Let’s say you bought a car for the first time this month, and you’re getting ready to move out of a major US city*.
Your used car isn’t as cheap as it was six months ago, but it’s fine. You’re making an uncomfortably large down payment because interest rates are high. Before you drive away, just settle the insurance.
Usually this is an afterthought. But not this year.
In fact, your car may have to sit in the parking lot for a day or two while you shop for a policy that isn’t that expensive. You’re not uniquely uninsurable, but American auto insurers are losing money on underwriting policies, and rates are skyrocketing.
Stocks of companies with large auto insurance businesses — those that trade without the protection of Warren Buffett’s statement, at least — are beginning to reflect these problems. Take Allstate and Progressive:
It’s not a complete mess on the market, but it’s not quite the same. Auto insurance losses were part of the reason rating agency Fitch cut Allstate’s credit rating to BBB from A- this week, as underwriting is the insurer’s largest line of business by premiums collected. Allstate also sold $600 million in preferred stock earlier this month at a yield of 7.375 percent, which is a relatively wide spread for Treasury notes. This indicates that management “feels comfortable with [a] Lower rating,” BMO analysts wrote after the sale.
CreditSights analysts say Progressive is holding up better. But they remain pessimistic about the entire industry. “After enjoying huge profitability with the onset of pandemic conditions with a significant drop in miles driven, inflationary pressures have been particularly acute,” they wrote.
The pressures on the profitability of auto insurance were mostly caused by unexpected “severity” rather than “frequency”. This means that insurance companies often don’t pay on policies, but they do We are Pay higher amounts.
Simply put: This is not because more car accidents happen, but rather that the average cost of car accidents to insurance companies (which are actually paid and those they expect to pay) is higher.
That’s what Progressive CEO Tricia Griffiths told investors and analysts on the company’s first-quarter earnings call. With our focus:
We saw higher-than-expected severity trends in previously closed claims in personal vehicles primarily in repair of vehicle covers. While I won’t consider why these trends have changed, I can tell you that we reacted quickly and decisively To adjust our reserves for these short-tailed coverages. I am confident in the people and processes we put in place to ensure we are adequately booked. . .
Now, there is a lot that goes into serious auto repair. And so two things. We’ve really suffered — and I think as an industry — with store capacity. So our ability to get cars in and productivity to get them out, which of course affects length of time, leasing, et cetera. Parts prices rose just under 3%, labor rates, so think about the unemployment rate and how there’s a problem with hiring everywhere. Same with mechanical techniques in body shops. But these repair rates rose between 4.5% and 5%. Here are some contributions.
Rising car prices and rising demand have played a large part in the long-term trend of higher car insurance costs.
The Mannheim Used Car Index shows used car prices were 8 percent higher in 2022, on average, than they were in the previous year, although prices have more or less leveled off since December. Not only are collected cars more expensive to replace, but repairs are also more expensive, as the cost of auto parts and services rose last year as well, according to BLS data.
However, there may be more to it than supply chain problems and labor costs.
The largest increases in progressive severity in the first quarter came in the categories of “physical injury” and “property damage,” according to its 10-Q report. These two categories seem to be reserved for accidents where the covered driver is at fault:
Allstate’s Mario Rizzo said on the company’s first-quarter earnings call that the stability of auto prices has been offset by a greater proportion of cars accumulated in wrecks. He said severity was estimated to be 9 to 11 percent higher in the first quarter than in all of 2022:
In fact, used car prices or gross used car values were down a little bit in the first quarter in our numbers, but we had a higher percentage of total loss frequency that impacted the mix, so those are really the drivers. And about physical injuries, it’s the same things we talked about, medical inflation, medical consumption, attorney representation.
So I think the risk drivers continue. As to where they’re going forward, it’s really anyone’s guess, but I think our point is, and we’ve been pretty consistent on this point, we’re going to continue to raise rates. We’ve really done that since the fourth quarter of 2021 all over the past year.
The insurance company also had to re-estimate its reserves (Amount expect to Pay Claims) in the fourth quarter of 2022 to reflect the following, among several others:
Increases in injury coverage reflect recent data and updated assumptions regarding the severity of third-party bodily injury claims, increased claims for attorney representation, litigation costs, increased use of medical treatment, and higher medical inflation.
So the car wreck victims and their attorneys have become more aggressive (I can’t imagine why), and may have made a big push in the first quarter (bewildering). Or that wrecks are getting rarer but worse for no apparent reason.
Whatever the reason, both Allstate and Progressive executives have spoken at length about raising prices. Allstate touted a 22 percent decline in new applications issued in its first-quarter view, with particularly steep declines in three states that faced challenges raising rates.
However, the metric used to rate the profitability of auto insurers, the “combined ratio,” shows that Allstate continued to lose money on auto underwriting in the first quarter, while Progressive barely made a profit.
In other words, this doesn’t sound like a “greedy inflation” story for auto insurers yet.
*This assumption may or may not have anything to do with recent events in this reporter’s life.