Investors are facing the highest inflation readings in over 40 years. The consumer price index (CPI), a measure of inflation, came in at 7.9% in February -- the ninth month in a row that inflation was over 5%.
Periods of high inflation can make for a tricky investment environment because it's difficult to predict when it will come down. As investors, some of the best companies you can invest in during an inflationary environment are those with pricing power, or the ability to raise prices without impacting demand.
One company with pricing power is Progressive (PGR 0.37%). The company faced higher prices last year, but reacted quickly -- and has produced market-beating returns for decades.
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Losses ticked up for the insurer in 2021
Progressive is known for its insurance products, such as car insurance, homeowners insurance, and other types. One benefit to owning insurance companies is that insurance will always be in demand as people look to protect their cars and homes.
When inflation is high, insurance companies suffer in the short term. That's because they have to absorb higher costs of parts and labor to repair damages to homes and especially to vehicles. This is what happened to Progressive last year.
Last year Progressive saw loss expenses increase 34% from 2020 levels. Losses ticked up as more drivers hit the road, with accident frequency rising 14%, while the severity (or cost to repair or replace vehicles) increased 9%. As the cost of repairs ticked up, Progressive reacted by raising premiums charged and exiting more costly regions to cover.
Why Progressive could perform well in a variety of market conditions
The ability to react quickly is what makes insurers stellar long-term investments. And when it comes to writing profitable policies, Progressive is one of the best.
The combined ratio is one way to measure how well a company writes insurance policies. The combined ratio is a key metric insurers use to measure profitability. It's calculated by adding losses and expenses and dividing that total by the earned premiums. A ratio under 100% means a company is writing profitable policies, and the lower the ratio, the better.
Progressive executives have set a goal of keeping the company's combined ratio below 96%. The company has maintained its combined ratio below this level for over 20 years now -- an impressive feat that the market has rewarded handsomely.
Data source: Company 10-K Filings. Chart by author.
Over that time, Progressive has averaged a 91.4% combined ratio. This stellar performance beats that of other large, publicly traded auto insurers Allstate (ALL -0.79%) and Travelers (TRV -7.41%), which have 94.7% and 95.7% average combined ratios in that same period, respectively.
Progressive's price changes have already improved its outlook
Progressive's early results in 2022 are encouraging for investors. After seeing a combined ratio above 96% for five months straight, from June to October last year, Progressive has gotten back below its target of 96%.
Data source: Progressive. Chart by author.
In the first two months of this year, the company's average combined ratio was a solid 93.3%, improving on its 95.3% ratio last year.
Progressive has done a stellar job of pricing insurance policies profitably for years now, and this year shows that it continues to adapt effectively. This skill in underwriting is why the insurer has crushed the market over two decades. While inflationary pressures persist, Progressive is positioned well to adjust and thrive.
