The Sky May Not Fall In, But...

Bedeviled by a host of woes, insurance companies enter 1991 with little relief in sight. Insolvencies among both life and property-casualty insurers have skyrocketed in the past two years and will only get worse as the nation's economic slump deepens. Comparisons with the savings and loan mess are overblown--insurers are in much better shape than the S&Ls. Even so, the insurance industry's fundamentals are discouraging. Earnings will continue to erode. And insurers seem sure to get unaccustomed scrutiny from worried politicians and regulators.

The chief culprits causing the industry's problems are poor investments and slowing premium income. Not even the biggest players are immune. Travelers Corp. posted a $499 million third-quarter loss last year, largely because of shaky real estate investments. First Executive Corp., burdened with massive junk-bond holdings and bleeding from its customers' tendency to cash in policies, is scrambling to restructure its debt.

TAILSPIN. Life insurers' headaches stem largely from efforts to match the juicy returns produced by mutual funds and other investment products that surged in the 1980s. When customers began deserting traditional whole-life policies, with their low, fixed interest rates, insurers countered with higher-paying alternatives. These innovations managed to retain business but were far more risky and less profitable. Monarch Capital Corp., for instance, stressed a policy called variable life, whose returns are tied to the stock market's performance. After the 1987 crash, variable life went into a tailspin. So did Monarch, which is scrambling to restructure its loans with bank creditors. Meanwhile, Washington isn't helping make life insurance more enticing. The recent federal budget accord zapped life insurers with income-tax increases of up to 40% by clamping down on business expense deductions. Insurers may compensate for this by cutting policyholder dividends. That won't help sales.

Life insurers, which control two-thirds of the industry's investment assets, have thus become far less bold. "Growth for growth's sake ended up squeezing profit margins, so it's outmoded," says Mark Puccia, senior vice-president at Standard & Poor's Corp. Witness the insurers' new caution about their guaranteed investment contracts (GICs), which promise investors who turn over a minimum $2 million a fixed return. Equitable Life Assurance Society of the U. S. lost $1.5 billion on GICs in the past decade after promising high interest rates. Now, Equitable's GIC yields are a modest 8%. And this mutual company--owned by its policyholders--plans to bolster its capital by selling stock to the public.

Waiting for an upturn in the property-casualty market, which has not recovered from a late-'80s price war, will again be like waiting for Godot. Major changes were expected in 1990 after three 1989 catastrophes: the San Francisco earthquake, Hurricane Hugo, and a Texas oil-refinery explosion. The pain of paying off these multibillion-dollar claims was supposed to end price-cutting. No such luck. "People wrote off those disasters as temporary aberrations, and the market has stayed very competitive," says Dennis A. Busti, president of Reliance National.

Automobile coverage is the one property-casualty line in which rates aren't lagging. Annual rate increases have reached double-digit levels in crowded metropolitan regions, where more cars mean more accidents. But car policies are no bright spot. Most insurers lose money on auto insurance, using it as a loss leader for more lucrative home and health insurance.

The good news for insurers is that the public backlash against higher auto rates seems to be abating. State-mandated rate rollbacks haven't worked as well as advocates hoped, and aren't on the political front burner anymore. One reason is successful industry court challenges. California's Proposition 103, passed in 1988, would have cut rates by as much as 20%, but the state Supreme Court gutted the law. Arizona voters rejected a rollback referendum last fall. Similar proposals in Michigan and Idaho aren't moving, though insurers still must cope with crackdowns in two big states, Pennsylvania and New Jersey. They failed to overturn Pennsylvania's; in New Jersey, the matter is pending.

The latest vogue for property-casualty providers, however, is to retreat from auto and other problem-ridden lines to focus on promising niches. This has proved successful for American International Group Inc. and Chubb Corp., among others. After years of uninspiring earnings, Continental Corp. has turned away from auto policies to move into medical malpractice, marine aviation, and short-line railroad coverage. Says CEO John P. Mascotte: "These days, it doesn't pay to be an insurance supermarket."

Given the current inhospitable climate, consolidation will probably pick up in the insurance industry this year. There are 2,600 life insurers and 3,800 property-casualty carriers in the U. S.--many of them tiny. Now, larger companies are quietly buying up the smaller ones. Last March, for example, CIGNA Corp. purchased Equicor-Equitable HCA Corp. for $777 million in an attempt to beef up its health insurance network. Foreign insurers with deep pockets have an appetite for even bigger deals. Germany's Allianz, the largest insurer in Europe, has agreed to buy Fireman's Fund Insurance Co. for $1.1 billion.

Meanwhile, Congress is keeping close track of the industry. It is considering federal regulation of insurers, now exclusively a state matter, out of fear that some states' lax balance-sheet standards could cause an epidemic of insurer insolvencies in 1991. Congress, notes Representative James H. Scheuer (D-N. Y.), "doesn't want to be accused once again of fiddling while Rome burns."

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