AUTO INSURANCE REPORT

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1 AUTO INSURANCE REPORT The Authority on Insuring Personal and Commercial Vehicles Vol. 22#47/1055 Sept. 7, 2015 INSIDE Table: Farmers premium and loss ratios by state, -. Pages 2-3 Farmers remains heavily concentrated in its biggest markets. Page 3 After verification, Alabama has fewer uninsured drivers. Page 5 Encouraged by success of the state s insurance verification system, insurers agree to share more data. Page 8 Losing in California Hurts, But Farmers Growth Troubles Reach More Widely Farmers makes plenty of money. For six straight years, the California-based insurer has enjoyed a better personal auto combined ratio and loss ratio than the national average, according to SNL Financial. Often, the gap is several points. Much of that national profit superiority is built on a foundation of a big book of California business, which is far better than the national average. Alas, Farmer s bottom line success is not reflected in its top line performance. Of the top 20 insurers, only one lost more market share in the past decade than Farmers. (That was fellow Californian, Mercury). Please see FARMERS on Page 2 Spike in Number of Miles Driven Ends Seven Years of Stagnation Americans love their cars again, with vehicle miles driven rising faster in a sustained way than any time in the past 15 years. The improving economy may be unevenly impacting the rich and poor, but it is reaching enough people that higher unemployment and greater economic activity have set cars in motion once again. Lubricating this driving boom are low gas prices: today s gas prices are slightly less than they were a decade ago, and adjusted for inflation they re about 20 cheaper than a decade ago. Not surprisingly, the rise in miles driven is also pushing up automobile accident and fatality rates, forcing insurers and public safety advocates to flex loss reduction and safety muscles that went nearly dormant during a long period of driving stagnation. From 1970 to 2007, there was only one substantial plateau in miles driven: the three years and two months between April 1979 and July There was also a shorter plateau through Other than that, miles driven rose year after, most powerfully from 1976 to 1979 and for the longest sustained stretch from 1982 to Please see DRIVING on Page 10 Alabama Sets The Pace With Verification System Alabama s web-based insurance verification system, which has been hailed as a model for other states, is starting to hit its stride even as it undergoes some significant changes to make it more efficient. One of those changes is monthly book-of-business uploads from insurers. Alabama started mandating liability insurance in 2001, and in 2008 lawmakers raised the minimum liability limits to $25,000 for injury liability for one person in an accident, $50,000 for two or more and $25,000 for property damage, up from 20/40/10. Please see ALABAMA on Page Magellan Isle Dana Point, CA (949)

2 Page 2 AUTO INSURANCE REPORT FARMERS Continued from Page 1 In 2005, Farmers had $1 billion in personal auto written premium, a 6.9 market share and growing (peaking at 7 in 2007 and 2008), and was ranked the fourth-largest U.S. auto insurer. By, premium had fallen 13.4 to $9.7 billion, and its market share dropped to just 5.1 market share, ranking sixth. You can blame Farmers performance in its home state of California for much of the trouble. In 2005 Farmers was the biggest auto insurer in the nation s biggest market, with $3.5 billion in State Farmers Personal Auto By State (000) Written Market Share Industry Written Market Share Please see FARMERS on Page 3 Industry Change -14 California $2,757, $2,699, Texas $1,646, $1,651, Florida $458, $466, Arizona $355, $376, Washington $344, $353, Colorado $306, $326, Oklahoma $298, $305, Illinois $297, $305, Oregon $275, $284, Minnesota $231, $250, New Jersey $204, $194, Missouri $187, $192, Michigan $185, $210, Nevada $182, $190, Utah $173, $176, New Mexico $151, $161, Pennsylvania $141, $130, Kansas $127, $132, New York $126, $131, Ohio $125, $139, Arkansas $82, $92, Indiana $81, $90, Idaho $78, $83, Alabama $76, $85, Wisconsin $74, $80, Tennessee $74, $78, s written premium and 18.1 market share. Over the course of the ensuing decade, premium fell a whopping 21. No other insurer in the top 20 fell anywhere close to that. Statewide premium growth was 12.8, so Farmer fell to second place behind State Farm, and market share collapsed to But you can t blame all of Farmers woes on California. Even without the California decline, the rest of the company s personal auto business grew less than almost any other large insurer. $9,701, $9,880, Data Source: SNL Financial, by permission, and the Auto Report Database. Loss ratio is incurred losses as a percentage of direct premium earned and does not include dividends or loss adjustment expense.

