Insurance Quotes & Advice

The insurance industry typically has strong capital reserves compared to their counterparts in the financial services industry.  The problem though is that most of those capital reserves are usually tied up in safe but steady investments.

No amount of diversification can do away with systemic risk, which is what the markets are experiencing in a big way.  Both the stock and bond markets have fallen on rough times in the midst of the worst financial collapse since the Great Depression.

Although the insurance industry usually fairs better than most in an economic downturn, it’s huge investment portfolios aren’t immune to the losses that pretty much everyone is feeling these days.  Even the normally reliable fixed income investments are feeling the heat as the troubles of bond insurers have caused turmoil in bond markets.

Underwriting has never made up the bulk of the profits for the insurance industry, most of it’s income has usually been derived from gains made from the all the premiums they take in and invest while waiting for claims to be paid out.  The industry experienced a nice recovery in the years after Katrina devastated insurers but most of that was due to market gains from their investment portfolios.

The current market troubles could have a negative impact on insurance rates.  Although competition is fairly tight in the industry, the loss of investment income has many companies considering alternatives to make up those profits.

However, whether or not state regulators will be sympathetic to their plight is another story all together as those recent spectacular gains have caused negative public perception for the industry as a whole.

While AIG will be forced to sell some of it units to payoff it’s obligations to the Federal Reserve, it is still a powerful company.  It’s definitely a setback for the proud company but it plans to keep it’s core property and casualty unit intact.

CEO Edward Liddy said the company would not sell its U.S. commercial lines property/casualty business or its foreign general insurance. Its personal lines business, however, will be put up for sale, except for its private client operations, which it intends to hold onto.

“We are refocusing on our traditional strengths in property and casualty underwriting. We have a number of remarkable businesses with leading market positions and significant competitive advantages that could not be recreated today,” Liddy said.

It’s not the best time to be selling assets as it is currently a buyer’s market out there but by focusing on it’s insurance units, the company can concentrate on what made it the world’s largest insurer in the first place.  Insurance underwriting is one of the few avenues in financial services that has been able to maintain somewhat it’s profitability.

So far AIG has borrowed $61 billion of the $85 billion earmarked for it but it would prefer to pay back the loan as soon as possible as the interest rate is quite exorbitant at 8.5% above LIBOR.  The big question will be how long will it take the company to recover.

Probably not as long as many people think, the company’s main problem was it’s lack of liquidity, a problem that will hopefully be resolved with the Fed’s loan despite the number of drawbacks from it.  However with the financial crisis still in full effect it’s unknown how much more losses AIG will face in the upcoming quarters as it’s exposure to credit derivatives on mortgage assets is remains considerable.

The biggest challenge will be for AIG to keep it’s customer base amidst all the recent negative media coverage but if it is successful there is no reason why it can’t continue being a strong force in insurance.

The past two decades have seen the lines blurred between insurance, commercial and investment banking.  The current financial crisis has seen the end to independent investment banking firms but it may also see a number of insurance units split off from larger financial conglomerates.

The sale of Wachovia to Citigroup will only include it’s banking services and leave it’s insurance unit as a stand alone entity.  It remains to be seen how the insurance unit will fare on it’s own but there is the fact that it will no longer be held down by the troubled mortgage assets from the parent bank holding company.

Wachovia Insurance Services is not included in the deal, according to Vince Scanlon, a spokesperson for Wachovia. Wachovia Insurance Services employs 1,300 people in 34 offices in 15 states and Washington D.C.

We have seen some consolidation in the insurance industry as was the case when Liberty Mutual acquired Safeco.  However the fact that Standard & Poors lowered their credit rating after a review of the acquisition may make firms second guess acquiring some of their weaker brethren.

At a time when capital is difficult to obtain, any downgrade of credit is not something companies will enter into lightly.  It is a different story in commercial banking because when acquiring another bank, the buyer also acquires that bank’s deposit base.

As was the case with Wachovia, because a number of large banks already have their own insurance units, it is quite possible that further consolidation in commercial banking could lead to a number of independent insurance units when it is all said and done.

This could very well lead to a stronger insurance industry overall in the end as they tend to fare better in economic downturns relative to other financial service sectors.