热点黑料

Direct writer GEICO’s success in auto insurance sales is due to spending dollars on effective advertising rather than on agents, according to recent research from analysts at Nomura Equity Research, which notes that GEICO has overtaken Allstate to become the nation’s second-biggest auto insurer while agency-writer Progressive is losing ground in the personal auto insurance race.

“GEICO may not be catchable in this race,” the analysts assert.

GEICO spends on advertisements that “deliver,” while “Progressive pays agents that don’t,” write research analysts Clifford Gallant and Matthew Rohrmann, comparing their underwriting expenses head-to-head. In the research note, the two equity analysts also assert that GEICO sells more coverage simply because it charges less.

“For a commoditized product, low cost and effective marketing are keys to share gain,” they say.

Using U.S. statutory direct written premium data from SNL Financial for the personal auto line for the first half of 2013, Nomura estimates that while State Farm still leads the pack with an 18.0 percent market share, market share for Berkshire Hathaway’s GEICO鈥攁t 9.9 percent鈥攅clipses both third-ranked Allstate (9.7 percent) and fourth-ranked Progressive (8.2 percent).

Drilling down to the state level, the analysts report that GEICO grew in all 50 states in the first half, with a median growth rate of 12.6 percent across the top-10 states, while Progressive’s median growth for the same 10 states was only 4.1 percent.

“GEICO’s growth rates are profound,” the Nomura report says, noting that GEICO is the only one of the top auto insurers with a pure direct model. “They tell us more than ever, the consumer wants the product cheap,” the authors said, referring to the relative growth rates.

On the other hand, “Progressive is saddled with a legacy agency business that absorbs dollars that could product greater return in ad spend and lower prices,” they write.

The report shows that GEICO spent $1.1 billion on advertising in 2012鈥攎ore than twice Progressive’s spend of $526 million.

Converting expense dollars into ratios, the analysts show that Progressive’s commission ratio was 6.4 percent of premiums, while its advertising expense was 3.3 percent of premiums last year. GEICO’s commission expense was negligible, and advertising came in at 6.8 percent of premiums.

The report also includes data showing average premiums per policy for the two carriers for the last three years鈥攁nd for Allstate’s Esurance as well. With lower premiums, GEICO and Esurance are enjoying double-digit growth, supporting the authors’ view that “the direct model wins.”

In August, during an investor conference call, Progressive’s Chief Executive Officer Glenn Renwick addressed questions about rate levels and expenses.

On the expense side, Renwick spoke about the relationship between acquisition costs for the agency and direct channels, saying that in recent years the carrier has gone “to great lengths to try to get an equalization of the acquisition costs” between the channels.

“We are now distributing in our agency channel at an acquisition cost that is very directly comparable to the costs that we incur in the direct channel,” he said.

Commenting on consumer preferences to one channel or the other, Renwick said: “Consumers will shop how they choose to shop, and while it’s very easy for some people to come to a conclusion that clearly there will be a massive directional shift one way or the other, that is not supported by the facts. It will, in fact, be a very slow change.”

Given this outlook, Renwick said Progressive is positioned to be an “absolutely equal provider of product to the two channels without creating an internal arbitrage” based on expense differentials.

Renwick also noted that the company purposely decreased advertising spending in the second half of last year, and also “bluntly” raised base rates across the board in reaction to a perceived uptick in loss severity.

The loss cost trends did not materialize as Progressive expected, he said, noting that not only would advertising be higher for the second half of this year than the second half of last year (staying at first-half 2013 levels), but also that product managers are fine-tuning rate changes鈥攖aking them down for individual segments where the tradeoff between growth in policy count from price cutting and a corresponding rise in combined ratio still produces acceptable margins.

Referring to “ordered pairs” of combined ratio and growth estimates, he said that managers are individually studying these and pricing with “surgical” precision.” They are “looking deep into their product to see where they can get ordered pairs that actually feel better,” he said.

“If the opportunity or the elasticity for growth is available to them and, perhaps, able to be exploited or capitalized by taking a rate decrease, they may do that,” he said.

It doesn’t matter if the individual segment is based on geography, customer profile or vehicle profile, he said, noting at one point that there are “tens of thousands” of segments or cells that can be subjected to this surgical approach.

In a separate research note published earlier this week, William Wilt of Assured Research, reviewed the concept of price elasticity of demand embedded in Progressive’s surgical approach. Price elasticity of demand essentially refers to the responsiveness鈥攅lasticity鈥攐f a customer in terms of the quantity of a product he or she will buy when the price of that product changes.

Wilt warns analysts not to be too quick to judge the success or failure of such an approach, using a series of simplified examples to demonstrate the lag between rate decreases and the earned impact of the changes. In some scenarios (for highly elastic or sensitive rating cells), earned premium growth is rapidly evident, while in others (targeting less sensitive rating cells), earned premium growth is barely evident within the first 12 months, Wilt shows in an analysis which he prepared with the help of Ed Combs, a former executive of Progressive who is now an advisor to Fractal Analytics.

Topics Auto Agencies Allstate