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Will Higher Premiums Aid Progressive's (PGR) Q3 Earnings?

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The Progressive Corporation PGR is slated to report third-quarter 2018 results on Oct 16 before market open. The company has a solid track of delivering a positive surprise in each of the last four quarters.

Factors to be Considered in Q3

Progressive is expected to have witnessed another quarter of sturdy policies in force across all its business lines, driving premiums higher. This coupled with improved investment income (attributable to sustained rate hikes) and higher service revenues and fees as well as other revenues should have fueled top-line improvement in the to be reported quarter. The Zacks Consensus Estimate for revenues is pegged at $8.2 billion, up 20.8% year over year.

The company’s efforts to bundle auto products with property insurance has been showing positive results. Solid performances at Vehicle and Property businesses might have benefited Personal and Commercial business lines.

Personal auto business likely has benefited from focus on marketing and competitive product offerings as well as a strong market presence. Progressive boasts being one of the leading auto insurers in the United States.

The company’s Property business has already gained traction. Increasing occurrences of cat events are inducing more policy writings, which in turn is supported by economic recovery and a strengthening labor market. Progressive’s compelling product portfolio continues to create growth opportunities. Thus, the Property business is expected to have delivered solid results in the third quarter.   

However, expenses might have increased due to higher loss and loss-adjustment expenses, policy acquisition costs plus other underwriting expenses.

The third quarter of a year generally bears the brunt of unprecedented catastrophes. A hurricane season typically gathers strength in August and September. This time was also no exception as the company suffered the wrath of Hurricane Florence. A Citigroup analyst has estimated Progressive to have suffered $21 million in cat loss as the company has exposure to North Carolina, where the hurricane made landfall.

Catastrophe modeller Risk Management Solutions estimated insured losses to the insurance industry in the range of $15-$20 billion, stemming from Hurricane Florence.

Nonetheless, prudent underwriting and competitive rates have likely limited the downside.  The Zacks Consensus Estimate is pegged at $1.47 per share, reflecting 178.1% year-over-year growth.

What the Quantitative Model Says

Our proven model does not show that Progressive is likely to beat estimates this to be reported quarter. This is because a stock needs to have both a positive Earnings ESP and a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. But that is not the case here as you will see below.

Zacks ESP: Progressive has an Earnings ESP of -1.00% as the Most Accurate Estimate of $1.13 is pegged below the Zacks Consensus Estimate of $1.14. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.

Zacks Rank: Progressive sports a Zacks Rank of 1, which increases the predictive power of ESP.

We caution against all Sell-rated stocks (#4 or 5) going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Some stocks worth considering from the insurance industry with the right combination of elements to come up with an earnings beat this time around are:

RenaissanceRe Holdings Ltd. RNR that is set to report third-quarter earnings on Oct 30. The stock has an Earnings ESP of +6.69% and a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank stocks here.

MGIC Investment Corporation (MTG - Free Report) that has an Earnings ESP of +3.21% and a Zacks Rank #2. The company is slated to report third-quarter earnings on Oct 17.

Torchmark Corporation TMK with an Earnings ESP of +0.44% and a Zacks Rank #2. The company is slated to announce third-quarter earnings on Oct 23.

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