This Stock Turned $10,000 Into $1.5 Million Over the Past 3 Decades. Here's Why It's a Smart Buy Today.

The stock market is one of the greatest wealth creators out there. Over the long run, the S&P 500 index has returned about 10% annually during the past century, rewarding patient investors who take a buy-and-hold approach to investing.

Some companies outperform the S&P 500 over extended periods. These companies have strong business models and capital and risk management, which allows them to produce stellar cash flows no matter what the economy does.

One excellent company that continues to show strength is Progressive (NYSE: PGR). The insurance company has delivered phenomenal returns of 18.3% compounded annually during the past three decades. Put differently, patient investors who invested $10,000 in the insurer three decades ago would be sitting on more than $1.5 million today. Here's why Progressive can keep delivering.

PGR Total Return Level data by YCharts

Insurance companies provide steady cash flows

Investing in insurance stocks isn't as exciting as investing in next-generation technology, but they can be an important part of your diversified portfolio. That's because insurance companies can provide steady cash flow thanks to consistent demand as people and businesses look to protect themselves from catastrophic losses. Even the legendary investor, Berkshire Hathaway Chief Executive Officer Warren Buffett, has said that insurance is a crucial part of Berkshire's business.

However, investing in just any insurance company isn't good enough. The industry is extremely competitive, and it can be difficult for companies to stand out. When you look at the industry, insurers, on average, barely break even. In other words, insurers collect just enough premiums to pay out claims and other expenses. This is where Progressive differentiates itself.

In 1965, Peter B. Lewis, the son of one of Progressive's founders, took over as CEO of the insurance company. Lewis made a commitment that the company would grow by consistently underwriting profitable insurance policies. This differed from the commonly accepted practice that insurance companies should break even on policies and make their profit from their investment portfolios instead.

Progressive is one of the best at pricing risk

Progressive set a goal to make $4 in profit for every $100 in premiums it received, and it continues to strive for this goal today. In other words, the company aims to achieve a combined ratio of 96%, which measures the ratio of a company's claims costs plus expenses divided by premiums collected.

During the past 22 years, Progressive has achieved a combined ratio of 96% or better. During that time, its combined ratio has averaged 91.8%, well below the industry average of 100%. This solid underwriting performance comes across multiple recessions and different soft and hard market environments that insurers have faced. Even last year, when automotive insurers posted their worst quarterly loss ratio in two decades, Progressive still managed to meet its objective.

This solid underwriting is a testament to Progressive's commitment to technology and its ability to maintain its edge in the automotive insurance market. One example of Progressive's underwriting advantage is its use of telematics. The insurer was one of the first to use driver data, like mileage driven, speed, and braking time, to personalize rates for drivers.

Here's why Progressive can keep delivering

Progressive's business is well positioned to grow alongside an expanding economy. It can also perform well if inflation reignites. JPMorgan Chase CEO Jamie Dimon has warned of growing government deficits, the decoupling of the world economy, and geopolitical tensions as potential drivers of elevated inflation and interest rates. The steady demand for automotive insurance gives Progressive pricing power, allowing it to adapt to rising costs.

It will also benefit if interest rates remain elevated for the long term. Progressive has a $72.3 billion investment portfolio, heavily invested in fixed-income assets like U.S. Treasuries. This year, the company earned $1.3 billion in investment income, up from $874 million last year.

Progressive continues to outperform its peers, and last year was a great example of how the company adapted to a challenging operating environment. The insurer has consistently performed well across numerous market and business cycles and remains an excellent stock for long-term investors.

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*Stock Advisor returns as of October 28, 2024

JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Courtney Carlsen has positions in Progressive. The Motley Fool has positions in and recommends Berkshire Hathaway, JPMorgan Chase, and Progressive. The Motley Fool has a disclosure policy.