State Farm's Toss, Progressives' Gain?

By Susanne Sclafane

NU Online News Service, July 19, 3:43 p.m.EST?In spite of disclosing a $35.5 million litigationcharge for the second quarter of 2002, The Progressive Corporationin Mayfield Village, Ohio, announced the company's second-quarteroperating earnings grew 52 percent to 162.4 million yesterday.

Net income was $160.4 million, or 71 cents per share, for thequarter, compared to $103.7 million, or 46 cents per share lastyear. The litigation charge, representing the company's bestestimate of its exposure to two categories of class actions, had aper-share impact of 10 cents in second-quarter 2002.

Glenn Renwick, the company's chief executive officer, saidProgressive has gained business where State Farm has left themarketplace.

During a conference call yesterday, executives said one of theclass action categories related to the company's use of alternativecommission programs. A second category, they said, related to"charges for betterment in first-party physical damage claims."

Progressive's legal counsel, Chuck Jarrett, further explainedthe "betterment" issue. "It is essentially charging for improvingthe condition of a car. It is a deduction from the amount of moneythat a claimant would receive if they get a car back that's inbetter condition than before the accident," he said.

Mr. Renwick focused on the company's growth opportunities inpersonal and commercial auto businesses that he said are coming asa result of competitors' actions?notably those of State Farm.

The CEO said when his competitor in Bloomington, Ill., as wellas other national and regional companies raise rates, withdraw froma market or put a sales moritorium in force, a partial result isgrowth in Progressive's new business applications andpolicies-in-force, particularly from agents.

He went on to describe State Farm's actions in Louisiana, Ohio,Texas and Florida, suggesting that even a 5 percent rate increaseby competitors in a state like Ohio?"a stable, lower-pricedmarket"?sends business in the direction of Mayfield Village,Ohio-based Progressive.

Mr. Renwick told listeners that he was highlighting State Farm'schanges because other companies often use State Farm's actions asthe basis for setting their own rates or underwriting strategies,thereby potentially increasing the flow of business to Progressiveeven more.

With regional carriers increasing rates and withdrawing from theFlorida market, he also reported a "continued surge" in newnonstandard private passenger auto business in that state.

As he had on prior calls, Mr. Renwick cautioned about the needto manage growth to a level consistent with the company's abilityto handle claims?a strategy needed to avoid a repeat of pastproblems the company encountered when it grew too aggressively inthe 1990s.

In the past quarter, he said, the company hired 600 new claimspeople (to an overall force of 8,500) and the company was "brushingup against" self-imposed growth limits in a few states.

In total, for the quarter, Progressive reported a 29 percentjump in net written premiums to $2.4 billion, with personal linesbusiness rising 28 percent (to $2.1 billion) and commercial growthcoming in at about 39 percent (to $288 million).

For commercial auto business, Mr. Renwick said that the companyhad experienced over 50 percent year-to-date growth, suggestingthat if growth continued at the current pace, the company couldmove from being the fifth-largest writer of commercial auto to thethird-largest within a year.

Mr. Renwick spent more time than usual discussing Progressive'sposition in the commercial auto market during yesterday'sconference call--a decision he may have regretted when severalanalysts focused on the commercial auto as the one dark spot on thecompany's underwriting profit picture for the month of June.

Mr. Renwick said an unusual number of claims and reservingactions for some large loss development added 7 points to thecommercial lines combined ratio for June.

"Just to put this in perspective, this was one month at 101combined," reported Tom Forrester, Progressive's chief financialofficer.

For the second quarter, over all lines, Progressive's GAAPcombined ratio improved 3 points to 93.4, compared to 96.4 insecond-quarter 2001.

In spite of the litigation charges Progressive reported for thequarter, Mr. Renwick had some positive news to report on the legalfront. He noted that the company received a decision from FloridaSupreme Court that diminution of value is not covered byProgressive's auto policies in the state (contrary to unfavorabledecisions Progressive and other carriers faced in Georgia lastyear.) He also said that during the quarter an Ohio trial court haddenied class certification of an action over auto collision repairswith generic parts rather than original manufacturer equipment.