Quarter

New 12 % (6) %

Renewal 7 11 8 10

Written premium per policy 10 5

Policy life expectancy - Trailing 12 months (9) (8)

Our Property business writes residential property insurance for homeowners, other property owners, and renters, in the agency and direct channels.

During the third quarter and first nine months of 2022, our Property business experienced a decrease in new applications, primarily due to the rate and other actions taken to address the profitability concerns.

During 2022, we continued to make underwriting changes to reduce our concentration risks by focusing our growth efforts in states with traditionally less catastrophe exposure and limit growth in the coastal and hail-prone states.

During 2021, we announced plans to non-renew about 60,000 policies in Florida, starting during the second quarter 2022.

During the second quarter 2022, new legislation was introduced prohibiting the non-renewal of certain policies.

In response, we changed our process to provide impacted policyholders the opportunity to have their policy renewed if meeting certain criteria.

We expect to non-renew less of the policies formerly intended for non-renewal, as previously discussed.

In light of the regulatory changes, we are identifying other opportunities to reduce our exposure in the coastal states.

The targeted rate increases taken during the last 12 months, are beginning to be earned into the book of business;

however, we realize that our current pricing actions and underwriting activities to limit growth in the coastal and hail-prone states and to increase our exposure in states with traditionally less catastrophe exposure will require more time than originally anticipated.

This information, combined with the continued extent of the weather-related losses, prompted us to reevaluate the portion of goodwill assigned to our Property business for impairment, resulting in a non-cash goodwill impairment charge of $224.8 million during the second quarter 2022, which represented the entire amount of goodwill assigned to the ARX reporting unit.

In addition to rate increases, as part of the underwriting changes discussed above, during the third quarter 2022 our written premium per policy increased, compared to the same period last year, primarily due to an increase in coverage values to account for inflation.

The written premium per policy impact from rate increases and underwriting changes were partially offset by a shift in the mix of business to a larger share of renters policies, which have lower written premiums per policy.

Our policy life expectancy decreased from the same period last year, primarily due to the targeted rate increases in states where we were not achieving our profitability targets.

Policy life expectancy

Trailing 12 months

Our Property business writes residential property insurance for homeowners, other property owners, and renters, and umbrella insurance in the agency and direct channels.

During the first quarter 2023, the increase in new applications experienced in our Property business was primarily due to underwriting changes made in an effort to promote growth in less volatile weather states and increased advertising spending.

Improving profitability and reducing concentration exposure continued to be the top priority for our Property business during the first quarter 2023.

We have concentrated our growth in the Property business in markets that are less susceptible to catastrophes and have lower exposure to coastal and hail-prone states.

New applications in these growth-oriented states were up about 30% over the first quarter last year.

In regions where our appetite to write new business is limited, we are prioritizing Progressive auto bundles, as well as lower risk properties, such as new construction or homes with newer roofs.

New applications were down just over 10% in these more volatile weather states.

In addition, we increased rates an average of about 3% in our Property segment during the first quarter 2023.

The increase in our written premium per policy, compared to the first quarter last year, was primarily due to rate increases taken over the last 12 months 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 less homeowners growth in volatile states that have higher average premiums.

We intend to continue to make targeted rate increases in states where we believe it is necessary to achieve our profitability targets.

A deferred tax asset or liability is a tax benefit or expense that is expected to be realized in a future period.

At September 30, 2022, we reported a net federal deferred tax asset of $1.3 billion, compared to a net federal deferred tax liability at September 30, 2021, and December 31, 2021, of $110.7 million and $152.9 million, respectively.

The change to a deferred asset from a deferred liability was primarily due to unrealized losses on securities in the fixed-income and equity portfolios recognized over the last 12 months.

Based on all of the available evidence, including the existing taxable temporary differences that will generate capital gains, our realized capital gains available in the carryback period, and our intent and ability to hold a portion of our fixed-maturity securities in an unrealized tax loss position until maturity, we determined that no valuation allowance is required at September 30, 2022.

