The stock market is one of the greatest wealth creators out there. In the long run, the S&P500 The index has returned approximately 10% annually over the past century, rewarding patient investors who take a buy-and-hold approach to investing.
Some companies outperform the S&P 500 over long periods of time. These companies have strong business models and capital and risk management, allowing them to generate great cash flows no matter what the economy is doing.
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This is an excellent company that continues to show strength Progressive(NYSE: PGR). The insurance company has achieved phenomenal returns of 18.3% per year over the past thirty years. In other words, patient investors who invested $10,000 in the insurer thirty years ago would be sitting on more than $1.5 million today. This is why Progressive can continue to perform.
PGR Total Return Level Chart
Investing in insurance stocks isn’t as exciting as investing in next-generation technology, but they can be an important part of your diversified portfolio. That’s because insurance companies can provide stable cash flow thanks to consistent demand as people and businesses look to protect themselves from catastrophic losses. Even the legendary investor, Berkshire Hathaway Chief Executive Officer Warren Buffett has said insurance is a critical part of Berkshire’s business.
However, investing in just any insurance company is not good enough. The sector is extremely competitive and it can be difficult for companies to differentiate themselves. If you look at the sector, insurers barely break even on average. In other words, insurers collect just enough premiums to pay out claims and other costs. This is where Progressive sets itself apart.
In 1965, Peter B. Lewis, the son of one of Progressive’s founders, took over as CEO of the insurance company. Lewis promised that the company would grow by consistently writing profitable insurance policies. This differed from the generally accepted practice that insurance companies should break even on their policies and instead make a profit from their investment portfolios.
Progressive set a goal of making $4 in profits for every $100 in premiums it receives, and continues to pursue that goal today. In other words, the company is targeting a combined ratio of 96%, which measures the ratio of a company’s claims costs plus expenses divided by premiums collected.
Over the past 22 years, Progressive has achieved a combined ratio of 96% or better. During that time, the combined ratio averaged 91.8%, well below the industry average of 100%. This solid underwriting performance comes after multiple recessions and various soft and hard market conditions that insurers have faced. Even last year, when auto insurers posted their worst quarterly loss figures in two decades, Progressive still managed to meet its target.
This solid adoption is a testament to Progressive’s commitment to technology and its ability to maintain its lead in the auto insurance market. An example of Progressive’s underwriting advantage is its use of telematics. The insurer was one of the first to use driver data, such as kilometers driven, speed and braking time, to personalize rates for drivers.
Progressive’s business is well positioned to grow alongside a growing economy. It could also perform well if inflation picks up again. JPMorgan Chase CEO Jamie Dimon has warned of growing government deficits, the decoupling of the global economy and geopolitical tensions as potential drivers of increased inflation and interest rates. Steady demand for auto insurance gives Progressive pricing power, allowing it to adapt to rising costs.
It will also benefit if interest rates remain high in the long term. Progressive has an investment portfolio of $72.3 billion, heavily invested in fixed-income assets such as U.S. Treasury bonds. This year, the company earned $1.3 billion in investment income, compared to $874 million last year.
Progressive continues to outperform its competitors and last year was a great example of how the company adapted to a challenging operating environment. The insurer has consistently performed well across many market and business cycles and remains an excellent stock for long-term investors.
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Courtney Carlsen holds positions in Progressive. The Motley Fool holds positions in and recommends Berkshire Hathaway, JPMorgan Chase and Progressive. The Motley Fool has a disclosure policy.
This stock has gone from $10,000 to $1.5 million over the past three decades. Here’s why it’s a smart purchase today. was originally published by The Motley Fool
