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Insurance Stalls On Earnings

Posted: Apr 22, 2009 12:04 PM by Greg Sushinsky

Tickers in this Article: CB, AFL, MET, ALL, PGR

Progressive Corp. (NYSE:PGR), a property-casualty insurer mostly involved in auto insurance, reported quarterly earnings down 3% from the same quarter last year. The company is reporting earnings per share at 35 cents for the quarter. Lately, Progressive has been struggling with flat earnings, even as industry conditions have improved, and was recently passed by Geico, which took Progressive's spot as third-largest auto insurer.

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The Other Financials
Progressive Corp., along with other insurers, have been the "other financial" group of companies and stocks, which have actually fared better than banks. While American International Group (NYSE:AIG) has been in the news for its trip to the precipice, the boring auto and life insurers have quietly held their own, though they also face potential problems.

Allstate (NYSE:ALL), the number one auto insurer, also had flat earnings. Although Allstate may be doing better than Progressive in its auto underwriting, in a Forbes article from February, private investment manager Martin Sosnoff commented that he didn't like Allstate's potential commercial real estate losses, and felt the company should slash its dividend and raise equity. Sosnoff also contends that Allstate does a "lousy" job investing policy holder premiums and surplus capital. (These instruments provide exposure to the real estate market without having to buy and sell property see A Guide To Real Estate Derivatives.)

Met Life (NYSE:MET) does a lot of individual insurance and financial services, so its product mix is different than the straight property-casualty. While MET is still highly profitable, its fourth-quarter year-over-year earnings were down slightly. Sosnoff says it is a healthy company, but maintains that even the healthy insurers could face massive equity dilution, as much as 50%. AFLAC (NYSE:AFL), the specialty supplemental insurer, also does business with cancer insurance in Japan, and maintains that it's in good shape despite S&P taking its ratings down over capital concerns. AFL's earnings, however, have been robust and rising.

Long-Term
Chubb Group (NYSE:CB), a property and casualty insurer, has also had flat earnings, but is regarded as a healthy long-term player in the insurance game. Chubb, like many other insurers, may have bottomed out in last fall's quarter with its year-over-year declines. The macro-trend in the industry is looking like profitability is recovering and could rise in the next year. The tainted atmosphere from other financials hasn't completely spread to the insurers, but insurers will still have to work hard to maintain profitability.

Near-Term Outlook
Progressive has not made the long-term strides it should have since Chairman of the board Peter Lewis retired six years ago. Progressive was built in younger, hungrier years, when the innovative and controversial Lewis led the company. At that point, Progressive was regarded as a mean, lean player, and its fall to a position behind Geico shows that this is no longer the case. (For more see The Industry Handbook: The Insurance Industry.)

V alue investor Martin Whitman, founder of Third Avenue Management, said in an interview with Forbes that "if a company needs access to capital markets, and especially if it needs it on a relatively continual basis, it might have a lot of trouble." This is underscored when you read of some insurers wanting TARP funds, despite insurance still being a successful industry.

Bottom Line
Factor in all of these aspects and at this point it's probably wise to take a pass on Progressive. If you want to invest in insurance, it would be better to pick a stronger player in the industry. Progressive needs to show more robust results, something to set it free from the pack of its competitors, before it regains its appeal as an investment.

By Greg Sushinsky

Greg Sushinsky is a passionate independent investor, who has done his own research, analysis and investing for 20 years. One of his earliest investing memories was when he first saved and bought U.S. Savings Bonds with his own money as a small child. From there, he studied investing on his own and made small stock purchases as he grew as an investor.

Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinsky's literary work, see http://writing.gregsushinsky.com/.

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