Drivers of profit
Here's what I keep asking myself this time of year: How can it possibly cost this much?
The question applies to lots of expenses. But the one that always sends me off the rails is my annual car insurance bill, due in full right out of the gate. Happy New Year.
Despite premiums that will average more than $1,000 for the first time this year, insurance companies insist Massachusetts is a tough place to make a buck selling auto coverage. They continue to operate in a regulated environment that has permitted moderate rate increases in recent years.
So why are the stocks of both publicly traded auto insurers that operate here bumping up against all-time highs?
Exhibit A: Commerce Group Inc. of Webster, the 800-pound gorilla of Massachusetts auto insurance. Commerce shares peaked at $48.54 on March 10 and closed yesterday at $46.78. The stock has climbed 39.6 percent over the past year.
Exhibit B: Safety Insurance Group Inc. of Boston, which commands a much smaller share of the state car insurance market. Shares of Safety, which went public in November 2002, hit a new high of $20.48 three weeks ago and closed yesterday at $18.26. Safety stock has soared 46 percent in the past 12 months.
Anyone expecting a simple explanation to this climb has paid no attention to the ever-running Massachusetts auto insurance story. There are no simple explanations to anything on this subject.
Start with the fact that Commerce and Safety shares have moved up by roughly similar degrees over the past year, though their businesses don't compare nearly so neatly (Commerce stock still trades at a premium to Safety shares, based on price-to-earnings ratios).
The appreciation of Commerce and Safety shares looks very much like the advances of most property-and-casualty insurance companies over the past year. A very powerful stock market tide has been lifting all boats by roughly the same degree.
The catch: The bull market for property-and-casualty stocks nationwide is based on steep premium increases companies have been able to charge for many types of coverage. Massachusetts auto insurance doesn't qualify as a product line with steep pricing power (Commerce operates a profitable and growing insurance business outside Massachusetts, but it's still a small slice of the company pie).
So earnings growth at Commerce and Safety over the past year must have been modest, right? Again, not so simple.
Profits more than tripled at both last year, but factors other than writing insurance policies had a lot to do with the bigger numbers.
Auto insurance companies make or lose most of their money three ways: on the difference between insurance premiums and expenses, on dividend income from investments, and on gains or losses from selling securities in their portfolios.
Commerce charged a bit more than it paid on insurance, and Safety paid slightly more than it charged. Both collected the kind of dividend income investors would expect.
Then both companies made a large chunk of their 2003 profit by reshuffling investment portfolios and taking profits in the process. That probably means selling longer-term bonds at a profit and buying shorter-term securities in their place.
Take those gains out of the equation, and the booming growth in company earnings would be cut by more than half. No one expects to see investment profits like that again this year.
The complicated facts: Massachusetts auto insurance stocks are way up, but not based on sustainable profit booms. Earnings at those companies were up sharply, but not based on basic insurance activity.
And I'm still grumbling about my bill.
Steven Syre is a Globe columnist. He can be reached at syre@globe.com.
