Ida only partially explains GEICO's highest quarterly loss ratio in 4 years

Hurricane Ida sent GEICO Corp. to its largest underwriting loss on absolute and relative bases in any period since the third quarter of 2017, according to an analysis of data contained in Berkshire Hathaway Inc.'s latest Form 10-Q, but reasons for concern extend well beyond a single natural catastrophe.

GEICO's pursuit of high single and low double-digit rate increases in a number of states during the third quarter signaled that the company's profitability concerns extended beyond the challenging year-over-year comparisons in measures of underwriting profitability associated with depressed driving in 2020.

Rising losses, after fully discounting the significant impact of Hurricane Ida, appear to confirm that the company faces a significant rate need that could lead to additional hikes in the coming weeks and months beyond the dozens of filings GEICO companies have already submitted.

GEICO's reported loss and loss adjustment expense, or LAE, ratio of 88.4% included an estimated 4.2 percentage points from the company's $400 million in Ida losses. However, those catastrophe losses appear to have been largely offset by favorable reserve development for prior accident years. Berkshire said GEICO's losses and LAE included reductions in the ultimate estimates for prior years' events of approximately $1.2 billion for the first nine months of 2021 after having previously reported reductions of $846 million during the first half of the year.

It marked the second-highest quarterly loss and LAE ratio for GEICO on an as-reported basis in any quarter to date in the 21st century, lagging only the third quarter of 2017 when the result was 91.9%. GEICO suffered from approximately $500 million in losses attributable to hurricanes Harvey and Irma in the third quarter of 2017 but experienced adverse prior-year development of an estimated $143 million. As such, the underlying loss and LAE ratios when excluding the effects of the hurricanes and prior-year development would have been approximately 87.7% in the third quarter of 2021 and 83.4% in the same period in 2017. The former figure also adjusts earned premium to add back in an estimated $15 million attributable to the lingering impact of the GEICO Giveback program.

The $2.9 billion program, unlike the premium credits and dividends issued by most of its private-passenger auto competitors, was structured as a 15% discount at the time of a policy's inception or renewal between April and October 2020, so its effects on the company's results were spread over several reporting periods on both written and earned bases. It was particularly impactful on GEICO's written premium growth rate in the third quarter. The reported expansion of more than 19.5% included the denominator effect of $1.5 billion worth in GEICO Giveback discounts; the normalized growth rate, excluding those discounts, would have been a considerably more modest 1.5%.

The pandemic's depressive effects on reducing claims volume in 2020 were evident in GEICO's reported results. Claims frequencies increased through the first nine months of 2021 by 12% to 13% for the property damage coverage, 13% to 14% for bodily injury and 21% to 22% for collision. Average claims severities surged by between 13% and 14% in the collision coverage for the first nine months of 2021, for example, as compared with between 10% and 11% for the first half of the year. Surging used vehicle values and rising repair costs have driven higher claims severities across the industry.

GEICO's rate filings suggest that the company has reacted across many geographies to recent trends. S&P Global Market Intelligence data shows that GEICO companies have filed for private auto rate increases, not including motorcycle and recreational vehicle policy forms, with effective dates for renewal business on or after Nov. 1, of $1.12 billion on books of business with annualized written premium of $11.55 billion in the aggregate across 26 states and the District of Columbia.

As previously detailed, GEICO's filings generally anticipate a return to pre-COVID-19 claims frequencies during the time frame its rates will be in use and, as a result, seek to eliminate "the distortions of the 2020 accident year." But its actuarial methodology has prompted questions from regulators in several states, including Texas where the group's largest underwriting affiliate submitted a filing in August for a double-digit overall rate increase.

In the fourth round of objections issued to date by the Texas Department of Insurance, actuary Eric Hintikka argued based on data showing lower frequency across coverages in the second quarter of 2021 relative to the fourth quarter of 2019 that "it does not seem obvious to me that we can expect frequencies to fully recover to their pre-pandemic levels in the very short term" due to factors such as broader employer acceptance of telecommuting arrangements. As a result, Hintikka added, "adjusting frequencies to the pre-pandemic levels seems a little questionable."

GEICO's third-quarter Texas frequency data as submitted to the regulator Nov. 5 in response to Hintikka's objection shows a continued narrowing in the difference between actual and expected frequency in the bodily injury and property damage coverages as well as significantly higher frequency in the collision coverage relative to the expected level.

It remains to be determined whether GEICO and its peers are able to implement all of the rate increases they need in across every jurisdiction in the current environment, but the historical nature of the company's third-quarter results offer another data point to confirm that the depths of the pandemic are increasingly distant.

The Ida losses sent GEICO to an underwriting loss of $289 million for the quarter, ending a string of six consecutive reporting periods of underwriting profitability that included two quarterly gains in excess of $1 billion. GEICO's only larger underwriting loss to date this century was its $416 million shortfall in the third quarter of 2017.