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Fair Value | 12 Months Ended
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Dec. 31, 2017
Fair Value Disclosures [Abstract] |
Fair Value | FAIR VALUE We have categorized our financial instruments, based on the degree of subjectivity inherent in the method by which they are valued, into a fair value hierarchy of three levels, as follows:
• | Level 1: Inputs are unadjusted, quoted prices in active markets for identical instruments at the measurement date (e.g., U.S. government obligations, which are continually priced on a daily basis, active exchange-traded equity securities, and certain short-term securities).
• | Level 2: Inputs (other than quoted prices included within Level 1) that are observable for the instrument either directly or indirectly (e.g., certain corporate and municipal bonds and certain preferred stocks). This includes: (i) quoted prices for similar instruments in active markets, (ii) quoted prices for identical or similar instruments in markets that are not active, (iii) inputs other than quoted prices that are observable for the instruments, and (iv) inputs that are derived principally from or corroborated by observable market data by correlation or other means.
• | Level 3: Inputs that are unobservable. Unobservable inputs reflect our subjective evaluation about the assumptions market participants would use in pricing the financial instrument (e.g., certain structured securities and privately held investments).
Determining the fair value of the investment portfolio is the responsibility of management. As part of the responsibility, we evaluate whether a market is distressed or inactive in determining the fair value for our portfolio. We review certain market level inputs to evaluate whether sufficient activity, volume, and new issuances exist to create an active market. Based on this evaluation, we concluded that there was sufficient activity related to the sectors and securities for which we obtained valuations. The composition of the investment portfolio by major security type and our outstanding debt was:
| Fair Value |
(millions) | Level 1 |  | Level 2 |  | Level 3 |  | Total |  | Cost |
December 31, 2017 |  |  |  |  |
Fixed maturities: |  |  |  |  |
U.S. government obligations | $ | 6,645.9 |  | $ | 0 |  | $ | 0 |  | $ | 6,645.9 |  | $ | 6,688.8 |
State and local government obligations | 0 |  | 2,297.1 |  | 0 |  | 2,297.1 |  | 2,285.6 |
Foreign government obligations | 0 |  | 0 |  | 0 |  | 0 |  | 0 |
Corporate debt securities | 0 |  | 4,997.7 |  | 0 |  | 4,997.7 |  | 4,997.2 |
Subtotal | 6,645.9 |  | 7,294.8 |  | 0 |  | 13,940.7 |  | 13,971.6 |
Asset-backed securities: |  |  |  |  |
Residential mortgage-backed | 0 |  | 836.7 |  | 0 |  | 836.7 |  | 828.8 |
Commercial mortgage-backed | 0 |  | 2,758.6 |  | 0 |  | 2,758.6 |  | 2,760.1 |
Other asset-backed | 0 |  | 2,454.7 |  | 0 |  | 2,454.7 |  | 2,454.5 |
Subtotal asset-backed securities | 0 |  | 6,050.0 |  | 0 |  | 6,050.0 |  | 6,043.4 |
Redeemable preferred stocks: |  |  |  |  |
Financials | 0 |  | 64.1 |  | 0 |  | 64.1 |  | 61.3 |
Utilities | 0 |  | 11.4 |  | 0 |  | 11.4 |  | 10.1 |
Industrials | 0 |  | 135.5 |  | 0 |  | 135.5 |  | 123.5 |
Subtotal redeemable preferred stocks | 0 |  | 211.0 |  | 0 |  | 211.0 |  | 194.9 |
Total fixed maturities | 6,645.9 |  | 13,555.8 |  | 0 |  | 20,201.7 |  | 20,209.9 |
Equity securities: |  |  |  |  |
Nonredeemable preferred stocks: |  |  |  |  |
Financials | 80.6 |  | 718.2 |  | 0 |  | 798.8 |  | 693.6 |
Industrials | 0 |  | 0 |  | 5.0 |  | 5.0 |  | 5.0 |
Subtotal nonredeemable preferred stocks | 80.6 |  | 718.2 |  | 5.0 |  | 803.8 |  | 698.6 |
Common equities: |  |  |  |  |
Common stocks | 3,399.5 |  | 0 |  | 0 |  | 3,399.5 |  | 1,498.7 |
Other risk investments | 0 |  | 0 |  | 0.3 |  | 0.3 |  | 0.3 |
Subtotal common equities | 3,399.5 |  | 0 |  | 0.3 |  | 3,399.8 |  | 1,499.0 |
Total fixed maturities and equity securities | 10,126.0 |  | 14,274.0 |  | 5.3 |  | 24,405.3 |  | 22,407.5 |
Short-term investments | 1,824.4 |  | 1,045.0 |  | 0 |  | 2,869.4 |  | 2,869.4 |
Total portfolio | $ | 11,950.4 |  | $ | 15,319.0 |  | $ | 5.3 |  | $ | 27,274.7 |  | $ | 25,276.9 |
Debt | $ | 0 |  | $ | 3,606.5 |  | $ | 37.1 |  | $ | 3,643.6 |  | $ | 3,306.3 |
| Fair Value |
(millions) | Level 1 |  | Level 2 |  | Level 3 |  | Total |  | Cost |
