Few businesses respond as well to fintech as insurance. Progressive (NYSE:PGR), based outside Cleveland, is a case in point. The company’s back-end automation and TV-driven acquisition efforts have profits skyrocketing. In the third quarter Progressive stock earned 42 cents per share on revenue of $2.48 billion, up about 21% from a year ago.
Investors are catching on, with Progressive stock up 47% in the last year, opening at $71.80 and a market cap of nearly $42 billion. But the price to earnings ratio is still a respectable 19, and Progressive has become a cash flow machine, delivering over $1.7 billion in operating cash flow each quarter.
Progressive Stock and Betting Against the House
It helps to think of insurance as a form of gambling. Customers bet that bad things will happen, and if they don’t the insurer takes the pot. Progressive is a property and casualty insurer, betting on whether your house is going to get robbed or your car is going to get totaled.
The loss rate on such policies gets simple to calculate at scale. The risk then becomes the cost of acquiring customers. Mass market TV ads and a web-based sales system cut those costs to the bone. The result is the Progressive profit machine.
Progressive didn’t invent the use of fintech and consumer marketing. Berkshire Hathaway’s (NYSE:BRK.A) GEICO unit has been doing similar things for years. Progressive’s innovation lies in its website estimating the costs of others’ policies, which hustles online customers quickly down its sales funnel.
Pushing the Envelope
Under CEO Tricia Griffith, a company lifer who started as a claims agent and took over in 2016, Progressive has continued to push the technology envelope with usage based insurance, sold as “Snapshot” in the consumer auto market.
The idea is to learn as much as possible about how much people drive and how effectively, then plug that data into rates. Electronic Logging Devices (ELDs) are already in use in truck fleets. Progressive uses an app that “gamifies” the process for the consumer market.
Polls indicate consumers resist sharing necessary location data, but in fact they do, both with the app or with ELD devices that plug-into their cars’ own computer systems. Progressive is now extending its rating program to truck fleets.
ELDs offering “discounts” collect accurate data on money coming in and can thus calculate just how much money should go out to turn a profit. Another way to increase cash flow, and data, is by quoting multiple lines of insurance simultaneously. Progressive recently won a patent on that.
Just How High Can Progressive Stock Go?
By focusing on consumer buyers with slick TV ads and a front-end that accurately calculates risks, Progressive has been able to quietly push through rate hikes that keep earnings and the stock price, rising.
Highly visible losses, when they’re calculable, also drive people to buy insurance even as rates rise. Progressive wants people to know about things like their $120 million in losses from Hurricane Michael. An insurer’s loss, after all, is a customer’s jackpot.
The biggest risk facing Progressive may be its investment risk. Stock and bond markets are their own form of gambling, and in a competitive world failure to win there can hit an insurer hard. Then there’s the risk of a recession that might cause consumers, to try saving money by not insuring their risks. But even in that case the company’s high degree of automation can keep losses manageable.
Progressive stock today is one of the best bets on the insurance board.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.
