On July 10, Ohio-based auto insurer Progressive Corp. (PGR) reported results for the second quarter of 2009. Earnings came in at $0.37 per share, one penny above the consensus estimate and up 15.6% from $0.32 per share reported in the prior-year period. Investment gains coupled with lower claims have contributed to this result.
Net premiums written increased 1% to $3.53 billion, while net premiums earned also increased 1% to $3.44 billion. Progressive experienced pre-tax investment gains of $15.9 million, versus a loss of $44.6 million in the year ago quarter. Combined ratio improved to 92.6% from 93.6% in the year ago quarter. The combined ratio reflects the percentage of premiums an insurance company pays to cover claims expenses.
However, growth remains a challenge at Progressive’s Commercial Auto and Agency Auto businesses. Economic downturn combined with increased competition has adversely affected both these markets. Commercial Auto business continues to be negatively affected by the downturn in the economy, primarily in the housing and construction sectors. While policies in force in June for Direct Auto and Special Lines were up 12% and 4%, respectively, Commercial Auto and Agency Auto were down 5% and 1%, respectively.
The disruption in the overall economy and financial markets has significantly shaken the consumers’ confidence in the economy, restraining their ability to purchase automobile insurance policies.

Therefore, the balance sheets of auto insurance providers such as Progressive Corp., Allstate Corp. (ALL), Infinity Property and Casualty Corp. (IPCC) and State Auto Financial Corp. (STFC) have been severely impacted. Also, the US auto insurance industry has been weighed down by unusually high expenses due to fraudulent activities.
During May, the company cut roughly 280 people in its claims section, around 2% of its claims workforce, with the reduction primarily in management. Approximately $7.5 million of severance and related expenses were incurred by the company in May for this action.
While Progressive’s recent results showed the continuation of slow premium growth trends, its underwriting results remain relatively favorable. Going forward, we expect the company’s cost-containment measures, good operating performances and market leading positions to benefit it.

As such, we continue with our Hold recommendation on the shares of PGR.
Read the full analyst report on “PGR”
Read the full analyst report on “ALL”
Read the full analyst report on “IPCC”
Read the full analyst report on “STFC”
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