Top publicly listed U.S. private auto insurers have witnessed a broad-based decline in loss frequency so far this year.
Berkshire Hathaway Inc.'s GEICO Corp., Progressive Corp. and Allstate Corp., the three publicly listed insurers among the Big 4 U.S. auto insurance companies, reported lower loss frequency for all types of private auto insurance coverage in the first six months of 2018, according to an S&P Global Market Intelligence analysis. Loss frequency is generally measured as the number of claims received as a percentage of the average in-force policies during a period.
Progressive reported an overall decrease in loss frequency of 2% for the first half of the year. The bulk of this decline occurred in personal injury protection, property damage and bodily injury, with each coverage type decreasing by about 2% to 3% in the six-month period, according to a quarterly filing. Collision policies saw a smaller 1% decline.
During a second-quarter earnings call, CFO John Sauerland said historical loss frequency is difficult to explain, let alone forecasting future trends. Sauerland said frequency trends have been somewhat volatile during the past decade, even as the long-term trend has generally been negative.
Frequency has fallen for six consecutive quarters, Saulerland said on the call, but given its volatile nature, "there is reason to be cautious."
"The key for us, I think, is ensuring that we are very agile where we think things have changed," the CFO said, according to a transcript. "We act very quickly and make those changes in the marketplace. And I think that's a big piece [of] how we win."
Progressive has cut rates on its private auto business in many states in the Midwest and South this year.
Allstate also disclosed in a second-quarter financial supplement that it had experienced six consecutive quarters of decreasing loss frequency across both property damage and bodily injury coverage types. At the same time, it said severity increased for both coverage types, owing to "the impact of higher costs to repair more sophisticated, newer model vehicles" and "higher medical costs," respectively. A May 2 investor presentation disclosed that paid claims frequency for bodily injury in particular began to trend lower in the third quarter of 2016.
Allstate CEO Thomas Wilson on a second-quarter call described the time series graph of the simultaneous decline in loss frequency and rise in loss severity as "an alligator's jaw" that grows wider with time. He warned against lowered pricing in the short term on the assumption of declining loss frequency, due to its inherent unpredictability.
"Pricing on that kind of basis and assuming the lower frequency is there usually means you're going to get caught in the jaws," he said, according to a transcript. "Because at some point, the frequency could come back [and] the severity is not going away."
Wilson had previously declined to offer a single "grand theory" to explain the decrease in loss frequency during a first-quarter earnings call.
One explanation for the current decline in private auto loss frequency is an increase in gasoline prices, according to Keefe Bruyette & Woods analyst Meyer Shields. Shields wrote in a July 15 note that higher gas prices should reduce auto accidents, and correspondingly claims, providing a boost to second-quarter earnings for private auto underwriters.
Other publicly listed private auto insurance companies did not experience a drop in loss frequency to the same extent as GEICO, Progressive and Allstate. MetLife Inc.'s auto business was a mixed bag; it reported lower auto frequency overall for the first six months of 2018, but within those six months, auto frequency increased during the second quarter. Michel Khalaf, MetLife's President of U.S. Business and EMEA, indicated that there was a general improvement in frequency while discussing pricing trends during a second-quarter earnings call.
"I think we've seen loss trends that are more favorable, generally speaking, in recent quarters, especially compared to '15 and '16. We think this is due to a number of factors, mainly the miles driven, which seemed to have flattened after several years of increase," he said, according to a transcript.
Kemper Corp. also experienced varying trends in loss frequency in the second quarter, according to its Form 10-Q. It reported a lower frequency of claims in its preferred personal automobile insurance segment, but a higher claims frequency on its nonstandard auto book, which is nearly 3x larger. CEO Joseph Lacher said loss costs within the nonstandard auto business were still more favorable than those observed two years ago.
"If you back up 24 months ago, we were getting hammered with loss cost trends, and that's probably a little bit of what's in our heads. Particularly California saw the peak of the pain, and that's one of our biggest states," Lacher said, according to an earnings call transcript. Loss costs have since "moderated," falling into the mid- or low-single digits across all of its nonstandard businesses, Lacher added.