The Progressive Corporation
The Progressive Corporation
6300 Wilson Mills Road
Mayfield Village, Ohio 44143
Fax: (440) 446-7436
Web site: http://www.progressive.com
Incorporated: 1956 as Progressive Casualty Insurance Company
Sales: $5.29 billion (1998)
Stock Exchanges: New York
Ticker Symbol: PGR
NAIC: 524126 Direct Property & Casualty Insurance Carriers; 524128 Other Direct Insurance (Except Life, Health & Medical) Carriers; 551112 Offices of Other Holding Companies
By practically any measure, The Progressive Corporation ranks among the United States’ most successful property and casualty insurers. The holding company’s primary subsidiary, Progressive Casualty Insurance Co., got its start by insuring “non-standard” or high-risk drivers. The firm’s profits have consistently outperformed the industry: from 1970 to 1992, Progressive averaged a three percent annual profit margin on underwriting insurance, whereas its competitors averaged a seven percent annual loss. In the more profitable 1990s its underwriting profit margin increased to 8.4 percent in 1998. Total revenues increased fourfold from $1.39 billion in 1989 to $5.29 billion in 1998. In 1992, Progressive became the nation’s largest provider of automobile insurance through independent agents. In 1993, Progressive became the largest automobile insurer in its home state of Ohio. By 1999 it was the fifth largest auto insurer in the United States and was set on becoming the largest. Although a publicly traded company, Progressive remained a family-run enterprise in the late 1990s; Peter B. Lewis, son of one of the co-founders, was chief executive officer, president, and chairman of the board. His younger brother, Daniel R. Lewis, was process leader of Progressive’s largest business, the Agency Business Unit.
Innovative Auto Insurance: 1930s and 1940s
The Progressive insurance organization was created in 1937 when Peter and Daniel’s father, Joe, joined fellow Cleveland attorney Jack Green for a state-sponsored investigation of a group of door-to-door insurance salesmen. In the course of that operation, the partners discovered a profitable and (unlike the subjects of their investigation) legal niche in the insurance business. To fill that niche, the two graduates of Western Reserve University School of Law first obtained insurance licenses. Using $10,000 borrowed from Lewis’s mother-in-law, they acquired five small auto service companies and called their new venture Progressive Mutual Insurance Company.
Lewis and Green established innovation as a hallmark of their enterprise at the outset. Before World War II, insurers customarily set premiums according to noncompetitive rate tables and required prepayment of policies. Progressive targeted blue-collar drivers with an inexpensive $25 policy, a monthly payment plan, and an industry first—the “one-and-one” policy. In the event of an accident, this coverage would pay up to $1000 to repair either the insured’s or the other driver’s car, at the policyholder’ s discretion. By virtue of its establishment in a garage, Progressive also offered its clients another unique convenience—drive-in claims services.
Lewis and Green wrote less than $10,000 in premiums that first year, and by 1939, Progressive’s original capital had dwindled to less than $1,500. A Chicago consultant advised the partners to get out of insurance, but they struggled on through the early 1940s. Peter B. Lewis would later observe that “World War II saved Progressive. People finally had jobs and money, so they could afford cars and insurance, but gas was rationed so they couldn’t drive and didn’t have many accidents.” The booming, car-crazy, postwar economy further accelerated Progressive’s business: premium revenues reached $480,000 by 1946. The era saw Progressive expand into the related areas of fire, theft, and collision insurance, as well as some financing services.
Innovation, Expansion, and Reorganization: 1950s
A new market opened up in the 1950s as many leading insurers began to segment their clients according to age, driving record, and other quantitative categories. They then insured only the statistically best candidates, known in the industry as “standard risks.” Progressive Casualty Insurance Company was created in 1956 to capture the growing “nonstandard” pool of drivers that didn’t make it into the preferred category. The new subsidiary wrote $83,000 in premiums during its first year in operation.
Founder Joe Lewis had died just one year earlier, and his son Peter B. Lewis joined the firm after graduating from Princeton University. The younger Lewis helped lead Progressive’s expansion outside Ohio’s boundaries after 1960. The company began writing policies in Michigan, Florida, Tennessee, Kentucky, Georgia, and Mississippi, and, within three years, extra-Ohio premiums topped $5 million annually. The Progressive Corporation, an insurance holding company, was formed in 1965 upon Jack Green’s retirement. It brought Progressive Casualty and three related insurance agencies under the Lewis family’s control through a leveraged buyout. The new company’s premium revenue totaled about $7.4 million during its first year of incorporation, which was also Peter Lewis’ first year as president and chief executive officer.