3 AUTO INSURANCE REPORT Page 3 FARMERS Continued from Page 2 And if you want an illustration of just how widespread the shrinking disease has become, look no further than our tables below. In Farmers lost market share in 45 of 51 markets, and gained share in only two. Only Georgia, a tiny state for Farmers, represented a growth victory, and it comes paired with a sub-par underwriting performance. At first glance, the shrinking in California might have served to better balance the geographic mix of Farmers portfolio, but that hasn t State Farmers Personal Auto By State (000) Written Market Share Industry happened. In, Farmers premium volume is more concentrated in both its top five and top 10 states than it was in Among the biggest insurers, Farmers remains the most concentrated in its top five states, at 57.3 Because this solid-profit, low-growth strategy has been in place for so long, one must conclude that this is what Farmers ultimate parent, Zurich, prefers. To be sure, high growth and high profits would be best, but if you can t have growth, it would seem profit comes first. AIR Written Market Share Industry Change -14 Montana $67, $71, Virginia $63, $73, Hawaii $54, $58, Georgia $53, $39, Connecticut $53, $61, Wyoming $44, $44, Nebraska $41, $46, Louisiana $31, $35, Iowa $30, $31, South Carolina $26, $30, Maryland $26, $25, South Dakota $23, $24, West Virginia $20, $23, Delaware $19, $20, Mississippi $17, $22, North Dakota $16, $16, North Carolina $16, $16, Kentucky $11, $11, Maine $8, $9, Alaska $6, $7, New Hampshire $5, $7, Rhode Island $4, $4, Vermont $3, $4, District of Columbia $3, $4, Massachusetts $ $ s $9,701, $9,880, Data Source: SNL Financial, by permission, and the Auto Report Database. Loss ratio is incurred losses as a percentage of direct premium earned and does not include dividends or loss adjustment expense.

4 Page 4 AUTO INSURANCE REPORT Name Alabama Personal Auto Insurers s Ranked by Direct Written (000) Mkt share Loss Ratio Mkt share Loss Ratio 2012 Mkt share 2012 Loss Ratio 2012 State Farm Mutual $649, $604, $555, Alfa Mutual $390, $390, $390, Allstate $288, $270, $254, Berkshire Hathaway/GEICO $250, $228, $193, Progressive $181, $171, $154, USAA $164, $151, $137, Nationwide Mutual $95, $97, $95, Farmers $76, $85, $90, Liberty Mutual $69, $62, $57, Travelers Companies $59, $55, $52, Country Financial $45, $46, $45, Safeway Financial Holding Co. $37, $37, $28, Auto-Owners Co. $30, $30, $31, MetLife Inc. $29, $25, $22, ACCC Co. $28, $21, $11, Affirmative Holdings $24, $25, $21, First Acceptance $22, $21, $17, Hartford Financial Services $20, $19, $18, Auto Club Exchange (SoCal) $20,644 7 $17, $13, Integon National (GMAC) $20, $21, $24, Cincinnati Financial $20, $19, $18, Access Co. $10, $12, $11, American Independent Cos. Inc. $9, $8, $6, Assurant Inc. $8, $9, $10, Direct General $8, $5, $ Sentry Mutual $8, $9, $8, AssuranceAmerica Co. $7, $8, $8, American National (ANPAC) $7, $7, $8, American Family Mutual $5, $4, $1, State Auto Companies $5, $5, $5, Infinity Property and Casualty $4, $10, $8, Baldwin & Lyons $4, $4, $4, Everest Re Ltd. $3, $4, $3, Ameriprise Financial Inc. $2, $2, $2, Horace Mann Educators $2, $2, $2, GuideOne $2, $2, $3, Employers Mutual Casualty Co. $2, $2, $2, Statewide s $2,640, $2,526, $2,348, Source: SNL Financial, by permission, and the Auto Report database. Loss ratio is incurred losses as a percentage of direct premium earned. The ratio does not include dividends or loss adjustment expense. Single year data can be skewed by reserve adjustments.

