Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

The Junk Pile

Is the Progressive Corporation Making Money?

Standalone auto insurers like the Progressive Corporation (NYSE: PGR) are in a tough spot these days. Vehicle insurance is still a highly lucrative business, but changing technology is threatening to change business beyond recognition.

Like Berkshire Hathaway’s (NYSE: BRK.B) GEICO, Progressive has built its business on two certainties. Those certainties are A) almost Americans will need to own an automobile and insure it, and B) old media advertising like television sells insurance.

Those certainties are no longer certain because of rapidly changing technology. App-based rideshare platforms like Uber, Lyft, and Didi, and next-generation car-rental solutions like Zipcar, Reachnow Ride, and Maven are offering the benefits of the car without car ownership. Self-driving auto technology may hasten that development; former GM Vice Chairman Bob Lutz thinks the automobile as we know it will vanish within 20 years.

Traditional media is vanishing even faster because of the rise of social media, digital video, and online advertising. What good are all those goofy advertisements with Flo; when two-thirds of the population is playing video games and watching movies on Netflix?

Progressive is Growing

Progressive has weathered those storms, so far, but cynics will note that the storms have not really begun. Ridesharing is very much a niche market that is only used by hipsters in Brooklyn, short-term car rentals are only found in a few cities, and autonomous cars are probably a few years from widespread use.

Although, the digital media storm has certainly ratings for traditional broadcast and cable television are plummeting. Viewership for the all-important NFL fell by 9.7% nearly 10% between the 2016 and 2017 seasons, Business Insider reported. Average people are abandoning television as fast as Republicans dropped Jeb Bush.

Despite that Progressive’s revenues are still growing, increasing by an impressive 14.448% during 3rd Quarter 2017. Progressive reported revenues of $6.605 billion in June 2017 and $6.791 billion in September 2017. Revenues were $5.935 billion in September 2016.

That would seem to indicate that Progressive has cracked the modern insurance code. Probably by offering very low rates or simply being before the public. The $6 billion question is how much longer can that last?

Equally important is how much longer can Progressive make money? Does being in a declining industry make Progressive a value investment?

Is Progressive Making Money?

Progressive cannot be considered a value investment right now because it is not making that much money. It only reported $224 million in net income on 30 September 2017, which was down from $367.66 million in June.

The company did generate a gross profit of $1.7413 billion but it reported $1.452 billion in operating expenses for 3rd Quarter 2017. That certainly calls all the money spent on Flo and the rest of the advertising into question.

Although Progressive does have a very good free cash flow it reported $1.134 billion in free cash on September 30, 2017. It also generated $1.169 billion in cash from operations. That means the company’s premiums are generating a lot of float but that float might not be sustainable.

Progressive needs to Learn from Warren Buffett

A very smart move at Progressive right now would be to learn from Warren Buffet and reinvest that float in something else. Berkshire Hathaway (NYSE: BRK.A) has generated vast amounts of cash by reinvesting insurance premium float in a wide variety of businesses.

An interesting opportunity would be to reinvest in auto leasing or rideshare – perhaps even buy into some next solutions like Roadie or Deliv. Another would be to investigate car leasing and other kinds of insurance.

Progressive is trying to move into business insurance. A big opportunity for the company would be gig-economy insurance particularly ridesharing drivers. A great opportunity would be to offer a product that combines an auto lease and insurance. The best way to offer it would be to such policies in conjunction with an auto-sharing service such as GM’s Maven.

Other opportunities include financial products and short-term insurance like that offered by Fair. A major revenue stream for auto insurers in the future will be offering short-term coverage for rental and ridesharing vehicles. Another will be liability policies that cover the person but not the car.

In the future, we are likely to see large numbers of people that drive on a regular basis but do not own a vehicle. Those people will still need insurance, which means Progressive will have a business. Building or buying a next generation insurance platform that offers a wide variety of short-term policies would be a smart move for Progressive.

Is Progressive a Good Investment?

Progressive is not a good investment because it was overpriced at $55.98 a share on 12 January 2018.

Progressive’s dividend is also very low, it paid 68.1¢ a share on 25 January 2017, which looked good until you realize the company only pays out once a year. If the company paid quarterly the dividend would have 17.25¢ a share, which stinks.

Progressive is trying to deceive shareholders by paying a dividend once a year. Such a move should tell investors to stay away from this stock. A management willing to play those kinds of games with the dividend is capable of other deceptions.

My advice for investors would be to stay away from Progressive until it gets some new management. This company needs a change of direction and some better ethics at the top. There are better buys in insurance out there, such as Berkshire Hathaway (NYSE: BRK.B) and Allstate (NYSE: ALL).