UPDATE: State Farm's Auto Unit Reports 2010 Underwriting Loss
March 01 2011 - 2:33PM
Dow Jones News
Underwriting losses at the massive car-insurance business
operated by State Farm Mutual Automobile Insurance Co. widened in
2010, even as the biggest home and auto insurer in the U.S. raised
prices.
State Farm's auto business spent $2.8 billion more on claims and
expenses than it collected from policyholders in premiums, marking
at least the third straight year the car-insurance operation has
reported an underwriting loss.
In each of 2009 and 2008, the insurer had an underwriting loss
in its auto business of $2.7 billion. The auto unit is the
company's largest.
State Farm's homeowner's business also operated at an
underwriting loss, though the $900 million loss shrank from $1.5
billion in 2009.
The unprofitable results at both units were offset by income
produced by State Farm's massive investment portfolio. Net income
for the company in 2010 was $1.8 billion, more than double the
amount the company earned in 2009. The insurer's net worth
increased 5.3% to $61.2 billion last year.
As a mutual company, State Farm is owned by its policyholders
and has frequently operated at an underwriting loss when it can
make up the difference with investment income. The insurer's
property-casualty operations have reported an underwriting loss in
seven of the last ten years, spokesman Dick Luedke said
Tuesday.
Still, State Farm has been boosting the price of car insurance.
With price increases in 32 states and decreases in 10 last year,
State Farm's overall auto insurance rate rose by 2.8% in 2010,
Luedke said. So far in 2011, State Farm has raised prices in eight
states and cut the price of coverage in one.
Analysts who follow the industry say the ongoing rate hikes
present an opportunity for smaller rivals. The third- and
fourth-largest auto insurers, Geico Corp. and Progressive Corp.
(PGR), have been adding policyholders at a torrid pace in recent
months.
Geico, owned by Warren Buffett's Berkshire Hathaway Inc. (BRKA,
BRKB), disclosed Saturday that it added 165,000 customers to its
policy count in last year's fourth quarter and 188,500 more in the
first seven weeks of 2011, putting it on pace for its best quarter
for new business in two years. The company was charging its average
policyholder about the same at the end of 2010 as it did at the
start.
For the full year, State Farm's policyholder count rose slightly
to 42.5 million drivers, Luedke said. With rounding, last year's
figure was also 42.5 million. Luedke declined to provide more
specific numbers, saying State Farm didn't want to tip off
competitors.
The modest increase in State Farm's auto customers leaves
Allstate Corp. (ALL) as the only one of the top four auto insurers
to lose policyholders in 2010.
State Farm "will almost certainly have to keep raising rates,"
wrote Meyer Shields, an insurance analyst with Stifel Nicolaus, in
a note to clients Tuesday afternoon. Those increases "should
benefit competing insurers, allowing them to nudge their own rates
up and still win disaffected customers from State Farm."
State Farm's written auto premiums, or the value of policies
sold, rose 1.6% to $31.5 billion in 2010, Luedke said. The combined
ratio for the auto business was 108.9, another way of showing the
underwriting loss. The ratio shows the company spent almost $1.09
on claims and expenses for every dollar of premiums it collected
from its customers.
State Farm also operates a life insurer, a bank and retail
mutual fund operations. Net income at the life unit was essentially
flat at $456 million, while the bank lost $35 million and the
mutual fund units lost $17 million. The losses at the bank and
mutual fund units both fell from a year earlier.
-By Erik Holm, Dow Jones Newswires; 212-416-2892;
erik.holm@dowjones.com
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