State Farm Suffers $7B Auto Underwriting Loss, Profits Decline 94%

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.”
Rivals Gain

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.

State Farm’s net worth, a measure of assets minus liabilities, climbed to $87.6 billion on Dec. 31 from $82.7 billion a year earlier. The boost includes a $4.2 billion increase in the property-casualty units’ stock portfolio. State Farm is among the largest holders in companies including Walt Disney Co., Johnson & Johnson and International Business Machines Corp., and counts on investments to help cushion underwriting losses.

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.
Funds, Banking

Other units did better than auto insurance. There was a $1.6 billion underwriting gain from the segment that includes residential coverage. Life insurance, the banking unit and a mutual fund operation were also profitable.

The annual results compare with a 14 percent decrease at Allstate, which posted 2016 net income of $1.88 billion. State Farm, which is owned by policyholders and has no publicly traded debt, reports results once a year and uses state accounting rules for insurers. Publicly traded insurers must use U.S. generally accepted accounting principles, making comparisons inexact.