Q2 GEICO results underscore likely success of industry's auto profitability push

Historically favorable underwriting results for Geico Corp. for the first half of 2024 provide another data point of the improvement that the US private auto insurance business is likely to experience during the full calendar year. They also may signal a coming change in the competitive dynamics of a market that has been characterized by rate increases and retrenchment for the better part of the last three years.

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➤ S&P Global Market Intelligence projected in July that the combined ratio for the US private auto business would decline by 6.5 percentage points in 2024 to 98.4%, implying a return to profitable underwriting results just two years after the business produced a generationally large loss. Our outlook assumed broad-based improvement across the industry at the same time results among the leading market participants varied widely.

➤ The Progressive Corp. and GEICO, which rank as the No. 2 and 3 US private auto insurers with a combined market share of 27.4% in 2023, dramatically outperformed the industry as a whole in the business that year. And they appear poised to do so again in 2024 with measures of underwriting performance for the first half and second quarter of the year that were their best for those periods since the depths of the COVID-19 pandemic in 2020.

➤ Given the challenges the industry confronted amid severe loss-cost inflation during the past three years, carriers have generally remained reluctant to declare a premature victory. But it appears that both GEICO and Progressive have pivoted to expansion mode after having delivered consistently favorable underwriting results through the trailing-12-month period ended June 30. GEICO said that its advertising expenses increased by an undisclosed amount in the second quarter while Progressive reported $1.6 billion in expenditures on advertising in the first half of the year, in line with its 2023 activity for the entire year. Increases in ad spend serve as a key driver of new business growth for direct-to-consumer auto insurers.

GEICO's loss and loss adjustment expense (LAE) ratio, according to the quarterly report on Form 10-Q filed Aug. 5 by parent Berkshire Hathaway Inc., tumbled to 74.1% in the second quarter and 73.3% for the first half of 2024 from results in the respective year-earlier periods of 84.3% and 83.7%. Its expense ratio for each of the second quarter and first six months of the year totaled 8.8% as compared with 10.4% in the second quarter of 2023 and 10.0% in the first half of that year due to what Berkshire described as improved operating efficiencies and increased operating leverage.

Other than the first six months of 2020, a period where private auto loss ratios cratered from mid-March through June amid a dramatic pandemic-era decline in driving, GEICO's 73.3% loss and LAE ratio matched its lowest in a first half of a year since 2010. The company's second-quarter loss and LAE ratio also marked a 14-year low for a comparable period when excluding pandemic-induced distortion. Its second-quarter combined ratio plunged by 11.8 percentage points to 82.9% in a result that reflected stronger premium growth, declining losses and a lower expense ratio.

Year-over-year comparisons were even more impressive when excluding the impact of favorable prior-year reserve development, which tumbled to just $50 million in the second quarter from $550 million in the year-earlier period. The decline in GEICO's loss and LAE ratio prior to favorable development amounted to 15.4 percentage points on a year-over-year basis as compared with the 10.2-point improvement on an as-reported basis. GEICO continues to experience lower claims frequencies across the property damage and collision coverages at the same time the average premiums per policy continues to rise due largely to the impact of rate increases.

Progressive's personal lines business, which largely consists of private auto policies, posted a combined ratio of 68.6% for the first half of 2024, according to its 10-Q, down from 81.7% in the year-earlier period. Its personal lines combined ratio for the first six months of 2024 of 86.6% represented the company's best such result since 2005, excluding the COVID-19-induced anomaly in 2020.

On a statutory basis, GEICO and Progressive together produced combined ratios in their private auto businesses of 93.7% in calendar-year 2023 as compared with 108.1% for the rest of the property and casualty industry in that line. Estimates based on their year-to-date GAAP disclosures imply a statutory-basis combined ratio of just 84.6% for the first half of 2024 between the two companies.

GEICO and Progressive have been so profitable that if we were to use their first-half 2024 GAAP results as a full-year run-rate and leave the rest of the industry's statutory financials unchanged from 2023 levels on a year-over-year basis, it would lead to a pro forma 2024 private auto combined ratio of 101.0% — 3.9 percentage points below the actual 2023 result of 104.9%. This represents an improbable scenario: Progressive has been materially boosting its ad spend in recent months, implying that the use of its first-half estimated personal lines expenses as a full-year run-rate would produce too low of an expense ratio; and the other publicly traded top-10 private auto insurers, The Allstate Corp. and The Travelers Cos. Inc., each posted respective measures of private auto underwriting profitability that were their best for a comparable period since the first half of 2021.

The unique challenges associated with the current private auto cycle, highlighted by continued disparities in the underwriting gains and losses generated by leading market participants, likely will spawn a wide range of competitive responses in the second half of 2024 and into 2025. Some carriers that have firmly established an ability to produce targeted underwriting margins might move aggressively to consolidate market share.

Modest rate decreases have emerged in increasing volume, for example, as some carriers dial back portions of previous hikes they implemented in select markets. Progressive reported "small rate decreases" in the second quarter in eight states at the same time its ad spend surge puts it on pace to set new internal and external records for a US P&C insurer in that category. GEICO has instituted a so-called Welcome Factor in a number of states that would offer newer customers discounts of varying amounts for the first few renewals and typically appear in product filings data as a rate decrease. Its recent ad campaign, meanwhile, has emphasized the range of coverage and service that GEICO provides as opposed to more traditional themes of low prices or the ease of obtaining a quote.

GEICO reported a year-over-year decline in policies in force of 4.3% in the second quarter. While that represents improvement from the previous comparisons contained in Berkshire 10-Qs for the third quarter of 2022 through the first quarter of 2024, it has been since September 2022 that Progressive last reported a year-over-year reduction in its personal auto policy count. Progressive's personal auto policies in force have increased on a sequential basis for seven consecutive months.

All told, we have seen little in the second-quarter results available to date to materially alter our upbeat outlook for the previously embattled private auto business, which incorporated a marginally higher expense ratio coming off of historically low levels in 2023, mid-teens growth in written and earned premiums, and a significant slowdown in the rate of increase in losses and LAE. Our 2025 outlook, which assumes sharply lower premium growth but still favorable underwriting results, remains dependent upon the speed at which the various competitive dynamics play out.