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Progressive Enjoying The Best Of Both Worlds
According to recent market statistics, Progressive Corp (NYSE:PGR) is the fourth largest auto insurer in the country. Sales and profit growth trends have picked up lately and suggest that the company should continue to pick up market share. Its business model is also somewhat unique and allows it to enjoy the best of both primary sales channels in the insurance industry.
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Third-Quarter Review
Net premiums written grew 5% to $3.7 billion while net premiums earned increased 4% to $3.6 billion. Net premiums earned is Progressive's primary revenue driver; the second is investment income from its investment portfolio. Year-to-date, the investment income has grown 4%.
The combined ratio, which is one of the primary profit measures for an insurance company and calculated by taking operating costs and dividing them by earned premiums, increased slightly to 92.9%. A lower combined ratio is better and a ratio below 100% signifies an operating profit.
Net income fell 3% to $261.6 million but was flat on a per-share basis at 40 cents as share buybacks reduced overall shares outstanding. This came in ahead of analyst projections of 36 cents per share. Over the past 12 months, return on equity has been impressive at 17.6%.
Outlook
Progressive is targeting a combined ratio of 96% over the long haul as it is focused on staying profitable but has become more focused on picking up new business that tends to be less profitable during the early stages.
The company's business model is somewhat unique. It is focused on selling insurance through agents, which is a more traditional model that firms including Allstate (NYSE:ALL), privately-held State Farm, and Travelers (NYSE:TRV) tend to rely on, but also sells policies directly to the public. This is what Berkshire Hathaway's (NYSE:BRK.A) (NYSE:BRK.B) Geico unit specializes in. This approach allows the company to enjoy the best of both worlds. Right now, the direct route is growing faster and expanded 14% during September. The agency business grew only 3%.
Bottom Line
Based off of book value, the shares price is high at a multiple of more than two times book. In terms of operating growth, over the past decade investors have been amply rewarded for paying a premium over other auto insurers because Progressive has grown sales in the high single digits and earnings in the high teens over this period. The last few years have seen more uneven growth, but current indications are that growth trends are picking up and returns on equity have also been impressively high. (To learn more about insurance, see Insurance Articles and Insight.)
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Third-Quarter Review
Net premiums written grew 5% to $3.7 billion while net premiums earned increased 4% to $3.6 billion. Net premiums earned is Progressive's primary revenue driver; the second is investment income from its investment portfolio. Year-to-date, the investment income has grown 4%.
The combined ratio, which is one of the primary profit measures for an insurance company and calculated by taking operating costs and dividing them by earned premiums, increased slightly to 92.9%. A lower combined ratio is better and a ratio below 100% signifies an operating profit.
Net income fell 3% to $261.6 million but was flat on a per-share basis at 40 cents as share buybacks reduced overall shares outstanding. This came in ahead of analyst projections of 36 cents per share. Over the past 12 months, return on equity has been impressive at 17.6%.
Progressive is targeting a combined ratio of 96% over the long haul as it is focused on staying profitable but has become more focused on picking up new business that tends to be less profitable during the early stages.
The company's business model is somewhat unique. It is focused on selling insurance through agents, which is a more traditional model that firms including Allstate (NYSE:ALL), privately-held State Farm, and Travelers (NYSE:TRV) tend to rely on, but also sells policies directly to the public. This is what Berkshire Hathaway's (NYSE:BRK.A) (NYSE:BRK.B) Geico unit specializes in. This approach allows the company to enjoy the best of both worlds. Right now, the direct route is growing faster and expanded 14% during September. The agency business grew only 3%.
Bottom Line
Based off of book value, the shares price is high at a multiple of more than two times book. In terms of operating growth, over the past decade investors have been amply rewarded for paying a premium over other auto insurers because Progressive has grown sales in the high single digits and earnings in the high teens over this period. The last few years have seen more uneven growth, but current indications are that growth trends are picking up and returns on equity have also been impressively high. (To learn more about insurance, see Insurance Articles and Insight.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Ryan C. Fuhrmann
Ryan C. Fuhrmann, CFA, has a background in portfolio management, overseeing assets for high-net-worth individuals and covering a broad array of industries from a generalist perspective. An active student of investing, he focuses on communicating his ideas as an investment writer and learning from the financial community. Ryan is also actively involved with the CFA Institute. Feel free to visit his website at www.rationalanalyst.com.
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