6300 Wilson Mills Road
Mayfield Village, Ohio 44143
Fax: (216) 446-7603
Incorporated: 1956 as Progressive Casualty Insurance
Revenues: $2.3 billion
Stock Exchanges: New York
SICs: 6331 Fire, Marine, and Casualty Insurance; 6399
Insurance Carriers, Nec; 6719 Holding Companies, Nec
By practically any measure, Progressive Corp. 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 consistently outperform the industry: from 1970 to 1992, Progressive averaged a 3 percent annual profit on underwriting insurance, whereas its competitors averaged a 7 percent annual loss. From 1983 to 1993, the company’s stock price increased twice as fast as Standard & Poor’s 500 index. In 1992, Progressive became the nation’s largest provider of automobile insurance through independent agents. In 1993, Progressive became the largest automotive insurer in its home state, Ohio. Although a publicly traded company, Progressive has remained a family-run enterprise: in 1994, the founding Lewis family owned 19 percent of its stock. Peter B. Lewis, son of a founder, was chief executive officer, president, and chairman of the board, and his younger brother, Daniel R. Lewis, served as a division president and treasurer.
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. Too fill that niche, the two graduates of Western Reserve University School of Law first obtained insurance licenses. Using $10,000 borrowed from Lewis’ 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.
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 son Peter 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 four decades at its helm, Lewis 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 treatment, and 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.”
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 are satisfied with a combined operating ratio of 100 or more—meaning that claims and expenses paid equaled or exceeded premiums collected. They make money not from selling insurance, but from making profitable investments. Progressive insists on keeping its combined ratio under 100 and therefore making an operating profit before investments. Since the 1960s, the auto insurance industry overall has consistently recorded losses on underwriting activities, but 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 competitors’.
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.”
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 reassume 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 policyholders. 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.
Part of Progressive’s claims strategy involved a five-year, $28 million overhaul of the company’s information system with the goal of increasing profits, cutting costs, and improving customer satisfaction by expediting the settlement of claims. A computer system known as Pacman (for Progressive’s Automated Claim Management), was implemented in July 1989.
The company also instituted Immediate Response claims service accessible using a toll-free, 24-hour hotline. Claims representatives may arrive in specially-marked claims vehicles, and are often able to settle claims on the spot. Cat personnel in vans equipped with cellular phones, fax machines, and link-ups to Pacman were often able to settle claims on the spot. In 1992, Progressive adjusters contacted over three-fourths of all claimants within 24 hours of their report. 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. Lewis emphasized two bottom-line benefits of such efficient and empathetic claims adjusting in a 1990 Financial World article: “We have evidence that the person who doesn’t go to a lawyer winds up with more money, and we wind up spending less… [F]raud is [also] becoming an increasingly important aspect of insurance company costs. If you get there early, there’s less fraud. And that eliminates costs.” The company was widely praised for its extraordinarily customer-oriented approach to claims. Progressive reported that its company mission is to reduce the human trauma and economic costs of automobile accidents.
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.
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 6 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 had established pilot programs in Texas, Florida, Ohio, Illinois, and Virginia to break into that market.
Analysts agreed that Progressive had taken “steps that are very positive,” as Joyce L. Culbert, an analyst with Chicago Corp. judged in 1993. However, with continuing competition in the nonstandard segment, some industry observers wondered whether Progressive could continue to make the dramatic strides it had recorded in the past. In addition, after being led by Peter Lewis for nearly four decades, one writer noted that “Progressive’s biggest risk is losing Lewis.” Brother Daniel, 13 years Peter’s junior, stood in the wings, but as of 1994 the elder Lewis, at 60, still occupied the company’s top three positions.
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.; 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.; Ohana 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.
Bowler, William R., “High Risk’s Reward: Progressive Corp. Writes Good Profits on Bad Drivers,” Barren’s, September 17, 1979, pp. 56-57.
David, Gregory, “Chastened?” Financial World, January 4, 1994, pp. 38-40.
Dumaine, Brain, “Times Are Good? Create a Crisis,” Fortune, June 28, 1993, pp. 123-30.
Gleisser, Marcus, “Progressive Insurance Profits Hit $1 Billion,” Cleveland Plain Dealer, February 6, 1988, p. 5B.
Greene, Jay, “Progressive Switches Control of Investments,” Cleveland Plain Dealer, February 12, 1993, p. IE; “Hard Choices Ensure Success,” Cleveland Plain Dealer, June 7, 1993, p. 17G.
King, Julia, “Re-engineering Put Progressive on the Spot,” Computer-world, July 15, 1991, p. 58.
McGough, Robert, “Like to Drink and Drive?” Financial World, November 27, 1990, pp. 26-28.
Mendes, Joshua, “Progressive: The Prince of Smart Pricing,” Fortune, March 23, 1992, pp. 107-8.
Phillips, Stephen, “Bad Risks Are this Car Insurer’s Best Friends,” Business Week, November 12, 1990, p. 122.
—April Dougal Gasbarre