Progressive Corp

Defying market gravity

In scouring the market with various screens I run, I recently came across a company with a stock price chart that sticks out like a sore thumb for how robust it has been in the face of market weakness – Progressive Corp (PGR).

It has risen practically without interruption, even in 2022 in the face of a major sell-off of the broader market indices:

Progressive Corp share price:

Source: Bloomberg

This company is the third largest underwriter of auto insurance in the USA, behind State Farm and Geico (Berkshire-owned):

Despite its scale, it has also been gaining about 1% point annually of market share within the US auto insurance market in recent years:

Source: Progressive Corp

It is notable that Progressive has managed to achieve the above market share gains while already being a player of significant scale, and not sacrificing profitability (ROE actually improved from FY18 onwards). By comparison at the other end of the scale, Lemonade, the digital-first startup (and a relative minnow!), is growing aggressively in its various categories (not so much auto yet, although that will ramp up with the integration of their Metromile acquisition) but is arguably “buying” market share via massive incurred losses: that company is growing policyholders by 30%+ p.a and net earned premium by 90%, while incurring a loss ratio of 90% (this is before other overheads need to be covered). It will likely incur a loss of $240m+ this year - the company’s market cap is $1.5bn.

Progressive’s underwriting margins have been consistently better than the overall industry in the US, and it has managed premium growth of 3x the market’s growth over 10 years:

Source: Progressive Corp

Similarly, a through-the-cycle ROE of >22% is very good – by comparison, Travelers and All State (two large, listed competitors) achieve average ROEs of around 12% and 13%, respectively, over a 10 year period.

Progressive’s main financial goal is communicated simply: it seeks to grow as rapidly as possible, while still achieving at least a 4% underwriting margin in any given reporting year. To date, they have been largely successful in this regard.

How has the business performed recently?

The past two years have been disruptive for most businesses, and short-term insurance is no exception. After benefitting in 2020 from Covid lockdowns (which reduced miles driven in the US and hence claims), Progressive has subsequently had to contend with rising claims frequency in 2021 (while they had reduced premiums the previous year to account for lower miles driven, saving customers $800m) as well as claims severity due to the impact of inflating used car prices and repair costs. Furthermore, weather-related catastrophe losses also resulted in underwriting losses in the group’s Property division (they also underwrite homes in addition to auto). The net result was a sharp decline in group profitability in 2021 – earnings per share halved versus the (admittedly high) base of 2020:

Progressive Corp: EPS, Combined ratio (*) and Loss ratio

(*) Combined ratio = loss ratio + expense ratio

Management commented that it focused heavily on prioritizing profitability instead of growth in 2H21, and hence the group took premium increases (while potentially sacrificing new business). Progressive added >1.3m Personal lines policies in 2021 (ending the year with 22.7m) but commented that “new applications will likely be a challenge given rate increases, but we will be well positioned when the industry catches up.” In 2021, Progressive filed personal auto rate changes averaging 8% countrywide.

In 2022, profits have fallen even further YTD – they generated an underwriting margin of 5% in 1H22 (vs 7% in 1H21; conditions deteriorated post Q1-21 onward), with the group producing a $0.41/share loss in 1H22. Backing out mark-to-market losses on their insurance float, I estimate core profits amounted to about $2.50/share for 1H22.

Notably, personal lines policy count was about 1% down at June 2022 vs a year prior – likely indicative of the company’s aggressive action on pricing: net rate increases were 2% for the quarter and 9% YTD.

Bloomberg consensus estimates for Progressive are earnings of $4.8/share this year, rising to $6.3/share in 2023:

Source: Bloomberg

So, from a relatively depressed base this year, profit growth is expected to average 23% for the next two years, rising beyond the FY21 peak quickly. My simple sense-check is that shareholders’ equity is currently $15.6bn, or $26.60 per share. If they earned their through-the-cycle ROE of 23% (average over 10 years), it implies $6.11 of earnings – and book value is growing. So, consensus expectations look reasonable.

Interestingly, the company also reports monthly numbers in quite a lot of detail – and its July results (released on 17th August) made for good reading:

The improvement in the combined ratio year on year, in particular, is a likely outcome of disciplined repricing of risk, while the drop in auto policy count (mostly concentrated in agency business) is consistent with this repricing, and in line with their commentary:

Encouragingly, there has been a dramatic improvement in the loss ratio for the Property business in July, as compared to the YTD metrics (mostly due to lower catastrophe losses):

At the current share price of ~$125, the stock is trading at a forward 20x P/E multiple to FY23e earnings. While there has been a significant rating improvement of this stock in recent years, this multiple does not appear overly expensive if the company can reassert market share growth as the broader insurance industry follows by repricing premiums, narrowing the relative value gap with Progressive in the minds of consumers who may have been “priced up”. Furthermore, the one-year forward earnings outlook likely does not represent peak margins or returns on equity.

I don’t currently (yet) own shares in Progressive, but this strikes me as a high quality company which should continue to do well over time - notwithstanding the short term earnings setback. At the very least, it should be on the ‘watch-list.’ In a way, it is disappointing that it hasn’t sold off with the broader market to provide an especially attractive entry point.

But that in itself is perhaps telling.

This note represents my personal views and opinion and in no way should be construed as advice or research - do your own due diligence!