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., have been adding policyholders at a torrid pace in recent months.
Geico, owned by Warren Buffett’s Berkshire Hathaway Inc., 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. 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.
