It was a tale of two halves of the year for Progressive Insurance, after third quarter earnings topped estimates and reversed dire trends from the previous quarter.
Though revenue missed estimates by less than 0.1% at $15.56 billion, the company avoided the massive expenses of the first half of the year, resulting in a dramatic improvement in the combined ratio – a measurement of premium revenue against expenses paid out to customers, where anything over 100 is unprofitable. The combined ratio fell favorably to 92.1% from an unprofitable 100.4% in the second quarter, beating analyst estimates by nearly 2%. The company’s investment income outperformed estimates at $510 million, and shareholders fared far better than expected, with earnings per share boosted to $1.89, well over the forecasted $1.69.
The results affirmed Progressive’s reputation as an insurer that can outperform competitors at a time when environmental and economic conditions posed substantial challenges for the insurance industry overall. The insurer’s success is largely attributed to its ability to circumvent the most expensive pain points in the first half of the year — a feat that few other property insurers managed this quarter.
“I think that they’ve shown us time and time again that when the industry runs into profitability issues, they can do a lot more with a lot less. And we’re seeing that now,” said Ryan Tunis, an insurance equity research analyst for Autonomous Research. “And that’s kind of what gives me the confidence in their ability to grow next year.”
Persistent inflation in used car prices, labor unrest at the three largest car-parts manufacturers and mounting auto loan default rates all hurt the country’s second largest car insurer’s bottom line for the first half of the year. Stock prices had the largest single day plummet since 2000 after second quarter earnings were released. But the third quarter looked markedly different.
Specifically, the company managed to attract new customers at a rapid clip at the same time that it implemented strategic rate increases. And the market took note: stock prices shot up from $143.30 to $154.95 throughout the day.
Auto policies had the largest year over year growth when compared to any other category – increasing 12% overall to 19,518 total auto policies in 2023 from 17,424 over the same period last year. Within that category, commercial auto lines increased a whopping 14% throughout the same timeframe.
“We believe robust retention, especially in the face of higher rates than a year ago, is an indicator that many of our competitors are still tight on underwriting and we remain competitive in the marketplace. ” said company CEO Tricia Griffith in an earnings call.
Analysts say that might be in large part because the demand for car insurance is fairly inelastic, so Progressive’s decision to increase rates incrementally allowed the company to widen its customer base and retain existing customers while adjusting for more costly payouts.
“Unless the increase is egregious, you’re not gonna find another insurer,” said Kevin Heel, an analyst at Argus Research.
Progressive’s success was a departure from industry-wide trends, as insurers grappled with challenging macroeconomic conditions outside of the auto industry. Two of Progressive’s top competitors – Travelers Insurance and Allstate – both posted revenue losses over the quarter in the past two weeks, citing costly extreme weather events that fueled company expenses.
Progressive’s ability to mitigate extreme weather costs came down to one strategy that the company has implemented for well over a year: de-risking. Unlike Chubb or Travelers insurance, Progressive doesn’t insure customers in Hawaii, and was in the clear for the devastating wildfires that cost Maui an estimated $4 billion in damages. Similarly, executives pointed to the reduction of coverage in risk prone areas like Texas, Florida and Louisiana, as a reason that this hurricane season hasn’t been as devastating as years past.
Although the company celebrated its resounding turnaround, there was a shadow of doubt about the months to come as some challenges have yet to fully play out.
“Given the geopolitical and macroeconomic environment, our view of the future could change overnight. ” said Griffith, CEO of Progressive Insurance.