Progressive Seeing Improvements In The Business, Growth Opportunities Remain

The pandemic barely slowed down Progressive's (NYSE:PGR) upward share price momentum, and this P&C insurer continues to deliver on some of the virtues of its business model, including analytics-driving pricing, lower-cost distribution, and opportunities to leverage growth in markets outside of its core personal auto business. While second quarter results weren't flawless, there were certainly some positives and the business should accelerate from here.

There are still challenges in the P&C business, including increasing loss severity in both auto and home lines, and Progressive's loss ratios are higher than pre-pandemic trends, though still broadly within targets. The real issue here is valuation - Progressive seldom looks cheap, and that makes sense given superior returns on equity and growth potential, but it's hard for me to call the shares a bargain today.

 

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Progressive Seeing Improvements In The Business, Growth Opportunities Remain

Kemper's Self-Improvement Plan Is Generating Strong Results

I liked Kemper (KMPR) earlier this year and saw strong potential as the company continued its turnaround efforts and moved toward the completion of its acquisition of Infinity, but I frankly underestimated the scope of near-term growth and underwriting improvement potential for the company’s core non-standard auto insurance business. And so while I liked the stock back in April, I wasn’t counting on a 33% move in the stock in such a relatively short time – then again, neither was the Street, and analysts have been moving their estimates higher pretty steadily.

Although I do think Kemper shares are a little pricey now on a core discounted earnings basis, a mid-teens P/E (in line with post-merger EPS growth prospects) to 2019 earnings can support a fair value in the $80’s and I wouldn’t be quick to assume that Kemper doesn’t have a few more beat-and-raise quarters up its sleeve. Higher cat losses remain a risk and the company has work to do in areas like commercial auto, but this is still a pretty interesting growth insurance stock.

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Kemper's Self-Improvement Plan Is Generating Strong Results

Investopedia: Hartford's Transformation Continuing To Unlock Value

A year ago, I was somewhat skeptical about Hartford's (NYSE:HIG) decision to transition out of its traditional life insurance and annuity businesses and towards a greater focus on P&C. While I thought the stock was cheap on a long-term ROE basis, I didn't expect the nearly 90% increase in the share price, nor the rapid pace of improvement in the company's legacy and going-forward operations. While the shares now have more average long-term potential on a ROE basis, there could still be upside left for these shares if Wall Street elects to value these shares more in line with other P&C companies with similar return characteristics.

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Investopedia: Progressive Improving Quality At The Expense Of Growth

Every insurance company has to maintain a delicate balance between earning on capital as much as possible, and not take excessive risks in the pursuit of those earnings. As a high-quality, well-run insurance company, Progressive (NYSE:PGR) has a long history of making good decisions. Those decisions are starting to compromise growth, however, and it's becoming more difficult to make a value case for Progressive in the insurance sector.

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Investopedia: Progressive Takes One Step Forward, One-Half Back

As property and casualty insurance companies go, Progressive (NYSE:PGR) is an exceptionally well-run one. Memorable advertising gets the company noticed, but it's the innovation in underwriting that has allowed the company to generally match industry pricing while realizing superior returns. Given the recent rebound in the price, though, investors may want to wait for a better entry point on these shares.

First Quarter Results 
Progressive reported that net written premiums rose almost 7% in the first quarter, showing a little more momentum later in the quarter. Direct premiums rose about 7%, while agent premiums rose about 5%. With many auto insurers boosting rates in response to above-trend losses, it looks as though Progressive is gaining some share.

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Seeking Alpha: Tower Group Has Plenty To Prove

When I bought shares in Tower Group (Nasdaq: TWGP), a small specialty insurance company, I thought that the Street was basically overlooking a growing insurance company that had significant expansion potential and a record of savvy management. As it turns out, maybe the Street wasn't missing so much – delays in integrating a major acquisition and surprisingly large underwriting losses have definitely eroded some of the value in this name. Although it remains a respectable value idea, the story has shifted from waiting for the Street to discover it to waiting on management to re-establish its bona fides.

A Tougher Landscape
It may not even be relevant to think of Tower as a specialty insurance company like W.R. Berkley (NYSE: WRB) anymore. From a business base that was once centered around small business casualty policies in the Northeast, Tower has expanded more and more into property, individual lines, and new regions like Florida, Texas, and California. Accordingly, it's more like a small P&C insurer competing for business with the likes of Travelers (NYSE: TRV), Allstate (NYSE: ALL), Berkshire Hathaway's (NYSE: BRK.A) GEICO, and Progressive (NYSE: PGR), but with a more focused attention on business customers.

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Tower Group Has Plenty To Prove

Investopedia: Tempest-Tossed Berkley

Storms both real and figurative have been buffeting the insurance industry for some time now. Loose underwriting standards and a drive for market share have kept a lid on premium price increases, storms and natural disasters have been whacking the loss ratios and a low interest rate environment - combined with default worries at national and local levels - has hampered investment income. 

In times like these, W.R. Berkley (NYSE:WRB) is a relatively safe harbor.

A Mix of News For Q2
In one very big respect, the second quarter was a bad one, but in many other ways it was a confirmation of real progress. Operating income was down about one-third from last year and that's the big negative take-away for investors.



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