(By Balachander) Deutsche Bank (DB) downgraded its rating on shares of Ohio-based insurer Progressive Corp. (NYSE:PGR) to "Sell" from "Hold" and reduced its price target to $17 from $19.
"As Progressive expands it Snapshot initiative, its already formidable underwriting skills are improving, and the company seems poised to be able to maintain it target of a 96 percent combined ratio, where it is today," the bank wrote. "However, that will also mean the avenues to margin expansion become few, and revenue does not appear to be growing quickly enough to justify the price-to-earnings multiple in excess of the market."
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The bank said Snapshot offers price discounts to good drivers who prove their skills with a monitoring device; however, it does surcharge bad driving.
DB believes the discounts are paid for by levying a base rate increase across all non-Snapshot drivers. This surcharge could be making Progressive less competitive in the non-UBI market, which still represents the vast majority of all drivers, and may partly explain why policycount growth isn't accelerating, the bank said.
The bank expects the rest of the industry will slowly adopt usage-based pricing, and Progressive will help that happen when it licenses its UBI intellectual property in 2Q15.
At that time, DB believes Progressive's market advantages could cause it to resume the high double-digit policycount growth it once had. "However, over the next two years, we don't see a catalyst to shorten the distance to that long-term goal."
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PGR stock fell 0.55 percent to trade at $20.72 on Monday. Shares have been trading in the 52-week range of $16.88 to $23.41.