In nearly 35 years at its helm, Peter Lewis has left his personal imprint on Progressive. The avid art collector and patron started a corporate collection and commissioned a new artist to illustrate the company’s annual report each year. By 1987, the corporate collection constituted over 1,000 pieces of award-winning contemporary art. Lewis was characterized as “a brilliant and unusual man” in a 1990 Financial World profile, and he has been credited with the managerial savvy that kept Progressive in the vanguard of auto insurance. Lewis established high employment standards early in his career. Progressive recruited employees at the country’s top business schools on the assumption that only the best students are accepted at, and matriculated from, these institutions. Lewis prided himself on the “ruthless discipline” expected of his executives. In 1990, he told Financial World that “There are 15 people who used to work for us who we asked to leave who became presidents of other insurance companies.”
Crisis and then Unchecked Growth: 1970s
Lewis took Progressive public in 1971 with the sale of 110,000 shares. That same year, the company formed a subsidiary, Progressive American Insurance Co., in Miami, Florida. Progressive and the property/casualty industry in general got a “wake-up call” in the mid-1970s, when years of consolidation, acquisition of major companies by noninsurance conglomerates, and depletion of reserves brought on the worst years since the Depression. During this crisis, Lewis set forth one of the company’s most important goals: to always achieve an underwriting profit. That standard, measured in the insurance industry as the combined operating ratio, soon became one of Progressive’s hallmarks. Most auto insurance companies were satisfied with a combined operating ratio of 100 or more—meaning that claims and expenses paid equaled or exceeded premiums collected. They made money not from selling insurance, but from profitable investments. Progressive insisted on keeping its combined ratio under 100 and making an operating profit before investments. Since the 1960s, the auto insurance industry overall has consistently recorded losses on underwriting activities, while Progressive has done so very infrequently.
As one of the few nonstandard or high-risk insurance companies, Progressive grew virtually unchallenged in the late 1970s. From 1975 to 1978, premium income nearly quadrupled, from $38 million to $112 million, as standard auto insurers turned away and dropped their riskier customers. By 1979, the company wrote policies in 31 states. Ohio accounted for one-third of premiums.
One of the keys to Progressive’s impressive results was its exacting actuarial standards. In the 1950s the company began to invest far more heavily than its competitors in collecting and analyzing accident data. Progressive’s actuaries sought out the best of the bad risks and devised more accurate pricing policies. For example, actuaries at Progressive found that, of motorists arrested for driving while under the influence of alcohol, those with children were least likely to drive drunk again. These select customers were still charged higher-than-normal rates, but Progressive’s “high-risk” premiums remained lower than those of its competitors.
Revenue Growth in the 1980s
These pricing policies helped the company’s premium volume increase to $157.3 million by 1980. As business around the country increased, Progressive established regional offices in Sacramento, Tampa, Richmond, Colorado Springs, Austin, Omaha, and Toronto in the late 1970s and early 1980s. In 1986, the company wrote over $830 million in premiums, over five times as much as it had at the beginning of the decade.
After the 1987 stock market crash, Lewis ousted his investment team and brought Alfred Lerner, chairman of Equitable Bancorp, MNC Financial Inc., and MBNA Corp., on as chairman and director of investments. Upon his hiring, Lewis compared Lerner’s investment expertise to basketball great Michael Jordan’s athletic prowess. Lewis asked Lerner to invest $75 million in Progressive to ensure the newcomer’s vested interest in his new employer’s financial performance.
The insurer celebrated its 50th anniversary in 1987 with its first $1 billion year and a listing on the New York Stock Exchange. Lewis told the Cleveland Plain Dealer that “We feel humble here because this could happen only in America.”
We seek to be an excellent, innovative, growing and enduring business by cost-effectively and profitably reducing the human trauma and economic costs of auto accidents and other mishaps, and by building a recognized, trusted, admired, business-generating brand.
Over the course of his five-year tenure at Progressive, Lerner appeared to have invested the firm’s funds profitably. Then, late in 1992, the investor converted his $75 million bond into $244.5 million in Progressive stock and sold half of his holdings. Lewis resumed the responsibilities of the chair and control of the firm’s investment strategy early in 1993, asserting that he simply had “the desire, time and comfort level necessary to re-assume responsibility for the financial side of the business,” in a February 1993 Cleveland Plain Dealer article.