5 AUTO INSURANCE REPORT Page 5 State Market Focus: ALABAMA Continued from Page 1 Alabama officials estimate that the percentage of uninsured motorists has fallen to 17, said Julie Magee, commissioner of the Alabama Department of Revenue. When state lawmakers passed the insurance verification law in 2011, the most recent data available from the Research Council put Alabama s uninsured rate at 22. In an update based on 2012 data, it was The actual impact of the verification system will be more apparent when the IRC updates its uninsured motorists report, which is expected next year. The state s goal is 10, Magee said. Last year, agents who specialize in nonstandard insurance reported a surge in business, though that has flattened out this year, said Ken McFeeters, an agent who represents the Alabama Independent Agents on the advisory council for the insurance verification program. Perhaps the most significant sign that the program is hitting its stride is the amount of registration reinstatement fees collected by the Department of Revenue. Drivers of uninsured vehicles face a 30-day suspension of their registration and must pay a $200 fee to reinstate the registration. A second or subsequent violation requires a fourmonth suspension and a $400 reinstatement fee. From Oct. 1,, through July 31, 2015, the department collected $1.9 million in reinstatement fees, a 131 increase over the same period the year before. Part of the delay was the fact that state officials didn t entirely trust their data, so they moved slowly when it came to suspending registrations of people who did not respond to requests to verify their insurance. We are finally seeing the benefits, Magee said. What we are seeing is the ones that were caught but not reinstating are now realizing, oh Lord, I can t get away with this. Magee emphasized that the purpose of the program is not to bring in a lot of revenue from reinstatement fees; the purpose is to reduce the number of uninsured drivers. State officials fully Alabama Auto Margins Ten-Year Summary, Percent of Direct s Earned Please see ALABAMA on Page 6 Line of Business Personal Auto Liab Avg 6.6 Personal Auto Phys Personal Auto Comm. Auto Liab Comm. Auto Phys Comm. Auto All Lines* *Auto; Home, Farm & Commercial Multiperil; Fire; Allied; Inland Marine; Med Malpractice; Other Liability; Workers Comp; All Other Note: calculations are by Auto Report using data from the National Association of Commissioners. Calculations are estimates, some based on national averages.

6 Page 6 AUTO INSURANCE REPORT State Market Focus: ALABAMA Alabama Continued from Page 5 on Motor Vehicle Administration (IICMVA). expect that while there Commercial will always be insurance Auto Louisiana, Insurers which has struggled with high rates of scofflaws, the amount s of Ranked reinstatement by fees will Direct uninsured motorists, Written will be implementing (000) a similar system early next year. drop dramatically as more people recognize that Mkt Loss Mkt Loss Mkt Loss it is less costly to buy a minimum limits share liability Ratio Insurers prefer share the Ratio web-based 2012system share to Ratio policy Name than to repeatedly have to pay reinstatement vendor-managed systems that require frequent Progressive fees. $34, $35, $34, uploads into a massive insurance database for Auto-Owners Co. $34, $32, $31, Jay Starling, assistant director of the state comparison with registrations. Travelers Companies Inc. $26, $27, $23, Motor Vehicle Division, said he has had inquiries from about a third of U.S. states about However, Alabama found last year that it Nationwide Mutual $19, $17, $15, American International $18, could $19,059 not avoid 4.9data uploads entirely $18,936 if 5.3 the system was $14,907 to work 3.9 effectively $15, follows Berkshire the Hathaway protocols Inc. developed for $16,413 online 4.0 veri Insurers $6,786 are now 53.7 being asked $2,487 though not 23.4 fication Zurich by the Industry $14,703 Committee $14, $15, Please see ALABAMA on Page Alabama s Old Republic International experience