Progressive Earnings: Strong Improvement Amid Industry Headwinds

Progressive’s PGR third-quarter results show that the company continues to handle current industry headwinds better than peers and suggest that pricing actions are helping to restore profitability. If all of this holds, the bounceback in profitability will be a bit quicker and sharper than we expected. However, we remain comfortable with our $114 fair value estimate in the meantime and will maintain our narrow moat rating. While we see Progressive as one of the most attractive insurance franchises in the United States, the stock currently looks materially overvalued to us. We think the current share price implies that Progressive’s long-term future will be much stronger than its past, and we don’t see a justification for that view.

While growth slowed a bit sequentially, growth in policies in force for personal auto was strong at 12% year over year. Results also suggest that the company continues to take material pricing increases, roughly in line with what we’ve seen the past year. We think Progressive’s relatively early move to shore up pricing is paying dividends currently.

The improvement in underwriting results was the main development in the quarter. The combined ratio for personal auto of 91.1% during the third quarter was a dramatic improvement from 100.1% last year and 99.5% in the previous quarter. We expect pricing increases to ultimately outrun claims headwinds, but this quarter suggests Progressive has rapidly normalized its results. Still, we would note that the company has shown temporary improvement at times in the past couple of years, only for the negative industry claims trends to reemerge and push the combined ratio back up. So while the most recent quarter is a positive sign, Progressive and the industry may not be out of the woods just yet.