Shares of insurance giant The Progressive Corporation (PGR 9.51%) fell on Wednesday, down 9% as of 2:14 p.m. EDT.
Progressive reported its June and second-quarter results today. While June showed a deceleration in premiums written and a decline in earnings relative to last year, the full second-quarter earnings per share figures grew, and actually beat expectations. However, Progressive's full-quarter top line up came in a bit short, leading to concerns over future growth.
NYSE: PGR
Key Data Points
Progressive's mixed results could be due to GEICO competition
In the second quarter, Progressive reported earnings per share of $5.67, up 5% and beating analyst expectations of $5.30. However, the company's net premiums written, a good proxy for top-line growth, came in at $21.08 billion, up 5% but short of analyst expectations.
At first glance, the top-line miss shouldn't matter as much as the bottom line, especially for insurance companies. Progressive's combined ratio of 87.3% still came in lower than the expected 88.8%. The combined ratio shows all corporate costs as a percentage of premiums; anything below 100% indicates underwriting profit before investment revenue, so the lower the combined ratio, the better.
Still, the trends may have been a bit concerning. June's monthly figures, which Progressive discloses, showed slowing growth: net written premiums were up just 3%, a deceleration from prior months, while June's year-over-year profits declined. And while the company's second quarter combined ratio came in below expectations, it was still slightly higher than last year's 86.2%.
So, while the bottom line beat expectations for the quarter, the trend remains one of deceleration and slightly lower profitability compared with last year. The trend could reflect a softening insurance market overall following years of price hikes, or perhaps stronger competition. Of note, Warren Buffett's conglomerate, Berkshire Hathaway (BRKA 0.52%) (BRKB 0.48%), owns GEICO, a Progressive competitor, and has undergone a major technology overhaul over the past few years in order to catch up with Progressive in telematics technology. That competitive dynamic could be at play here.
Image source: Getty Images.
Progressive looks cheap after the pullback
After today's decline, Progressive shares trade at just 10.5 times earnings, which is quite low; however, Progressive's price-to-book ratio is 3.5 times, which is somewhat high for an insurance company.
The discrepancy between the low P/E ratio and the high P/B ratio indicates that Progressive is earning extremely high returns on equity. While that is the sign of a competitively advantaged company, should new competitive threats emerge, such as GEICO, then Progressive's profitability could revert to more industry-standard levels. While Progressive's profitability is still quite good, the decelerating trends are clearly worrying investors today.
