Progressive: Earnings Regress

| About: Progressive Corporation (PGR)
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Auto insurer Progressive Corporation’s (NYSE:PGR) earnings for November fell to 12 cents per share compared with 20 cents in the year-ago period. Though the company achieved a growth in premium writings, the year-over-year decline in earnings reflect a large gain from the sale of U.S. Treasury securities in the prior-year period.

The company, which reports earnings on a monthly basis, disclosed an income of $80.0 million, down from $137.5 million in the prior-year period. In November 2008, Progressive experienced $100.1 million of net realized gains, primarily from the U.S. Treasury securities sale for tax-planning purposes. Realized gains in November 2009 were $6.1 million.

Progressive’s net premiums written increased 2% year-over-year to $942.1 million. Combined ratio, which reflects the percentage of premiums paid out as claims and expenses, improved to 92.2% from 93.8% recorded in the year-ago period.

Policies in force (PIF) were good in Personal Auto and Special Lines, which were up 5% and 3% year-over-year, respectively. In Personal Auto, Direct Auto reported a 13% growth in PIF while Agency Auto was flat year-over-year.

However, Progressive’s Commercial Auto business still remains a drag on its earnings. The segment was down 5% year-over-year. This line continues to be negatively impacted by the downturn in the economy, primarily in the housing and construction sectors. Combined with this, increased competition has added to its woes.

Progressive’s recurring pre-tax investment yield was 3.7% year-to-date, versus 4.8% reported in the year-ago comparable period. Reported book value was $8.56 per share at Nov 30, 2009, up from $8.34 at Oct 31, 2009, and $8.13 at Sep 30, 2009. Return on equity on a trailing 12-month basis was 17.0%. During November, Progressive repurchased 2.2 million shares at an average price of $16.99. In early November, approximately $300 million of its securities were reallocated into common equities.

We expect Progressive to benefit from the recent signs of economic improvement and from indications of an increase in auto insurance rates. The company also enjoys a number of positives, including its industry-leading position, strong risk-based capital ratios, underwriting margins and stability, and the benefits of its cost-containment measures.