If you’re on the hunt for a good value stock, you might want to look at this insurance company that’s managed to outperform the market for many years.
The buzz around artificial intelligence (AI) and related infrastructure is exciting and has, unsurprisingly, sent the market soaring. The S&P 500 is up about 15% this year, and the tech-focused Nasdaq Composite has risen even more—around 20% since January.
Despite the bullish market, there are concerns about lofty valuations. Finding solid companies trading at reasonable prices becomes a challenge. But, one standout option in the auto insurance sector is Progressive (PGR +3.59%).
Progressive holds a strong market position and has consistently outperformed its competitors. However, its stock recently saw a 30% drop from its all-time highs, which could be seen as a tempting investment opportunity.
Here’s why I think this is a worthwhile chance to invest at a discount:
Today’s changes
(3.59%) $7.53
current price
$217.14
Key data points
Market capitalization
$127 billion
daily range
$210.77 – $217.41
52 week range
$199.90 – $292.99
volume
238K
average volume
3.3M
gross profit
0.00%
dividend yield
0.02%
Progressive: A Solid Long-Term Investment
As a significant player in the U.S. auto insurance market, Progressive holds a 15% market share, second only to State Farm with 18%. What makes Progressive appealing is its continuous demand; drivers will always require insurance for protection, and legal regulations ensure a steady need.
Additionally, Progressive excels in underwriting. The company utilizes technology and telematics to monitor driver behavior and assess risk accurately. This clever approach showcases its strong risk selection and claims management.
The effectiveness of this approach is evident in its combined ratio. Over the past two decades, Progressive has averaged a combined ratio of 92%, meaning for every $100 in premiums incurred, there’s an $8 underwriting profit.
Graph by author.
In a competitive insurance landscape, where average combined ratios tend to hover around the breakeven mark of 100%, Progressive’s consistent outperformance is commendable.
What’s Behind Progressive’s Recent Weakness?
The latest dip in Progressive’s performance followed their September earnings announcement, where they disclosed plans to return nearly $1 billion to Florida policyholders. Thanks to tort reforms in Florida, Progressive has enjoyed reduced litigation costs, which improved its underwriting margins. Active policyholders in Florida will receive an average refund of about $300 due to benefits exceeding state caps from 2023 to 2025.
Though these refunds weren’t exactly unexpected, they did impact Progressive’s underwriting profit, pushing the combined ratio up to 100% in September. This might have raised some alarm among investors. Yet, examining the first three quarters of the year, they still show a robust combined ratio of 87.3%.
In general, Progressive stocks have struggled this year, with worries about a potentially softening pricing environment in the insurance industry. While the industry is cyclical, it doesn’t align exactly with broader business cycles. Instead, it alternates between “hard” and “soft” markets.
In challenging markets, increasing claim rates and fewer competitors allow the most profitable companies to gain a larger share of the market. Conversely, during softer times, losses can drop, yet competition intensifies, making profitable growth harder to achieve.
Image source: Getty Images.
Some signs suggest that pricing could soften, posing a potential hurdle for Progressive’s growth in the short term. This is likely a key factor contributing to the stock’s underperformance this year, especially given the S&P 500’s impressive gains. Still, companies like Progressive have the power to adjust pricing in response to rising costs, even if inflation rears its head again. Plus, they stand to benefit from increasing interest rates.
A Prime Buying Opportunity
As a long-term shareholder, I’m not particularly worried about Progressive’s struggles this year. The company seems to uphold its strong underwriting performance. Any shift in its ability to manage risks and pricing would be reflected in a higher combined ratio, but we’re not seeing that at the moment.
Right now, Progressive’s stock is trading at 15 times its expected earnings for next year, marking its lowest valuation in nearly two years. I really believe the company can maintain its leading position, so the current weakness could be a perfect time to buy.