At September 30, 2022, and December 31, 2021, we had recoverable income taxes of $31.0 million and $19.2 million, respectively, which were reported as part of other assets in our consolidated balance sheets, compared to net current income taxes payable of $36.2 million, which were reported as part of accounts payable, accrued expenses, and other liabilities at September 30, 2021.

The taxes payable/recoverable vary from period to period based on the amount of estimated taxes paid.

The effective tax rates for the three and nine months ended September 30, 2022, were 12.9% and (1.6)%, respectively, compared to 14.7% and 20.5% for the same periods last year.

The difference between the reported effective tax rates and the statutory tax rate of 21% reflects the impact of a number of factors, including the amount of pretax income (loss) earned in the period, our typical permanent tax differences such as stock-based compensation, and, for the nine months ended September 30, 2022, the effect of the goodwill impairment, which was a nonrecurring charge.

See Note 5 – Income Taxes for a reconciliation between the statutory and the effective tax rates.

At March 31, 2023 and 2022, and December 31, 2022, we had net current income taxes payable of $203.3 million, $201.1 million, and $10.9 million, respectively, which were reported in accounts payable, accrued expenses, and other liabilities in our consolidated balance sheets.

The increase in the payable balance at March 31, 2023 and 2022, compared to December 31, 2022, in part reflects that first quarter estimated payments are not due until the second quarter of the year.

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 March 31, 2023 and 2022, and December 31, 2022, we reported net federal deferred tax assets of $1.1 billion, $0.4 billion, and $1.1 billion, respectively.

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 in each period.

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 assets 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 for the three months ended March 31, 2023, was 19.2%, compared to 19.6% for the same period last year.

Consistent with prior years, we had no uncertain tax positions.

See Note 5 – Income Taxes for further information.

RESULTS OF OPERATIONS – INVESTMENTS

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The fully taxable equivalent (FTE) total return includes recurring investment income, adjusted to a fully taxable amount for certain securities that receive preferential tax treatment (e.g., municipal securities), and total net realized, and changes in total net unrealized, gains (losses) on securities.

The following table summarizes investment results for the periods ended September 30:

Three Months Nine Months

2022 2021 2022 2021

The following table summarizes investment results for the periods ended March 31:

Pretax recurring investment book yield (annualized) 3.0 % 2.0 %

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Total portfolio 2.3 (3.8)

The increase in the book yield, compared to last year, for both periods, 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 periods ended September 30, follows:

Three Months Nine Months

2022 2021 2022 2021

The increase in the book yield, compared to last year, 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 increase in the fixed-income total return, compared to last year, reflected the impact of declining interest rates, while the increase in common stocks reflected general market conditions.

A further break-down of our FTE total returns for our fixed-income portfolio for the periods ended March 31, follows:

Fixed-income securities:

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Portfolio Duration

(years) Rating 1

September 30, 2022

(years) Average Rating 1

March 31, 2023

government obligations $ 27,350.1 48.3 % 3.7 AAA

11 unchanged sentences

$ 56,686.4 100.0 % 3.0 AA

September 30, 2021

March 31, 2022

government obligations $ 19,528.8 36.7 % 3.9 AAA

State and local government obligations 2,144.2 4.0 3.4 AA+

Foreign government obligations 12.3 0.1 1.3 AA+

Foreign government obligations 17.4 0.1 4.3 AAA

Corporate debt securities 11,280.0 21.2 3.1 BBB

3 unchanged sentences

Preferred stocks 1,748.0 3.3 3.5 BBB-

Short-term investments 1,088.7 2.1 0.2 AA+

Short-term investments 529.9 1.0 0.2 A-

Total fixed-income securities 48,373.8 91.0 3.1 AA-

11 unchanged sentences

Preferred stocks 1,397.5 2.6 2.8 BBB-

Short-term investments 942.6 1.8 0.2 AA

Short-term investments 2,861.7 5.4 0.1 AAA-

Total fixed-income securities 50,726.8 94.8 2.9 AA

7 unchanged sentences

To the extent the weighted average of the ratings falls between AAA and AA+, we assign an internal rating of AAA-.

