On Nov 13, 2014, we issued an updated research report on Progressive Corp. (PGR).
The company’s third-quarter 2014 earnings outperformed the Zacks Consensus Estimate and improved year over year. Increase in premiums in the Agency business, Direct Personal Lines and Commercial Auto business aided top-line as well as bottom-line growth. This Zacks Rank #2 (Buy) stock has been delivering positive earnings surprises in the trailing four quarters.
Progressive Corp.’s management remains focused on customer retention. The policy life expectancy (PLE), a measure for customer retention, has been increasing for the Agency business and Direct auto businesses. Apart from this, the company has been taking other initiatives to provide consumers with distinctive new auto insurance options. These include Snapshot and Name Your Price programs, which are expected to drive growth.
The company has also been strengthening its balance sheet by increasing cash balance and lowering debt levels. The debt-to-capital ratio improved over the years and we expect the company to engage in deleveraging activities to record an even better debt-to-capital ratio.
In its consistent efforts to improve shareholder value, Progressive Corp. engages in share buybacks, besides paying annual dividend. Given its financial strength, we expect more capital deployment going forward.
However, as a property and casualty insurer, Progressive Corp. is exposed to catastrophe occurrences. The combined ratio represents the percentage of premiums paid out as claims and expenses, and is a determinant of underwriting profitability. The company’s combined ratio has been continuously decreasing over the last few quarters but in the last reported quarter, it deteriorated marginally. If any severe catastrophes occur in the near term, the combined ratio could further deteriorate.
The soft economy, combined with heightened competition, has adversely affected Commercial Auto businesses where consistent growth could be challenging. Progressive Corp.’s primary customers, which include small businesses are affected by the low level of employment, construction spending and new business creation, along with constraints on commercial credit. All these have led to a reduction in insurable risks.
With respect to estimate revisions, the Zacks Consensus Estimate for 2014 and 2015 increased as the estimates were raised over the last 60 days. It is currently pegged at $1.73 (up 1.2% as 6 of 14 estimates moved north) for 2014 and $1.73 (up 0.6% as 4 of 14 estimates were raised) for 2015. The expected long-term earnings growth rate of the stock is 7.10%.
Other Promising Stocks
Investors interested in the same sector could consider players like Alleghany Corp. (Y), AmTrust Financial Services, Inc. (AFSI) and Navigators Group Inc. (NAVG), all of which sport a Zacks Rank #1 (Strong Buy).
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