Ahead of the Bell: Progressive downgraded

Fearing a seasonal increase in losses and its current valuation, an analyst cut his rating Monday on property and casualty insurer Progressive Corp.

Friedman, Billings, Ramsey & Co. analyst Bijan Moazami cut his rating on Progressive to "Market Perform" from "Outperform" and lowered his price target to $17 from $19.

Shares of Progressive closed Friday at $15.17.

In a research note, Moazami said Progressive's valuation combined with concerns about short-term profitability no longer warrant FBR's top stock rating.

Progressive's loss ratio is highly seasonal and approaching the peak period for insurance claims, especially among its insurance coverage for recreational vehicles, Moazami wrote in the note.

The insurer is also likely to face an increase in personal injury protection losses in the near future, Moazami said. Personal injury protection provides customers with money to cover medical expenses and lost wages in the event of an auto accident regardless of fault. During economic downturns, customers are more likely to file claims for personal injury protection, Moazami said, which could further add to Progressive's near-term costs.

Because of the increased loss assumptions for Progressive, Moazami lowered his operating earnings estimate for 2009 to $1.45 per share from $1.60 per share. He cut his 2010 earnings estimate to $1.50 per share from $1.60 per share.

Analysts polled by Thomson Reuters, on average, forecast earnings of $1.50 per share for 2009 and $1.44 per share for 2010.

Moazami also noted that Progressive trades at too high a premium above one of its main competitors, Allstate Corp. Progressive's combined ratio has been worse than Allstate's over the past two years, yet Progressive trades at 2.4 times book value while Allstate trades at 1.05 times book value, Moazami said.

Combined ratio measures how much an insurer pays out in claims and expenses compared to how much it receives from writing new insurance.

While Moazami notes Progressive should trade at a premium above Allstate, the gap is too wide and Progressive shares could be limited by the high book value.