One of the best ways to make money in the stock market is to buy shares of stellar businesses and hold on to them as long as the company performs. A simple buy-and-hold approach can be a very reliable way to realize significant portfolio returns.

When looking for candidates to make into long-term holdings, you want to find companies with distinct competitive advantages, a history of outperformance, and a business that has thrived across market cycles. One company that checks all of these boxes is Progressive (PGR 2.35%), which writes automotive and property insurance policies. 

Progressive's competitive advantage

Insurance companies tend to make great investments because of their ability to measure risk and adapt to changing environments. The best insurers price policies well over decades to generate consistent returns, which Progressive has done.

One way Progressive generates these accurate risk assessments is by using a technology called telematics. Telematics uses a device installed in your car or an app on your phone to collect data like miles driven, speed, and braking time to develop personalized rates that could save money for the best drivers. Progressive first rolled out telematics in 2004 on a limited basis, and made it widely available in 2011 through its Progressive Snapshot product.  

A person examines damage to a car.

Image source: Getty Images.

The technology helps Progressive manage risk with precision, which you can see when reviewing its combined ratio, a crucial metric for insurers that measures how profitable policies are. It measures the sum of claims and expenses divided by premiums collected, with a ratio below 100% showing that a company's policies are profitable.

Over the last 20 years, Progressive posted a combined ratio of 91.4%, crushing the industry's average combined ratio of 99.7% in the same period. When the Property & Casualty Insurance industry's average combined ratio was 107% in 2011, Progressive's combined ratio was a stellar 93%. And it hasn't gone above 96% since 2000. 

Last year, Progressive saw a slight uptick due to higher claims from Hurricane Ida and elevated repair and replacement costs for cars. But it quickly adapted, and the ratio remained below management's long-term goal of 96%.

A chart shows Progressive's combined ratio compared to the property and casualty industry average.

Data sources: Progressive and National Association of Insurance Commissioners. Chart by author.

Competition is heating up, but Progressive still holds this edge

Progressive faces increasing competition from legacy insurers like Geico and State Farm, which have rolled out their own telematics products in recent years. It also faces competition from Root and Lemonade's Metromile, which make usage-based insurance powered by telematics central to their business.  

While the influx of competition could eat away at Progressive's business, it has a first-mover advantage and a vast amount of data to work with. Progressive's Snapshot product gives it 10 years of data, which is crucial when building good pricing models through machine learning. Its competition still needs to build up a base of driving data and build a model that can price policies effectively from this data.

Progressive has been resilient in the face of inflation

Progressive has pricing power, making it a stellar stock if inflation persists. This past year, it quickly adapted to rising claims costs by raising premiums on its policies. Through the first half of this year, net premiums (an insurance company's equivalent of revenue) earned are up 12% year over year.  

Progressive has proved it can perform across various economic environments over the past 20 years and is one of the best insurers in the industry, making it an excellent stock to buy and hold for the long haul.