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Progressive Back in Neutral Lane

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We are upgrading Progressive Corp. (PGR - Analyst Report) to Neutral from Underperform on the back of solid third quarter performance and the announcement of a special dividend.

Third quarter earnings outpaced the Zacks Consensus estimate as well as the year-ago results. Higher premiums largely drove the improvement. Net premiums written in the third quarter grew 10% with policies in force reporting growth of 5%. Higher premium per policy and customer retention aided the company to report better results.

To return more value to it shareholders, Progressive undertakes share buybacks besides paying annual dividends. Recently, the Board approved a special dividend of $1.00. This special dividend will be paid in addition to Progressive’s annual cash dividend. The special dividend will allow Progressive to return about $605 million to shareholders, that further establishes the inherent strength of its balance sheet. The company also bought back 4.4 shares in the third quarter with 42.3 million shares remaining under its authorization.

Management continues to focus on customer retention. The policy life expectancy, a measure for customer retention, for its Agency auto business increased 4%. Also, Progressive’s Sanpshot and Name Your Price programs are expected to drive growth. 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.

On the flip side, we expect underwriting margins to remain volatile considering the loss cost trends and the soft economic environment. Underwriting margin exhibited a declining trend over the several past quarters. However, the third quarter saw improvement in underwriting margin to 4%, in line with the company’s long-term target of 4%.

Further, combined ratio, which is a primary measure of underwriting profitability, is continually deteriorating. Therefore, higher combined ratio concerns the company’s profitability.

Nevertheless, the company is poised to benefit from impressive operating performances and its market leading position. A strong balance sheet and favorable financial strength rating are among the positives.

Progressive currently carries a Zacks #3 Rank, translating into a short term Hold rating. The Allstate Corporation (ALL - Analyst Report), which competes with Progressive, shares the same Zacks Rank.
 

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