The group led by State Farm Mutual Automobile Insurance Co. posted its largest-on-record net underwriting loss in the third quarter of 2021, according to a preliminary review of statutory data by S&P Global Market Intelligence, with historically unfavorable results in its two key business lines.
Unprecedentedly favorable results in the private-passenger auto business in 2020 appear increasingly distant as third-quarter 2021 data for the largest U.S. personal lines insurer show the extent to which the pendulum has swung in the opposite direction in only a matter of months.
The combination of elevated catastrophe losses, a return toward normal driving activity relative to 2020's depressed levels, and the effects of inflation on average claims severities creates a scenario that may require broad-based increases in premium rates. Actions could include the rollback of temporary discounts instituted by State Farm and some competitors in response to COVID-19, increases in base rates, or a combination of the two.
With third-quarter results for each of the top three U.S. private auto insurers — State Farm, GEICO Corp. and The Progressive Corp. — providing cause for concern, time may be of the essence to take corrective actions.
State Farm's third-quarter net underwriting loss of $3.56 billion as calculated on a preliminary basis exceeds by more than 3x the $976 million loss posted by the group in the year-earlier period. Only one other time in the 20 years of statutory data available on a quarterly basis has State Farm net underwriting loss exceeded $3 billion: a $3.14 billion loss during a historically destructive period for tornadic activity in the second quarter of 2011. State Farm Mutual Automobile, alone, saw a negative year-over-year swing of $2.62 billion.
From a combined ratio standpoint, State Farm's 119.2% result for the third quarter of 2021 as calculated preliminarily represents a 13.7 percentage point increase from the year-earlier period. State Farm last generated a higher combined ratio in the second quarter of 2011 at 123.2%.
Line of business-level results on a direct basis also carried historical significance. Natural catastrophes, Hurricane Ida in particular, likely had a negative impact on results though they were not discussed in the relevant third-quarter filings. A State Farm spokesman declined to comment, noting that the company plans to release its full-year 2021 results in early 2022.
State Farm Fire & Casualty Co., which holds dominant market share in the homeowners market in hard-hit Louisiana, reported a doubling in total direct paid losses in the state on a year-over-year basis for the first nine months of 2021 to $900.3 million. Across the group, the homeowners direct incurred loss ratio of 95.4% marked an increase of 11 percentage points from an elevated result in the year-earlier period, and it stands as the highest such result in a third quarter since 2008. Hurricanes Gustav and Ike made landfall during the third quarter of 2008.
Results in the auto insurance lines may be more concerning even if they were not as elevated from a relative standpoint.
The group's direct incurred loss ratio for the auto physical damage line spiked in the third quarter by 23.5 percentage points to 88.4%, the highest result in that business line in any quarter in at least the last 20 years. The previous high had been 86.2% in the second quarter of 2011. The direct incurred loss ratio in the private-passenger auto liability line of 70.2% marked an increase of 12.5 percentage points from the year-earlier period and it was 8.3 points above the result for the first half of 2021.
State Farm's quarterly statements did not include a discussion of recent private auto trends, but the data would suggest that the company may be experiencing the same kinds of dual pressures as its peers. A snapback toward normal levels of claims frequency in 2021 as state and local governments dialed back pandemic-related restrictions occurred at the same time costs to repair and replace motor vehicles have surged, pushing up average claims severities.
The No. 2 and 3 U.S. private auto insurers, Berkshire Hathaway Inc.'s GEICO and Progressive, both experienced upward loss-ratio pressure in their third-quarter GAAP results. In response, GEICO has filed high-single and low-double-digit rate increases across a growing swath of states. Progressive President and CEO Tricia Griffith said during a Nov. 3 conference call that "we definitely need rates."
The most impactful State Farm filing obtained by S&P Global Market Intelligence for a private auto rate increase as measured by the implied written premium change were hikes of 4.5% and 4.8% for two underwriting companies in New York. They arrived at that change through an increase to their COVID-19 premium adjustment factors to 0.97 from 0.91 previously and 0.87 originally. State Farm instituted those factors throughout its private auto business in mid-2020 as a means of making good on its pledge to lower auto rates by 11% on average nationally at a time driving levels and claims frequency had plunged.
"The effects of COVID on driving exposure continue to diminish, and this is anticipated to be the case for the time period the revised rates would be in effect," the State Farm companies said in the New York filing, which is due to become effective on Dec. 6. They later added that rates, after accounting for the revision, would "still remain lower than the premium level prior to the August 31, 2020 introduction of the adjustment factor."
While dynamics within each state may be different, the surge in the group's overall private auto direct incurred loss ratios during the past five quarters casts doubt on the merits of continued pandemic-related discounting.
Methodology
Third-quarter 2021 results in this article were compiled manually from the statutory statements of 12 State Farm P&C companies as the difference between year-to-date financials for the periods ended Sept. 30 and June 30, not including the recently formed State Farm Classic Insurance Co. They may be subject to further revision upon S&P Global Market Intelligence's forthcoming consolidation of electronically filed results.
S&P Global Market Intelligence calculates historical results for U.S. property and casualty groups as they currently exist, including the impact of acquisitions such as State Farm's purchase of GAINSCO Inc. That transaction had a negligible impact on results both before and after the acquisition given the small size of GAINSCO's MGA Insurance Co. Inc. relative to the group as a whole.