01—Abstract
Summary
Summary of the 10-K filed March 1, 2011. Cited figures are marked; the original filing is the authoritative source.
The Progressive Corporation (PGR) closed fiscal 2010 with strong profitability and a clear capital-return posture.
Net income was $1,068.3 milliona, or $1.61 per diluted share, versus $1,057.5 million ($1.57) in 2009 and a net loss of $70.0 million in 2008. The combined ratio improved to 92.4 from 91.6 in 2009 on a basis slightly weaker than 2009 but still well inside the company's 96 target, and the underwriting margin was 7.6%, above management's 4% objective. Net premiums written grew 3% to $14.5 billion, driven by a 9% rise in Direct auto premiums and a 4% rise in Agency auto applications, while Commercial Auto continued to shrink under economic pressure.
Policies in force rose 7% in Personal Lines, led by 13% growth in Direct auto. The balance sheet and capital story is central to the investment case. Shareholders' equity rose to $6.05 billion and book value per share to $9.13b.
Total investments were $15.5 billionc, and the fixed-income portfolio carried a weighted average credit quality of AA- and a duration of only 2.0 years, reflecting a deliberate defensive stance. Progressive returned about $1.4 billion to shareholders in 2010 through a $1.00 extraordinary dividend ($663.2 million), share repurchases of $258.6 million, and the annual variable dividend of $.3987 per share paid in February 2011. It also retired $222.9 million of its 6.70% Debentures.
The variable dividend formula will rise to a 33-1/3% target of after-tax underwriting income for 2011, which signals management's intention to keep distributing excess capital. Key risks flagged in the filing include reserve adequacy (the company released $320.4 milliond of prior-year reserves, a 2.2-point benefit to the combined ratio, which flatters current results), a cyclical auto insurance market, regulatory and litigation exposure (including credit-based underwriting, PIP and bodily injury claims), a federal insurance regulatory framework established by Dodd-Frank, and the variability of the annual dividend, which may fall to zero in a weak year as it did for 2008.
02—Key points
Key Highlights
- Net income of $1.07 billion ($1.61 per diluted share) in 2010, up from $1.06 billion in 2009 and a $70 million loss in 2008.
- Combined ratio of 92.4 and underwriting margin of 7.6%, comfortably above the company's 4% profitability objective and its 96 combined-ratio underwriting discipline.
- Net premiums written rose 3% to $14.5 billion; Personal Lines policies in force grew 7%, with Direct auto up 13%, while Commercial Auto remained flat.
- Favorable prior-year reserve development of $320.4 million (2.2 combined-ratio points) contributed meaningfully to 2010 results and warrants scrutiny of underlying current-year margins.
- Returned roughly $1.4 billion to shareholders in 2010 via a $1.00 extraordinary dividend, $258.6 million of buybacks, and the $.3987 annual variable dividend; the 2011 target payout rises to 33-1/3% of after-tax underwriting income.
- Balance sheet is conservatively positioned: $15.5 billion portfolio averaging AA- credit quality with a 2.0-year duration, $6.05 billion in shareholders' equity, book value of $9.13 per share, and a debt-to-capital ratio of 24.5%.
- Ongoing litigation and regulatory exposure includes class actions on PIP, bodily injury practices, credit-based underwriting under the Fair Credit Reporting Act, and the new federal Insurance Office created under Dodd-Frank.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2010filed March 1, 2011Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $15.22B$14.56B | +4.5% |
| Interest Expense | $133.50M$139.00M | −4.0% |
| Net Income | $1.07B$1.06B | +1.0% |
| EPS (Basic) | $1.62$1.59 | +1.9% |
| EPS (Diluted) | $1.61$1.57 | +2.5% |
| Shares Outstanding (Basic) | 657.90M666.80M | −1.3% |
| Shares Outstanding (Diluted) | 663.30M672.20M | −1.3% |
05—Questions
Frequently Asked Questions
How profitable was Progressive's core insurance business in 2010?
Underwriting operations were highly profitable, with a combined ratio of 92.4 (pretax underwriting margin of 7.6%), versus 91.6 in 2009 and 94.6 in 2008. Personal Lines posted a 93.0 combined ratio, while Commercial Auto was much stronger at 87.5. Results were supported by $320.4 million of favorable prior-year reserve development.
Is the annual variable dividend reliable for investors?
Not necessarily. The dividend is formula-driven, equal to a target percentage of after-tax underwriting income times the Gainshare factor (ranging from zero to two), and is only paid if after-tax comprehensive income exceeds after-tax underwriting income. The 2010 payout was $.3987 per share, the 2009 payout was $.1613, and no dividend was paid for 2008. The Board may also alter or suspend the policy at any time before declaration.
How strong is Progressive's capital position and how is it being used?
Capital is strong, with total capital (debt plus equity) of $8.0 billion, a debt-to-capital ratio of 24.5% (down from 34.0% in 2008), and a net premiums written-to-surplus ratio of 2.9 to 1. Management is returning excess capital through dividends, buybacks, and debt retirement, including the $222.9 million Debenture tender in 2010. The company holds $2.2 billion in a non-insurance subsidiary for flexibility.
What are the main risks to future earnings?
Key risks include loss reserve adequacy in a long-tail bodily injury and PIP environment, intensifying competition and a cyclical 'soft market' in auto insurance, severe catastrophes, adverse regulatory or court decisions (including rate regulation and credit-based underwriting), and market risk in a $15.5 billion investment portfolio with significant preferred stock and equity exposure. Commercial Auto growth also remains weak, with policies in force flat and premiums per policy declining.
06—Continue