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Difficult environment may lead to more tough choices for US auto insurers

Downward pressure on premium rates, claims volume and investment income could compel other U.S. private auto insurers to follow Allstate Corp.'s lead in seeking to extract additional operational efficiencies from their businesses.

Spending on items such as employee salaries, travel, rent and real estate among the top 10 private auto insurers and the U.S. property and casualty industry as a whole fell to their lowest levels relative to premium writings in more than a decade in 2019. But newfound macroeconomic challenges in combination with the competitive threat posed by low-cost market participants have placed even more importance on achieving and maximizing underwriting profitability in a commoditized business, potentially setting the stage for additional belt-tightening.

Allstate unveiled its transformative growth initiative in December 2019, pledging a series of actions intended to improve its competitive position in the personal lines market. Among other things, the plan involved the consolidation of four distinct organizations into a single business model; product redesigns that increased reliance on sophisticated rating algorithms in pricing; increased investments in technology; and a reduction in operating expenses. However, the biggest headline might have been the company's decision to phase out the brand Esurance, the direct-to-consumer auto insurer Allstate acquired in 2011.

A Sept. 30 release offered some additional clarity on the program, as Allstate revealed it would reduce its workforce by approximately 3,800 employees, primarily in claims, sales, service and support functions. The company said improving the competitive price position of its auto insurance business to further its goal of boosting customer value "requires cost reductions to maintain margins."

Allstate said it expects to incur restructuring charges of approximately $290 million on a pretax basis, much of which would hit the books in the third quarter. Severance and employee benefits will account for about $210 million of that amount, the company disclosed in a Form 8-K filing. The balance of the charges relates to real estate exit costs resulting from office closures.

"Our intent is to drive the expense ratio down over time," Executive Vice President and CFO Mario Rizzo said during Allstate's Aug. 5 earnings conference call.

An analysis of disclosures in Allstate's most recent combined annual statutory statement shows that the company had already been making considerable progress in that regard. Its 2019 ratio of other underwriting expenses to net premiums written of 24.4% was the company's lowest in 17 years.

Allstate's results came as part of a broader trend. Statutory expenses in the U.S. private auto business, including the combination of commissions and brokerage, taxes, licenses and fees, other acquisition expenses and general expenses, fell to the lowest level relative to net premiums written in at least the past two decades in 2019. The private auto expense ratio showed only nominal improvement from the previous two years, however, as higher advertising spend offset reductions in other areas.

The 2019 expense ratio among the top 10 writers of private auto business at the group level, inclusive of results for all business lines, fell to less than 23.9% from 24.1% in 2018. The ratio for those 10 combined entities was last lower in 2005. Salaries and employee relations and welfare, excluding payroll taxes, accounted for 5.3 percentage points of the 2019 expense ratio, down from 6.7 percentage points as recently as 2013.

Trends in those line items have followed a similar trajectory as it pertains to loss adjustment expenses, but those costs will face extra scrutiny in the current environment following the COVID-19-related dive in claims frequency.

Expenditures on travel, rent and real estate have been placed under the microscope amid a global pandemic. Many corporations have curtailed or prohibited business-related travel and started to consider ways to shrink their real estate footprints. But statutory data indicates that the top 10 private auto groups spent more than 8x as much in 2019 on salaries and employee relations and welfare than they did on those categories across all expense classifications.

S&P Global Market Intelligence projects that the private auto expense ratio will tick higher in 2020 due to a number of one-time, pandemic-related developments before declining in 2021. Exactly how much it will fall likely depends on whether other large writers decide to make cutbacks of a magnitude comparable to Allstate. The extent to which downward pressure on premium volume persists represents another variable as temporary, but significant, rate reductions by the likes of State Farm Mutual Automobile Insurance Co. and GEICO Corp. could contribute to a denominator effect.

Consolidation in the personal lines space, including through Allstate's pending agreement to acquire National General Holdings Corp. and MetLife Inc.'s prospective sale of its P&C business as has been suggested in published reports, could drive further improvements. Allstate, for its part, said it expects to realize "significant cost synergies" through the acquisition and the eventual consolidation of its independent agent business into the National General platform.