Progressive: Trading This Winner At All-Time Highs

The Progressive Corporation (NYSE:PGR) stock is in focus today, rising 7% in a down tape. To remind you, we had previously recommended this stock to our investing group as one that would hold up in a chaotic rate environment, and publicly recommended the stock in April.

In that column, we were very clear. Buy from $135 down $5 increments of progressively larger sizes. We said to wait for a pullback and execute. Sure enough, we got the selloff that we prescribed, allowing traders to build a position, as the stock traded down to $115. Had you taken the advice, you would have made 5 purchases and have an average cost of around $122-$124 depending on lot sizes. Fast-forward just a few months later, and the stock is at $154, good enough for a 25% gain. This is our investing style.

Meanwhile, the broader averages have been crushed. The returns are helped by an 8% return today, following a dazzling Q3 performance. In this column, we update you on the performance and our forward view. Astute traders should now consider backing out of their initial investment and letting the rest run as a house position. Let us discuss.

In today's update, we discuss the Q3 results. The performance can fluctuate and is really all about the losses they take relative to the premiums to take in. That is the model. The stock pays a small quarterly dividend, but this is also a company that is known for paying hefty annual dividends as well over the years. In the present column, we will discuss performance metrics that you need to be aware of.

Let's start with earnings and revenues. The consensus EPS estimate was $1.70, on net premium revenues of $15.36 billion. Turns out revenues were $15.59 billion across premiums, securities, fees, and service revenue. This actual revenue number was a 20% increase from last year, and earnings hit $1.89 per share. This was a stellar headline performance and has taken PGR shares to all-time highs. It is notable that September was an incredible month with a 22% increase in net written premiums from the year ago September.

Further, there was a lower rate of Catastrophe losses this quarter. And that is the thing we always tell you about insurance. Those big losses from catastrophes will come and go, and these are just the details of being an insurer. You see, there are bad quarters with lots of weather events or other big loss-causing disasters. But that is the variance of the math behind insurance. Long-term, it's all about the math.

So long as premiums are growing from either or both volumes of policies and or the costs charged to the clients, the company will pay out less over time. Insurance is risk protection for consumers and businesses, but insurance companies often win because many governments mandate insurance coverage. And for every quarter with losses, we get quarters like the one just reported, with less claims than expected. Not only do we like to watch for net income, but we like to watch for core income, the customer base (net written premiums), and the underlying combined ratios. The latter two measures specifically help us gauge the health of Progressive.

Core income metrics

Progressive had a great quarter, and we noted the exceptional performance in September. Take a look at how strong the month was:

These are strong results, driven by increased premium costs for many customers. The underlying combined ratio was 89.7%, and the catastrophe loss ratio was just 1.8%. This comes as net written premiums grew once again, and they grew across the board in September. Net written premiums were up 22% from last year to $4.9 billion company-wide. In personal lines, we saw 21%, and 28% increases in net written premiums for Agency and Direct premiums, respectively.

Looking forward, we urge you to continue to watch net premium growth, while monitoring the combined ratios each quarter. But this sub-90% combined ratio was strong. Note, this was a substantial change from the 116% last September. So, what we have here is a company that now has pricing power to charge customers for, and also saw lower catastrophic losses.

Looking ahead

We continued to believe that, although as a major insurer the PGR balance sheet remains complex, it is in strong shape. The debt-to-capital ratio is a very comfortable at 28.4%.

That said, The Progressive Corporation stock trades at a hefty valuation, where you are paying for the growth we are now seeing in the stock. In our opinion, PGR stock is great for slow, long-term growth. However, following our tactical trade, we think you back out your initial investment, plus a little bit of profit, and let the rest run in a long-term account, collecting all future gains, spinoffs, and of course, dividends. Should shares retrace, we think new money can come in. We continue to like The Progressive Corporation stock with its pricing power, but it is always best to get a better price.

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