Progressive Insurance coverage, Regressive Returns? (NYSE:PGR)

Effectively acknowledged for its charming mascot, Flo, Progressive Company (NYSE:PGR) is among the largest insurance coverage firms on this planet by market cap, sitting narrowly beneath $100 billion as I write this. Curiously, the inventory is at its all-time excessive, with a P/E like a tech firm. Whereas many different firms’ shares slumped in worth in the course of the occasions of 2022, PGR stored plugging alongside.

It’s value inspecting what precisely traders are getting with this established and pleasant model. I’ll evaluate the financials and the outlook for the corporate. In the end, pretty much as good as the corporate is, I feel PGR is overpriced, and that makes it a SELL.

Present Enterprise

Progressive primarily offers in automotive insurance coverage. Additionally they supply merchandise associated to property, workman’s compensation, and varied different merchandise. Automotive insurance coverage simply makes up nearly all of their enterprise. With 29.5m insurance policies in impact as of November, 19.4m have been beneath their private auto line, with an extra 1.1m insurance policies of their skilled traces.

As may also be seen above, barely extra of those insurance policies are underwritten immediately by way of the corporate than by exterior brokers. Direct gross sales happen on their web site, by way of their app, or over the cellphone. The place doable, the corporate tries to bundle completely different insurance coverage merchandise right into a single providing in an effort to enhance income and construct stronger buyer relationships.

The automotive insurance coverage market could be very aggressive, and Progressive has many rivals in that area. In line with ValuePenguin, as of January 2024, Progressive had the second-largest slice of American market share for automotive insurance coverage, at 14.1%.

Primarily based on the figures they supply, the highest 10 auto insurers management about 77% of that market. It’s a decent area.

The corporate’s additional money is invested, ideally to get a greater return and yield than merely maintaining it within the financial institution, which is regular in insurance coverage.

In Q3 2023, the corporate reported $61.9 billion in investments on its stability sheet. Because of regulatory constraints, most of those are in fixed-income securities, and little or no is in equities.

General, the stability sheet is fairly robust. The portfolio itself is enough to cowl most of its liabilities, and tangible property general are effectively in extra of that.

Monetary Historical past

What sort of outcomes has this enterprise mannequin gotten? The corporate skilled profitable development over the previous decade to develop into one of many main auto insurers within the nation. I’ll embrace YTD information for 2023 (as much as Q3 and based mostly on the corporate’s information releases for October and November).

Progressive is and continues to be a gradual grower and compounder. How has this been mirrored in earnings and returns to shareholders?

Their earnings have trended towards development. The unusual rise in 2020 was resulting from an absence of claims amid decreased visitors (and subsequently decreased accidents) in the course of the COVID lockdowns. Dividend payouts present that these additional earnings have been in the end given out to shareholders.

Regardless of regularly rising revenues, earnings have been down in 2022. Of their 2022 Type 10K (pg. App.-A-51), administration defined within the Working Outcomes that this was a mixture of a decline out there worth of their portfolio’s securities, impairment of goodwill, and (importantly) losses incurred from their Property Line, primarily insurance policies within the Southeast, resulting from storms.

Stability sheet reveals unsurprising development of property and liabilities, given what I’ve already talked about.

But, asset development has been 3.32x since 2014, whereas TBV has solely elevated 2.4x, considerably because of the newer challenges.

A Look to the Future

As I discussed earlier, this firm, regardless of being insurance coverage, is buying and selling at a really excessive a number of. That implies there’s optimism about development in earnings, so the place would the expansion be?

Auto Line

To reiterate, Progressive is the #2 automotive insurer by market share. The massive ten have 77% of this market. The alternatives are shrinking. Progressive already operates in all 50 U.S. states. There’s not a lot new territory to penetrate. For the Auto Line revenues to develop, they want to have the ability to increase costs with out dropping clients, purchase shares from these robust rivals, or trip the wave of a rising market. Ought to something of this stuff happen, I imagine the affect shall be small. Let’s begin with pricing, and I’ll quote the corporate of their 2022 10K once more:

Whereas a number one model is vital to our success, we function in a really aggressive business the place value is a really robust consideration for shoppers once they store or determine to resume their insurance policies. Consequently, aggressive costs are one among our 4 technique pillars.

So they’re conscious of this, and I anticipate they are going to be hesitant to lift costs considerably over time. Now, they’ve been making substantial will increase to maintain up with latest excessive inflation, and that’s to be anticipated. After all, that’s solely nominal development.

If you happen to look again on the chart on revenues, that $55.7b for 2023 is extra like $46.8b in 2020. So sure, Progressive no less than has some pricing energy in opposition to inflation, however let’s not let it warp our notion of development an excessive amount of.

So far as taking market share goes, they are able to try this with the smaller insurers, however I imagine the opposite large 9 will even be doing that. Additionally they have potent advertising and marketing campaigns. Flo is pitted in opposition to the likes of the Gecko, Mayhem, and Jake from State Farm. It’s a kind of indicators the place Progressive is a good enterprise however doesn’t fairly have a moat all to itself.

