Madison Funds, an investment management firm, published its “Madison Investors Fund” second-quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly portfolio return of 6.82% was recorded by the fund’s Class Y shares for the second quarter of 2021, compared to the S&P 500 Index gains of 8.55% for the same period. You can view the fund’s top 5 holdings to have an idea about their top bets for 2021.
In the Q2 2021 investor letter of Madison Funds, the fund mentioned The Progressive Corporation (NYSE: PGR) and discussed its stance on the firm. The Progressive Corporation is a Mayfield, Ohio-based insurance company with a $56.3 billion market capitalization. PGR delivered a -2.72% return since the beginning of the year, while its 12-month returns are up by 5.89%. The stock closed at $95.57 per share on August 18, 2021.
Here is what Madison Funds has to say about The Progressive Corporation in its Q2 2021 investor letter:
“Progressive Corporation is the third largest automotive insurer in the country, and one of the fastest growing. The company has long been known as the savviest underwriter in the industry, marrying excellent risk selection with best-in-class marketing analytics.
Many auto insurers have good margins or good growth, but virtually none have both. Progressive has both. The reason that most competitors don’t have both is simple – automotive insurance is a relatively commoditized product, so if a company is pricing its product to generate good revenue growth, it’s probably sacrificing margins.
The reason Progressive is an exception is twofold. It sells many of its policies directly to customers, without agents. This means it doesn’t have to pay commissions, which means it has lower costs than competitors that use agents. Thus, it can slightly underprice competitors, and still garner higher margins than those competitors. The second reason is that it has built up the best expertise and database in terms of predicting the propensity of a driver to have an accident. Thus, it can offer lower prices to safer drivers more accurately than the competition. With the years of proprietary data and experience it has accumulated, it will be very difficult for new companies to outdo it on proper risk pricing. Because of this combination of lower costs and better analytics, Progressive has been outpacing industry growth by several points for the past few years, even while maintaining much higher margins than the industry. We expect this outperformance to continue for many years.
Last year was an unusual year for Progressive. With a dramatic drop in the number of miles driven by customers because of Covid related shutdowns, there were many fewer accidents than typical. While Progressive gave back a material amount of this benefit to its policyholders, it still reported abnormally high profits. With miles driven recovering quickly so far in 2021 as the economy has re-opened, the frequency of accidents has almost returned to normal. In addition, the severity of the accidents has actually picked up from historical levels; we’re not sure exactly what is causing this, although there’s strong evidence that drivers are driving faster and with more abandon than they did pre-Covid.
Thus, insurers, including Progressive, are seeing losses from claims pick up, crimping margins, at least compared to the past year. We believe that the loss trends will either normalize as drivers resume previous driving patterns, or the industry will raise prices to account for the higher losses. Thus, we expect Progressive’s margins to remain at adequate, if not strong, levels. Its stock trades at a meaningful discount to the overall stock market, despite its stellar track record and top-notch management.”
Based on our calculations, The Progressive Corporation (NYSE: PGR) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. PGR was in 44 hedge fund portfolios at the end of the first half of 2021, compared to 45 funds in the previous quarter. The Progressive Corporation (NYSE: PGR) delivered a -5.78% return in the past 3 months.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
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Disclosure: None. This article is originally published at Insider Monkey.
