Progressive has been on a roll over the last two years, fueling a sharp rise in the stock price. In 2018, net written premiums grew 20% and the company posted an underwriting margin of 9.4%. Management's goal has been to keep the margin above 4%, which it has well exceeded in recent years.
Progressive turned in another strong quarterly report in early May, with net written premiums up 16% over the prior-year period and an underwriting margin of 11.2%. Strong underwriting growth fueled a 50% jump in earnings per share year over year.
As the company continued to post stellar operating results, investors were willing to pay more for each dollar of earnings. At the start of 2019, the stock traded for a forward P/E of less than 12, but now trades for 15.7 times this year's earnings estimate, which explains part of the 32.5% advance in the shares so far this year.
The first quarter did include a word of caution from CEO Tricia Griffith. While Progressive continues to attract new policyholders, Griffith said, "There are certainly signals of a softening personal auto market." She clarified during the conference call that executives are not seeing any softening in pricing, but instead, they are seeing "less shopping." Fewer people shopping for better rates means Progressive has less chance to win over new customers from other insurance companies that may not be able to match its competitive rates.
Griffith also said that management has a lot of experience navigating soft markets, which partly explains why Progressive has continued to post strong growth. The company is effectively using marketing, selling more products and services to existing customers, and investing more in its agents to help them sell more policies to combat a soft market.
Progressive doesn't offer guidance, but analysts expect earnings growth on an adjusted basis to moderate this year, improving to $5.25 per share compared to $4.99 in 2018.
Investors should be aware that the valuation has gradually drifted higher over the last decade, so there is less margin for error as Progressive moves forward.