2 Includes $74.7 million, $399.7 million, and $143.4 million of net unsettled security purchase transactions at September 30, 2022 and 2021, and December 31, 2021, respectively, with the offsetting payable included in other liabilities.

The total fair value of the portfolio at September 30, 2022 and 2021, and December 31, 2021, included $4.2 billion, $2.9 billion, and $4.2 billion, respectively, of securities held in a consolidated, non-insurance subsidiary of the holding company, net of unsettled security transactions.

2 At March 31, 2023 and 2022, we had $22.8 million, and $356.0 million, respectively, of net unsettled security purchase transactions included in other liabilities, compared to $34.4 million included in other assets at December 31, 2022.

The total fair value of the portfolio at March 31, 2023 and 2022, and December 31, 2022, included $4.1 billion, $5.1 billion, and $4.4 billion, respectively, of securities held in a consolidated, non-insurance subsidiary of the holding company, net of unsettled security transactions.

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

9 unchanged sentences

The following table shows the composition of our Group I and Group II securities:

September 30, 2022 September 30, 2021 December 31, 2021

March 31, 2023 March 31, 2022 December 31, 2022

($ in millions) Fair

16 unchanged sentences

Total portfolio $ 56,686.4 100.0 % $ 53,186.4 100.0 % $ 53,548.3 100.0 %

1 We did not hold any non-investment-grade redeemable preferred stocks at September 30, 2022 and 2021, or December 31, 2021.

To determine the allocation between Group I and Group II, we use the credit ratings from models provided by the National Association of Insurance Commissioners (NAIC) to classify our residential and commercial mortgage-backed securities, excluding interest-only securities, and the credit ratings from nationally recognized statistical rating organizations (NRSRO) to classify all other debt securities.

1 We did not hold any non-investment-grade redeemable preferred stocks at March 31, 2023 and 2022, or December 31, 2022.

To determine the allocation between Group I and Group II, we use the credit ratings from models provided by the National Association of Insurance Commissioners (NAIC) to classify our residential and commercial mortgage-backed securities, excluding interest-only (IO) securities, and the credit ratings from nationally recognized statistical rating organizations (NRSRO) to classify all other debt securities.

NAIC ratings are based on a model that considers the book price of our securities when assessing the probability of future losses in assigning a credit rating.

1 unchanged sentence

Management believes NAIC ratings more accurately reflect our risk profile when determining the asset allocation between Group I and Group II securities.

The decrease in the percentage of Group I securities since year end was driven by sales and valuation declines in our common equity portfolio, with the proceeds from the common stock sales and the $1.5 billion debt offering in March 2022 reinvested in Group II short-term investments.

Unrealized Gains and Losses

As of September 30, 2022, our fixed-maturity portfolio had pretax net unrealized losses, recorded as part of accumulated other comprehensive income, of $3,941.3 million, compared to net unrealized gains of $474.5 million and $71.4 million at September 30, 2021 and December 31, 2021, respectively.

The decreases from both periods in 2021 were due to increasing interest rates across our fixed-maturity portfolio and wider credit spreads outside of our short-term and Treasury portfolios.

During the first quarter 2023, our total net unrealized losses on fixed-maturity securities decreased $0.6 billion, resulting from declining interest rates during the period, compared to an increase in net unrealized losses of $1.4 billion in the first quarter of last year when interest rates were rising.

The valuation changes for both periods were primarily in our U.S.

government and corporate debt portfolios, with our commercial mortgage-backed securities also declining in value during the first quarter last year.

As of March 31, 2023, our fixed-maturity portfolio had total after-tax net unrealized losses, which are recorded as part of accumulated other comprehensive income (loss) on the consolidated balance sheets, of $2.2 billion, compared to $1.4 billion and $2.8 billion at March 31, 2022 and December 31, 2022, respectively.

See Note 2 – Investments for a further break-out of our gross unrealized gains (losses).

