How quickly and decisively private-passenger auto insurers choose to act on recent dramatic improvements in underwriting results will determine the duration of the current pricing cycle and could further consolidate market share for the first-movers.

Geico Corp., the No. 3 US private auto insurer, posted historically favorable fourth-quarter 2023 underwriting results, according to our analysis of data contained in parent Berkshire Hathaway Inc.'s annual report on Form 10-K. Only once in the past 23 years did Geico post a larger pretax underwriting gain than the $1.37 billion it recorded in the fourth quarter of 2023 in an outcome that the company attributed to the combination of sharply improved loss experience, tight expense controls and a rate-driven acceleration in premium growth.

With The Progressive Corp., the No. 2 US private auto insurer, carrying its momentum from the end of the prior year into January, at least two of the three leading market participants are poised to benefit from continued tailwinds from more benign inflationary trends and rate increases in the pipeline at the same time inflationary headwinds appear to be calming down. And should their loss ratios remain at or near recent levels, both companies would have plenty of room to materially increase customer acquisition efforts after they each retrenched through much of 2022 and 2023.

Geico's loss and loss-adjustment-expense (LAE) ratio broke below the key 80% threshold in the fourth quarter of 2023, marking an end to the company's longest consecutive stretch of ratios of 80% and above since Berkshire began reporting the auto insurer's results in the current quarterly format at the turn of the century. In tandem with an increasingly austere expense ratio, in part reflecting a pullback on advertising spending, the sum of the loss, LAE and expense ratios of 86.5% in the fourth quarter of 2023 marked Geico's lowest such result in the closing three months of at least the past 23 calendar years by a margin of 7.3 percentage points. The fourth quarter of 2023 marked the fourth time in the past five quarters that Geico's expense ratio was in the single digits.

Berkshire attributed Geico's $5.52 billion positive swing in pretax underwriting earnings to the combination of higher average premiums per policy, lower claims frequencies, reductions in reserves for prior accident years and lower advertising costs. The company also noted that Geico's average claims severities continued to rise in 2023 due to higher auto repair parts prices, labor costs and medical inflation.

A closer look at historical trends finds cause for optimism that the favorable dynamics will persist. Both frequency and severity statistics have been trending in the right direction with Geico continuing to see high-single-digit rates of decline in average frequencies in the property damage and collision coverages; the 1% to 2% increase in average bodily injury claims frequency for the full year was lower than the ranges the company had reported in previous periods. From an average severity standpoint, rates of increase for the full year were slightly lower than those Geico had posted earlier in 2023.

Fourth-quarter 2023 results also did not benefit from outsized effects of reserve releases. We calculate that Geico's re-estimates during the period reduced its loss and LAE ratio by just under 3 percentage points, an amount that was below the effects from similar actions in the previous three quarters of 2023 and only slightly above the impact in the year-earlier period.

Geico also experienced meaningful acceleration in premiums written during the fourth quarter of 2023. Year-over-year growth of 6.7% marked its largest such increase in a fourth quarter in five years. It ended a lackluster seven-quarter stretch for a company famous for gobbling up market share in which rates of change ranged from a decline of 2% to an increase of 2.8%. Geico's full-year growth in premiums written totaled just 1.9% for the second straight time.

The Berkshire filing did not quantify the extent of Geico's pullback in advertising, the company's key driver of new business growth. But it did offer details on the extent of Geico's retrenchment as evidenced by a 9.8% decrease in policies in force. That contrasts with Progressive, which increased its personal auto policy count during 2023 by 9.1% even as it significantly dialed back on growth from June through November.

Progressive signaled in its 10-K as filed with the SEC on Feb. 26 that it will continue to push for rate increases in select geographies where they are needed, though the company believes that its prices are "adequate and competitive" in most product and state combinations. President and CEO Tricia Griffith in her annual letter to shareholders credited a "herculean effort" during the second half of 2023 to bring the company's overall combined ratio down below management's 96% target after a challenging start to the year.

Griffith explained that Progressive had to pivot quickly from its initial plan to "put the pedal to the metal for growth" to one focused on driving profitability through a variety of actions that included a 50% decline in advertising spend in the second half of the year relative to the first half. Now, the company is unwinding certain of the non-rate-related actions it took to restrict growth and is prepared from an advertising standpoint to "open up the spigot and get more business in the door" as many competitors continue to raise rates, leading consumers to shop for alternatives, Griffith said during a Feb. 27 conference call. While Griffith declined to divulge Progressive's 2024 advertising spend budget, the company's January personal lines expense ratio hit a 10-month high.

S&P Global Market Intelligence's rate filings data continues to show a preponderance of increases across the sector, evidence of the "continued hard market" that Griffith referenced during the call.

Our RateWatch application shows an aggregate rate change of 3.4% for filings approved or otherwise disposed between Jan. 1 and Feb. 23 on top of the 14.6% increase for full year 2023. While there are several filings for rate decreases that remain pending, most of those reflect filings to implement a forthcoming reduction in Michigan Catastrophic Claims Association's per-vehicle personal injury protection assessments. One notable exception was Progressive American Insurance Co.'s Feb. 9 submission of an overall rate decrease of 2.3% on a use-and-file basis for a $3.79 billion book of private auto business.

Recent rate submissions generally rely on historical experience only through Sept. 30, 2023, and do not yet capture the kinds of fourth-quarter improvements that the leading writers have observed. But it remains to be seen whether and to what extent the inclusion of more recent experience changes the industrywide pricing trajectory, which has been underscored by year-over-year growth in the motor vehicle insurance component of the US Consumer Price Index at the highest rates since 1976.

^{This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.}