State Farm Profit Plunges on $7 Billion Auto Underwriting Loss
State Farm Mutual Automobile Insurance Co., the largest U.S. property-casualty insurer, said annual profit fell 94 percent on car insurance claims costs.
Net income dropped to $400 million from $6.2 billion in 2015, when results included one-time gains in the stock portfolio tied to pharmaceutical deals, the Bloomington, Illinois-based company said Tuesday in a statement. The underwriting loss from auto insurance widened to $7 billion from $4.4 billion.
U.S. insurers have been pressured by rising costs on auto policies as smartphones distract drivers and repair costs climb. Travelers Cos. said last month it had begun to increase auto premiums because of higher expenses, following Allstate Corp. and Berkshire Hathaway Inc.’s Geico.
State Farm’s “highly unprofitable auto insurance results should provide further room for the industry to raise auto insurance rates. We would view this as a favorable tailwind for the other major auto insurers” such as Geico, Allstate, and Progressive Corp.,” Jay Gelb, an analyst at Barclays Plc, said in a note to investors. “Improved pricing should eventually lead to better auto insurance underwriting margins, which have been negatively affected by increased claims cost inflation.”
Allstate jumped 1 percent to $82.16 at 4 p.m. in New York, the biggest advance in the 21-company S&P 500 Insurance Index. Progressive climbed 0.7 percent, while Berkshire rose 0.5 percent.
The results are the first for a full year under Chief Executive Officer Michael Tipsord, who was promoted in 2015 to replace Edward Rust. His compensation was $8.16 million for 2016, Dave Phillips, a spokesman for the company, said in an email.