PROGRESSIVE CORPORATION:1984 – 1993

•PEST•INDUSTRY ANALYSIS•VALUE CHAIN•VALUE-ADDED OPERATIONS

Nature of Change

Impact of Change

Opportunities

ThreatsStrategic Response

PoliticalChange

• Compulsory Auto Insurance• Required assumption of non Standard risk under Assigned Risk Plans • Prop 103 in CA

• Insurance Co’s were regulated

• Increased Business from The Non Standard Segment

• Limit on the Profits

•Competition from Allstate

•1950 – Focus on Emerging “Non Standard Segment”

• Moved out of California

EconomicChange

• Rise in Consumer Standard of Living

•Automobile demand rose steadily

•Tapping Customers by giving them incentives

• Growing competitors into Non Standard Segment

• Reduced premiums for customers meeting special requirements

PEST ANALYSIS

PEST ANALYSIS, cont.

Nature of Change

Impact of

ChangeOpportunities

Threats

Strategic Response

SocialChange

• Increased Automobile Ownership• Rising demand for “Drive Through” approach for purchasing Auto Insurance

• More insurance policies to be written every year

• Get business through New Product Development & Product Reengineering

• Opened “Walk – in” Customer Service centers

Technological Change

•1970 onwards : Birth of Modern Computing & development in technology sector

• Data Could be stored and used as needed

• Use of Computers and systems to store, organize, send and receive information and data

•Built databases on Accidents to capture the lower risk portion of the Non Standard segment•Using Express Quote Service in California, Texas, Florida etc.

Nature of Change

Impact of Change

Opportunities

Threats Strategic Response

Technological change

•Use of Differential Pricing on the basis of age, driving record etc.(14000 premiums)

•Installation of Computer system and nation wide voice/data system for faster communication helped reduce Costs associated with false pricing and delayed claims processing

• Use of 1-800 number and Immediate Response System

PEST ANALYSIS, cont.

INDUSTRY ANALYSIS524: The Insurance Carriers and Related Activities

Industry

2002 NAICS Code

1987 SIC

CodeNAICS Industry Definition

524

Insurance Carriers and Related Activities – Industries in the Insurance Carriers and Related Activities subsector group establishments that are primarily engaged in one of the following: (1) underwriting (assuming the risk, assigning premiums, and so forth) annuities and insurance policies or (2) facilitating such underwriting by selling insurance policies, and by providing other insurance and employee-benefit related services.

5241

Insurance Carriers – This industry group comprises establishments primarily engaged in underwriting (assuming the risk, assigning premiums, and so forth) annuities and insurance policies and investing premiums to build up a portfolio of financial assets to be used against future claims. Direct insurance carriers are establishments that are primarily engaged in initially underwriting and assuming the risk of annuities and insurance policies. Reinsurance carriers are establishments that are primarily engaged in assuming all or part of the risk associated with an existing insurance policy (or set of policies) originally underwritten by another insurance carrier. Industries are defined in terms of the type of risk being insured against, such as death, loss of employment because of age or disability, and/or property damage. Contributions and premiums are set on the basis of actuarial calculations of probable payouts based on risk factors from experience tables and expected investment returns on reserves.

52412

Direct Insurance (except Life, Health, and Medical) Carriers – This industry comprises establishments primarily engaged in initially underwriting (i.e., assuming the risk and assigning premiums) various types of insurance policies (except life, disability income, accidental death and dismemberment, and health and medical insurance policies)

524126

6331,

6351

Direct Property and Casualty Insurance Carriers – This U.S. industry comprises establishments primarily engaged in initially underwriting (i.e., assuming the risk and assigning premiums) insurance policies that protect policyholders against losses that may occur as a result of property damage or liability.

http://www.census.gov/epcd/naics02/N2SIC52.HTM#N524

A.M. Best estimated the size of the Auto Insurance Market to be $21B in 1975 $109B in 1993

In 1993, approximately 300 companies compete in the industry

INDUSTRY ANALYSIS

Automobile Insurance Industry Size and Growth

1984 1985 1986 1987 1988 1989 1990 1991 1992 1993

PROGRESSIVE

Underwriting Profit

-2.4% 0.0% 4.3% 5.6% 2.9% -1.2% 1.0% -3.7% 3.5% 10.7%

Return on

Average Equity

18.0%

36.9% 26.9% 24.7% 25.9% 17.4% 21.5% 6.7% 34.7% 36.0%

INDUSTRY

Underwriting

Profit*

-17.4

%-17.0% -8.6% -4.7% -5.4% -10.4% -9.8% -9.0% -3.0% -2.0%

Return on

Equity**1.9% 4.0% 13.6% 15.8% 13.2% 9.9% 8.6% 9.2% 4.4% 9.8%

INDUSTRY ANALYSIS

Progressive Corp. and Industry Profitability, 1984-93

* Industry underwriting profitability refers to the entire automobile insurance market** Industry ROE refers to the entire Property-Casualty insurance industry

All data from the case

INDUSTRY ANALYSIS

Progressive Corp. vs. Industry Performance, 1984-93

Data from finance.yahoo.com from 1986 -1993 plotted against S&P500

•Progressive had an annual growth rate of 22% over 1984-1993•Industry had only 8.7%

•Progressive was able to squeeze a profit of 6.4% from their underwriting•Industry treated auto insurance as a loss leader, and typically lost 6.4%

•Progressive boasted returns of 28.7%•S&P performed at 14.9% over the same period

