Safeco Results Raise Concerns About U.S. Motor Market

Comments made by U.S. insurer Safeco's management at the company's 2005 results conference call have sparked concerns about the state of the U.S. motor insurance market.

Safeco's management described the behaviour of some of its competitors in the U.S. motor market as irrational. Shares in Safeco and Allstate, another big U.S. motor insurer, fell more than 3% following the comments.

Safeco posted $691 million net income for 2005, up from $562 million in 2004. But pre-tax underwriting profit at Safeco Auto fell to $140 million for the year, down from $176 million in 2004. In the fourth quarter of 2005 the motor business's underwriting profit was $19 million, down from $41 million in the same period in 2004.

Investment bank Morgan Stanley lowered its estimates of Safeco's performance in 2006 because it says underlying trends in personal lines are deteriorating. "In our view, building competitive pressures in personal automobile have begun to overtake the secular improvements of the past several years," analysts from Morgan Stanley said in a research note. "If we are right, the dynamics in the personal lines sector no longer support the peaking multiples afforded to those stocks."

But some say there has been an overreaction to Safeco's comments about increased competition in the motor market. Adam Klauber, analyst at investment bank Cochran Caronia Waller Securities, says only a small number of players are undercutting the market.

"The reactions were overblown," he says. "The market has been pretty competitive for the past 18 months. Here or there, there are a few looking to take more market share – that is the nature of a relatively competitive market. But there is not a wholesale movement to get market share."

Klauber adds that the motor market has been profitable in the past few years. He expects the market to continue to perform well. "Margins are at record highs," he says. "The market has been performing pretty well. It is very profitable and should give returns on equity of between 15% and 20%."

Safeco's management said one company had put in place a new rating structure that it believed was 30% too low in at least one state. But investment bank Merrill Lynch notes that the market is behaving rationally overall. It believes investors may have misinterpreted the company's comments.

"We sense that although some players appear to be irrational, many of the larger public companies are maintaining a certain level of discipline," analysts at Merrill Lynch said in a research note. "In addition, from what we understand, the national company referred to by Safeco has already pushed for higher prices in at least one state. Increased competition and/or deteriorating loss costs have been in our expectations for some time. Based on our research, we would not describe the competitive conditions in auto insurance as a price war."