Holding Period Gains and Losses

The following table provides the balance and activity for both the gross and net holding period gains (losses) for the nine months ended September 30, 2022:

The following table provides the balance and activity for both the gross and net holding period gains (losses) for the three months ended March 31, 2023:

(millions) Gross Holding

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Equity securities 1

2,026.6 (182.2) 1,844.4

Total holding period securities 2,027.9 (258.0) 1,769.9

2 unchanged sentences

Equity securities 1

45.2 45.3 90.5

Total changes in holding period securities 45.8 58.6 104.4

Balance at September 30, 2022

Balance at March 31, 2023

Hybrid fixed-maturity securities 1.9 (62.5) (60.6)

Equity securities 1

2,071.8 (136.9) 1,934.9

Total holding period securities $ 2,073.7 $ (199.4) $ 1,874.3

1 Equity 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.

2 unchanged sentences

Following are the primary exposures for our fixed-income portfolio.

Details of our policies related to these exposures can be found in the Management’s Discussion and Analysis included in our 2021 Annual Report to Shareholders.

• Interest rate risk - our duration of 2.7 years at September 30, 2022, fell within our acceptable range of 1.5 to 5 years.

We shortened our portfolio duration from 3.0 years at December 31, 2021, which we believe provides some protection against further increases in interest rates.

Interest Rate Risk Our duration of 3.0 years at March 31, 2023, 3.1 years at March 31, 2022, and 2.9 years at December 31, 2022 fell within our acceptable range of 1.5 to 5 years.

The duration distribution of our fixed-income portfolio, excluding short-term investments, represented by the interest rate sensitivity of the comparable benchmark U.S.

Treasury Notes, was:

Duration Distribution (excluding short-term securities) September 30, 2022 September 30, 2021 December 31, 2021

Duration Distribution (excluding short-term securities) March 31, 2023 March 31, 2022 December 31, 2022

1 year 19.2 % 16.2 % 17.5 %

5 unchanged sentences

Total fixed-income portfolio 100.0 % 100.0 % 100.0 %

• Credit risk - our credit quality rating of AA was above our minimum threshold during the third quarter 2022.

Credit Risk This exposure is managed by maintaining an A+ minimum average portfolio credit quality rating, as defined by NRSROs.

At both March 31, 2023 and December 31, 2022, our credit quality rating was AA and at March 31, 2022 it was AA-.

The credit quality distribution of the fixed-income portfolio was:

Rating September 30, 2022 September 30, 2021 December 31, 2021

Average Rating 1

March 31, 2023 March 31, 2022 December 31, 2022

AAA 65.2 % 54.2 % 65.5 %

9 unchanged sentences

1 The ratings in the table above are assigned by NRSROs.

• Concentration risk - we did not have any investments in a single issuer, either overall or in the context of individual asset classes and sectors, that exceeded our thresholds during the third quarter 2022.

• Prepayment and extension risk - we did not experience significant adverse prepayment or extension of principal relative to our cash flow expectations in the portfolio during the third quarter 2022.

Concentration Risk We did not have any investments in a single issuer, either overall or in the context of individual asset classes and sectors, that exceeded our thresholds during the first quarter 2023.

Prepayment and Extension Risk We did not experience significant adverse prepayment or extension of principal relative to our cash flow expectations in the portfolio during the first quarter 2023.

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 $4.3 billion, or 19%, of principal repayment from our fixed-income portfolio, excluding U.S.

Treasury Notes and short-term investments, during the remainder of 2022 and all of 2023.

Treasury Notes and short-term investments, during the remainder of 2023.

Cash from interest and dividend payments and our short-term portfolio provide additional sources of recurring liquidity.

The duration of our U.S.

government obligations, which are included in the fixed-income portfolio, was comprised of the following at September 30, 2022:

government obligations, which are included in the fixed-income portfolio, was comprised of the following at March 31, 2023:

($ in millions) Fair

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Securities Duration

(years) Rating

(years) Average Rating

(at period end) 1

September 30, 2022

March 31, 2023

Residential mortgage-backed securities $ 630.0 $ (16.1) 6.3 % 0.4 A

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Total asset-backed securities $ 9,998.8 $ (986.4) 100.0 % 1.7 AA-

September 30, 2021

March 31, 2022

Residential mortgage-backed securities $ 951.1 $ (4.0) 7.3 % 0.3 A-

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1 The credit quality ratings in the table above are assigned by NRSROs.

