Insurers Suffer Like It’s 1965 With Low Portfolio Yields

Warren Buffett had just taken control of Berkshire Hathaway Inc. (BRK/A), a textile maker he would build into one of the world’s largest insurers, the last time U.S. property-casualty carriers endured such low interest rates.

That was almost five decades ago. The industry averaged annualized yields of just 3.1 percent on investments in the first quarter this year, the lowest since 1965, according to data released today by the Property Casualty Insurers Association of America and ISO, a unit of Verisk Analytics Inc. (VRSK)

The Federal Reserve has keep benchmark borrowing rates near zero since 2008 to help stimulate the U.S. economy. That’s hurt insurers, which rely on bonds to generate income, and led many carriers to raise prices for coverage. Results fell industrywide on slowing growth in policy sales and higher claims costs in the first quarter, according to the data.

“Further slippage in underwriting results could lead to downward pressure on insurers’ overall profitability, as current investment yields make offsetting increases in investment income rather unlikely,” the organizations said in a statement.

Net income for the industry fell to $13.8 billion in the first quarter from $14.3 billion a year earlier, the data show.

Insurance executives from Travelers Cos. to Loews Corp. (L) have warned investors of the challenge that low yields present for their businesses. Buffett, too, has said that current yields make fixed-income securities among the riskiest investments and instead steered his company’s funds into stocks and toward takeovers. In 2013, he called bonds on insurer balance sheets “wasting assets.”

Berkshire’s insurance units include Geico, a seller of car coverage, National Indemnity and General Re. Premiums from those businesses helped fuel the company’s expansion, giving Buffett funds for stock picks and acquisitions. The company’s operations now span the transportation, energy, manufacturing and retail industries.

To contact the reporter on this story: Noah Buhayar in New York at nbuhayar@bloomberg.net

To contact the editors responsible for this story: Dan Kraut at dkraut2@bloomberg.net Dan Reichl

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