Deteriorating claims severity helped send GEICO Corp. to a second consecutive quarterly underwriting loss during the final three months of 2021 as the Berkshire Hathaway Inc. subsidiary provided another example of the significant impact of inflation on the profitability of the U.S. private-passenger auto insurance business.
The fourth-quarter 2021 GEICO underwriting loss of an estimated $101 million could have been far larger in the absence of a significant amount of favorable prior-year reserve development, which produced corresponding reductions in losses and loss adjustment expenses.
But even with the benefit of an estimated $600 million reduction in ultimate claim loss estimates for claims occurring in prior years, based on disclosures by GEICO parent Berkshire Hathaway in its annual report on Form 10-K as filed Feb. 28 with the SEC, the auto insurer's fourth-quarter 2021 loss and LAE ratio of 87.5% still ranked as its fourth-highest to date in the 21st century. GEICO posted higher loss and LAE ratios in the third quarters of 2017 and 2021 as it experienced hundreds of millions of dollars worth of hurricane losses in each period. It also generated a higher result in the fourth quarter of 2017, which included an estimated $480 million reserve build.
Excluding the impact of prior-year reserve development and named storms, GEICO's underlying loss and LAE ratio in the fourth quarter of 2021, 93.8%, would exceed the comparable results for all three of the earlier periods. It was 10.1 percentage points above GEICO's estimated result for the fourth quarter of 2020 when excluding approximately $253 million in favorable development for that period.
These challenges notwithstanding, GEICO may be better positioned than many of its private auto peers to bounce back as it was a first-mover in filing for sizable rate increases in several states. But in the meantime, another challenging comparison looms in the first quarter of 2022.
A step-change in severity trends, to borrow the terminology used by The Progressive Corp. President and CEO Tricia Griffith in her Feb. 28 annual letter to shareholders, was apparent in the GEICO data included in the Berkshire Hathaway Form 10-K. Full-year 2021 severity trends in collision coverage surged by between 15% and 16% from 2020 levels. The range was slightly higher than the between 13% and 14% that Berkshire had reported for the first nine months of the year. Trends in bodily injury and property damage coverages were slightly improved from the first three quarters of 2021 at between 2% and 3% and between 8% and 10%, respectively.
Berkshire said in its Form 10-K that average property claims severities rose in 2021 due to increases in used vehicle valuations. GEICO companies have also attributed higher severities in private auto rate filings, including in a Feb. 22 response to questions from the New Jersey Department of Banking and Insurance, to factors such as increasing repair costs, supply chain disruptions, the semiconductor chip shortage, rising medical costs and general inflation.
Frequencies have also bounced back from the depths of the pandemic. According to the Berkshire Form 10-K, in 2021 they rose in property damage and bodily injury coverages by between 13% and 14% and in the collision coverage by between 21% and 22%.
The New Jersey rate filing offers even more granular detail on the timing and extent of the increases by month and coverage in one of the group's top five markets. Frequency across all coverages in Government Employees Insurance Co.'s and GEICO Indemnity Co.'s books of business in the Garden State exceeded the result for the comparable pre-pandemic month in November 2021 for the first time, though that outperformance proved short-lived when faced with the surge of the omicron variant in December 2021. Severity across coverages was up by more than 7% on rolling three- and six-month bases in December 2021. In collision coverage, which the Form 10-K indicated saw the largest year-over-year severity spike, the increases on rolling three- and six-month bases were 27.1% and 21.3%, respectively.
"There was indicated rate need prior to the COVID pandemic and with frequency returning and severity increasing, the overall rate need has been exacerbated," the GEICO companies said in support of a filing where they each are seeking to implement overall rate increases of 6.9% on books of business with $1.76 billion in annualized written premium.
While there may be some early evidence of a peak in the rate of increase in used vehicle valuations, it will take GEICO time to earn the benefit of the higher rates it has implemented in a number of states. Several of the hikes, including the proposed New Jersey increases, are not intended to take effect for renewing business until April, for example. GEICO also benefited in the first quarter of 2021 from relatively low claims frequency as COVID-19 case counts and deaths spiked into January of that year. Its first-quarter 2021 loss and LAE ratio of 72.4% marked the company's second-best result in the previous eight years. Only the second-quarter 2020 ratio of 62.1% was lower.
GEICO's 2021 struggles were not unique. Private auto market-share leader State Farm Mutual Automobile Insurance Co., for example, reported a $3.4 billion underwriting loss in its auto business for the year prior to the impact of policyholder dividends, a reversal from a 2020 gain of $3.5 billion, prior to dividends.
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.