(Dow Jones) THE RATE OF GROWTH IN PERSONAL-auto-insurance premiums rose by 0.1% year-over-year after experiencing a 0.5% uptick in September. This was reported Nov. 15. Arguably this pace is somewhat like watching paint dry or grass grow. Rates rose by an average 0.4% so far in 2007.

The overall fading-growth trend in pricing has existed for four years. While State Farm continues to reduce rates, others are beginning to raise rates. The current environment is somewhat similar to that in late 1999, the last extremely competitive market. The difference is that during that cycle there was an extended period of negative or no growth.

In this cycle that period has been much shorter. These decreases are somewhat understated due to the inflationary impact of symbol drift which takes into account make, model and year of the car.

In 2007, State Farm has reduced rates in 37 states. That said we believe the personal auto insurance market is beginning to stabilize. Allstate recently conducted an analysis that found among 4 major auto insurers -- State Farm, GEICO (a division of Berkshire Hathaway), Farmers [a unit of Zurich Financial Services] and Nationwide Financial Services -- there were fewer rate decreases than increases in the third quarter. Together these four companies represented some 34% of 2006 industry sales.

We remain of the belief that competition in personal auto insurance is much less than in commercial lines.

Three components of the Consumer Price Index we consider most related to auto-loss costs -- medical-care costs, professional services and motor-vehicle body work -- increased in October.

Two additional factors exhibiting positive trends for the industry that we believe have a direct relationship with underwriting profitability are vehicle miles traveled and real gross domestic product. Vehicle miles traveled have generally exhibited a moderating trend. The Federal Reserve's real GDP expectations are 2.25%-2.50% in 2007 and 2.50%-2.75% in 2008 down from 3.3% in 2006. Historically, we have felt the largest factor affecting auto-accident frequency has been the level or strength of the economy.

Although we believe that the psychology around auto-insurance stocks improves with higher gas prices, we believe that the greatest impact on auto-insurance frequency is from changes in economic activity. In periods of reduced economic activity, this would take the form of less people driving to work, going on vacation, going out to dinner and possibly having a drink and fewer trucks.

We continue to believe this industry is becoming an oligopoly which could provide greater price stability. This trend was interrupted by the 2005 hurricanes as insurers sought to reduce concentration in catastrophe-prone areas. In 2006 the market share held by the five largest companies rose from 52.3% to 53.1%. State Farm's market share fell from 22.5% in 1995 to 17.7% in 2006, while Allstate's was reduced from 12.3% to 11.3%. Meanwhile GEICO and Progressive's combined share rose from 5.4% to 14.4%.

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By Charles B. Gates--Jonathan Wright--Vinay Misquith

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