Auto insurers' profit margins will continue to face pressure this year, according to one leading property-casualty equity analyst.
Bank of America analyst Brian Meredith said the fact that the January Consumer Price Index monitor of auto insurance costs increased by a mere .6 percent, compared with a 1 percent increase the previous month, is a clear indication of the problems faced by the carriers that specialize in this line.
And p-c companies should not expect to make it up in homeowners' increases, despite the hurricane-related costs of 2005.
"Homeowners pricing weakened again in January of 2006, with rates down 2.2 percent year-over-year, compared with a 1.5 percent decrease in November on a year-over-year basis," he said.
"We don't expect broad-based price firming in homeowners as a function of the hurricanes, despite expectations for rate increases in storm-affected states such as Allstate's 16.3 percent average statewide increase in Florida, approved this month," Mr. Meredith said.
That increase was only granted with the proviso that the Northbrook, Ill.-based company used the additional funds for more reinsurance purchases, which the company was already planning to do after its more than $3 billion third-quarter loss.
For the past several months, auto insurance margins have been positively impacted by a drop in the severity of losses, which some have attributed to a possible reduction of automobile use in the wake of higher gas prices.
But Mr. Meredith said carriers could no longer count on that with all components of personal auto loss severity running well above pricing, according to the most recent figures.
"Coupled with stabilizing frequency trends, we believe we are entering a period of margin compression for personal auto insurers," he said.
Such a period usually results in downward estimate revisions and price-to-book multiple compression for personal line stocks and underperformance relative for commercial lines, according to Mr. Meredith.
State insurance regulators continue to approve rate decreases for companies that now include State Farm, Horace Mann, GEICO and Nationwide, Mr. Meredith noted.
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