What’s going on with auto insurance in the US?

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Let’s say you’re buying a car for the first time this month and you’re preparing to move out of a major US city*.

Your used car isn’t as cheap as it would have been six month ago, but it’s fine. You’re making an uncomfortably large down payment because interest rates are high. Before you leave, you just need to sort out the insurance.

Normally this is an afterthought. But not this year.

In fact, your car may have to sit for a day or two while you look for a policy that isn’t exorbitantly priced. You’re not uniquely uninsurable, but US auto insurers have been losing money on underwriting policies and prices are rising rapidly.

The shares of companies with large auto insurance businesses—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 the total market chaos, but it’s not exactly copacetic either. Auto insurance losses were part of the reason Fitch Ratings downgraded Allstate’s credit to BBB from A- this week, as auto 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%, a relatively wide spread over Treasuries. This suggests that management is “comfortable [a] lower rating,” BMO analysts wrote after the sale.

Progressive is holding up better, CreditSights analysts say. But they are still pessimistic about the whole industry. “After enjoying outsized profitability towards the onset of pandemic conditions with substantial declines in miles driven, inflationary pressures have been particularly acute,” they wrote.

The pressures on auto insurance profitability were caused primarily by unexpected ‘severity’ rather than ‘frequency’. This means that insurers do not pay the policies as often as they do, but they do I am paying higher amounts.

To put it simply: It’s not because more car accidents are happening, but the average cost of car accidents by insurers (both those already paid and those expecting to pay) are higher.

Here’s what Progressive chief executive Tricia Griffith told investors and analysts in the company’s first-quarter earnings call. With our emphasis:

We have seen higher-than-expected trends in severity in previously closed claims in the personal auto sector, primarily in setting vehicle coverages. While I won’t speculate on why these trends have changed, I can tell you that we have reacted quickly and decisively to adjust our reserves for these short tail covers. I am confident in the people and processes we have in place to ensure we are adequately confidential. . .

Now, there’s a lot that goes into the gravity of car repair. And then a couple of things. We’ve really — and I think as an industry, struggled with store capacity. So our ability to get cars in and the yield to get them out, which obviously has an effect on duration, rental, et cetera. Parts prices are up just under 3% and labor rates are up, 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 those repair rates have increased between 4.5% and 5%. So these are some contributions.

Rising car prices and high demand have indeed played a major role in the long-term trend of rising auto insurance costs.

THE Manheim Used Vehicle Index shows that used car prices were on average 8% higher in 2022 than a year earlier, although prices have more or less stabilized since December. Not only are replacements for totaled vehicles more expensive, but repairs are also more expensive, as is the cost of car parts AND Services it also increased last year, according to BLS data.

However, there may be more to it than supply chain issues and labor costs.

Progressive’s largest first-quarter severity increases were in the “personal injury” and “property damage” categories, according to his 10-Q. Both of these categories appear to be for accidents where the covered driver AND found defective:

of Allstate Mario Rizzi he said in the company’s first-quarter earnings call that stabilizing auto prices were more than offset by a higher share of cars that totaled into scrap. He said the severity was estimated to be 9 to 11% higher in the first quarter than in the full year 2022:

Actually, used car prices or total values ​​for used cars actually went down a little bit in the first quarter in our numbers, but we had a higher percentage of total loss rate that impacted the mix, so those are really the drivers. And on personal injury, it’s the same things that we’ve talked about, medical inflation, medical consumption, legal representation.

So I think the drivers of gravity continue to persist. In terms of where they’re going next, it’s really anyone’s guess, but I think our outlook is, and we’ve been pretty consistent on that, we’re going to continue to raise prices. We’ve been doing this really since the fourth quarter of 2021 all the way through last year.

The insurer also had to revalue its reserves (the amount it expect pay for claims) in the fourth quarter of 2022 to reflect, among other things, the following:

The increases in personal injury coverage reflect recent data and updated assumptions regarding the severity of third party personal injury claims, the increase in legally represented claims, the costs of litigation, the increase in the use of medical care and rising medical inflation.

So auto accident victims and their lawyers are getting more aggressive (I can’t imagine why), and maybe even made a big push in the first quarter (puzzling). Or the wrecks are getting rarer but worse for no discernible reason.

Whatever the cause, Allstate and Progressive executives have been talking at length about the price increase. Allstate touted a 22% drop in new issue applications in its Q1 filing, with particularly steep declines in three states where it faced challenges to raise rates.

However, the metric used to gauge the profitability of auto underwriters, the “combined ratio,” shows that Allstate continued to lose money on its auto underwriting in the first quarter, while Progressive just barely turned a profit.

In other words, this still doesn’t look like a “greed” story for auto insurers.

*This hypothetical may or may not have something to do with recent events in this correspondent’s life.