10-QPeriod: Q3 FY2018

PROGRESSIVE CORP/OH/ Quarterly Report for Q3 Ended Sep 30, 2018

Filed October 31, 2018For Securities:PGR

Summary

Progressive Corporation (PGR) reported a strong third quarter of 2018, demonstrating robust growth in both premiums earned and policies in force, up 21% and 13% year-over-year, respectively. The company's underwriting operations were particularly strong, driven by a significant reduction in catastrophe losses compared to the prior year and improved average written premium per policy. This led to a substantial increase in net income and comprehensive income attributable to Progressive, with an underwriting margin of 9.7%. Investment performance contributed positively, though less dramatically than underwriting, with a pretax book yield of 2.9% on recurring investment income. The company maintained a conservative investment strategy with a focus on quality and managed its portfolio duration to mitigate interest rate risk. Progressive also continued to strengthen its capital position through debt and preferred stock issuances, maintaining a debt-to-total capital ratio below 30%, and demonstrating a solid liquidity position through positive operating cash flows.

Financial Highlights

36 data points
Beta

Revenue

$8.50B

Net Income

$928.40M

10.9% Net Margin

EPS (Diluted)

$1.57

Total Assets

$45.54B

Cash & Equivalents

$121.90M

Free Cash Flow

$1.66B

Financial Statements
Beta
Revenue$8.50B
Interest Expense$42.00M
Net Income$928.40M
EPS (Basic)$1.58
EPS (Diluted)$1.57
Shares Outstanding (Basic)582.70M
Shares Outstanding (Diluted)586.60M

Key Highlights

  • 1Net premiums earned increased by 21% year-over-year to $7,930.5 million for the three months ended September 30, 2018.
  • 2Net income attributable to Progressive surged by 314% to $928.4 million for the three months ended September 30, 2018.
  • 3Underwriting margin improved significantly to 9.7% from 2.6% in the prior year's comparable period, largely due to reduced catastrophe losses.
  • 4Total policies in force grew by 13% to over 20 million by the end of September 2018.
  • 5The company's investment portfolio value stood at $32.4 billion as of September 30, 2018, with a pretax book yield on recurring investment income of 2.9% for the quarter.
  • 6Total capital increased to $15.7 billion, with a debt-to-total capital ratio of 24.6% as of September 30, 2018.
  • 7The effective tax rate decreased to 17.7% for the third quarter of 2018, reflecting the Tax Cuts and Jobs Act of 2017.

Frequently Asked Questions

Progressive's net income growth was primarily driven by a substantial increase in net premiums earned (up 21% year-over-year) and a significant improvement in the underwriting margin to 9.7%. This improved underwriting performance was largely due to a 70% decrease in catastrophe losses compared to the prior year, coupled with higher average written premium per policy and a decrease in auto claims frequency.

The investment portfolio's fair value was $32.4 billion at September 30, 2018. Recurring investment income generated a pretax book yield of 2.9% for the quarter. The total portfolio generated a fully taxable equivalent (FTE) total return of 1.2%. The fixed-income portfolio had an FTE total return of 0.5%, while the common stock portfolio yielded 7.4%.

Progressive maintained a strong capital position, with total capital (debt plus shareholders' equity) at $15.7 billion as of September 30, 2018. The debt-to-total capital ratio remained below 30% at 24.6%. The company generated approximately $5.2 billion in positive operating cash flow for the first nine months of 2018, indicating robust liquidity.

Progressive adopted new accounting guidance for financial instruments in January 2018, which now recognizes changes in fair value of equity securities as a component of net income, rather than other comprehensive income. This change can lead to increased volatility in net income. The company also noted the ongoing accounting for the Tax Cuts and Jobs Act of 2017, particularly regarding compensation expense deductibility and loss reserve discounting, with definitive guidance still pending.