Will Progressive's Growth Strategy Pay Off?
The auto insurer continues to add customers but posted disappointing results in the second quarter due to catastrophe losses and inadequate pricing.
Progressive reported June results last week and the market was not pleased. The insurer’s stock price declined by 13.1% on Thursday before recovering 1.8% on Friday. The stock is down 22.1% from its all-time high on April 11. The decline on Thursday was attributed to quarterly earnings coming in at 57 cents, well short of the consensus estimate of 85 cents. Progressive was the worst performer in the S&P 500 on Thursday and its decline on that day was the largest more than fifteen years.
Markets are always ravenous for data and Progressive certainly delivers a higher than normal stream of information for analysts to review. The company releases financial data on a monthly basis, three times as often as nearly all publicly traded companies. Although I am not sure that this level of granularity is particularly useful for valuation purposes, it is certainly interesting to monitor for those of us who follow insurance.
Progressive is an important company to follow for Berkshire Hathaway shareholders. Berkshire’s second quarter results should be released in three weeks and will include an update on GEICO. Progressive and GEICO have been fierce competitors for many years and this rivalry has been the subject of several articles on The Rational Walk. The most recent article was on May 5, the day before the Berkshire annual meeting.
In addition, I wrote a detailed profile of Progressive in December 2022 as well as a survey of the competitive landscape of the auto insurance industry in April 2022.
This article presents a brief update on Progressive’s recent results that builds on the discussion contained in Progressive vs. GEICO: The Battle Continues, so readers who haven’t seen that article yet might want to review it before proceeding.
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The brief discussion that follows is based on Progressive’s monthly financial reports for April, May, and June. Progressive’s 10-Q will be filed on Tuesday, August 1 and the company will hold its quarterly earnings call on August 2. During the first half of the call, management will make a presentation on loss reserving and pricing. This will be particularly interesting given the company’s unsatisfactory results in recent months.
The most interesting data to track on a monthly basis is policies in force. This figure represents the number of outstanding insurance contracts that are in effect as of the end of each month. Unlike other metrics that involve estimation, policies in force should be known with precision at each reporting date.
On one hand, growth in policies in force is positive because it is a sign that the company is gaining market share. On the other hand, growth is only good if it generates underwriting profits. Progressive reports underwriting profits on a monthly basis, but these figures are heavily dependent on loss estimates which could prove to be incorrect. However, it’s still an interesting data point to track.
The exhibit below shows Progressive’s policies in force segmented by product line over the past twelve months along with sequential and annual percentage changes: