Today we're going to talk about one of the largest property insurance companies in the United States.$forward Insurance (PGR.US) $。

In the slow-growing and highly competitive auto insurance industry, forward insurance is a rare growth stock, the growth rate of premium and profit is the fastest in the industry, and the company's market share has gradually increased.It has become the third largest auto insurance company in the United States, after State Farm and Berkshire Hathaway's GEICO.

The US auto insurance industry remains on the brink of profit and loss all the year round, but Progressive Insurance has the leading underwriting profitability, resulting in a world-leading and very stable high ROE level, with an average ROE of 21.6% over the past decade. Correspondingly, the company's share price is also rising.It has risen continuously since 2009 and has risen more than 11 times so far.

What kind of company is this? Why does it stand out in the auto insurance industry?

Three key transformations

The predecessor of forward Insurance was founded in 1937. For the first 20 years, it mainly focused on car insurance for blue-collar workers and property insurance for car rental companies, and developed rapidly with the help of World War II dividends. Since then, the company has undergone three key transformations:

1. In 1956, we entered the non-standard market and locked the target customers as high-risk groups. In this low competitive market, we cultivated our own risk pricing ability and built an independent agent network.

In the United States, according to the risk characteristics of the insured, the personal car insurance market is divided into standard market and non-standard market, in which the standard market is composed of low-and medium-risk users with relatively good user behavior characteristics (such as low driving violation rate and low risk rate). The non-standard market is made up of high-risk users, including drivers with high violation rates, drivers over the age of 65, drivers who do not speak English, drivers of high-performance cars, and so on.

Because the risk of the insured is relatively low in the standard market, many insurance companies are more inclined to underwrite the policy business in this market. In the non-standard market, due to the high risk of the insured and the difficulty of pricing, many insurance companies will not underwrite the insurance policies in this market, and no one is interested in the policy business in this market for a long time.

Forward Insurance has set its sights on this "no man's land". Through the long-term operation and in-depth study of high-risk business, forward Insurance has established a set of industry-leading subdivision pricing strategy to identify relatively low-risk people in high-risk groups. as a result, a higher underwriting profit is achieved.

Its independent agent network also expanded gradually with the development of high-risk business during this period. In 1988, Progressive Insurance became the largest property insurance company in the United States through independent agent channels.

2. With a large number of car insurance companies entering the non-standard market, the competition in the non-standard market is becoming more and more fierce. after a long period of pilot and research, the company entered the standard market in 1993.

Unlike non-standard markets, which focus more on pricing power, standard markets place more emphasis on companies' control of expense rates, and one of the most effective ways to reduce expense rates is through direct selling, as insurance companies such as GEICO have demonstrated. So after entering the standard market, Qianjin Insurance has successively opened up direct selling channels: opening telephone direct selling, launching the first company website in the online insurance industry, and starting online direct selling. In 2018, direct sales of personal car insurance surpassed agents to become the largest channel of premium income for forward insurance.

3. In 2009, we began to use a diversified product portfolio to attract and retain high-quality customers.

After years of fierce competition, the market pattern of the American property insurance market has become relatively stable. In such a market, how to retain customers becomes more important.

The customer retention of State Farm, the largest property insurance company in the United States, is very high, one of the very important reasons is that State Farm has almost all property insurance products, users can "buy all in one stop", while users who buy multiple insurance products in the same insurance company tend to have lower price sensitivity, higher loyalty and lower risk, and are very high-quality customer groups.

So forward Insurance began to focus on the development of residential property insurance, improve their own product chain, and build themselves into an "insurance terminal".

Compared with the two auto insurance leaders, State Farm has high brand awareness and customer loyalty, and has always maintained the first market share, butIn terms of pricing power, Progressive Insurance is obviously better.

As can be seen from the chart below, during the period from 2014 to 2019, the comprehensive expense rate of State Farm in 2018 is less than 100%, while in other years, the comprehensive expense rate is more than 100%, which means that in these four years, the underwriting profit of State Farm is in a state of loss, and the company relies more on investment income to make profit. And forward Insurance, because of its excellent pricing power, the company's comprehensive expense rate has been maintained between 93% and 97% during the period from 2014 to 2019, that is, the underwriting profit has been profitable.

