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Diverging bottom-line results could have top-line implications for auto insurers

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Diverging bottom-line results could have top-line implications for auto insurers

An apparent divergence in loss experience for some of the nation's largest private-passenger auto insurers thus far in the fourth-quarter 2016 earnings season could have competitive implications that last long after companies close the books on the fiscal year.

Whereas Allstate Corp. reported its lowest Allstate-brand auto combined ratio (including the impact of catastrophes and prior-year reserve development) since the third quarter of 2014 and Progressive Corp. achieved its management's targeted underwriting margins in both its agency and direct auto businesses, Travelers Cos. Inc. posted a 116.7% combined ratio in its agency auto business for the fourth quarter of 2016 and The Hartford Financial Services Group Inc. produced a 118.1% combined ratio in its personal auto book for the quarter, and a 111.6% combined ratio in the business for the full year, as both companies observed increases in bodily injury claims severity.

Progressive showed a resurgence in agency auto policies in force through 2016 while its direct auto policy count continued to expand in the high-single or low-double digits. Allstate-brand auto policies in force declined on a sequential basis for the fourth consecutive quarter, but the company may be poised to resume an expansion of its business, or at least stem the tide of decline, as 2017 begins.

Allstate President Matthew Winter said during a Feb. 2 conference call that the company engaged in a "fairly dramatic increase" in rates as it sought to catch up to the spike in claims frequency that the company experienced during the previous 18 months. Now that the company has "caught up" from a rate perspective, it is positioned to resume adding agencies and stem declines in retention rates, he said.

"It's a vicious treadmill if retention keeps declining because it's very hard to add enough new business to make up for that loss," Winter said. "We saw a slight stabilization in the decline in this last quarter. That makes sense to us since we took a huge amount of rate in the second quarter of 2016, and so most of that has burned through already and impacted customers and we've dealt with the disruption already."

Because some competitors have only "recently" begun to raise rates in response to environmental conditions, Winter explained, Allstate "should be in a very good position to pick up more of those customers from a new business perspective" to the extent their actions trigger elevated shopping behavior. The company's loss assumptions for 2017 are such that Winter expects more of a "moderated rate need" that responds to normal inflationary trends.

Newly issued applications for Allstate-brand auto policies were flat on a year-over-year basis in the fourth quarter of 2016 at about 562,000, marking a notable improvement from the declines in excess of 26% the company observed during the previous three quarters. The renewal ratio of 87.4% was down by approximately 10 basis points from the third quarter of 2016 and 80 basis points from the fourth quarter of 2015.

Trends in new and renewal personal auto business at The Hartford may come under further pressure in 2017 even after the company said that new business written premiums plunged by 57.9% in the segment during the fourth quarter of 2016.

The retention rate by policy count slipped to 83% in the fourth quarter of 2016 from 84% in each of the previous seven quarters; the premium retention rate, meanwhile, increased to 89% in the fourth quarter of 2016 from 88% in the third quarter of 2016. Auto policies in force of less than 1.97 million marked the first time since The Hartford began including the statistics in its quarterly supplements in the first quarter of 2007 that the count fell below 2 million.

"We are taking the corrective actions necessary to improve our profitability, and that will obviously require some top-line shrinkage," said Christopher Swift, The Hartford's chairman and CEO, during a Feb. 3 call.

The new business premium of $48 million in the fourth quarter of 2016 was also the lowest The Hartford's personal auto business had booked in a reporting period in at least a decade.

"We reduced our new business marketing efforts in many jurisdictions until more-adequate rates are in effect," said President Douglas Elliot. He expressed confidence that The Hartford could resume its new business growth once adequate rates are in place.

Allstate, Travelers and The Hartford all guided to improvement in personal auto underwriting profitability in 2017 as compared with 2016, but they will be starting from very different positions. And it appears their desire to generate top-line growth beyond the lift provided by rate increases will vary considerably.