Corporate Profile: Progressive Corporation

Business Sketch

It's risky business, and Progressive loves it. Long a leader in nonstandard, high-risk personal auto insurance, The Progressive Corporation has motored beyond its traditional business into standard-risk and preferred auto insurance, as well as other personal-use vehicle coverage (motorcycles, recreational vehicles, and snowmobiles). Besides personal lines, the company's offerings include collateral insurance for auto lenders, directors' and officers' insurance, and employee misconduct insurance. The company markets directly to consumers via its Web site and toll-free telephone number and through 30,000 independent agents in the US.

Already among the top three US auto insurers based on volume (behind #1 State Farm and Allstate), Progressive says it aims to be on top in this decade. Personal lines make up about 90% of Progressive's premiums. Colorful chairman Peter Lewis (Warhol portraits of Chairman Mao adorn his office) is the son of one of the insurer's founders and owns almost 15% of the company. Lewis is picture above.

A favorable insurance climate and the improvement of the company's claims system have helped Progressive grow its treasure chest. Focusing on its core auto business, Progressive has stopped writing homeowners insurance.

History

Attorneys Jack Green and Joseph Lewis founded Progressive Mutual Insurance in Cleveland in 1937. Initially offering standard auto insurance, the company attracted customers through such innovations as installment plans for premiums (a payment method popularized during the Depression) and drive-in claims services (the company was headquartered in a garage).

Progressive's early years were uncertain -- at one point the founders were even advised to go out of business -- but the advent of WWII bolstered business: Car and insurance purchases were up, but accidents were down as gas rationing limited driving.

Then came the suburbs and cars of the 1950s. While most competitors sought low-risk drivers, Progressive exploited the high-risk niche through careful underwriting and statistical analysis. Subsidiary Progressive Casualty was founded in 1956 (the year after Joseph Lewis died) to insure the best of the worst. Lewis' son Peter joined the company in 1955 and helped engineer its early-1960s expansion outside Ohio. After Green retired in 1965, Peter gained control of the company through a leveraged buyout and renamed it The Progressive Corporation. Six years later, Lewis took it public and formed subsidiary Progressive American in Florida.

In the mid-1970s the industry went into a funk as it was hit by a wave of consolidations and rising interest rates. Lewis set a goal for the company to always earn an underwriting profit instead of depending on investments to make a profit. Progressive achieved stellar results during the 1970s, especially after states began requiring drivers to be insured and other insurers began weeding out higher risks.

Competition in nonstandard insurance grew in the 1980s, as major insurers such as Allstate and State Farm joined the fray with their larger sales forces and deeper pockets. In 1988 California's Proposition 103 retroactively reduced rates; Progressive fought California's demand for refunds but set aside reserves to pay them.

That year Lewis hired Cleveland financier Alfred Lerner to guide company investments. Lerner invested $75 million in Progressive via a convertible debenture; five years later he converted it to stock, half of which he sold for $122 million. Soon after, he was asked to resign. In 1993 Progressive settled with California for $51 million and applied to earnings the remaining $100 million in refund reserves. (Company soul-searching related to Proposition 103 led to the launch of Progressive's now-famous "Immediate Response" vehicles, which provide 24-hour claims service at accident sites.)

In 1995 Progressive's practice of using consumer credit information to make underwriting decisions drew the attention of Arkansas and Vermont insurance regulators, who said the company might be discriminating against people who didn't have the credit cards Progressive used to evaluate creditworthiness. In 1996 insurance regulators in Alaska, Maryland, and Texas also began probing Progressive's credit information practices.

In 1997 Progressive bought nonstandard auto insurer Midland Financial Group. As competition grew in 1999, the company cut rates and said it would write no new policies in Canada. In 2000 -- with underwriting margins dropping industrywide -- the company continued advertising aggressively. Progressive stopped writing new homeowners insurance in 2002, instead concentrating on its core operations.

Improved market conditions and improvements to the company's claims system in 2003 helped Progressive's bottom line and the company's agency auto operations showed a profit in 45 out of 48 states.

Sources: DTIA research, various business information sources