01—Abstract
Summary
Summary of the 10-K filed February 25, 2009. Cited figures are marked; the original filing is the authoritative source.
The Progressive Corporation (PGR) reported a net loss of $70.0 milliona, or $0.10 per share, for fiscal 2008, its first annual net loss in 26 years.
The loss was driven by $1.4 billionb of net realized investment losses, including roughly $1.9 billion of other-than-temporary impairment write-downs, about 90% of which related to its preferred stock holdings. Underlying insurance operations remained solid: the companywide underwriting profit margin was 5.4% (combined ratio 94.6), above the company's 4% target, and total underwriting profit was $734.9 million. Net premiums written fell 1% to $13.6 billion, while policies in force grew 3%, led by Direct auto, which grew 9%.
The weakness shows up in the investment portfolio and capital base. The portfolio fell to $13.0 billionc from $14.2 billion, total capital (debt plus equity) dropped to $6.4 billion, and shareholders' equity declined to $4.2 billion from $4.9 billion. The company reduced equity exposure from about 16.5% to 5.6% of the portfolio and raised its cash and U.S. Treasury holdings to $4.8 billion.
Because of the net loss, the board declared no annual variable dividend for 2008, so the payout is tied directly to after-tax underwriting income and comprehensive income. Debt-to-total-capital rose to 34.0%d from 30.6%, and the premiums-to-surplus ratio stayed at 3.0 to 1. For investors, the central question is whether the insurance franchise can keep producing underwriting margins above target while the company rebuilds investment-driven capital.
The 10-K highlights rising claims severity and frequency in Commercial Auto, growth pressure in Agency auto, and exposure to financial-sector preferred stocks as key risks. The company also disclosed a Massachusetts regulatory investigation over comparative rating errors. Management said its new capital layers, including a $1.0 billion non-insurance subsidiary reserve, are intended to support growth, but the diminished third layer of excess capital limits flexibility for repurchases and dividends.
02—Key points
Key Highlights
- Net loss of $70.0 million ($0.10 per share) in 2008, the first annual net loss in 26 years, driven by $1.4 billion of net realized investment losses.
- Other-than-temporary impairment write-downs of about $1.9 billion, with roughly 90% tied to preferred stocks, many issued by large financial institutions.
- Underwriting profit of $734.9 million, a 5.4% margin and 94.6 combined ratio, exceeding the company's 4% target despite 1.2 points of catastrophe losses.
- Net premiums written fell 1% to $13.6 billion, while policies in force rose 3% to about 11.4 million, driven by 9% growth in Direct auto.
- Total capital (debt plus equity) fell to $6.4 billion from roughly $7.1 billion, and shareholders' equity dropped to $4.2 billion from $4.9 billion.
- No annual variable dividend was declared for 2008 because after-tax comprehensive loss was below after-tax underwriting income; the 2009 dividend is also tied to this formula at a 20% target.
- Portfolio repositioned toward safety: $4.8 billion in cash and U.S. Treasuries (triple the prior year), and equity exposure reduced from 16.5% to 5.6% of the portfolio.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2008filed February 25, 2009Financial Statements
FY2008 against FY2007
| Line item | FY2008FY2007 | Change |
|---|---|---|
| Revenue | $12.84B$14.69B | −12.6% |
| Interest Expense | $136.70M$108.60M | +25.9% |
| Net Income | -$70.00M$1.18B | −105.9% |
| EPS (Basic) | $-0.10$1.66 | −106.0% |
| EPS (Diluted) | $-0.10$1.65 | −106.1% |
| Shares Outstanding (Basic) | 668.00M710.40M | −6.0% |
| Shares Outstanding (Diluted) | 673.90M718.50M | −6.2% |
05—Questions
Frequently Asked Questions
Why did Progressive report a net loss in 2008 when its insurance operations were profitable?
The loss came from the investment portfolio, not underwriting. Progressive recorded about $1.4 billion of net realized losses, mainly from roughly $1.9 billion of other-than-temporary impairment write-downs. Most of these were on preferred stocks, many issued by large banks and financial firms whose values fell sharply during the 2008 credit crisis. Underwriting profit of $734.9 million was not enough to offset those losses.
Will Progressive pay a dividend to shareholders?
Not for 2008. Under its annual variable dividend policy, a dividend is paid only if the Gainshare factor is above zero and after-tax comprehensive income is at least after-tax underwriting income. Because the 2008 comprehensive loss was $614.7 million, no dividend was declared. The company has stated its intent to repeat the formula for 2009, but the board can change or withhold the payment, and any dividend would be declared only in December 2009.
How strong is Progressive's capital position after the 2008 losses?
Capital is weaker but still adequate by regulatory measures. Shareholders' equity fell to $4.2 billion and debt-to-total-capital rose to 34.0% from 30.6%. The net premiums written to surplus ratio held at 3.0 to 1, and risk-based capital ratios were well above minimum requirements. Management said the excess-capital layer available for buybacks and dividends has been diminished, and it has a $125 million secured credit facility plus a $1.0 billion non-insurance subsidiary that can support the insurance companies if needed.
What are the main risks in Progressive's core auto insurance business?
Key operating risks include Commercial Auto, where unfavorable reserve development (driven by late-reported claims and higher severity) and a 94.7 combined ratio reflected pressure from the weak economy. Agency auto new applications fell 13% in 2008, and new business growth remains a challenge. Other risks include catastrophe losses (1.2 points in 2008), rising bodily injury and personal injury protection severity, and pending class action litigation, including challenges to the use of credit in underwriting and claims practices.
How exposed is Progressive to the financial sector?
Substantially. About 75% of its preferred stock holdings were obligations of financial sector issuers, and five financial-sector firms were downgraded in late 2008, representing 13% of the nonredeemable preferred portfolio. The company has since reduced preferred and equity risk, bought credit default protection on financial issuers, and said it will adjust its concentration guidelines in 2009 to reduce sector and single-issuer exposure.
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