Are Increased Traffic Fatalities Hurting Auto Insurers?

Financial data shows that auto insurers are being hurt by increased traffic fatalities and accidents. The National Safety Council reported that the number of people killed in motor-vehicle accidents in the United States increased by 18% over the past two years on August 23, 2016.

The number of people killed on America’s roads increased by 9% during the first six months of 2016 according to council data rising to 19,100. That number has doubled in the past two years rising by 18% since 2014.[1]

The costs of all those accidents are staggering in addition to 19,000 killed – around 2.2 million individuals were seriously injured. The council estimated the monetary costs at $205 billion. What’s truly disturbing is that those increases are the highest in 50 years since 1966, and the decline is showing no sign of reversing.

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The Auto Insurance Industry Feels the Pain

That’s very bad news for the auto insurance which is already feeling the pain from those accidents. Data provided by ycharts shows that the net income at some major insurance companies is already down.

 Allstate (NYSE: ALL) saw its net income fall by $981 million between June 2015 and June 2016. The number dropped from $2.637 billion in 2015 to $1.656 billion a year later.

Progressive (NYSE: PGR) experienced a net income drop of $267 million during the same period. Progressive reported a net income of $1.325 billion in June 2015 that fell to $1.058 billion a year later.

Travelers Companies (NYSE: TRV) reported that its net income fell by $453 million over that period. Travelers reported a net income of $3.602 billion June 2015 that fell to $3.149 billion in 2016.

One person died in this three-car crash. (KATU News photo)
One person died in this three-car crash. (KATU News photo)

Cincinnati Financial (NASDAQ: CINF) reported a net income drop of $13 million. Its net income was $654 million in June 2015 and $641 million in June 2016.

Mercury General (NYSE: MCY) reported a sustained net income increase in that period. Mercury’s net income rose by $64.73 million, growing from $46.14 million in June 2015 to $110.87 million a year later.

It looks as if some auto insurers are beginning to suffer losses because of increased accident rates. Another conclusion that we can draw here is that mass market insurers that rely on advertising and direct sales seem to be more vulnerable to these income losses.

Disturbingly the falling income is coming at a time when revenue at some of the insurers is growing. Indicating that the companies are selling more insurance but making less money from it.

Allstate saw its revenue grow from $36.63 billion June 2015 to $35.75 billion June 2016. Progressive saw its revenues grow by nearly $2 billion ($1.93 billion to be exact) during the same period; rising from $20.12 billion in June 2015 to $22.05 billion in June 2016. Cincinnati Financial reported an increase of $133 million, its revenues rose from $5.143 billion in June 2015 to $5.276 billion a year later.

Travelers also reported a modest revenue drop from $27.01 billion in June 2015 to $26.94 billion a year later in June 2016. Mercury saw its revenue grow in the same period rising from $2.913 billion in June 2015 to $3.221 billion a year later – an increase of $308 million.

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A Deeply Flawed Business Model

All this seems to point to a deeply-flawed business model. Auto insurers are generating more revenue but making less money.

A cause of this is churn which occurs when an insurer spends money on advertising and discounts to attract new policyholders. It generates revenue from the new premiums but the cost of claims from increasing accidents eats up the extra cash generated.

One problem insurers face is that the more policies they issue the more vulnerable they are to increased accident rates. Another problem is that the new sales are based upon low premiums.

Insurers like Allstate and Progressive can raise rates but that can just lead to more churn as customers move to lower-priced competitors. Some insurers are getting creative as well; Progressive is trying to charge senior citizens; who are more like to die in accidents, higher rates in Maine. That of course raises the likelihood of a political backlash and increased regulatory costs.

Allstate was talking about a 25% rate increase for some drivers in Georgia in June. It is no coincidence that the National Safety Council reported a 34% increase in auto fatalities in that state. A problem that Allstate faces is that aggressive underwriters like Mercury operate in Georgia.

How Long Can the Dividends Last?

One has to wonder how Allstate can keep giving shareholders a 1.83% dividend yield in the face of these increased expenses. We also have to wonder how Progressive can keep offering a 2.73% dividend yield; and Cincinnati Financial a 2.43% dividend yield, with these declines happening. Serous doubt is also cast upon Travelers 2.11% dividend yield’s future.

It looks as if auto insurance companies may no longer be the constant money makers some of us have thought. Instead this industry might be facing serious losses, and falls in share price in the new future.

My suggestion would be for investors to stay away from this sector with the exception of Mercury. Its 4.62% dividend yield might one of the few that survives the growing carnage on the roads and in the auto insurance industry.

 

[1] http://www.nsc.org/Connect/NSCNewsReleases/Lists/Posts/Post.aspx?ID=134