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Progressive's growth surge shows the squeeze on smaller competitors

The top-line growth trend shown in recent months by Progressive Corp. would seem to reinforce the longer-term view of the private-passenger auto insurance market presented by CEO Andrew Rose.

Rose said during the 8th annual Insurance M&A Symposium that auto insurers "without big names" will be increasingly challenged to attract business in a market where $7 billion is spent annually on advertising to chase what he described as about $20 billion in annual turnover in premium.

"Companies not growing their market share are in trouble as their expense ratio climbs," said Rose, who has led Admiral Group Plc's U.S. auto insurance comparison site since 2012.

As many auto insurers raise rates in response to adverse claims frequency and severity trends in the past couple of years, companies such as Progressive and Berkshire Hathaway Inc.'s GEICO Corp. have picked up market share. Their results to-date in 2017 suggest they are poised to gain even more ground this year.

The combination of the group led by State Farm Mutual Automobile Insurance Co., Berkshire Hathaway, Progressive and Allstate Corp. held share of nearly 49.2% of the private auto market in 2016, based on direct premiums written generated from the 50 U.S. states and the District of Columbia. Progressive and GEICO accounted for 21.1% of the private auto market.

Although both of those figures represented incremental increases over 2015, they are significantly higher than the 43.1% combined share for the four groups and 14.3% combined share for Progressive and GEICO in 2006.

Private auto direct premiums written in the 50 U.S. states and the District of Columbia in 2016 rose just less than 12% at Berkshire Hathaway, largely reflecting the impact of GEICO, and 12.1% at Progressive. Based on monthly net premiums written data reported by Progressive through September, that group is poised to post a materially higher rate of growth in 2017.

For the trailing-12-month period ended Sept. 30, Progressive's net premiums written in its personal vehicle businesses totaled $22.02 billion, an increase of almost 14.9% from the comparable year-earlier period. Its trailing-12-month growth rate, calculated on the same basis through Dec. 31, 2016, was just less than 12%. Although Berkshire Hathaway has yet to report its third-quarter results, GEICO's trailing-12-month growth rate in written premiums as reported in its parent company's SEC filings climbed to 14.9% through June 30, up from expansion of 11.7% during the comparable year-earlier period and 12.5% for full-year 2016.

Unit growth has been key to both companies' expansion, and Progressive's September results were especially noteworthy in that regard.

Its personal auto policies in force climbed nearly 10.7% to more than 11.4 million. Progressive's personal auto policies in force last increased by a double-digit percentage in October 2004 and last rose at a steeper rate in August 2004.

By channel, agency auto policies in force increased more than 10.7%, which represented the strongest growth rate in that figure since May 2004. Direct auto policies in force expanded 10.6%, a 13-month high.

Rose presented several hypothetical scenarios whereby midsized auto insurers could use M&A as a way to enhance their positions. One involved a consolidation of the various AAA-linked insurers "under one roof" to better leverage the strength of their brand. As it stands, he said, the AAA brand is "underutilized" in the auto insurance business due to the disconnected nature of the companies.

The combination of Auto Club Exchange Group, Auto Club Insurance Association Group and CSAA Insurance Exchange would have share of more than 3.2% based on their 2016 private auto direct premiums written in the 50 U.S. states and the District of Columbia, as opposed to no more than 1.3% individually. That would rank ninth nationally behind the four aforementioned groups, United Services Automobile Association, Liberty Mutual Holding Co. Inc., Farmers Insurance Group of Cos. and the group led by Nationwide Mutual Insurance Co.

"Even joint marketing efforts have the potential to be a disrupter," Rose said.

He dismissed the likelihood of long-term success for consolidation among smaller auto insurers due to inherent challenges pertaining to scale, expense ratios and access to data for use in pricing.

"Two broken models do not make a good one," he said.

Rose labeled the broad adoption of the autonomous vehicle as the "single greatest threat" to the auto insurance business over time. But, he added, "No one knows" with certainty "when this change will take place or what this change means."