Let’s say you’re buying a car for the first time this month and you’re about to move outside of a major US city*.
Your used car isn’t as cheap as it would have been six months ago, but that’s okay. You are putting in an uncomfortably high down payment because interest rates are high. Before leaving, you just need to take out insurance.
Normally, it’s an afterthought. But not this year.
In fact, your car may need to sit in the lot for a day or two while you shop for a policy that isn’t exorbitantly priced. You’re not only uninsurable, but US auto insurers have lost money on underwriting policies and prices are rising rapidly.
Corporate stocks with major auto insurance firms — those trading without the protection of Warren Buffett’s imprimatur, at least — have begun to reflect these issues. Take Allstate and Progressive:
It’s not total market chaos, but it’s not exactly copacetic either. Auto insurance losses were among the reasons Fitch Ratings downgraded Allstate’s credit to BBB from A- this week, as auto underwriting is the insurer’s largest line of business in terms of premiums received. Allstate also sold $600 million of preferred stock earlier this month yielding 7.375%, a relatively wide spread with Treasuries. This suggests that management is “comfortable [a] lower rating,” BMO analysts wrote after the sale.
Progressive is holding up better, according to CreditSights analysts. But they are still pessimistic about the whole industry. “After enjoying outsized profitability in the onset of pandemic conditions with a substantial drop in miles driven, inflationary pressures have been particularly acute,” they wrote.
The pressures on auto insurance profitability have been caused primarily by unexpected “severity” rather than “frequency”. This means that insurers do not reimburse policies more often, but they do are pay higher amounts.
To put it simply: it’s not because there are more car accidents, but the average cost of car accidents from insurers (both those already paid and those they expect payable) are higher.
Here’s what Tricia Griffith, CEO of Progressive, told investors and analysts during the company’s first quarter earnings call. With our emphasis:
We saw higher than expected severity trends in previously closed personal auto claims, primarily by fixing vehicle coverages. While I’m not speculating on why these trends changed, I can tell you that we reacted quickly and decisively. to adjust our reserves to these short-term hedges. I trust the people and processes we have in place to ensure that we are sufficiently reserved. . .
Now, there are a lot of things that go into car repair seriousness. And so a few things. We’ve really – and I think as an industry – struggled with store capacity. So our ability to get cars in and the throughput to get them out, which of course has an effect on duration, rental, etc. Parts prices are up just under 3% and labor rates, so think about the unemployment rate and the fact that there’s a hiring problem everywhere. Same thing with mechanical technicians in body shops. But these repair rates are up between 4.5% and 5%. Here are some contributions.
Rising auto prices and strong demand have indeed played an important role in the long-term trend of higher auto insurance costs.
The Manheim Used Vehicle Index shows used car prices were 8% higher in 2022, on average, than they were the year before, although prices were more or less stabilized since December. Not only are totaled vehicle replacements more expensive, but repairs are also more expensive, as the cost of auto parts and services also increased last year, according to BLS data.
However, there may be more than supply chain issues and labor costs.
According to its 10-Q, Progressive’s biggest increases in severity in the first quarter came in the “bodily injury” and “property damage” categories. These two categories seem to relate to accidents where the covered driver is found guilty:
Allstate’s Mario Rizzo said on the company’s Q1 earnings call that stabilizing auto prices were more than offset by a higher share of cars that were destroyed. He said the severity was estimated to be 9-11% higher in the first quarter than in 2022:
In fact, used car prices or total used car values actually went down a bit in the first quarter in our numbers, but we had a higher percentage of total loss frequency which impacted the mix, so those are really the drivers. And on personal injury, it’s the same thing we talked about, medical inflation, medical consumption, legal representation.
So I think the gravity factors continue to persist. As for the future, anyone can guess, but I think from our perspective, and we’ve been pretty consistent on this, we’re going to keep pushing prices up. We’ve really been doing this since the fourth quarter of 2021 all the way through last year.
The insurer also had to re-estimate its reserves (the amount it waits pay claims) in the fourth quarter of 2022 to reflect, among other things, the following:
Increases in personal injury coverages reflect recent data and updated assumptions related to severity of third party bodily injury claims, increase in claims with attorney representation, legal costs, increased usage medical treatment and rising medical inflation.
So car accident victims and their attorneys are getting more aggressive (can’t imagine why), and they may have even had a big push in the first trimester (confusing). Or wrecks get rarer but worse for no apparent reason.
Whatever the cause, executives at Allstate and Progressive have talked at length about raising prices. Allstate touted a 22% drop in new claims issued in its Q1 presentation, with particularly steep declines in three states where it has been difficult to raise rates.
Yet the metric used to gauge the profitability of auto underwriters, the “combined ratio,” shows Allstate continued to lose money on its auto underwriting in the first quarter, while Progressive barely made a profit.
In other words, it doesn’t sound like a “greed” story for car insurers yet.
*This assumption may or may not have something to do with recent events in this correspondent’s life.
