Accelerated growth: competition among companies vying for a piece of the private-passenger auto market is heating up.

After getting an A on a test at school, Bob Glasspiegel's 13-year-old son recently came home and joked, "I've got good news! I can save you 10% on auto insurance with Geico!"

It was an offhand comment, but it shows the name of an insurance company is on the lips of a teen still years away from having a driver's license. "Geico has done a good job building brand name recognition," said Glasspiegel, an equity analyst with Langen McAlenncy.

In the competitive world of private passenger auto, which represents about 40% of the total U.S. property/casualty market, Geico, a subsidiary of Berkshire Hathaway, and Progressive Insurance Group have been pulling themselves up the market share ladder in recent years.

>From 1998 to 2003, Progressive has grown from being the fifth-largest private-passenger auto carrier to the third. That jump represented a 112% growth in direct premiums written, growing to $10.4 billion in 2003 from $4.9 billion in 1998, according to A.M. Best statistics.

Geico (Berkshire Hathaway) also has shown tremendous growth, clawing its way from sixth largest to fifth largest in that time period. That single step represented a 93% growth in direct premiums written for Geico, or $7.9 billion in direct written premiums for 2003 vs. $4.07 billion in 1998.

Both companies have a distance to go before they can catch the No. 1 and No. 2 market leaders, State Farm Group and Allstate Insurance Group, respectively. State Farm looms large, with $29.5 billion in direct premiums for 2003.Allstate is No. 2, with $15.9 billion, according to preliminary A.M. Best Co. data. State Farm held a hefty 19% market share in private passenger auto for 2002, the latest market share information available, and was about twice as big as Allstate, which held a 10.7% market share.

Allstate used to be about twice as big as No. 3, Progressive, but the companies are coming closer together. Some industry watchers see a day when Progressive can catch up.

"I can envision Progressive challenging Allstate for the No. 2 position in the next three years," said Chris Winans, vice president of equity research at Lehman Brothers, which has an investment relationship with Allstate. "It is conceivable. If Allstate continues to shrink and Progressive continues to grow at the same rote, they would have almost equal market share in two years' time--but that's assuming a lot. To assume Progressive can grow at the same pace may be too aggressive. It's probably not correct to assume that Allstate does nothing to grow itself or stop the erosion of its market share."

Glasspiegel said Allstate's growth rates are converging with Progressive's. "Allstate is writing almost as much new dollar business as Progressive, but Progressive has a much smaller base," Glasspiegel said. "I don't know if they'll catch them for awhile."

Selling It

Although Progressive and Geico both are growing 111ster than many of their competitors in private passenger auto, they have done so with different operating models.

Progressive, which sells its products through both direct channels and independent agents, competes head to head with other companies that sell through independent agents, such as MetLife, Safeco and Travelers, Winans said.

Geico sells only directly to customers, through its Web site and its toll-free phone number. In 2002, Geico's Internet operations grew by 75%, according to the annual letter to shareholders written by Warren Buffett, chairman of Geico's parent company, Berkshire Hathaway.

Allstate uses mostly independent agents, and State Farm relies on a captive agent force to sell policies. "They don't compete with Progressive and Geico on the direct selling channel," Winans said.

Progressive's growth has not been directly coming out of Allstate's and State Farm's hides, he said.

"It's coming more from the bottom 30% of the market that is sold through independent agents. It's the companies that don't have near the sophistication that a Progressive or Safeco has," Winans said.

What's in a Brand?

Winans describes how Progressive and Geico have managed to increase their market share in private passenger auto in two simple words: "Incessant advertising."

"It seems like advertising for auto insurance policies that are cheaper than anyone else is almost like turning on a spigot," he said.

According to AdAge.com, Geico is the second-largest insurance advertising spender (behind State Farm) for 2002. That's after Geico dropped its spending by 14% to $142.8 million from $165.4 million in 2001. It's no surprise to find Progressive in the No. 3 spot, spending $136.3 million in 2002, up slightly from $135.5 million in 2001.

Ira Zuckerman, an equity analyst with Nutmeg Securities Ltd., said he wasn't sure if the money spent on advertising is well spent.

He quoted Philadelphia-based retailer John Wanamaker, who is famous for saying he knows half the money he spends on advertising is wasted, but he can never find out which half.

"Does advertising help sell the product? I don't know. Maybe. Whether in fact it helps to sell a commodity product like personal auto and personal homeowners, which everyone has to have, I don't know," Zuckerman said. He argued personal auto is a commodity product that's basically bought according to price.

Auto writers also have to be able to hang on to a policyholder longer than one year to make a profit, Winans said. The longer they hold onto a customer--as long as the underwriting and pricing are correct--the more profitable that customer can be for the company, he said.

