ALL Allstate Corporation

Progressive Corp. (PGR) holds a dominant position in product, service and distribution innovation, especially in Personal Auto. The company continues to focus on customer retention as well as actively manage its capital position and return wealth to its shareholders.

However, these positives are somewhat dwarfed by headwinds at its Commercial Auto businesses as well as volatile underwriting margins. We thus retain out Neutral recommendation on Progressive.

The company is also a leader in underwriting technology and the application of quantitative analytics in pricing and risk selection. The company’s rates are very competitive in all its markets and it continues to benefit from its expanded multi-product offering.

Progressive is also effectively lowering its combined ratios. It improved from 94.6% in 2008 to 91.6% in 2009. Though the ratio deteriorated to 92.4% in 2010, the company again delivered a lower combined ratio of 90.3% in the first quarter of 2011, though it deteriorated to 93.4% in the second quarter.

Moreover, the policy life expectancy, a measure of customer retention, for its Agency auto products is now higher than the year-ago level. We expect the company to report a higher PLE in the coming quarters in light of the emphasis placed on competitive pricing for the current customers to ensure their retention.

During the second quarter of 2011, Progressive bought back 13.3 million shares for $282.9 million. Furthermore, in June 2011, the company’s board approved a new share buyback authorization of $75 million. The company is also effectively lowering the debt-to-total-capital ratio. The ratio was 23.6% as of June 2011, down from 23.7% as of March 2011. In July, the company bought back $222.9 million of debt.

On the flip side,the sluggish economy combined with an increased competition has adversely affected the Commercial Auto market.

The fluctuating loss cost trends is expected to affect the underwriting margins. It was 5.4% in 2008, deteriorating to 8.4% in 2009, improving to 7.6% in 2010 and again deteriorating to 9.7% in the first quarter of 2011. However, it improved to 6.6% in the second quarter.

Progressive reported second quarter earnings per share of 38 cents a share, though lagging the Zacks Consensus Estimate. However, earnings were ahead than a year ago driven by higher investment gains and higher premiums earned.

The quantitative Zacks #4 Rank (short-term Sell rating) for the company indicates downward pressure on the shares over the near term.

Headquartered in Mayfield Village, Ohio, The Progressive Corporation is one of the largest auto insurers in the country. It is a leading independent agency writer of private passenger auto coverage, market leader for the motorcycle product and is one of the leading companies in the commercial auto insurance market. It competes with Allstate Corporation (ALL).

 
ALLSTATE CORP (ALL): Free Stock Analysis Report
 
PROGRESSIVE COR (PGR): Free Stock Analysis Report
 
Zacks Investment Research