Two Weeks Can Make a Difference for Auto Insurers

A thesis introduced almost two months ago was based on an outlook that an inflationary datapoint caused by higher gas prices may lead to higher profitability for auto insurers. That thesis has now unfolded and is following the upward revisions to the earnings estimates for Allstate.

In prior notes, we built a case using FactSet data that combined ratios for auto insurers could head lower, which would send profits higher. In the early days of our thesis, a March 27 note focused on rising inflation driven by higher gas prices, both of which started to escalate following the onset of the war in Iran. We anticipated persistently higher gas prices would lead to fewer miles driven if habits such as carpools were adopted.

Fewer miles driven, we proposed, would lower claims and loss ratios and drive profits higher for auto insurance companies. We also proposed that AI could help drive combined ratios lower. Our April 24 note reviewed conference call transcripts and proposed that AI investments had moved from pilot projects into business operations such as call centers and the underwriting process. The impact of AI, as it drives down both loss ratios and expense ratios, would also contribute to lower combined ratios.

Our focus has been on potential upward earnings estimate revisions for Progressive and Allstate given the high concentration of auto insurance. However, other insurers with books of auto insurance premiums should benefit from higher gas prices, as both miles driven and losses decline.

The two tables on the following page include combined ratio estimates for Allstate. The red boxes show estimates for the components of the combined ratio: the loss ratio and the expense ratio. The top table is from our May 1 note. The bottom table reflects most recent data.

Comparing the two tables, the most recent table on the bottom shows that estimates for Allstate’s combined ratio for each quarter have fallen. A drop in the combined ratio is what we would anticipate as higher gas prices drive down the loss ratio, and AI helps drive down both the loss ratio and expense ratio. 

Company/Security - All Estimates - FactSet 

Company/Security - All Estimates - FactSet 

The table below, from FactSet’s estimate data, shows the earnings estimates for Allstate. Since the time we initiated our thesis at the end of March, earnings estimates were increased between April and May. It is very likely that the increase in expected earnings is driven by the drop in the combined ratio, which improves profitability. 

Company/Security - All Estimates - FactSet

The list below highlights the notes published in connection with the anticipated improvement in the profitability of auto insurers, starting with our first note. 

1. March 27: Gas Prices, Benefit Ratios, and Inflation. Higher inflation due to higher gas prices may produce lower benefit ratios for auto insurers. 

2. April 17: Mixing 1Q Macro and Initial Bank Earnings: Outlook for Insurance. Persistently higher gas prices linked to expected drop in loss ratios. 

3. April 24: Artificial Intelligence Has Evolved from Pilot Projects to Differentiators Among Insurance Firms. AI has favorably impacted costs and underwriting, which translates into margin resilience.

4. May 1: Auto Insurers' Profits Could Increase Given Persistently High Gas Prices. Higher gas prices could increase auto insurers’ profits. 

It makes sense that earnings estimates for Allstate have increased as estimates for the combined ratio have fallen. If higher gas prices and the impact of AI investments persist, it should be expected that combined ratios will fall further, which (all else equal, such as investment income) should continue to increase profitability and earnings expectations. 

Macro Trends and Impact on Insurance Earnings 

Market Performance Data: Impacts Investment Income

Updated data since prior report (positive) 

The advancing equity markets are 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

Updated data since prior report (positive)

Updated data (negative)

Initial jobless claims rose to 211,000, and the April unemployment rate of 4.3% was unchanged from March. Together, data still supports near-term stability in the premium volume of employer-sponsored benefit lines. The relatively low unemployment rate reduces lapse risk for group products such as life and disability insurance. 

The April Non-Farm Payroll report released May 9 showed an uptick and was the first release to capture labor market reaction to the April 2 implementation of tariffs. Meaningful deterioration, if the 3-month trend continues, could signal rising unemployment and pressure on group products.

We wrote in our December 5 note about 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 would face, such as MetLife. 

Inflation Data: Impact on Claims Costs

Updated data (negative and positive)

Two measurements of inflation, headline CPI and core PCE, continued to increase to 3.8% and 3.5%, respectively. Increases in Core PPI signal continued input cost pressure on construction and repair for insurance companies, which compresses underwriting margins and reinforces the need for insurers to be diligent about accelerating rate filings and tightening terms in affected lines.

Two Sources of Inflation

• Tarrif-driven (negative): We have written about the negative impact that 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 in our March 27 note that the most recent source of inflation, higher fuel costs, may actually lower claim costs for companies focused on writing auto insurance. We have 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—and reduce miles driven. This note highlights the most recent combined ratio and estimates data, which signal that the thesis is unfolding. 

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. 

Source: FRED, BLS

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