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Progressive Earnings Fall Despite Premium Growth

By Dan Caplinger - May 7, 2016 at 11:20AM

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The auto-insurance giant is taking a long-term view with respect to maximizing profitability.

Image: Progressive.

Insurance company Progressive (PGR 1.90%) has taken been a player in the increasingly competitive auto-insurance industry for a long time. Yet even though the insurer still sees that business as a key part of its growth strategy going forward, Progressive has also made forays into other types of personal insurance coverage as well as building up a modest commercial and property business. Coming into the release of its first-quarter quarterly report, investors already had a sense of how the company had performed, but they were looking for guidance on longer-term strategic thoughts. Let's take a closer look at Progressive and how its quarter went.

How Progressive fared last quarter
Progressive's first-quarter results came as a nice rebound from a fairly sluggish fourth quarter of 2015. Net premiums written rose by 15% to $5.82 billion, and earned premiums rose at pace that was only slightly slower at 14%. However, some of the same trends that held back bottom-line growth were still in evidence during the first quarter, as net income fell 13% to $258.2 million. That produced earnings of $0.44 per share, which was more than a nickel per share below last year's first-quarter figure as well as the consensus estimates among investors for the period.

A closer look at Progressive's results shows that the strength in certain parts of the insurance company's business remained consistent with past performance. The strongest area of Progressive's business was in direct-sold auto-insurance policies. There, policies in force jumped by 11% to 5.18 million, making up more than half of the company's total personal auto policies in force. However, agency-sold auto policy numbers fell were up a more modest 2% to 4.87 million, bringing Progressive's total gains for personal auto overall up 6%.

Outside of the auto arena, Progressive also saw mixed performance. Progressive's special-lines business on personal insurance policies were up 2% from year-ago levels to 4.15 million, and that growth rate was consistent with the pace of growth that Progressive has seen in the past. The commercial lines segment enjoyed accelerating growth of 10% to about 575,000 policies in force.

The full quarterly report revealed more details about Progressive's segments. Premium growth in the direct personal lines business jumped by mid-teen percentages, outpacing agency premium growth of 6%. Commercial lines enjoyed premium growth exceeding 20%.

As we saw in the fourth quarter of 2015, the tepid investment climate was also a factor that weighed on Progressive's results. The company's taxable equivalent return for the quarter was 1.2%, which was consistent with Progressive's own expectations and little-changed from the year-ago quarter. Net investment income put in a respectable gain of 13% to $118.8 million, but net realized gains on securities fell by nearly half. Year-over-year, book value was up almost 6% to $12.97 per share.

Can Progressive keep driving forward?
The company was careful about reining in too much excitement about the strong gains in business. Quoting from CEO Glenn Renwick's letter to shareholders in the quarterly report, "These are certainly welcome periods but should be accepted along with the more global perspective that our growth is not always smooth." Renwick also reminded investors to balance the sense of achievement in producing strong gains with "the sobering reality that growing a business like ours and maintaining profitability is both a significant challenge and one not consistently achieved by many."

One troubling aspect for Progressive is that key ratios of performance have shown signs of declining quality. Higher losses sent personal lines combined ratios up almost a full point to 94.5, and the commercial-lines performance was even worse, climbing almost six points to 88.9. Lower ratios are better, because the combined ratio indicates the percentage of premiums used for loss payments and for underwriting expenses. Progressive noted that weather impacts played a role in the performance, but it's still a trend that investors need to pay attention to in the future.

Yet Progressive is keeping itself focused on its strategic vision. Reporting monthly numbers makes its performance appear volatile, but the nature of Progressive's business rewards factors like consumer retention, building brand appeal, and managing economic risk effectively.

Progressive investors didn't react strongly to the release of the report, rising in line with the overall stock market. As long as Progressive can keep navigating the twists and turns in its road toward growth, shareholders should benefit in the long run.

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