December 31, 2016 |  |  |  |  |
Fixed maturities: |  |  |  |  |
U.S. government obligations | $ | 2,870.1 |  | $ | 0 |  | $ | 0 |  | $ | 2,870.1 |  | $ | 2,899.2 |
State and local government obligations | 0 |  | 2,502.6 |  | 0 |  | 2,502.6 |  | 2,509.5 |
Foreign government obligations | 24.5 |  | 0 |  | 0 |  | 24.5 |  | 24.5 |
Corporate debt securities | 0 |  | 4,550.9 |  | 0 |  | 4,550.9 |  | 4,557.8 |
Subtotal | 2,894.6 |  | 7,053.5 |  | 0 |  | 9,948.1 |  | 9,991.0 |
Asset-backed securities: |  |  |  |  |
Residential mortgage-backed | 0 |  | 1,499.3 |  | 0 |  | 1,499.3 |  | 1,489.7 |
Commercial mortgage-backed | 0 |  | 2,253.1 |  | 0.3 |  | 2,253.4 |  | 2,266.9 |
Other asset-backed | 0 |  | 2,351.1 |  | 0 |  | 2,351.1 |  | 2,350.7 |
Subtotal asset-backed securities | 0 |  | 6,103.5 |  | 0.3 |  | 6,103.8 |  | 6,107.3 |
Redeemable preferred stocks: |  |  |  |  |
Financials | 0 |  | 59.5 |  | 0 |  | 59.5 |  | 59.8 |
Utilities | 0 |  | 30.9 |  | 0 |  | 30.9 |  | 30.5 |
Industrials | 0 |  | 101.5 |  | 0 |  | 101.5 |  | 98.5 |
Subtotal redeemable preferred stocks | 0 |  | 191.9 |  | 0 |  | 191.9 |  | 188.8 |
Total fixed maturities | 2,894.6 |  | 13,348.9 |  | 0.3 |  | 16,243.8 |  | 16,287.1 |
Equity securities: |  |  |  |  |
Nonredeemable preferred stocks: |  |  |  |  |
Financials | 138.1 |  | 715.4 |  | 0 |  | 853.5 |  | 734.2 |
Industrials | 0 |  | 0 |  | 0 |  | 0 |  | 0 |
Subtotal nonredeemable preferred stocks | 138.1 |  | 715.4 |  | 0 |  | 853.5 |  | 734.2 |
Common equities: |  |  |  |  |
Common stocks | 2,812.0 |  | 0 |  | 0 |  | 2,812.0 |  | 1,437.1 |
Other risk investments | 0 |  | 0 |  | 0.4 |  | 0.4 |  | 0.4 |
Subtotal common equities | 2,812.0 |  | 0 |  | 0.4 |  | 2,812.4 |  | 1,437.5 |
Total fixed maturities and equity securities | 5,844.7 |  | 14,064.3 |  | 0.7 |  | 19,909.7 |  | 18,458.8 |
Short-term investments | 3,009.3 |  | 563.6 |  | 0 |  | 3,572.9 |  | 3,572.9 |
Total portfolio | $ | 8,854.0 |  | $ | 14,627.9 |  | $ | 0.7 |  | $ | 23,482.6 |  | $ | 22,031.7 |
Debt | $ | 0 |  | $ | 3,188.5 |  | $ | 127.3 |  | $ | 3,315.8 |  | $ | 3,148.2 |
Our portfolio valuations, excluding short-term investments, classified as either Level 1 or Level 2 in the above tables are priced exclusively by external sources, including: pricing vendors, dealers/market makers, and exchange-quoted prices. During 2017 and 2016, we did not have any transfers between Level 1 and Level 2. Our short-term security holdings classified as Level 1 are highly liquid, actively marketed, and have a very short duration, primarily 90 days or less to redemption. These securities are held at their original cost, adjusted for any accretion of discount, since that value very closely approximates what an active market participant would be willing to pay for such securities. The remainder of our short-term securities are classified as Level 2 and are not priced externally since these securities continually trade at par value. These securities are classified as Level 2 since they are primarily longer-dated auction securities issued by municipalities that contain a redemption put feature back to the auction pool with a redemption period typically less than seven days. The auction pool is created by a liquidity provider and if the auction is not available at the end of the seven days, we have the right to put the security back to the issuer at par. At December 31, 2017, vendor-quoted prices represented 66% of our Level 1 classifications (excluding short-term investments), compared to 52% at December 31, 2016. The securities quoted by vendors in Level 1 primarily represent our holdings in U.S. Treasury Notes, which are frequently traded and the quotes are considered similar to exchange-traded quotes. The balance of our Level 1 pricing comes from quotes obtained directly from trades made on active exchanges. At December 31, 2017, vendor-quoted prices comprised 98% of our Level 2 classifications (excluding short-term investments), while dealer-quoted prices represented 2%, compared to 99% and 1% at December 31, 2016, respectively. In our process for selecting a source (e.g., dealer, pricing service) to provide pricing for securities in our portfolio, we reviewed documentation from the sources that detailed the pricing techniques and methodologies used by these sources