Description

Progressive was last written-up by lys615 in 2012 Progressive is up ~5x in price return and has returned over $12 in dividends. To steal a page out of Chuck Akre’s book, maybe the next Progressive is Progressive.

While Progressive is a much larger company today than it was during this write-up, 26.2 million policies in force (PIF) (May 31, 2021), up 11% year-over-year, and about 3x the 8.5 million PIFs at year-end 2011, Arguably the outlook is far more positive today than one could have perceived back at year-end 2011. Also the PIF CAGR is faster!

Return:

Over the coming five years I expect Progressive to double their new written premiums while returning around half of the capital they generate back to shareholders yielding an IRR of 18%.

Valuation:

Many investors love to tie themselves to Book value for insurance companies. However, given Progressive’s 23% ROE over the last decade and the fact that with only 5.6% market share of the $698bn dollar and growing P&C market in the US Progressive has a multi-decade growth opportunity. If I use a simple DCF and a 10% discount rate assuming the company reinvests 45% of their capital at a 23% ROE the DCF breaks because the implied long-term growth rate is 10.35%.

Using a conservative 20% ROE and a range of 30-40% reinvestment rate we generate a deserved multiple of ~18 to 30x earnings. Currently PGR trades at ~19x forward earnings, the low end of this range.

Before you laugh at me from the peanut gallery given this stock has traded in the mid teens for much of its history, I point you to the 20.5% IRR since inception and the 15% growth in premiums written over the past five years at a 27% ROE to argue that this company has been meaningfully undervalued for far too long.

That said I do not expect the company to massively revalue higher, I do believe this analysis helps support why I do not model multiple contraction in generating my return estimate.

General Commentary:

Many of us think of auto insurance when we think of Progressive. And we would be right as Progressive held the title of #3 market share of US Personal Auto insurance. However, the company is not stopping there. The firms mission statement is as follows:

“Progressive seeks to become consumers’ and agents’ No. 1 choice and destination for auto, home, and other insurance.”

In April 2015 after the company completed their acquisition one of an insurance partner, ASX, the company directly entered the homeowners and renter’s insurance markets. This has enabled them to meaningfully increase their addressable market given many homeowners bundle their insurance products and more direct alignment when paired with Progressives new Platinum Agency strategy led to a massive acceleration in premium growth without sacrificing profitability. Evidence of this strengths is that in 1Q21 the company put up its first double digit quarter of policies in force (PIF) growth in Personal Auto since 2004 when they had meaningfully less market share. 

            Progressive has a low single digit of the category they call the Robinson’s but they are growing in the high-teens (or better) and are likely to continue for many years as their brand with this customer segment only strengthens. In 4Q19 The company noted they had only ~2% market share of the independent agent robinson market which is a $59bn market and they were makign headway into the captive Robinson market as well which is giving increased access to a $97bn pool of premiums. Further evidence the company has a very long runway for growth especially given the numerous share donors they compete with. While Progressive isn’t yet a top 4 player, with (only ~5.6% mkt share in 2020) in their $700bn market opportunity, therein lies the opportunity, three (State Farm, Allstate, Liberty Mutual) of the top 4 have been stagnating/donating share the last 5 years.

Key Financials (Source 2020 Annual Report)

Risks:

Self-Driving Vehicles: Lame response but I do not believe this fall within the investable time horizon of the next 5-10 years. Vehicles stay on the road for a very long time, average age of a car in the US is ~12-13 years old and many are older.

Soft Insurance Market: The US auto insurance market was highly profitable in 2019 and again in 2020, this sets up for weak pricing in the face of rising frequency and severity in 2021. Morgan Stanley downgraded the stock on this worry putting out a $5 per share EPS number for 2021. We are almost halfway through 2021 and we believe pricing is likely to rebound and may rebound faster than expected if the world reopens faster than perceived. Overall there is cyclicality in the insurance market but overt time Progressive has earned superior ROEs as a function of better cost control and market segmentation, if anything a period of lower profits for the industry will enable them to invest while peers pull back and accelerate market share gains. PGR is a through the cycle winner.  

Fails to make Homeowners and new lines as profitable as core: This is a potential risk however looking at other companies’ success such as ALL which do not have the same culture of cost control, and segmentation I am confident Progressive’s team will be able to figure it out.

Catalyst

Continued outperformance of street expectations

Auto market starts to harden 2H21, 1H22