I.I.I.’s P/C Joint Industry Forum

Insurance industry conferences are usually serious and dry affairs. And they are probably even more so in the current environment where insurers have been grappling with huge catastrophe losses.

But Dr. Robert Hartwig, president of the Insurance Information Institute, provided a rare occasion for executives to smile and break out in laughter. It happened at a CEO panel discussion for the insurance industry’s annual ritual, the I.I.I. Property/Casualty Joint Industry Forum, held earlier this month in New York.

Amid the talk of dismal profits and lower investment income for 2011, Liberty Mutual CEO David Long mentioned one area where incomes are exceeding expectations: investment in energy, thanks to the growing national interest in hydraulic fracturing. Dr. Hartwig, with his sharp wit, didn’t miss a beat. He responded by telling CEOs and the conference audience that “That’s fracking great news!” Amid the laughter, he added, “I can’t believe I just said that.”

The rest of the conference was more subdued, however. Panelists talked about the insurers’ poor investment income – hurt by the low interest rate – and how the insurers’ investment income will likely continue to perform poorly for next few years.

Property/casualty insurers get a portion of their revenues from the interest generated by their bond portfolios. But a prolonged period of low interest rates has hampered the industry’s ability to offset its underwriting losses with investment income, I.I.I. said. Currently, 70 percent of the P/C insurance industry’s investment portfolio is held in high-quality corporate and government bonds, with 20 percent in diversified stock holdings. The remaining 10 percent is usually held as cash or very short-term securities.

One of the panelists was Jay Gelb, managing director at Barclays. He warned that the interest rate factor will continue to pose a challenge. “We think [low interest rates will be] a big headwind for earnings and returns on equity for at least the next few years when you essentially have zero percent interest rates at the short end of the curve and the long end continues to flatten,” he said.

Matthew Mosher, senior vice president at A.M. Best, remarked that low interest rates are clearly hurting earnings and that it will push the need for more stringent underwriting.

“Investments can’t carry you, and that puts a lot more pressure on operations,” added Lori Dickerson Fouche, CEO of Fireman’s Fund. “We have to come back to basics in terms of business. You can’t rely on investment results to get you the kind of returns you need.”

The industry posted the worst underwriting results since 2001 last year, and returns on equity sunk into the low single digits, according to Dr. Hartwig. Panelists said there are two ways to help improve underwriting profit going forward: by raising rates and through great underwriting. But with so much competition out there, it’s going to be a while before a full hard market comes our way.