and determined if their policies adequately considered market activity, either based on specific transactions for the particular security type or based on modeling of securities with similar credit quality, duration, yield, and structure that were recently transacted. Once a source is chosen, we continue to monitor any changes or modifications to their processes by reviewing their documentation on internal controls for pricing and market reviews. We review quality control measures of our sources as they become available to determine if any significant changes have occurred from period to period that might indicate issues or concerns regarding their evaluation or market coverage. As part of our pricing procedures, we obtain quotes from more than one source to help us fully evaluate the market price of securities. However, our internal pricing policy is to use a consistent source for individual securities in order to maintain the integrity of our valuation process. Quotes obtained from the sources are not considered binding offers to transact. Under our policy, when a review of the valuation received from our selected source appears to be outside of what is considered market level activity (which is defined as trading at spreads or yields significantly different than those of comparable securities or outside the general sector level movement without a reasonable explanation), we may use an alternate source’s price. To the extent we determine that it may be prudent to substitute one source’s price for another, we will contact the initial source to obtain an understanding of the factors that may be contributing to the significant price variance, which often leads the source to adjust their pricing input data for future pricing. To allow us to determine if our initial source is providing a price that is outside of a reasonable range, we review our portfolio pricing on a weekly basis. We frequently challenge prices from our sources when a price provided does not match our expectations based on our evaluation of market trends and activity. Initially, we perform a review of our portfolio by sector to identify securities whose prices appear outside of a reasonable range. We then perform a more detailed review of fair values for securities disclosed as Level 2. We review dealer bids and quotes for these and/or similar securities to determine the market level context for our valuations. We then evaluate inputs relevant for each class of securities disclosed in the preceding hierarchy tables. For our structured debt securities, including commercial, residential, and asset-backed securities, we evaluate available market-related data for these and similar securities related to collateral, delinquencies, and defaults for historical trends and reasonably estimable projections, as well as historical prepayment rates and current prepayment assumptions and cash flow estimates. We further stratify each class of our structured debt securities into more finite sectors (e.g., planned amortization class, first pay, second pay, senior, subordinated, etc.) and use duration, credit quality, and coupon to determine if the fair value is appropriate. For our corporate debt and preferred stock (redeemable and nonredeemable) portfolios, as well as the notes and debentures issued by The Progressive Corporation (see Note 4 – Debt), we review securities by duration, coupon, and credit quality, as well as changes in interest rate and credit spread movements within that stratification. The review also includes recent trades, including: volume traded at various levels that establish a market, issuer specific fundamentals, and industry specific economic news as it comes to light. For our municipal securities (e.g., general obligations, revenue, and housing), we stratify the portfolio to evaluate securities by type, coupon, credit quality, and duration to review price changes relative to credit spread and interest rate changes. Additionally, we look to economic data as it relates to geographic location as an indication of price-to-call or maturity predictors. For municipal housing securities, we look to changes in cash flow projections, both historical and reasonably estimable projections, to understand yield changes and their effect on valuation. Lastly, for our short-term securities, we look