Auto Insurers’ Profits Could Increase Given Persistently High Gas Prices

Data has emerged supporting a view in prior notes that combined ratios for auto insurers could be headed lower, which would send profits higher. Early indicators suggest this drop is already unfolding. Our 4/24 note (Artificial Intelligence Has Evolved from Pilot Projects to Differentiators Among Insurance Firms) highlighted that AI investments have driven down expenses, which drives down expense ratios.

Our 3/27 note (Gas Prices, Benefit Ratios, and Inflation) discusses how a sustained rise in gas prices would likely lead to changes in driver habits, which could decrease miles driven, push down accidents, and reduce the loss ratio. The habits likely to reduce miles driven have started to surface.

Taken together, expense ratio and loss ratio improvement would result in a lower combined ratio. Our focus has been on Progressive and Allstate given the high concentration of auto insurance, but other insurers with books of auto insurance premiums should benefit as well.

Expense Ratio

Expenses are already coming down. Both Progressive and Allstate have deployed artificial intelligence across their claims and underwriting operations with measurable results. At Allstate, management confirmed on its Q3 2025 earnings call that "in the claims operation, all adjuster emails are generated or reviewed by AI," which contributes to lower operating costs. Allstate's CFO placed the AI journey in "middle innings," which indicates further efficiency ahead.

On Progressive’s Q4 2024 investor presentation, claims president James Murphy commented that photo-estimating AI functionality was deployed in place of 200 staff that would have otherwise been hired to address growth. The AI-driven efficiency gains, in part, contributed to measurable results: Progressive achieved a companywide combined ratio of 87.4 in 2025, an improvement from 88.8 in 2024. Allstate's auto combined ratio improved 10 points to 85.0 in 2025, down from 95.0 in 2024, in part, driven by AI initiatives.

Loss Ratio

Loss costs could be headed lower. The sustained increase in gas prices has begun to impact driving habits, such as carpooling and consolidating trips for personal errands. These new habits are reducing miles driven and, by extension, frequency of claims. The clearest historical proof of concept that lower miles translate into improved loss ratios, albeit extreme, was COVID, which caused 2020 miles driven to decline almost 40% versus the prior year. The auto insurers recorded their best combined ratio in two decades.

Another version of that dynamic—gas prices nearly 30% higher since Iran began blocking tanker traffic through the Strait of Hormuz—is taking hold and reducing miles driven.

• The Financial Times reported at the end of April that “People are adjusting their habits by cutting back on filling up tanks, sharing rides and avoiding driving.”

• With gas above $4/gallon, CNBC reported drivers are "driving less, combining trips." Fewer miles driven means fewer accidents, which will lower the loss ratio for auto insurers.

• CCC Intelligent Solutions, a data and technology platform that processes claims for more than 300 U.S. insurers, reports that "paid claim frequency for collision and comprehensive coverages continue to trend down slowly."

Conclusion

Improvement in the loss ratio for auto lines could improve the total profitability of both companies. As shown in the table below, auto premiums for Allstate and Progressive were 65% and 79% of total premiums, respectively. Improved profitability in a major portion of each company is likely to translate into higher earnings than are currently expected.

Interestingly, current estimates reflect a slight increase in both the expense and loss ratios for both companies. This outlook does not align with an environment where AI investments are continuing to drive down expenses along with reasonable expectations that sustained, higher gas prices have altered habits that will lead to a decline in miles driven. 

Source: Company/Security - All Estimates - FactSet

Source: Company/Security - All Estimates - FactSet

If combined ratios move as our analysis suggests, it provides a good catalyst for the earnings of both companies to exceed current consensus. 

Macro Trends and Impact on Insurance Earnings 

Market Performance Data: Impacts Investment Income

Updated data since prior report (positive) 

The S&P 500 and Nasdaq reached new all-time highs on April 28—up ~29.6% and ~50% YoY respectively. This is a positive for the earnings of life insurers and annuity writers through higher fee income, stronger separate account values, and expanded realized gain opportunities across investment portfolios. 

Employment Data (NFP, Unemployment, Claims): Impacts Premiums

No new data since prior report

Updated data (positive)

Weekly jobless claims fell to 189,000, which was below consensus, and the March unemployment rate was 4.3%. Together, data supports near-term premium volume stability in employer-sponsored benefit lines and reduces lapse risk for group products such as life and disability insurance.

The improvement in April initial claims was the lowest level all year. Looking ahead, the April Non Farm Payroll report, scheduled for May 8, will be the first release to capture labor market reaction to the April 2 implementation of tariffs. Meaningful deterioration could signal rising unemployment and pressure on group products. We have written notes on the potential impact that a weaker labor market could have on group insurance premiums and the headwinds that companies with large books of group premiums, such as MetLife, would face. (Insurance: Contrary to Positive Estimates, Jobs Data Points to Headwinds)

Inflation Data: Impact on Claims Costs

Updated data (negative and positive) 

Two measurements of inflation, headline CPI and core PCE, surged to 3.3% and 3.2%, respectively. The increase in Core PPI signals continued input cost pressure on construction and repair, further compressing underwriting margins and reinforcing the need for insurers to accelerate rate filings and tighten terms in affected lines.

Two Sources of Inflation

Tarif-driven (negative): We have written about the negative impact tariff-driven inflation has on claims costs. Higher costs for auto parts and lumber attributed to tariffs, for example, push up the cost to settle policyholder claims, which drives up loss ratios and drives down earnings.

Energy-driven (potential positive): We have also written that the most recent source of inflation—higher fuel costs—may actually lower claim costs for companies focused on writing auto insurance. (Gas Prices, Benefit Ratios, and Inflation) In a prior note we made the case that a sustained increase in the price of gasoline may change driving habits such as increases in work from home or carpooling to reduce miles driven.

This appears to be unfolding. In today’s note we make a case that AI investment and the likelihood of a drop in miles driven will lower the combined ratios for ALL and PGR. If this is the case, it will challenge current consensus estimates, which do not incorporate improvement. 

Linking Macro Trends to Potential EPS Impact 

Our Macro Tracker table lists key economic data relevant to insurance company earnings. The right-hand column ties macro trends to the potential impact on company earnings.

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