01—Abstract
Summary
Summary of the 10-K filed February 26, 2013. Cited figures are marked; the original filing is the authoritative source.
The Progressive Corporation (PGR) reported a solid but less profitable 2012.
Net premiums written grew 8% to $16.4 billiona and net premiums earned rose 7% to $16.0 billion, with total revenues reaching $17.1 billion. However, net income fell 11% to $902.3 million (diluted EPS $1.48, down from $1.59), driven by a rise in the combined ratio to 95.6 from 93.0. Drivers included roughly 5% higher personal auto severity, elevated catastrophe losses (about 1.7 points, including Superstorm Sandy), and a swing to unfavorable prior-year reserve development of $22.0 million versus favorable development of $242.0 million in 2011.
The company still met its 4% underwriting margin target at 4.4%. Investment performance was a bright spot. Pretax recurring investment income fell 8% to $443.0 millionb as portfolio yields declined, but net realized gains of $306.8 million and a 6.8% fully taxable equivalent total return lifted comprehensive income 17% to $1,080.8 million.
The $16.5 billionc portfolio remains conservatively positioned, with a 1.9-year duration, an average credit quality of AA-, and a 2.9-to-1 premiums-to-surplus ratio. Capital return remained a priority: Progressive returned nearly $1.0 billion to shareholders in 2012 through a $1.00 special dividend ($604.7 million), an annual variable dividend of $0.2845 per share (about $172 million, paid February 2013), and $174.2 million of buybacks.
Debt-to-total capital fell to 25.6% from 29.6% after retiring $350 milliond of 6.375% notes. Management noted that the variable dividend depends on underwriting results and the Gainshare factor, so future payouts may vary significantly.
02—Key points
Key Highlights
- Net premiums written rose 8% to $16.4 billion, the fastest growth since 2004, driven by a roughly 6% personal auto rate increase and 460,000 new policies; policies in force reached about 13.3 million.
- Net income declined 11% to $902.3 million (diluted EPS $1.48 vs. $1.59) as the combined ratio deteriorated to 95.6 from 93.0, though it remained above the company's 4% underwriting margin target.
- Prior-year reserve development turned unfavorable at $22.0 million, compared with $242.0 million favorable in 2011, with Commercial Auto and Florida PIP driving the swing.
- Comprehensive income rose 17% to $1,080.8 million, supported by a 6.8% FTE total portfolio return and $306.8 million in realized gains, despite recurring investment income falling 8% to $443.0 million.
- Approximately $1.0 billion was returned to shareholders in 2012, including a $1.00 special dividend, a $0.2845 annual variable dividend, and $174.2 million of share repurchases.
- Debt-to-total capital improved to 25.6% from 29.6%, with $2.06 billion of debt outstanding and a 2.9:1 net premiums written-to-surplus ratio.
- Snapshot usage-based insurance crossed $1 billion in annual premium, and the company holds six related patents, positioning it as a technology differentiator in personal auto.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2012filed February 26, 2013Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $17.08B$15.77B | +8.3% |
| Interest Expense | $123.80M$132.70M | −6.7% |
| Net Income | $902.30M$1.02B | −11.1% |
| EPS (Basic) | $1.50$1.61 | −6.8% |
| EPS (Diluted) | $1.48$1.59 | −6.9% |
| Shares Outstanding (Basic) | 603.30M632.30M | −4.6% |
| Shares Outstanding (Diluted) | 607.80M636.90M | −4.6% |
05—Questions
Frequently Asked Questions
Why did Progressive's earnings decline in 2012 despite strong premium growth?
Net income fell 11% because the combined ratio rose to 95.6 from 93.0. The main causes were about 5% higher personal auto severity, roughly 1.7 points of catastrophe losses (including about $100 million from Superstorm Sandy), and unfavorable prior-year reserve development compared with favorable development in 2011. Lower recurring investment income from falling portfolio yields also contributed.
How much did Progressive return to shareholders in 2012, and will the dividend continue?
About $1.0 billion was returned in 2012: a $604.7 million special dividend, a $172.0 million annual variable dividend ($0.2845 per share, paid February 2013), and $174.2 million in buybacks. The annual variable dividend is formula-based (33-1/3% of after-tax underwriting income times the Gainshare factor) and will be zero if underwriting results or comprehensive income are weak. The Board retains discretion to change the policy, so future payouts can vary significantly.
How strong is Progressive's capital position and balance sheet?
Statutory surplus was $5.6 billion, and the premiums-to-surplus ratio was 2.9 to 1. Total capital was $8.1 billion, and debt-to-total capital fell to 25.6%. The company has $1.4 billion of securities available at its non-insurance holding subsidiary and no financial covenants or rating triggers on its debt. Its next scheduled maturity is $150 million of 7% notes due October 2013.
What are the main risks investors should monitor?
Key risks include pricing adequacy in a competitive, cyclical auto market; reserve adequacy, since ultimate losses could exceed carried reserves; catastrophe exposure, which the company notes may be increasing with climate change; regulatory and litigation exposure, including class actions over PIP and bodily injury claims; cyber and data security risks; and investment market risk in a $16.5 billion portfolio. The company also notes that its variable dividend and reliance on subsidiary dividends for holding-company funding are subject to regulatory limits.
06—Continue