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Progressive Closes In on Auto-Insurance Leaders

November 8, 2009


Progressive has long been an innovator in the auto-insurance market and it has consistently produced some of the highest returns in the insurance industry.

The company's shares now trade around $16 -- about 10 or 11 times estimated 2010 profits -- but Chris Neczypor, a Goldman Sachs analyst, thinks they can hit $21 in the next year.

The Wall Street consensus calls for Progressive to earn $1.45 a share in 2010, compared with an estimated $1.47 this year. However, Mr. Neczypor and other bulls see profits coming in at closer to $1.60 a share next year, as the company benefits from higher auto-insurance rates and a larger customer base.

Progressive now is the No. 4 U.S. auto insurer, with a 7% market share, behind State Farm at 18%, Allstate at 10% and Berkshire Hathaway's Geico unit at 8%. Progressive and Geico have taken market share in the past five years and are viewed by many investors as the industry's best-managed companies.

Progressive originally focused on drivers with a history of accidents and moving violations, a market shunned by many insurers. It now is a leader in selling coverage directly to consumers. The direct-sales market, now about 20% of industry sales, is growing at the expense of insurance sold through agents.

Progressive uses sophisticated mathematical models to price insurance and has best-in-class financial systems that let it report earnings monthly, making it the only company in the Standard & Poor's 500-stock index to do so.

Among Progressive's customer-friendly offerings is a "concierge" service that allows drivers who get into accidents to drop off their cars at one of more than 50 central locations in U.S. metropolitan areas and let Progressive handle the repairs. Potential customers also can tell Progressive how much they want to pay for auto insurance and get a policy tailored to their budget.

Marketing and branding are important for a direct seller of insurance. Progressive long had a weaker advertising campaign than rival Geico, whose TV commercials feature the popular gecko and cavemen. But Progressive finally has countered successfully with TV ads using a perky comedienne known as Flo, whose real name is Stephanie Courtney.

Progressive is a top-flight company that may continue to take market share in the fragmented auto-insurance market. Investors may do well to go along for the ride.

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