If you want to build long-term wealth, investing in the stock market is a good practice. The past century has been the S&P500 index has generated an average return of 10.6% per year, showing that patient investors are rewarded in the long term.
Certain companies can outperform the S&P 500 index for extended periods of time. These great companies tend to generate excellent cash flow and have some distinct advantages over their competition.
Progressive (NYSE: PGR) is an excellent example of how quality companies can deliver excellent returns for patient investors. A $1,000 investment in the insurer when it went public in 1971 would be worth $8.7 million today. Here’s why the company has crushed it and has what it takes to keep winning.
How Progressive broke the industry
Investing in insurance companies doesn’t seem exciting, but Berkshire Hathaway CEO Warren Buffett loves them, which should be reason enough to pay attention to them. Buffett likes that insurance companies offer stable cash flow, thanks to consistent demand for insurance products from both consumers and businesses.
Owning insurance is essential for people and businesses to protect themselves against catastrophe, and good insurers can weigh the risks of insuring a large number of policies against the benefits of underwriting profits. However, insurance is a hyper-competitive sector in which companies find it difficult to distinguish themselves.
When you evaluate the industry broadly, insurers break even when you look at the ratio of premiums paid to the cost of claims and the cost of running their business. Decades ago, it was generally accepted that insurers would not profit from their policies. Instead, they would make money from their large investment portfolios.
Progressive objected to this widely accepted doctrine. In 1965, Peter B. Lewis (whose father helped found Progressive) took over as CEO of the insurance company, which was still quite small, with only 40 employees at the time. Lewis promised that they would achieve growth by consistently writing profitable insurance policies. While this meant customers could go to competitors for lower rates, it also laid the foundation for Progressive’s long-term success.
In 1971, Progressive went public and set a goal of making $4 in profits for every $100 in premiums it received. This long-term commitment to profitable underwriting has been the foundation for Progressive’s long-term success and is why a $1,000 investment would be worth over $8.7 million today.
PGR Total Return Level data per YCharts
Progressive overcame a challenging environment for insurers in 2023
Insurance companies tend to break even, which shows how hyper-competitive it is for companies to break into the industry. To illustrate this, you need to understand the combined ratio. This measure of profitability represents the relationship between a company’s premiums collected and its costs and claims costs incurred. A ratio around 100% means a company is breaking even, while a lower ratio means a more profitable underwriting policy.
Last year, insurers struggled with inflation, which increased the cost of repairs and replacements, increasing claim costs and putting pressure on the profitability of their insurance policies.
In the first quarter of last year, the loss ratio of car insurers was the worst in a quarter going back twenty years. At the end of the year, the combined ratio of the property and casualty sector stood at 103.9%, the highest figure since 2017.
Despite the challenging circumstances, Progressive adjusted the premiums charged and designed the insured portfolio in such a way that a combined ratio of 94.5% was achieved. This marked the 22nd year in a row that the company has achieved its goal of 96% or better, which is a testament to Progressive’s commitment to technology and maintaining its lead in the auto insurance market.
A high quality stock to own
Progressive is well positioned if the economy continues to grow, and can also benefit from tailwinds if inflation and interest rates remain higher for longer. The company continues to expand its current policy, which rose 7% in the first quarter, despite increasing premiums, demonstrating its pricing power if inflation remains stubbornly high. It also benefits from higher interest rates because it can invest future cash flow at attractive yields in lower-risk U.S. Treasury bonds.
Progressive continues to outperform its peers and last year was a good example of adapting to a challenging operating environment. The insurer continues to deliver on its long-term goals and has proven itself as a top insurer, making it an excellent stock for the long term.
Should You Invest $1,000 in Progressive Now?
Consider the following before purchasing shares in Progressive:
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Courtney Carlsen holds positions in Progressive. The Motley Fool holds positions in and recommends Berkshire Hathaway. The Motley Fool recommends Progressive. The Motley Fool has a disclosure policy.
This stock turned $1,000 into $8.7 million — and it’s still a buy today was originally published by The Motley Fool
