Over nearly 33 years, Los Angeles-based Mission Insurance Cos. evolved into one of California’s largest and most profitable writers of worker compensation insurance. But for the last two years the company’s history has been written in unfamiliar red ink.
A $15.4-million net loss in 1983 was followed last year by one a dozen times worse--$198 million.
As a result, the parent holding company, Mission Insurance Group Inc., is embarked on a pruning operation to “get the company back to basics,” as a spokesman put it, trimming in particular its reinsurance operations, which accounted for about 5% of premium income last year while generating disproportional losses. A week ago, it also abruptly replaced its president and chief executive, Louis F. Marioni, with Ray D. Johnson Jr., who until last June headed the insurance subsidiary of Mission’s largest shareholder, Cincinnati-based American Financial Corp., led by financier Carl H. Lindner, which owns 49.9% of Mission’s common stock.
To analysts and regulators familiar with the property-casualty insurance business, however, Mission’s ill fortune merely mirrors that of the industry as a whole, if greater in degree. “Call it a worst-case scenario,” one analyst suggested. “Everything that could have happened, happened.”
Rate Boosts Expected
“The last year was far worse than anyone imagined that it would be,” said Leandro S. Galban Jr., a security analyst with Donaldson, Lufkin & Jenrette Securities Corp. in New York, in assessing the property-casualty business. Galban forecast a 20% increase in commercial insurance premiums, a 5% to 10% increase in personal homeowners’ insurance rates, and a 6% to 7% increase in personal auto insurance rates. Businesses can also expect higher deductibles to be imposed on their policies, tighter limits placed on coverage and reduced discounts, he added.
If such significant rate increases do in fact occur--and more importantly stick --it would be good news for Mission and its beleaguered competitors in the property-casualty insurance industry, which controls assets exceeding $250 billion and offers financial protection against losses ranging from fender-bender traffic accidents to natural disasters. Firmer prices would signal that the industry is finally emerging from an unprecedented downward spiral stretching back nearly six years.
Since 1979, when recession-pinched companies began trimming insurance expenses, annual losses in the industry have swelled annually from $1.3 billion the first year to $21 billion in 1984. These losses swelled as property-casualty insurers such as Mission sought to counter defections from among their customers and to woo new investment income by indulging in wave after wave of price-cutting. By 1983, rates had dropped to two-thirds of 1979 levels.
Could offset Losses
Not surprisingly, many insurers found themselves paying out more in claims than they were collecting in premiums. But as long as interest rates remained high these underwriting losses could be offset by income from invested premiums.
Mission, as an extreme example, spent more than $161.20 last year for every $100 in premiums earned, up from $124.70 for each $100 in 1983. The bulk of those increases came from ballooning loss claims from insured customers, not from swollen overhead in a company that prides itself, a spokesman said, in being lean. (Mission, which has about 2,100 employees and sells insurance through independent agents and brokers, has announced no layoffs.)
After interest rates began falling, an overextended industry became financially vulnerable to a rapidly rising tide of loss claims from poor risks signed on in the competitive frenzy to sell more insurance and retain existing clients. Last year, for example, investment income topped $17 billion for the first time but still fell $4 billion short of the industry’s losses, according to the Insurance Information Institute, a trade group.
If 1983 thrust venerable Fireman’s Fund, the insurance arm of American Express Co., into the spotlight of misfortune, 1984 has bracketed it on Mission. While Fireman’s Fund, based in the Marin County town of Novato, Calif., has now all but put the bad news behind it in nearly breaking even last year, Mission’s losses may not end until the second half of this year--providing, analysts emphasized, that the company can obtain fresh operating capital.
Seeks New Capital
Mission has retained the New York investment-banking firm of Salomon Brothers to explore “ways and means to infuse necessary additional capital into the company,” it said on Feb. 15 in reporting its 1984 loss (and Marioni’s resignation). One obvious source, to analysts and other observers, would be American Financial Corp., which last April increased its 20.7% stake in Mission to 49.9% through a tender offer of $23 a share. (Mission common stock closed Friday at $7 in trading on the New York Stock Exchange.)
Johnson, Mission’s new chief executive, joined the company as senior executive vice president and chief operating officer last June, leaving the presidency of another Carl Lindner-led company, Republic Indemnity Co. of America, a modest-sized worker compensation insurer in Encino. The company, Johnson and Marioni have yet to comment on the reasons for Marioni’s abrupt resignation after 23 years with the company. Both men are 56.
