Following Progressive's (PGR 0.01%) April earnings, which were announced in mid-May, investors were less than enthused. The insurer posted figures that made investors cautious, as profitability was hurt in the quarter due to increased claims. The stock dropped nearly 14% following the announcement.
Progressive recently presented solid May earnings figures and the value stock saw its price rebound as a result. The insurer saw its profitability metrics bounce back, more in line with its historical performance -- a good sign that the insurer will post another stellar quarterly earnings period when results are announced this month.
A strong May is a good sign for strong second-quarter earnings
Progressive reported its May financials, and in that investors saw net premiums written and net premiums earned increase 7% and 13% from last year, respectively. Policies in force increased 11% to $26.2 billion from last year as well. Moving to the bottom line, net income for the month was down 7% -- mainly due to a 31% decrease in net realized gains compared to last year.
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In the first two months of the second quarter, Progressive has seen net premiums written and net premiums earned increase 13% a piece. Net income was down 50%, largely due to a 55% decrease in net realized gains compared to last year.
Last year, the insurer saw large net realized gains on securities from its sale of U.S. Treasuries as well as large gains in its equity portfolio. This was due to stocks rebounding sharply in April following a steep sell-off in March, benefiting the insurer's gains in the second quarter last year. While investment gains aren't as large this year, the insurer's underlying business still grew at a steady clip.
Another positive note for Progressive is that its combined ratio of 93.1% for the month of May was an improvement from May 2020's 93.7% and the 96% seen in April 2021. Combined ratio is a measure of profitability in the industry; with a ratio under 100% meaning the insurer is underwriting profitable policies, while a ratio over 100% means it is losing money on its policies. Progressive has a history of stellar profitability, as it has not seen a combined ratio over 96% in more than 20 years.
Expanding its commercial lines of coverage with its recent acquisition
Progressive recently announced the completion of its acquisition of Protective Insurance Corporation, totaling $338 million. The acquisition was previously announced in February 2021.
Protective Insurance Corporation is a property-casualty insurer specializing in coverage for trucking and transportation fleets. Its largest products are commercial automobile and workers' compensation insurance.
In 2020, Protective Insurance had $441 million in net premiums written and a net income of $4.4 million. It was a tough year for the insurer, which saw net premiums written decrease 2.5% while net income declined 39%.
The addition of Protective Insurance helps Progressive expand on existing product lines. Specifically, the insurer sees an opportunity to grow its commercial line of coverage. In 2020, commercial coverage accounted for $3.1 billion in premium revenue, or only 12.5% of Progressive's total revenue. By adding Protective Insurance, Progressive gains the company's domain expertise while also expanding its share of the transportation industry insurance market.
Progressive continues to put up stellar numbers and is a great cash-generating business. While not necessarily a major acquisition, the company's purchase of Protective Insurance Corporation gives investors some insight into management's strategy -- which is to expand its commercial lines of coverage. Progressive's expansion into this area is worth keeping an eye on, as it could provide another growth opportunity for the already stellar insurance company.
