A balanced portfolio is one key to investing successfully. That means diversifying your portfolio across stocks of different styles in different industries. One industry that makes for intriguing investment opportunities is insurance.
Insurance products are always in demand, whether due to regulations or people's desire to mitigate risks in life. This ongoing demand can make insurers steady investments that are also good hedges against inflation.
If you've overlooked the insurance industry and want to add exposure to it, Progressive (PGR -0.97%) is one stock I would buy first. The company is one of the best in the game at what it does. Here's why it would be an excellent addition to your portfolio.
Progressive has a huge head start on the competition with its trove of driver data
Progressive writes insurance policies, and its $48 billion in premiums written makes it the third-largest property and casualty insurer (P&C) in the U.S. Only State Farm ($70 billion in written premiums) and Berkshire Hathaway ($52 billion in written premiums) are larger.
Progressive has enjoyed a substantial advantage over competitors thanks to its trove of driver data. The insurer has been playing around with telematics, or pricing insurance policies based on driving habits, for years. It rolled out its first telematics product in 2004 on a limited basis, and then made it widely available through its Progressive Snapshot product in 2011.
Its technology gave it a first-mover advantage and a head start of several years on competing insurers. For years, Progressive has crushed the competition with its industry-beating profitability.
Image source: Getty Images.
Warren Buffett has high praise for the insurer
Progressive's use of telematics and its profitability in the extremely competitive insurance industry have earned it praise from Berkshire Hathaway Chief Executive Officer Warren Buffett. Berkshire owns several insurance companies, including Progressive's competitor, GEICO. Buffett believes it's a two-horse race between the two when it comes to auto insurance. He had the following to say about Progressive:
I have always thought for a very long time [that] Progressive has been very well run. They have an appetite for growth. Sometimes they copy us. Sometimes we copy them. And I think that will be true five years from now, ten years for now.
Even Charlie Munger, vice chairman of Berkshire Hathaway, admitted: "In the nature of things, every once in a while, somebody is a little better at something than we are."
Why insurers can weather difficult economic backdrops
Investors should consider insurance stocks because of their steady cash flows and ability to grow in times of inflation or economic growth. For example, Progressive's free cash flow, or the cash left after paying for operating costs and capital expenditures, grew from $1.6 billion 10 years ago to almost $7.5 billion today.
Data source: YCharts
Insurance companies can be resilient businesses in times of inflation, too. That's because of their ability to see claims costs data coming through and adjust policy prices to ensure they maintain profitability. This was evident in the later stages of the pandemic, when the cost of used car prices and repairs shot higher. In response, insurers began raising their premiums to keep up with the rising claims costs. From 2020 to 2022, Progressive's net earned premiums rose 25%.
Earlier this year, Progressive's profitability again took a hit from rising claims costs. In the first quarter, the insurer faced a surge of last-minute lawsuits in Florida. Additionally, insurers dealt with a slew of weather-related events that resulted in the industry's largest first-quarter underwriting loss in 12 years. Despite this, Progressive bounced back in its most recent earnings and has adapted well to challenging conditions once again.
Progressive has a proven track record of success
Insurance stocks can be an excellent part of a diversified portfolio. These companies face potentially increasing climate-related disasters, which is always a risk when it comes to writing insurance policies. However, these companies can be resilient during times of inflation, and the best ones can adapt quickly. Progressive has proven its ability to adjust to challenging circumstances, which is why it's my top insurance stock you can own today.
