Private auto moves past its inflection point — strategically and financially

Better days are here again for the US private passenger auto business, as newly released statutory data shows and S&P Global Market Intelligence's 2024 US Auto Insurance Market Report projects. But while the rising tide should lift all boats, some carriers may be better positioned than others to take advantage of the improvements.

The private auto business has been consolidating for years both in terms of market share and the number of carriers writing meaningful amounts of premiums — and for good reason. The largest players in the space have increasingly differentiated themselves in a variety of ways, leveraging competitive advantages that vary from company to company but cumulatively serve to concentrate more business in a smaller array of carriers.

We see the business continue to separate itself into three broad categories of companies:

1) Large, national or superregional carriers that benefit from some combination of economies of scale, impenetrable financial strength, differentiated distribution, broad and deep data and analytics, iconic brands and/or lean expense structures;

2) Smaller carriers focused on specific market niches such as nonstandard vehicles, collector cars, high net worth customers, or a leading presence in a handful of states in which national writers have opted to remain underrepresented; and

3) Companies that retain a private auto presence due to corporate inertia and/or a belief that a full suite of personal lines products is necessary to maintain customer and agent relationships.

The historically poor underwriting results in 2022 and 2023 prompted a growing number of companies that previously fell into the third category to reconsider or scale back their continued presence in the private auto market. Even though the business is well on its way to recovery, as demonstrated by financial results to date in 2024, we believe more carriers will continue to engage in some corporate soul-searching as the largest players' competitive moats grow wider and deeper.

The combined market share of the top 10 groups in the private auto market based on direct premiums written totaled 76.5% in 2023. While that marked a slight retreat from the 2022 peak of 76.8%, reflective of well-below-average year-over-year growth by Geico Corp. parent Berkshire Hathaway Inc., Farmers Insurance Group of Cos. and Liberty Mutual Holding Co. Inc., the top 10's combined share was only 58.6% in 1998, 66.4% in 2008 and 69.9% in 2013. This analysis uses combined annual statement data to present P&C groups in their original structures; SNL P&C groups, in contrast, show the historical results based on current structures.

That growth has especially come at the expense of the smallest market participants. Between 1998 and 2023, the combined share of the 11th-through-25th-largest private auto groups fell to 11.6% from 15.3%; among those ranked 26th through 50th, to 6.0% from 9.7%, and for the rest of the industry, to 5.8% from 16.4%.

Alternatively, the number of P&C groups and stand-alone carriers that generated the inflation-adjusted equivalent to $10 million in 2023 private auto premiums fell to 108 that year from 138 in 1998.

The commercial auto market, meanwhile, is decidedly more fragmented in terms of overall market share and the niches in which carriers choose to focus or, in some cases, avoid.

While The Progressive Corp., the No. 1 writer based on 2023 commercial auto direct premiums written, has consolidated its leadership position in a dramatic manner in recent years, a number of national carriers have limited the breadth and depth of their exposure to the business given the profitability challenges it has faced. The market includes a number of risk-retention groups and other carriers with a narrow focus on specific classes of business. The top 10 commercial auto insurers' combined share of the market in 2023 of 44.6% was identical to their combined position in 2012.

The top two US private auto writers, the group led by State Farm Mutual Automobile Insurance Co. and Progressive, are positioned to end 2024 with the highest combined market share of pairing since at least 1995, based on direct premiums written growth rates in excess of 20%, apiece during the first half of the year. But there are various strategic dynamics in the market, including American Family Mutual Insurance Co. Group's pending sale of the nonstandard auto business that operates under The General name and exit from Main Street America-branded standard private auto products, that could keep the top 10 from further consolidating their position in the short term. But we suspect the largest carriers — at least the top five of State Farm, Progressive, GEICO, The Allstate Corp. and United Services Automobile Association — remain poised over the longer term to enhance their dominance.

Among the 11th-through-25th-largest groups, while Kemper Corp. opted to run-off its standard and preferred personal lines business after a strategic review process, Sentry Mutual Holding Co. grew its private auto writings by more than 70% by buying The General. In addition, The Hartford Financial Services Group Inc. has signaled an interest in potentially expanding beyond its AARP-branded products.

There has been significant churn within the rest of the industry, with expansion by niche carriers offset in part by exits and retreats by others. We would anticipate more of the same in the coming years, including from regional carriers primarily focused on commercial lines. SECURA Insurance Mutual Holding Co.'s private auto direct premiums written tumbled by 64.0% during the first half of 2024 as the company executed its personal lines exit.

Private auto direct premiums written at the group led by Columbia Mutual Insurance Co. fell by 17.7% during the first half of the year, even before it confirmed plans to focus exclusively on commercial lines. Group members, which write private auto business across an eight-state footprint in the Midwest, said that the combination of "successful growth" in commercial lines and the "profitability challenges" in the private auto business brought them to an "inflection point."

In a letter to the Kansas Insurance Department, Columbia Mutual said, "We can no longer continue to invest in and grow our commercial business and simultaneously manage our personal lines book with the level of service and commitment that our customers have grown to expect." The group had exited the personal property business in 2012 but decided to remain in the private auto space to the extent that it "remained a viable pathway for us to invest in the growth of our commercial lines."

Though we project that the private auto business as a whole will return to profitability in 2024, capping two years of remarkable improvement, it will remain unprofitable for many market participants. And even as loss ratios come down, a wide gap in expense ratios will remain.

Our updated 2024 private auto combined ratio projection of 97.7% would reflect improvement of 7.2 percentage points from 2023's actual result and 14.4 percentage points from 2022's worst-in-decades result of 112.2%. This projection incorporates year-to-date statutory results through the third quarter of 2024, which show a 9.8-percentage-point decline in the private auto direct incurred loss ratio. Our expectation for a somewhat lesser amount of improvement from a full-year combined ratio standpoint takes into account losses from the October landfall of Hurricane Milton and the effects of significant increases in advertising on the expense ratio.

We remain cautious in our commercial auto outlook, with a projected 2024 combined ratio of 108.5% versus an actual result of 109.3% in 2023. Commercial auto liability results improved only incrementally in the third quarter, reflecting the effects of unfavorable prior-year reserve development, and our outlook contemplates a one-time increase in incurred losses of more than $500 million associated with American Transit Insurance Co.'s change in reserving methodology.
 

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.