The insurance industry overall suffered consumer backlash that took the form of rate legislation in the late 1980s. The most notorious law, California’s Proposition 103, mandated 20 percent cuts in auto insurance premiums and refunds to many customers after its 1988 adoption. That year, $305 million, or 28 percent, of Progressive’s business was in California. By 1993, Progressive had reduced its revenues from the state to $50 million and created a $150 million reserve to pay for rate rollbacks to 260,000 current and former policy holders. That year, Lewis reached an agreement with John Garamendi, California’s insurance commissioner, to refund $51.2 million, or 18 percent of premiums paid on policies written between November 1988 and November 1989. The remaining $100 million in the contingency fund went to Progressive’s coffers.
Competition in the nonstandard segment also heated up in the late 1980s, as Allstate, Integon, American Premier (formerly Penn Central Corp.), and small local rivals followed Progressive’s lead into this “risky business.” Progressive responded to these challenges and instituted several operational changes, including a five-year, $28 million overhaul of its information system and a new Immediate Response claims service accessible using a toll-free, 24-hour hotline. A television advertising campaign emphasized not only the speed, but the compassion, that Progressive’s policyholders could expect by recounting an incident when a Progressive claims representative actually arrived at an accident site before the police.
However, Progressive and its talented leader were not infallible. In 1986, the company began insuring long-haul truck and bus fleets. This segment grew from nothing to $175 million in premiums within two years. However, trucking companies wielded strong buying power, and insurance industry rivals’ price cuts soon siphoned off Progressive’s long-haul business. By 1992, the experiment had lost $84 million—an amount unheard of and unacceptable at Progressive—and was eliminated.
Remarkable Growth After Difficult Start: 1990s
The combination of rollbacks in California, the misstep into transportation insurance, and drastically lower net income in 1991 (profits dropped from $93.4 million in 1990 to $32.9 million in 1991) created a “mini-crisis” that soured Wall Street on Progressive. The stock’s price inched up just six percent in 1991, compared to its 35 percent increase the previous year. In response, Lewis reduced employment at Progressive the next year by 19 percent, or 1,300 workers. Lewis softened the blow for the remaining 5,600 employees by instituting a profit-sharing program, but admitted to Fortune magazine that the money-saving decision “destroyed morale.” However, Progressive was able to cut costs enough to actually reduce premium rates in 18 states during 1993. After 1991’s rather dismal results, profits nearly tripled to $153.8 million in 1992 and rose to $267.3 million the following year.
Standard and preferred policies only constituted 4.5 percent of Progressive’s private passenger auto premiums in 1993, but in 1993 and 1994 the company established pilot programs in Texas, Florida, Ohio, Illinois, and Virginia to break into that market. In 1997 it began selling policies in the preferred auto insurance market in California, competing against the state’s big three auto insurers Farmers Insurance Group, State Farm Insurance Cos., and Allstate Insurance Co. Following the passage of Proposition 103 in 1988, Progressive had backed away from the California market, laying off 800 workers at its Rancho Cordova office. Now the company intended to compete more aggressively in the state, adding five more offices to the six it already operated there. After net premiums grew from $1.45 billion in 1992 to $3.44 billion in 1996, Progressive was the sixth largest U.S. auto insurer and the 13th largest in California.
Progressive continued its tradition of innovative services in 1994, when it introduced its 1-800-AUTO-PRO service. Consumers could call the number any time of the day or night to receive a quote on their auto insurance from Progressive. During the same call, they could also receive comparison rates for up to three other leading auto insurers, a move designed to help consumers more easily comparison shop and make more informed buying decisions.
In 1996 the company announced its interest in taking into account personal credit histories, which reflected a customer’s financial responsibility and how he chose to pay his bills, when setting their auto insurance rates in California, something which Progressive was able to do in other states. Progressive had found that people with better credit ratings tended to cost the company less money, and therefore should be charged lower rates. The proposal would have to be approved by the state’s insurance commissioner. Critics charged that it would discriminate against certain groups of people, including low-income individuals such as minorities and college students. According to Progressive, using a consumer’s financial responsibility as a factor in setting their insurance rates was not reflective of that person’s income, race, or gender.
