Last month, Hurricane Ian, the fifth-strongest hurricane on record to hit the U.S., plowed into Florida's southwest coast. The storm tore through the region's low-lying towns and neighborhoods along its path, leaving many to deal with its destruction.

According to Karen Clark & Co., a risk-modeling firm, losses from Hurricane Ian will cost private insurers as much as $63 billion -- making it the most expensive storm in Florida's history. Progressive (PGR 0.18%) is one insurer that faces hundreds of millions in losses from the storm.

Despite the significant losses, Progressive can weather this storm like those that came before it. Here's why.

Progressive stock dropped following the announcement of its losses

Progressive helps customers protect against risk by writing automobile and homeowners insurance policies throughout the U.S.

The company estimated it would have $760 million in catastrophe losses from Hurricane Ian. About 95% of these losses occurred in Florida. About $585 million of the losses were from automobile claims while property losses amounted to another $200 million. The stock fell over 9% on the morning of its announcement. 

Progressive does this to limit risk on its policies

Progressive's losses could have been a lot worse. The company uses something called reinsurance, which is insurance purchased by insurance companies to limit their exposure. This helps protect insurers from outsized losses, like those from Hurricane Ian.

According to Progressive, its allocation of property damage from the hurricane was $1.4 billion. However, its reinsurance policy limits losses from property insurance-related claims to up to $200 million from a single event. The company could be responsible for up to $575 million in aggregate claims if there are multiple catastrophes throughout the year.

While the company has reinsurance on its property insurance policies, it doesn't use this for its automobile policies, which is why these claims make up most of its losses.

Catastrophes are inherent to the insurance industry

Weather-related events happen all the time. According to Munich Re, there were 980 natural disasters globally in 2020, costing insurers $210 billion in losses. In the previous year, 409 natural disaster events cost insurers $71 billion. Not only that, but five of the top seven costliest natural disaster events -- all hurricanes -- occurred within the past six years. 

Natural disasters are a normal part of the insurance business, and companies must adapt, or else they can go out of business. Increased catastrophe losses in recent years have caused the insurance industry to go into a "hardening" period. A hard market occurs when there are a lot of insurance claims, and companies are less likely to compete on pricing for business.

The insurance market has been in a hard since 2019, giving insurers the flexibility to raise rates without losing too much business. This is another way the industry adapts to growing claims costs from the frequent natural disasters we've seen in recent years.

Progressive is one of the best at weathering the storms

The combined ratio is one way to measure how well an insurer writes policies. This ratio is the sum of losses and expenses divided by the premiums collected. Companies want this ratio to be under 100% because it means they are collecting more premiums than they are paying out in claims; the lower the percentage, the better.

Progressive has done an excellent job of pricing policies with precision while eliminating policies in higher-risk regions of the U.S. Over 21 years, Progressive's combined ratio hasn't gone above 96%. In fact, during this period, its average combined ratio of 91.6% crushed the average industry ratio of 100%.

Progressive's combined ratio from 2001 to 2021.

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

Following Hurricane Ian, Progressive's combined ratio jumped to 96.5% for the year. While this is above its historical average, it's still close to the company's target ratio of 96%.

While nobody wants to see a company incur losses, they are a natural part of the industry. As one of the best insurers in the country, Progressive is unfazed by these losses.