Insurers' risky gambits cast shadow on future

November 11, 1990|By Peter H. Frank

Thrifts, banks and insurance companies.

What's the difference? A lot of people can't find one -- and there's the problem.

Bad real estate, "junk" bonds, operating losses, insolvencies, decimated stock prices and falling dividends have increasingly blurred the lines separating insurance from the other two industries -- if not in reality, then at least in people's thinking.

"Insurance companies are victims of the same things that got savings and loans and got banks," said Matthew W. Finn, a financial-services analyst with Edward D. Jones & Co. in St. Louis.

Insurance executives and state regulators bristle even at the hint of a comparison. The belief that similarities exist comes only from a basic misunderstanding of what the insurance industry does and how it does it, they say.

"One of the things that concerns me is that people tend to ask if the insurance industry is the next savings and loan," said Edward H. Utley, president of GEICO Corp., a large property-casualty insurer based in Chevy Chase. "There is just no parallel between the two industries at all."

Still, questions are being asked about the future of the business, and the industry is spending more and more of its time trying to convince people of its health.

Some of that could be found locally last week.

Maryland vividly and painfully witnessed the debacle of the S&L industry five years ago. It has seen nearly a year's worth of mounting problems at its banks.

But it was not until Wednesday that the woes of the insurance industry made their dramatic entrance into the state.

With USF&G Corp.'s announcement four days ago that its longtime chairman, Jack Moseley, would resign and that the company's much-beloved dividend would be slashed and its work force cut, the current realities rocking the industry hit home with a vengeance.

The directors of the Baltimore-based insurance giant, succumbing to a stubborn and widespread profit squeeze, finally decided that the company needed the $160 million more than their shareholders did. Thus the board moved to reduce the quarterly payout to 25 cents a share from 73 cents.

The layoffs, which the company said would come from all levels of employees and all divisions, would help save an additional $75 million a year. The company declined to say how many of its 11,800 employees -- 3,000 of whom work in the Baltimore area -- would be affected.

"They took the right decisions, albeit belatedly," said Herbert E. Goodfriend, an industry consultant and former analyst with Prudential-Bache Securities. "But a lot of what they face is not theirs to control."

What's going on here? A House subcommittee concluded earlier this year that if "warnings are not heeded, the insurance industry and the nation could face a solvency crisis rivaling the present savings and loan situation."

How can an industry that holds nearly $2 trillion in assets be in such trouble?

Blame it on the '80s, some say. Blame it on the industry, others counter.

The reality probably lies somewhere in the middle, according to the majority of analysts, regulators and industry executives. It can be found primarily in the changing nature of the industry.

Like a family's savings and checking accounts, life insurance and property-casualty companies are structured with different goals in mind.

The life insurance business, like a savings account, is run with an eye on the long term. Withdrawals -- in the form of claims -- are typically stable, and predicting when people will die can be done with relative accuracy. Few surprises occur. As a result, premiums collected on life insurance policies are often invested in such things as long-term mortgages and long-term bonds.

Like a checking account, the business of property-casualty companies -- those that sell automobile, homeowner and disaster insurance, as well as worker's compensation -- involves the unpredictable. Though deposits are made monthly, checks must be written daily as small and large expenses, including claims, arise. Because disasters can occur, much of the cash held in reserve to pay claims must be kept easily accessible, in shorter-term investments.

The trick is matching the length of the investment to the life of the policy. If a company expects to pay out $100 million 10 years from now, for example, it attempts to invest enough money so that it will have $100 million in 10 years.

But the importance of smart investments goes well beyond paying claims. It goes to the heart of the industry's profits.

By 1980, insurance companies had become accustomed to the fact that they could no longer count on the old business of collecting premiums and paying claims to make money.

Income that was made from investing their policyholders' money changed from being simply icing on an already profitable cake to being the only thing standing between the industry and annual losses.

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