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Allstate and Progressive Q3: A tale of two cities

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People have the funny ability to look at the same thing and come up with two drastically different perspectives. We have all seen those ambiguous images that look like a duck or a rabbit. Recall the dress that made headline news for being either white and gold or blue and black.

If simple things like a picture of a dress can divide opinions, of course complex systems, like nationwide economic outlooks and their impacts on driver behavior, supply chain issues, and shopping trends would similarly invite contradictory analyses.

On Progressive’s Q3 call, the company presented its take on where the competitive personal auto market is heading. CEO Tricia Griffith believes Progressive stands ahead of the market in reacting and raising rates. Management acknowledged the firm is playing catch up to the severity spike, as well as seeking to ensure future pricing adequacy, and admitted some of its insureds are likely to shop around and find better deals elsewhere for the time being.

However, Progressive described the slowdown in advertising and policies-in-force growth as a crucial step to achieve an underwriting profit. The firm predicted that, by the time competitors catch up on rates, it would be positioned to pull growth levers again.

So, where does that leave one of its largest peers, Allstate, on its responsiveness to market challenges?

In a subtle dig at Progressive that began, “I’m never bold enough,” Allstate CEO Tom Wilson suggested that if Progressive is first to respond, it’s because they are first to experience the adverse trends, and Allstate has a less susceptible business mix.

Progressive and Allstate often compete in different distribution channels – one’s loss is not always another’s gain. However, each company’s ability to respond quickly to adverse trends will determine profitability in the coming year. If one used value creation as a proxy, it’s clear Progressive has been winning that competition with a total value creation CAGR of 17.3% vs. Allstate at 11.8% since 2011.

Allstate is also responding with rate action and continuing to lower its expense ratio, but the recent acquisition of National General and its non-standard mix complicates the situation. Sometimes it is better to let the excess capital burn a hole in your pocket.

Below we examine the quarter’s results and how the different strategies could translate into long-term market gains.

First of all, both companies are experiencing adverse loss cost trends, but returns will also reflect capital efficiency.

A series of wide-ranging factors, from Federal Reserve monetary policy to the supply of truck drivers available to move freight from ports, are impacting inflation and severity trends. New and used car prices, as well as replacement parts and auto repair labor costs, are spiking, forcing insurers to pay more to repair or replace damaged vehicles.

In mid-summer this year, used-car prices appeared to begin a downward trend after a huge surge – but this quickly reversed as October prices spiked 8.3% month over month, as shown in the recent Manheim Used Car Index.

For Allstate, frequency benefits have partially mitigated the ongoing severity spike, reducing the impact felt on the firm’s loss ratio. The company is still reporting property damage frequency down nearly 17% from 2019, although up 16.6% from 2020 when more people were staying home at the height of the pandemic.

Progressive’s management also noted that increased severity and frequency, as well as natural catastrophes, are impacting the entire personal auto insurance sector.

The trends in personal auto drove this quarter’s results.

As seen in the chart below, Allstate’s Q3 underlying loss ratio is up 3.5pts from pre-pandemic levels, while Progressive’s is up 6pts. The divergence is a function of business mix, with Progressive’s auto book making up 79% of premiums LTM, compared to only 68% at Allstate.

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However, only focusing on the underlying loss ratio might lead one to miss the volatility and noise in the reported numbers. Looking on a reported basis, Allstate's combined ratio modestly exceeds Progressive over time.

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Capital deployment is another critical factor in thinking about overall returns. For Progressive, the same capital base goes further and hence can generate a higher ROE due to its higher premium leverage, as shown below.

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Secondly, Progressive does, in fact, appear to be responding faster than Allstate.

A shorter-tail book and predominantly six-month policies in its personal auto book allows Progressive to respond quicker. Progressive has gotten a head-start on taking rate, enacting personal auto rate increases through the third quarter of the year averaging around 6% in 20 states.

Progressive’s management noted that regulatory scrutiny is normal. Still, given the increase in severity and the industry-wide need for rate, regulatory regimes in different states are expected to allow the firm to take rate.

On the other hand, Allstate is in the middle of rate action spanning the second half of 2021, with rate increases implemented in eight states so far with twelve others planned through 2022, averaging a pricing increase of 6.7%.

Our analysis of rate filings below showed similar trends in October, with Progressive outpacing Allstate on rates.

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Thirdly, expense benefits will become harder to achieve.

Progressive’s expense ratio improved during the quarter as it lowered advertising expenses.

Allstate’s expense ratio for the quarter (25.1%) was impacted by restructuring-related expenses, as the company let go of agents and worked to build a lower-cost distribution model.

Adjusted, its expense ratio of 24.3% is an improvement from historical levels of around 27%. Allstate expects to lower the expense ratio to 23% by 2024, about 1pt a year.

As we’ve heard across the industry, some cost reductions are also expected from a reduction in real estate.

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In summary, Progressive’s quick response with rates and growth continues to set it apart from its peers. Although Allstate isn’t far behind in rate action, the company’s initiatives, including the recent acquisition and restructuring, could present a more complicated picture.

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