It's earnings season once again and quarterly reports are being issued that give investors some insights into companies' recent performance. Savvy investors may find surprises on occasion, they also know not to put too much emphasis on the numbers from a single quarter. That's especially true when it comes to blue-chip stocks with long histories of outperformance.

The blue-chip stock Progressive (PGR 0.70%), for example, recently sold off nearly 7% following the release of its first-quarter earnings report. It appears some investors were concerned about the auto and property insurer's profitability in the quarter.

Progressive grew its net premiums by 22% year over year to $16.1 billion in Q1. Expenses jumped 20%, too, led by an increase in loss and loss adjustment expenses of $10.6 billion. The insurer benefited from unrealized gains of $603 million on its fixed-maturity portfolio. Last year, it posted a loss of $1.4 billion for the quarter due to rising interest rates. As a result, its net income for the quarter jumped 43% year over year to $448 million.

The stock price decline that resulted may have been a reaction to the uptick in Progressive's combined ratio. This key metric in the insurance business measures the proportion of expenses plus claims to the total premiums written. Management set a goal of keeping this ratio below 96%, and it has done a stellar job keeping it low for decades. But its combined ratio ticked up to 99% in the first quarter.

It was concerning news, but the ensuing sell-off appears to be an overreaction, and it presents a potential buying opportunity for long-term investors. Here are three reasons why.

1. Changes in Florida laws hurt Progressive short term, but it should benefit long term

In the first quarter, Progressive saw its loss and loss adjustment expenses (money it sets aside to cover losses related to court proceedings) jump 4.6 percentage points, half of which it attributes to changes in Florida laws.   

On March 24, Florida Gov. Ron Desantis signed a broad tort reform bill that overhauled the state's litigation landscape. Florida has the highest amount of lawsuits against insurers in the country, and these legislative changes are what insurers have been advocating for.

The news sounds positive for insurers, so why did it hurt Progressive? Before the bill passed, thousands of last-minute lawsuits flooded court clerks' offices in Florida. Todd Michaels, a Coral Gables lawyer and secretary of the Florida Justice Association, told the Tallahassee Democrat, "There are many cases that would've been turned down or would've been settled pre-suit. But given the deadline, you have to file a suit to protect your client." 

According to Elyse Greenspan, an analyst with Wells Fargo, there were over 70,000 lawsuits filed in the week before the law change took effect. In response, Progressive set up reserves, just like it does after a hurricane, to account for the surge in lawsuits. This resulted in a one-time hit to Progressive's combined ratio, but in the long run, the legislative changes should benefit it and other  insurers in the state. 

2. Progressive has a history of stellar underwriting

Investors were caught off guard by the rise in Progressive's combined ratio. What's important to remember is that Progressive has a long history of operating with a stellar combined ratio. Since 2002, its combined ratio has averaged 91.6% annually -- well below the industry average of 100% in that period. 

A chart shows Progressive's combined ratio vs the industry average over 20 years.

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

Investors will want to pay attention to Progressive's combined ratio over the coming quarters to see if it returns to management's target range of 96% and lower. If it remains above 96%, that could be a sign that the company's underwriting activities are becoming less profitable.

The uptick in the combined ratio would be concerning if it were due to poor underwriting, but for now, it appears to be a temporary blip due to a one-time event.

3. Progressive can adapt to inflation and take advantage of higher interest rates

The final reason to buy the dip here is Progressive's ability to do well in the current economic environment. Insurers can adapt to inflationary pressures, and Progressive has done so quite well.

During the last two years, it raised the premiums it charges customers while maintaining solid profitability metrics. Last year its combined ratio was 95.8%, while the average industry was 102.4%. In the first quarter, its premiums written were up 22%, showing that it continues to raise premiums charged as inflation remains elevated. 

It's also able to take advantage of higher interest rates. Because insurers collect premiums up front, they can put the money to work in their investment portfolio by buying shorter-dated bonds, and those bonds now pay higher yields than they have in years.

The final word on Progressive's Q1

Progressive's first-quarter numbers looked concerning on the surface, but the concerns appear overblown when you dig into the details. Changes in Florida laws have required it to boost its reserves for now, which took a toll on its combined ratio metric in the quarter. However, these changes should benefit insurers in the long run, making its weaker first-quarter results look like a temporary aberration. Progressive has done a stellar job of writing policies for years, and its overblown sell-off makes this an excellent time to buy its shares.