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GEICO's top-line surge accelerated in Q2, but loss ratio creeps higher too

GEICO Corp.'s growth rate in premiums written continued to rise during the second quarter as the company benefitted from a sharp increase in new business.

The nation's second-largest private auto insurer experienced growth of 10.2% in voluntary auto policies in force, 5% in premiums per auto policy and 17.8% in voluntary auto new business sales, parent Berkshire Hathaway Inc. said Aug. 4 in its Form 10-Q.

The 16.7% increase in GEICO's premiums written in the second quarter represented the fastest year-over-year rate of acceleration since Berkshire Hathaway began consistently disclosing the figure in its annual and quarterly SEC filings in the fourth quarter of 2012. The company's premiums written rose 15.6% in the first quarter and have now expanded double-digit percentages for 10 consecutive reporting periods.

The reported growth rate in voluntary auto new business sales compared unfavorably with the first quarter's result of 30.2%, but it still ranks as the second-highest value Berkshire Hathaway has disclosed in that regard in an SEC filing in at least the last seven years.

But at the same time GEICO generated growth at historically significant levels, its loss and loss adjustment expense, or LAE, ratio continued to rise. The ratio of 84.3% for the three-month period ended June 30 was the highest GEICO had reported in a second quarter since 2000. The loss and LAE ratio topped 80% for a fifth consecutive quarter for the first time since a stretch ending in the second quarter of 2001. GEICO's second-quarter combined ratio, however, remained below 100% at 98.4% for the period.

Berkshire Hathaway said GEICO's average claims severities for the first half of 2017 rose between 4% and 5% for property damage and collision coverages. The range of the increase for bodily injury coverage was from 4% to 6%. From a frequency standpoint, the company said the measure was "relatively flat" for property damage and collision coverages, up 3% for bodily injury coverage and down about 2% for personal injury protection.

The accelerated pace of expansion follows commentary by Berkshire Hathaway Chairman Warren Buffett in his 2016 annual letter to shareholders regarding his plans for the auto insurer, as he said GEICO would "make hay while the sun sets, knowing that it will surely rise again."

GEICO was not alone among the nation's largest private auto insurers in obtaining growth in units and premiums during the second quarter.

Rival Progressive Corp., which reported strong growth in a variety of private auto business metrics during the second quarter, attributed part of its success to "many of our competitors taking higher rate increases than we have." The company's mantra regarding expansion has been to grow as fast as possible while maintaining a combined ratio of 96% or better.

Its personal vehicle net premiums written increased 14.1% year over year in the second quarter, which represented the fifth consecutive period of double-digit percentage growth. The company's direct and agency auto policies in force have produced growth rates in the high-single-digit percentages in recent months.

Allstate Corp. executives said recently that they feel "quite good" about the company's competitive position in a market where it is mostly seeking to take "modest" rate increases while the actions of competitors are "all over the board." The company reported year-over-year growth in Allstate-brand auto applications of 8.2% during the second quarter, up from less than 4.5% in the first quarter, and its Allstate-brand auto renewal ratio held steady on a sequential basis at 87.4%.

The conventional wisdom has been that carriers like Allstate that recognized and responded earlier to adverse changes in claims frequency and severity trends through rate increases would be poised to benefit as competitors attempted to catch up. However, executives at the company reported that the situation was not necessarily playing out in that manner in all markets.

To that end, Progressive executives responded to a question during an Aug. 3 conference call on how the company envisions competition with mutual insurers playing out, given the different financial objectives they are perceived to maintain relative to publicly traded stock insurers.

"Obviously everybody has their own operating objectives," said Progressive President and CEO Tricia Griffith. "We really try to surgically focus on our objective to grow as fast as we can at a 96[% combined ratio] as long as we can serve our customers."