Progressive vs. GEICO: The Battle Continues
Progressive's Q1 results were poorly received. Does GEICO have an opportunity to reverse market share losses while returning to underwriting profitability?
“Progressive has been on the telematics bandwagon for, I don’t know, more than 10 years, probably closer to 20 years. GEICO, until recently, wasn’t involved in telematics. And it’s been only the last two years that they’ve made a very serious effort, in terms of using telematics for segmentation and for trying to match rate and risk. It’s a long journey. But the journey has started, and the initial results are promising. It’ll take a while, but my hope and expectation is that hopefully in the next year or two, GEICO will be in a position to catch up with Progressive, in terms of telematics. And hopefully that’ll then translate into both growth rate and margins.”
— Ajit Jain, Berkshire Hathaway Annual Meeting, May 2, 2022
Automobile insurance is a major expense for the typical American family. Bankrate estimates that the average cost of a full coverage automobile policy is now $2,014 per year. As a point of reference, the Bureau of Labor Statistics recently reported that median weekly earnings of full-time wage and salaried workers was $1,100 during the first quarter, the equivalent of $57,200 on an annualized basis.
When I wrote Auto Insurance Competitive Dynamics in April 2022, Bankrate indicated that the average cost of a full coverage automobile policy was $1,655 during 2021. When the cost of a non-discretionary big ticket item increases by over 20% in a short period of time, the typical consumer is going to comparison shop. As much as someone might like Progressive’s Flo or the famous GEICO Gecko, there are limits to brand loyalty in this business. The internet makes comparison shopping easy.
GEICO and Progressive have long been fierce competitors and I have written about this rivalry many times over the years. As a Berkshire Hathaway shareholder, I have followed Progressive for well over a decade. I wrote a detailed profile of Progressive in December 2022. It contains information about the auto insurance industry as well as a section on the rivalry between GEICO and Progressive.
In the 1990s, GEICO and Progressive were relatively small players in auto insurance with market shares of 2.5% and 2.2% respectively in 1995. By 2021, GEICO had taken the number two position behind State Farm with 14.3% of the market while Progressive was close behind at 13.7%. However, Progressive passed GEICO to take second place in 2022, as measured by direct premiums written. GEICO still had a slight edge in direct premiums earned. The following exhibit shows market share data for 2022 provided by the National Association of Insurance Commissioners:
For all practical purposes, Progressive and GEICO are nearly tied in the competition for second place, with State Farm maintaining a tenuous grasp on first place.
In the Progressive profile, I provided a snapshot of key data for Progressive and GEICO since 2001. The exhibit below updates that snapshot for 2022 results. Note that premiums earned in this table includes Progressive’s commercial and property lines in addition to private passenger auto lines.
GEICO has consistently run at a lower expense ratio compared to Progressive, and this was particularly pronounced in 2022 as GEICO reduced its expense ratio from 14.5% to 11.7%. Progressive reduced its expense ratio from 19.6% to 18.5%. However, GEICO’s loss ratio skyrocketed to 93.1% while Progressive kept its loss ratio to 77.3%. As a result, GEICO’s combined ratio was 104.8% while Progressive’s combined ratio was 95.8%. For the second time since 2001, GEICO posted an underwriting loss for a full year. In contrast, Progressive has no annual underwriting losses since 2001.
The pandemic resulted in unprecedented shifts in driver behavior that insurers had no way to model ahead of time. Initially, industry loss ratios were far lower than normal as the pandemic began in the first quarter of 2020. Fewer drivers were on the roads due to lockdowns and mileage driven plummeted. However, Progressive, GEICO, and other insurers provided rebates to customers in 2020 in recognition of lower automobile usage. These rebates inflated expense ratios in 2020.
As drivers returned to the roads in 2021 and 2022, accidents and claims predictably increased. Inflation began to take a toll on insurers as the cost of repairs increased and used car prices skyrocketed, as I discussed in an article on the automobile industry in August 2022. It has been a rough few years for all auto insurers.
Conventional wisdom seems to be that GEICO’s late implementation of telematics is to blame for many, if not most, of the company’s underperformance relative to Progressive. In my profile on Progressive, I include a number of quotes from Warren Buffett and Ajit Jain regarding telematics. They both concede that Progressive’s superior use of technology has provided an edge with respect to setting the right premium based on the risk of the driver.
I am writing this article on the eve of the 2023 Berkshire Hathaway annual meeting on May 6, 2023. Tomorrow morning, Berkshire will release first quarter 2023 results including the 10-Q which will contain details on how GEICO has fared so far this year. Unfortunately, most Berkshire shareholders will not have time to review this material prior to the annual meeting.
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Progressive’s Q1 2023 Results
In addition to providing quarterly results, Progressive releases a significant amount of information on a monthly basis on its investor relations site. As a result, following Progressive’s results during the quarter is possible with an unusually high degree of granularity. Berkshire shareholders can look at Progressive’s results as a sort of leading indicator of how industry conditions are shaping up during a quarter.
The rest of this article is a brief overview of Progressive’s results for the first quarter with a focus on policies in force and underwriting results. I covered the company’s business model, investment portfolio and overall results in much more detail in the profile published in December so readers who are particularly interested in the company can refer to that report in addition to what follows in this article.