Progressive Lags in October - Analyst Blog

Progressive Corp.'s (PGR) earnings per share for October 2010 were 12 cents, down 25% from 16 cents in October 2009. However, the results of the reported month were in line with September 2010. Net income for the month declined a substantial 28% to $76.5 million from $106.7 million in the year-ago period. On a sequential basis, net income declined 7% from $81.9 million in the previous month.

Progressive reports its results every month. The company recorded net premiums of $1.34 billion, up 3% from $1.3 billion in October 2009 and 16% from$1.15 billion in September 2010. Net premiums earned were $1.39 billion, up 5% from $1.33 billion in the year-ago period and up 25% from $1.11 billion in the prior month.

Progressive reported net realized gain on securities of $25.6 million, compared with $20.0 million in October 2009 and $19.9 million in the preceding month. The combined ratio − the percentage of premiums paid out as claims and expenses − at 95.9% deteriorated 430 basis points from 91.6% recorded in the year-ago period and 200 basis points from 93.9% in the preceding month.

During October, policies in force remained healthy, with the Personal Auto segment increasing 8% year over year and 0.7% sequentially. Special Lines increased 5% year over year but declined 0.4% over the preceding month.

In Personal Auto, Direct Auto reported a double-digit growth of 14% year over year, but showed a slight improvement of 1% in policies-in-force from the last month. Agency Auto was up 4% year over year and 0.5% from the last month. However, Progressive's Commercial Auto segment continued to drag results, reporting declines of 1% year over year and 0.4% from the preceding month.

Total expenses for the reported month increased 10% to $1.35 billion from $1.23 billion in October 2009. The major components contributing to the increase in total expenses were an 11% year-over-year increase in losses and loss adjustment expenses reaching $1.04 billion, a 3% year-over-year increase in policy acquisition costs climbing to $133.1 million and other underwriting expenses spiking 12% year over year to $159 million.

Progressive continues to actively manage its capital position. Reported book value per share was $9.31, up from $8.34 as of October 30, 2009, and down from $9.78 as of September 30, 2010.

Return on equity on a trailing 12-month basis was 16.9%, down from 18.7% in October 2009 and from 18.3% in September 2010. The debt-to-total-capital ratio was 24.1% as of October 2010, down from 27.9% as of October 2009 but up from 23.1% as of September 2010.

In October, Progressive reported third quarter earnings of 40 cents per share, beating the Zacks Consensus Estimate of 37 cents. However, earnings lagged year-ago results as lower investment gains more than offset premiums earned.

Allstate Corporation (ALL), which competes with Progressive, registered third quarter operating earnings of 83 cents per share, way behind the Zacks Consensus Estimate of 97 cents and 99 cents recorded in the year-ago quarter. Results for the quarter deteriorated primarily due to lower-than-expected premiums coupled with higher expenses in the Property-Liability insurance segment, along with relatively higher tax expenses.

We maintain our Neutral recommendation on Progressive. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the shares over the near term.

 
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