with the system, $16,554 which Canal Co. $13, $13, $10, Cincinnati Financial $12, $11, $9, Alabama Liberty Mutual $11, $13, $14, Sentry Mutual Commercial $11, Auto $5,490 Insurers 23.0 $4,546 5 Employers Mutual Casualty Co. $11, $9, $6,365 s Ranked by Direct Written (000) 6 Pennsylvania National Mutual Casualty $11, $11, $11, State Farm Mutual $9,004 Mkt 2.2 Loss 87.8 $8,847 Mkt 2.3 Loss 51.5 $10,035 Mkt 2.8 Loss 87.8 share Ratio share Ratio 2012 share Ratio QBE Name (Gen Cas/Unigard) $7, $5, $2, Progressive FCCI Mutual Ins Hldg Co. $34,255 $6, $35,566 $5, $34,973 $4, Auto-Owners Munich-American Holding Co. $34,169 $6, $32,175 $6, $31,830 $5, Travelers W. R. Berkley Companies Inc. $26,172 $6, $27,115 $7, $23,929 $6, Nationwide Arch Capital Mutual Ltd. $19,297 $5, $17,157 $5, $15,604 $2, American Federated International Mutual Co. $18,269 $5, $19,059 $4, $18,936 $3, Old Tokio Republic Marine International $16,554 $5, $14,907 $5, $15,871 $5, Berkshire American Hathaway Financial Inc. Inc. $16,413 $5, $6,786 $5, $2,487 $5, Zurich IAT Reinsurance (U.S.) $14,703 $5, $14,308 $3, $15,518 $2, Canal Allstate Co. $13,510 $5, $13,693 $4, $10,351 $3, Cincinnati State Auto Financial Companies $12,353 $4, $11,014 $3, $9,470 $4, Liberty Hartford Mutual Financial Services $11,706 $4, $13,805 $5, $14,799 $4, Sentry CNA Financial Mutual $11,340 $3, $5,490 $4, $4,546 $6, Employers Farmers Mutual Casualty Co. $11,187 $3, $9,089 $4, $6,365 $4, Pennsylvania ACE Ltd. National Mutual Casualty $11,016 $3, $11,717 $3, $11,051 $3, State Fairfax Farm Financial Mutual Holdings $9,004 $3, $8,847 $2, $10,035 $2, QBE Lancer Financial (Gen Cas/Unigard) Inc. $7,321 $3, $5,269 $3, $2,716 $3, FCCI United Mutual Fire Ins Hldg Inc. Co. $6,783 $3, $5,402 $3, $4,929 $2, Munich-American AmTrust Financial Holding Services $6,474 $3, $6,057 $1, $5,107 $1, W. Enstar R. Berkley Ltd. $6,350 $3, $7,018 $2, $6,782 $4, Arch Cherokee Capital Ltd. Co. $5,941 $3, $5,120 $1, $2,931 $ Federated ProSight Specialty Mutual Co. $5,691 $2, $4,800 $2, $3,841 $1, Tokio Statewide Marine s $407,059 $5, $385,575 $5, $360,202 $5, American Source: Financial SNL Financial, Inc. by permission, $5,336 and the Auto 46.0 Report $5,147 database $5, IAT Loss Reinsurance ratio is incurred (U.S.) losses as a percentage $5,093 of direct premium 39.9 earned. $3,118 The ratio does 139.2not include $2,073 dividends 0.6 or loss 6 adjustment expense. Single year data can be skewed by reserve adjustments. Allstate $5, $4, $3, State Warning: Auto Auto Companies Report $4,968 is a confidential, 60.4 copyrighted $3,726 newsletter for subscribers $4,361 only Hartford No part Financial of this Services publication may $4,282 be reproduced 89.3 by any form $5,329 or means, including 7 photocopying, $4,483 scanning, 89.5 CNA Financial $3, $4, $6, Farmers $3, $4, $4, ACE Ltd. $3, $3, $3, Fairfax Financial Holdings $3, $2, $2, Lancer Financial Inc. $3, $3, $3,

7 AUTO INSURANCE REPORT Page 7 State Market Focus: ALABAMA Continued from Page 6 required to upload their book of business each month so state officials can update insurance information in the state s registration database. The book of business uploads are not used to verify insurance, however. Rather, they ensure that when the online verification system seeks confirmation of coverage, it is checking with the correct insurer. Some states that require proof of insurance at registration have experienced a problem in which drivers buy insurance then cancel the policy after they receive or renew their tags. Alabama has sought to avoid that problem by reconfirming all insurance information in 30 days. In addition, the state runs all registrations through its insurance verification system monthly, and if the system cannot confirm insurance twice, the vehicle owner is contacted to provide proof of insurance. Until insurers started providing book of business information to refresh the registration data, there was a big problem: In too many cases, the system would not be able to confirm insurance for people who had changed insurers, leading