EARNINGS : Fireman’s Fund Net Falls; Price Pressures Cited
Fireman’s Fund reported Tuesday that earnings through June plunged 29%, reflecting continuing erosion in the nation’s business liability insurance market.
The company, based in Novato, Calif., said net income for the year’s first half totaled $81.6 million, down 29% from 1988 while revenue slipped 10.9% to $1.7 billion. In the second quarter, net income declined a more modest 11.5% to $45.1 million as total revenue slipped 5.8% to $880.7 million.
Insurance expenses averaged $115.90 for every $100 collected, despite the company’s declared intent to resist both wild price cutting to meet competition and accepting heavier insurance risks to gain new business. Last year, this figure, the so-called combined underwriting ratio, stood at $107.80 for the company.
“These rising underwriting ratios are due primarily to an increase in loss and loss-expense ratios despite the company’s resolve to write only adequately priced business in the competitive commercial insurance market,” Fireman’s Fund said in releasing the data.
The company is not alone in experiencing what Firemark, an insurance research and investment banking firm in Parsippany, N.J., called a broad erosion of prices that began emerging nearly three years ago.
“The pricing pressures are now universal,” Firemark Chairman Michael J. Morrissey said in an interview. But he applauded the insurer’s candor in calling attention to the pricing problem “even when it hurts.”
Fireman’s Fund apparently is intent on not repeating its experience of six years ago, when it got so badly burned that its former parent had to rescue it.
During the last price-cutting cycle, which began in 1979 and extended into 1984, the effects were worsened by extremely high interest rates exceeding 20%. The prospect of a high guaranteed rate of return induced most insurers to seek new business with unparalleled aggressiveness so they could invest the premiums. That strategy worked fine only as long as interest rates stayed high and the greater risks assumed in taking on new business did not generate bigger claims.
“Companies are being forced to lower prices below what they would like to charge,” said Sean F. Mooney, chief economist with the Insurance Information Institute, an industry-financed research and education office in New York. “But I don’t see any scenario like 1981-84.” Moreover, he said, price cutting remains far more modest--”more like giving up a foot instead of a mile.”
Morrissey agreed. “It’s not like a blood-bath scenario.”
In 1983, while Fireman’s Fund was still a subsidiary of American Express, accumulated claims for insurance losses had so drained reserves that the parent was forced to pump $230 million into the company and send in a new management team to turn it around. The turnaround eventually succeeded to such a degree that when American Express later made an initial public offering for Fireman’s Fund stock, the offering quickly sold out and the 126-year-old company regained its independence.
In New York Stock Exchange trading Tuesday, Fireman’s Fund common stock closed up 87.5 cents a share at $35.
