A Chart You Should See: Progressive Disappoints

NEW YORK (TheStreet) -- Shares of Progressive (PGR) dropped 3.8% on Thursday after the auto insurer announced disappointing February results, and analyst opinion on the stock leans toward the negative.

The shares were down another 0.9% in late morning trading Thursday, to $23.38.

Progressive reported February earnings of $47 million, or 8 cents a share, down from $100.2 million, or 17 cents a share, in February 2013. Net premiums written increased 3% year-over-year to $1.539 billion, while net premiums earned grew 5% to $1.253 billion. But loss and loss adjustment expenses rose 13% year-over-year to $1.012 billion during February.

Progressive's combined ratio - losses and expenses divided by earned premiums - rose to 97.2% in February from 91.4% a year earlier. The combined ratio is a profitability measure for an insurer's underwriting business. A ratio under 100% means the underwriting business is profitable, while a ratio over 100% means the insurer's underwriting business is losing money. Many insurers show overall profits even when their underwriting business are losing money, because of earnings from their securities investment portfolios.

The company reported "total development" -- that is, adverse development -- of $29.3 million for prior accident years, meaning it expected that much more in losses on existing policies.

The insurer also reported a trailing 12-month return on average equity of 17.2%, based on net income, and 17.9%, based on comprehensive income.

Here's what three analysts with differing opinions on the outlook for Progressive's stock had to say about the February results:

MKM Partners analyst Harry Fong rates Progressive a "buy," with a $32 price target, and in a client note on Thursday attributed the relatively weak February results to winter storms in December, and "nothing more." Fong did cut his 2014 earnings estimate for Progressive to $1.60 from $1.70, while leaving his 2015 EPS estimate at $1.80.

"We would take advantage of yesterday's weakness and continue to recommend purchase of the shares," Fong wrote.

Citigroup analyst James Naklicki has a neutral rating on Progressive, with a $24 price target. The analyst in a note on Wednesday called February "an ugly month for Progressive."

"We think severity trends at Progressive may have been higher than previously reported, which would be more consistent with the industry severity trends we are observing from Fast Track. If this is the case, Travelers (TRV) and Allstate (ALL) could see also deteriorating results in their auto segments," Naklicki wrote. He lowered his 2014 EPS estimate for Progressive to $1.59 from $1.70, but stuck with his 2015 EPS estimate of $1.85.

KBW analyst Meyer Shields rates Progressive a "underperform," with a price target of $22, and in a client note Wednesday wrote that his rating was based on "expected combined ratio compression in 2014." Shields estimates the company will earn $1.37 a share this year, with EPS rising to $1.59 in 2015.

Shields expects the price-to-forward earnings ratio of Progressive to decline, "as its combined ratio climbs back toward 96% in 2014." The company's combined ratio in 2013 was 93.5% in 2013.

Based on Wednesday's closing price of $23.58, Progressive's stock was trading for 14.0 times the consensus 2015 EPS estimate of $1.68, among analyst polled by Thomson Reuters. The consensus 2014 EPS estimate is $1.58.

Out of 22 analysts polled by Thomson Reuters, two rate the shares a "buy," 12 have neutral ratings, seven have "underperform" ratings, and one analyst rates the shares a "sell."

This chart shows the performance of Progressive's stock against the S&P 500 ^GSPC over the past year:

PGR ChartPGR data by YCharts

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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