Morningstar | Progressive Had a Very Good 2018, but We Expect Mean Reversion
Progressive capped off an impressive 2018 with strong fourth-quarter numbers and generated a 25% ROE for the year. However, while we think Progressive remains a strong, narrow moat franchise, we also think that the cyclical tailwinds that the company has enjoyed over the past couple of years will wane, and there are some signs in the results that suggest this might be starting. We will maintain our $53 fair value estimate.In response to a previous rise in claims, Progressive and the rest of the industry have enjoyed strong pricing increases over the past couple of years, which has led to impressive underwriting results. This remained the case this year, with Progressive’s personal auto lines recording a 90.3% combined ratio for the year, well below the company’s range over the past decade. We attribute this strong underwriting performance mainly to industry conditions, as peers are also reporting strong underwriting results. However, it is the nature of insurance pricing to overshoot in both directions. We expect mean reversion to kick in over time, and a level of 92.5% for the fourth quarter, while still below the historical range, suggests this might be starting to occur.
On the plus side, the move into homeowners insurance continues to pay off in terms of auto growth in the agent channel. Policies in force in this channel were up 12% year over year. Here too, though, we expect the positive impact to wane over time as there is likely a limit to the amount of share that can be taken in this low-growth channel, and the growth number did decline slightly from results earlier in the year.
Progressive has been firing on all cylinders over the past couple of years. While some of this relates to good moves by management and we think the company’s structural competitive advantages remain in place, we also think returns will ultimately move back in line with historical levels and that the current market price doesn’t fully reflect this reality.
Progressive is an insurance holding company. The company's insurance subsidiaries and affiliates provide personal and commercial auto insurance, personal residential property insurance, and other insurance and related services. The company's Personal Lines segment writes insurance for personal autos and recreational and other vehicles. The Commercial Lines segment writes auto-related primary liability and physical damage insurance, and business-related general liability and property insurance, each predominately for small businesses. The company focuses on property insurance for homes, condos, manufactured homes, and renters, as well as personal umbrella insurance and primary and excess flood insurance.
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Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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