U.S. Auto Insurance Returns May Be Mediocre Through 2007

   Of DOW JONES NEWSWIRES
   (This item was originally published Wednesday afternoon.)

NEW YORK -- U.S. personal auto insurance will continue to post mediocre returns for property-casualty companies over the next five years, despite today's higher rates and tighter policy terms, according to a new study.

Conning Research & Consulting Inc., an insurance research firm, found in its latest report, "Caution Flag for Personal Automobile Insurance," that the insurance pricing and loss environment through 2007 won't be dramatically different from the environment between 1993 and 2001.

"According to Conning's growth and profitability metrics, personal automobile has been a mediocre line," Conning said. "Between 1993 and 2001, personal automobile premiums grew by 45.7%. This growth was considerably slower than that of the economy at large - between 1993 and 2001, gross domestic product grew by 59.6%."

In the same period, personal auto's average return on surplus was 7.8%, below a reasonable estimate for the industry's cost of capital, Conning said. By comparison, Treasury notes average 6% growth, suggesting only a 1.8% premium for the risk undertaken by auto insurers, the research firm said. Return on surplus is net income divided by the amount of capital an insurer has after liabilities.

The study focused on the results of 161 insurers between 1993 and 2001, who represent about 96.1% of the personal auto industry.

Only a few insurers have been able to outpace GDP growth and achieve an average return on surplus above 12%, which Conning considers a "respectable" benchmark of profitability.

"Weak-to-middling automobile insurers will have great difficulty achieving newfound success," Conning said. "They will be constrained by the nature of the personal automobile insurance marketplace and by the absence of factors that could make winners out of a much larger portion of the industry."

Namely, demographics for new car sales are likely to remain stable, if not decline somewhat through 2007, and losses will continue to rise, Conning said. Also, rates are likely to moderate, if not decline, in the next five years.

Personal auto rates, which have been rising for three years, likely peaked in 2002, Conning said. The research firm expects moderate pricing in 2003. For 2004, it expects a more aggressive marketplace, in which companies are more focused on increasing market share than on underwriting.

Also, state regulators are likely to be more resistant to rate hikes in 2003 and beyond, Conning said.

While rates are likely to decline after 2003, medical costs will likely continue to rise, Conning said. Inflation of damage repair costs seems stable after moderating in 2002, Conning said.

At the same time, there isn't likely to be a strong run-up in new car sales beyond 2003. The 2000 to 2002 period was very strong for new car sales, in part due to aggressive financing by manufacturers.

"Historical cycles suggest this cannot continue indefinitely" Conning said. "Manufacturers are unlikely to continue with their extremely attractive financing terms and deep discounts for another three to five years."

-By Chad Bray, Dow Jones Newswires; 201-938-5293; chad.bray@dowjones.com

Updated January 9, 2003 7:30 a.m. EST