In 1998 the company’s underwriting profit margin increased from 6.6 percent in 1997 to 8.4 percent, while the industry average was.3 percent. With Personal Lines net premiums written of $4.9 billion, Progressive was the fifth largest U.S. auto insurer. Auto premiums accounted for 93 percent of Progressive’s total net premiums written, which reached $5.3 billion in 1998. Brand-building efforts included sponsoring the 1999 Super Bowl XXXIII half-time show and introducing new commercials featuring E.T. as Progressive’s spokesperson.
At the beginning of 1999 Progressive created a second CEO position, perhaps to ensure an orderly management succession when 65-year-old Peter B. Lewis decided to retire. Charles Chokel, who had managed the company’s $5.6 billion investment portfolio for the past six years as chief financial officer, assumed the new position of CEO in charge of investments and capital management. Lewis remained chairman and CEO in charge of insurance operations as well as president.
Throughout the 1990s Progressive’s stated goal was to be the number three auto insurer in the United States. To reach that goal the company would have to increase its premiums to an annual rate of about $10 billion. The company’s recent brand-building efforts were aimed at making Progressive the number one consumer choice for auto insurance. The company had offered quotes over the Internet through its own Web site (www.progressive.com) since 1997 and was the first auto insurer to sell policies online. To achieve its goal of being the most widely available auto insurance, Progressive also began offering its quotes over other Web services, such as Ins Web (www.insweb.com) and Quotesmith (www.quotesmith.com). By 1997 it was selling auto insurance to every driver in as many ways as possible: through independent agents, over the telephone, and on the Internet.
Progressive’s unique Immediate Response claims service, competitive prices, cost-cutting measures, and other efforts had resulted in a decade of solid growth. For the next decade the company was poised to grow as aggressively as its plans called for and prosper in a very competitive business environment.
Airy Insurance Center, Inc.; Allied Insurance Agency, Inc.; Auto Insurance Solutions, Inc.; Classic Insurance Co.; Express Quote Services, Inc.; Gold Key Insurance Agency; Greenberg Financial Insurance Services, Inc.; Insurance Confirmation Services, Inc.; Lakeside Insurance Agency, Inc.; Midland Financial Group, Inc.; Mountain Laurel Assurance Co.; Mountainside Insurance Agency, Inc.; National Continental Insurance Co.; Pacific Motor Club; Paloverde Insurance Company of Arizona; PCIC Canada Holdings, Ltd.; Progressive Adjusting Company, Inc.; Progressive American Insurance Co.; Progressive Casualty Insurance Co.; Progressive Insurance Agency, Inc.; Progressive Investment Company, Inc.; Progressive Max Insurance Co.; Progressive Mountain Insurance Co.; Progressive Northern Insurance Co.; Progressive Northwestern Insurance Co.; Progressive Partners, Inc.; Progressive Preferred Insurance Co.; Progressive Premium Budget, Inc.; Progressive Risk Management Services, Inc.; Progressive Southeastern Insurance Co.; Richmond Transport Corp.; Tampa Insurance Services, Inc.; Progressive Agency, Inc.; Transportation Recoveries, Inc.; United Financial Casualty Co.; Village Transport Corp.; Wilson Mills Land Co.; Bayside Underwriters Insurance Agency Inc.; Garden Sun Insurance Services Inc.; Halcyon Insurance Co.; Marathon Insurance Co.; Ghana Insurance Company of Hawaii Inc.; Paragon Insurance Company of NY; Progressive Casualty Investment Company; Progressive NY Agency Inc.; Progressive American Life; Progressive Bayside Insurance Company; Progressive Casualty Insurance Company of Canada; Progressive County Mutual Insurance Company; Progressive Gulf Insurance Company; Progressive Life Insurance Ltd.; Progressive Premier Insurance Company of Illinois; Progressive Specialty Insurance Company; Progressive Universal Insurance Company of Illinois; Pro-West Insurance Company; The Paradyme Corporation; United Financial Adjusting Company.
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_____, “Hard Choices Ensure Success,” Cleveland Plain Dealer, June 7, 1993, p. 17G.
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_____, “Progressive’s Promoted Takes His Place: CEO Chokel Offers Stark Contrast to Eccentric Lewis,” Grain’s Cleveland Business, January 11, 1999, p. 3.
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—April Dougal Gasbarre
—updated by David Bianco