How This Blue-Chip Stock is Crushing the Bear Market

It’s been a challenging year in the stock market, but you wouldn’t know it by looking at Progressive‘s (PGR -2.18%) stock performance. Since the beginning of 2022, its stock has gained 30%, far outperforming the S&P 500, which is down 12.3% in that same period.

Progressive’s outperformance comes down to a couple of factors. For one, insurers did quite well this past year because they can hedge against inflation. Second, it’s one of the best in the industry at churning a profit and producing strong cash flows.

The insurer has a long history of outperforming the stock market. Here’s the secret to its success in this bear market.

Why Progressive is an excellent inflation hedge

Progressive primarily writes automotive insurance policies covering individuals and businesses. This past year the company did an excellent job navigating uncertainty in the economy, which was marred by outsized inflationary pressures.

Insurance companies can be an excellent source of cash flows. That’s because insurance products are always in demand thanks to legal requirements and people’s desire to limit losses from catastrophic events. While this keeps a steady demand for insurance products, Progressive is one of the best in the game and has a stellar history of identifying and writing profitable policies.

In 2021 Progressive saw claims costs go through the roof. Not only were more drivers on the road as regions reopened following the pandemic, but the cost of resolving the claims jumped higher too. Accident frequency was up 14%, while the cost to resolve these claims (either through auto repairs or replacing vehicles) was up 9%. 

The insurer quickly noticed and responded by raising premiums and eliminating specific premiums that accounted for its biggest losses. Last year the insurer grew its premiums collected for the full year by 10%. In the fourth quarter, its premiums grew by 16%. Being able to adapt to inflation was key to Progressive’s success last year, as well as the success of other insurance companies.

This is Progressive’s secret sauce for long-term success

Progressive has been on the cutting edge in collecting driver data and focusing on the most profitable policies.

In 2011 it was one of the first insurers to use telematics, or driver data, to price its policies. Its Progressive Snapshot product gave it insight into data points, like driving speed, braking time, and mileage driven, that others didn’t have. The innovative nature of Progressive has allowed it to be one of the most profitable insurers in the industry for decades now.

One metric that puts this into perspective is the combined ratio. In insurance, the combined ratio is total claims plus the expenses a company incurs, divided by the total premiums collected. A ratio below 100% means the insurer is writing profitable policies; the lower the ratio, the more profitable the business.

Over 21 years, Progressive’s combined ratio of 91.6% has crushed the industry average of 99.9%. Through three quarters of last year, the industry average ratio jumped to 105.3% — showing just how much of an impact inflation had on claims costs. Despite a challenging pricing environment, Progressive’s combined ratio for the year was a stellar 95.8%. 

Data sources: Progressive and National Association of Insurance Commissioners. Industry data for 2022 is through Sept. 30. Chart by author.

A no-brainer stock to own

Progressive has long been a top-performing company. Its returns speak for themselves. Since 2002, its total return of 2,000% has absolutely crushed the S&P 500’s total return of 423%.

PGR Total Return Level data by YCharts

The company has done an excellent job of writing profitable policies for decades, and it doesn’t look like that will stop any time soon. Even in a difficult environment that saw other insurers lose money, Progressive maintained a solid level of profitability.

The insurer has earned the praise of Berkshire Hathaway (which owns GEICO) vice chair Charlie Munger, who said, “every once in a while, somebody is a little better at something than we are.” Profitable underwriting is the name of the game, and as long as Progressive displays this through a stellar combined ratio, the stock is a no-brainer for any investor.

Courtney Carlsen has positions in Progressive. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Progressive and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway, short January 2023 $200 puts on Berkshire Hathaway, and short January 2023 $265 calls on Berkshire Hathaway. The Motley Fool has a disclosure policy.