Fitch To Auto Insurers: Price While You Can

Fitch said conversations with companies indicate the pace of increases slacked off in 2003, and it cautioned that "if insurance price increases lag increases in insurance costs, industry underwriting margins will suffer."

The report on auto insurance 2003 market results said that last year, among the 10 largest insurers, State Farm, followed by Allstate were on top, while Zurich/Farmers swapped places with Progressive, which moved into third. Berkshire Hathaway/GEICO passed Nationwide to move from sixth to fifth. USAA, Liberty Mutual, Travelers and AIG followed Nationwide, in that order.

Fitch said Progressive direct written premium grew 27.8 percent to $7 billion during the period, while Allstate saw a 3.6 percent increase for an $11.9 billion total. If the two companies continue at those growth rates, Progressive will overtake Allstate for second place "sometime in 2005," Fitch predicted.

With the exception of GEICO, none of the 10 improved their combined ratio, according to Fitch estimates for the period ending Sept. 30, 2003. GEICO, by Fitch estimates, improved by three points to 92.8. State Farm combined ratio rose 14.1 points to 103.1.

While auto insurance profitability improved in 2003, Fitch said that underwriting results must improve to a low-to-middle 90′s combined ratio to produce an adequate return on capital given current interest yields on invested assets.

Donald Thorpe, senior director at Fitch Ratings, said that while pricing has been on the upswing, "those insurers who have been able to use favorable market conditions to their advantage by building market share and surplus will be best positioned. Conversely, insurers who failed to take advantage and are still struggling with underwriting issues will likely find it more difficult to correct pricing deficiencies, thus potentially decreasing their competitive position."

The companies that have used the favorable pricing environment to build market share and surplus "will be best positioned to weather a downturn," according to Fitch.

Fitch noted that regulatory pressure may also intensify if purchasers see insurance costs rising faster than their ability to pay them, or if the insurance industry reports profit levels that purchasers and consumer groups deem excessive. "Such scrutiny puts a limit on companies' ability to raise rates even when those increases are economically justified," said Mr. Thorpe.

The full report "U.S. Automobile Insurance 2003: Cruising, But What About the Road Ahead?" is available on the Fitch Ratings Web site at www.fitchratings.com.