Market Mad House

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

Long Ideas

Progressive’s Wireless Device Could Be a Safety Threat

Progressive Corp’s (NYSE: PGR) Snapshot wireless tracking device could be a safety hazard. CBS Boston reported that at least one driver claimed the device shut down his car while he was driving it.

James Manning thinks the device, which plugs into a car’s diagnostic port, shut down his 2005 Chrysler PT Cruiser twice while driving it. The Great Barrington resident blames the device, which he had just installed, because he had a mechanic check the car who found nothing wrong with it.

Progressive denied the allegation that the device caused the malfunction, but it did pay Manning a $600 claim to cover repair costs, CBS Boston reported. The TV station’s reporters also discovered that Progressive has received 8,121 complaints about Snapshot from drivers and paid out $582,000 in claims related to the devices. The source of that information was said to be an unidentified Progressive claims specialist.

Snapshot and Telematics

Snapshot is Progressive’s attempt to use telematics or Wi-Fi technology to solve one of the car insurance industry’s most basic problems: lack of accurate data about driving patterns.


A telematics device is a computer that records the amount of driving, driving habits like speed, and the time a person drives. That information is transmitted back to the insurer via Wi-Fi in an attempt to give the company an accurate picture of a person’s driving habits. The idea is to identify safer, low-risk drivers in order to offer them a lower rate.

Such technology is supposed to be an alternative to some of the questionable methodology the auto-insurance industry currently uses to set rates. At present, insurers use metrics like credit scores, zip codes and even students’ grades, which have nothing to do with driving habits, to set rates. The idea here is that a person who gets good grades or pays her bills on time is more responsible and more likely to be a good driver.

Obviously, such data provides an unrealistic and unreliable picture of driving habits. Telematics is supposed to provide insurers with actual data about driving for risk assessment. Unfortunately, that technology is not working out as the industry hoped.

One reason why insurers have embraced telematics is to try to keep down the number of accident claims, which has been rising in recent years, possibly because of inaccurate data about driving habits. Allstate and Berkshire Hathaway’s (NYSE: BRK.A) GEICO are raising premiums in order to cover the increased claim costs, Insurance Journal reported.

Telematics Not Working

Another insurer, the privately held American Family Insurance, suspended its telematics program, MySafetyValet, after 7,900 of its customers returned the devices, CBS Boston reported. An American Family spokesman told the TV station that the company plans to resume using telematics with a different device from a different manufacturer.
Insurers might have to turn to other technological fixes, such as dash cams, to solve this problem. Some British motorists have resorted to installing dash cams similar to those used by police, The Guardian reported. The cameras are supposed to combat auto insurance fraud by providing accurate video of accidents.

Are Auto Insurers Still a Value Investment?

The whole telematics issue raises the interesting question of whether auto insurers are still a good investment. Value investors like Warren Buffett have long thought of auto insurers that way because of all the float their premiums generate, but is that still true in the face of all the competition in today’s insurance industry?

There is some evidence that profits in the industry are falling. Allstate (NYSE: ALL) reported its thinnest margin in three years and declining profit margins in February, Crain’s Chicago Business reported. The profits have been falling because the number of claims the nation’s second largest auto insurer is writing is rising. Allstate is currently raising premiums in some states to cover higher than anticipated expenses.

From a value investors’ standpoint, both Progressive and Allstate are mixed bags. Progressive reported some really impressive numbers on March 31, 2015, including a dividend yield of 2.52%, a profit margin of 6.04% and a return on equity of 18.3%. Yet it also reported quarterly diluted earnings per share figure of -7.41%.

Progressive has reported an impressive amount of revenue growth as well. Its revenue rose by $1.14 billion between March 2014 and March 2015, rising from $18.44 billion to $19.59 billion. That indicates the company’s aggressive marketing is paying off in the form of more premiums and more revenue.

Despite the premium increases, Allstate is still more stable than Progressive is. Allstate offered shareholders a dividend yield of 1.66%, a profit margin of 7.56% and a return on equity of 14.17%. Like Progressive, Allstate’s revenues are benefiting from aggressive marketing; Allstate’s revenue increased by $780 million between March 2014 and March 2015, rising from $34.73 billion to $35.15 billion.

It looks as if the auto insurance industry has mastered the art of marketing but not that of risk mitigation. Even though its promotions are working, some of its cost control measures, such as telematics devices, seem to be backfiring. One has to wonder how the imminent entry of such an aggressive marketer as Google Inc. (NASDAQ: GOOG) into the U.S. auto insurance market will affect the situation.

Despite the failure of telematics, auto insurers are still a value investment—a value investment that might be riskier than some of us thought.