Rate Hikes Not Bringing Profit to Auto Insurers

By Susanne Sclafane, Insurance Journal
Aug. 18, 2023

Jumps in rates and written premiums did little to move the needle on underwriting profits for U.S. personal auto insurers, Fitch Ratings reported based on a recent review of midyear results of nine big market players.

Profitability challenges in the auto line prompted a Fitch downgrade of the lead subsidiary of one of the insurers, Kemper, on Aug. 17, and a changed outlook for another, Horace Mann. Separately, S&P Global Ratings downgraded yet another---Allstate---earlier the same week.

In their analysis of public company GAAP filings titled, “U.S. Auto Insurer Profit Recovery Slow to Materialize,” Fitch analysts calculated a 10% aggregate increase in premiums for the nine-company cohort for the first six months of 2023. But the aggregate combined ratio for the group improved less than a point, dropping to 100.4 for first-half 2023, compared to 101.3 for the same period last year.

The aggregate combined ratio now hovers right above breakeven, with just two of the nine publicly traded personal auto insurers---Progressive and GEICO---reporting sub-100 combined ratios, a chart in the Fitch report reveals.

Fitch cited continued unfavorable claims severity and higher catastrophe losses as factors driving the overall underwriting loss for the group.

“Future profit improvement will continue to be hindered by unusually high loss severity,” the Fitch writeup predicted.

The combined ratio figures compiled by Fitch reveal GEICO was the only one of the nine carriers to actually report a lower combined ratio in first-half 2023 compared to first-half 2022. While GEICO reported a 9.7-point drop in its combined ratio and premiums growing less than 1.0% (0.9% per Fitch’s calculation), other carriers saw combined ratios grow in the range of 0.1 points (Kemper) to 16.3 points (The Hartford).

Excluding GEICO, the overall first-half 2023 combined ratio for the group is about 103, up about 3 points from last year’s first half ex-GEICO result. (Carrier Management estimates based on premiums and underwriting profit information in the Fitch commentary.)

GEICO vs. The Rest

Commenting on GEICO’s results in the Management’s Discussion and Analysis section of Berkshire Hathaway’s second-quarter 2023 report published earlier in August, the conglomerate cited higher average premiums per auto policy, takedowns in prior accident year’s claims estimates and cuts in advertising costs to explain the reversal from last year’s underwriting losses to underwriting profits for the quarter and six month periods.

Although rate increases generated 16.3% higher average premiums per policy over the last 12 months, GEICO’s overall premiums were basically flat. A decrease of 2.7 million policies in force over the same period---a 14.4% drop in policy counts---explains why premiums did not increase.

Berkshire said the cuts in advertising contributed to the decline in the number of policies.

GEICO’s first-half loss ratio improved 7.5 points, with the prior-year reserve takedown ($888 million) accounting for roughly 3.6 points of the change (by CM’s calculations). The expense ratio improved 2.2 points.

As for other carriers, loss severity continues to be an issue, Berkshire noted. “Average claims severities in the first six months of 2023 were higher for property damage (21-23% range), collision (7-9% range) and bodily injury (6-9% range) coverages,” Berkshire’s stated in the MD&A.

Meanwhile, claim frequency changes varied by coverage, with property damage and collision frequencies down 7-8%, while frequencies rose slightly for bodily injury and personal injury coverages.

While GEICO’s premium volume hardly budged, among the remaining carriers analyzed by Fitch, Progressive had an outlier premium jump of more than 20% for the first half.

Premium growth averaged 10.2% for the nine carriers overall, but only four of the nine---Progressive, Allstate, Travelers and Cincinnati Financial---actually recorded increases of 10% or more. Together, first-half 2023 premiums for the eight carriers other than Progressive only grew by about 4%.

That’s a problem when loss costs are climbing faster. The Fitch report displays CPI data from the Bureau of Labor Statistics indicating that Motor Vehicle Insurance costs leapt by more than 10% annualized for each month since September 2022, including a 17% jump in June 2023.

Progressive, in its second-quarter earnings report, revealed that, unlike GEICO, its policies in force are climbing by double-digits, while unfavorable prior-year loss reserve development and catastrophe losses fueled worsening underwriting results through the first six months. On Aug. 16, Progressive reported July 2023 results, revealing the year-to-date combined ratio is now down to 97.6, through seven months, from 99.1 through six months, with premium growth staying at the 20-plus percent level.

In contrast to Progressive and GEICO’s sub-100 combined ratios for the year so far, Kemper, Horace Mann and The Hartford posted first-half combined ratios above 110, with The Hartford’s result deteriorated more than 16 points.

“Persistent severity loss increases in auto have had a meaningful influence on overall industry results. We continue to respond with significant pricing actions,” said Hartford CEO Christopher Swift during a conference call, according to a report from our sister publication, Insurance Journal.

“During the quarter, we achieved renewal written price increases of 13.8% and expect acceleration to above 20% by the fourth quarter. As loss cost trends emerge, we will aggressively push for appropriate rate actions,” Swift added.

Rating Agency Actions: Horace Mann and Kemper

Fitch took rating actions on the carrier’s with the second- and third-worst first-half auto combined ratios---Horace Mann and Kemper---on Aug. 17.
For Horace Mann, Fitch Ratings has affirmed the ratings of the property/casualty operating subsidiaries at “A” (Strong), but revised the rating outlooks to negative from stable.

“The negative rating outlook for the P/C subsidiaries reflects continued weakness in the personal auto and property lines of business which Fitch believes will persist over its ratings horizon,” Fitch said in a statement. “In 1H23, the auto segment combined ratio deteriorated relative to the prior-year period as a result of persistently high claims severity, while the property business reported above-average catastrophe losses, leading to a total P/C combined ratio of 118.4, compared with 115.3 for full-year 2022.”

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