Residential Mortgage-Backed Securities (RMBS) The following table details the credit quality rating and fair value of our RMBS, along with the loan classification and a comparison of the fair value at September 30, 2022, to our original investment value (adjusted for returns of principal, amortization, and write-downs):

Residential Mortgage-Backed Securities (at September 30, 2022)

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 March 31, 2023, to our original investment value (adjusted for returns of principal, amortization, and write-downs):

Residential Mortgage-Backed Securities (at March 31, 2023)

($ in millions)

Average Rating 1

Non-Agency Government/GSE 2

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BB 0.3 0 0.3 0.1

B 0.1 0 0.1 0.1

CCC and lower 1.8 0 1.8 0.2

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1 The credit quality ratings are assigned by NRSROs;

when we assigned the NAIC ratings for our RMBS, 96.5% of our non-investment-grade securities were rated investment grade and reported as Group II securities, with the remainder classified as Group I.

when we assigned the NAIC ratings for our RMBS, 100% of our non-investment-grade securities were rated investment grade and reported as Group II securities.

2 The securities in this category are insured by a Government Sponsored Entity (GSE) and/or collateralized by mortgage loans insured by the Federal Housing Administration (FHA) or the U.S.Department of Veteran Affairs (VA).

In the residential mortgage-backed sector, our portfolio consists of deals that are backed by high-credit quality borrowers or have strong structural protections through underlying loan collateralization.

During the third quarter 2022, we did not make any purchases or sales to the residential mortgage-backed portfolio.

The decrease in market value was mostly attributed to principal paydowns.

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 September 30, 2022, to our original investment value (adjusted for returns of principal, amortization, and write-downs):

Commercial Mortgage-Backed Securities (at September 30, 2022)

During the first quarter 2023, the portfolio decreased as a result of maturities on securities and we did not have any purchase or sales activity.

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 March 31, 2023, to our original investment value (adjusted for returns of principal, amortization, and write-downs):

Commercial Mortgage-Backed Securities (at March 31, 2023)

($ in millions)

Average Rating 1

Multi-Borrower Single-Borrower Total % of Total

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BB 0 376.4 376.4 8.3

B 0.1 0 0.1 0

CCC and lower 0.1 0 0.1 0.1

Total fair value $ 210.0 $ 4,293.0 $ 4,503.0 100.0 %

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when we assigned the NAIC ratings for our CMBS, 30% of our non-investment-grade securities were rated investment grade and reported as Group II securities, with the remainder classified as Group I.

The CMBS portfolio experienced wider spreads and high volatility in the third quarter 2022.

New issuances in the single-asset single-borrower (SASB) market slowed significantly due to less favorable market conditions, as well as low trading volumes and liquidity in the secondary trading market.

Given ongoing uncertainty about the future trajectory of the economy and its impact on real estate, we did not add to our portfolio during the quarter, and reduced certain positions that we believe will be sensitive to potential future economic weakness.

Our focus continues to be on SASB with high-quality collateral in the office, self-storage, multi-family, and industrial sectors.

Other Asset-Backed Securities (OABS) The following table details the credit quality rating and fair value of our OABS, along with a comparison of the fair value at September 30, 2022, to our original investment value (adjusted for returns of principal, amortization, and write-downs):

Other Asset-Backed Securities (at September 30, 2022)

The CMBS portfolio experienced heightened volatility in the first quarter 2023, as commercial real estate has been a focal point of investor concern.

In addition to concerns around employees returning to the office, stress in the regional banking sector could translate into less availability of financing for this asset class.

New issuance has remained slow in the single-asset single-borrower (SASB) market and liquidity has continued to be challenged.

