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GEICO's growth lags Progressive's private auto expansion in 8th straight quarter

GEICO Corp.'s financial results continue to point to an eventual pickup in premium growth trends, but that upturn did not occur in the second quarter.

Parent Berkshire Hathaway Inc. disclosed in its 10-Q for the period that the No. 2 U.S. private auto insurer's net premiums written totaled $8.70 billion, an increase of 5.7% from the second quarter of 2018. While reflective of higher policies in force and average premiums per policy in GEICO's voluntary auto business, the growth rate compared unfavorably to results in prior periods, as well as to the private auto expansion achieved by rival Progressive Corp.

Entering the second quarter, GEICO had achieved growth in net premiums written of at least 6.6% in each of the previous 21 reporting periods. GEICO's percentage growth rates were in the double digits in 17 of those 21 quarters.

Berkshire Hathaway has only disclosed GEICO's quarterly net premiums written on a consistent basis in its SEC filings since the start of 2013, so such year-over-year comparisons prior to the first quarter of 2014 are not available. A review of historical statutory data for the current members of the GEICO subgroup as consolidated by S&P Global Market Intelligence suggests that the second quarter's premium growth likely matches the auto insurer's slowest rate of expansion since the third quarter of 2010.

Arguably more striking has been the comparative pace of expansion between GEICO and Progressive, the No. 3 U.S. auto insurance group. Personal vehicle net premiums written at Progressive totaled $7.49 billion in the second quarter, which represented a year-over-year increase of 12.5%.

Progressive's growth rates exceeded GEICO's only three times during a 14-quarter stretch ended June 30, 2017. Since then, however, Progressive's growth rates have topped GEICO's for eight consecutive quarters. In fact, in each of the past six quarters, Progressive's personal auto business growth rates have been more than 5 percentage points higher than GEICO's.

The pace of Progressive's recent growth elicited comments from Berkshire Chairman and CEO Warren Buffett during the company's annual shareholders meeting earlier this year. But the extent to which the recent gap persists between the two competitors remains to be seen.

It also remains likely that GEICO's second-quarter growth will exceed that of the P&C industry as a whole. GEICO's first-quarter growth in the combination of private auto liability and auto physical damage lines was more than double the expansion of just over 3% for the remainder of the industry.

Certain statistics in GEICO's second-quarter report suggest reason for optimism that the company's growth rate has bottomed. Growth in voluntary auto policies in force, for example, moved up to 4.5% from 3.6% a quarter earlier. Voluntary auto new business sales surged by 8.6%, according to the second-quarter report, from 6.2% in the first-quarter report and from declines at rates ranging from 4.7% to 11.8% during the four quarters of 2018.

The company also increased its underwriting expense on both absolute and relative bases in part due to higher spending on advertising, a key driver of new business growth. GEICO's underwriting expenses of $1.20 billion in the second quarter were up 8.5% from the prior-year period, and they amounted to 13.6% of net premiums earned as compared with 13.4% a year ago.

On the other hand, GEICO did see some erosion in its loss and loss-adjustment-expense ratio in the second quarter. The loss and LAE ratio of 82% was 3.5 percentage points above the second-quarter 2018 level, and it was the first time since the fourth quarter of 2017 that the result equaled or exceeded 80%.

Though Berkshire said GEICO had the benefit of only $54 million from the reduction of ultimate claim loss estimates for prior years' loss events during the first half of 2019, as compared to $430 million in the first six months of 2018, the vast majority of the favorable development took place in the first quarters of those two years. S&P Global Market Intelligence calculates that GEICO had unfavorable development of $29 million in the second quarter versus favorable development of $23 million in the year-earlier period, based on a review of disclosures in Berkshire filings.

GEICO also experienced a divergence in claims frequency and severity trends, consistent with certain of its auto insurance peers. The company reported declines in frequency across the property damage, collision and personal injury protection coverages of between 2% and 4% relative to 2018; it was flat for the bodily injury coverage. Severity, meanwhile, increased by between 4% and 6% in property damage and collision coverages and by between 6% and 8% for bodily injury coverage.