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BusinessWeek: January 11, 1993 |
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Industry Outlook: INSURANCE
INSURERS RECOVER FROM WHIPLASH Insurers are being kind to each other because they're in the midst of restructuring. Venerable companies are cutting costs severely, seeking mergers, or selling key operations. Travelers Corp. is paring its work force by 10%. Kemper Corp. and TransAmerica Corp. are leaving the property-casualty business. Travelers has sold 27% of itself to Primerica Corp., and Kohlberg Kravis Roberts & Co., an investment bank, has bought Aetna Life & Casualty Co.'s American Re-Insurance Co. subsidiary. "A lot of big companies are selling off pieces to stay alive," says Furman Selz Inc. Managing Director Ernest G. Jacob. Consolidation is coming mostly to multiline insurers, which have sold everything from auto to life and health: They've decided they can't be all things to all people, especially now that rivals such as Geico Corp. use toll-free calling and credit-card sales instead of costly agents, or specialize in one kind of coverage. Even old-line insurers are catching on: ITT Hartford Insurance Group now markets directly to members of the American Association of Retired Persons. NEW MIX. For property-casualty writers, the big problem this year will be the aftermath of Andrew, the Chicago flood, the Los Angeles riots, and 1992's tornadoes. In response, the reinsurers who share the risk by providing insurance, above certain limits, to primary insurers will trim their exposure and may raise rates by 30% to 50%. Most insurance is reinsured, so that will tighten its availability. The catastrophes will also hasten an inevitable transformation in income mix. With interest rates low, insurers have quit counting on double-digit returns on investments. That will help force property-casualty rates higher in 1993--up 10%, some analysts say. Thus, profits of insurers "will begin to improve by the middle of the year," says analyst Weston M. Hicks at Sanford C. Bernstein & Co. Analysts surveyed by the Insurance Information Institute think the industry's combined ratio--what insurers pay out in claims and overhead per dollar of premium--will turn more favorable this year, declining from 113% to 111%. Analysts say property-casualty profits could rebound to as high as $12 billion. Profits on auto insurance may improve, too. That business is often a loser for big insurers. But changing driving habits and safer cars cut the number of U.S. road fatalities from 49,000 in 1988 to 43,500 in 1991. Claims costs, which rose 8% to 10% a year in the mid-1980s, have risen 5% annually for the past two years. Insurers also have won modest rate increases in some states, though they're still battling regulators in such unprofitable markets as New Jersey and California. Regulators there won't let insurers drop their auto coverage while continuing to sell more lucrative lines, such as homeowners' insurance. Life insurers may have to wait a while for better tidings, since they're still working off bad real estate investments. The share of their assets in mortgages is down to about 15%, vs. 20% in 1990. But many loans due this year can't be rolled over at high enough rates to provide positive cash flow. Life insurers have been selling policies cheap to wrest savings dollars from mutual funds and banks. In that battle, "you can get a lot of premium and go broke," says David Roe, CEO of United Services Life Insurance Co. in Arlington, Va. Life insurers are also bracing for tough new capital standards. While they won't affect most insurers, they may speed a flight to quality by buyers who fear failure of life companies with too much dicey real estate and junk bonds. The cloud over all U.S. insurers is the uncertain atmosphere in Washington. Life companies are often targets for revenue-raising measures, such as one in 1990 that took away quick deductibility of agents' commissions and a proposal last year to tax annuities. Health insurers will face pressure from a new Administration intent on reforming health care (page 95). A further threat to all insurers is a proposal by U.S. Representative John D. Dingell (D-Mich.) to set minimum reserves and other standards. State politicians have fought this, arguing that their oversight is sufficient. But some large insurers back the idea as a way to standardize regulation. Last year's disclosures of alleged fraud among some unregulated foreign reinsurers give Dingell ammunition, since some 40% of U.S. reinsurance is now handled by offshore carriers. Even so, it's doubtful that increased regulation or a health-care fix will trim the earnings of insurers in 1993 by nearly as much as hurricanes and tornadoes did in 1992. So, with one eye on the weather map, insurers enter 1993 in a cautiously optimistic mood. | |
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