Associated Press

The crumbling stock market is hitting people’s pocketbooks in a lot of different places, including an increasingly touchy area – insurance prices.

The crumbling stock market is hitting people’s pocketbooks in a lot of different places, including an increasingly touchy area – insurance prices.

Just how much major insurers’ investment losses have contributed to the rapidly rising prices for homeowners and auto coverage is fiercely debated among the industry’s leaders and their critics.

“Investments are a minor factor in rates,” said Farmers Insurance spokesman Jeffrey Beyer. “It’s irresponsible to say otherwise.” But a new study by a consumer watchdog group argues that losses in risky investments are driving up insurance rates far more than the industry admits.

In its findings, the Santa Monica-based Foundation for Taxpayer and Consumer Rights contends the bull market of the 1990s caused insurers to overindulge in now notorious companies like Enron and WorldCom.

Insurance policyholders are being forced to subsidize the industry’s losses on bad investment through sharply higher premiums, according to the report, expected to be released Tuesday.

The group is headed by Harvey Rosenfield, who wrote a successful 1988 voter reform initiative, which added a provision requiring regulators to include an insurer’s investment performance in the rate-setting formula.

Like most investors, insurers have suffered heavy losses in the plummeting stock market.
During the first half of this year, property and casualty insurers suffered $8.6 billion in paper losses on their investments, according to the Insurance Services Office, which tracks the industry’s returns.

Those still unrealized losses eclipsed the industry’s reported profit of $4.6 billion during the first half of 2001, the ISO said.

Industry leaders say the investment losses aren’t as significant as their higher claims expenses. Those expenses caused the property-and-casualty industry to lose a combined $7.9 billion last year, the ISO said.

Insurers paid an average of $1.22 last year for every $1 paid for homeowners coverage, according to the Insurance Information Institute, a trade group. In auto liability, insurers paid an average of $1.12 for every $1 in premium, it said.

Those figures, coupled with a projected $40 billion in claims from the Sept. 11 terrorist attacks in 2001, are the main reasons insurance rates are climbing after remaining stable or declining for most of the 1990s, industry officials said.

The financial hit on policyholders has been significant, particularly in homeowners insurance, where some rates have climbed by more than 50 percent over the past year.

Allstate, the largest publicly held property-and-casualty insurer, provided a snapshot of industry trends in its financial report covering the first half of this year.

As of June 30, Allstate‘s average price for homeowners insurance was 21 percent higher than the prior year. The average policyholder with a good driving record paid Allstate 8 percent more for auto insurance.

The watchdog group contends some of insurers’ recent losses stemmed from investments that strayed from the industry’s traditionally conservative objectives.

After reviewing regulatory filings in California, the foundation found 10 major insurers recognized losses totaling $274 million on five scandal-ridden companies – Enron, WorldCom, Adelphia, Global Crossing and Tyco International.

The losses, spanning 2001 and the first half of this year, covered investments in corporate bonds, as well as stocks.

State Farm, the nation’s largest personal property and casualty insurer, lost $60.7 million on WorldCom stock and bonds, the report said.

“That’s a cheap shot,” said Dan Dunmoyer, president of the Personal Insurance Federation, a trade group that represents State Farm and other major insurers. “Until three years ago, investments in corporate bonds weren’t considered radical. They were considered the safest things in the world.”

State Farm‘s loss on WorldCom securities represented just a small piece of its total investment portfolio. The insurer invests $37 billion to $45 billion annually.

Besides State Farm, the other insurers analyzed in the study were: Allstate, Farmers, Fireman’s Fund, Liberty Mutual, Mercury Casualty, Nationwide Mutual, United Services Automobile Association, Zurich American and the Northern California affiliate of the American Automobile Association.

As the stock market soared in the late 1990s, some of these companies became more involved in stocks and corporate bonds instead of sticking to investments in government securities, the study found.

In 1998, the 10 insurers covered in the study held 48 percent of their investments in stocks and corporate bonds. By 2001, the average holdings in stocks and corporate bonds had climbed to 57 percent, the report said.

“This is like double jeopardy for a lot of policyholders,” said Doug Heller, senior consumer advocate for the group that conducted the study. “They lost money in their retirement accounts and now the insurance industry is imposing its losses on them.”

Insurers say their investments would have fared much worse if not for a diversified approach that includes big stakes in government securities. The strategy generated handsome returns that helped lower rates for much of the 1990s, insurance officials said.

Despite the market’s recent turmoil, the industry’s net investment income during 2001 still totaled $37.1 billion, down from $40.7 billion in 2000, the ISO said.

The 9 percent year-to-year decline in investment income was the sharpest in industry’s history, but insurers still fared better than most investors, said Robert Hartwig, chief economist for the Insurance Information Institute.

“My guess is the majority of people with 401(k)s would have traded our investment returns for theirs,” Hartwig said.