Data taken from the case

INDUSTRY ANALYSIS

HH Index, 1993

Data taken from the case

Insurer Net Premiums Written

Market Share w/o ARPs

Market Share w/ ARPs

State Farm $ 2,430,000 13.50% 19.16%

Allstate Indemnity $ 2,192,836 12.18% 17.29%

Progressive $ 1,819,000 10.11% 14.35%

Mid-Century $ 1,000,000 5.56% 7.89%

American Premier $ 935,525 5.20% 7.38%

Hartford $ 372,311 2.07% 2.94%

Colonial Insurance Company $ 335,635 1.86% 2.65%

Integon $ 246,393 1.37% 1.94%

Guaranty International $ 236,804 1.32% 1.87%

Dairyland (Sentry Insurance Corp.) $ 207,223 1.15% 1.63%

Assigned Risk Plans $ 5,320,000 29.56% N/A

Others (approx. 290) $ 2,904,000 16.13% 22.90%

total $ 17,999,727

total w/o ARPs $ 12,679,727

Assumptions:300 companies operatingSince ARPs are distributed amongst operating companies according to market share in the state, we assume nationwide distribution of ARPs based on nationwide market share

This leads to an HH Index of:

1016.167

VALUE CHAIN

Progressive Corporation

Progressive Consumers

100%

Underwriters Revenue 10.7%*

Underwriters OpEx 25.4%*

Other/After Sales OpEx 48.9%**

Legal 15%*

*Taken from the case**Assumption

INDUSTRY SUPPLY/VALUE CHAIN

Non-Standard Insurance Industry

Independent Agency Independent Agency ForcesForces

Non-Standard Non-Standard InsurersInsurers

Progressive AgentProgressive Agent ProgressiveProgressive

Two main chains in the non-standard insurance industry:

1. Insurance companies worked with an independent agent, who procured clients for them.

2. Progressive worked with their own agents who were an important part of matching clients to claims and pricing claims fairly.

VALUE CHAIN

Progressive Corporation

Margin

Inbound Logistics

Operations Outbound Logistics

Marketing& Sales

After-Sale Service

Data Gathering

Rating

Underwriting

Investing

Policy Issues

Billing and Collections

New Sales

Policy Renewal

Policy Re-pricing

Agent Mgmt.

Advertising

Claims response

Loss Control

LossSettlement

Financial Accounting / Legal Counsel / Regulatory Compliance

Personnel Training

Research and Development (Product/sales practices/Settlement procedures)

IT & Communications

VALUE-ADDED ACTIVITIES

Human Resources

After-Sales Services

Marketing & Sales

Info. & Comm. Tech.

Inbound Logistics

Service Non-Standard Sector

VALUE-ADDED ACTIVITIES

Human Resources

Extensive Training Seminars:Newer Employees attended classes for

6-weeks a year Invested $9MM in Managerial training1,000 Progressive employees graduated

from their adjuster training centers each year

Trained in the art of negotiations and grief counseling

H/R brought value add to the end consumerbecause Progressive employees receivedauthority to attend to consumer cases withouthaving to go through different people.

VALUE-ADDED ACTIVITIES

Value added by Human Resources

VALUE-ADDED ACTIVITIES

After-Sales Services

Executed an “Immediate Response” System

Set up a toll-free number accessible 24/7

Allowed adjusters to write checks at the scene of accident for coverage

Started tracking “loss report lag-time” Introduced the service of “Office on

Wheels”Offered roll back premiums if policy

holders agreed to pre-selected repair shops and medical providers

The after-sales services brought value toProgressive’s consumers in regards to gettinghigher and quicker settlements, response timeto a claim was within hours either at the consumers

home or scene of accident. Compared to a traditional

insurer, where the adjuster would not meet the policy

holder until days or weeks.

VALUE-ADDED ACTIVITIES

Value added by After-Sales Services

VALUE-ADDED ACTIVITIES

Marketing & Sales

Introduced Express Quote Service in CAExpanded to TX, FL, OH with a toll free

number 1-800-AUTOPROProgressive could offer policies directly

at a lower costOpened up “Walk-In” customer service

centers Progressive employees inspected cars

for safety and discussed reduced coverage and policies

VALUE-ADDED ACTIVITIES

Value added by Marketing & Sales

Progressive’s marketing & sales provided a “one-stop shop” for consumers to compare competitor pricing and receive safety inspection.

Progressive’s lower 5% commission structure on AutoPro (15% competitors) direclty benefited consumers with lower prices

VALUE-ADDED ACTIVITIES

Information & Communication Technology

Installed a $28MM computer system and nationwide voice/data system

Allowed faster communication between agents and headquarters & shorter processing times

VALUE-ADDED ACTIVITIES

Value added by Info. & Comm. Tech.

Having a solid information & communication infrastructure added value by allowing local adjusters to process 30% more claims in a much more efficient manner. The ability to process more claims leads to shorter turn around times for deciding on consumer claims.

VALUE-ADDED ACTIVITIES

Inbound Logistics and Operations

Progressive invested much more heavily than competitors in collecting and analyzing data

Progressive classified 11 different age categories

In any given community Progessive offered 14,000 different premiums based on drivng records

VALUE-ADDED ACTIVITIES

Value-Added by Inbound Logistics and Ops

Having access to consumer data and information allowed Progressive to add value by developing premiums based on: lifestyles, driving habits, age, gender, distant from work, and classified them in different high-risk groups. It allowed them to “personalize” insurance coverage based on specific characteristic traits.

VALUE-ADDED ACTIVITIES

Servicing Non-Standard Sector

Progressive offered insurance to “blue collar” workers, people with poor driving records, drivers older than 65, non-speaking English drivers, drivers of high-performance cars, and young first time drivers with no insurance history.