Progressive Corporation Has Risen More Than 30% This Year. Why Does Buffett Praise This Insurance Company?

The auto insurance sector has outperformed other financial stocks this year. Among them, Progressive's stock price has risen by more than 30%. Buffett has repeatedly praised Progressive for its "discipline in underwriting," and said in an interview that the company "does a better job" than Berkshire Hathaway's Geico.

Inflation statistics for May, released by the U.S. Department of Labor, showed that auto insurance costs increased by 20.3% year-on-year. Progressive has increased its rates by a total of 41% since the first quarter of 2021, compared to a 34.5% rate hike by Allstate during the same period. Accordingly, in 2024 Q1, Progressive's first-quarter premium income increased by 19.5% and Allstate's increased by 12.1%.

Contrary to insurance companies' record high premiums revenue, the inflation rates of costs that insurance companies need to bear, such as for hospital services and auto parts, are 9.5% and -1.1%, respectively. Soaring insurance prices and moderation on the cost side mean that insurance companies’ Loss Ratio continued the downward trend.

The encouraging underwriting results in Q1 showed that the average auto loss ratio was 71.8%, 140 bps better than the 2016-19 run rate and improved 800 bps from 2023 Q1. In particular, Progressive’s loss ratios are lower than its peers.

At the same time, leading insurance companies have cut back on advertising expenditures, resulting in exceptionally low Expense Ratios as they strive to enhance profitability. In the first quarter, the average Expense Ratio was roughly 230 basis points lower than the average from 2016 to 2019.

Progressive continued to capture an increased market share. During the first quarter, Progressive's policies in force (PIF*) saw a 7% growth, in contrast to the slight declines experienced by Geico and Allstate. Progressive's personal auto PIF count escalated to 20.8 million in April, a notable rise from 8.8 million in 2013. Geico reached a peak of 19 million PIF in 2021 but has since decreased to 15 million in the first quarter, down from 12 million in 2012. Meanwhile, Allstate's total auto PIF dropped to around 20 million in the first quarter, after nearly hitting 22 million in 2021. Although Allstate's National General brand did see an increase in policies, with a 12.6% expansion in the first quarter, it only accounts for 20% of the company's total auto PIF.

*An in-force policy means that the contract between the insurer and the policyholder is active.

Meanwhile, Progressive gives more discounts on annual rates to drivers with good credit, while for teenage drivers and drivers with accident records, the company charges much higher rates than the industry.

Major auto insurers could see historically high returns on equity in 2024 as price hikes improve underlying margins. Besides, higher interest rates have helped offset weaker underwriting. In 2023, Allstate's fixed-investment income reached $1.7 billion, marking an increase of nearly 50% compared to 2020. On the other hand, Progressive's fixed-investment income more than doubled during the same period, a result attributed to maintaining investments with shorter durations.

Bloomberg analyst Palazola noted that Allstate Insurance's ROE is expected to reach 20%, while Progressive Insurance's ROE is expected to be 28%, close to 2018's record 31.6%.

Higher operating efficiency means Progressive may challenge the industry leader's position. Buffett once told New York Times reporter Andrew Ross Sorkin during Berkshire's annual shareholder meeting, "I have always thought for a very long time [that] Progressive has been very well run. They have an appetite for growth. We will see five years from now or 10 years from now which one of us passes State Farm first."