Quick thoughts on PGR: hold

During a challenging time for the industry the stock is at an ATH …

This is not investment advice. Please read the disclaimer. I might own discussed stock(s) currently or at a later time. I might transact in any securities at any time.

PGR trades at an all time high of USD 127 and at 4.4x July’s book value, which is pretty high. This is during a challenging time for the industry, due to claims inflation and normalization of moving patterns. Is that a price too high, and could it make sense to sell or reduce my second biggest position (14.5%) here? (Last time i reduced my PGR position was in Dec’21 at $97).

Would I want to buy it back? I like PGR and feel quite comfortable holding the stock of this (perceived) quality company. Stating this is always easier when having an unrealized gain. I am up at least 70%, thus taxes would be due (c. 12% of current value). Thus, if the stock falls tmr 12% to 3.9x P/B i could, net of taxes due, buy back roughly the same amount of stock. Would that be an instantaneous buy? I do not think so. But maybe it should be …

Could PGR be fairly valued or even cheap here? In this case I should hold on. July results were quite positive with underwriting profitability (CR at 89.8% vs 94.2 ytd) presumably better than recent results and peers, even though July is only one month! But, could PGR fare much better during this period with high inflation? If the narrative is true, PGR does a better job of segmentation (could explain why direct auto is growing better than agency since more data driven?) which would be even more important currently. Further, a rather short duration bond portfolio (2.8yrs) will result in better investment income in a rather short time. Further, they stay true to their goals (growing as fast as possible with CR<96) and took measures to protect profitability (anything else would be a thesis break).

PGR is waiting for the right market environments (=better expected underwriting profits) or so it seems from the call, to switch back on local media advertising. So PIF growth (=structural) should increase again, even though with their current size relative growth rates will come down. On top, if underwriting margins (1-cr) normalize, the dollar market value of premiums has increased a good bit via inflation, along with interest rates. And mix, is also supportive, since commercial PIFs still show growth albeit slowing and carry higher premiums per PIF and lowest CRs (~90%). So far for the positive (or wishful?) scenario… in which, growth comes from various sources: price, volume, and mix.

So what could returns from here be? I think returns from here can still be well above 10% without aggresive assumptions. Believing that (i) inflation will stop sometime, (ii) PGR can earn healthy underwriting margins again and (iii) returns to grow / win market share is critical … and as I think reasonable. (further i still hold cash, and thus will probabaly not sell PGR here… but maybe i should… )

Further reads

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