Hold Progressive, Pre-Earnings

We anticipate The Progressive Corporation (PGR - Analyst Report) will release its 2Q08 results the week of July 14, 2008. While 1Q08 results were a penny ahead of our expectations, results for the month of May were adversely affected by a reduction in net premiums written and higher investment losses.

Historically, PGR has been considered as one of the best run and most profitable personal lines insurers in the industry, demonstrated by stronger premium growth and substantially higher ROE than most of its peers. Though we suspect 2Q08 results could be a penny or two better than our estimate, competition continues to intensify premium and earnings growth has slowed (a trend that we expect to continue). Therefore, we reiterate 2008 and 2009 earnings expectations, as well as our Hold recommendation on the shares of PGR.

We maintain our FY08 and FY09 EPS targets of $1.35 per share. At the current price, the shares of Progressive trade at 2.87x its 1Q08 book value of $7.01 per share. The company's multiple is currently 120 basis points above its peer group median (up from 99 basis points as of our last report, matching the 120 basis points of seven quarters ago), reflecting its long track record of superior profitability.

Based on an industry wide deceleration in personal line pricing, we think earnings growth of most of the participants may moderate and valuation multiples may through 2008 and into 2009 potentially. Depending on how well it will execute its strategy, PGR's upside is limited relative to its downside risk. At best, our new six-month price target of $21.50 per share (up from $19.05 per share) incorporates the current multiple of 2.7x our estimated book value of $8.00 per share as of December 31, 2008.

Read the full analyst report on PGR