This Blue Chip Stock Surged After Earnings and Is Up 32% in the Past Year: Here's Why It's Still a Buy.

One blue chip stock that has crushed the market for decades is Progressive (PGR 0.32%). The insurer has a long track record of success in profitable underwriting, which is evident when you consider a $1,000 investment in the company four decades ago would be worth $1.5 million today.

Following the company’s fourth-quarter earnings report, the stock jumped nearly 5%, as investor concerns from the insurer’s first two quarterly earnings reports in 2023 waned. Over the last year, Progressive has gained 32%. Here’s why it’s not too late to buy.

The first half of 2023 was challenging for Progressive

Last July, Progressive stock plummeted 13% following its second-quarter earnings announcement, its largest decline in two decades. On the surface, things weren’t too bad. Net premiums were up 18%, while it turned a net profit of $345 million. However, the profitability of its insurance policies was a point of concern.

For insurers, the combined ratio is an important measure of profitability. This ratio takes the insurer’s expenses plus claims losses divided by premiums collected. Well-run insurance companies consistently post combined ratios that beat the industry average, and there’s no better example than Progressive.

The company’s long-term goal is a ratio of 96 or lower, so when this ticked up to 100.4 in the second quarter, investors grew concerned. Halfway through the year, Progressive’s combined ratio was 99.7, and its 23-year streak of a ratio below 96 appeared to be in jeopardy.

A few factors weighed on Progressive in the first half of last year, including a flood of last-minute lawsuits in Florida and lingering impacts of inflation that increased repair and replacement costs, leading to the worst first-quarter underwriting loss for property and casualty insurers in 12 years.

Person in a winter storm stands in front of a car while on a phone call.

Image source: Getty Images.

Progressive’s strong pricing ability makes it a solid all-weather stock

One of Progressive’s greatest strengths is its ability to underwrite profitable insurance policies consistently. From the first day it went public in 1971, Progressive’s goal has been to underwrite profitable policies that earn it $4 for every $100 in premiums written. At the time, it was common practice that insurance businesses would break even on their underwriting while generating profits from their investment portfolios.

Progressive’s focus on profitable underwriting has helped it focus on finding the customers who best fit its risk profile and adjusting premiums as necessary to account for changes in the operating environment. For example, the cost of repairs and replacement vehicles has risen dramatically. Because of Progressive’s pricing power, net written premiums have increased by 52% over the past three years.

Progressive management adjusted to the challenging operating environment and finished 2023 in a strong way. In the fourth quarter, the company increased its net written premiums by 21% year over year while its net income was $303 million. It also accomplished a combined ratio of 88.7 and finished the year with an annual ratio of 94.9 — its 23rd consecutive year of a 96 combined ratio or better.

A chart shows Progressive's combined ratio over the past two decades.

Chart by author.

Progressive’s track record makes it a solid long-term holding

For investors in Progressive, the fourth quarter was a good sign that the company has a handle on rising costs and has adjusted well. The company has faced challenges over the past few years, including rising interest rates and inflation, and has proven once again that it stands alone regarding underwriting profitability.

On a valuation basis, Progressive is a little expensive, trading at 27.3 times earnings for the year. This is slightly above its 10-year average. However, its one-year forward price-to-earnings ratio is around 17.3. The stock also trades at a premium to peers, but that’s to be expected as long as it continues to achieve industry-beating profitability.

Progressive has an excellent track record of success, which was on full display in 2023. Its fourth-quarter earnings reaffirmed the company’s position as one of the country’s top insurance writers. As long as it continues to perform, it is an excellent stock for investors to buy and hold.

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