Progressive Corporation
One of our new buys in the Worldwide High Dividend Yield Value Fund during the first quarter of this year was Progressive Corporation (PGR, Financial), the third largest personal automobile insurance carrier in the U.S., with a market share of 13% as of December 31, 2020. While the company has a successful history of expanding into new markets (like commercial auto insurance), personal auto insurance still dominates its income statement, representing 89% of Progressive's pre-tax underwriting profit in 2020.
Progressive is a best-of-breed auto insurance carrier. The company has a long track record of innovation, industry-leading profitability (lowest 10-year average combined ratio) and market share gains. Progressive has also generated high returns (19% average operating ROE). Over the 16 years ended December 31, 2020, the value compound (defined as growth in book value per share plus cumulative dividends per share) was +13.3%. The company seems to have two clear competitive advantages: direct distribution (low expense ratio) and superior data analytics (low loss ratio).
Over half of Progressive's personal auto insurance policies are sold direct to consumers without an agent. Selling direct provides an inherent cost advantage by eliminating agent commissions. Although selling on a direct basis requires greater advertising expense, the net trade-off leads to a lower than industry average expense ratio. This expense advantage allows Progressive to generally offer lower prices than the competition (gaining market share) while at the same time earning superior margins (due to a lower expense ratio) in a self-perpetuating feedback loop. Around 25% to 30% of total U.S. auto insurance policies are currently sold on a direct basis, and this percentage has been growing. Younger consumers in particular are more comfortable buying direct without an agent. Thus, over time, the trend towards greater direct writing of auto insurance is expected to persist.
Progressive's second key competitive advantage is superior data analytics. Given its roots as a non-standard auto insurance carrier, superior data analytics was critical to Progressive from the very beginning. Progressive collects mountains of data and, in particular, granular data that allows for constant refinements in customer segmentation and risk-based pricing. The company has invested heavily in IT systems and management talent (data scientists) to consistently match risk to rate. Interestingly, the data edge also plays a fundamental role in reducing claims costs by, for example, identifying claims fraud. By using data to quickly identify fraud, Progressive has had an edge in paying fair but lower claims costs. This data advantage is ultimately reflected in a loss ratio which has been consistently below the average industry loss ratio.
At purchase, we paid between $85 and $87 per share, or roughly 15x estimated 2021 operating earnings per share (excluding net after-tax gains/losses realized on securities), and approximately 75% to 80% of our conservative estimates of intrinsic value. Moreover, Progressive has paid an above-average dividend in the form of a regular quarterly dividend and a discretionary additional variable dividend paid annually. In 2019 and 2020, the total dividend declared per share was $2.65 and $4.90, respectively.
From Tweedy Browne (Trades, Portfolio)'s 2021 annual letter to shareholders.
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