Today, I reviewed Value Line’s latest coverage of the Property/Casualty Insurance Industry. I spent a bit more time on Progressive (PGR) than on most of the other company profiles. I have not followed Progressive in great detail in the past other than being aware of it in the context of reading about GEICO which is a Berkshire Hathaway (BRK.A) subsidiary. I have covered GEICO in some detail on this site in the context of Berkshire’s overall results.
Since Berkshire acquired full control of GEICO in 1995, the company has advanced from seventh to third position among auto insurers according to Warren Buffett’s latest letter to shareholders. (As an aside, Warren Buffett’s account of Berkshire’s purchase of GEICO in his 1995 shareholder letter is well worth reviewing.)
GEICO’s main competitive advantage is derived from its low cost operations which are made possible by the direct sales model the company uses to sell insurance policies. By selling products over the phone and online, significant efficiencies can be captured compared to a traditional agency distribution model. Progressive also employs a direct channel (although they also have a sales channel through independent agents) and the company has a strong long term track record.
While this article is not in any way a complete review of Progressive, I thought it would be interesting to compare GEICO and Progressive over a ten year period in terms of overall volume of premiums earned, underwriting results, and operating efficiency.
Ten Year Records
The following exhibit shows selected underwriting results for GEICO and Progressive over the past ten years:
Both Progressive and GEICO show strong results by nearly any measure during this timeframe. GEICO’s compounded annual growth rate in premiums earned over the ten year period was 10.1% while Progressive grew at a 9.1% rate. GEICO’s average underwriting loss ratio was 75.8% while Progressive’s average loss ratio was a bit better at 71.4%. GEICO had the distinct advantage when it came to underwriting expenses with a ten year average of 17.8% versus 20.9% for Progressive.
Over the past two years in particular, we can conclusively see the benefits of GEICO’s low cost model. Despite having higher underwriting loss ratios in both years as well as lower levels of premiums earned, GEICO ended up with higher pre-tax underwriting profits due to significantly lower underwriting expenses compared to Progressive. Another way to look at this is that GEICO was able to accept premiums that realized a higher level of losses than Progressive while being more profitable due to tighter expense controls. This presumably translated into lower premiums for policyholders and higher market share.
Disclosure: The author owns shares of Berkshire Hathaway. The author does not currently own shares of Progressive.