Progressive Protecting Its Shareholders

By Ryan C. Fuhrmann | March 07, 2012 AAA

Progressive Corp. (NYSE:PGR) competes in the hypercompetitive market for automotive and related vehicle insurance. Despite the wide array of insurers and cut-throat business practices employed by many to gain market share, Progressive has a leading market share. It also treats shareholders well, especially when it comes to internal capital allocation decisions.

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Full Year Recap
Total revenues advanced 3.3% to $15.5 billion. Net premiums written, or insurance premiums issued, during the year reached $15.1 billion to exceed $15 billion for the first time. This represented an annual growth of 5%. Premiums earned on policies that passed their effective lives without a claim, rose 4% to $14.9 billion to constitute the vast majority of the top line. The rest consisted primarily of gains related to Progressive's investment portfolio.

Progressive ended the year with 12.3 million personal policies in force and just over half a million commercial auto policies. The information for 2011 has yet to be released, but as of 2010 the company controlled 8% of the market of net written premiums of $159 million. Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) is a key rival, as are Allstate (NYSE:ALL) and Traveler's (NYSE:TRV), which operate nationally, and Mercury General (NYSE:MCY) operates primarily in California.

Net income fell roughly 4.7% to $1.02 billion. Share buybacks tempered the per-share decline a bit as earnings fell 1.2% to $1.59 per share. Based off the year-end book value of $9.47 per share, this represented a very healthy return on equity of 16.5%. The combined ratio, another standard industry measure of underwriting profitability, deteriorated by 0.2 points to 93.2 in the personal lines. A ratio below 100 indicates an underwriting profit. It was a stronger 90.9 in commercial auto. For related reading, see A Breakdown Of Stock Buybacks.

Outlook
For the coming year, analysts currently project revenue growth just north of 5% and total revenues just below $16 billion. The profit projection is $1.57 per share, or a slight decline from 2011.

The Bottom Line
Though Progressive is performing well operationally, its share price performance has been more uneven. For 2011, the stock, including the dividend payout, returned only 0.2% to lag the stock market's total return of 2.1%. The total returns have also lagged the market on a three and five year basis, though over the past decade shareholders have garnered 6.6% annual total returns to best the market's 2.9% annual return.

Progressive has also been known to announce extra dividends, as it did in 2010, to pay out capital it doesn't need to grow and maintain its operations. It also repurchases stock and acquired close to $1 billion of its own shares during 2011. So, while its operations are only growing modestly, management manages its capital extremely well and earmarks much of it to growing shareholder returns. Over the past decade, it has leveraged annual sales growth of less than 8% to annual earnings growth above 13%. For additional reading, check out 5 Must-Have Metrics For Value Investors.

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

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