at acquisition price relative to the coupon or yield. Since our short-term securities are typically 90 days or less to maturity, with the majority listed in Level 2 being seven days or less to redemption, we believe that acquisition price is the best estimate of fair value. We also review data assumptions as supplied by our sources to determine if that data is relevant to current market conditions. In addition, we independently review each sector for transaction volumes, new issuances, and changes in spreads, as well as the overall movement of interest rates along the yield curve to determine if sufficient activity and liquidity exists to provide a credible source for our market valuations. During each valuation period, we create internal estimations of portfolio valuation (performance returns), based on current market-related activity (i.e., interest rate and credit spread movements and other credit-related factors) within each major sector of our portfolio. We compare our internally generated portfolio results with those generated based on quotes we received externally and research material valuation differences. We compare our results to index returns for each major sector adjusting for duration and credit quality differences to better understand our portfolio’s results. Additionally, we review on a monthly basis our external sales transactions and compare the actual final market sales price to a previous market valuation price. This review provides us further validation that our pricing sources are providing market level prices, since we are able to explain significant price changes (i.e., greater than 2%) as known events occur in the marketplace and affect a particular security’s price at sale. This analysis provides us with additional comfort regarding each source’s process, the quality of its review, and its willingness to improve its analysis based on feedback from clients. We believe this effort helps ensure that we are reporting the most representative fair values for our securities. Except as described below, our Level 3 securities are also priced externally; however, due to several factors (e.g., nature of the securities, level of inactivity, and lack of similar securities trading to obtain observable market level inputs), these valuations are more subjective in nature. Certain private equity investments and fixed-income investments included in the Level 3 category are valued using external pricing supplemented by internal review and analysis. After all the valuations are received and our review is complete, if the inputs used by vendors are determined to not contain sufficient observable market information, we will reclassify the affected security valuations to Level 3. At December 31, 2017, we did not have any securities in our fixed-maturity portfolio listed as Level 3. At December 31, 2016, the security in our fixed-maturity portfolio listed as Level 3 was thinly held with little liquidity and based on these factors, it was difficult to independently verify the observable market inputs that were used to generate the external valuation we received. Despite the lack of sufficient observable market information for our Level 3 security, we believe the valuation received, in conjunction with our procedures for evaluating third-party prices, supports the fair value reported in the financial statement. At December 31, 2017, we held one private nonredeemable preferred security with a value of $5.0 million that was priced internally. The security was purchased during the third quarter 2017 and the value at December 31, 2017 equals the cost at acquisition. A review of their latest available financial statements did not reveal any significant changes that would impact the security’s fair value. We did not hold any internally-priced securities at December 31, 2016. We review the prices from our external sources for reasonableness using internally developed assumptions to derive prices for the securities, which are then compared to the prices we received. During 2017 or 2016, there were no material assets or liabilities measured at fair value on a nonrecurring basis. Based on our review, all the prices received from external sources remain unadjusted. The following tables provide a summary of changes in fair value associated with Level 3 assets for the years ended December 31, 2017 and 2016:
| Level 3 Fair Value
(millions) | Fair Value at Dec. 31, 2016 |  | Calls/ Maturities/ Paydowns |  | Purchases |  | Sales |  | Net Realized (Gain)/Loss on Sales |  | Change in Valuation |  | Net Transfers In (Out) |  | Fair Value at Dec. 31, 2017 |
Fixed maturities: |  |  |  |  |  |  |  |
Asset-backed securities: |  |  |  |  |  |  |  |
Commercial mortgage-backed | $ | 0.3 |  | $ | (0.3 | ) | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |
Total fixed maturities | 0.3 |  | (0.3 | ) | 0 |  | 0 |  | 0 |  | 0 |  | 0 |  | 0 |
Equity securities: |  |  |  |  |  |  |  |
Nonredeemable preferred stocks: |  |  |  |  |  |  |  |
Industrials | 0 |  | 0 |  | 5.0 |  | 0 |  | 0 |  | 0 |  | 0 |  | 5.0 |
Common equities: |  |  |  |  |  |  |  |
Other risk investments | 0.4 |  | (0.1 | ) | 0 |  | 0 |  | 0 |  | 0 |  | 0 |  | 0.3 |
Total Level 3 securities | $ | 0.7 |  | $ | (0.4 | ) | $ | 5.0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 5.3 |
| Level 3 Fair Value
(millions) | Fair Value at Dec. 31, 2015 |  | Calls/ Maturities/ Paydowns |  | Purchases |  | Sales |  | Net Realized (Gain)/Loss on Sales |  | Change in Valuation |  | Net Transfers In (Out) |  | Fair Value at Dec. 31, 2016 |
Fixed maturities: |  |  |  |  |  |  |  |
Asset-backed securities: |  |  |  |  |  |  |  |
Commercial mortgage-backed | $ | 9.9 |  | $ | (9.6 | ) | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0.3 |
Total fixed maturities | 9.9 |  | (9.6 | ) | 0 |  | 0 |  | 0 |  | 0 |  | 0 |  | 0.3 |
Equity securities: |  |  |  |  |  |  |  |
Nonredeemable preferred stocks: |  |  |  |  |  |  |  |
Industrials | 0 |  | 0 |  | 0 |  | 0 |  | 0 |  | 0 |  | 0 |  | 0 |
Common equities: |  |  |  |  |  |  |  |
Other risk investments | 0.3 |  | 0 |  | 0 |  | 0 |  | 0 |  | 0.1 |  | 0 |  | 0.4 |
Total Level 3 securities | $ | 10.2 |  | $ | (9.6 | ) | $ | 0 |  | $ | 0 |  | $ | 0 |  | $ | 0.1 |  | $ | 0 |  | $ | 0.7 |
The following tables provide a summary of the quantitative information about Level 3 fair value measurements for our applicable securities at December 31:
| Quantitative Information about Level 3 Fair Value Measurements
($ in millions) | Fair Value at Dec. 31, 2017 |  | Valuation Technique | Unobservable Input | Unobservable Input Assumption |
Fixed maturities: |  |  |  |
Asset-backed securities: |  |  |  |
Commercial mortgage-backed | $ | 0 |  | NA | NA | NA |
Total fixed maturities | 0 |  |  |  |
Equity securities: |  |  |  |
Nonredeemable preferred stocks: |  |  |  |
Industrials 1 | 5.0 |  | Internal price | Unadjusted purchase price | 3.9 |
Subtotal Level 3 securities | 5.0 |  |  |  |
Third-party pricing exemption securities 2 | 0.3 |  |  |  |
Total Level 3 securities | $ | 5.3 |  |  |  |
1 The security was internally-priced since it is privately held and it was valued at December 31, 2017 using the purchase price. 2 The fair values for these securities were obtained from non-binding external sources where unobservable inputs are not reasonably available to us.
| Quantitative Information about Level 3 Fair Value Measurements
($ in millions) | Fair Value at Dec. 31, 2016 |  | Valuation Technique | Unobservable Input | Unobservable Input Assumption
Fixed maturities: |  |  |  |
Asset-backed securities: |  |  |  |
Commercial mortgage-backed | $ | 0.3 |  | External vendor | Prepayment rate 1 | 0
Total fixed maturities | 0.3 |  |  |  |
Equity securities: |  |  |  |
Nonredeemable preferred stocks: |  |  |  |
Industrials | 0 |  | NA | NA | NA
Subtotal Level 3 securities | 0.3 |  |  |  |
Third-party pricing exemption securities 2 | 0.4 |  |  |  |
Total Level 3 securities | $ | 0.7 |  |  |  |
1 Assumes that one security has 0% of the principal amount of the underlying loans that will be paid off prematurely in each year. 2 The fair values for these securities were obtained from non-binding external sources where unobservable inputs are not reasonably available to us. Due to the relative size of the Level 3 securities’ fair values compared to the total portfolio’s fair value, any changes in pricing methodology would not have a significant change in valuation that would materially impact net or comprehensive income.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -URI http://asc.fasb.org/topic&trid=2155941 + Details
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