Given continued uncertainty about the future trajectory of the economy and its impact on real estate, we reduced certain positions, during the quarter, that we believed would be sensitive to potential future economic weakness.

As of the end of the first quarter 2023, we had no delinquencies in our CMBS portfolio.

With renewed focus on the commercial real estate sector, the following table shows the composition of our CMBS portfolio by maturity year and sector:

Commercial Mortgage-Backed Securities Sector Details (at March 31, 2023)

($ in millions)

Rating Automobile Collateralized Loan Obligations Student Loan Whole Business Securitizations Equipment Other Total % of

Office Lab Office Multi-family Multi-family IO Retail Industrial Self- Storage Casino Defeased Total Average Original LTV Average Current DSCR

2023 $ 103.4 $ 0 $ 0 $ 33.5 $ 0 $ 0 $ 0 $ 0 $ 22.8 $ 159.7 53.7 % 3.7

2024 169.4 24.1 21.7 40.4 36.7 176.0 155.8 0 0 624.1 57.3 2.2

2025 7.7 41.3 0 36.8 63.2 42.6 0 0 0 191.6 67.0 1.8

2026 556.4 79.8 328.4 32.8 0 116.2 76.1 106.4 0 1,296.1 62.0 1.8

2027 432.3 0 51.8 29.6 0 115.4 256.4 0 0 885.5 59.3 1.8

2028 256.6 0 0 22.5 0 0 0 0 0 279.1 51.9 3.2

2029 482.6 0 0 10.7 0 0 0 62.3 0 555.6 57.6 3.0

2030 72.5 54.6 0 3.7 0 0 0 83.3 0 214.1 55.5 3.1

2031 213.1 84.1 0 0 0 0 0 0 0 297.2 66.5 1.9

Total fair value $ 2,294.0 $ 283.9 $ 401.9 $ 210.0 $ 99.9 $ 450.2 $ 488.3 $ 252.0 $ 22.8 $ 4,503.0

LTV= loan to value

DSCR= debt service coverage ratio

1 The floating-rate securities were extended to their full maturity and fixed-rate securities are shown to their anticipated repayment date (if applicable) or otherwise, their maturity date.

We show the average loan to value (LTV) of each maturity year when the loans were originated.

The LTV ratio that management uses, which is commonly expressed as a percentage, compares the size of the entire mortgage loan to the appraised value of the underlying property collateralizing the loan at issuance.

A LTV ratio less than 100% indicates excess collateral value over the loan amount.

LTV ratios greater than 100% indicate that the loan amount exceeds the collateral value.

We believe this ratio provides a conservative view of our actual risk of loss, as this number displays the entire mortgage LTV, while our ownership is only a portion of the structure of the mortgage loan-backed security.

For many of the mortgage loans in our portfolio, our exposure is in a more senior part of the structure, which means that the LTV on our actual exposure is even lower than the ratios presented.

In addition to the LTV ratio, we also examine the credit of our CMBS portfolio by reviewing the debt service coverage ratio (DSCR) of the securities.

The DSCR ratio compares the underlying property's annual net operating income to its annual debt service payments.

DSCR ratios less than 1.0 times indicate that property operations do not generate enough income over the debt service payments, while a DSCR ratio greater than 1.0 times indicates that there is an excess of operating income over the debt service payments.

A number above 1.0 generally indicates that there would not be an incentive for the borrower to default in light of the borrower's excess income.

The DSCR calculation reported in the table is calculated based on the most currently available net operating income and mortgage payments for the borrower, which, for most securities, is full year 2022 data.

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 March 31, 2023, to our original investment value (adjusted for returns of principal, amortization, and write-downs):

Other Asset-Backed Securities (at March 31, 2023)

($ in millions)

Average Rating Automobile Collateralized Loan Obligations Student Loan Whole Business Securitizations Equipment Other Total % of

AAA $ 1,154.0 $ 1,072.8 $ 39.1 $ 0 $ 533.7 $ 228.9 $ 3,028.5 62.3 %

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Increase (decrease) in value (0.9) % (4.8) % (10.3) % (9.6) % (1.3) % (7.7) % (4.4) %

Our OABS portfolio offered less relative value in the third quarter 2022.

