Progressive Beats Estimates - Analyst Blog

Progressive Corp.'s (PGR) earnings per share for third quarter 2010 were 40 cents, up 3 cents from the Zacks Consensus Estimate of 37 cents. The result of the reported month was in line with the prior-year quarter. Net income for the quarter was $216.6 million, down 3% from $269.9 million reported in third-quarter 2009.
 
Lower investment gains more than offset premiums earned resulting in a year-over-year decline in net income.
 
The company recorded net premiums of $3,715.4 million during the third quarter of 2010, up 5% from $3,553.5 million in the third quarter of 2009 and up 0.2% from $3,707.9 million during second quarter 2010. Net premiums earned were $3,599.9 million, up 4% from $3,441.4 million in the year-ago period and 0.3% from $3,590.2 million in the prior quarter.
 
Net realized gains on securities were $26.9 million during third quarter 2010, a significant decline from a gain of $38.8 million in the prior-year quarter and a considerable improvement from a loss of $39.5 million in the second quarter of 2010. The combined ratio − the percentage of premiums paid out as claims and expenses − deteriorated slightly to 92.9% from 92.7% recorded in the year-ago quarter and the prior quarter.
 
Progressive reports results every month. During September, policies in force remained healthy, with the Personal Auto segment increasing 8% year over year and 0.1% from the prior month. Special Lines increased 5% year over year and declining 0.1% over the preceding month.
 
In Personal Auto, Direct Auto continued to report double-digit growth of 14% year over year, but showed a slight improvement of 0.4% in policies in force from the last month. Agency Auto was up 3% year over year and down 0.1% from last month. However, Progressive's Commercial Auto segment continued to drag results, reporting a 1% year-over-year decline.
 
Total expenses for the reported month increased to $1.06 billion, up 7% from $0.9 billion in September 2009. The major components contributing to the increase in total expenses were losses and loss adjustment expenses increasing 6% year over year to $796.8 million, policy acquisition costs increasing 3% year over year to $106.2 million and other underwriting expenses surging 18% year over year to $143.8 million.
 
Progressive continues to actively manage its capital position. Reported book value per share was $10.12, up from $9.86 as of August 31, 2010, and $8.13 as of September, 2009.
 
Return on equity on a trailing 12-month basis was 17.6%, down from 20.1% in September 2009 and 18.2% in August 2010. The debt-to-total-capital ratio was 22.6% as of September 2009, down from 28.4% as of September 2009 and 23.0% as of August 2010.
 
Based on its industry-leading position, strong risk-based capital ratios, steady operating performances and focus on customer retention, we believe Progressive is poised to benefit as the economic recovery gains traction. However, increased competition and pressure on underwriting margin keep us on the sidelines.
 
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.