kiplinger connection
Insurance Industry • The Economy • Federal Spending

Insurance Industry:
Lower 2006 claims, robust stock market are good for insureds, for now.
The Economy:
One—housing stronger by March; two—a weaker overseas dollar will still hold.
Federal Spending:
The politics of a new majority mean spending will stay at 2006 levels.

Insurance Industry
These are heady days for insurers.
Record profit margins for property and casualty underwriting plus big returns on investments make for healthy bottom lines.
And a big drop in claims ... the result of a mild hurricane season, no terrorism, longer life spans, and fewer traffic injuries. Dwindling payment claims spell fatter coffers.

Next year won’t be quite as profitable. The slowing economy will take a toll, as will new rules by credit-rating agencies that’ll force insurers to beef up reserves. Plus competition is increasing in some areas.
But that’s good for most customers, who will see premiums stay flat or rise slowly.
Property rates will fall ... everywhere but along coasts. Owners near the water will see premiums go up 10% or more in 2007.
Life insurance costs will drop about 4% next year, continuing their steady retreat.
Auto rates ... flat. In 2006 ... up 0.5%.

Employers can expect to pay less for workers’ comp, on average. However, rates are highly regulated and vary considerably among states.
Terrorism rates will climb, though. Congress will renew the law providing a backstop, but it will be less generous than it is now.

Soaring profits are prompting a wave of IPOs among reinsurers ... insurers of insurers. A bunch of reinsurers were created in the wake of Hurricane Katrina, did very well and are now looking to cash in.
An uptick in mergers is also on tap. Some private equity firms that financed start-ups to take advantage of high post-Katrina rates want to grow through mergers. Brokerages are also good takeover targets.

Products for baby boomers will keep the black ink flowing.
Among them: Policies combining long term care with payouts of life insurance. Variable annuities guaranteeing the owner’s principal. And fixed annuities for people who are retiring without pensions.

But good times will draw scrutiny from regulators and Congress looking into why insurers haven’t settled many lawsuits in La. and Miss. Congressional hearings won’t lead to much. Insurers have an ally in Sen. Chris Dodd (D-CT), the incoming head of the Senate Banking Com. However, insurers will have to disclose fees and clear up fine print as regulators zero in on allegations of abuse by insurance companies.

The Economy
The seeds of a recovery in housing are finally being sown.
It may not look that way, with price growth still decelerating and sales droopy, particularly for new homes.
But we see the housing market finding its floor by spring and beginning a gradual resurgence.

Gains in unsold inventory are much slower now than they were earlier this year, signaling that home supply is adjusting to weaker demand. Builders are taking this weakness on the chin, particularly in the Northeast and the Midwest. But their pain is a plus for long-term stability of the housing market as well as for homeowners.
Low mortgage rates are a balm for the market, keeping potential buyers from getting cold feet. Sales of existing homes ... 85% of the market ... now seem to be stabilizing. The popular 30-year fixed mortgage has fallen to 6.1% from 6.8% in July. The rate will go up a bit next year, but not enough to hurt sales.

Note that the limit on conforming mortgages won't change in 2007. It'll stay at $417,000 ... the first time without a yearly hike since 1993. Why? The limit is linked to house prices, which haven't budged much. Conforming loans can be repurchased by Fannie Mae and Freddie Mac and thus tend to have lower interest rates than larger "jumbo" mortgages.

The long-term outlook for the dollar remains bearish. Slowing U.S. economic growth, expected interest rate cuts by the Fed while other central banks hike rates, and big trade and budget deficits will weigh on the greenback. A dollar free fall, however, is unlikely ... too many countries depend on the U.S. as a top market for their exports.

Federal Spending
So much for bipartisanship. The postelection handshakes and pledges of cooperation are quickly fading from memory as lawmakers use the lame-duck Congress for partisan advantage.
An ugly budget fight early next year is all but certain. Republicans set the stage for that by opting to postpone decisions on the spending bills for fiscal year 2007, which started Oct. 1. When Congress convenes Dec. 5, it will pass a temporary funding bill to keep the government operating until Feb. 15, forcing Democrats to take ownership of the old budget before writing a new one for 2008.

The GOP aim: Put Democrats in a bind. Whatever spending levels they set, even if they pass the bills as written by GOP leaders, President Bush will use his veto pen. That’ll let him attack Democrats for being spendthrifts. In the meantime, federal agencies must operate at 2006 levels, which means no new money for research, transportation, job training, small business loans, export assistance, and more. It also is delaying construction of a fence on the U.S.-Mexico border.
Complicating the picture will be another defense-spending bill. The administration will soon ask for about $150 billion more to fund the wars in Iraq and Afghanistan. Bush will load up the bill with other defense requests and dare Democrats to try to block it.