This Stock Turned $1,000 Into $8.7 Million — and It's Still a Buy Today – The Motley Fool

If you’re looking to build long-term wealth, investing in the stock market is a great habit to thrive in. S&P 500 The index has generated an average annual return of 10.6%, showing that patient investors can be rewarded in the long term.

Certain companies are able to consistently outperform the S&P 500 Index over the long term. These great companies tend to generate superior cash flows and have a distinct advantage over their competitors.

progressive (P.G.R. -0.31%) is a great example of how a quality business can deliver excellent returns to patient investors. A $1,000 investment in this insurance company when it went public in 1971 would be worth $8.7 million today. Here’s why this company has been so successful and has what it takes to keep winning.

How Progressive broke industry conventions

Investing in insurance companies may not seem like much fun. Berkshire Hathaway That alone should be reason enough to take a look at insurance companies, since CEO Warren Buffett likes them. Buffett likes that insurance companies provide a steady cash flow thanks to consistent demand for insurance products from both consumers and businesses.

Insurance is essential for individuals and businesses to protect themselves against catastrophic events, and a good insurance company can balance the risks of large policies with the benefits of underwriting profits. But the insurance industry is competitive, and it can be difficult for companies to stand out.

When assessing the industry on a broad scale, insurance companies break even when looking at the ratio of premiums paid to claims costs and operating expenses. Decades ago, the common perception was that insurance companies did not make profits from insurance policies, but from large investment portfolios.

Progressive challenged this accepted dogma. In 1965, Peter B. Lewis (whose father had helped found Progressive) became CEO of what was then a tiny insurance company with just 40 employees. Lewis vowed to achieve growth by continually writing profitable policies. This meant that customers would flock to competitors in search of lower rates, but 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 received. This long-term commitment to profitable underwriting has been the foundation of Progressive’s long-term success and why a $1,000 investment back then is worth more than $8.7 million today.

PGR Total Return Level data Y Chart

Progressive overcame a tough environment for insurers in 2023

Insurance companies tend to break even, which indicates how competitive the industry is for companies. To explain this, we need to understand the overall ratio. This profitability indicator shows the ratio between the premiums collected by the company and the expenses and claims costs incurred by the company. A ratio around 100% means the company is breaking even, while a lower ratio means more profitable underwriting.

Last year, insurers struggled with inflation, which increased repair and replacement costs, raising claims costs and squeezing underwriting profitability.

In the first quarter of last year, auto insurers’ loss ratios were the worst in the past 20 years. At the end of the year, the general insurance industry’s overall profit margin was 103.9%, the highest since 2017.

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Despite the challenging environment, Progressive adjusted its rates and restructured its insurance portfolio to achieve a composite ratio of 94.5%, marking the company’s 22nd consecutive year of achieving targets above 96%, a testament to Progressive’s focus on technology and continued dominance in the auto insurance market.

High quality stocks to own

Progressive is well-positioned if the economy continues to grow, and it could also benefit from tailwinds if inflation and interest rates remain high for an extended period of time. Despite raising premiums, the company continues to grow the number of policies in force, up 7% in the first quarter, giving it pricing power if inflation remains stubbornly high. The company also benefits from rising interest rates because it can invest future cash flows in low-risk U.S. Treasury securities at attractive yields.

Progressive continues to outperform its peers, and the past year has been a great example of how the company has adapted to a challenging operating environment. The company continues to achieve its long-term objectives and has established itself as a top-tier underwriter, making it a great long-term stock to own.