01—Abstract
Summary
Summary of the 10-K filed February 27, 2018. Cited figures are marked; the original filing is the authoritative source.
Progressive (PGR) closed 2017 with a strong year on the top line and a rebound in profitability.
Net premiums written rose 16% to $27.1 billiona, a company record increase of $3.8 billion, and policies in force grew 10% to 18.2 million. The companywide combined ratio improved to 93.4 (underwriting margin 6.6%) from 95.1 in 2016, and net income attributable to Progressive rose 54% to $1.59 billion, or $2.72 per diluted share. Results were helped by lower auto claim frequency and higher earned premium per policy, partly offset by $830.5 million of catastrophe losses, including Hurricanes Harvey and Irma, and an underwriting loss in the Property segment (ASI).
The Property business, acquired via the 2015 ARX deal, was the weak spot: it posted a 105.1 combined ratio, including about 6.7 points of acquisition-related amortization. Management is transitioning ASI products to the Progressive brand and building a bundled auto/home strategy (Destination Era). Progressive also faces a near-term obligation to buy out ARX minority shares, roughly $180 millionb in Q2 2018 if ownership reaches 80%, and up to about $310 million if all put rights are exercised.
Debt-to-capital was 26.3%, and management said it will likely need to raise additional capital in the next 12 months to support premium growth, which could push debt-to-capital above its 30% target. A structural tailwind is the Tax Cuts and Jobs Act, which cut the federal rate to 21% and produced a one-time $99.5 millionc net tax benefit in 2017.
Management expects the effective tax rate to fall to about 20% from the historical 32-33%, which should boost future net income. Shareholder returns run through an annual variable dividend, $1.1247d per share for 2017, paid in February 2018 at about $655 million, with a 33-1/3% underwriting-income target maintained for 2018.
02—Key points
Key Highlights
- Net premiums written grew 16% to $27.1 billion, a record annual increase of $3.8 billion, and policies in force rose 10% to 18.2 million.
- Companywide combined ratio improved to 93.4 from 95.1 in 2016, giving a 6.6% underwriting margin, 2.6 points above the company's profitability objective.
- Net income attributable to Progressive rose 54% to $1.59 billion ($2.72 per diluted share); total comprehensive income was $1.94 billion.
- Catastrophe losses rose to $830.5 million (3.2 combined ratio points), including Hurricanes Harvey and Irma; Property segment combined ratio was 105.1, a loss-making year.
- The Tax Act reduced the federal tax rate to 21%, yielding a $99.5 million net tax benefit in 2017 and an expected effective tax rate near 20% going forward.
- Debt-to-total-capital was 26.3%; management expects to raise capital within 12 months, possibly pushing the ratio above its 30% target.
- The 2017 annual variable dividend was $1.1247 per share (about $655 million), with the 33-1/3% target retained for 2018; ARX minority buyouts could require roughly $180 million to $310 million in 2018.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2017filed February 27, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $26.84B$23.44B | +14.5% |
| Interest Expense | $153.10M$140.90M | +8.7% |
| Net Income | $1.59B$1.03B | +54.4% |
| EPS (Basic) | $2.74$1.77 | +54.8% |
| EPS (Diluted) | $2.72$1.76 | +54.5% |
| Shares Outstanding (Basic) | 580.80M581.70M | −0.2% |
| Shares Outstanding (Diluted) | 585.70M585.00M | +0.1% |
05—Questions
Frequently Asked Questions
How did Progressive's profitability change in 2017?
The combined ratio improved to 93.4 from 95.1, and net income attributable to Progressive rose 54% to $1.59 billion ($2.72 per diluted share). Lower auto claim frequency and higher earned premium per policy drove the improvement, partly offset by catastrophe losses and Property segment losses.
Why did the Property business lose money, and what is being done about it?
The Property segment (ASI, acquired through ARX in 2015) posted a 105.1 combined ratio and a 5.1% underwriting loss, driven by 30.3 points of catastrophe impact and about 6.7 points of acquisition-related amortization. Management is shifting ASI products to the Progressive brand and expanding direct sales through HQX to support bundled auto/home growth.
What are the upcoming capital needs and obligations?
Progressive must buy ARX minority shares under put/call rights, around $180 million in Q2 2018 to reach 80% ownership and up to about $310 million if all rights are exercised. Management also said it will likely need to raise additional capital within 12 months to support premium growth, possibly with debt, which could push debt-to-capital above 30%.
How will the tax reform affect future earnings and dividends?
The federal rate fell to 21% from 35%, and management expects the effective tax rate to drop from 32-33% to about 20%, a material boost to future net income. The annual variable dividend formula now applies a 21% tax rate to underwriting income, so dividends may rise under the same policy, though the amount remains performance-dependent and subject to Board discretion.
What drove the variable dividend and how reliable is it?
The dividend equals 33-1/3% of after-tax underwriting income multiplied by a Gainshare factor (1.79 for 2017). It is paid only if the Gainshare factor is above zero and comprehensive income exceeds after-tax underwriting income. The amount varies year to year and is not guaranteed, since the Board can alter or skip the dividend at any time.
06—Continue