(PGR) Progressive Downgraded to Neutral

On May 17, 2013, we downgraded our recommendation on Progressive Corp. (PGR) to Neutral from Outperform based on the stressed bottom line growth and continued pressure on underwriting margins. This auto insurer currently carries a Zacks Rank #3 (Hold).

Why the Downgrade?

In the last 4 quarters, Progressive managed to deliver earnings surprise in only one quarter.  Average surprise in last 4 quarters came at a negative 8.9%.

Progressive has been delivering deteriorating combined ratios for the past few years. Although combined ratio improved to 170 basis points year-over-year to 92.4% in the first quarter of 2013, the improvement is not sustainable as it was backed by absence of any major catastrophic events during the quarter. Occurrence of any severe catastrophes in the near term might deteriorate the combined ratio.

The Commercial Auto business is recording year-over-year growth for the past few months yet, the sluggish economy and increased competition is expected to stress the growth of the segment. Progressive mainly caters to small businesses. Lower levels of employment, construction spending and new business creation, combined with constraints on commercial credit have led to a reduction in insurable risks for these businesses. We expect this headwind to continue as uncertainty in the economy and elevated levels of unemployment are expected to persist for a while.

During the first quarter of 2013, Progressive’s underwriting margin deteriorated to 7.6%. Underwriting margins for the company are expected to remain volatile in the upcoming term, owing to the loss cost trends and soft economic environment.

However amidst a number of negatives, the company’s focus on expanding multi-line product offering, customer retention and increasing shareholders worth through buybacks and dividend payouts positions Progressive to actively drive growth and earnings.

Other Stocks to Consider

Among others in the industry, American Safety Insurance Holdings Ltd. (ASI), AXIS Capital Holdings Limited (AXS) and Montpelier Re Holdings Limited (MRH) carry a favorable Zacks Rank #1 (Strong Buy) and are worth noting.
AMER SAFETY INS (ASI): Free Stock Analysis Report

AXIS CAP HLDGS (AXS): Free Stock Analysis Report

MONTPELIER RE (MRH): Free Stock Analysis Report

PROGRESSIVE COR (PGR): Free Stock Analysis Report

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