Progressive Thoughts on Price to Book

Joel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The ubiquitous Flo ads on TV remind us that at Progressive (NYSE: PGR), you see the price they offer along with the price of their competitors.  It got me thinking that I should look at their stock price and compare it to their competitors.  The top 4 car insurance companies are:

1. State Farm -- owned by their policy holders

2. Allstate (NYSE: ALL)

3. GEICO -- owned by Berkshire Hathaway

4. Progressive

Progressive and Allstate are the only pure-play insurance companies, so let's compare some financial data.  

<table> <tbody> <tr> <td> </td> <td>Progressive</td> <td>Allstate</td> </tr> <tr> <td>Market Capitalization (in billions) </td> <td>14.6</td> <td>22.05 </td> </tr> <tr> <td>Price/Earnings</td> <td>16.32</td> <td>9.84</td> </tr> <tr> <td>Price/Book</td> <td>2.42</td> <td>1.07</td> </tr> <tr> <td>Dividend</td> <td>.28</td> <td>.88</td> </tr> <tr> <td>Dividend Yield</td> <td>1.2%</td> <td>1.9%</td> </tr> <tr> <td>Debt/Equity</td> <td>34.35</td> <td>29.43</td> </tr> </tbody> </table>

The number that jumps out at me is Progressive's price to book.  I love to buy financial stocks that are trading below book value.  For example, I own American Insurance Group (NYSE: AIG) shares as they are trading at .60 times book, so could I consider owning a stock trading at 2.3 times book?  I wondered if this is normal for Progressive, so I looked at the price to book from 2008 to 2012.

<img src="http://media.ycharts.com/charts/7440aee1d0a8dbd8e634231275068644.png" />

PGR Price / Book Value data by YCharts

Seriously?  What is it about Progressive?  Their price to book stayed around 2 after the financial meltdown in 2008.  It looks like it is time to dig into the details.

Laser Focus

Progressive only sells insurance on cars/boats/RVs.  They do not sell property/casualty or life insurance like Allstate.  Stocks that do one thing well tend to have higher valuations.  The difference in the latest 10-K is a great example.  Allstate has 9 subsections of risks including my favorite "Predicting claim expense relating to asbestos, environmental, and other discontinued lines is inherently uncertain and may have a material effect on our operating results and financial condition". 

Partnering instead of building

Allstate and State Farm both offer discounts to policyholders that add homeowners insurance.  To combat this, Progressive offers homeowners insurance by partnering with 8 property/casualty companies.  Progressive will get you a quote from these companies, thereby "offering" a bundled package, yet they do not have to underwrite the homeowner’s policy.

Agency and Direct Options

Progressive offers policies through independent insurance agents (55% of premiums) and directly through progressive.com (45% of premiums).  This differs from State Farm and Allstate that rely on the bulk of their offerings from captive insurance agencies that only sell their products.  GEICO also has captive insurance agents, but the bulk of their sales are direct.  That makes Progressive the only top insurer that works with independent agents. In the last quarter, the direct policies were more profitable than agency.  In the year earlier it was the opposite. Tapping into two channels to sell products is good strategy. 

Growth

Let's face it, Wall Street loves growth and Progressive is delivering it.  In the last quarter, Progressive grew agency premiums by 8% and direct by 10%.  Earnings were down 2% mainly due to losses from super storm Sandy which resulted in 230,000 cars being damaged.  Had Progressive also underwritten homeowner’s policies, their losses would have been much greater.

Balance Sheet

Progressive's balance sheet was already good, but keeps getting better.  Between September 2011 and September 2012 Progressive paid off debt, reducing it from $2.443 Billion to $2.062 Billion.  Part of this was through debt-buyback and part was redeeming for cash their January 2012 $350 Million note.  After their $150 Million note due October 2013 their next maturity is in 2021 (and its interest rate is 3.75%!)  With 8 years before any debt is due, Progressive has maximum financial flexibility.

Equally impressive is the return of capital to shareholders in the past year.  In November, Progressive issued a special dividend of $1, and still had capital to bought back 8.4 million shares in the first 9 months of 2012.  So far the buyback has been accretive to shareholders as the average cost to buy back the shares was $20.25 and Progressive is now selling around $24.

The Verdict

I was predisposed to dislike Progressive due to one quick look at price to book, but after looking under the hood, I am impressed. It looks to me that Progressive's stock reflects its laser focus, business model,  and strong balance sheet.  If the company feels strong enough about their future to buy back shares at 2.4 times book, than I can too.   I will look to add Progressive to my portfolio a few days after this article is published.  I figure having Progressive and AIG as my insurance stocks gives me a great blend of growth and value investing. 

 


CoachUrMoney owns shares of American International Group. The Motley Fool recommends American International Group. The Motley Fool owns shares of American International Group and has the following options: Long Jan 2014 $25 Calls on American International Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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