Progressive Insurance Making Progress

By Ryan C. Fuhrmann | July 16, 2010 AAA

Personal and commercial auto insurer Progressive Corp. (NYSE:PGR) reported second-quarter results on Tuesday that showed the company continues to grow in the segment that sells auto policies directly to consumers. Strong historical growth and high underwriting standards are other reasons to look closely at the stock, even though it is more pricey than the firm's archrivals.
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Second-Quarter Overview
Net premiums written grew 5% to $3.7 billion while net premiums earned increased 4% to $3.6 billion. Investment losses, the second primary revenue item for insurance companies that comes in the form of net investment income, sent net income down 15% to $211.9 million, or 32 cents per share. The combined ratio improved ever slightly to 92.7.

A Direct focus
Progressive continues to steal a page from Berkshire Hathaway's (NYSE:BRK.A) (NYSE:BRK.B) GEICO insurance unit by focusing on selling automobile insurance directly to consumers. Direct auto saw a 15% jump in policies in June while policies sold through insurance agents only grew 3%. Direct policies now represent 44% of total personal auto policies in force. The company also offers insurance on "special line" products such as mobile homes, recreational vehicles, and even snowmobiles. It also operates a small commercial auto segment. (Learn more about auto insurance, see Beginner's Guide To Auto Insurance.)

Year-to-Date Results and Outlook
For the first two quarters of its fiscal year, Progressive reported low single-digit growth in net premiums earned and investment income. Total revenues reached $7.4 billion while net income increased 5% to $507.5 million, or 76 cents per diluted share.

For the full year, analysts expect a modest increase in revenue to $14.7 billion and earnings of $1.48 per share, which would represent a year-over-year decline of approximately 7%.

Bottom Line
At a recent share price of about $20, Progressive continues to trade at a hefty premium to reported quarter-end book value of $9.44 per share. A forward P/E multiple of 13.5 is more reasonable, but it's still ahead of peers that include Travelers (NYSE:TRV) and Allstate (NYSE:ALL) that trade at single-digit forward multiples.

However, Progressive stands out as it has managed to grow premium and investment income in the double digits over the past five- and 10-year periods. Continued growth will rely on selling direct to consumers. Progressive also has a reputation for conservative underwriting standards, which should help minimize downside risk.

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