Progressive Surpasses Estimates

Progressive Corp.’s (PGR - Analyst Report) third quarter earnings of 40 cents per share were 7 pennies ahead of the Zacks Consensus Estimate of 33 cents. Investment gains coupled with increase in premiums written have contributed to this result.

Also, provisions for income taxes were reduced by $18.0 million in September 2009. As with the improvement in investment market conditions, the company reversed the remaining valuation on its deferred tax asset.

Progressive’s net premiums written increased 1% year-over-year to $3.55 billion. The company recorded a pre-tax investment gain of $38.8 million, compared to a loss of $1.4 billion in the year-ago quarter. Combined ratio, which reflects the percentage of premiums paid out as claims and expenses, improved to 92.7% from 95.1% recorded in the year-ago period.

Policies in force were good in Personal Auto and Special Lines, which were up 5% and 3% year-over-year, respectively. In Personal Auto, the 13% increase in Direct Auto was partially offset by a 1% decrease in Agency Auto.

However, growth remains a challenge at Progressive’s Commercial Auto business, which was down 5% year-over-year. This line continues to be negatively impacted by the downturn in the economy, primarily in the housing and construction sectors. Combined with this, increased competition has added to its woes.

Progressive’s recurring pre-tax investment yield was 3.7% year-to-date, versus 4.8% reported in the year-ago comparable period. Reported book value was $8.13 per share at Sept. 30, 2009, compared to $7.24 at June 30, 2009. Return on equity on a trailing 12-month basis was 20.1%. During September, Progressive repurchased 1.5 million shares at an average price of $16.99.

Year-to-date, Progressive has earned $752.5 million, or $1.12 per share, compared to a loss of $229.3 million, or 34 cents, in the comparable prior-year period.

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 struggled against 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, the company enjoys a number of advantages including an 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 the shares of Progressive.