is an unusual corporate creature: a growth company in a slow-growth industry.

A pioneer in employing real-time driving information to price auto insurance policies, Progressive (ticker: PGR) has been able to take market share in the U.S. profitably year after year.

Its shares, now trading around $100, still look reasonably priced at about 17 times projected 2021 operating earnings of $5.83 a share. Reflecting its strong financial systems, Progressive reports earnings monthly—probably the only company in the S&P 500 to do so. Barron’swrote favorably about the company nearly a year ago, when the stock was around $80.

The stock’s yield is just 0.4{98cae0078f524eff3ab8ec32cf55b261677ef6c8a6ed6e94d92a4234b93f46b6} based on its regular dividend. But the company has paid special dividends in the past three years, with $4.50 a share distributed in January.

The company’s success reflects a data-driven culture created by longtime leader and insurance iconoclast Peter Lewis that continues to improve under the current CEO, Tricia Griffith, a 56-year-old corporate lifer.


Source: Bloomberg

“Progressive has a dominant business model and it’s only getting better,” says David Rolfe, chief investment officer at Wedgewood Partners, which holds the stock. “It’s a relative bargain in a stock market where growth companies with competitive advantages have broken above their historical valuation ranges. I wouldn’t be surprised if Progressive does.”

The company is expected to earn a nearly 20{98cae0078f524eff3ab8ec32cf55b261677ef6c8a6ed6e94d92a4234b93f46b6} return on equity this year, comfortably above the returns among big property and casualty insurers.

Progressive is the No. 3 player in the $250 billion (in annual premiums) auto insurance market, behind State Farm and Geico, which is owned by Warren Buffett’s

Berkshire Hathaway

(BRK.A and BRK.B). Progressive is gaining on both rivals; its market share stood at 13.3{98cae0078f524eff3ab8ec32cf55b261677ef6c8a6ed6e94d92a4234b93f46b6} in 2020, against 13.5{98cae0078f524eff3ab8ec32cf55b261677ef6c8a6ed6e94d92a4234b93f46b6} for Geico and 16.2{98cae0078f524eff3ab8ec32cf55b261677ef6c8a6ed6e94d92a4234b93f46b6} for State Farm. Progressive had a 3{98cae0078f524eff3ab8ec32cf55b261677ef6c8a6ed6e94d92a4234b93f46b6} share 25 years ago and under 8{98cae0078f524eff3ab8ec32cf55b261677ef6c8a6ed6e94d92a4234b93f46b6} in 2010.

Geico and Progressive are leaders in selling policies directly to consumers, the fastest-growing segment of the market. Progressive also has a significant presence among traditional insurance agents. Last year, Progressive’s personal auto insurance policies grew by 1.6 million, double Geico’s increase. It’s a good bet that Progressive will pass Geico this year.

Progressive’s basic strategy is simple: Grow as fast as possible while maintaining a 4{98cae0078f524eff3ab8ec32cf55b261677ef6c8a6ed6e94d92a4234b93f46b6} underwriting profit margin. The company has consistently done that while the industry has struggled to earn an underwriting profit. Revenue growth has averaged 15{98cae0078f524eff3ab8ec32cf55b261677ef6c8a6ed6e94d92a4234b93f46b6} over the past four years, and policies in force have risen at a 10{98cae0078f524eff3ab8ec32cf55b261677ef6c8a6ed6e94d92a4234b93f46b6} clip. In the first quarter, premiums grew 19{98cae0078f524eff3ab8ec32cf55b261677ef6c8a6ed6e94d92a4234b93f46b6} and policies were up 12{98cae0078f524eff3ab8ec32cf55b261677ef6c8a6ed6e94d92a4234b93f46b6} versus a year earlier.

Vinay Saqi, a private investor and a former Wall Street analyst who has followed Progressive for many years, projects that annual revenue could grow at a 10{98cae0078f524eff3ab8ec32cf55b261677ef6c8a6ed6e94d92a4234b93f46b6}-plus clip for the next three to five years off a premium base of $40 billion in 2020.

“Progressive could earn $10 a share in three to five years,” he says. And this assumes its auto-underwriting profit margins fall to 7{98cae0078f524eff3ab8ec32cf55b261677ef6c8a6ed6e94d92a4234b93f46b6} from around 13{98cae0078f524eff3ab8ec32cf55b261677ef6c8a6ed6e94d92a4234b93f46b6} in 2020. Saqi thinks there is no reason that Progressive can’t reach a market share of 25{98cae0078f524eff3ab8ec32cf55b261677ef6c8a6ed6e94d92a4234b93f46b6} to 30{98cae0078f524eff3ab8ec32cf55b261677ef6c8a6ed6e94d92a4234b93f46b6}. “Nobody puts it all together the way Progressive does.”

Based on what state regulators permit, the company can use such factors as driving records, credit scores, occupation, gender, and age to price policies. In nearly all states, customers can choose to download a phone app or get a plug-in device that monitors real-time driving to potentially save on premiums—and most do save money.

The app measures braking, acceleration, time of day (late-night driving is more dangerous), miles driven, and even signs of distracted driving.

“Our main competitive advantage,” Progressive tells Barron’s, “is providing the rare combination of broad distribution (available where/when/how consumers choose to shop), broad acceptability (we like to say we offer a rate for nearly every risk), and competitive prices.”

The auto insurance industry is coming off a strong 2020, mostly the result of reduced driving—and accidents—during the pandemic.

Progressive earned about $7.50 a share in 2020, adjusted for securities gains that flow through its income statement. This year’s earnings are expected to be lower, at around $6.

One long-term danger is the growth of autonomous driving, which could reduce accidents and the number of privately owned cars.

Saqi notes that Progressive is the leader in commercial auto insurance, which is a partial hedge. This could give Progressive the opportunity to insure autonomous fleets as they develop. And drivers will still need to insure against theft and noncollision damage to cars, even if autonomous systems work perfectly.

Michael Zaremski, a Credit Suisse analyst who has an Outperform rating on the stock, likes the road ahead: “It’s a way to play the direct-to-consumer secular theme with one of the few hypergrowth stories in the space.”

Write to Andrew Bary at [email protected]

Previous post People, Not Process or Technology, Are the True Drivers of Transformation
Next post UKG Unveils Life-Work Technology Vision at Annual Connections Conference