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Insurance companies aim to charge more in premiums than they pay out in claims, and Progressive (NYSE: PGR) has done a good job of achieving that goal over the long run. However, competitive pressure often prevents insurers from charging as much as they'd like to, and coming into its second-quarter financial report, Progressive investors were prepared for a drop in earnings compared to the year-ago period. Progressive's results were actually even weaker than most investors had feared, but the company remains confident that it's taking the steps it should to ensure its long-term success. Let's look more closely at the latest results from Progressive to see what they tell us about its future prospects.
Did Progressive make the cut?
Progressive's second-quarter results were mixed in most investors' eyes, as we've seen in previous quarters. Top-line performance remained strong, with net premiums written rising by 13% to $5.93 billion and net premiums earned posting an 11% gain. However, net income plunged by nearly half to $194.9 million, and that produced earnings of $0.33 per share. That was $0.04 less than the consensus forecast among those following Progressive stock.
Taking a closer look at Progressive's numbers, you can see the trends that have helped support its overall business. Direct-sold auto insurance policies continued to drive the bulk of Progressive's growth, climbing 11% and representing the majority of the company's overall auto business. Agency-sold auto policies climbed 4%, and special lines personal policies inched upward by 3%. The commercial lines part of Progressive's business also managed a double-digit percentage gain in policies in force, and outside the auto area, property coverage was popular, rising 12%.
Yet in terms of profitability, Progressive struggled. The company said that greater catastrophe losses took their toll on underwriting profits, and less favorable prior accident year development also hurt results. Overall, those two factors were responsible for about two-thirds of the reduction in its underwriting profit, and higher claims frequency and severity made up the balance of the downward pressure.
In addition, investment-related issues also had an impact on Progressive's bottom line. Investment income of $114.6 million was roughly comparable to the year-ago quarter, but realized gains fell by more than half because of losses on the insurer's positions in various derivatives. Nevertheless, an increase in unrealized gains reflected a fairly favorable market environment during the quarter.
What lies ahead for Progressive
Progressive remains optimistic about its long-term prospects. As CEO Glenn Renwick said in his letter to shareholders, "Fast quality growth, coupled with very acceptable margins, is adding significantly to the intrinsic value of the enterprise and our current and future earnings potential." The CEO noted that current margins are relatively weak, reflecting a typical cyclical downturn, but those growth prospects should combine with upward premium movement in the near future to enhance long-run results.
Progressive has also been working on defining its overall strategic vision more clearly. On the property side of the business, Progressive said that it had successfully exited the commercial property insurance arena, which was generally inconsistent with the rest of its portfolio in terms of the risks it entailed. By refocusing more on residential property coverage, Progressive should be able to manage its risk more effectively and avoid holding onto non-core assets any longer than necessary.
At the same time, having greater exposure to property insurance increases opportunities for bundling homeowners coverage with auto policies. Progressive is seeing some progress on that front, and if it takes off, it could be a major driver of future growth for the insurer.
Progressive investors have reacted positively in general to the report, with the stock moving upward immediately following the announcement and posting gains of roughly 3% over the past week. With strong brand awareness, Progressive has plenty of growth opportunities that could increase its market share in a highly competitive insurance market and give it more chances to become a more important player in the industry going forward.
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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Progressive. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.