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American drivers are back on the road despite high gas prices, and miles driven are now above prepandemic levels. That’s bad news for auto insurers, which are reporting some of their worst results in a decade due to elevated claims expenses. Insurers are facing higher costs for used cars, parts, mechanics, and rental cars.
Insurers such as
Allstate
(ticker: ALL),
Progressive
(PGR),
Mercury General
(MCY),
Travelers
(TRV), and Geico, a unit of
Berkshire Hathaway
(BRK.A), have filed for rate increases, but they have been slow to come or inadequate in states such as California and New York. California’s insurance regulators have imposed an effective moratorium on rate increases for two years.
Progressive CEO Tricia Griffith said on a recent conference call that the California moratorium was “unfortunate” and hurting consumers. “We would love to write more business in California,” she said. “Unfortunately, right now we aren’t able to get adequate rates.”
Allstate, Travelers, and Geico all reported underwriting losses in their auto business in the second quarter, while Progressive, the industry’s best-run company, eked out an underwriting profit. The companies all prospered in 2020 when driving was light.
Auto insurers’ shares have held up this year despite poor results, as investors figure the companies eventually will realize a double benefit from higher insurance premiums and higher rates, which lifts the income on their bond portfolios.
“Allstate is attractive, but it may take some time to turn things around,” says Cathy Seifert, an analyst at CFRA.
At about $127, Allstate trades for 24 times a depressed projection of 2022 earnings and 11 times 2023 estimated results. It yields 2.7%.
“We believe the auto insurance industry is now in the hardest pricing cycle of the last 20+ years and view Allstate’s rate increases as a leading indicator for improving profitability results through FY24,” wrote Raymond James analyst Greg Peters in a recent note. He has a Strong Buy rating and $155 price target on the stock. (A hard market refers to a period of improving rate increases.)
Auto insurance costs were up 1.3% in July after rising 1.9% in June, based on the consumer price index. More increases are likely as the industry deals with what Mercury General has termed “extraordinarily high inflation” in claims costs.
With unmatched analytics, including a leading position in the use of real-time driving behavior to price policies, Progressive is the class act of the industry. Its stock price reflects that status, trading at $119, or 25 times projected 2022 and 19 times estimated 2023 earnings. It fetches more than four times book value—one of the highest ratios among insurers.
Progressive, the No. 3 auto insurer based on premium revenue, continues to distance itself from rivals and take market share. Progressive and No. 2–ranked Geico have outpaced the industry for more than two decades by dominating the fast-growing direct-sales channel, which doesn’t rely on agents. State Farm is the leader in premium revenue.
Progressive has bested Geico in recent years, and a Berkshire shareholder asked Geico management about it at the Berkshire annual meeting in April. Ajit Jain, who runs Berkshire’s insurance operations, acknowledged that “Progressive has done a much better job than Geico both in terms of margins and in terms of growth rate.”
Jain said Geico is ramping up its use of telematics (using real-time driving to price policies), but it is way behind Progressive. Telematics can benefit insurers since good drivers tend to use the technology, and it sits well with insurance regulators critical of the industry’s other ways of pricing insurance, including credit scores and geography.
“Progressive is the leader in recognizing and solving problems and growing while others are still adjusting,” says Peters, who has an Outperform rating and a $135 price target on the stock.
Mercury General has been the hardest-hit auto insurer this year because of its outsize exposure to California, which accounts for about 85% of premiums. The stock is down 38%, to about $33.
The company’s chairman and controlling shareholder, George Joseph, a World War II airman, founded Mercury in 1961 at a time when auto insurers did little segmentation of drivers by risk. Joseph, 100, is still involved in running the business and was the world’s oldest billionaire until the stock fell this year.
Mercury recently reported an operating loss of 35 cents a share for the second quarter and slashed its dividend by 50%, to 31.75 cents a share. It now yields 3.8%.
Barron’s wrote an ill-timed favorable article on the company in 2021 when the stock traded at $59. The stock is trading at a premium of just 10% to book value, suggesting it might have bottomed. Mercury could become a takeover candidate for a company like Progressive, which has a relatively small presence in California.
Write to Andrew Bary at andrew.bary@barrons.com
Read More: Progressive Is the Best-Run Auto Insurer. It May Not Be the Best Stock to Buy.