Progressive Earnings: Strong Growth Comes at the Expense of Profitability

Narrow-moat Progressive PGR has navigated the current industry environment better than peers, but second-quarter results show that the company is not immune to the headwinds auto insurers are facing. Management appears to be trying to find the right balance between growth and profitability. While Progressive did see strong growth in the quarter, profitability was much less impressive. We will maintain our $107 fair value estimate and see the shares as a bit overvalued at the moment.

In the personal auto segment, growth continued to accelerate, with policies in force up 14% year over year. The agent and direct channels were up 11% and 17%, respectively. Along with the policies in force growth, Progressive appears to be continuing to push through solid pricing increases. We thought Progressive’s relatively strong recent underwriting results put the company in a good position to pick up some share, and that appears to be playing out.

However, that growth is coming at the expense of underwriting profitability, which is well below the company’s historical norms. While that is to be expected given current industry headwinds, the situation is worsening. The combined ratio for personal auto increased to 99.5% from 95.0% last year and also increased 80 basis points sequentially. The company continues to see material adverse development, which is weighing on underwriting profitability. We normally take a dim view of adverse reserve development. However, in the current environment, we see this as a bit more understandable and have seen similar issues at peers.

We do expect underwriting margins to improve as pricing increases work into results, but this quarter suggests that process might take a bit longer than we expected, and that Progressive might not be through the worst of it.