Progressive Earnings: Underwriting Profitability Dinged by Adverse Reserve Development

Over the past year, personal auto insurers have struggled with a number of negative claims trends. This has pushed most of Progressive’s PGR peers into recognizing significant underwriting losses. While not completely immune to these trends, narrow-moat Progressive has materially outperformed peers during this period. The first quarter, however, marked a bit of a stumble on this front, as adverse reserve development dinged the company’s underwriting profitability. Still, we remain comfortable with our $107 fair value estimate, which we will maintain.

On the positive side, Progressive saw growth in policies in force accelerate significantly in the first quarter, with the agent and direct channels up 5% and 15% year over year, respectively. This led to overall year-over-year policies in force growth of 11%. With peers struggling to contain underwriting losses right now, we think Progressive is well positioned to pick up some share. Additionally, results suggest that strong pricing increases continue to work their way into results, which should help normalize underwriting results moving forward.

However, the negative in the quarter was a step back in underwriting results, with the company reporting a combined ratio of 98.7% in personal auto, compared with 95.2% last year. Progressive had improved its combined ratio sequentially in the fourth quarter, suggesting the company might have hit something of an inflection point. But results deteriorated in the first quarter, suggesting normalization in underwriting results may be a longer process. The main culprit was adverse reserve development, which negatively impacted Progressive’s overall combined ratio by 460 basis points in the quarter. The development was mainly tied to personal auto and driven by greater-than-expected severity and some legal changes in Florida.