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This Insurance Stock Is Up 20% This Year. Here’s Why It’s Still a Buy.

Earnings season has arrived, and Progressive (PGR 1.35%) is one stock off to a hot start. After falling short the past few quarters, the company posted strong results that exceeded Wall Street’s earnings and revenue forecasts. 

Progressive is a high-quality insurance company with a history of market-beating results and an ability to adapt to a challenging environment for property and casualty insurers. The stock rose after the company’s earning report and is now up more than 20% year to date. Here’s why it’s not too late for investors to get in on this dependable stock.

Rising natural catastrophes and costs pose a challenge to insurers

Insurance companies have faced their share of challenges in recent years. For one, insurers have seen rising and more severe natural catastrophes. According to a report by insurer Swiss Re, 285 natural catastrophes last year caused $284 billion in damage, well above the 10-year average of $220 billion. 

Earlier this year, the U.S. experienced several weather-related disasters — including from tornados, hail, and wind — raising claims costs for insurers. According to S&P Global Market Intelligence, property and casualty insurers posted the largest first-quarter underwriting loss in 12 years. 

The environment has been even more challenging for insurers like Progressive and Allstate that focus on the automobile market. S&P Global said the auto insurance sector had its worst direct incurred loss ratio in the first quarter in more than two decades. 

Auto insurers have dealt with the effects of inflation during the past several years. Higher prices for used and new cars, higher costs of replacement parts, and increased labor costs have all contributed to higher claims expenses for these companies.

Image source: Getty Images.

Progressive’s lackluster start to 2023

Progressive’s earnings results in the first two quarters of this year were disappointing. The company’s loss and loss-adjustment expenses, or the portion of its reserves set aside for unpaid losses, increased 25% from last year.

In the first quarter, the company faced a slew of last-minute lawsuits amid changes to a Florida law. While the law would benefit insurance companies in the long run, lawyers filed 70,000 lawsuits before it became effective. Progressive set up reserves like it would during a hurricane or other weather event to cover the potential costs of resolving these lawsuits.

To see the impact on Progressive’s business, investors must understand the combined ratio, which is vital to understanding how profitable an insurer’s policies are. This ratio divides the claims costs and other expenses by the total premiums taken in. Good insurance companies want to see this ratio under 100%, and the lower the ratio, the better.

In the first half of this year, Progressive’s combined ratio was 99.7% across all its businesses. While this indicates its policies were profitable, this is well above management’s long-term goal of 96%.

Progressive’s third-quarter earnings impressed

Progressive bounced back in a big way in the third quarter. Its net premiums written rose 20%, while its net income of $1.1 billion significantly improved from last year’s net income of $124 million. Its combined ratio for the quarter was a solid 92.4%, bringing its year-to-date ratio to 97.2%. The company hasn’t posted an annual combined ratio above 96% since 2000, and the recent quarterly trends are a positive sign that management is moving in the right direction. 

The ability to adapt to challenging market conditions makes the company a compelling investment. It has proved itself as a top policy writer for years: Its combined ratio during the past two  two decades has averaged 91.6%, crushing the industry average of 100%. The company has even earned the praise of Berkshire Hathaway‘s Warren Buffett and Charlie Munger, who know a thing or two about investing in insurance companies.

The investor takeaway

Progressive’s track record of success is one reason I wasn’t too concerned with its earnings misses earlier in the year. The insurer is in a position to weather any potential inflationary pressures should they rear their ugly heads again, and will benefit in times of economic growth.

The company continues outperforming its industry peers, including this year amid a challenging backdrop for insurers, making this one solid insurance stock to buy and hold for the long haul.

Courtney Carlsen has positions in Allstate and Progressive. The Motley Fool has positions in and recommends Berkshire Hathaway and S&P Global. The Motley Fool recommends Progressive. The Motley Fool has a disclosure policy.

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