Auto Insurers Get Nudge on Wall St. as Premiums Rise

Higher automobile insurance rates about to hit consumers in California have caught the attention of Wall Street.

Shares of Los Angeles-based auto insurer Mercury General Corp. soared 14.5% to a 52-week high of $36.63 on the New York Stock Exchange on Tuesday after several Wall Street analysts upgraded the stock in anticipation of expected rate increases for auto insurance in the Golden State.

“We have seen a number of insurers file for rate increases and we expect this process to accelerate next year,” Alison Jacobowitz, a Merrill Lynch Global Securities analyst, said in a report issued Tuesday.

Rising rates would reverse a five-year downward trend that saw California auto premiums decline from third-highest in the nation in 1995 to 20th last year, said Scott Edelen, a spokesman for the California Department of Insurance. Overall, California auto insurance rates fell 2.1% last year, he said.

The department already granted some of California’s largest auto insurers--including Allstate, Farmers, 21st Century, Geico and Safeco--mid to high single-digit rate increases in recent months, said Blair Sanford, an analyst at Cochran, Caronia Securities in San Francisco. At 9.5%, Geico’s proposed increase is among the largest requested by a major insurer.

The shifting number of companies asking the state for permission to increase rates compared with those filing for decreases shows how the market is changing. Only eight companies asked for premium increases in all of last year compared with 32 through just the first six months of this year, according to the Department of Insurance. Moreover, 152 companies filed for permission to drop rates in 1999. Only 47 have done the same through the first half of this year.

Mercury’s stock serves as an early warning of this trend because of what the industry calls the “churn” factor.

Once they have settled on an insurer, consumers tend to be lazy about checking whether their company’s rates are competitive, even when they get small increases. But when they get hit with large increases, they start to go shopping.

Mercury, which has about 7% of the California market, is one of the low-cost providers and should gain market share from this trend, Sanford said.

Though rates vary by area, number of drivers in a family, age and driving records, the cost of a standard insurance policy for a married couple living in Glendale with no accidents or driving violations ranges from about $2,100 with Mercury to about $3,000 with Allstate, according to state figures.

Several factors have prompted insurers to seek higher rates.

“We are seeing both the frequency and severity of claims increase,” said Lisa Wannamaker, a spokeswoman for Allstate Insurance Co., which won permission in September to raise rates 5.3% for higher risk drivers.

The tight labor market also has driven up the cost of repairs--auto shops are demanding and winning higher fees from insurers.

Brian Sullivan, editor of the newsletter Auto Insurance Report, said higher medical expenses are also a contributor. He also said that insurers are seeing a jump in claims from high-risk drivers--people with multiple traffic violations or accidents.

Sullivan believes the average cost of auto insurance might increase in California, but he said the increase will be far lower than the steady premium declines in recent years.

That’s a theme insurers are already talking up. 21st Century plans to raise rates 6.4% starting today. But spokesman Ric Hill points out the increase is far lower than the combined 25% decline in rates 21st Century customers received over the last four years.

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Premium Stock

Shares of Mercury Insurance Group have risen 65% this year and 29% over the last month based on expected profit growth from rising auto insurance premiums in California.

Mercury Insurance daily stock closes on the New York Stock Exchange

Tuesday: $36.63, up $4.63

Source: Bloomberg News