We are upgrading
) to Neutral from Underperform on the back of solid third quarter
performance and the announcement of a special dividend.
Third quarter earnings outpaced the Zacks Consensus estimate as
well as the year-ago results. Higher premiums largely drove the
improvement. Net premiums written in the third quarter grew 10%
with policies in force reporting growth of 5%. Higher premium per
policy and customer retention aided the company to report better
To return more value to it shareholders, Progressive undertakes
share buybacks besides paying annual dividends. Recently, the
Board approved a special dividend of $1.00. This special dividend
will be paid in addition to Progressive's annual cash dividend.
The special dividend will allow Progressive to return about $605
million to shareholders, that further establishes the inherent
strength of its balance sheet. The company also bought back 4.4
shares in the third quarter with 42.3 million shares remaining
under its authorization.
Management continues to focus on customer retention. The policy
life expectancy, a measure for customer retention, for its Agency
auto business increased 4%. Also, Progressive's Sanpshot and Name
Your Price programs are expected to drive growth. 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.
On the flip side, we expect underwriting margins to remain
volatile considering the loss cost trends and the soft economic
environment. Underwriting margin exhibited a declining trend over
the several past quarters. However, the third quarter saw
improvement in underwriting margin to 4%, in line with the
company's long-term target of 4%.
Further, combined ratio, which is a primary measure of
underwriting profitability, is continually deteriorating.
Therefore, higher combined ratio concerns the company's
Nevertheless, the company is poised to benefit from impressive
operating performances and its market leading position. A strong
balance sheet and favorable financial strength rating are among
Progressive currently carries a Zacks #3 Rank, translating into a
short term Hold rating.
The Allstate Corporation
), which competes with Progressive, shares the same Zacks Rank.
ALLSTATE CORP (ALL): Free Stock Analysis
PROGRESSIVE COR (PGR): Free Stock Analysis
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