Why Progressive Doesn't Look Very Impressive

Progressive's (NYSE: PGR  ) second quarter net income jumped 16% from the year-ago period, buoyed by growing premiums and a gain on investments. The insurer, which covers autos and homes, failed to meet Street expectations, sending the shares down by around 4% after reporting. Was it really that bad?

Into the numbers
Progressive's net premiums rose to $3.8 billion, up 3.5% from the year-ago period. Net premiums earned also rose 3.6% to $3.7 billion. Though the commercial auto policies count declined 2% in June, compared to June 2010, personal policies rose 5% to 12.2 million during the month. Obviously, rising premiums and increasing policy counts are good things for an insurer, and that showed.

The insurer's net income rose to $245.2 million from $211.9 in the same quarter last year. This includes a net realized gain on investments of $26 million. Progressive had incurred a loss of $39.5 million on investments in the second quarter last year.

The earnings growth is definitely commendable, as it comes at a time when the insurance industry has been hit hard by disasters this year, leading to surging losses for the insurers. Progressive's catastrophe loss amounted to $125 million for the quarter as compared to $47 million in the year-ago period. Rival Allstate (NYSE: ALL  ) suffered even more, with second quarter catastrophe losses of $2.3 billion.

Financials
Ohio-based Progressive has a long-term debt level of $1.9 billion on its books. Recently, the debt-to-capital ratio was reduced to $23.6% from 26.2% in the year-ago quarter. The company also has a good interest coverage ratio of 12.6 times, making it look comfortable on the debt-servicing and capitalization front.

The combined ratio, which indicates the percentage of claims and expenses paid out of premiums, is an important ratio to gauge the effectiveness of insurers. For Progressive, this figure indicates profitable underwriting in-house operations. For the math nerds out there, the company sports a 93.4% ratio. This is level is fine.

However, it has risen slightly from 92.7 in the same quarter last year. Several years ago, it consistently ran in the mid-80s. Anything below 100 is good, but a rising ratio is worth keeping an eye on, because it can suggest increased risk-taking and tougher competition.

Stiff competition
Progressive's online insurance sales have slowed down a bit. Though the company is already into direct selling over the Internet, competition is getting stiffer.

Berkshire Hathaway's (NYSE: BRK-A  ) (NYSE: BRK-B  ) Geico unit has been aggressively launching campaigns in a bid to attract customers, spending a whopping $800 million in advertisements last year. Allstate, another big player which banks on agent-selling, recently acquired White Mountains Insurance's (NYSE: WTM  ) online auto quotes and comparison-providing units to get into the online selling mode. This adds to the heated race for market share in the industry.

To increase sales, Progressive introduced an innovative auto insurance earlier this year which offers discounts based on driving habits. It is also bringing in more packages for auto and home insurances to retain and attract more customers. More of such innovations will be needed to tackle the highly competitive industry.

The Foolish bottom line
Growing premiums and policies is good news for Progressive. But the increasing combined ratio and stiff competition look somewhat concerning to me. It's something to keep an eye on.

Click here to add Progressive to your watchlist.

Fool contributor Neha Chamaria does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of White Mountains Insurance Group and Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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