1. Progressive Corp Take-Aways

2. Progressive’s “recipe” for Competitive Advantage n Identify a profitable and growing customer segment of the market: u “Mis-priced” non-standard clients n Key problem: Customer retention n Solution: Create superior service n Main point: Pricing and service are complements

3. Progressive’s Competitive Advantage in Non- Standard n Intelligent pricing u sophisticated historical database of non-standard customer attributes & accidents u better ability to rate customers (i.e., estimate risk) u more prices (14,000) u product managers u Express Quote 1800 n Better Service u Immediate Response F 24/7 operations u Empowered, trained adjusters u Measure performance of service organization F lag between claim filing and closure F fraction of open claims F tied to incentives u Fast Payment Find the “right” customer segment Increase Customers’ Willingness to Pay

4. The Price is Right n You are bidding to acquire a client list from a rival firm n The value of the client list to the rival is from $0 - $9 with equal probability n Because of your superior service, the client list is worth 50% more if you acquire it n The rival will accept any price for the list which is at or above its value n How much should you bid?

5. Equilibrium Analysis n The only sensible bid is not to bid at all n Why? u You “win” only in circumstances where the list is least valuable. u Suppose you bid $3. u Then you win when the list is worth: 0, 1, 2, or 3 (each equally likely) u Your profits from the acquisition are: F.25 x $9 < $3 F So you actually lose money on average

6. Mis-pricing is a major driver of cost in insurance Driver RiskExpected Claims High$2000 Medium$1000 Low$600 Expected Loss: $1200 / customer “Dumb” Player: Charge $1200 to everybody “Smart” Player: Charge $1150 to Medium and Low Customers, $2000 to High Customer Gets only high risk customer loses $800 Gets medium and low risk customers, makes $900

7. Questions about Progressive’s Competitive Advantage n How sustainable is Progressive’s competitive advantage in non-standard? u how long would it take other firms to develop the same (or better) pricing expertise? u Product advantage versus competitive advantage? n Can Progressive’s competitive advantage in non- standard be transferred to the standard segment? u do they have better pricing skills in standard? can they develop them faster than others? u can competitors in standard copy Progressive’s Immediate Response System? F do they have the incentives to do so?

8. Progressive met Allstate’s challenge and entered the standard segment Progressive S&P 500

9. Progressive performance highlights n Expansion in other non-standard segments: u 25% market share in 2002 for motorcycles (#1 player) u nearly 2M total policies for motorcycles, mobile homes, watercraft, snowmobiles, and homeowners n Shift to direct channel: u Approx 30-35% of new auto policies acquired via direct channel

10. Progressive strategy in 2004 n Maintain focus on 4% underwriting margin n Continue to build direct distribution strength (I.e., Internet) n Compete in standard n Strategic principles remain high-service and focus on risk segments in which Progressive has a pricing advantage