American International Group Inc., the company repaying a $182.3 billion government rescue, led the U.S. insurance industry to its best year since 2003 as investments strengthened.
Nineteen of the 22 companies in the Standard & Poor's 500 Insurance Index are beating returns for the benchmark S&P 500 this year. AIG, based in New York, has nearly doubled and is the insurance index's best performer. Warren Buffett's Berkshire Hathaway Inc. has risen 22% this year. The index, which also includes MetLife Inc., the biggest U.S. life insurer, and brokers like Aon Corp., has advanced 15%, its biggest annual jump since 19% in 2003. The S&P 500 has risen about 13% so far in 2010.
The industry is building on a recovery that started last year when the insurance index rose 11%. Insurers, which are regulated by states, avoided much of the federal Dodd-Frank financial overhaul this year, said Malcolm Polley, chief investment officer of Stewart Capital Advisors LLC, a subsidiary of S&T Bancorp.
Insurers were "probably the best options in a troubled marketplace for financials," Polley, who helps manage about $1 billion, said in an interview.
"The whole financial services sector got taken out and shot in 2008," Polley said. "It didn't matter what kind of financial you were, people just wanted out. Now, you're beginning to separate the wheat from the chaff."
AIG, once the world's largest insurer, is shedding assets as it seeks to repay the U.S. government rescue and has reported improved investment results. Realized losses on investments cost the company $661 million in the third quarter, compared with $1.86 billion a year earlier.
MetLife has reported net income of more than $2.7 billion this year through Sept. 30 after a loss of about $2.2 billion in all of 2009. Third-quarter investment income rose 12% from a year earlier, to $4.39 billion. MetLife, of New York, has climbed 27% this year.
Prudential, the second-biggest U.S. life insurer, has advanced 20% so far this year. The Newark, N.J., company's third-quarter earnings gained after a rising stock market allowed the company to reduce reserves against minimum-return guarantees it makes to annuity customers.
"The insurance industry has done a pretty good job at bolstering its capital position," Kenneth Janke, executive vice president and deputy chief financial officer at Aflac Inc., said in an interview. "Investors have shifted more toward going back to looking at the income statements of the insurance companies and not just the balance sheets."
MetLife and Aflac are adding corporate debt to their portfolios as life insurers increase holdings in the securities at the fastest rate in six years amid near-zero interest rates. For the first time, life insurers own more than $2 trillion in the bonds issued by companies, according to data released by the Federal Reserve this month.
Corporate bonds are returning about 10% this year, including invested interest, according to Bank of America Merrill Lynch's U.S. Corporate & High Yield Master Index. The debt returned a record 26% last year, after posting an 11% loss in 2008.
Property/casualty insurers benefited from the biggest increase in sales in four years in the quarter that ended Sept. 30, according to a report from ISO, a unit of Verisk Analytics Inc.
Third-quarter policy sales rose 2.3%, to $110.7 billion, from $108.2 billion a year earlier.
Competition on commercial rates and a weakening municipal-bond market may hurt property/casualty insurers next year, said Paul Newsome, an analyst with Sandler O'Neill & Partners LP.
"There are concerns about the financial strength of many municipalities across the country," Newsome said in an interview. State and local bonds are "very important for property/casualty insurers."
