However, he continued, loss cost inflation could translate into continued rate increases. Unprofitable companies will need bigger increases, "but even insurers currently at or near their break-even points will soon be underwater," he said.

Rate increases should produce more shopping among consumers for more affordable insurance, benefiting large auto carriers that can underprice their competitors because of their economies of scale, according to the Stifel Nicolaus analysis.

On the homeowners insurance side, loss costs (excluding catastrophes) are rising by more than 10 percent annually, said Mr. Shields. Because of this, margins are expected to compress over the next 12-to-18 months in this line, "except for companies capable of rapidly recognizing and responding to loss cost inflation.

Allstate, The Hanover Group and Progressive are highly rated and the companies are considered "industry leaders in pricing analytics" and have the discipline to maintain rate adequacy, Mr. Shields said. Erie Insurance also received positive marks.

The analyst predicted that Mercury General's underwriting margins "should deteriorate rapidly" because of its overexposure to the volatile trends in the California private passenger auto market. Mr. Shields said the company lacks the loss analytics other companies have shown, and a miscalculation over the next 12 months could spell increased margin compression.