Here is an exercise bound to give some CEOs a panic attack: Imagine what would happen if you didn't "manage," or smooth out, your quarterly earnings.

Pretty frightening, no? This is a market, after all, where stocks that miss earnings by a penny get pounded. Now add this: Imagine you didn't give analysts any "guidance" on your undoctored earnings.

Meet Peter Lewis, chairman of Progressive, a fast-growing auto insurer in Cleveland. Mr. Lewis, 65 years old, refuses to guide analysts about Progressive's quarterly earnings. He also won't lift a finger to smooth out earnings zigs and zags.

Though this could earn Mr. Lewis a gold star from securities regulators, it has exposed him to criticism from Wall Street. And the strategy has triggered unusual short-term gyrations in Progressive's stock. But he's not about to change.

"It is not honest" to manage earnings, Mr. Lewis says. Besides, when companies "manage" their earnings, he adds, they mar their own business intelligence: "The accounting stuff that's required to smooth things out causes management to mislead itself."

This is more than idle grousing. Corporate America's commonplace practice of managing earnings is coming under increasing scrutiny by regulators. Arthur Levitt, chairman of the Securities and Exchange Commission, publicly has carped about earnings manipulation.

The SEC has begun taking action. The commission in December sued W.R. Grace in a Miami federal court, alleging that the company fraudulently managed earnings when a unit was growing faster than executives felt could be sustained. Grace denies wrongdoing.

Business: Insurance
Year ended Dec. 31	1998	1997
Revenue (millions)	$5,292	$4,608
Earnings (millions)	$457-a	$400-b
Diluted per-share earnings	$6.11-a	$5.31-b

Latest quarter (Dec. 31, 1998): Diluted per-share earnings: $1.05-c vs. $1.39-d Average daily volume: 286,342 shares Shares outstanding: 72.5 million
Trailing P/E: 23	Dividend yield: 0.2%

a-Includes net realized gains on security sales of $11.4 million.
b-Includes net realized gains on security sales of $98.5 million.
c-Includes net realized losses on security sales of $37.8 million.
d-Includes net realized gains on security sales of $30.8 million.

But it isn't just Grace. Many companies are concerned because they for years have felt that managing earnings -- as long as the tweaking remained "immaterial," in accounting parlance -- was perfectly proper. The practice, they argued, benefited shareholders by protecting the stock from wild bounces over mild events.

Mr. Lewis's stance has taken shape over his 34-year career at Progressive. At its root is an attitude that Wall Street analysts are paid to analyze. You know, go out and kick the tires: Interview customers, suppliers and competitors, and dig through company filings, that sort of stuff. If analysts are spoon-fed by companies, Mr. Lewis believes, they just aren't doing their job.

That approach has caused aftershocks. Progressive's stock can be wildly volatile when it surprises Wall Street with its earnings. On Oct. 16, 1998, the stock surged nearly 20 points when Progressive beat analysts' consensus third-quarter operating earnings by 44 cents a share. Then on Jan. 26, the stock plunged more than $30 when Progressive's fourth-quarter operating earnings of $1.38 a share fell 16 cents short of expectations.

The fun is set to begin anew. Early next week, Progressive is expected to release first-quarter earnings. And analysts already are getting antsy.

"I'm getting more nervous as the day gets closer," says Nancy Benacci, an insurance analyst at McDonald Investments. She's even having trouble sleeping. "It's like taking a final exam," she says. "Did I pass or did I fail?"

Weston Hicks, an insurance analyst at J.P. Morgan, has an air of annoyed resignation: "I can't predict the quarter," he sighs. "I might as well flip a coin."

Over the long haul, it's difficult to make the case that Progressive's stock has been hurt by its indifference to Wall Street convention. As the company's earnings have leapt, so has the stock. Progressive's share price has outperformed the Standard & Poor's 500-stock index in the past five, 10 and 15 years. For instance, Progressive's 15-year return through Wednesday was 4,438%, compared with 735% for the S&P 500. That performance is highly unusual for any company, let alone an insurer.

Indeed, its leaping and loping make Progressive's stock particularly useful as a contrarian play. Morgan Stanley equity strategist Leah Modigliani says Progressive's independent behavior has made it a valuable stock in a portfolio: Not only has it produced high returns, but it often zigs when the market zags, smoothing out the ride for the whole portfolio.

Don't expect other companies to follow Progressive's path anytime soon. "The pressure from analysts is mind-boggling," Mr. Lewis says. There's even pressure inside the company to smooth out the stock's gyrations: "Some of our people care a lot about the stock price."

How does Progressive resist that pressure? Well, like some other large companies that decline to smooth earnings or give analysts guidance (Berkshire Hathaway and Loews come to mind), Progressive is run by its biggest shareholder. Mr. Lewis owns a 13% stake, valued at more than $1.3 billion. "My job is secure," he says. "It doesn't depend on the day-to-day stock price."

But his attitude seems to be contagious. Ask Progressive's controller and (part-time) investor-relations executive, Tom King, why the company doesn't manage earnings, and he rails that it is "a slippery slope. Somebody expects you to earn a dollar a share," but instead you earn 95 cents, he says. "You borrow five cents to make it up. Next quarter, you do it again. Before you know it, you're in trouble."

For Progressive, it wasn't always this way. Some 15 years ago, Mr. Lewis recalls, the company did try to manage its earnings -- and it had the opposite problem. It kept earning more than it wanted to report; when it finally took the accumulated reserve into earnings, analysts ignored it as a one-time gain.

Progressive then refused to talk to analysts at all. Mr. Lewis felt that analysts' phone calls "seem often to be an attempt to get inside information." After slamming the door on Wall Street, "nothing bad happened to the stock price," Mr. Lewis says.

But when Progressive needed to do a secondary stock offering a few years back for a big shareholder (not Mr. Lewis), investment bankers said Progressive "won't get a good price on the stock unless you agree to talk to analysts," Mr. Lewis says. So the company started talking, but it still doesn't give any guidance.

Why isn't he that open with analysts? "We provide everything," he bristles, including "an annual, detailed study of our loss reserves, stuff other people don't show. We withhold nothing."

Nobody knows what next week's earnings will bring -- not even Mr. Lewis. "We don't know what happens until we close our books," he says. "The wind blows, people run into each other, and we can't tell when they're going to do it."

For what it's worth, McDonald's Ms. Benacci expects first-quarter earnings of $1.45 a share. The consensus estimate is $1.49, First Call says. Ms. Benacci's "buy" rating has more to do with long-term expectations than quarterly earnings.

No matter how many unexpected bumps surface, some institutional holders remain fans. Sequoia Fund, a mutual fund that owns nearly as much Progressive stock as Mr. Lewis, said in its annual report that the stock's January massacre hurt performance. But it is sitting tight: "We still have confidence in this unusual company's longer-term prospects."

Heard on the Street

Progressive CEO Refuses
To Smooth Out Earnings

Heard on the Street

Progressive CEO Refuses To Smooth Out Earnings

Progressive CEO Refuses
To Smooth Out Earnings