01—Abstract
Summary
Summary of the 10-K filed February 27, 2019. Cited figures are marked; the original filing is the authoritative source.
Progressive (PGR) reported a strong 2018 in its 10-K filed February 27, 2019, with net premiums written up 20% to $32.6 billiona and net income attributable to Progressive up 64% to $2.6 billion ($4.42 diluted EPS).
Growth was broad-based across Personal Lines, Commercial Lines, and Property, and policies in force rose 12%b to 20.4 million. The companywide underwriting margin improved to 9.4% from 6.6%, helped by lower catastrophe losses (2.0 loss ratio points versus 3.2 in 2017) and a lower auto claims frequency, which fell about 3%, even as severity rose about 5%. Investors should note that reported net income is now more volatile.
Under the new accounting standard effective in 2018, equity holding-period gains and losses flow through net income. The 2018 result absorbed roughly $498 millionc of net holding-period losses on equity securities. Comprehensive income of $2.5 billion, up about 30%, is management's suggested alternative measure.
The Property segment remains unprofitable, with a 6.9% underwriting loss that includes 5.6 points of ARX-related amortization, and it carries Florida and Texas exposure and catastrophe risk. Capital management changed materially. The board ended the annual variable dividend after 2018 and replaced it with regular quarterly dividends, initially targeted near $0.10d per share, plus a possible annual supplemental dividend.
Progressive issued $1.65 billion of debt and preferred shares, raised debt-to-capital to 28.9%, and took its ARX ownership to 86.8%. The 2018 annual dividend of $2.514 per share, about $1.47 billion, was paid in February 2019.
02—Key points
Key Highlights
- Net premiums written grew 20% to $32.6 billion, with Personal Lines at 83% of the total, Commercial Lines at 12%, and Property at 5%.
- Net income attributable to Progressive rose 64% to $2.6 billion, or $4.42 per diluted share; comprehensive income rose 30% to $2.5 billion.
- The companywide underwriting margin improved to 9.4% from 6.6%, with Personal Lines at 9.7%, Commercial Lines at 13.3%, and Property at -6.9%.
- Policies in force reached 20.4 million, up 12%, with Property policies up 32% and Commercial Lines up 8%.
- The variable dividend policy was replaced by regular quarterly dividends (about $0.10 per quarter initially), and a $2.514 per share dividend was declared for 2018.
- Equity mark-to-market now runs through net income, which created a $498 million holding-period loss in 2018 and adds earnings volatility.
- Debt-to-capital rose to 28.9% after $1.65 billion of new debt and Series B preferred issuance; the ARX minority buyout continues toward a 2021 put/call.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 27, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $31.98B$26.84B | +19.2% |
| Interest Expense | $166.50M$153.10M | +8.8% |
| Net Income | $2.62B$1.59B | +64.3% |
| EPS (Basic) | $4.45$2.74 | +62.4% |
| EPS (Diluted) | $4.42$2.72 | +62.5% |
| Shares Outstanding (Basic) | 582.40M580.80M | +0.3% |
| Shares Outstanding (Diluted) | 586.70M585.70M | +0.2% |
05—Questions
Frequently Asked Questions
Why did net income rise so sharply in 2018?
Underwriting profit increased to $2.9 billion from $1.7 billion, driven by higher earned premium per policy, lower catastrophe losses, and lower auto claim frequency. The 2017 result also included a tax benefit from the Tax Cuts and Jobs Act that did not recur at the same scale.
How should investors interpret the new equity accounting?
Equity securities are now marked to market through net income rather than other comprehensive income. Net income will therefore swing with equity markets, so management suggests comprehensive income as a better measure of operating performance.
What is the outlook for the Property segment?
Property remains loss-making, with a 106.9 combined ratio in 2018, including 5.6 points of ARX amortization. Management is raising rates and expanding product distribution, but the segment carries significant catastrophe exposure in Florida and Texas, which account for about 46% of Property premiums.
What changed in the dividend policy?
The annual variable dividend, tied to after-tax underwriting income, was terminated after the February 2019 payment. The board now expects regular quarterly dividends, initially about $0.10 per share, and will consider an additional annual dividend at its discretion.
06—Continue