Progressive (PGR) is the fourth largest auto insurer in the U.S. and one of the top 20 home insurance companies.
Every month, the insurer releases a very detailed dashboard report, providing fundamental key metrics. The document gives an overview of the current business trend. Based on this report, the investor could update or adapt, if needed, his/her opinion on the valuation of the insurer, its operating performance, and its commercial development.
On April 17, 2018, the insurance company reported its March results. Living up to its reputation for delivering a robust operating performance, the company beat the estimates. The company reported a 90.3% combined ratio for March, in spite of $40 million in catastrophe losses, representing 1.8 loss ratio points. The net income increased by 31% to $140.6 million.
At the beginning of April, Progressive increased its ownership of the outstanding ARX equity to 86.7% from 69.0% at year-end 2017. The strategy of the company is to extend its presence on the regular P&C market and diversify its revenues without deteriorating its operating performance.
In spite of an overall positive environment (lower corporate tax rate, increase in the investment income, robust commercial development combined with a well-monitored underwriting process), I still consider that the company remains overvalued. Based on the FY2018 results I tried to forecast, my target price is in the range of $46 and $60 per share.
Excellent As Usual. Quite Boring In Fact.
Even if Progressive if the fourth largest auto insurer, the company succeeds in many years to deliver double-digit growth. Furthermore, the P&C insurer can maintain the level of its margins as well.
In March, the net earned premiums amounted to $2,279.7 million or a 20% increase compared to last year. All the lines of business grew at least by 17%.
On a year-to-date level, the total earned premiums grew by 19% to 7,174 million. All the lines of business increased at least by 16%.
However, the increase in the turnover does not mean profitability growth, in particular for an insurance company. The key metric for a P&C insurer is and remains the combined ratio. The lower the combined ratio is, the higher the profitability is. With a 90.3% combined ratio reported for March, the company ended the first quarter with a strong year-to-date and monthly performance.
On a segment side, the operating performance of the commercial motor insurance business deteriorated slightly with a monthly combined ratio of 96.1%. The personal lines of business delivered an excellent operating performance with a combined ratio of 89%. Because of the amortization of the costs related to the acquisition of a controlling interest in ARX, the expense ratio deteriorated by 6.0 percentage points and impacted negatively the combined ratio which ended at 98.6%. However, the combined ratio of the property business improved significantly, as the company reported, one year ago, a monthly combined ratio of 117.7%. In my view, the company is going to succeed to restore the profitability of the regular P&C activities.
On a year-to-date basis, the combined ratio of the property business improved by 6.6 percentage points to 90.0%, while the expense ratio was still impacted by the amortization expense associated with the acquisition of the controlling interest in ARX.
For 2018, I consider that the combined ratio should be better than in 2017. That's why I have reviewed my assumptions and felt that the company would report a combined ratio of 94% under the base case scenario.
Book Value and Earnings Estimation
Previously, I expected the book value to increase by around 10% and the diluted EPS to be in the range of $2.50 and $4.30.
I have updated the assumptions regarding the earned premiums growth, the combined ratio, and the pre-tax annualized investment yield. Hence the estimated EPS changed accordingly.
Based on the estimated earnings per share and the book value per share which would be reported for March, we can determine a forward valuation of Progressive by the multiples method. Based on the current book value per share and the TTM EPS, the intrinsic value is around $48 per share. Based on the FY2018 expected book value and EPS, the intrinsic value per share is in the range of $46 and $60.
In my view, the company remains slightly overvalued. For the investors who have already invested in Progressive, keeping their stocks is undoubtedly not a bad idea.
Progressive's dividend is paid annually in a lump sum, in an amount that is calculated on the basis of the insurance operating performance for the year. The annual variable dividend will be based on the following formula:
With the change in the tax rate (21% instead of 35%), the formula should change accordingly. Based on the assumptions I have taken to assess the FY2018 EPS and the latest gainshare factor released by the P&C insurer, I estimate the FY2018 dividend per share in between of $1.04 and $2.15. However, I would like to remind the investors that the dividend is sensitive to the underwriting income and the gainshare factor, which is assessed by the management.
As expected, the market reacted positively, when the company released its March 2018 results. The stock price grew by around 2%. However, in my opinion, the company remains overvalued, even by using the FY 2018 estimated metrics. Nevertheless, the investors, who have already invested in Progressive, should sleep well for the moment, as the insurer remains well-managed, combining steady growth and strong operating performance and continues to restructure the non-core activities (the property business) to make them more profitable.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.