Elevated auto losses send State Farm to 5th straight quarterly underwriting loss

The group led by State Farm Mutual Automobile Insurance Co. generated its second-largest net underwriting loss for a first quarter in the last 20 years amid a continued drag from the private-passenger auto physical damage business.

Soaring used car prices and other inflationary pressures triggered by supply chain bottlenecks have caused claims severities for certain private auto coverages to rise significantly around the industry in recent reporting periods. Statutory results obtained by S&P Global Market Intelligence suggest they contributed to a third straight quarter of outsized auto physical damage losses for State Farm, the No. 1 U.S. private auto insurer by 2021 direct premiums written.

Although the rate of increase in used car prices has slowed since January, inflation is likely to continue to negatively impact private auto insurers' second-quarter results and further increase carriers' resolve to pursue rate increases.

Market Intelligence preliminarily calculates a net underwriting loss for the State Farm property and casualty group of $793.6 million for the first quarter. That marks deterioration from a loss of $210.3 million in the year-earlier period and represents the largest first-quarter net underwriting loss since the group posted a $910.7 million shortfall for the opening three months of 2017.

State Farm has historically produced its strongest underwriting results in the first quarter. During the decade ended in 2021, its cumulative net underwriting results by period included a gain of $1.47 billion in the first quarter and losses of $5.54 billion, $8.17 billion and $4.64 billion, respectively, in the second, third and fourth quarters.

Group-level results as consolidated by Market Intelligence reflect their current composition, including the impact of completed acquisitions of U.S. P&C carriers. They exclude State Farm Classic Insurance Co., a recently formed company that has begun filing products geared toward car enthusiasts who own and operate collector vehicles.

The top-tier mutual company, which generated 94.6% of its 2021 net premiums written from private auto business, posted a net underwriting loss of $1.66 billion in the first quarter compared with a loss of $419.4 million in the year-earlier period. State Farm Fire & Casualty Co., which generated 83.9% of its 2021 net premiums written from the homeowners and farm owners business, fared better as it posted a net underwriting profit of $727.9 million, nearly double its $365 million gain in the first quarter of 2021.

First-quarter statutory filings and financial data are not yet available on the Capital IQ Pro platform. However, our review of the State Farm filings highlights a key enhancement that will be made available once first-quarter results are populated.

The first quarter of 2022 marks the first reporting period in which part 1 and part 2 of quarterly filings include a more granular breakout of various property and casualty lines of business. In this example, private and commercial auto physical damage results will be broken out in the quarterly data for the first time after having previously been combined into a single line item for disclosures of direct premiums written and earned as well as direct losses incurred.

This new breakout is not particularly meaningful in the context of State Farm's results, given its much heavier focus on the private auto business. But it will be helpful in analyzing results for companies like The Progressive Corp. and The Travelers Cos. Inc., which maintain significant private and commercial auto businesses.

More significant for State Farm in the first quarter was the historical nature of its physical damage loss ratios. We calculate an auto physical damage loss ratio for the seven group members that write private auto business on a direct basis of 86.1% for the first quarter. There was a 3-basis-point gap between the group's private auto physical damage and combined private and commercial auto physical damage loss ratios.

This marked a 13.5-percentage-point increase from the year-earlier period, and it was the third straight quarter in which the group's auto physical damage loss ratio exceeded 86%, peaking in the third quarter of 2021 at 88.4%. Prior to that point, the State Farm group had only once posted an auto physical damage loss ratio in excess of 86% in any quarter going back to the start of 2001. The group's auto physical damage loss ratio spiked to 86.2% in the second quarter of 2011, a period that was characterized by historically high frequency and severity of tornadic activity.

The filings did not include commentary about the company's results. The top-tier mutual, in its 2021 annual statement, attributed a 36.8% year-over-year increase in net incurred losses primarily to "a return to pre-COVID-19 driving behavior."

The collision and comprehensive coverages, which are part of the physical damage line, have been among the hardest hit by inflationary pressures. They have also been the target of ongoing efforts by a number of private auto insurers, including State Farm, to raise rates.

For example, State Farm Mutual Auto recently filed for a 6.4% overall rate increase on a $3.35 billion book of Texas private auto business, with an expected effective date of June 20. The filing contemplates rate increases for collision and comprehensive coverages of 8% and 20%, respectively, as well as 7% for bodily injury.