Can Progressive Stay In Gear?

With rates falling, the car insurer is trying innovative ways to keep ahead of the pack

Say you're in an auto accident. You're not hurt, but your car is so banged up that it's not worth fixing. Now imagine that instead of sending you a check so you can go car shopping, your insurance company combs the classified ads and the Internet for you to find a new set of wheels. That shopping service, which Progressive Corp. is testing on dozens of Ohio customers for a year, is just one of the company's latest spins on the mundane business of insuring drivers and their cars. Progressive isn't ready yet to say if the service, which is free to customers, will become a regular offering. But Thomas A. King, Progressive's treasurer, insists: "It's amazing. Customers love it."

That's a good thing, because if Progressive wants to stay ahead of the pack, it's going to have to shift into overdrive. Based in Mayfield Village, Ohio, the nation's No. 3 auto insurer, behind State Farm Insurance Cos. and Allstate Corp. (ALL ), has posted soaring growth in recent years, thanks in part to the sort of hefty premium hikes that customers don't love. Progressive's average annual 183% profit growth and 152% total return since 2001 made it No. 1 on our most recent BusinessWeek 50 ranking of top-performing large companies.


But lately, growth has been slowing. For the first half of 2004, net premiums in Progressive's core auto insurance business were up 13%, vs. 29% a year earlier. And with a weaker stock market, total returns on Progressive's investment portfolio were only 1.2% in the first half, down from 5.2% the previous year. In total, revenues rose 18%, to $6.6 billion. Because claims are falling, net income in the first half of the year grew 46%, to $846.3 million -- a healthy gain for sure, but far below the previous year's 72% rise.

Still, Progressive's focus on finding innovative ways to make life a little better for its customers engenders a lot of loyalty, giving it a cushion in tough times. "They get and keep customers by putting emphasis on service," says Ira Zuckerman, an analyst at Nutmeg Securities. That's one reason premium income is expected to grow 12% this year, while the industry average will be 4% to 5%, estimates Sandler O'Neill & Partners analyst Nicholas Pirsos. Besides testing the shopping service in Ohio, Progressive is expanding its "concierge" claims centers, where a customer can bring a damaged car and get a rental while Progressive handles the headache of finding a body shop. The centers even lend customers a text-message pager to transmit updates. Progressive says the 20 centers it operates in 18 cities also boost efficiency by speeding inspections and repairs. But it acknowledges that the centers work only in densely populated areas with a critical mass of customers.

In yet another bid to develop services, Progressive is evaluating a system that takes personalizing premiums to the max. In a Minnesota test earlier this year, the company put a computer chip in customers' cars to record when they were driving, how far they went, and how fast they drove. Then, with hookups provided by the company, people went online and uploaded the information to Progressive. (Drivers were free to view the data first and decline to send it if they chose.) After crunching the numbers, the insurer wants to see if it can tailor rates individually, charging less, say, for someone who rarely drives in rush hour. Progressive hasn't decided whether to proceed with the system.

Progressive is going to need those innovative services to help it hold on to customers and keep its premiums high as increases in insurance rates industrywide slow or as rates even fall. Already, such rivals as USAA and Farmers Insurance Group have reduced rates. State Farm cut the price of insurance in 30 states by up to 13.6%, thanks to falling claims. That put pressure on Progressive. In May, for instance, it reduced the price of some Florida policies by 4.4%.

Adding some urgency to the rate slowdown is uncertainty about the volume of claims. The number of claims at Progressive and throughout the industry has been falling -- down 3.5% in the last 12 months alone. Nobody knows why, or if the falloff is a fluke or an ongoing trend. Progressive's King worries "when, if ever, accident frequency will increase to historical levels," since higher payouts eat into profits. Some analysts chalk up the decline to "smarter" cars that help avoid accidents or to high gas prices, which deter driving. A theory Progressive favors is that the number of insured cars has outpaced the number of drivers; think two-income couples with three cars. Nevertheless, Progressive can't rely on falling claims forever.

Nor can it count on its rivals becoming less aggressive. Allstate, for instance, is boosting its marketing spending by $175 million this year and is a sponsor at the Olympic Games. So Progressive, which has long stressed the ease of buying its policies by phone or on the Net, is devising an ad campaign, likely to launch in 2005, that plays up the 30,000 independent agents that sell its insurance. Progressive, after all, has zoomed along in the last few years. The last thing it wants now is to stall and sputter while its rivals bear down.

By Louise Lee in San Mateo, Calif.

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