What insurance industry's surprising rebound means for investors, consumers

The US insurance industry – hard hit by the Sept. 11 terrorist attacks – is slowly inching back toward recovery. Stock prices for many insurers are now equal to or higher than share prices on Sept. 10. Many firms, moreover, surpassed market expectations for the first quarter of this year.

As a group, the insurance sector was in the black for the first quarter of 2002, according to a composite analysis by Business Week magazine.

That in itself is remarkable.

The collapse of the twin towers is expected to result in the largest insured loss ever recorded by US insurance companies. Estimates range between $40 billion and $50 billion. That's far higher than the $16 billion in claims for Hurricane Andrew in 1992, the largest loss up to 2001.

While final losses have not yet been tallied, initial losses from Sept. 11 were so staggering that some 19 insurance companies were immediately placed on credit watch by corporate credit reporting agencies such as Standard & Poor's. Congress and the White House also began weighing a plan, which later stalled in the Senate, to create a financial "safety net" for the industry in case of future terrorist attacks and additional claims.

While many of the insurance companies are now off credit monitoring, the fallout – for consumers as well as investors – continues. While Washington provided a bailout package for the airline industry last year, the impetus for a similar safety net for the insurance industry is "falling apart," says Robert Hunter, who oversees insurance for the Washington-based Consumer Federation of America (CFA).

Instead, he says, Congress is likely to pass several smaller, more specific bills to protect the insurance industry against diverse types of losses linked to terrorism.

Still, for many companies, the terrorist attacks merely accelerated insurance-rate hikes that had begun well before the fall of 2001. The reason: An economic downturn put an end to the massive profits insurance companies made from investing premiums in the booming stock market of the late 1990s. Even with rising premiums, the increased revenues have yet to translate into across-the-board gains in corporate earnings. Rather, much of the money has been converted into payouts to claimants following Sept. 11.

Investors looking to buy insurance stocks should do so selectively, based on the economic fundamentals of each company, says Cathy Seifert, who tracks the industry for Standard & Poor's Corp. in New York.

Like many insurance industry analysts these days, Ms. Seifert looks for firms with strong balance sheets as well as those that have a foothold in other markets such as retirement-savings accounts or a wide range of financial services.

To get a better grasp of the insurance industry, analysts break it down into a series of subsectors that deal with various insurance products.

They include:

Life and health sector, which insures individuals. According to Sam Stovall, who tracks stock sectors for Standard & Poor's, the life and health sector index is up 2.3 percent for the year through May 24.

Property and casualty sector, which insures such items as homes and automobiles. S&P's property and casualty index is up 9 percent.

Independent-brokerage sector, which serves as middlemen for those who sell and distribute insurance products. S&P's index for this sector is down 2.7 percent

Multiline sector, which includes large companies that offer different types of insurance or financial products. S&P's multiline sector index is down 12 percent, in part because of the troubles of one or two firms in the index, Mr. Stovall says.

As far as the overall insurance industry is concerned, Standard & Poor's is "neutral" about the financial sector, which includes insurance companies, says Stovall.

Other analytical services, such as Value Line and Morningstar, use a case-by-case approach in monitoring individual insurance companies, rather than recommending the overall sector or subsectors.

Individuals can invest in the insurance industry by buying selected company stocks, or through mutual funds, such as the Fidelity Select Insurance Fund, which is up 6 percent through May 28.

Financial-services funds also contain insurance stocks. Use a research website such as Morningstar (www.morningstar.com) to find funds with insurance-company exposure.

On the consumer side, insurance premiums on cars and homes rose by 6 percent last year, according to the Insurance Information Institute. (See chart, left.) It projects similar increases this year, spurred in part by higher home-repair costs, medical costs, liability claims, and fraud.

Individuals facing higher-than-expected premiums, says Mr. Hunter of the CFA, should start comparison shopping. Many times "rates vary dramatically between companies," he says.

Also, "take, if possible, higher deductibles, and be sure not to file small claims, which could drive up your overall premiums," Hunter adds.

Finally, he recommends having various insurance policies written by one firm, which should lead to discounted premiums.