Over the past two years, car insurance prices have risen at the quickest rate since the 1970s. When drivers got angry and sought policies elsewhere, one company was ready and waiting with competitive rates.
Progressive raised premiums before auto insurance inflation really took off, so it was able to cushion profits as claim costs rose. Once prices in the broader market caught up, the Ohio-based company was under less pressure to raise them again.
The strategy has propelled Progressive to become the second-largest auto insurer at a time of historic inflation. Now, the company is offering minimal price increases and even decreases to its auto customers, putting it in a position to gain market share at a fragile moment for insurers under pressure from hurricane losses and reinsurance hikes.
“As our competitors catch up in rate, we are optimistic that we’re well-positioned for more growth in the future,” Progressive CEO Tricia Griffifth told analysts in the company’s third quarter earnings call last week.
Progressive’s savviness in pricing risk can be attributed to an investment in data analytics, analysts say.
In September, the company’s number of active auto policies grew 17% year-over-year, its most direct new policies sold despite spending below 2019 levels. Competitors Allstate and Geico both reported decreases.
“This is because rates were rising across the industry, prompting customers to shop at and eventually purchase from Progressive,” Progressive’s media business leader Jay VanAntwerp told analysts in August.
Warren Buffett says ‘Progressive was better’ at setting rates
Progressive has been investing heavily in data analytics for more than 20 years, which has given them an edge in risk selection, Neuberger Berman senior research analyst Chai Gohil said.
This investment allows the insurer to collect vast amounts of consumer data, he said, enabling it to choose which risks to take on. It does this by targeting the most profitable customer segments, pricing policies based on individual risk profiles and responding to market trends.
“Think about a huge whiteboard with all the data points of all the consumers, a majority of the consumers you would want. Then you can choose and say, I want this, I want that,” Gohil said. “That’s exactly the ability that Progressive has and why it has done so well over the years.”
The strategy has even caught the attention of Warren Buffett. The CEO of Berkshire Hathaway, which owns Geico, has remarked on Progressive’s ability to match rate to risk several times.
“Geico’s done well, extremely well, but Progressive was better at setting the right rate, and we’re catching up, I think, fairly fast,” Buffett told shareholders in 2021.
By 2023, Progressive surpassed Geico in market share. Progressive accounts for 15.24% of the car insurance market, according to the National Association of Insurance Commissioners, while Geico
holds 12.31%. State Farm remains the largest auto insurer.
‘Gangbusters competitive’
In the second half of 2021, the average price of used cars started to rise rapidly. With a global supply chain crisis in full swing, replacement parts were more expensive, too.
When used car prices rise, the cost of total loss claims increases as insurance companies pay out more to replace totaled vehicles. Progressive eventually priced in people returning to their commutes, too, as claims frequency increased.
By the time car prices peaked in late 2022, Progressive had been raising premiums consistently for a year. It took competitors between six months and a year to catch up.
The insurer wasn’t immune to consequences from its rate increases, and lost policies in 2021 and 2022.
By the end of 2023, motor vehicle insurance prices had risen 19% annually, Consumer Price Index data shows. Auto inflation has slowed a bit, but insurance prices were still up 16% year-over-year in September.
Since Progressive had already done most of its price hikes, it got an influx of interest from customers whose premiums were about to go up. As a result, policy loss moderated and the company eventually gained new policy growth.
“State Farm or other companies that are still raising rates, in many cases, their customers are struggling to afford these new higher rates, so they’ll shop for cheaper alternatives,” said Meyer Shields, an analyst at Keefe, Bruyette & Woods. “So we’re increasingly seeing [Progressive] actually grow at the consequence of other companies’ problems.”
It’s difficult to tell if customers were attracted to the cost of premiums or Progressive’s slower rate of price hikes. Auto insurance prices vary greatly by location and coverage.
“Frankly, our premium kind of goes up and down,” Griffifth told analysts. “It’s been a high inflationary trend that’s abating, which is great for our customers.”
As of October, the average price for a 40-year-old driver with a clean record seeking a Progressive auto insurance policy was $2,254, data provided by Bankrate shows. This is cheaper than the average Allstate or State Farm policy, but more expensive than Geico premiums last month.
Zach Bartness, president and CEO of Shared Alliance Insurance in Greenville, South Carolina, has taken notice of Progressive’s pricing edge.
“In 2020 and 2021 they existed, they were fine, but they weren’t gangbusters competitive like they are now,” he said.
While State Farm and Allstate remain the biggest South Carolina auto carriers, Bartness said Progressive has taken the No. 3 spot. He estimates 15% to 20% of his auto insurance clients are Progressive policyholders.
Shareholders profit from insurance inflation
Investors have been loving Progressive’s growth. The company’s share price is up 52% this year, outpacing Berkshire Hathaway and Allstate by 26 and 19 percentage points, respectively. State Farm is not publicly traded.
Analysts are anticipating Progressive will report earnings per share of $13.02 for 2024, up a whopping 113.1% from last year. In 2025, analysts expect a 4.2% annual jump in earnings to $13.56 per share.
Analysts estimate revenue will grow 21.8% to $74.98 billion in 2024 and 16.5% to $87.37 billion in 2025.
Beyond inflation, insurers consider a “mosaic of factors” when pricing risk, including frequency of loss and location, said KPMG insurance lead Scott Shapiro. Inflation moderation could help other companies work toward matching Progressive’s rates.
“As that inflation comes down, that should help companies to improve their competitiveness,” Shapiro said.
Now that Progressive has found its secret sauce for pricing auto premiums, the company is using its data analytics expertise to expand into the homeowners segment, which currently makes up less than 10% of its business. The insurer is seeking more customers by bundling home and auto insurance.
“As Progressive gets into that market, clearly their homeowners’ product needs to be a lot stronger and sophisticated,” Gohil said.