Making an initial sale is one thing, but keeping a customer is another, agreed Lisa Samuelson, vice president of Parker LePla, a Seattle-based integrated branding firm.

"A commodity has no customer loyalty; it can only keep customers by lowering its price," Samuelson said. "Geico has done a wonderful job with their gecko campaign and getting people more aware of the company. But what are they doing to build customer loyalty? What are they offering beyond price? How are they going to keep moving and keep the customers they've attracted?"

She said companies should view their "brand equity" as a pyramid, with awareness of the company being the first step. "Advertising is a wonderful medium to get your message out there. Look at Aflac ... it went from 10% brand recognition in this country to a 90% recognition. That's the power of advertising," Samuelson said. However, companies should strive to move customers up the brand equity pyramid to the highest level, which is commitment. For example, Harley Davidson riders are so committed to the Harley brand that they'll pay thousands of dollars more than a sticker price for a motorcycle, she said.

She said the private-passenger auto market "is very competitive. There are a lot of clutter and messages out there. People who can do the most effective job of getting a brand promise that goes beyond price will do better in the long run."

But it's not enough to simply be able to sell auto insurance, Zuckerman said. "If you can sell the product, but can't make any money on it, it doesn't do you any good. But if you have the best product, but you can't sell it, that doesn't do you much good either."

Smarter Pricing

Progressive especially has mastered the art of segmentation--breaking the market down into segments based on risk, then charging an appropriate price for that risk, Zuckerman said. "It's a commodity product, bought basically on price. Being able to segment the market and charge the right price for the right risk is essential" he said.

Mary Beth McDade, a spokeswoman for Progressive, said technology is critically important to Progressive's success. "Technology is intertwined with the business here--it's not a stand-alone function--and it runs through every part of our business," McDade said in a written statement. "We study our business at the most intricate levels to understand how each segment performs and to be certain that we've priced them adequately. And once we've arrived at the answers, we go back and review them again to determine if performance changes at different points in time or changes over time. While we don't know how other companies do this, our suspicion is that they are not studying their business at the level of detail that we do and therein may lie a competitive advantage."

Other companies, including Allstate, also have begun to use segmentation and tools such as credit scoring to more accurately price their products, Zuckerman said.

"I wouldn't say that Progressive and Geico changed the marketplace, but the industry reacted to their success and accelerated rating tiers, direct marketing initiatives and Internet platforms," said Anthony Diodato, vice president of personal lines for A.M. Best Co. He said other competitors "have realized that they had to become more efficient, reduce costs and streamline their operations to be competitive in a very dynamic marketplace."

Know When to Walk Away

Setting the right price for the right risk may also mean staying out of tricky markets.

Both Geico and Progressive are different from the other top 10 private-passenger auto carriers in that they do not underwrite homeowners insurance.

"The conventional wisdom is you have to sell one to sell the other, and if you don't offer both, it's harder to sell either one stand-alone," Winans said. "I don't think that's holding true."

Geico does sell homeowners insurance, underwritten by Travelers, but doesn't underwrite or take risk on the product itself.

Progressive entered the homeowners market in March 2000, on a limited basis, but dropped the product when it proved to be unprofitable. Progressive offered homeowners insurance through 2000 and 2001 only in conjunction with automobile coverage and only through a select number of independent agents in Arizona, Michigan, Maryland, Texas and Illinois. Due to worse-than-expected underwriting results for the group and the industry ms a whole, however, Progressive decided to discontinue writing homeowners insurance in all states effective May 3, 2002.

"This action was also taken because the homeowners product did not meet management's goal of attracting more standard and preferred auto business by packaging a homeowners product with its auto product," said Andrew Colannino, assistant vice president of personal lines for A.M. Best Co.

Progressive and Geico may have been wise to stay on the sidelines instead of entering full throttle into the homeowners market, equity analysts said.

"For the last 20 years, it's been a huge positive for them, because homeowners has been a horrible business," Glasspiegel said. With homeowners carriers asking for, and receiving, rate increases in recent years, however, not writing the troubled line may not be the same advantage today as it would have been a few years ago, he said.

Winans agreed, saying it's questionable whether that advantage will remain. "The entire homeowners industry has cracked down on crummy underwriting so much so that homeowners have accepted the fact that there's not the same appetite that there used to be to get a discount to buy both [homeowners and auto] policies," Winans said.

Colannino said it can be both an advantage and disadvantage for the companies to stay out of homeowners insurance.

"Some companies' strategy is to get as many products in a household as possible, which improves retention. Progressive and Geico focus instead on personal auto policies with the emphasis on the ease of getting coverages, service and cost-efficient policies," Colannino said. "Their strategy has worked very well."

