Progressive Earnings: Strong Growth in an Improving Market

Progressive continued to show its strength in the fourth quarter. While personal auto insurers have seen underwriting results recover this year due to pricing increases, Progressive continues to be a relatively strong performer in terms of underwriting profitability and growth, which we think reflects well on management. Narrow-moat Progressive generated an outsize return on equity of 36% this year as it exploited industry tailwinds. The company is tracking a bit ahead of our expectations, and we expect to increase our fair value estimate to $163 from $151 per share. However, we still see shares as materially overvalued, and we believe the market is overly focused on the near-term outlook. Our valuation assumes return on equity trends back in line with the company’s historical average over the next few years.