We have retained our Neutral recommendation on Progressive Corp. (PGR) following impressive second quarter results. However we believe that high costs and a soft macroeconomic environment are likely to weigh on the company’s growth. This leading auto insurer currently carries a Zacks Rank #3 (Hold).
Why the Reiteration?
Progressive’s second-quarter earnings came in at 54 cents per share, surging almost 176% year over year. Results also surpassed the Zacks Consensus Estimate of 40 cents per share by 35%. Over the last 30 days, six out of fourteen estimates moved up while two were nudged down to increase the Zacks Consensus Estimate for 2013 by 1.3% to $1.58. It also translates to a year-over-year improvement of 37.6%.
Progressive has a strong position in the auto insurance market owing to its competitive rates and multi-product offering. It is also a leader in underwriting technology and the application of quantitative analytics in pricing and risk selection. The company has been generating enough growth in all its segments owing to higher premiums. The second quarter was also no exception to this. Moreover the company’s focus on customer retention is expected to fetch more revenues and enhance growth in the upcoming period. Although rate increases undertaken by the company in 2012 had reduced policy life expectancy (a measure for customer retention) as policies begin to renew, the numbers are expected to improve.
Additionally, Progressive’s continuous efforts to return capital to shareholders through share repurchase and dividend payout is another positive factor. During the second quarter, Progressive bought back 3 million shares and is left with 36.8 million under its 75 million buyback program authorized in Jun 2011. This also establishes the inherent strength of Progressive’s balance sheet.
However, the company’s increased exposure to catastrophe losses keeps growth volatile owing to the uncertainty of the events. Additionally, Progressive’s Commercial Auto operations mainly cater to small businesses. Depressed levels of employment, construction spending and new business creation, combined with constraints on commercial credit in recent times have led to a reduction in insurable risks for these small businesses. This makes us skeptical regarding the prospect of the segment in the upcoming term.
Other Stocks to Consider
Among other insurers, Global Indemnity Plc (GBLI), EMC Insurance Group Inc. (EMCI) and Everest Re Group Limited (RE) carry a favorable Zacks Rank #1 (Strong Buy) and are worth considering.
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