The CFA calls the practice “discriminatory,” while others view it as adept underwriting. Judgments aside, I wondered: Is there a difference in performance between the insurers that use these factors in underwriting and those that don’t?
The CFA study
According to a CNBC article:
CFA went online to get price quotes for two hypothetical customers: a factory worker with a high school diploma and a plant supervisor with a college degree.
Both were the same in every other way: a 30-year old single woman who rents in a moderate-income neighborhood, drives a 2003 Honda Civic, had no accidents or moving violations in the last 10 years and who went without insurance coverage for the past 15 days.
The price-shopping … attempts to get quotes from the 10 largest insurance companies for the minimum required liability coverage in 10 major urban areas …
Based on its analysis of the country’s top 10 insurance companies, CFA found price quotes that were as much as 40 percent higher for drivers with less education and lower-job status.
Insurance companies that used these factors in pricing:
American Family Insurance — private company
Liberty Mutual — private company
Geico — owned by Berkshire Hathaway
Progressive — public company
Farmers Insurance — owned by Zurich Insurance
Insurance companies that did not use these factors in pricing:
Allstate — public company
State Farm Insurance — private company
Travelers — public company
USAA — private
Stock price performances
There are only two public companies in each category, so this is hardly a statistically significant study. (I’m not including Berkshire Hathaway, as Geico is just one of many holdings. Also, keep in mind Farmers Insurance is just one of Zurich’s holdings.) Additionally, the companies have different business mixes. A more exact study would compare only auto loss ratios.
1-year advantage: non-“discriminators”
The Allstate Corporation (NYSE:ALL), by far, was the top performer. Travelers Companies Inc (NYSE:TRV), the other company that didn’t consider education and occupation in pricing decisions, came in the middle of the pack, roughly tied with The Progressive Corporation (NYSE:PGR).
5-year advantage: n/a
One might give the advantage to the companies that didn’t use the personal factors because one of them, Travelers Companies Inc (NYSE:TRV), is a runaway winner. However, that fact is muted by the others’ performances.
10-year advantage: n/a
The performances are in line with the 5-year performances.
Biz snapshots & basic metrics
Progressive
The Progressive Corporation (NYSE:PGR), a $15.6 billion market cap company, provides personal and commercial auto insurance, and other specialty property-casualty insurance products primarily in the U.S. It’s the fourth largest auto insurer in the U.S., with a personal to commercial lines breakdown of roughly 90% to 10%.
Allstate
The Allstate Corporation (NYSE:ALL), a $24.1 billion market cap company, provides personal property and casualty insurance, life insurance, and retirement and investment products primarily in the U.S.
Travelers
Travelers Companies Inc (NYSE:TRV), a $31.5 billion market cap company, provides commercial and personal property and casualty insurance products to businesses, government units, associations, and individuals primarily in the U.S. It’s the second largest auto insurer, as well as the second largest provider of homeowners insurance, and the sixth largest provider of commercial property and casualty insurance.
| Company | Forward P/E | 5-Yr PEG | P/B | Operating Margin (ttm) | Profit Margin (ttm) | ROE (ttm) |
| Progressive | 15.6 | 1.7 | 2.4 | 10.3% | 6.5% | 18.1% |
| Allstate | 10.1 | 1.2 | 1.2 | 10.9% | 6.7% | 11.3% |
| Travelers | 10.6 | 1.2 | 1.2 | 16.0% | 11.5% | 12.0% |
Yahoo! Finance; data to July 26.
Profit margin and ROE are especially important metrics. Travelers Companies Inc (NYSE:TRV) and The Progressive Corporation (NYSE:PGR) are the respective standouts here.
It’s critical to look at free cash flow. Insurance companies, by their nature, are usually cash flow machines. Travelers’ FCF was over 200% of its net income over the trailing twelve months, a big plus. The Allstate Corporation (NYSE:ALL) had a negative FCF, which requires investigating.
Travelers Companies Inc (NYSE:TRV) 2.4% dividend yield makes it the top dividend-payer. The Allstate Corporation (NYSE:ALL) and Progressive have 1.9% and 1.1% yields, respectively.
The Progressive Corporation (NYSE:PGR) and Travelers recently reportedly second quarter results. Progressive had a great quarter, with revenue up nearly 12% and net income up 178%. Travelers had a solid quarter, with revenue and net income up 3.5% and 85%, respectively. The Allstate Corporation (NYSE:ALL) reports on July 31.
Progressive has 7.6% insider-ownership; the others have close to nil.
My take on the study
The nature of the beast with insurance is it’s often unfair on the individual level because pricing is based on actuarial findings on the group level. That’s especially true on new policies where there’s no historical record upon which to base pricing decisions.
That said, I agree with the CFA in this case because it involved drivers with considerable driving experience. After 10 years of driving experience, personal factors such as educational level and occupation — as well as others, such as marital status — seem irrelevant.
Takeaway
There are not enough companies to draw a meaningful conclusion to the posed question.
That said, objectively-speaking, both Travelers Companies Inc (NYSE:TRV) and The Progressive Corporation (NYSE:PGR) possess some promising investment features and warrant further analysis. Travelers has very good profit margins and FCF, and pays a solid dividend. Progressive sports an excellent ROE and has decent insider-ownership.
The article Auto Insurers: Does Pricing “Discrimination” Pay? originally appeared on Fool.com and is written by BA McKenna.
BA McKenna has no position in any stocks mentioned. The Motley Fool recommends Progressive. BA is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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