Another advantage of staying away from writing homeowners policies is that it lessens the risk to natural catastrophes, such as hurricanes, tornados and hail storms, Diodato said. "Homeowners business is more susceptible to those losses than auto products, which may potentially impact a company's financial strength. Multiple-line companies, especially those with a sizable property book of business, are more susceptible to weather-related losses than are monoline auto carriers."

Unlike the other top 10 auto writers, Progressive and Geico also tend to avoid difficult markets, such as New Jersey and Massachusetts. Progressive is looking into the New Jersey market, now that regulatory reforms have been established.

"If they could figure out how to be profitable in those states, it would increase their market share," Winans said.

And both companies plan to continue to grow.

"Our goal is to be consumers' No. I choice for auto insurance," said McDade of Progressive.

Peter Lewis, Progressive's chairman and former chief executive officer, focused on growth to propel the company from the 43rd-largest auto writer in 1980 to the No. 5 writer in 1999.At that time, Lewis said his goal was to rise to the No. 1 spot by 2010.

Current Progressive CEO Glenn Renwick, who was once chief information officer, improved how Progressive used technology to speed up billing and accounting, with the goal of improving retention by improving claims service. For instance, in 1999, Progressive said more than 33% of its claims were reported to its immediate response team within two hours, and more than 70% of vehicles were inspected within 24 hours of the first report.

"I have often described Progressive as a technology company in the auto insurance business," Renwick said in a letter to shareholders in 2004.

Progressive also has a goal of writing at an underwriting profit of at least 4%, according to the letter.

"Our growth objective is to grow as fast as possible, constrained only by our profit objective and our ability to provide high-quality service,' McDade said.

Another Story

Government Employees Insurance Co., or Geico, was one of the first companies that billionaire investor Warren Buffett ever bought stock in. Impressed with the company's low-cost way of selling insurance, he bought stock in Geico as a young 20-year-old fresh out of school. After selling his personal holdings a few years later, Buffett eventually went on to head Berkshire Hathaway, where he led the company into buying first a 30% ownership in Geico, which grew to a 50% ownership before Berkshire moved to buy the entire company in 1995, according to Buffett's 1995 letter to Berkshire shareholders.

In Buffett's 1997 letter to shareholders, he explained the company's goal is to turn a modest 4% underwriting profit on Geico's policies, and use the "float" to invest. In 1997, Geico had an underwriting profit of 8.1%, and Buffett wrote, "that percentage was higher than we wish it to be: Our goal is to pass on most of the benefits of our low-cost operations to our customers ... with that in mind, we reduced our average rates a bit during 1997 and may well cut them again this year."

At that point, Buffett said he was expecting to see the company's underwriting profitability fall in 1998, "but the company's growth could accelerate. We're planning to step on the gas." He said Geico's marketing expenses would top $100 million, 50% more than the previous year, but he hoped to see the company's then-3% market share mushroom--and it has.

>From 1992 to 2003, Geico's premium volume has grown to $8.1 billion from $2.2 billion, and its market share has grown to 5% from 2.1%, according to Buffett's 2003 shareholder letter.

King of the Mountain

Competition in the private-passenger auto market is expected to get more intense in the coming years. "You see it in terms of pricing, advertising and commission rates," Glasspiegel said.

The cost of auto insurance is expected to rise by 3.5% in 2004, the smallest increase in four years, the Insurance Information Institute said. The projected increase represents a substantial slowdown from 2003 when auto insurance costs rose by 7.8%. Better drivers, safer cars and crackdowns on fraud and abuse are behind the trend, though rising costs for medical care, vehicle repairs and skyrocketing jury awards remain a problem, according to the institute's analysis.

Rising automobile theft rates and fraud will keep costs higher for motorists in some states, such as Florida, Massachusetts and New York, the institute said.

State Farm, by far the largest player, has cut auto rates in more than 10 states so far this year, reflecting improved underwriting and claims results in 2003. "In some states, they have reduced rates but those adjustments have focused on their preferred customers. Thus far these reductions have been geared toward retaining high quality insures rather than obtaining market share," Diodato said.

Other companies are chasing market share. For instance, Safeco, currently the No. 14 writer of private passenger auto (by direct premiums written for 2002), has said it wants to muscle up to the No. 5 position. "Safeco and the other bigger players will continue to increase market share at the expense of regionals, smaller mutuals ... who can't be competitive in terms of rates due to expenses," Zuckerman said. He added the smaller companies don't have the capital to invest in the technology needed to do the same market segmentation that allows the larger companies to do a better job at pricing.

Yet State Farm, the largest personal lines writer in the United States, doesn't appear to have adopted segmentation yet, Zuckerman said. State Farm "has lost some market share in the last couple of years, but finally got the underwriting back last year. Two years of down auto claim frequency has resulted in excess profit margins, and they'll try to give some of that up to write more business," Zuckerman said.