them to get annoying questionnaires asking them to verify their coverage. In fact, in and, 82 of questionnaires sent out for verification of coverage came back with proof that insurance was in place on the day that it was checked by the system. Refreshing the registration database to reflect changes in insurers books of business each month is expected to reduce the problem immensely. Alex Hageli of the Property Casualty Insurers Association of America, who is a member of Alabama s insurance advisory council, said it was apparent that this was a necessary move to make the online verification system work more smoothly. Please see ALABAMA on Page 8 Alabama Snapshot Regulator: Commissioner Jim L. Ridling Rate regulation: prior approval Size of personal auto market: $2.64 billion ( DPW) Rank: 25th Average policy expenditure: $659 (2012) Rank: 37th Auto Report PAIN Index rank: 20th (2012) Property Report HURT Index rank: 6th (2012) Auto registrations: 2.08 million () Truck registrations: 2.59 million () Vehicle miles traveled (VMT): 64.9 billion () Traffic fatalities: 1 per 100 million VMT; U.S.: 1 () Vehicle thefts: per 100,000 residents; Region: per 100,000 residents () Liability defense: contributory negligence Minimum Requirements: BI: $25,000/$50,000 PD: $25,000 Safety Laws Weak graduated licensing Primary safety belt law Motorcycle helmets required for all Texting ban for all drivers; cellphone ban for young drivers Demographics Population: 4.85 million ( est.) Change 2010-:, U.S.: +3.3 Median household income (avg ): $43,253; U.S.: $53,046 Population density: 94.4 per square mile; U.S: 87.1 per square mile (2010) Sources: SNL Securities, NAIC, U.S. Dept. of Transportation, PCIAA, NAMIC, U.S. Census Bureau, IIHS, FBI

8 Page 8 AUTO INSURANCE REPORT Continued from Page 7 We wanted to be receptive and collaborative with Alabama because they have done a really good job of implementing the system, he said. We met them halfway. With more up-to-date insurance information in the registration database, the number of questionnaires sent out will start to trend lower, Starling said. Changing insurers is only one of the problems that prevented the online verification system from confirming coverage for vehicles that in fact had valid insurance in place. The other problem was incorrect data entry, such as incorrect vehicle identification numbers. Last year, the advisory council decided to incorporate fuzzy Alabama s online insurance verification system had more than its share of early troubles, but has made great progress. logic, so that if numbers don t match exactly but are very close, the system will confirm that the insurance is in effect. We were the first state to fully implement the [web services] system as written, so we had to stub our toe in a lot of areas, Magee said. Broadly speaking, using web services is a very inexpensive way to address this issue. Prior to the web services model, Alabama hired a vendor to send out random questionnaires seeking verification of coverage. At that time, in 2011, the state was spending $61,000 monthly on a verification system. In 2015, the average monthly cost is $35,833. One factor in Alabama s ability to reduce its costs has been its reliance on the University of Alabama Center for Advanced Public Safety to develop the software to perform real-time verification, track ongoing coverage and manage mailers that are used by registrants to respond to requests for insurance verification. State Market Focus: ALABAMA Saving money is a huge issue in Alabama. Republican Gov. Robert Bentley called a second special session, beginning September 8, after lawmakers failed to pass a budget for the fiscal year that begins Oct. 1. Bentley had called for a $302 million in tax increases to fund a $1.9 billion spending plan. Including in his first tax package was a proposal to eliminate premium tax credits so that all insurers would pay 3.6. The governor said this would amount to an additional $25 million in premium tax dollars going into the general fund. taxes account for