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Some things leave you speechless…
Insurers expect record profits
Consumers, hit with rate hikes after last year’s storms, not likely to get any relief
Oct. 13, 2006, 11:27PMBy JOSEPH B. TREASTER
New York TimesInsurance companies are expecting record profits in 2006 after predictions of another year of devastating hurricanes have so far come to naught.
Industry experts are estimating that profits may reach $60 billion, on a combination of higher premiums along the coasts, no major payouts for natural disasters and strong investment returns. The insurers also had high profits on other lines of coverage such as auto insurance, workers compensation and general liability.
The record profits expected this year come after a year when insurers paid out $61 billion for damage from Hurricane Katrina and other storms.
Even so, the insurers ended up with a profit of $43 billion for 2005 because of exceptionally good results on investments, declining claims on policies on homes away from the coast, and profits on other lines of coverage.
Homeowners and businesses along the coasts, hit with much higher insurance costs after the barrage of hurricanes, probably will not get any relief, industry experts and consumer advocates said.
The hurricane season lasts another seven weeks, until Nov. 30, but no one is expecting any costly storms.
“We’re fairly confident that the chances of a cataclysmic hurricane this year are behind us,” said Robert Hartwig, the chief economist of the Insurance Information Institute. “And we think we’re going to have some good numbers.”
The expected record profit this year will add momentum to a decades-long earnings streak, interrupted by only one annual loss — $7 billion in 2001, when the Sept. 11 attacks staggered the insurers.
Stock prices come alive
Reinsurance companies — the sometimes obscure insurers that back up the most familiar name brands in insurance by selling them coverage to share the risks — are also expected to do exceptionally well in 2006. So will investors such as hedge funds that began providing capital directly to insurers when they saw premiums along the coast climbing.
As the hurricane season began in June, the price of insurance stocks dipped. But the stocks began to come alive in August as some investors sensed that “this season was not going to be a disaster, nothing like last year,” said Adam Klauber, an analyst at Cochran, Caronia, Waller, a brokerage in Chicago.
The stocks are up an average 12 percent since mid-August, Klauber said. Shares of Allstate, one of the biggest home insurers along the coasts, have jumped 14 percent in that period, closing at $62.93 on Friday. Shares of Renaissance Re, one of the largest companies providing catastrophe coverage for big insurers such as Allstate and Chubb, have risen 17 percent to close at $56.03 on Friday.
Insurers raised premiums on homes and businesses along the coasts by 10 times or more in some cases compared with last year’s rates in the wake of a series of powerful hurricanes last year and in 2004 and forecasts of perhaps a half dozen major storms this year.
Complete industry results for 2006 will not be available until early next year. But based on data so far, Hartwig is estimating profits of $55 billion to $60 billion. Jim Auden, who helps direct research and analysis of the industry at Fitch Ratings, a company that tracks financial strength of insurers, estimated profits at $60 billion.
The industry’s optimism stems from an updated forecast this month from the University of Colorado that predicts no more than one mild hurricane in October and no hurricanes at all in November.
However, owners of coastal homes and businesses should not expect any easing of their insurance costs. “Just because there wasn’t a major storm this year, doesn’t mean there won’t be one next year or the year after,” Auden said. “Certain coastal markets are probably still underpriced.”
Consumers cry foul
Consumer advocates, on the other hand, are crying foul. “It’s unfair,” said J. Robert Hunter, the director of insurance at the Consumer Federation of American. “They have overestimated their losses and vastly overpriced. And now, when the money rolls in, there is no relief for consumers.”
Hunter, a former insurance commissioner in Texas, said he and other regulators agreed to sharp price increases after Hurricane Andrew devastated a swath of Florida south of Miami in 1992. The insurers agreed then, he said, to base their prices on long-term averages for damage. After the powerful storms in 2004 and 2005, the industry shortened its projections to five years. “If you’re going to use a shorter time frame,” Hunter said, “you’ve got to lower rates when profits are good. You can’t just go up when it’s bad and stay there.”
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