Though analysts had expected a substantial loss in 1984, based on a nine-month loss of $102 million, the 94% increase to $198 million in the last three months surprised some who follow the firm.
“I didn’t expect this kind of a loss,” said Frederick T. Sandburg of Baltimore-based Legg Mason Wood Walker Inc., “but we did expect a loss, and that the losses would continue into the first quarter and maybe the second quarter of this year.” Results for many property-casualty companies “fell off the table” in the second half of the year, Sandburg observed.
Before midyear, however, the company was already struggling to turn the tide of red ink by raising its insurance rates and tightening its underwriting standards to avoid poor risks, a spokesman said. Such changes take months to show up significantly in financial results, however, and other analysts agreed with Sandburg’s assessment that the company will likely continue to operate at a loss for at least the first half of 1985.
Nonetheless, Mission is already benefiting from increased workers’ compensation income in California, where over the last three years the company sold 74% of its written premiums. The Department of Insurance, which sets rates to finance benefits determined by the Legislature, ordered an 8.5% increase effective Jan. 1 and an additional 3.1% increase March 1.
Arizona increased its workers’ compensation rates 21.9% last Oct. 1, and rate increases reportedly are pending in several other Sun Belt states in which the company is active.
The significance of these increases for Mission stems from the fact that workers’ compensation accounted for 73% of sales last year. In California, however, the Legislature had improved benefits months before the present rate increases took effect, boosting insurance losses.
“That has not been a good line for them for the last six months or so,” said analyst Sandburg, “and while that line was deteriorating so were their other lines,” aggravating 1984’s second-half results.
Will Take Time
In other words, the rate gap only added to the financial woes of Mission, which normally enjoys something of a financial cushion from its workers’ compensation business. While that gap has now closed, generating increased premium income, it will take some months yet to accumulate into financial significance.
As the year ended, Mission was forced to tap $70 million of precious capital to shore up its legally required loss reserves. It also cut in half the announced dividend rate for most worker compensation policyholders, saving capital but increasing Mission’s vulnerability to its competitors. Since the state sets benefits and rates in California, insurers compete in terms of low overhead and service and by encouraging worker safety among its clients by offering dividends and premium rebates to firms with good claims records.
The next few weeks may prove crucial to Mission’s successful turnaround. Stockholders’ equity--or the company’s surplus--plunged from $215.7 million at the end of 1983 to just $8.5 million as Mission’s stock tumbled from its 1984 high of $27. Company assets slipped to $979 million from $1.02 billion.
Yet, the company’s financial situation may not be as precarious as this would indicate. Under the accounting system used to report financial data to state regulators, Mission’s surplus may top $55 million, not the $8.5 million reported under the so-called generally accepted accounting principles required by the Securities and Exchange Commission.
Audit Is Routine
Data under the so-called statutory procedure is due at the Department of Insurance March 1, chief examiner Ansel Shapiro said. The department expects to dispatch auditors to review Mission’s financial records this spring, he added, but pointed out that this is done routinely every third year, which 1985 happens to be for Mission.
“This is not an emergency situation,” Shapiro said. “They have bit the bullet and raised their reserves.”
For now, analysts are watching the company’s efforts to raise funds.
“They need more capital to stay in business or will have to cut the company drastically,” said Sandburg, given the amount of insurance in force and Mission’s greatly reduced net worth. “They cannot support that premium level with that capital.”
Another analyst said: “Even if their reserves are accurate and their bonds are valued at market prices, there is not enough capital to write new business.”
Withdrawing from the reinsurance business, the Mission spokesman said, will enable Mission to concentrate on “the areas that we know best and have been most successful with over the years.”
Peering into a clouded future, an analyst observed: “At this point in property-casualty, it’s hard to say where the bottom is. But the cycle and pricing are improving--that’s all a plus. And rate increases in workers’ comp are a plus. Whether that’s enough is another question.”
MISSION INSURANCE GROUP INC.
In millions Year Revenues Earnings 1974 $81 3.9 1975 96 3.8 1976 119 7.7 1977 179 14.0 1978 263 21.8 1979 350 32.3 1980 402 40.4 1981 434 48.4 1982 428 45.1 1983 483 (loss 15.4) 1984 512 (loss 198.0)