Progressive Corporation’s (PGR) second quarter 2010 earnings came in at 32 cents per share, down 3 cents from the Zacks Consensus Estimate of 35 cents. This also fell short by 5 cents from 37 cents per share recorded in the year-ago period. Net income for the quarter was $211.9 million, down 15% from $250.1 million reported in second-quarter 2009.
Though premiums written and premiums earned improved during the quarter, results were affected by higher expenses.
The company recorded net premiums of $3,707.9 million during the second quarter of 2010, up 5% from $3,528.6 million in the second quarter of 2009 but down 2% from $3,777.5 million during first quarter 2010. Net premiums earned were $3,590.2 million, up 4% from $3,441.4 million in the year-ago period and 3% from $3,501.1 million in the prior quarter.
Net realized losses on securities were $39.5 million during second quarter 2010, a significant decline from a gain of $15.9 million in the prior-year quarter and $30.8 million in first quarter 2010. The combined ratio — the percentage of premiums paid out as claims and expenses — deteriorated slightly to 92.7% from 92.6% recorded in the year-ago quarter and 90.9% in the prior quarter.
Progressive reports results every month. During June, policies in force remained healthy, with the Personal Auto segment increasing 8% year over year and 1% from the prior month. Special Lines increased 4% year over year and 1% over the preceding month.
In Personal Auto, Direct Auto continued to report a double-digit growth of 15% year over year, but showed a slight improvement of 1% in policies in force from the last month. Agency Auto was up 3% year over year and 0.6% from last month. However, Progressive’s Commercial Auto segment continued to drag results, reporting a 2% year-over-year fall as a result of the economic downturn.
Total expenses for the reported month increased to $1.04 billion, up 3% from $1.01 billion in June 2009. The major components contributing to the increase in total expenses were losses and loss adjustment expenses increasing 1% year over year to $781.4 million, policy acquisition costs increasing 2% year over year to $104.8 million and other underwriting expenses surging 11% year over year to $138.5 million.
Progressive continues to actively manage its capital position. Reported book value per share was $9.44, up from $9.37 as of May 31, 2010, and $7.24 as of June 30, 2009.
Return on equity on a trailing 12-month basis was 18.7%, substantially up from -1.0% in June 2009 but down from +19.5% in May 2010. The debt-to-total-capital ratio was 25.7% as of June 2010, down from 30.6% as of June 2009 and 25.8% as of May 2010.
Progressive has a strong foothold in the industry. It continues to deliver strong risk-based capital ratios and steady operating performances. Also, it remains focused on customer retention.
The company is poised to benefit as the economic recovery gains pace. However, increased competition and pressure on underwriting margins will remain headwinds in the upcoming quarters. We thus maintain our Neutral recommendation on Progressive. The quantitative Zacks #3 Rank for the company indicates no clear directional pressure on the shares over the near term.
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