3/6/2007
Dow Jones
Newswires
CHICAGO (Dow Jones)--It doesn't take a caveman waking up on the
wrong side of the rock to know that the little guy in the
auto-insurance sector faces an uphill battle in taking business
away from the big guys - and remaining profitable while doing
it.
For one thing, auto-insurance premiums this year, for the first
time since 1999, are expected to decline across the board, meaning
the funds insurance companies get will suffer. For another, the
cost of doing business is skyrocketing as those with deep pockets
spend a lot on advertising to show consumers why they are the
better insurance provider.
The upshot? It is getting more difficult for second-tier auto
insurers without big advertising budgets and snazzy new marketing
tactics to win their share of business.
But don't tell that to Safeco Corp. (SAF), an auto, homeowners and
small commercial insurer with a market value of $7 billion. It
plans to succeed through a combination of cost-cutting and what
could be called guerilla marketing to win business in what has been
called a down cycle for auto insurance.
Shares of Safeco were trading recently at $65.50, not far from its
52-week high of $69.15 and well off the low of $57.43. Its
price/earnings ratio of 9.90 lags the industry's 10.34
average.
The stock trades at around 1.7 times its book value per share,
estimates Raymond James analyst C. Gregory Peters, below its peer
group average of 1.9 times, as investors consider its chances
against the competition. (Raymond James received non-investment
banking securities-related compensation from Safeco in the last
year.)
There is room for upside if Safeco can deliver on its goal of
beating the big guys at least some of the time and by staying sane
in the current soft market. That's a big "if."
At least one analyst - Rob Haines of CreditSights Inc., an
independent researcher - is telling investors looking at the
property/casualty sector to run for the exits because he sees
profitability deteriorating at most property/casualty insurers,
including Safeco, as the soft market returns "with a
vengeance."
And make no mistake, the market is softening. Robert U'Ren, senior
vice president of Quality Planning Corp., the data analysis unit of
Insurance Services Office Inc., calls it a familiar cycle for the
insurance industry. As prices climb and profits strengthen, "one
company reduces its prices to win more customers, and that cycle
goes until no one is making money," U'Ren said. The cycle started
about a year ago and is likely to gain traction, he said.
U'Ren says some drivers - probably at least half - shop for auto
insurance based on price alone, which helps push all the
price-cutting. Berkshire Hathaway Inc.'s (BRKA, BRKB) Geico unit,
the fourth-largest auto insurer in the U.S. and famous for its
caveman advertising campaign, has gained market share faster than
any other big insurer by appealing to that group, promising that 15
minutes can cut drivers' insurance bills by as much as 15%. Other
drivers, including the more affluent, pay attention to brand and
products and may be less sensitive to price.
At an insurance conference last month, Safeco Chief Executive
Paula Rosput Reynolds said one of her goals is to break out from
the "sameness" among insurance companies that all compete on
selling essentially the same thing.
One tactic is to cut costs while giving agents a better deal to
persuade them to quote Safeco's offering. Another is to have
something unique to offer customers who like the idea of products
advertised by competitors like much-larger Allstate Corp. (ALL),
but who come to their independent agents for advice.
Last year, Allstate, the second-largest player behind State Farm,
shook up the industry with the rollout of its "Your Choice"
auto-insurance packages, which allow customers to pick the various
levels of insurance they want (high-priced options include features
such as accident forgiveness and deductibles that drop over time).
Other insurers have scrambled to match the popular features or
compete on price. Safeco has started its own effort to come up with
competing products.
"It's been a long time since we've put together a product that
either has the agent affirmatively offering us because we uniquely
have the feature, or alternatively, have somebody walk into an
agent's office and say, you know, I don't even know what the name
of that company is, but you know, they've got 'that thing'. And I
want 'that thing'," Rosput Reynolds said. "That's part of what
we're trying to invent right now, 'that thing'."
(Lavonne Kuykendall covers the insurance industry in the Chicago
bureau of Dow Jones Newswires.)
-By Lavonne Kuykendall, Dow Jones Newswires; 312-750-4141;
lavonne.kuykendall@dowjones.com
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