The portfolio decreased due to sales, amortization, and scheduled paydowns.

We selectively added short-maturity securities in our OABS portfolio and we did not add any collateralized loan obligations during the quarter.

During the first quarter 2023, we selectively added to our automobile, equipment, and whole business securitization as we viewed spreads, and potential returns, across this sector to be attractive.

Our automobile and equipment additions were mainly through new issue purchases, primarily focusing on higher credit tranche securities in the capital structure.

MUNICIPAL SECURITIES

The following table details the credit quality rating of our municipal securities at September 30, 2022, without the benefit of credit or bond insurance:

Municipal Securities (at September 30, 2022)

Rating General

The following table details the credit quality rating of our municipal securities at March 31, 2023, without the benefit of credit or bond insurance:

Municipal Securities (at March 31, 2023)

Average Rating General

Obligations Revenue

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Department of Veterans Affairs, or private mortgage insurance providers.

Credit spreads for longer tax-exempt municipal bonds tightened during the third quarter 2022, while spreads for shorter tax-exempt municipal bonds, as well as taxable municipal bonds, widened.

Our allocation to the municipal bond sector declined modestly and we were not active during the quarter.

Credit spreads of both tax-exempt and taxable municipal bonds tightened during the first quarter 2023.

Our allocation to this sector declined modestly during the quarter.

CORPORATE DEBT SECURITIES

The following table details the credit quality rating of our corporate debt securities at September 30, 2022:

Corporate Securities (at September 30, 2022)

Rating Consumer Industrial Communication Financial Services Technology Basic Materials Energy Total

The following table details the credit quality rating of our corporate debt securities at March 31, 2023:

Corporate Securities (at March 31, 2023)

Average Rating Consumer Industrial Communication Financial Services Technology Basic Materials Energy Total

AAA $ 0 $ 0 $ 0 $ 50.8 $ 0 $ 0 $ 0 $ 50.8

AA 64.1 0 0 443.0 0 0 62.0 569.1

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Total fair value $ 3,399.0 $ 1,693.6 $ 537.8 $ 2,718.2 $ 652.3 $ 152.9 $ 1,527.5 $ 10,681.3

The size of our corporate debt portfolio decreased from $10.2 billion at June 30, 2022 to $9.2 billion at September 30, 2022.

This decrease was due to securities that matured, sales of securities with less attractive risk/reward profiles, 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 the third quarter 2022.

The duration of the corporate portfolio was 2.9 years at September 30, 2022, compared to 3.0 years at June 30, 2022.

Overall, our corporate securities, as a percentage of the fixed-income portfolio, decreased during the third quarter 2022.

At September 30, 2022, our corporate debt securities made up approximately 19% of the fixed-income portfolio, compared to approximately 21% at June 30, 2022.

This decrease reflects our more conservative stance in the economic environment prevailing during the quarter.

The size of our corporate debt portfolio increased to $10.7 billion at March 31, 2023 from $9.4 billion at December 31, 2022 as we increased our allocation to the investment-grade corporate sector.

At the same time, we continued to reduce our exposure to high-yield securities given a less certain macro environment and less attractive risk/reward profile of these securities.

At March 31, 2023, our corporate debt securities made up approximately 20% of the fixed-income portfolio, compared to approximately 19% at December 31, 2022.

We slightly lengthened the maturity profile of the corporate debt portfolio during the first quarter 2023.

The duration of the corporate portfolio was 3.0 years at March 31, 2023, compared to 2.8 years at December 31, 2022, as our purchases focused on securities with somewhat longer maturities which provided attractive risk reward profiles.

PREFERRED STOCKS – REDEEMABLE AND NONREDEEMABLE

The table below shows the exposure break-down by sector and rating at September 30, 2022:

Preferred Stocks (at September 30, 2022)

The table below shows the exposure break-down by sector and rating at March 31, 2023:

Preferred Stocks (at March 31, 2023)

Financial Services

Average Rating U.S.

