We retain our Underperform recommendation on
), following its second quarter earnings. Progressive's earnings in
the reported quarter lagged the Zacks Consensus Estimate as well as
the year-ago results. The magnitude of the increase in expense was
more than the increase in revenue, thus inducing lower numbers.
ALLSTATE CORP (ALL): Free Stock Analysis Report
PROGRESSIVE COR (PGR): Free Stock Analysis
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Combined ratio has been deteriorating over the past few quarters.
It deteriorated 380 basis points over the prior-year quarter to
94.1% in the first quarter and 420 basis points to 96.7% in the
second quarter. The combined ratio represents the percentage of
premiums paid out as claims and expenses and is a primary measure
of underwriting profitability. A higher combined ratio thus
concerns the company's profitability.
We expect underwriting margins to remain volatile considering the
loss cost trends, the economic environment and the company's growth
initiatives. It declined to 5.9% in the first quarter of 2012 to
2.4% in the second quarter, attributable to higher loss costs due
to an increase in severity and frequency. Also, it fell below the
company's long-term target of 4%.
Though Progressive has been experiencing improved results at its
Commercial Auto businesses, maintaining the trend could be
challenging. We expect sluggish economic recovery, increased
competition and depressed levels of employment to be the headwinds.
Nevertheless, new businesses, higher premium per policy and
customer retention aided the company to report better results over
time. Also, Progressive undertakes share buybacks besides paying
annual dividends to return more value to its shareholders. Given
its favorable financial strength, we expect more shares to be
repurchased going forward.
The quantitative Zacks #5 Rank (short-term Strong Sell rating) for
Progressive indicates downward pressure on the shares over the near
he Allstate Corporation
), which closely competes with Progressive, holds a Zacks #2 Rank
(short-term Buy rating), indicating slight upward boost on the
shares in the near term.