PROGRESSIVE CORP/OH/ (PGR) stock intrinsic value fair value estimate & owner earnings analysis

Progressive is the second-largest private passenger auto insurer in the United States and the largest writer of commercial auto and motorcycle insurance. Personal Lines (personal auto, special lines such as motorcycles and RVs, and homeowners/renters) was 87% of 2025 net premiums written; Commercial Lines was 13%. It sells directly and through independent agents, prices with fine-grained segmentation including its Snapshot usage-based program, and earns investment income on a roughly $97 billion portfolio funded largely by policyholder premiums and claim reserves. How we measure earnings. We start from operating cash flow and strip out every change in insurance working capital, including the growth in claim reserves and unearned premiums. That float is real money to invest but it is owed to policyholders, so we do not count its growth as earnings. Gains and losses on securities are also excluded; interest and dividend income stays in. Stock compensation (about $132 million in 2025) is charged as a cost, and only the share of capital spending needed to keep the business running is deducted. On this basis owner earnings per share were $1.87 (2016), $2.98, $5.32, $5.08, $7.35 (2020), $3.56 (2021), $4.87 (2022), $6.36 (2023), $14.09 (2024) and $17.88 (2025). Net income in 2022 was only $1.18 per share because of securities losses and a goodwill write-down; those are excluded here, which is why 2022 shows $4.87. The level we value from. Auto insurance runs in cycles: when accident costs jump, as in 2021-2023, margins fall until rate increases catch up, and then rich margins draw price competition. 2024 and 2025 were the best years of the past decade. The 2025 underwriting profit margin was 12.6% (an 87.4 combined ratio) against the company's own goal of 4%, helped, by the company's own account, by low accident frequency, light catastrophe losses and favorable development on prior-year claims. Margins that rich are already being pushed back. Personal auto rates were cut slightly in 2025, and Florida's excess-profit law forced a $1.2 billion policyholder credit for 2023-2025. So we do not value the company on 2025's $17.88. Over the full 2016-2025 cycle, the median owner-earnings margin was 7.1% of revenue. Applied to the 2025 book of business ($87.7 billion of revenue), that gives a normal level of about $10.54 per share. The number of policies in force is real and renews, so we count today's size. We do not count today's peak margin. The first half of 2026 is still running at peak levels: we estimate owner earnings of about $9.47 per share against $9.39 a year earlier, with net income of $6.13 billion against $5.74 billion. So the reversion is placed in 2027-2028, not now. Earnings grew 27% in 2025; every case assumes earnings decline in 2026-2027, so no case relies on growth that has not happened. Growth credited. Progressive has added policies year after year through soft and hard markets, funded from its own cash. It added nearly 13.9 million policies in the last five years and grew policies in force 10% in 2025. We credit only 3% a year in the base case and 5% in the bull case, well below that record, and none in the bear case. We give no credit for further market-share gains beyond that, for premium growth from inflation, or for a return to peak margins. Base case ($240 per share): about $17.00 of owner earnings in 2026 and $13.50 in 2027 as margins come down. From 2028 the margin sits at the 7.1% cycle median, with 3% annual growth through 2035 (about $14.16). After that, earnings are held flat. Car insurance is required by law in nearly every state, and Progressive's scale and pricing data have kept it profitable in every year of the ten-year record, so we expect that earning power to persist. We assume no further growth after 2035. Bear case ($152): a repeat of the 2021-2023 cost shock, for example from claim severity (tariffs on vehicles and parts are a risk the company itself flags), more Florida-style profit caps, or a heavy catastrophe year in the homeowners book. Owner earnings fall to a 4.5% margin, close to the 2016 and 2021 levels and about $6.71 per share, for 2027-2029. They then settle at a 5.8% margin (about $8.59), close to what the company's 96 combined-ratio target produces at today's investment income, with no growth. Bull case ($351): 2026 at about $18.00 and 2027 at about $16.50. Margins then hold at 9% of revenue, near the 2018-2020 average and still below 2024-2025, with 5% annual growth through 2035 and flat after that. All cases are discounted at 6%. Debt. For an insurer, borrowing and the investment portfolio are part of the business, so they are already reflected in these earnings and nothing extra is subtracted or added. The roughly $4.5 billion of equity securities is not added on top, because the portfolio backs claim reserves and required capital. Debt outstanding was about $6.95 billion at year-end 2025, and the reported fair value of the debt was about $7.8 billion at June 30, 2026. Interest paid was $276 million in 2025 against $14.2 billion of pre-tax income, and shareholders' equity was $34.3 billion at June 30, 2026. Even the bear case covers interest many times over, so no maturity or covenant affects the outcome. Change since our previous review. In August we valued the shares at $94 / $348 / $621 using net income and higher discount rates. We now measure earnings from cash flow with securities gains excluded, discount every case at 6%, and refuse to extend 2025's peak margin. That lowers the base and bull values. Valuing the bear case at a cycle-normal level rather than a trough raises it. Margin-of-safety price. A 20% annual return needs a big discount here, because earnings can swing by more than half in a single year, as owner earnings did from 2020 to 2021. The margin-of-safety price is $145. The price assumes a three-year holding period; if the shares converge on the base case over that period, the base case implies a little over 20% a year including the large annual dividend Progressive pays ($13.90 per share declared for 2025). The bear case implies roughly the starting price with a small gain. Above that price, a return to normal margins would leave too little room. What would make this wrong: margins staying near 2024-2025 levels for years, which would favor the bull case, or a long period of losses in auto or property insurance driven by claim inflation, which would push results toward or below the bear case.