Banks Foreign

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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 September 30, 2022, all of our preferred securities continued to pay their dividends in full and on time.

During the quarter, we had exposure to one institution that was put into receivership by the Federal Deposit Insurance Corporation in March 2023.

The effect of this action, along with broader weakness in securities issued by financial institutions, drove the majority of the decline in the portfolio’s value from $1.4 billion at December 31, 2022 to $1.3 billion at March 31, 2023.

Additionally, we had an industrial position that was called during the quarter.

Approximately 82% of our preferred stock securities pay dividends that have tax preferential characteristics, while the balance pay dividends that are fully taxable.

Our preferred stock portfolio declined from $1.6 billion at June 30, 2022 to $1.4 billion at September 30, 2022.

The decline was primarily due to sales of preferred securities with less attractive risk/reward profiles as we took a more conservative stance in the economic environment prevailing during the quarter.

Common Equities

Common equities, as reported on the balance sheets, were comprised of the following:

($ in millions) September 30, 2022 September 30, 2021 December 31, 2021

($ in millions) March 31, 2023 March 31, 2022 December 31, 2022

Common stocks $ 2,774.0 99.3 % $ 4,792.5 99.6 % $ 2,801.7 99.3 %

Other risk investments 1

20.3 0.7 20.1 0.4 19.8 0.7

Total common equities $ 2,794.3 100.0 % $ 4,812.6 100.0 % $ 2,821.5 100.0 %

The majority of our common stock portfolio consists of individual holdings selected based on their contribution to the correlation with the Russell 1000 Index.

We held 791 out of 1,016, or 78%, of the common stocks comprising the index at September 30, 2022, which made up 95% of the total market capitalization of the index.

At September 30, 2022 and 2021, and December 31, 2021, the year-to-date total return, based on GAAP income, was within our targeted tracking error, which is +/- 50 basis points.

1 The other risk investments consist of limited partnership interests.

During the third quarter 2022, we funded partnership investments of $0.2 million, and we have an open funding commitment of $7.1 million at September 30, 2022.

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 787 out of 1,007, or 78%, of the common stocks comprising the index at March 31, 2023, which made up 95% of the total market capitalization of the index.

At March 31, 2023 and 2022, and December 31, 2022, the year-to-date total return, 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 potential of a more difficult economic environment over the near term.

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995:

Investors are cautioned that certain statements in this report not based upon historical fact are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

These statements often use words such as “estimate,” “expect,” “intend,” “plan,” “believe,” and other words and terms of similar meaning, or are tied to future periods, in connection with a discussion of future operating or financial performance.

Forward-looking statements are based on current expectations and projections about future events, and are subject to certain risks, assumptions and uncertainties that could cause actual events and results to differ materially from those discussed herein.

These 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:

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• the effectiveness of our reinsurance programs and the continued availability of reinsurance and performance by reinsurers;

• the highly competitive nature of property-casualty insurance markets;

• 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;

• how intellectual property rights affect our competitiveness and our business operations;

• whether we adjust claims accurately;

• our ability to maintain a recognized and trusted brand;

• our ability to attract, develop and retain talent and maintain appropriate staffing levels;

• 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 impacts of a security breach or other attack involving our computer systems or the systems of one or more of our vendors;

• the secure and uninterrupted operation of the facilities, systems, and business functions that are critical to our business;

• the success of our efforts to acquire or develop new products or enter into new areas of business and navigate related risks;

• our continued ability to send and accept electronic payments;

• the possible impairment of our goodwill or intangible assets;

• the 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, and other public policy matters;

• 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 securities into cash on favorable terms;

• 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;

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• the impact from not managing to short-term earnings expectations in light of our goal to maximize the long-term value of the enterprise;

• the impacts of the COVID-19 pandemic and measures taken in response;

• the impacts of epidemics, pandemics or other widespread health risks;

• 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.

In addition, investors should be aware that generally accepted accounting principles prescribe when a company may reserve for particular risks, including litigation exposures.

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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis