Progressive is one of the largest auto insurers in the United States with 11.1% market share as of 2018. We believe Progressive benefits from a sustainable cost advantage versus most other players in the auto insurance industry. Some of its largest competitors are mutual companies (i.e. their policyholders own the business), so they tend to be managed in a less return-focused way than the industry players not owned by more economic-return-focused public investors. Additionally, these companies, as well as most other industry competitors, have wed themselves to a captive agent business model that limits their ability to pivot to lower cost, alternative forms of distribution for fear of disenfranchising their agents. In contrast, Progressive has successfully built out a powerful direct business that lowers its cost of customer acquisition by cutting out the agent’s commission and that now accounts for 50% of its insurance premiums written each year. Additionally, Progressive has built a culture of analytics innovation that has enabled them to consistently achieve better underwriting results than its competitors. While we don’t count on this advantage continuing indefinitely, we do believe it’s likely to continue for some time. As a result of these advantages, we believe Progressive will remain a low cost leader and continue taking market share and earning industry-leading returns for decades to come.
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