about 16 of the general fund. The biggest beneficiaries of premium tax credits are Alfa, a powerful domestic insurer affiliated with the Alabama Farmers Federation, and State Farm. Together, the two companies accounted for $96.2 million of the $110.4 million in tax credits granted over the last four years, according to state Department of data cited by the Alabama Political Reporter. The tax credits are supposed to provide an incentive for companies based on the amount of full time employees and owned real estate in Alabama. The proposal to eliminate the tax credit died with the governor s original budget, and it is unlikely to be revived in the next budget proposal. However, the legislative committee of the Alabama Independent Agents is considering whether to lobby lawmakers to make the change. Their argument is that the tax incentives give giant companies like Alfa and State Farm a pricing advantage that independent agency companies may lack. The design of the tax credit negates the economic impact of the many independent agents who write business on behalf of those companies. Do we disagree with it? Yes, said Bill Sager, executive vice president of the independent agents group. Have we made a determination that legislatively we can tackle it? No. AIR

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10 Page 10 AUTO INSURANCE REPORT DRIVING Continued from Page 1 But after reaching an all-time high of 3.04 million annual miles traveled in November 2007, miles traveled plummeted to 2.94 million in November It would be more than seven years, until December, before miles driven returned to that record level. That is the longest sustained period of stagnating U.S. driving in more than 50 years, and most likely the longest such period in history. After reaching bottom in 2011, there was a modest climb from 2012 through the first three quarters of before growth surged again. Make no mistake, this is not unprecedented growth. In fact, the past year s surge is relatively modest compared to the growth of the 1980s and 1990s. But as the strongest growth in 15 years, and a profound change in direction from the past seven years, this driving binge is a shock to the insurance and highway systems. Modest achievements in accident avoidance technology are not spread widely enough to have a real impact so it is no surprise that many insurers are seeing higher claims costs. (Others have been immune so far, but it seems just a matter of Vehicle Miles Traveled Moving 12-Month, Millions of Miles June 2015=3.09m Nov. 2007=3.04m Dec. =3.04m Sources: U.S. Federal Highway Administration, Federal Reserve Bank of St. Louis Shaded areas are U.S. economic recessions. AUTO INSURANCE REPORT Established 1993 Brian P. Sullivan, Editor Telephone: (949) bpsullivan@riskinformation.com Leslie Werstein Hann, Managing Editor Telephone: (908) leslie@hannwriting.com Patrick Sullivan, Associate Editor Telephone: (949) bpsullivan@gmail.com Subscription Information: (800) On the Web: Auto Report, 2015, published weekly, 48 times a year, by Risk Information Inc., Magellan Isle, Dana Point, CA It is a violation of federal law to photocopy or reproduce any part of this publication without first obtaining permission from the Publisher. ISSN: Subscription Rates: $1,087 per year in U.S. and Canada. Elsewhere $1,127 per year. time.) Despite the remarkable achievements in auto safety, this kind of spike in driving is bound to result in more fatalities, and indeed that is just what we have. The National Safety Council reports fatal accidents were up 14 in the first half of 2015 and could top 40,000, the most since 2007, the last time miles driven was this high. Since more claims means more premium, does all this mean auto insurance is back on track for longterm growth? We think not. Rather, we are looking at a rebound in driving after a long stagnation, but the rate of accidents per mile driven continues to fall, so unless the economy grows at an unprecedented rate, more driving won t come to the rescue. Enjoy the growth while it lasts. AIR