Fireman’s Fund Sets Profit Mark During Year

Fireman’s Fund reported record 1987 earnings Tuesday of $362 million on revenue of $3.9 billion, but the company’s top executives expressed concern about what they fear may be troubling industry trends.

“While we are pleased to report net income of $362 million--almost 60% more than ever in history--we sure did scramble to get there,” said Jack Byrne, chairman of the property-casualty insurer, which is headquartered in Novato, Calif.

“Insurance operations would have been considerably brighter without our midyear reserve strengthening,” he added, referring to an increase in loss reserves last June to keep pace with growth in business. On the other hand, “investment results . . . were wonderful,” said Byrne, who supervises the company’s huge investment portfolio.

Consolidated revenue for the 12 months--combining insurance sales and investment returns--totaled $3.9 billion, up from $3.7 billion. But in the fourth quarter, consolidated revenue slipped more than 11% to $901 million from $1.02 billion a year earlier. Net income for the quarter plunged 56% to $35.2 million, reflecting a $27.8-million loss from the company’s investment portfolio, compared to a $39.3-million capital gain a year earlier.

Most potentially troubling from the perspective of Bill McCormick, who heads the property-casualty insurance subsidiaries, were modest increases in underwriting losses. Moreover, while net insurance premiums written, or new sales, stayed about flat at $3.37 billion for the year, the fourth-quarter total slipped more than 15% to $660 million from $779 million.

“The decline in fourth-quarter written premium is a clear sign that the cycle is turning (downward) faster than anticipated,” McCormick said. “Our challenge is to hold to our pricing and underwriting standards.

“We have plenty of capital and can take all the business that’s fit to write,” he added.

In fact, McCormick noted in an interview, the company’s premium-to-surplus ratio at the end of the year was a healthy 2.7 to 1. (State regulators generally hold insurers to no higher than a 3-to-1 ratio of premiums written to surplus funds to cover eventual insurance claims.)

Since McCormick joined Fireman’s Fund five years ago to help bail out the severely troubled company, more than $2 billion has been poured into reserves against potential insurance losses. And after several years of losses, the 125-year-old company returned to profitability two years ago. But the experience, McCormick acknowledged, has left him “intensely” aware of the rise-and-fall nature of the insurance business.

Byrne and McCormick seized on the yearly earnings report as an occasion to voice concern that the industry is heading toward another cycle of costly rate-slashing. This time around, they say, they are determined to keep their company profitable.

But like the mythical Cassandra, doomed to see her prophecies go unheeded, the Fireman’s Fund executives found little immediate industry support for their warning that excessive price cutting among insurers may again be overpowering caution in the quest for new business. Nor is there much evidence yet of the predatory pricing that brought many insurers to the brink of insolvency in the first half of the decade.

On the other hand, observed California’s insurance commissioner, Roxani Gillespie, few states beside California investigate pricing practices unless someone complains, “and no one complains when rates come down.” Gillespie’s inspectors already have put one unidentified insurer on notice that its pricing policies appear to be improper, she said.

However, Gillespie added, premiums for some forms of liability insurance rose so high in reaction to the earlier severe losses that some price reductions have been inevitable.

“The marketplace gossip that we hear from agents and brokers is that there is a lot more competition for the business that’s out there,” said John Washburn, Illinois’ commissioner and president of the National Assn. of Insurance Commissioners. “Everyone’s jittery that it may swing too far--and we’re glad they are.”

According to the industry-supported Insurance Information Institute, earnings will likely peak in 1988 as loss claims begin to rise due to a number of factors, including faster highway speed limits this year in 38 states.

In the same vein, Gerald S. Haims, who follows the industry for Seidler Amdec Securities in Los Angeles, called McCormick’s warnings “premature, in terms of seeing really severe price competition.” Haims suggested that Fireman’s Fund may have sought to play down the exceptional 1987 earnings, which were buoyed, as Byrnes and McCormick noted, by special tax benefits and substantial investment profits.

“We didn’t want to make it sound like, ‘We sure did knock the ball out of the park,’ ” acknowledged Fireman’s Fund spokesman Carole Kelleher. “Quite a few things helped.”