RISK AND RETURN
Insurers are Enjoying the Return to an Up Cycle as Markets, Underwriting Improve
By CHRIS CZIBORR
Woe is not the insurance industry, despite the recent wildfires that swept through Southern California.
Two years of better underwriting and rising premiums, coupled with higher interest rates and a strengthening stock market, have conspired to put insurers on better ground than they’ve been on in years,even with an estimated $2 billion in losses expected from the Southland fires.
The property and casualty insurance sector, for instance, saw its surplus rise 10% to $312 billion through the first half of the year, according to the New York-based Insurance Information Institute. Surplus is a key industry number that measures the excess of assets over liabilities.
This year’s surplus is near its 1997 level but still off a high of $334 billion in 1999. Last year, surplus fell 1.5%, a victim of falling returns from stock market investments, among other issues.
Meanwhile, pretax income for property and casualty insurers was $20.2 billion in the first half of the year. Pretax income was $4.2 billion for all of 2002. And losses from underwriting policies have fallen from a record $52 billion in 2001 to an estimated $4 billion to $6 billion this year.
The results are welcome after the past few years that included the Sept. 11, 2001, terrorist attacks and numerous corporate failings, plus this year’s Hurricane Isabel.
The rebounding stock market and rising interest rates are some help. In addition to revenue from premiums, insurance companies depend on income from their investable assets in stocks and bonds to boost surplus.
Insurers play the stock market to different levels.
Last year, New York-based insurer American International Group Inc. invested about 64% of its $40 billion in investment assets in bonds, with about 8% in stocks.
St. Paul Cos. in St. Paul, Minn., put 77% of its $18.6 billion in investment assets in bonds and 3% in stocks last year. And Warren, N.J.-based Chubb Corp. invested 80.1% of its $18 billion in investment assets in bonds and only about 2.5% in stocks.
Since the late 1990s, the three insurance companies have somewhat restructured their portfolios, moving some investments from stocks into the relative safety of bonds. Overall investment income has taken a hit in recent years, due to declining interest rates, a bearish stock market and venture capital losses.
But for the first half of 2003, American International, St. Paul and Chubb each posted increases in investment income compared to the same period last year.
So what has that meant for manufacturers such as Anaheim electric vehicle maker Taylor-Dunn Corp.? Higher insurance rates.
Taylor-Dunn has seen its insurance rates grow by more than 20% a year in the past two years, said Chief Executive Jim Goodwin.
“Once they’ve gotten a price increase, getting a decrease is pretty rough,” he said.
Taylor-Dunn’s healthcare coverage costs have jumped 24%, while product liability insurance premiums are up 22%.
Last year the company absorbed the insurance rate increases,something Goodwin said the company no longer can afford to do.
“We pass those cost increases along to customers, and most of our competition does the same thing by increasing prices,” Goodwin said. “It’s somewhat of a national thing that we’re experiencing.”
The insurance industry has its own cycle, which doesn’t necessarily match economic ups and downs.
“It’s absolutely a very cyclical business that depends on supply and demand in the marketplace,” said John Fuhrman, senior vice president with the Irvine office of Chicago insurance brokerage Aon Corp. “As more insurers enter the market, competition gets fierce and premium prices drop. Companies lose profitability and that leads to a flight from the insurance sector. Capital goes away, competition decreases and premiums go up. Profits go up and then more insurers enter the market.”
Insurance industry officials say the insurance cycle is on an upward slope that started last year.
The prior trough was seen in 1993, when insurers saw a drop in pretax income of about $20 billion, roughly the same as in 2001, according to Aon.
Some good news for companies such as Taylor-Dunn: New insurers coming into the market are having a dampening effect on premium increases, said Gene Mueller, an attorney at Newport Beach law firm Stradling, Yocca, Carlson & Rauth. Mueller holds the Chartered Property-Casualty Underwriter designation.
“We’re seeing some new choices that are available to policyholders,” he said. “Some of the new entrants are located in Bermuda, so they can take advantage of the new high premiums in the market without having long loss histories to make up.”
Meanwhile, the fires and Hurricane Isabel, which caused about $1.2 billion in losses, won’t have a wide-ranging effect on premiums, said Bob Hartwig, chief economist for the New York-based Insurance Information Institute.
“Those are two distinct events with relatively localized effects,” Hartwig said. “With the wildfires there will be premium increases, but those will chiefly affect homeowners,specifically homeowners who live in high-risk areas.”
Said Nicole Mahrt, spokeswoman for the Washington-based American Insurance Association: “The wildfires and Isabel won’t have as much of an impact on overall premiums like Sept. 11 did. Sept. 11 had much larger implications, because it dried up the reinsurance market.”
The reinsurance market is critical for insurers because it provides a way to share risk. In return for assuming a portion of coverage that other insurers have issued, reinsurance providers get a slice of insurance premiums. Companies looking for insurance coverage, meanwhile, have a better chance of landing protection that would otherwise be too risky for one insurer to give.
