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Natural disasters are taking a toll on Progressive insurance’s bottom line and led to huge losses

The insurance industry’s basic business model hinges on the idea that, over the long run, insurers can be profitable if they are smart about the policies they underwrite.

For Progressive, profiting from solid underwriting practices has been a big part of its success, yet weather always plays a factor in determining short-term results.

Coming into Thursday’s third-quarter financial report, Progressive investors expected that the insurer had suffered from worse conditions during the quarter, and the company’s numbers were in line with those expectations.

Let’s take a closer look at what Progressive said and whether better times could lie ahead.

Bad weather for Progressive

Overall, Progressive’s third-quarter results lived up to what most investors had wanted to see. Net premiums written were up 12%, to $6.05 billion, which was consistent with expectations among those following the stock. Net premiums earned also picked up 13%, to $5.72 billion.

However, once again net income took a big hit, falling 29%, to $198.7 million. That produced earnings of $0.34 per share, which exactly matched the consensus forecast among investors.

A closer look at Progressive’s numbers reveals that the emphasis on direct-sold insurance policies continues to show up in the insurer’s business progress. Agency-sold auto policy counts climbed by 5%, to 4.98 million, but direct-sold policies were up 10%, to 5.32 million.

The special-lines business had a more modest 3% growth, while the commercial business continued to accelerate, seeing growth of 12%. Gains on the property-coverage side of the business were also impressive, picking up 11% to finish at 1.18 million policies in force.

Once again, though, those policy increases didn’t translate to higher earnings. More adverse events during the quarter were the primary culprit in hitting Progressive’s bottom line.

For instance, in July, hail, wind, and flood events more than doubled Progressive’s catastrophic losses compared to July 2015. Things got even worse in August, when flooding in Louisiana boosted catastrophic losses to $75 million, up from just $9 million in the previous year.

September had the same problem, with losses quintupling from year-ago levels due to Hurricane Hermine in Florida, as well as storms in the Midwest and continued losses from Louisiana floods.

In addition, losses stemming from Progressive’s investment portfolio also hit the  insurer’s bottom line. During the quarter, Progressive suffered net realized losses of $20.7 million, partially offsetting investment income of $119 million for the quarter. However, unrealized gains increased by $134 million, reflecting favorable market activity.

hurricane hermine Ground water begins to flood some low areas as Tropical Storm Hermine heads inland Thursday, Sept. 1, 2016, in Dekle Beach, Fla. A hurricane warning was in effect for Florida’s Big Bend from the Suwannee River to Mexico Beach. AP Photo/John Raoux

Can Progressive get its bottom line to rise?

Despite the negative impact of catastrophic losses, Progressive believes that such events can help it stand out as an insurance company.

As new CEO Tricia Griffith explained to attendees of Progressive’s Investor Relations Meeting earlier this month, profit is the company’s first objective, and the insurance provider hopes to grow as fast as it possibly can without sacrificing the profitability of the new business that it writes.

At the same time, Griffith also noted that serving customers well is essential. Right now, Progressive is confident in its ability to serve a growing number of customers without sacrificing quality, and that has shown up particularly well in the company’s response to people in need in Louisiana and other hard-hit areas around the country.

The key to Progressive’s strategic direction is in encouraging more of its customers to take bundles of different products. Progressive is well-known for its auto insurance, but homeowners insurance is a smaller part of its overall business.

By getting more auto customers to add homeowners coverage, the company can dramatically improve its profitability. When it combines this approach with stronger retention efforts, Progressive thinks it has a recipe for continued success.

Progressive investors reacted positively to the news, with the stock climbing 2% at midday following the announcement.

Even as catastrophic events can cause short-term hits, Progressive is taking advantage of the opportunity to generate customer loyalty by offering outstanding service in times of crisis. That’s a strategy that should generate long-term earnings growth and pay dividends well into the future.

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