This can also show that Progressive Insurance is not through a simple strategy of low premium to expand market share and retain customers.

Industry-leading premium growth rate and underwriting profit margin

Divided by business, the current premium income of Qianjin Insurance mainly comes fromPersonal car insurance, commercial car insurance and residential property insurance. Among them, personal car insurance is the most important business, commercial car insurance business has the fastest growth and the strongest profitability, residential property insurance business has also developed rapidly in recent years.

In the first quarter of this year, these three types of business income accounted for 77.2%, 18% and 4.7% of the total premium income, respectively.

For many years,Advance Insurance, whether it is premium growth or underwriting profit margin, has been in the forefront of the industry.The reason is that the company has a strong risk pricing power, which is inseparable from the company.Continuous technology investment, and pay attention to pricing model and risk prediction。

When it first got involved in the non-standard car insurance business, the company invested more capital and manpower than its competitors to collect and analyze accident data. With the help of its huge database, forward Insurance can make more accurate pricing according to the insured's lifestyle, driving habits, personal characteristics and so on.Compared with the competitors, the risk characteristics of the insured of forward Insurance are grouped in more detail, and the price range of insurance products is wider.

For example, in the 1950s, most insurance companies would not consider age as a risk factor, but Progressive Insurance would price according to the age of the insured, gradually expanding from two age groups to 11 age groups.

From the perspective of the industryThe profit of American property insurance industry is mainly investment income, but the profit of forward insurance is mainly underwriting profit.

It is worth pointing out,The success of forward insurance is also closely related to the company's "soul" and the original CEO Peter Lewis.

In 1956, the 23-year-old Peter Lewis joined the company, in 1965 pledged equity acquisition of Progressive Casualty, before the establishment of Insurance into the company and served as CEO. Under his leadership, forward Insurance has created many firsts in the industry, and even after leaving office, his strategic thinking has been handed down to this day.

Peter Lewis pays special attention to the power of technology, especially the acquisition and use of data. Almost every product innovation of forward Insurance has experienced a long and large-scale data collection stage. In additionPeter regards underwriting profit as the most important indicator of a company's profitability. The company's operation should first guarantee an underwriting profit margin of 4% and will not sacrifice underwriting profit for the scale of the premium.The emphasis on underwriting profit can still be seen in the latest financial reports.

In addition, forward Insurance is also ahead of its peers to vigorously develop direct sales.Direct selling can effectively reduce the expense rate of car insurance, thus reducing the premium rate. Low price is the biggest barrier in the competition in the car insurance market, especially in the standard car insurance market.In 1994, Qianjin Insurance took the lead in launching telephone inquiry, price comparison and purchase services in the auto insurance industry, in which price comparison service has always been the feature of Qianjin Insurance.

That's it, rely onLong-term accumulated technical ability, accurate positioning of customer base, advantage of direct sales channel and excellent pricing abilityForward Insurance continues to increase its market share and retain customers in the highly competitive auto insurance industry.

"better than Berkshire's GEICO."

Berkshire's insurance business performed poorly last year. Ajit Jain, Berkshire's director and "potential successor" to Buffett, said frankly at this year's shareholders' meeting.Rival forward Insurance Company performed better than Berkshire's GEICO.. The main reason is that Qianjin Insurance has installed communication equipment on customers' cars, allowing insurance companies to monitor customers' driving conditions and enable customers to enjoy car insurance services with discounted premiums. "Progressive Insurance has been developing communication equipment for 10 years, and we have only recently started. "

Investment management company LRT Capital Management mentioned Progressive Insurance in its investor letter in the first quarter of 2022.

"the direct selling model enables the company to have an industry-leading comprehensive ratio.The company has plenty of room for growth and grabs market share from peers such as State Farm, Farmers and Nationwide. The cost advantage brought by the direct selling model is unstoppable, and the company's scale advantage in advertising and other customer acquisition costs has further consolidated its strong competitive position. We thinkThe future industry pattern will be dominated by duopoly forward Insurance and GEICO.

In addition, forward Insurance's portfolio is very conservative, with more than $44 billion in fixed-income securities. Among them, securities with a maturity of less than five years account for 75% of the portfolio, which meansThe rise in interest rates will benefit the companyBecause the portfolio will be repriced into higher-yielding securities relatively quickly "