01—Abstract
Summary
Summary of the 10-K filed March 1, 2010. Cited figures are marked; the original filing is the authoritative source.
The Progressive Corporation (PGR) closed 2009 with a strong rebound from a difficult 2008.
Net income was $1.06 billiona, or $1.57 per diluted share, compared with a net loss of $70.0 million in 2008. The turnaround was driven by underwriting results: the combined ratio improved to 91.6 from 94.6, an 8.4% underwriting margin that beat the company's 4% target. Net premiums written grew 3% to $14.0 billion, helped by an 11% rise in total personal auto written premium and a 20% jump in new Direct auto applications.
Commercial Auto remained weak, with premiums down 10% and policies in force down 5%, although its margin improved sharply to 14.2%. Favorable prior-year reserve development of $136.0 millionb added roughly one point to 2009 profitability. Investment results also recovered.
Net realized gains were $27.1 millionc, compared with a $1.4 billion realized loss in 2008 driven by preferred stock impairments. The portfolio's fair value rose 13% to $14.7 billion, and its total return was 12.5%. Shareholders' equity increased to $5.7 billion from $4.2 billion, and book value per share rose to $8.55 from $6.23.
Statutory policyholders' surplus reached $5.0 billiond, and the premiums-to-surplus ratio improved to 2.8 to 1. Debt to total capital fell to 27.5% from 34.0%. Capital return remains tied to a formula-based annual variable dividend.
For 2009, the Board declared a $0.1613 per share dividend, about $108.5 million, paid in February 2010. Management also repurchased $180.6 million of shares.
Investors should note that the dividend is performance-based and may vary sharply year to year, and that the Board can change or suspend the policy. Risks disclosed include reserve adequacy, catastrophe exposure, regulatory and litigation exposure, and the portfolio's concentration in preferred stocks, although 2009 showed the portfolio recovering.
02—Key points
Key Highlights
- Net income of $1,057.5 million ($1.57 diluted EPS) versus a net loss of $70.0 million in 2008.
- Combined ratio improved to 91.6 from 94.6, an 8.4% underwriting margin versus a 4% target.
- Net premiums written up 3% to $14.0 billion; Direct personal auto new applications up 20%.
- Commercial Auto underwriting margin rose to 14.2% even as premiums fell 10% and policies in force fell 5%.
- Net realized investment gains of $27.1 million, compared with a $1.4 billion realized loss in 2008.
- Book value per share rose to $8.55 from $6.23; statutory surplus reached $5.0 billion, with a 2.8:1 premiums-to-surplus ratio.
- 2009 dividend of $0.1613 per share (about $108.5 million) under an annual variable policy tied to underwriting income; no dividend was paid for 2008.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2009filed March 1, 2010Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $14.56B$12.84B | +13.4% |
| Interest Expense | $139.00M$136.70M | +1.7% |
| Net Income | $1.06B-$70.00M | +1610.7% |
| EPS (Basic) | $1.59$-0.10 | +1690.0% |
| EPS (Diluted) | $1.57$-0.10 | +1670.0% |
| Shares Outstanding (Basic) | 666.80M668.00M | −0.2% |
| Shares Outstanding (Diluted) | 672.20M673.90M | −0.3% |
05—Questions
Frequently Asked Questions
Why did Progressive return to profitability in 2009 after losing money in 2008?
The 2008 loss was driven mainly by $1.4 billion of realized investment losses, largely other-than-temporary impairments on preferred stocks during the financial crisis. In 2009 investment losses reversed to a $27.1 million gain as markets recovered, and underwriting profit rose sharply, with the combined ratio improving from 94.6 to 91.6 on lower catastrophe losses and favorable reserve development.
Is the annual dividend reliable for investors?
Not necessarily. The dividend is calculated as a target percentage (25% for 2010, up from 20%) of after-tax underwriting income, multiplied by a Gainshare factor that can range from zero to two. No dividend is paid if comprehensive income falls below underwriting income or if the Gainshare factor is zero. The Board can also change or discontinue the policy, so payments can vary significantly, as the 2008 zero payment and the $0.1613 for 2009 show.
What are the main risks to future earnings?
Key risks include reserve adequacy, since the company carries $6.7 billion of loss and LAE reserves and small changes in severity assumptions can move results; catastrophe losses from hurricanes and severe weather; intense price competition in the auto market; and the Commercial Auto business, where premiums and policies have been shrinking. The investment portfolio also carries concentration risk in financial-sector preferred stocks, and a credit rating downgrade could raise borrowing costs and trigger collateral requirements.
How is the company's growth trending?
Growth is modest but improving. Net premiums written rose 3% in 2009 after declines in 2008 and 2007. Personal Lines grew 5% and Direct auto policies in force rose 13%, while Commercial Auto policies in force fell 5%. Management is pursuing new products such as Name Your Price, MyRate usage-based insurance, and the Progressive Home Advantage bundle, and began writing auto insurance in Australia in December 2009.
06—Continue