The Stability of Insurance Stocks
Investing in insurance stocks may not evoke the same excitement as investing in next-generation technology, but they can play a vital role in a diversified portfolio. Insurance companies generate stable cash flows due to consistent demand; people and businesses continually seek to protect themselves from catastrophic losses. This consistent demand has made insurance a crucial segment for many successful investors, including Warren Buffett, whose Berkshire Hathaway derives a significant portion of its earnings from its insurance operations.
However, not all insurance companies are created equal. The industry is highly competitive, and standing out can be a challenge. On average, insurance companies barely break even, with many relying on their investment portfolios for profits. This is where Progressive differentiates itself from the competition.
Progressive’s Unique Approach
In 1965, Peter B. Lewis, the son of one of Progressive’s founders, took the helm as CEO, committing the company to consistently underwrite profitable insurance policies. This approach diverges from the prevailing industry practice, where companies often aim to break even on policies while generating profits from investments.
Progressive sets a target to earn $4 for every $100 in premiums collected and continues to strive for a combined ratio of 96%. The combined ratio measures the ratio of claims and expenses to premiums earned, with a lower ratio indicating better profitability. Over the past 22 years, Progressive has achieved a combined ratio of 96% or better, averaging an impressive 91.8%, well below the industry average of 100%. This outstanding underwriting performance has persisted through multiple economic downturns and varying market cycles. Remarkably, during a challenging period when automotive insurers faced their worst quarterly loss ratios in two decades, Progressive successfully met its objectives.
Commitment to Technology and Risk Management
Progressive’s solid underwriting results reflect its commitment to leveraging technology and maintaining a competitive edge in the automotive insurance market. One notable example of this is Progressive’s use of telematics, making it one of the first insurers to personalize rates based on driver data, such as mileage, speed, and braking behavior. This innovative approach not only enhances underwriting accuracy but also allows Progressive to offer tailored pricing to customers.
Thriving in Economic Fluctuations
Progressive is well-positioned to grow alongside the economy, even in times of inflation. The stable demand for automotive insurance grants the company pricing power, enabling it to adjust rates in response to rising costs. Jamie Dimon, CEO of JPMorgan Chase, has warned about potential inflationary pressures stemming from rising government deficits, global economic disruptions, and geopolitical tensions. However, Progressive’s resilient business model positions it favorably to navigate these challenges.
Moreover, if interest rates remain elevated for an extended period, Progressive stands to benefit from its substantial investment portfolio, currently valued at $72.3 billion. This portfolio is heavily invested in fixed-income assets, including U.S. Treasuries. In the current year, the company reported investment income of $1.3 billion, a significant increase from $874 million the previous year.
Resilience in Adversity
Progressive has consistently outperformed its competitors, with the past year exemplifying its ability to thrive amid a challenging operational environment. The insurer has shown resilience across various markets and business cycles, establishing itself as an excellent stock for long-term investors. As investors look for solid, reliable options in their portfolios, Progressive Insurance stands out as a prime example of a high-quality business capable of delivering sustainable returns.
