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Because stock investments represent only a relatively small part of insurance companies' investment portfolios, a stock market downturn is unlikely to have a dramatic impact on insurers.
Indeed, a rise in interest rates-which could well accompany a stock market downturn-could have a more significant impact on insurers because it would reduce the value of insurers' bond holdings, which are far greater than their stock investments, market observers say.
According to Oldwick, N.J.-based A.M. Best Co., as of year-end 1995, about $90 billion of the industry's $673 billion in total invested assets, or about 13%, was invested in the common stock of non-affiliated companies.
As a result, even a 30% stock market correction would have a "very limited impact on individual insurers," said Eric Simpson, vp in Best's property/casualty department.
Mr. Simpson said only about 150 insurance groups, or about 12% of the total of 1,200 insurance organizations, have more than 50% of their assets invested in common stocks.
"For the most part, those insurers that have taken large positions in the stock market are doing so because they have not overextended themselves on the underwriting side of the business," he said.
"They'll take a long-term view of their equity holdings, as they should," which will enable them to sustain a stock market downturn, he said.
Todd Stephenson, senior vp and chief financial officer of Indianapolis-based American States Financial Corp., said that as of the end of September, the insurer had $225 million invested in common stocks, or "just about 5% of our total invested assets, so it's not a large percentage of our investment portfolio, obviously."
A 20% stock market correction, which some financial analysts predict is likely, would amount to $45 million pretax, which represents just 5% of American States' statutory surplus, or 3.5% of its equity on a generally accepted accounting principles basis, according to Mr. Stephenson.
American States views these investments from a long-term perspective.
With the liquidity available to the insurer elsewhere, "we would not have to sell any of those equities to be liquid," he explained.
The stock market would have to drop by a "highly unlikely" 40% to have a significant impact on insurers, said Sean Mooney, senior vp at the Insurance Information Institute in New York. He noted that 1987's 20% drop "didn't have much impact."
Other observers also point to the relatively small proportion of insurer investments in equities.
If there is a downturn, "capital will shrink, but there's so much capital out there that I don't know it makes that much difference one way or another. I don't think that's a major concern," said Harry Fong, director at C.J. Lawrence/Deutsche Securities Corp. in New York.
Insurance companies have not had a large amount of their investments in equities since the early '70s, when there was a significant correction in the market, "and a lot of insurance companies that had substantial investments in equities lost most of their surplus," said George Yonker, vp-finance, at SAFECO Corp. in Seattle.
"I think at that time a lot of companies got out of equities and have just never gotten back in any meaningful amount," he said.
SAFECO has a policy of having no more than 20% of its investments in equities, though "it's been running closer to 15% for us than it has that 20% maximum," said Mr. Yonker, who noted SAFECO had $593 million in unrealized gains as of the end of September.
A spokeswoman for ITT Hartford Group Inc. said about 10% of the insurer's invested assets are in stocks, with the balance in bonds. Of that 10%, 75% are in domestic common stocks and the remainder in foreign common stocks.
"We're pretty comfortable with our exposure, and we have no immediate intention to reduce that exposure," she said. "It's performed quite well for us this past year, but we're always assessing the situation."
"Most of the companies I deal with take a fairly prudent approach to asset allocation with regard to equities, and I think a 20% decline is completely manageable within the context of their capital structures," said Weston Hicks, an analyst with Sanford Bernstein & Co. in New York.
"I don't think it'll help and I don't think it'll hurt," he added.
"The market's up over 50% the last two years. Many (insurers) have benefited from that increase, so you'd have to take all of that away before you'd be back to even where you started from," he said.
"I think environmental and catastrophe exposures would probably be more material" than a stock market correction, said Craig Elkind, a director at Standard & Poor's Corp. in New York. "There might be some companies out there for which this could be a ratings issue or a solvency issue, but I just don't think it's a general issue as regards the solvency of the entire industry."
However, John Keefe, a vp and analyst with Ferris Baker Watts in Baltimore, thinks a stock market downturn could have a serious impact.
"I think it's fair to say at least two-thirds of the increase in surplus in 1996 is a result of unrealized gains, which are marked to market, and that could vanish pretty quickly.
"When people talk about the insurance industry's low operating leverage-for every dollar of surplus there's only $1.10 in net premiums written-people say the insurance industry has an extraordinary amount of excess capital. Well, a lot of that capital can vanish overnight."
Insurers have been harvesting realized gains over the past few years, said Mr. Keefe.
"I don't think that insurance companies will be forced to liquidate bonds and liquidate stocks in a falling market to pay for the next (major) hurricane, but I also think that when you look at the huge increases in surplus over the past couple of years, which have far outstretched the increase in premium writings, that an analyst has got to keep an eye on the equity markets and how that affects particular stocks."