Introduction

The Progressive Corp. (PGR) is an insurance company that has a great history of growth, and in the last quarter, the business reached the milestone of 25 million policies in force. Progressive has also proven to improve operating metrics and keep efficient at these levels. It was looking as if the company has continued this trend into 2021but Q2 showed a bump into the road, with overall revenues and premium growth but a spike in operating metrics. The company does have a relatively high P/BV, but with the growth pattern and high dividend, I think the insurer trades at a fair value. While Q2 can be concerning, I believe a full year is needed to truly gauge the business health and for that reason, I am a hold on Progressive.

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A Progressively Growing Business

Progressive has a great history of growing the business and improving metrics along the way. Over the past five years, the insurer has grown total revenues and premiums by 12% and 11% per year. This is while the loss ratio has declined over by 10 percentage points to lower the combined ratio by about 6 percentage points. This top-line growth paired with improved operations has allowed the company to grow the bottom line by 40% per year.

Q1 2021: Continued Performance

In Q1 of 2021, Progressive continued to show solid growth and steady metrics. Total revenue increased by 23% to $11.445 billion. The top-line growth was on the back of a 19% increase in net premiums. During the quarter, Progressive reached the milestone goal of 25 million policies in force. Looking down to the bottom line shows the insurer increased profits in this quarter by 114% to $2.51 per share. While this is impressive much of the net income gains are from investment holdings which are appreciated along with an improving economy. 

The Personal Lines, Commercial, and Property segments all posted growth in this quarter. Personal lines grew 14%, Commercial grew 57%, and Property grew 17%. This high growth stemmed from increased volume across all segments and increased premiums among the Commercial segment. 

Looking at insurance metrics shows that Progressive is still operating efficiently. The loss ratio and expense ratio for the quarter was 68.3% and 21%. While the expense ratio was down slightly from the prior year, the loss ratio saw a 3 percent point increase. Together the combined ratio for the company as a whole was 89.3%, an increase of 2 percentage points from last year. At this level, Progressive is making 10.7 cents per dollar of premium sold. Looking deeper into the segment metrics shows where the uptick in the company-wide ratio came from. While Commercial decreased 6.6 percentage points, Property saw a high 26.7 percentage point increase in the combined ratio. This increase brought the Property segment's combined ratio to 115%, an unprofitable level. Catastrophe losses in the segment were large due to Texas, Oregon, & Alabama storms during the three months.

Q2: 

While Q1 2021 was continued operating growth for Progressive, Q2 had its fair share of issues. The top line showed continued growth per usual with total revenue growing by 8.5% on the back of 14% premium growth. The company continues to add policies in force with a gain of over 1 million since the end of Q1. All looks to be normal from the top view, but looking at net income for Q2 shows a decline by 56% from last year. This was due partially to fewer investment gains but primarily caused by a worsening combined ratio. The combined ratio in Q2 was up 8.8 percentage points to 96.5%. The loss ratio increased to 80.1 while the expense ratio stayed steady. This increase in the loss ratio was attributable to increased personal auto accident frequency, which was up 47% compared to last year. Overall, Q2 showed how the rebound from a pandemic is affecting the comparable metrics on a quarter to quarter basis. In the end, Progressive still has a combined ratio of 93% for the year so far. While this is on the higher end of the historic levels for this metric it is important to let the full-year ride out to see the big picture.  

Valuation

As of writing, Progressive trades at around $95 per share. For 2021 the EPS estimate is $5.51, therefore the forward P/E is 17.24x. As of last quarter, the book value per share of the company is $31.83, so Progressive is also trading at 2.98x to book value. The company also has a dividend yield of 5.17% at this moment. Altogether these metrics show to me the company is fairly valued.

Conclusion

Progressive has shown the company has consistently grown, and in Q1 of 2021, the insurer grew further with high revenue, premiums, and insured. The company has also been able to maintain great operating metrics in Q1 despite some catastrophe losses in the Property segment. Q2 proved some concern for the underwriting of the policies Progressive has made, as the combined ratio increased by 8.8 percentage points on the back of an increasing loss ratio. But to gauge the full health of the insurer a full year's picture is necessary, especially while the top line grows at a great rate. Overall, the price to book value is a bit steep, but with the high dividend yield and consistent growth, the insurer seems to be fairly valued.