Third-quarter earnings of $4.37 a share roughly matched estimates but fell 2% from a year ago after a $465 million pretax swing to realized investment losses. Written premiums rose 4% while policies in force rose 6%, and the stock fell as much as about 10%.
Progressive's insurance operations had a better third quarter than a year ago. Its bottom line did not, and its premium growth is slowing.
The auto insurer reported third-quarter net income of $2.54 billion, or $4.37 a share, compared with $2.62 billion, or $4.45, a year earlier. That was roughly in line with analysts' estimates, which ranged from about $4.30 to $4.46; FMP's consensus was $4.35. The combined ratio, which measures claims and expenses as a share of premiums, improved to 88.7 from 89.5. Below 100 means an insurer makes money on its policies, so a lower number is better.
Where the earnings went
The difference came from investments. Progressive recorded $170 million of pretax net realized losses on securities in the quarter, compared with $295 million of gains a year earlier, a swing of $465 million. About $369 million of that swing came in September, when realized losses reached $231 million against a $138 million gain a year earlier.
September on its own looked strong at the operating level. Net income more than doubled to $630 million, or $1.08 a share, and the monthly combined ratio was 90.0, compared with 100.4 a year earlier, when the company lost money on underwriting.
Premiums versus policies
The more important trend may be in the top line. Net premiums written rose 4% in the quarter to $22.3 billion, and only 2% in September. Policies in force grew 6% to about 40.5 million. Direct auto policies rose 8% and agency auto 7%, while property policies were flat.
When policy counts grow faster than premiums, that suggests the average premium per policy is falling, though written premiums measure a quarter's sales while policies in force are a count at quarter-end. That pattern could reflect rate reductions, a shift toward lower-priced policies or both. Either way, it points to softer pricing at a time when underwriting margins are wide enough to invite competition for customers.
Progressive's stock opened about 6.8% lower and fell as much as about 10% before recovering part of the loss. It was down about 5.2% at $211.36 by about 1:45 p.m. Eastern.
Market implications
One reading is that the quarter was healthy where it counts. An 88.7 combined ratio leaves Progressive with a wide underwriting margin, policy growth remains strong, and investment losses on securities are marked to market and can reverse.
The other reading is that the earnings cycle has turned. Premium growth at 2% in September, falling below policy growth, implies pricing is already giving back some of the gains that drove recent profits, and a better combined ratio may be hard to sustain if rates keep easing.
What to watch
October monthly results in November, the gap between premium growth and policy growth, and whether competitors' third-quarter reports show the same softening in auto pricing.