Farm Money: Flood Damage Claims Not Helping Bad Year for Insurers

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Byline: PATRICK LAY

IT has been a bad year for insurers; those who escaped the economic effects of the horrors of September 11, have been hit by massive flood claims throughout Europe and by falling stock markets.

Insurers do not often make money from the premiums they charge as high as they may be - their profits tend to come from wise investment of those premiums until the time comes from meeting claims.

These are the reserves which build the strength of an insurance company when times are tough. The failure of Independent Insurance and the difficulties being encountered by Equitable Life show how important it is for insurance companies to be well reserved in times like these.

So, when Richard Carter, chairman of rural insurer NFU Mutual tells shareholders in his yearly report he is pleased "to report that our balance sheet is in good shape" it should be a relief to the society's growing number of policyholders.

Not only did business continue to grow in the past 12 months, with a 20 per cent rise in premium income in general business and 22 per cent gain in Life business, but there was a pounds 51m operating profit on the technical account which was returned to policyholders through the Mutual Bonus discount scheme.

There were, however, "substantial unrealised losses," totalling pounds 140m, recorded in the equity portfolio, an indication of the volatility of the market place.

It is a stock exchange truism that nobody actually ever makes a profit or a loss on a share until that share is sold, but events of the past few years mean it could take a long time to recover on paper, at least, what has been lost - on paper.

No greater example of this has been demonstrated than the fate of telecoms equipment maker, Marconi, where investors learned this week that a bank rescue package meant that they now owned only one share for every 200 they previously owned, and that that one share is worth just 2.15p against the pounds 12.50 they were worth just two years ago.

There's never been a better example of the warning "share prices can go down as well as up."

I don't know whether NFU Mutual held any Marconi shares, but it is an indication of the risks involved. …