INSURANCE: CAUGHT IN A SQUEEZE

The life insurance industry is in an unenviable squeeze – expenses are rising, but the price of the product is going down. According to Michael J. Collins, president of Fidelity Union Life (the fifth-largest publicly held insurance company locally, with assets of about $590 million), the average price of a life-insurance policy is 15 percent less than it was six years ago. A lot of companies are slicing premium rates in the face of stiff competition, and living on investment income. The better managed life insurers are still making money from operations and investments, but the stock market evidently hasn’t noticed. Six years ago, Fidelity Union stock hit a high of $46, while earning $2.39 per share; every year since, earnings have increased, to $4.03 per share last year. Dividends have risen by more than a dollar a share, but by the end of 1978, the price of Fidelity Union stock had dipped to $26.

Southwestern Life’s experience has been similar to Fidelity Union’s: Everything is going up but the price of the stock. (Southwestern is number one locally, with assets of nearly $2 billion; net profit last year was $38 million, compared to $19 million in 1972. See table, page 100.) Market analysts are concerned about the squeeze on profit margins and the effect the nation’s economic ills may have on the industry. In hard times, policy lapses increase, as do low-interest borrowings against cash values. In addition, the industry is worried about a House Commerce Committee proposal that insurance agents supply prospective clients with a buyer’s guide, analyzing costs and benefits of various policies – a boon to consumers, a threat to industry profits. (The buyer’s guide might even show how a customer would be better off buying low-premium term instead of high-premium whole life, and putting the difference in a savings account, for example.)

Investment income has permitted the life-insurance industry to enjoy double-digit growth in earnings in the face of single-digit growth in premiums. On the plus side for the future, mortality rates are falling, and inflated net worths are resulting in higher face values of policies. But with more and more buyers choosing term insurance over the more profitable whole life, the near future looks less than spectacular.

The casualty insurance industry has enjoyed twice the earnings gains of the life insurance field in the last couple of years, but casualty stocks have performed even worse than life stocks. Price/ earning ratios of four to five abound. Casualty writers are heavily dependent upon state regulatory handouts, which are always based upon the past rather than the future. Since the immediate past has been fat, analysts expect the regulatory authorities to dole out a lean immediate future.

One local company that manages to do well during thick and thin is Employers Casualty Company, ranked seventh locally with assets of about $275 million. It has experienced underwriting losses only three times in its 58-year history. The most recent downer was 1975, when auto claims went berserk. That year, Employers Casualty earned only $0.96 per share, but since then it has been straight up – $3.53 in ’76, $6.80 in ’77, and $7.84 last year. But even during good years, the Employers Casualty P and L strikingly shows the effect that investment income has on performance in the insurance industry. Of last year’s $7.84-per-share profits, $4.14 came from earnings on investments. And because Employers Casualty concentrated on tax-exempt obligations, more than $10 million in investment income was tapped for just over $1 million in taxes. If this keeps up, maybe insurance companies won’t bother to insure anymore – they’ll just invest. The big news in the health insurance field is the alternative offered by health maintenance organizations (HMO’s). An HMO charges a flat monthly rate for medical services, regardless of the amount actually used. The monthly cost is about $35 for an individual and $100 for a family. In most plans, participating doctors are likewise paid a fiat monthly rate regardless of the extent of services actually performed. So the traditional roles are reversed: The doctor assumes the risk (rather than the insured and the insurer), and does better financially when patients are well than when they are sick. The HMO costs about 50 percent more than the average health insurance policy, but preventive services such as regular physical exams are included, and there is no deductible or risk sharing.

HMO’s have been around for decades, but have begun to mushroom since Congressional encouragement began in 1973. At the end of 1978, there were over 200 HMO’s in 37 states, serving more than 7 million people. Locally, Metrocare in Arlington became the first operational HMO in February. Public response has not been overwhelming; only 35 customers were enrolled during the first two months of operation. Bob Collins, vice-president in charge of marketing, is shooting for 6000 members by February 1980, though, and 170 doctors have already agreed to participate. In Dallas, Kaiser-Prudential expects to be operational this month. One of the joint venturers, Kaiser Foundation Health Plan Inc., has HMO roots dating back to 1945 and is involved in service to more than 3.5 million customers, mostly on the west coast. “Kaiser-Pru” is setting up shop initially at Medical City Hospital, with five primary-care physicians and a roster of specialists who have agreed to accept referrals. Applicants may sign directly with Kaiser-Pru, rather than going through their employers.

Only 5 percent of hospital patients pay their own bills, so we really haven’t felt the brunt of the dramatic cost increases. Were this not the case, we would likely have experienced by now a protest movement that would make Howard Jarvis seem about as vociferous as Winnie the Pooh. HMO’s point to statistics which show that their clients spend about half as much time in hospitals as patients outside HMO plans. Detractors say that the program is only a step away from socialized medicine. By this time next year, we should have an inkling as to what Dallas – and Dallas’ insurance companies – think of the concept.