Progressive Faces Challenges as Expenses Rise and Growth Slows

Auto insurance company Progressive (ticker: PGR) is currently encountering some obstacles that have caused its stock to suffer and raised concerns among investors.

Wells Fargo analyst Elyse Greenspan recently downgraded shares of Progressive from Buy to Hold, citing higher expenses and slower growth. Her revised price target for the stock is $128 per share, down from $162.

Greenspan explains in her downgrade report that their previous Buy rating was based on the belief that Progressive could continue growing despite lowering prices. However, this assumption was proven wrong by June’s results.

At the end of June, the total number of automotive policies in force slightly decreased to 19.66 million from 19.67 million in May. While this may seem like a small change, it is accompanied by shrinking underwriting profits.

Progressive’s combined ratio, which compares underwriting and corporate expenses with revenue, stood at 104.9% in June. This indicates that insurance underwriting was causing financial losses for the company. (However, Progressive still generates investment income from its insurance float.) In May, the combined ratio was 99%.

These disappointing figures have led Greenspan to believe that Progressive’s stock will remain stagnant until insurance expenses return to normal. Additionally, the company faces higher costs for auto claims due to the increased value of both new and used cars in recent years.

Although the Manheim Used Vehicle Value Index did show a 10% year-over-year drop in used car prices in June, they are still nearly 40% higher compared to pre-pandemic levels. Expensive cars result in more costly repairs and higher auto insurance premiums.

Investors reacted negatively to the June results, causing Progressive’s stock to decrease by 13.1% on Thursday. In premarket trading on Friday, shares were down 0.2%, while S&P 500 and Dow Jones Industrial Average futures were up 0.2% and 0.5%, respectively.

Following the downgrade, approximately 33% of analysts who cover Progressive rate its shares as Buy. In comparison, the average Buy-rating ratio for stocks in the S&P 500 is around 55%. The average analyst price target for Progressive stands at approximately $143 per share.