Progressive's Commercial Auto a Concern

Growth remains a challenge at Progressive Corporation's (PGR - Analyst Report) Commercial Auto and Agency Auto businesses. The economic downturn, combined with increased competition, has adversely affected both of these markets.

Policies in force in August for Commercial Auto and Agency Auto were down 5% and 1%, respectively. However, Direct Auto and Special Lines were up 12% and 3%, respectively.

Progressive's earnings for August were impressive as the company benefited from an increase in premiums written while steering clear of investment losses. The company, which reports earnings on a monthly basis, posted a profit of $55 million, or 8 cents per share, compared to a loss of $135.2 million, or 20 cents, a year ago.

Like Progressive, other auto insurance providers such as Allstate Corp. (ALL - Analyst Report), Infinity Property and Casualty Corp. (IPCC - Snapshot Report) and State Auto Financial Corp. (STFC - Snapshot Report) have experienced the severe impact of the weak economy, which has significantly hampered consumers' confidence and their ability to purchase automobile insurance policies. Additionally, the U.S. auto insurance industry has been subject to unusually high expenses due to fraudulent activities.

Nevertheless, we expect Progressive to benefit from the recent signs of economic improvement and from indications of an increase in auto insurance rates. Also, Progressive enjoys a number of factors that bode well going forward, including its industry-leading position, strong risk-based capital ratios, underwriting margins and stability, and the benefits of its cost-containment measures. Therefore, we have a Neutral recommendation on its shares.