Morningstar | Tailwinds Persist for Progressive in 3Q
Progressive’s streak of turning in strong results continued in the third quarter. Strong growth and underwriting margins have the company generating a trailing 12-month ROE of 29%, a truly impressive level for an insurance company. While we think Progressive’s narrow moat will keep its future ROEs at an industry-leading level, current results are well above its historical range, and we think they will be incredibly hard to sustain, given the mean-reverting nature of the industry. We will maintain our $50 fair value estimate.Growth remains impressive, and the company appears to be maintaining modest pricing increases year over year. The bigger factor right now, though, is that the company’s bundling strategy is still paying dividends in the agent channel, which saw policies in force increase 13% year over year. While we appreciate the success Progressive has had with its bundling strategy, we think there is a realistic limit to the share Progressive can take in this low-growth channel. We would note that policies in force are up about 20% since the start of 2017, and we expect growth in this channel to start to slow.
Progressive continues to generate strong underwriting margins, with the combined ratio in personal auto lines at 88.7% for the quarter, and 89.5% year to date. For comparison, Progressive’s trailing five-year combined ratio average through 2017 was about 94%. In our view, strong pricing increases over the past year or two have auto insurers like Progressive generating underwriting margins that are not sustainable, and we would note that we have seen evidence that other leading insurers started cutting pricing earlier this year.
Progressive’s results provide an early indication of the impact of natural catastrophes on the industry. In September, Progressive incurred $45 million in catastrophe losses compared with $155 million last year. Management’s early estimate of losses for Hurricane Michael is $60 million. So far, it appears that the industry will see another relatively high level of catastrophe losses in 2018, but at this point, the impact doesn’t appear to be quite as bad as last year.
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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