While soaring gas prices are discouraging Connecticut drivers from hitting the road, analysts say auto insurers are likely to benefit from the trend.
Higher gas prices tend to correlate with fewer miles driven, which translates into less accidents and better loss ratios for auto insurance companies, the argument goes.
If the pattern continues, insurers should expect “a disproportionate reduction in accidents and claims as a consequence of higher gas prices,” said Meyer Shields, an analyst with Stifel Nicolaus.
Shields and Jay Gelb of Lehman Brothers point to slightly better than expected results in underwriting in the first quarter for auto insurers Allstate and Progressive, which rank No. 1 and No. 3, respectively, in the Connecticut market.
During the first quarter, Progressive’s insurance subsidiaries generated underwriting profitability of 5.4 percent, SEC documents indicate. And its underwriting expenses were significantly better than expected in April. The company’s stock price rose from 16.07 at the end of March to a May closing price of 20.06, a 25 percent increase.
Lehman Brothers has upgraded Progressive’s shares and increased its price target from $15 to $20, while raising its earnings per share estimate for the year to $1.30.
At the same time, Allstate showed a 1 percent decrease in claim frequencies during the first four months of this year compared to the same time period in 2007.
Shields has given “buy” ratings to both companies, expecting their stocks to outperform the S&P 500 by more than 10 percent over the next 12 months.
Insurers aren’t as convinced that high gas prices are necessarily responsible for reduced auto claims.
Many Variables
“While it’s possible the impact of people driving less has something to do with it, it’s next to impossible to put a finger on one variable,” said Brett Ludwig, corporate relations manager for Allstate’s northeast region. “There’s no way to tell for sure.”
Leah Knapp, a spokesperson for Progressive agreed. “It’s difficult to ascribe change of frequency or severity of accidents to any one factor, such as higher gas prices,” she said.
The U.S. Department of Transportation announced that Americans drove 11 billion miles less in March 2008 than in March 2007, a decline of 4.3 percent.
It was the first time March travel fell since 1979, and it continued a trend of declining mileage that began last November.
While Shields admits other factors can affect the number of miles Americans travel — including the economy, weather and even the number of weekends in a month — he said his long-term analysis demonstrates a strong relationship between miles driven and gas prices.
Fewer miles driven also implies that there will be fewer accidents, Shields said.
Riskier Drivers
High gas prices should particularly reduce the amount of travel by riskier drivers, who typically have tighter budgets and above-average loss experience, Shields said.
Should customers expect rate cuts as a result? Shields doesn’t think so.
He said the trend of declining driving mileage began in December 2007, and it is probably still too recent a development to alter the overall tendency of insurers raising rates to keep up with loss cost inflation.
“We don’t expect insurers to stop raising rates because, historically, people have adjusted to higher gas prices and resume their driving habits fairly quickly,” said Shields in an industry report.
Insurers said the correlation between less claims and cheaper rates is not that simple.
While the number of claims is a factor in determining rates, its only part of the equation.“As losses go down, so do rates, but there are many other variables involved as well,” said Ludwig of Allstate.
Susan Giacalone, counsel to the Insurance Association of Connecticut, said the number of claims filed matters, but so does the severity of those claims.
