Why I’m Not Selling Progressive Even After Its Net Income Drops


For nearly a third of the year, stocks have not recovered much from their lows – at Friday’s close, the S&P500 was down 10.4% so far in 2022.

One stock that performed well at the start of the year is progressive (RMP 3.34%); the auto insurer regains its title up 5.5%. However, if you’ve read its first-quarter earnings report and noticed its net profit plummeted nearly 80%, you might have wondered why investors weren’t fleeing instead.

As a Progressive stockholder, I’m not too worried. Here’s why.

Image source: Getty Images.

Progressive core business continues to grow

In the first quarter, Progressive saw its net profit fall 79% to $314 million after posting a profit of nearly $1.2 billion in the same quarter last year. What happened?

The problem is not Progressive’s core business: writing good insurance policies. Progressive’s net premiums earned increased 13% from a year ago to $11.8 billion in the quarter. What dragged Progressive down in the quarter were investment losses of $445 million.

Progressive, like many other insurers, brings in money when customers pay for their policies and then uses those funds to pay out customer claims. In the time between receiving the money and paying claims, he can invest that money, also called floating.

Progressive invests 92% of its investment portfolio in bonds, such as US Treasuries and corporate debt. In the first trimester, the iShares 20+ Year Treasury ETF lost 10% while iShares Trust-iShares iBoxx $Investment Grade Corporate Bond ETF lost 8%, leading to lower Progressive investment returns. Last year, the insurer saw its investments generate a gain of $585 million. This $1 billion change in investment results was the main driver of its loss in the quarter.

The progressive is used to seeing a swing in investment gains and losses. Over the past four years, the company has had investment losses in three different quarters, including the last one.

A bar chart shows Progressive's quarterly gains and losses over the past two years.

Data source: Quarterly Progressive Filings. Table by author.

The company has enjoyed strong investment returns in the quarters following the initial pandemic-induced market shock in March 2020. However, Progressive’s investment results have been lackluster as bonds and stocks got off to a slow start in 2022.

As a shareholder, I am not concerned. This is because investment gains and losses and investment income are such a small part of Progressive’s overall profit.

To put things into perspective, here is the same information with investment income and earned premiums. As you can see, investment gains or losses tend to fluctuate and are a minimal source of his income.

A bar chart shows Progressive's income from earned premiums, investment income, and investment gains and losses over the past two years.

Data source: Quarterly Progressive Filings. Table by author.

This is how I like to rate the company

I pay more attention to how the premiums increase and how well Progressive does in writing policies. Over the past 10 years, Progressive has grown its earned premiums at a compound annual growth rate of 11.5%. Not only that, but the company has always underwritten profitable insurance policies.

One metric that helps measure profitable underwriting is the combined ratio, a measure of profitability for insurers that is the ratio of claims paid plus operating expenses to total premiums collected. A metric below 100% means a company writes profitable policies, so the lower the ratio, the better. Progressive’s goal is to keep this ratio below 96%, which it has done for 20 years.

A bar chart shows Progressive's combined ratio since 2002.

Data source: Progressive annual and quarterly filings. *2022 data up to the first quarter. Table by author.

Progressive’s core business is not investing, and fluctuations in gains or losses on its investments are expected – that’s why I’m not selling the stock as long as Progressive continues to write profitable insurance policies .


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