Auto insurers benefit as people drive less - Fewer fender benders take place as surging gas prices keep cars parked

SAN FRANCISCO (MarketWatch) -- Surging gas prices have been cruel to most financial-services firms this year, with investors fretting that borrowers have less money to repay debt.
But auto insurance, dominated by companies including Allstate Corp. (ALL:The Allstate Corporation
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Last: 45.34-0.83-1.80%

4:05pm 07/24/2008

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ALL 45.34, -0.83, -1.8%) and Progressive Corp. (PGR:The Progressive Corporation
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4:01pm 07/24/2008

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PGR 19.59, -0.43, -2.1%) , may be one of the few financial-services sectors to benefit.
Americans drove 1.4 billion fewer miles on the highway in April compared with a year ago, according to the U.S. Transportation Department. In March, people drove roughly 4.3% fewer miles than they did a year before. That was the biggest yearly drop since the department's Federal Highway Administration started keeping records in 1942.
As Americans drive less, the number of car accidents may be falling, limiting the frequency of auto-insurance claims.
Allstate, one of the largest auto insurers in the United States, said late Wednesday that the frequency of claims involving damage to cars and other property fell 4.2% in the second quarter. The frequency of claims involving injuries dropped 7.6% in the period compared with a year earlier.
If such a trend becomes strong enough, auto-insurance premiums may be pressured.
"If gas prices remain high and economic activity slows further, we believe that improved auto-loss trends will continue in the future, leading to stronger underwriting profitability, and therefore multiple expansion for auto-insurance stocks," Bijan Moazami, an analyst at Friedman, Billings, Ramsey, wrote in a note Thursday.
Allstate shares have dropped roughly 12% so far this year, partly because the company has large investment exposures to mortgage-related securities that have slumped in value as the housing crisis deepens. See story on Allstate's quarterly results.
However, that's much better than the 27% slump in the S&P Insurance index in 2008.
Progressive shares are up more than 4% this year. Shares of Mercury General Corp. (MCY:mercury genl corp new com
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4:01pm 07/24/2008

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MCY 48.87, -0.50, -1.0%) , another auto insurer, are down less than 1% so far in 2008, while rival State Auto Financial Corp. (STFC:State Auto Financial Corp
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4:00pm 07/24/2008

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STFC 27.05, +2.21, +8.9%) is up 0.4%.
Travelers Group (TRV:travelers companies inc com
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4:02pm 07/24/2008

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TRV 42.88, -2.72, -6.0%) reported modestly favorable frequency trends in its auto-insurance business when it reported solid second-quarter profit on Wednesday.
State Auto hasn't seen any improvement in the frequency of auto claims yet, but Kyle Anderson, a spokesman for the company, said it would not be surprising to see such a trend take hold.
If such a trend becomes strong enough, auto-insurance premiums may be pressured, he added.
However, Anderson also noted that there are a lot of other factors that go into setting auto-insurance rates, such as the cost of repairing crashed vehicles and buying new parts.
Indeed, if rising oil prices end up fueling broader inflation, the cost of settling auto claims could rise, analysts say.
In the second half of this year, high steel and plastics prices will increase the cost or severity of auto-insurance claims involving physical damage, said Brian Meredith, an analyst at UBS, on Thursday.
Alistair Barr is a reporter for MarketWatch in San Francisco.