Can This Top Insurance Stock Continue to Outperform the Market?

Key Points

• Progressive insurance earnings show investors an opportunity for another market-beating rally backed by fundamentals.
• Financial growth and Wall Street price targets support Progressive stock's near future, especially with one catalyst in mind.
• Home insurance in Florida rising above the national average could leave an empty market for Progressive Insurance to take over.

Most of the market’s attention is now centered around the technology sector, particularly those stocks dealing with the growth and global adoption of artificial intelligence. Investors could point to NVIDIA Co. NASDAQ: NVDA as the primary stock in this group, as it has delivered a rally of over 150% in 2024. However, some other sectors and stocks are also worthy of a look today.

In the financial sector, kicking off the new earnings season, came bank stocks to show investors what is happening underneath the hood of the U.S. economy, in both the consumer sense and at the corporate level. A subsector within finance is insurance, and most investors aren’t aware of what is happening in that space and why it could be the next one to take the crown from the semiconductor names.

Today, shares of the Progressive Co. NYSE: PGR are trading lower by 3.4% after a sharp rally to start the trading session. This initially bullish reaction came after the company reported its second-quarter 2024 earnings results. However, bears came sweeping in, believing that slowing inflation may create headwinds for the company to keep delivering strong financial growth. Here’s how these beliefs could be wrong.

New Home Insurance Demand Could Fuel a New Rally in Progressive Stock

In Florida, roughly 15% to 20% of homeowners have thrown in the towel when it comes to home insurance, as rates have risen astronomically over the past 12 months, an amplified trend compared to the rest of the national average increase.

This is the result of Florida having the fastest-growing housing market, both in price and construction activity. This could be why Warren Buffett started buying homebuilders like D.R. Horton Inc. NYSE: DHI in 2023, betting on the rising activity within the construction sector.

Insurance rates take into account the national inflation rate and the value of the underlying asset, in this case, the home price. With both inputs acting against consumers, it is no surprise to see a recent massive rise in rates. While this is bad for more regional and local insurance firms, a national company like Progressive could benefit from this.

Having achieved economies of scale, Progressive stock now shows a market capitalization of $122.4 billion today, showcasing the size and reach the brand has to leverage into cheaper rates compared to the competition.

When looking into the company’s press release for the second quarter of 2024 earnings, investors will notice that Progressive’s property business was responsible for most of the policy growth over the past year and, therefore, the segment responsible for the financial momentum the company has built.

Property policies reported 10% annual growth, above the 7% seen in auto policies, Progressive’s second largest business. A massive jump in the company’s earnings per share (EPS) drove the growth in both underwritten policies and premium increases.

Going from only $0.75 EPS in 2023 to $3.94 EPS in 2024 could be a shadow of what’s to come for Progressive moving forward. Wall Street analysts now forecast 8.5% EPS growth for the next 12 months, which is unlikely to assume the potential market share grab Progressive could affect defecting homeowner insurance in Florida.

Wall Street Predicts Another Rally for Progressive Stock

Analysts at Bank of America want to see Progressive stock rally to their price targets, which were recently (as of July 2024) set to $276 a share, daring the stock to rally by 32% from where it trades today.

Progressive's free cash flow (operating cash flow minus capital expenditures) supports these forecasts. It rose from $2.4 billion in 2023 to $4.2 billion in 2024, nearly doubling the company's ability to reward shareholders and reinvest in further growth.

Progressive's financials will also reveal that the company historically generates a return on invested capital (ROIC) rate above 20%, allowing investors to tap into Progressive stock's wealth-compounding abilities.

Knowing that the Florida market and the overall insurance need of the U.S. could act as a further tailwind for Progressive stock, short interest collapsed by 11.7% over the past month, opening the way for bullish investors to take over instead.

Some of these bulls included Progressive stock's largest shareholders, like Confluence Investment Management, which boosted its stake by 2.7% as of July 2024. While this boost may not seem much in percentage terms, it brought the asset manager's net investment up to $194.6 million today.