Standard and Poor’s says Auto, Homeowners Outlook Stable

June 7, 2002

Higher pricing underlies the prospect of improved earnings among U.S. auto and homeowners’ insurers, according to a midyear report released by Standard & Poor’s. The outlook has been revised to stable (from negative at year-end 2001).

According to S&P’s, personal-lines underwriters are generally operating in a more favorable environment than their fellow members in commercial-lines , and even the State Farm group, hitherto a dampening influence on pricing, is conforming to a stronger pricing trend.

Although the personal-lines sector incurred negligible payouts to terrorism in 2001, some of the large players in the sector did undergo a major reduction in capital from Sept. 11 losses, because their coverage also straddles commercial-lines business. This effectively reduced supply in the industry.

Dividend payments by operating companies to fund stock buyback programs of their parent companies have also limited available capital. S&P’s projects an improvement in the combined ratio for automobile coverage (measuring insurer payouts plus expenses, as a percentage of premium) to about 103.5 percent for 2002, compared with 108.4 percent for 2001. For the homeowners’ line, where mold exposures have proven a drag on underwriting performance, the combined ratio is projected at 112 percent, compared with 122 percent in 2001. In the case of State Farm, which wields about 20 percent of the national personal-lines market, large losses have galvanized the group into pressing for rate increases.

State Farm has also ceased writing homeowners policies for new customers in Texas and California while, for its ongoing policies in Texas, it has filed for major premium-rate increases and has gained permission to apply more reasonable terms for mold exposure.

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