Lastly, I imagine the variety of drivers who want insurance coverage is unlikely to rise by any main diploma. There are already 240m licensed drivers within the U.S. With the millennials all grown up now and declining beginning charges for years, there’s not a big, new cohort of drivers for insurers to scoop up anymore. Realistically, Auto Line’s development shall be incremental.

Property Line

That is actually the place the corporate desires to lock in development and should clarify the excessive value of PGR. As beforehand said, Progressive likes to bundle its merchandise with its Auto Line, as this isn’t solely a bigger sale, however they imagine these clients usually tend to renew. This matter was a serious supply of debate within the Q3 Earnings Name. I’ll quote among the administration on it:

The factor to think about there, Josh, is which segments we’re rising in could be considerably indicative of the place they’re coming from. So we’re persevering with to develop effectively within the extra most well-liked segments of our enterprise, the “Robinsons,” but in addition we name “Wrights” who’re owners that don’t bundle but their house and auto with Progressive. And we have now not been rising, really this 12 months, we’ve been shrinking just a little bit on the usual finish. So the nonstandard finish of the spectrum. In order that bodes very well for our future development as a result of, clearly, these clients keep on with us longer.

A part of the wrestle is that the Property Line has not been worthwhile recently, largely resulting from massive storms in 2022 and the corporate’s publicity to Florida:

Whereas I feel there’s some intelligence to the thought of leveraging their current ebook of Auto clients and turning them into bundle clients as a way of development, the execution has not began effectively. This was additionally talked about in that earnings name:

Sure. I feel we begin with what we began with a couple of 12 months in the past, and that was to de-risk the ebook and have much less new apps and insurance policies in risky states and extra in nonvolatile. And also you noticed the information on that within the queue that we imagine we’re doing a fantastic job. We’re non-renewing about 115,000 insurance policies in Florida, we’re simply over listed in Florida. And so we love Florida. Now we have a variety of Robinsons. Now we have a variety of autos and we proceed to have a variety of houses, however we weren’t making a living and we would have liked to non-renew some. So that may occur over the following 12 months or so.

Whereas the corporate goes to enhance its threat fashions to underwrite much less and with higher costs, I personally suppose this may very well be a warning. Maybe increasing right into a line that may very well be as large as Auto is them deviating from their robust fits.

That isn’t to say that they gained’t pull this off, however the place automotive insurance coverage is steadier and extra predictable, property insurance coverage is a distinct product with completely different dangers. An investor has to ask, “If elevated revenues additionally include elevated prices, is it actually earnings development?”

Having mentioned that, if we assume that they discovered from the issues of Florida and different Gulf States, profitable execution of the technique might develop earnings considerably.

Valuation

So let’s speak in regards to the present valuation earlier than I do my very own. The market cap of Progressive sits just under $100b, a giant firm! But, the TBV is barely $16.6b. Not many insurance coverage or monetary firms will commerce that top above TBV. YTD internet revenue for 2023 can also be $3b, so the place is the $100b in worth?

Effectively, first contemplate that a few of this is because of market conduct for the reason that occasions of 2022 (struggle in Ukraine, inflation).

If we have a look at complete returns since Jan. 1, 2022 to in the present day for the S&P 500, the S&P Insurance coverage Choose Business Index, and PGR, we’ll discover that each of the latter beat the previous. Insurance coverage firms are sometimes seen as defensive shares, so the entire sector stayed up on that, no matter earnings. Insurance coverage firms are seen as safer, so individuals pay extra for them.

Nonetheless, PGR’s return has been greater than that of the Index, so individuals should anticipate development. If earnings are usually round $3b, then to me that implies the market thinks they’ll develop to about $10b fairly quickly. What are the chances, then? If we assume progressive solely averages 3% earnings development annually, then $10b doesn’t occur.

If we assume Progressive solely averages 15% development (which might be commendable for the corporate of that measurement), it occurs in 2032, not precisely quickly.

If we common 25% development for no less than the primary six years, we get there by 2029.

Even when it’s not for a full decade, 25% is loads to perform, particularly for a giant insurer like Progressive. It’s particularly robust if the supply of development nonetheless must be made a worthwhile phase first. Whereas I feel Progressive is a good firm, I’d like to purchase it with extra modest development assumptions. If I worth it for 3% development and apply my normal low cost price of 10%, right here is the worth of the following decade’s earnings.

That’s $21.3 billion. Added to the tangible ebook worth of $16.6b and divided by the variety of shares, which tells me the truthful worth of the corporate is $64.50. The present value of $170 appears wealthy to me.

Conclusion

Progressive is a superb firm with one of the vital recognizable manufacturers in insurance coverage. But, it’s buying and selling at an all-time excessive, as if the #2 automotive insurer has a path to meteoric development. Moderately, the premium is borne out of investor preferences for “defensive” insurance coverage shares within the wake of 2022 and anticipation of development from the Property Line that isn’t making a living, resulting from misguided threat assumptions.

The technique for development is a brilliant one, however traders ought to watch a bit longer to substantiate that they will really begin to do it, and even when that day comes, they need to watch out to not overpay for a vivid future, or else they gained’t earn money. Possibly, at finest, it is a $70b enterprise, however I don’t see a justification for $100b. Within the meantime, I wouldn’t need to threat my hard-earned cash shopping for PGR, and if I did personal it, it might be a simple SELL at this value.