Pgr Road
Image source: Progressive.

The auto insurance industry has become increasingly competitive, and Progressive (NYSE:PGR) has done its best to distinguish itself from its peers through unique advertising, and an unusual willingness to stand up to rivals like Berkshire Hathaway's (NYSE:BRK-A) (NYSE:BRK-B) Geico unit by revealing comparable pricing. Still, coming into Progressive's fourth-quarter financial report Wednesday, investors expected the company to suffer a decline in earnings.

Progressive was able to cushion the blow to its bottom line, surpassing expectations, even though it wasn't able to provide full-blown earnings growth. Let's look more closely at how Progressive did to finish out 2015, and what's ahead for the company.

Progressive keeps driving higher
Progressive's fourth-quarter results showed a slowing pace of growth for the auto insurance specialist. The company saw net premiums written climb 5%, to $4.84 billion, and earned premiums also rose at the same 5% pace. That's much slower than the double-digit percentage gains from the first half of 2015, with December being particularly weak in showing 9% to 11% declines in premium revenue.

The result was an 11% drop in net income, to $330.4 million for the quarter, and that resulted in earnings of $0.56 per share. That was down 10% from year-ago figures, but it managed to top the consensus forecast by nearly $0.10 per share.

One thing to keep in mind about Progressive's year-over-year results is that the comparison isn't entirely fair. The reason is that operating results for 2014 included an extra week of activity for December and for the fourth quarter due to the way in which Progressive accounts for its fiscal accounting periods. The company said that, if you adjust for that extra week in the year-ago period, premium revenue would have risen 13% for the quarter.

Looking more closely at Progressive's numbers, the same trends that we've seen for awhile continued in the fourth quarter. The company's agency-sold auto-policy counts remained almost unchanged, at 4.74 million, but direct sales continued to produce stronger growth, climbing 9%, to 4.92 million. Progressive's special-lines business on personal insurance policies maintained its slower pace of gains, climbing 2% from a year ago. The company's commercial-lines segment saw policy growth of 8%; but with just more than 555,000 policies in force, that part of Progressive's business is relatively small.

Overall, Progressive had a good 2015 from a business perspective. Premiums written climbed 10%, and most of its expenses climbed at a slower rate than its revenue growth.

The problem, though, is that Progressive suffered in its investment portfolio. Net investment income climbed 11%, to $454.6 million, but the company's total realized gains on securities got cut in half from 2014, as impairment losses tripled. Even worse, unrealized losses on securities amounted to almost $213 million, and that was primarily responsible for the 23% drop in total comprehensive income available to Progressive for the year.

What's down the road for Progressive in 2016?
One key for Progressive's future success it to keep its operating metrics solid. The company reported a favorable company-wide combined ratio of just 92.5, indicating that Progressive is using smart underwriting practices to bring in profitable business. Actuarial adjustments allowed the company to decrease its loss reserves by $192 million in 2015, freeing up capital, and further demonstrating its ability to take on customers whose loss experience will be favorable.

In addition, the future direction of interest rates will play a major role. Unlike Berkshire Hathaway, which has an extensive portfolio of operating companies and stock holdings, 75% of Progressive's investment portfolio is in fixed-maturity bonds and similar securities. Only about 13% is held in common stock, limiting Progressive's exposure to the stock market along with its potential investment growth.

Progressive investors seemed satisfied with the company's numbers. The stock climbed 2% in the first hour of trading following the announcement. If Progressive can avoid the potential short-term negative impact of higher rates on its bond portfolio, then its prospects for 2016 appear to be sound and promising.

Dan Caplinger owns shares of Berkshire Hathaway. The Motley Fool owns shares of and recommends Berkshire Hathaway. The Motley Fool recommends Progressive. 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.