01—Abstract
Summary
Summary of the 10-K filed February 26, 2014. Cited figures are marked; the original filing is the authoritative source.
The Progressive Corporation (PGR) reported strong 2013 results, with net income rising to $1,165.4 milliona ($1.93 per diluted share) from $902.3 million in 2012, driven primarily by higher underwriting profitability.
The underwriting margin improved to 6.5% (combined ratio 93.5) from 4.4% in 2012, aided by fewer catastrophe losses (1.0 point in 2013 versus 1.7 points in 2012) and higher average premiums following 2012 rate increases. Net premiums written grew 6% to $17.3 billionb, though growth was largely driven by rate increases rather than policy count, as policies in force rose only about 2% and new personal auto applications were roughly flat. The company's balance sheet and capital return posture remained strong.
Shareholders' equity reached $6.19 billionc, debt-to-total-capital fell to 23.1% from 25.6%, and statutory surplus rose to $6.0 billion with a 2.9-to-1 premiums-to-surplus ratio. Progressive returned roughly $1.2 billion to shareholders and other investors in 2013 through dividends, share repurchases, and debt buybacks, and declared a $1.00 special dividend plus a $0.4929 annual variable dividend payable in February 2014. Investors should note that the variable dividend is performance-based and may vary significantly or be skipped in future years, as the 2012 variable dividend was only $0.2845 per share.
Key risks flagged in the filing include ongoing regulatory and legislative pressure on auto insurance rates and the use of credit in underwriting, litigation (including numerous pending class actions, though the company reports no material exposure), unfavorable prior-year reserve development in Commercial Lines and run-off businesses, and the cyclical, highly competitive nature of the auto insurance market. Investment returns were solid, with a 5.4%d total portfolio return aided by a 32.8% return on common equities, while the fixed-income portfolio returned only 1.7%.
02—Key points
Key Highlights
- Net income rose 29% to $1,165.4 million ($1.93 diluted EPS) from $902.3 million ($1.48) in 2012, primarily from higher underwriting profitability.
- Underwriting margin improved to 6.5% from 4.4% in 2012, above the company's long-term target of at least 4%, with combined ratio of 93.5 versus 95.6.
- Net premiums written grew 6% to $17.3 billion, but policies in force grew only about 2%, so growth was driven mainly by rate increases rather than new customers.
- Total shareholder returns in 2013 were about $1.2 billion, including $890.2 million in dividends declared and $273.4 million in share repurchases, plus $54.1 million of debt repurchases.
- Debt-to-total-capital fell to 23.1% from 25.6%, and statutory surplus rose to $6.0 billion; the premiums-to-surplus ratio held at 2.9 to 1.
- Annual variable dividend of $0.4929 per share (about $293.9 million) plus a $1.00 special dividend were declared, but the variable dividend is performance-based and may vary significantly or not be paid in future years.
- Snapshot usage-based insurance surpassed $2 billion in annual premiums, and the company holds seven usage-based patents, though several patents face PTAB challenges.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2013filed February 26, 2014Financial Statements
FY2013 against FY2012
| Line item | FY2013FY2012 | Change |
|---|---|---|
| Revenue | $18.17B$17.08B | +6.4% |
| Interest Expense | $118.20M$123.80M | −4.5% |
| Net Income | $1.17B$902.30M | +29.2% |
| EPS (Basic) | $1.95$1.50 | +30.0% |
| EPS (Diluted) | $1.93$1.48 | +30.4% |
| Shares Outstanding (Basic) | 599.10M603.30M | −0.7% |
| Shares Outstanding (Diluted) | 603.60M607.80M | −0.7% |
05—Questions
Frequently Asked Questions
Why did Progressive's profitability improve so much in 2013?
Underwriting profit rose to $1,120.1 million (6.5% margin) from $708.9 million (4.4%) in 2012. The main drivers were higher average earned premiums from 2012 rate increases, lower catastrophe losses (1.0 point of combined ratio versus 1.7 points in 2012), and a lower expense ratio. Unfavorable prior-year reserve development of $45.1 million was a modest offset, compared with $22.0 million in 2012.
How sustainable is the annual variable dividend?
The dividend equals 33-1/3% of after-tax underwriting income multiplied by a Gainshare factor (1.21 for 2013). It is paid only if the Gainshare factor is above zero and comprehensive income exceeds after-tax underwriting income. The amount has varied widely: $0.4929 for 2013, $0.2845 for 2012, and $0.4072 for 2011. The Board can also change or skip the policy at any time, so investors should not treat it as a fixed payout.
Is Progressive's growth coming from new customers or from price increases?
Mostly from price. Net premiums written rose 6%, and written premium per policy rose about 4% in personal auto. Policies in force grew only about 2% companywide, and new personal auto applications were roughly flat (down 1% for the year), though they turned positive in late 2013 as rates became more competitive. Policy life expectancy declined 4% for personal auto, indicating some customer retention pressure after the 2012 rate increases.
What are the main risks to Progressive's reserves and litigation exposure?
Net loss and LAE reserves total $7.4 billion, and the filing notes that severity assumptions (4.0% for personal auto liability and 6.1% for commercial auto) drive the estimate. A 2% severity change would move net reserves by about $140 million for the 2013 accident year. Management reports numerous pending putative class actions, including challenges to PIP handling, labor rates paid to repair shops, and Snapshot practices, but states that it does not expect them to have a material impact. Only one case, challenging uninsured motorist rejection forms, has an accrual.
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