Auto-insurance hikes headed down the road

U.S. auto-insurance companies, led by Allstate Corp. and Progressive Corp., are raising their premiums in at least 20 states as the $160 billion industry moves to end two years of price reductions.

The states involved generally are the most populous and include Pennsylvania and New Jersey. Insurers say they need higher prices to counter rising repair and medical costs.

Allstate, ranked second by premiums, said that its collision bills rose 2.2 percent in the fourth quarter of 2007 from a year earlier and that payouts for injuries rose 9.3 percent. Safeco Corp., which gets almost half its total insurance premiums from auto policies, reported a $19 million loss on auto underwriting.

Pennsylvania provides one example of the rate hikes. State Farm Mutual Automobile Insurance Co., the nation's largest auto insurer, said it would hike rates 1.1 percent this year in the state. No increase is planned for New Jersey motorists, State Farm said.

Nationwide, the rate adjustments may reverse the 20 percent drop in the stock-market values of Allstate and Progressive in the last 12 months, Bear Stearns Cos. analyst David Small said. Earnings should improve this year because insurers have become better at predicting driving records and then setting rates, he said.

"There's a lag before rate increases show up on the income statement," Small said. "But it's real, it's happening, and you'll see it in earnings by the end of the year."

Some examples of higher costs for auto insurers:

Rising prices for new vehicles and expenses for labor and replacement parts contributed to a 45 percent increase in car-repair costs in the last 10 years, according to information compiled by the Highway Loss Data Institute in Arlington, Va.

Collision costs rose 2.4 percent in the third quarter of 2007 from a year earlier, according to the Property Casualty Insurers Association of America in Des Plaines, Ill.

The cost of auto-body work was up 3.3 percent in 2007, the U.S. Labor Department reported.

Claims for bodily injuries climbed 6.6 percent in last year's third quarter, the PCI said. That was driven by more expensive hospital visits, which rose 6.7 percent in 2007, according to the Labor Department.

Auto-insurance coverage typically has been a boom-or-bust business, said Bill Wilt, an analyst at the brokerage Morgan Stanley. When insurers make money, they cut prices to gain market share. Then, as premiums fail to cover claims, insurers raise prices.

This time, insurers are lifting rates before the industry becomes unprofitable, Small said.

If the latest increases stick, auto insurers may be able to avoid a repeat of 1999, when the companies began losing money. It took three years for underwriting to make money again, according to data from the insurance-rating firm A.M. Best Co.

Safeco, of Seattle, acted too late to avoid losses, disclosing last week that it spent almost $1.03 in claims and expenses for every $1 collected in premiums during the fourth quarter. Rising medical costs contributed to the loss, chief executive Paula Rosput Reynolds said.

Safeco raised rates in 34 of 44 states in 2007 and is increasing prices in 18 states during the first quarter.

Allstate raised prices for its standard auto coverage in about two dozen states last year. State Farm applied to increase prices this year in four states, including Pennsylvania, while proposing decreases in six, after cutting last year in all but one state.

The increase "doesn't sound like much, but it's huge" for an industry with narrow margins, said Bruce Marlow, president of New York-based American International Group Inc.'s direct auto-insurance unit and Progressive's former chief operating officer. "There just isn't a lot of room here to get the pricing wrong for very long."

The five largest automobile-insurance writers in each state, by premiums written.*

New Jersey

Company Premiums

In millions

New Jersey $789.3

Manufacturers

Geico 752.8

Allstate 747.8

State Farm 521.3

Liberty Mutual 473.0

Pennsylvania

Company Premiums

In millions

State Farm 1,300.0

Erie 888.9

Allstate 830.0

Nationwide 715.1

Progressive 599.8

*For year ended Dec. 31, 2006.

SOURCE: New Jersey Dept. of Banking and Insurance, Pennsylvania Department of Insurance.EndText