Why the Downgrade?
On May 17, 2013, we downgraded our recommendation on
) to Neutral from Outperform based on the stressed bottom line
growth and continued pressure on underwriting margins. This auto
insurer currently carries a Zacks Rank #3 (Hold).
In the last 4 quarters, Progressive managed to deliver earnings
surprise in only one quarter. Average surprise in last 4
quarters came at a negative 8.9%.
Progressive has been delivering deteriorating combined ratios for
the past few years. Although combined ratio improved to 170 basis
points year-over-year to 92.4% in the first quarter of 2013, the
improvement is not sustainable as it was backed by absence of any
major catastrophic events during the quarter. Occurrence of any
severe catastrophes in the near term might deteriorate the
The Commercial Auto business is recording year-over-year growth
for the past few months yet, the sluggish economy and increased
competition is expected to stress the growth of the segment.
Progressive mainly caters to small businesses. Lower levels of
employment, construction spending and new business creation,
combined with constraints on commercial credit have led to a
reduction in insurable risks for these businesses. We expect this
headwind to continue as uncertainty in the economy and elevated
levels of unemployment are expected to persist for a while.
During the first quarter of 2013, Progressive's underwriting
margin deteriorated to 7.6%. Underwriting margins for the company
are expected to remain volatile in the upcoming term, owing to
the loss cost trends and soft economic environment.
However amidst a number of negatives, the company's focus on
expanding multi-line product offering, customer retention and
increasing shareholders worth through buybacks and dividend
payouts positions Progressive to actively drive growth and
Other Stocks to Consider
Among others in the industry,
American Safety Insurance Holdings Ltd.
AXIS Capital Holdings Limited
Montpelier Re Holdings Limited
) carry a favorable Zacks Rank #1 (Strong Buy) and are worth
AMER SAFETY INS (ASI): Free Stock Analysis
AXIS CAP HLDGS (AXS): Free Stock Analysis
MONTPELIER RE (MRH): Free Stock Analysis
PROGRESSIVE COR (PGR): Free Stock Analysis
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