For nearly a decade now, the increasing intensity and cost of natural disasters has been one of the most significant headwinds for property insurers. More recently, some of the country’s largest insurance companies have made headlines for pulling away from select regions that have been especially costly.
For Progressive Insurance, the country’s second largest car insurer, that strategy has paid off – for now.
In the third quarter, redistribution allowed Progressive to avoid huge losses that other insurers incurred after wildfires ravaged Maui, costing approximately $3.2 billion in damages, and also limited exposure to Hurricane Idalia, which cost nearly $10 billion in damages across Florida, Georgia, North and South Carolina. After reinsurance kicked in, Progressive’s property catastrophe losses were 28 points lower than the first six months of the year.
“We should have probably seen the need to de-risk a little bit in states like Florida, Texas, Louisiana and across the country earlier,” said Chief Executive Officer Tricia Griffith. “That’s why we’re doing that now.”
According to the third quarter earnings call de-risking at the end of 2022 contributed to an improved revenue through the year to $15.6 billion, a 21% increase from the same time a year before. Analysts expect revenue to reach $68.93 billion by 2024, a substantial jump from the weak $49.6 billion in 2022. Investors were rewarded as earnings per share exceeded expectations and hit $2.09.
Last month, Progressive Insurance made good on its promise to continue this strategy, and announced that it would stop insuring approximately 115,000 homes in Florida. The company cited the increased costs of disasters that represented a disproportionate amount of coverage on Progressive’s books. Florida represents more than 17 percent of all homes insured by Progressive, even though only 6.5 percent of the country’s homes are in the state, according to a press release announcing the move.
Progressive did not respond to a request for comment.
While there is widespread consensus that this was the right business move for the current situation – especially where underwriting policies in some regions where strict regulatory environments have made blatantly unprofitable environments for insurers – climate scientists and analysts alike are not confident that withdrawal strategy is sustainable.
“It’s something they have to be careful about,” said Brett Horn, a senior analyst at Morningstar who has maintained a sell rating for Progressive. Horn said he has no reason to believe that Progressive is in trouble yet, especially given the company’s track record in the past year. Horn’s sell rating is largely based on over-valuation, rather than any immediate concerns about the company’s operation.
But he also added that the longevity of Progressive’s de-risking strategy has a very feasible limit should the cost of climate catastrophes continue to spiral to more regions of the country.
“They can only forgo so many losses on the homeowner’s side before that strategy doesn’t make sense anymore,” Horn said.
Progressive’s recovery has outpaced competitors
Climate scientists who measure the economic impact of extreme weather were even less optimistic about the feasibility of Progressive’s rebalancing strategy.
U.S. insurers have paid out a record-high $295.8 billion in natural disaster claims over the past three years, according to international risk management firm Aon and the American Property Casualty Insurance Association. Those damages dragged on insurers profit margins throughout the first half of 2023, and Progressive was not spared, with sizable second quarter earnings misses that company executives blamed on extreme weather, among a slew of other factors. The second quarter results led to the largest single-day stock price drop since 2000.
That’s because shifting weather patterns have made the costs of climate crises harder to predict, according to Adam B Smith, the lead scientist for NOAA National Centers for Environmental Information’s U.S. Billion-dollar Weather and Climate Disasters – a project that tracks the frequency of billion dollar weather catastrophes.
In 1980, only 20 states had natural disasters with damages that exceeded $5 million, according to the National Oceanic and Atmospheric Association. In 2023, there were 48. And because some regions are experiencing extreme weather that is relatively new, properties are not as resilient or prepared for the climate challenges at hand, Smith said.
Number of billion dollar disasters 1980-2023
Source: https://www.ncei.noaa.gov/access/billions/
“We have 20th century infrastructure, but we live in a 21st century climate. The delta between those two is one of the reasons that the costs and the vulnerability is so high,” said Smith.
Progressive has yet to announce drastic changes anywhere else, but advocates say that the pullback in Louisiana, Texas and California has already made insurance unaffordable and out of reach for the people living there.
“It’s a slow moving disaster that we have here,” said Andreanecia Morris, the executive director of HousingNOLA, a New Orleans based organization that advocates for increased regulation on insurance prices, and financial support from the local and federal government. “We predicted this as early as 2020. We knew that this was coming.”
In 2022, the average homeowners insurance rate in Louisiana increased by 18.5% over the previous year, according to the Insurance Information Institute, putting the average statewide cost of homeowners insurance $700 higher than national averages.
Those changes, according to Morris, have meant that living in the state is becoming untenable for a growing population of homeowners, many of whom have lived in the region for generations.
“We’re looking at a mass displacement event. I wish to God I was being hyperbolic,” Morris said.
To be sure, analysts watching Progressive’s performance in the past year are not ringing the alarm bells just yet – including some with sell ratings. The company’s track record of navigating difficult insurance landscapes means there is still opportunity to navigate the challenging environment deftly.
Additionally, the extent to which Progressive will have to continue withdrawing from a widening expanse of expensive, disaster prone states will largely hinge upon how favorable the regulatory environment will be to rate increases that will allow insurers to offset billowing weather related costs.
For analysts that have maintained Progressive’s overweight rating, the current political climate is encouraging.
“The regulation in so many states really varies, and a lot of states almost always accommodate rate increases,” said Meyer Shields, a buy-side analyst with Keefe Bruyette and Woods. “You won’t necessarily have [de-risking] explode in terms of being an unmanageable issue.”