Most analysts said they don't see any company pushing State Farm out of the top private-passenger auto spot in the near future.

"State Farm is a long way away from losing its No. 1 status," Winans said.

Show Me the Ad Money

Among insurers, Geico and Progressive were the second and third largest buyers of advertising in consumer media, including national and local newspapers, consumer and Sunday magazines, network and cable television, network and spot radio and outdoor advertising.

Berkshire Hathaway

Main Private

Passenger Auto Company: Government Employees Insurance Co. (Geico)

Headquarters: Washington, D.C.

Chief Executive Officer: Olza M. Nicely

2003 Private Passenger Auto Direct Premiums Written: $7.9 billion

Source: A.M. Best Co., Preliminary State/Line Reports 2003

Progressive Insurance Group

Headquarters: Mayfield Village, Ohio

Chief Executive Officer: Glenn M. Renwick

2003 Private Passenger Auto Direct Premiums Written: $10.4 billion

Source: A.M. Best Co., Preliminary State/Line Reports 2003

Show Me the Ad Money

Among insurers, Geico and Progressive were the second and third
largest buyers of advertising in consumer media, including national and
local newspapers, consumer and Sunday magazines, network and cable
television, network and spot radio and outdoor advertising.

                                                          Revenue
                                                       ($ Millions)

        Rank    Brand                                2002        2001

           1    State Farm Mutual Auto              $49,700     $46,100
           2    Geico (Berkshire Hathaway)            6,670       6,060
           3    Progressive Corp.                     9,294       7,490
           4    Allstate Corp.                       29,583      28,805
           5    Blue Cross & Blue Shield            143,200     125,946
           6    American International Group         67,482      55,450
           7    Aflac                                10,257       9,595
           8    Pacific Life Insurance Co.               NA          NA
           9    Zurich Financial Services Group      40,448      38,485
          10    Liberty Mutual                       14,544      11,035

Total Top 10                                        371,178     328,966

                      In 11
                  Consumer Media
                   ($ Millions)

        Rank      2002        2001

           1     $182.4      $203.2
           2      142.8       165.4
           3      136.3       135.5
           4      104.0        44.3
           5       79.8        71.0
           6       43.9        52.7
           7       41.7        39.4
           8       30.6        19.2
           9       29.1        28.9
          10       27.3        21.7

Total Top 10      818.0       781.5

Notes: Ad spending from TNS Media Intelligence/CMR; revenue is from
public documents.

Source: AdAge.com

Growing Faster

Progressive and Berkshire Hathaway (Geico) grew three
times as fast as State Farm from 1998 to 2003, according
to direct premiums written.

              State Farm     27% Growth
                Allstate      9% Growth
             Progressive    112% Growth
                  Zurich      5% Growth
      Berkshire Hathaway     93% Growth
              Nationwide     43% Growth
                    USAA     60% Growth
          Liberty Mutual     73% Growth
* American International
                   Group    117% Growth
         American Family     54% Growth

* 2003 information includes acquisition of four companies from GE
Financial.

Note: Table made from bar graph.

Source: Preliminary A.M. Best Co. State/Line Reports 2003

How Much Is Your Brand Worth?

Advertising can make customers aware of a company's brand name, but companies have to go beyond that to earn their loyalty. The more loyal customers are, the more they will base their purchasing decision on the value of the product, rather than the price.

[ILLUSTRATION OMITTED]

Moving On Up

Progressive Insurance Group and Berkshire Hathaway Insurance Group,
which writes private-passenger auto insurance through Geico, have
moved up from fifth and sixth largest private-passenger auto insurers
in 1998 to the third and fifth largest companies in 2002.

1998

                                             Market Share
Rank    Company                                   (DPW) %

   1    State Farm Group                             19.71
   2    Allstate Insurance Group                     12.37
   3    Zurich/Farmers Group                          6.37
   4    Nationwide Group                              4.31
   5    Progressive Insurance Group                   4.16
   6    Berkshire Hathaway                            3.45
   7    USAA Group                                    3.00
   8    Liberty Mutual Insurance Cos.                 2.26
   9    Travelers Property/Casualty Group             1.96
  10    American Family Insurance Group               1.91

2002

   1    State Farm Group                             19.31
   2    Allstate Insurance Group                     10.65
   3    Progressive Insurance Group                   5.77
   4    Zurich/Farmers Group                          5.48
   5    Berkshire Hathaway                            4.72
   6    Nationwide Group                              4.60
   7    USAA Group                                    3.57
   8    Liberty Mutual Insurance Cos.                 2.31
   9    American Family Insurance Group               2.16
  10    American International Group                  2.04

Source: A.M. Best State/Line Report