Oct. 10 (Bloomberg) -- Progressive Corp., the first of the 10 biggest U.S. insurers to report third-quarter results, said profit fell 27 percent after it cut prices on auto policies.

Net income dropped to $299.2 million, or 42 cents a share, from $409.6 million, or 53 cents, in the same period a year earlier, the Mayfield Village, Ohio-based company said today in a statement. Profit before investment gains was 37 cents a share, matching the average estimate of 17 analysts compiled by Bloomberg.

Chief Executive Officer Glenn Renwick has been lowering prices to attract customers as rivals including State Farm Mutual Automobile Insurance Co. do the same. Premium revenue fell for the third consecutive quarter, dropping 2.3 percent to $3.46 billion, while the number of policyholders increased 3.9 percent, led by the unit covering motorcycles and boats. Consumer auto policies, Progressive's largest business, rose 1.9 percent.

``Aggressive pricing actions have yet to generate meaningful improvements in new business production,'' said Thomas Cholnoky, an analyst at Goldman Sachs Group Inc. in New York, in a note to investors. He has a ``sell'' rating on the shares.

Progressive, the third-largest auto insurer in the U.S., lost 18 percent this year in New York Stock Exchange composite trading. It's the second-worst performer, ahead of bond insurer Ambac Financial Group Inc., in the 24-member Standard & Poor's 500 Insurance Index after being the top gainer from 2001 to 2006. The stock fell 33 cents, or 1.6 percent, to $19.83 today.

Income from investments increased 8.3 percent to $183.9 million. Profit from changes in the value of holdings was $58.5 million before taxes, compared with $2.4 million a year earlier.

Profit Margin

September claims costs rose 7 percent to $772.9 million. Progressive retained 5.2 cents of each dollar after paying claims and expenses in the month, down from 13.1 cents a year earlier. Renwick has said he is willing to cut prices until the company keeps as few as 4 cents from every dollar. The company had previously reported results for July and August.

State Farm, the largest U.S. auto insurer, has cut rates in 49 states this year, after lowering prices in 44 states last year by an average of 2.2 percent, said spokesman Dick Luedke. Berkshire Hathaway Inc. subsidiary Geico Corp., the No. 4 U.S. car insurer, said it is lowering prices in some areas of the country as well. Allstate Corp., the second-largest, said it's not lowering rates.

The September results suggest rates may be stabilizing, though ``it's hard to determine if this is a monthly abnormality or an actual trend,'' said David Small, and analyst with Bear Stearns Cos. in New York, in a note to investors. Small rates the shares ``peer perform.''

Direct Response

The number of Progressive customers who purchased auto coverage through the Internet, phone or mail increased 6.3 percent from a year earlier to 2.57 million policyholders, the biggest increase in the monthly results since May 2006. Progressive ranks third in the so-called direct-response market, behind Geico and United Services Automobile Association, said Charles Gates, an analyst with Credit Suisse Group in New York. Progressive consumers who bought car coverage through agents fell 0.5 percent to 4.46 million.

For the auto insurance industry as a whole, the percentage of policyholders who bought their coverage by direct response has almost doubled in the last decade to 17.6 percent, Gates said.

``Direct response is the future,'' he wrote in a note to investors to reiterate his ``outperform'' rating on Sept. 11, after Progressive announced it was consolidating the direct-response and agency units to reduce expenses.

The number of policyholders who insure their motorcycles, mobile homes and boats with Progressive rose 8.1 percent to 3.14 million, and commercial auto customers grew 6.9 percent to 540,900.

Progressive repurchased 26.1 million shares in the quarter, or 3.6 percent of the stock outstanding as of June 30, after announcing in June that it would buy back 100 million shares over two years. The company issued $1 billion in debt that month to finance the repurchase and a special dividend of $2 a share it paid in September.

To contact the reporter on this story: Erik Holm in New York at eholm2@bloomberg.net.

Last Updated: October 10, 2007 16:32 EDT