01—Abstract
Summary
Summary of the 10-K filed March 2, 2020. Cited figures are marked; the original filing is the authoritative source.
Progressive (PGR) closed 2019 with a strong year.
Net premiums written grew 15% to $37.6 billiona and net premiums earned grew 17% to $36.2 billion, with policies in force up 10% to 22.4 million. Net income attributable to Progressive rose 52% to $3.97 billion ($6.72 diluted EPS), and comprehensive income rose 76% to $4.43 billion. Results were helped by a 13% increase in underwriting income and a sharp rise in investment income, which climbed 27% to $1.04 billion.
Realized gains on securities of $1.03 billionb, driven largely by equity holding-period gains, also boosted reported earnings. The companywide underwriting margin was 9.1%, slightly below 9.4% in 2018, with a combined ratio of 90.9%. The quality of the results has some caveats.
The Property segment posted an underwriting loss of 1.7% (including 4.3 points of ARX-related amortization), and Personal Lines margins held near 9.5%. Unfavorable prior-year reserve development rose to $232 millionc from $89 million, and the company recorded a $163 million charge for fraudulent renewable energy tax credit investments. Auto new application growth slowed as competitors cut rates, and the 2019 accident-year severity assumption in reserves is sensitive to inflation.
Management is also pursuing growth through its Destination Era bundling strategy and expanding Commercial Lines (TNC business and the new BOP product). Capital remains solid.
Total capital reached $18.1 billiond, the debt-to-capital ratio fell to 24.4%, and the premium-to-surplus ratio was 2.7:1. The company paid $2.65 per share in dividends for 2019, including an annual variable dividend, and it agreed in February 2020 to buy out the minority interest in ARX for about $242 million, bringing its stake to 100% in the second quarter of 2020.
02—Key points
Key Highlights
- Net premiums written rose 15% to $37.6 billion, with Personal Lines up 15%, Commercial Lines up 20%, and Property up 16%.
- Net income attributable to Progressive rose 52% to $3.97 billion, or $6.72 per diluted share, though realized equity gains of about $1.03 billion contributed materially.
- Companywide underwriting margin was 9.1% (combined ratio 90.9%), versus 9.4% in 2018; the Property segment lost money at a -1.7% margin.
- Investment portfolio grew to $39.3 billion (up 17%), with a fixed-income pretax book yield of 3.1% and a total portfolio FTE return of 7.9%.
- Unfavorable prior-year loss reserve development increased to $232 million from $89 million, mainly from injury severity and reopened PIP claims in Florida.
- Capital position strengthened: total capital of $18.1 billion, debt-to-capital of 24.4%, and premium-to-surplus of 2.7:1.
- Agreed in February 2020 to acquire the remaining ARX minority shares for about $242 million, bringing ownership to 100% in Q2 2020.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2019filed March 2, 2020Financial Statements
FY2019 against FY2018
| Line item | FY2019FY2018 | Change |
|---|---|---|
| Revenue | $39.02B$31.98B | +22.0% |
| Interest Expense | $189.70M$166.50M | +13.9% |
| Net Income | $3.97B$2.62B | +51.8% |
| EPS (Basic) | $6.75$4.45 | +51.7% |
| EPS (Diluted) | $6.72$4.42 | +52.0% |
| Shares Outstanding (Basic) | 583.80M582.40M | +0.2% |
| Shares Outstanding (Diluted) | 587.20M586.70M | +0.1% |
05—Questions
Frequently Asked Questions
What drove Progressive's strong 2019 net income growth?
Net income attributable to Progressive rose 52% to $3.97 billion. The increase reflected a 13% rise in underwriting income on 15-17% premium growth, a 27% increase in investment income to $1.04 billion, and $1.03 billion in total realized gains, mostly unrealized equity gains recognized in earnings under the new accounting standard. Investors should note that the realized gains are volatile and not part of core underwriting results.
Is Progressive's underwriting profitability improving or deteriorating?
Underwriting margin was 9.1% in 2019, slightly down from 9.4% in 2018, and the combined ratio was 90.9%. Personal Lines margin was steady at 9.5%, and Commercial Lines fell to 10.4% from 13.3%. Property was the weak spot at a -1.7% margin, although that improved from -6.9% in 2018. Prior-year reserve development was unfavorable, and management flagged rising injury severity.
What risks did the 10-K highlight regarding the company's financials?
Key risks include reserve adequacy (the company reserves $18.1 billion and a 2% severity miss would move net reserves by roughly $300 million), catastrophe exposure in the Property segment, and sensitivity to auto severity trends, especially bodily injury and PIP claims. The company also took a $163 million charge after tax credit fund investments tied to fraud were reversed, and it faces ongoing class-action litigation and LIBOR transition risk on about $3.3 billion of securities.
How strong is Progressive's capital and dividend capacity?
Shareholders' equity rose to $13.7 billion, and statutory surplus was $13.7 billion, giving a 2.7:1 premium-to-surplus ratio. Debt to total capital fell to 24.4%, versus a 30% target. Progressive paid $2.65 per common share in dividends declared for 2019, and the company retains about $3.2 billion of securities in a non-insurance subsidiary that could support capital needs. Dividends are variable and set by the board, so future payouts may differ.
06—Continue