Insurance Companies Face Second Worst Year in History

By Gullo, Karen | THE JOURNAL RECORD, May 25, 1994 | Go to article overview

Insurance Companies Face Second Worst Year in History


Gullo, Karen, THE JOURNAL RECORD


NEW YORK _ There are seven months left in the year and hurricane season has just begun, but 1994 already is the second worst in history for insurers.

Losses from the Los Angeles earthquake and the winter storms already have reached $8.5 billion, industry estimates show. Based on the anticipated damage of a normal hurricane season, the figure could exceed $10 billion.

Though not nearly as bad as the $23 billion in losses that Hurricane Andrew caused in 1992, the worse year ever for insurers, this year's catastrophes will cost the industry _ and some of its customers _ dearly.

Many insurers will report lower annual profits as a result of paying thousands of claims from people and businesses affected by the California earthquake and the winter storms. Policy holders in the hardest-hit areas will likely see rates for property and casualty insurance rise.

"Catastrophe losses are going to put a dent in industry profitability," said Fred Sandburg, an analyst at Kemper Securities Inc.

It's considered unlikely that any insurance companies will fail as a result of the losses. But companies that did a bulk of their business in California and aren't owned by larger, profitable firms face an upward battle in regaining earnings momentum.

In the past, insurance companies have relied on money earned from investments _ mostly dividends and interest earned on bonds and stocks _ to offset losses. But investment income is declining because insurers have been replacing older, higher-yield bonds with newer bonds that pay lower interest rates.

"The investment side of the business used to be gravy," said Steven Dreyer, an analyst at Standard Poor's Corp., a financial information company that rates the health of insurers and other businesses. "But the capital gains have been harvested for the most part, and the income won't keep coming."

S P recently lowered its ratings on several insurance companies, a reflection of their weakened financial stability and lower quality of their own bonds as an investment. …

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