Still Neutral on Progressive

Progressive Corp. (PGR - Analyst Report) holds a dominant position in product, service and distribution innovation, especially in Personal Auto. The company continues to focus on customer retention, actively manage its capital position and return wealth to its shareholders.

However, these positives are somewhat dwarfed by headwinds at its Commercial Auto businesses as well as higher combined ratio. We thus retain out Neutral recommendation on the company.

Progressive is seen as a leader in product, service and distribution innovation. It is also a leader in underwriting technology and the application of quantitative analytics in pricing and risk selection. These attributes aid it in writing higher premiums.

Net premiums written in the third quarter grew 4% with policies in force reporting growth of 5%. New businesses, higher premium per policy and customer retention helped the company to report better results. Business at Agency improved 2% while Direct Personal Lines increased 5%

The company also remains focused on maintaining a healthy policy life expectancy (PLE), a measure for customer retention. We expect the company to report a higher PLE in the coming quarters in light of the emphasis placed on competitive pricing for the current customers to ensure their retention.

Progressive continues to actively manage its capital position and return wealth to its shareholders in the form of share repurchases. During the third quarter of 2011, Progressive bought back 22.2 million shares for $411.2 million, bringing the year-to-date total to 42.3 million shares repurchased for $832.1 million. The company is still left with 59.7 million share under its authorization.

On the flip side, though Progressive was effectively lowering its combined ratios (improved from 94.6% in 2008 to 91.6% in 2009), it started reporting a higher combined ratio. It deteriorated to 95.2% in the third quarter. Progressive suffered cat loss of $63 million in the third quarter, with $20 million coming from Hurricane Irene.

Furthermore, the sluggish economy combined with an increased competition continues to impede performance at the Commercial Auto.

Progressive’s third quarter earnings missed the Zacks Consensus Estimate by three cents and year-ago quarter's results by 16 cents. Results were affected by lower investment income as well as higher expenses.

The Zacks Consensus Estimate for fourth-quarter 2011 is 34 cents per share. For full years 2011 and 2012, the Zacks Consensus Estimates are, respectively, $1.45 and $1.58.

The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the stock over the near term.

Headquartered in Mayfield Village, Ohio, The Progressive Corporation is one of the largest auto insurers in the country. It is a leading independent agency writer of private passenger auto coverage, market leader for the motorcycle product and is one of the leading companies in the commercial auto insurance market. It competes with Allstate Corporation (ALL - Analyst Report).

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