Progressive Corporation — 2019 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
The Progressive Corporation, an insurance holding company with Personal Lines, Commercial Lines, Property, service, and investment operations, reported unaudited results for the three and nine months ended September 30, 2019. Progressive owned 87.1% of ARX Holding Corp. at quarter-end. Results are not necessarily indicative of full-year performance.
Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Total revenues | $9,530.5 million | $8,495.8 million | $28,281.2 million | $23,943.9 million |
| Net income attributable to Progressive | $841.7 million | $928.4 million | $2,899.5 million | $2,350.6 million |
| Diluted earnings per share | $1.42 | $1.57 | $4.90 | $3.98 |
| Net premiums earned | $9,012.2 million | $7,930.5 million | $26,296.7 million | $22,738.7 million |
| Underwriting profit | $732.5 million | $771.4 million | $2,533.0 million | $2,299.2 million |
| Underwriting margin | 8.1% | 9.7% | 9.6% | 10.1% |
| Combined ratio | 91.9% | 90.3% | 90.4% | 89.9% |
| Net cash from operating activities | Not separately provided | Not separately provided | $5,133.4 million | $5,201.5 million |
Revenue increased approximately 12% in the quarter and 18% year to date. Net income attributable to Progressive declined approximately 9% in the quarter but increased approximately 23% year to date. Net margins were approximately 8.8% in Q3 2019 versus 10.9% in Q3 2018, and approximately 10.2% year to date versus 9.8% in the prior-year period.
- Net premiums written increased 12% in Q3 and 13% year to date. Policies in force increased 10% year over year to 22.1 million.
- Personal Lines produced a 9.0% Q3 underwriting margin and 91.0% combined ratio; Commercial Lines produced a 6.3% margin and 93.7% combined ratio; Property recorded a 2.3% underwriting loss margin and 102.3% combined ratio.
- Net investment income was $257.1 million in Q3 and $758.9 million year to date, compared with $212.3 million and $558.5 million, respectively, in the prior-year periods.
- Total net realized gains on securities were $65.4 million in Q3 and $659.8 million year to date, versus $182.1 million and $166.7 million, respectively, in 2018. The year-to-date increase was driven primarily by equity-security holding-period gains.
- Total assets were $54.0 billion at September 30, 2019, compared with $46.6 billion at December 31, 2018. Shareholders’ equity was $14.1 billion versus $10.8 billion at year-end.
- The investment portfolio had a fair value of $38.6 billion, with 91.8% in fixed-income securities and short-term investments. Fixed-income duration was 2.9 years and weighted-average credit quality was AA.
- Debt carrying value was $4.4 billion and fair value was $5.1 billion. Debt-to-total capital was 23.8%, below the company’s stated 30% threshold. The $250 million discretionary bank line of credit had no borrowings.
- Cash, cash equivalents, and restricted cash were $46.2 million at September 30, 2019, while the company also held $34.3 billion of available-for-sale securities and $4.3 billion of equity securities.
Material Changes Versus the Prior Comparable Period
- Underwriting profitability weakened: the Q3 margin declined 1.6 percentage points and the combined ratio increased 1.6 points, primarily from higher claim severity, unfavorable prior-year development, and catastrophe losses.
- Q3 net income declined despite revenue growth, largely reflecting weaker underwriting results and lower securities gains than in Q3 2018. Year-to-date earnings benefited substantially from market-related equity gains.
- Personal auto severity increased approximately 6% in Q3 and 7% year to date, while frequency decreased approximately 2% and 3%, respectively. Commercial auto severity increased approximately 14% while frequency decreased 5%.
- Unfavorable prior-year reserve development increased to $215.2 million year to date from $47.0 million in 2018. Personal auto contributed approximately $108 million, Commercial Lines approximately $71 million, Property approximately $19 million, and special lines approximately $17 million.
- Net catastrophe losses increased to $158.8 million in Q3 from $127.2 million and to $442.4 million year to date from $383.0 million.
- Net unrealized gains on fixed-maturity securities improved to $671.7 million pretax at September 30, 2019, from net unrealized losses of $134.2 million at December 31, 2018, primarily because of declining interest rates.
- The company adopted new operating-lease accounting on January 1, 2019, recording a transition adjustment of $213.0 million for leased assets and $217.6 million for lease liabilities, with no effect on earnings or cash flows.
Guidance, Outlook, Commentary, Risks, and Unusual Items
The filing does not provide formal quantitative earnings or premium guidance. Management expects to continue pursuing premium and policy growth while monitoring pricing, underwriting restrictions, retention, claim severity, advertising efficiency, and profitability.
- Management stated that it had sufficient capital and operating cash flow to support the business, debt service, dividends, contractual obligations, and expected capital requirements for the foreseeable future.
- Personal auto application growth remained positive but slowed versus the prior year, while retention and policy life expectancy remained important operating priorities.
- Management continued to take selective rate actions, particularly in Property, and indicated that further rate increases may be used where needed to meet profitability targets.
- In the first quarter, Progressive recorded an additional $156.1 million income-tax provision after concluding that certain federal renewable-energy tax credits and related benefits were invalid because of alleged sponsor fraud. Related renewable-energy fund impairment losses totaled $62.4 million year to date.
- Property results remain exposed to severe weather and catastrophe losses. Reinsurance provides protection for much of the Property business, but the vehicle businesses have no catastrophe-specific reinsurance.
- Litigation is ongoing in areas including injury claims, personal injury protection, medical payments, policy documents, repair-shop labor rates, wage-and-hour matters, and claims and marketing practices. Most non-claim litigation exposures were not considered both probable and estimable at quarter-end.
- Key continuing risks include pricing and reserving accuracy, inflation in medical and repair costs, interest-rate and equity-market volatility, credit and counterparty risk, catastrophe events, reinsurance recoverability, regulatory changes, competition, litigation, cyber and technology risks, and the ability to retain customers.
Most Important Facts for Investors to Verify
- Whether elevated auto claim severity, reopened PIP claims, and unfavorable reserve development persist or moderate.
- Whether premium and policy growth can continue without further deterioration in combined ratios and retention.
- The sustainability of year-to-date investment gains and the sensitivity of book value to interest-rate and equity-market changes.
- The ultimate tax, recovery, and litigation consequences associated with the renewable-energy fund allegations and related tax-credit reversal.
- Property catastrophe frequency, reinsurance recoverables, and the company’s net retained exposure to severe weather.
- Debt maturities, liquidity from the investment portfolio, and the company’s ability to maintain dividends and share repurchases while funding growth.