Progressive Reports Mixed Results

Progressive Corp.’s (PGR - Analyst Report) earnings per share for the fourth quarter of 2011 were 42 cents, declining 8% from 45 cents in the year-ago quarter. Results were however above the Zacks Consensus Estimate of 35 cents. Net income dropped 14% from fourth quarter 2010 to $256.7 million in the quarter under review.

The company recorded net premiums of $3.54 billion in the quarter under review, up 8% from $3.26 billion in the year-ago quarter. Net premiums earned were $3.78 billion, up 4% from $3.62 billion in the year-ago quarter.

Net realized gains on securities in the fourth quarter of 2011 were $29.5 million, plummeting 62% from $77.9 million in the fourth quarter of 2010. The combined ratio − the percentage of premiums paid out as claims and expenses − improved only 10 basis points over the prior-year quarter to 93.0% in the reported quarter.

Fiscal 2011 Snapshot

Progressive’searnings per share for full year 2011 were $1.45, down sharply 31% from $2.11 per share in the year-ago period. Results were a penny below the Zacks Consensus Estimate of $1.46 cents. Net income decreased 34% from the last year to $924.3 million.

Net premiums written for full year 2011 were $15.1 billion, up 5% year over year. Net premiums earned increased 4% to $14.9 billion in the year.

Net realized gains on securities in 2011 were $102.6 million, increasing 7% year over year. The combined ratio deteriorated 60 basis points to 93.0% in full year 2011.

Numbers in December

Progressive publishes monthly financial reports. During December, policies in force remained healthy, with the Personal Auto segment recording a 5% year-over-year increase but declining 0.14% sequentially. Special Lines also increased 5% year over year but declined 0.4% from the preceding month.

In Personal Auto, Direct Auto reported a growth of 6% year over year but declined 0.18% from the preceding month. Agency Auto was up 4% year over year but declined 0.11% from the last month. However, Progressive’s Commercial Auto segment continued to drag results, reporting declines of 0.3% year over year.

Total expenses for the reported month increased 3.6% to $1.08 billion from $1.04 billion in December 2010. The major components contributing to the increase in total expenses were a 3% increase in losses and loss adjustment expenses as well as in policy acquisition costs and an 8% increase in other underwriting expenses.

Progressive reported a book value per share of $9.47, up from $9.13 as of December 31, 2010.

Return on equity on a trailing 12-month basis was 16.5%, down from 17.1% in December 2010. The debt-to-total-capital ratio was 29.6% as of September 2011, up from 24.5% as of December 2010.

Dividend Update

On December 9, 2011, the board of directors declared an annual dividend of 40.72 cents per share. The dividend will be paid on February 3, 2012, to shareholders of record on January 26, 2012.

We maintain our Neutral recommendation on Progressive. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the shares over the near term.

Headquartered in Mayfield Village, Ohio, 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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