Progressive Corporation: 2014 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
The Progressive Corporation is an insurance holding company focused primarily on personal auto and recreational vehicle insurance, with additional commercial auto, service, investment, and run-off indemnity businesses. This unaudited Form 10-Q covers the three and nine months ended September 30, 2014, compared primarily with the corresponding 2013 periods.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Net premiums earned | $4,540.1 million, up 6% | $13,455.9 million, up 5% |
| Total revenues | $4,766.1 million, up 5% | $14,215.2 million, up 5% |
| Income before taxes | $441.8 million, up 28% | $1,361.0 million, up 5% |
| Net income | $296.1 million, up 27% | $910.8 million, up 5% |
| Diluted earnings per share | $0.50, up 30% | $1.53, up 7% |
| Underwriting profit | $339.8 million; 7.5% margin | $961.9 million; 7.1% margin |
| Combined ratio | 92.5% | 92.9% |
| Operating cash flow | Not separately provided for the quarter | $1,657.5 million, down from $1,748.0 million |
Net income benefited from stronger underwriting results and higher net realized investment gains. Net realized gains on securities were $38.2 million in the quarter and $198.0 million year to date, compared with $27.9 million and $241.4 million, respectively, in 2013. Investment income declined 5% in the quarter and 2% year to date, reflecting lower yields and a greater allocation to short-term investments.
Comprehensive income was $229.9 million for the quarter, down 20%, primarily because equity-market returns were materially weaker than in the third quarter of 2013. Nine-month comprehensive income was $931.8 million, up 8%.
At September 30, 2014, total assets were $25.9 billion, shareholders’ equity was $6.9 billion, investments were $19.1 billion, cash was $90.6 million, and debt was $2.2 billion carrying value, or $2.5 billion fair value. Debt represented 23.8% of total capital, compared with 22.8% at September 30, 2013. The company reported no borrowings under its $100 million discretionary line of credit.
Material Changes Versus the Prior Comparable Period
- Net premiums written increased 6% in both the quarter and the first nine months. Personal Lines grew 6% in both periods; Commercial Lines grew 6% in the quarter and 4% year to date.
- Policies in force increased 2% overall: Personal Lines increased 2%, driven by 7% growth in Direct auto, while Agency auto declined 1% and Commercial Lines declined 1%.
- The total underwriting margin improved to 7.5% from 5.8% in the quarter and to 7.1% from 6.7% year to date.
- Commercial Lines produced a substantial improvement, with an 81.4% quarterly combined ratio versus 94.1% in 2013 and an 84.8% year-to-date ratio versus 94.4%. Management attributed the improvement to prior rate increases, lower truck-claim frequency, and favorable reserve development.
- Personal Lines remained profitable but weakened year to date, with a 93.7% combined ratio versus 93.1%. Direct Personal Lines had a 94.6% year-to-date combined ratio versus 92.8%, reflecting unfavorable loss reserve development.
- Catastrophe losses were $32.4 million for the quarter and $171.4 million year to date, compared with $34.9 million and $164.5 million in 2013.
- Common-share repurchases totaled $234.7 million for the first nine months, compared with $164.8 million in 2013. The company repurchased 3.9 million shares in the quarter and had 21.5 million shares remaining under its authorization at September 30.
- Progressive issued $350 million of 4.35% Senior Notes due 2044 in April 2014 and repurchased $44.3 million principal amount of its 6.70% junior subordinated debentures during the quarter.
Guidance, Outlook, Management Commentary, Risks, and Unusual Items
- Management stated that underwriting margins for the quarter and year to date exceeded its long-term profitability target of at least 4% and continued to target a combined ratio of 96 or better for capital-planning purposes.
- The company expects to continue evaluating state-level rate needs and responding to changes in loss-cost trends. Selective rate increases and underwriting restrictions reduced Agency auto new applications, while Direct auto growth remained stronger.
- Progressive planned to begin rolling out a next-generation auto program in December 2014, including changes to preferred-customer pricing and Snapshot offerings. It also planned to open two Service Centers in the fourth quarter and one to two additional centers over the following two years.
- The annual variable dividend target for 2014 was 33 1/3% of annual after-tax underwriting income. The year-to-date Gainshare factor was 1.38 at September 30, but the final factor and any dividend remained subject to full-year results and Board approval. The filing does not provide a declared 2014 annual dividend.
- Investment income and portfolio returns remain exposed to low interest rates, reinvestment risk, equity-market declines, credit deterioration, liquidity conditions, and changes in interest rates. Portfolio duration declined to 1.6 years from 2.0 years a year earlier.
- The investment portfolio had $51.8 million of gross unrealized losses at September 30, including $45.1 million in fixed-income securities. Management concluded that these losses were not other-than-temporary and did not expect to be required to sell the affected securities before recovery.
- Pending litigation includes claims-related, medical and injury benefits, policy-document, auto-repair labor-rate, wage-and-hour, marketing, and other business-practice matters. Accruals for non-claims litigation were not material, but the company stated that adverse judgments or settlements could materially affect results.
- Other unusual items included a $4.8 million loss on debt extinguishment in the quarter, a $0.1 million investment impairment loss, and a $13.4 million held-for-sale property balance related to two future Service Center sites.
Most Important Facts for Investors to Verify
- Whether Personal Lines loss severity, particularly bodily injury and personal injury protection, continues to increase and pressures the Direct channel’s combined ratio.
- Whether Commercial Lines’ favorable reserve development and lower loss frequency persist or reverse.
- The final 2014 Gainshare factor and annual variable dividend declared by the Board.
- Premium growth, policy retention, Agency auto new-business trends, and the effect of rate actions on policies in force.
- Future realized or unrealized investment losses, credit impairments, and the effect of interest-rate and equity-market movements on comprehensive income and capital.
- Development of loss reserves, catastrophe losses, litigation exposures, and any material changes to the company’s stated liquidity and capital adequacy.