NU Online News Service, April 6, 1:39 p.m.EDT

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Despite continued increases in loss costs, the private passengerauto insurance industry should continue to remain profitable,benefiting from the weak economy, a financial analyst said.

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Using data supplied by the Insurance Services Office Inc., MeyerShields of Stifel Nicolaus in Baltimore said in an analyst's notethat to counteract a 1 percent annual increase in loss costs, thereis a decline in claim frequency, which has fallen to its lowestlevel since the first quarter of 2007. Lower repair and replacementcosts are also moderating severity, he said.

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Because of this, he explained, underwriting profits should stayabove levels anticipated when current rates were determined.

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However, he continued, loss cost inflation could translate intocontinued rate increases. Unprofitable companies will need biggerincreases, "but even insurers currently at or near their break-evenpoints will soon be underwater," he said.

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Rate increases should produce more shopping among consumers formore affordable insurance, benefiting large auto carriers that canunderprice their competitors because of their economies of scale,according to the Stifel Nicolaus analysis.

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On the homeowners insurance side, loss costs (excludingcatastrophes) are rising by more than 10 percent annually, said Mr.Shields. Because of this, margins are expected to compress over thenext 12-to-18 months in this line, "except for companies capable ofrapidly recognizing and responding to loss cost inflation.

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Allstate, The Hanover Group and Progressive are highly rated andthe companies are considered "industry leaders in pricinganalytics" and have the discipline to maintain rate adequacy, Mr.Shields said. Erie Insurance also received positive marks.

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The analyst predicted that Mercury General's underwritingmargins "should deteriorate rapidly" because of its overexposure tothe volatile trends in the California private passenger automarket. Mr. Shields said the company lacks the loss analytics othercompanies have shown, and a miscalculation over the next 12 monthscould spell increased margin compression.

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