Auto property-damage and injury frequency, as insurers put it, dropped by a quarter or more from a year earlier in the first half of 2020 at Allstate, Berkshire Hathaway’s Geico and Progressive, according to company filings. Not only were people driving fewer miles and thus having fewer car accidents, but staying at home also led to a reduction of frequency in homeowner claims such as break-ins, Allstate recently told analysts.
The economic benefit of this reduced frequency has been substantial. At Progressive, for example, the ratio of personal-line losses to premiums earned dipped from above 70% in January and February to as low as 42% in April. Progressive shares are up by a quarter this year, compared with a 21% decline in the overall S&P 500 financials index.
This phenomenon isn’t over yet, but there is evidence it is waning. Allstate earlier this month said frequency trends were normalizing in some states as of June. That tracks with reports from transportation data provider Inrix, which show that U.S. vehicle miles traveled returned to average levels seen in January and February by late June. Still, they have hovered there since, when you might normally expect a big jump for summer. In July, Progressive’s personal-line loss to premiums ratio was 64.9%.
Investors might be cheered by the fact that many, though not all, insurers have scaled back premium givebacks instituted earlier this year. Industry rates for private-passenger auto insurance dropped by more than 2% month-to-month in both May and June, according to Wells Fargo tracking of regulatory rate filings. That slowed to just a 0.1% decline as of mid-August.
But it may still be some time before negative pressures on rates entirely abate, whether due to competitive pressure or consumers’ budget tightening. So it is possible frequency upticks might catch up to rate declines at some point. Credit Suisse analyst Michael Zaremski calls the rate dynamic the “elephant in the room” that may suppress valuations on personal insurers until they lap the start of the pandemic next spring, when it will become clear if loss ratios have normalized.
Beyond frequency, there are also questions about growth if people do fewer things—like rent a new apartment for the school year—that generate new policies. Notably, Lemonade, the newly listed digital insurer centered around younger consumers, warned of a possible seasonal impact in the second half of 2020. Normally the latter part of a year is “really driven by the moving dynamic of people in the U.S., and that’s just uncertain this year,” Lemonade told analysts.
If the rate environment also gets much softer, personal insurance stocks may no longer provide investors with the same degree of protection.