Insurers’ Investments in the 90s

Another perspective on the big market turn in the early 00s:

consider what happened to the European insurance industry in 2002. European insurers are allowed to invest much more in equities than their U.S. counterparts can. (Berkshire Hathaway (BRK.A:NYSE) is an interesting exception here.) As the bull market of the 1990s came to an end, European insurers found themselves flush with surplus from years of excellent stock-market returns, and adequate, if declining, underwriting performance. The fat years had led to sloppiness in underwriting from 1997 to 2001.

During the bull market, many of the European insurers let their bets ride and did not significantly rebalance away from equities. Running asset policies that were, in hindsight, very aggressive, they came into a period from 2000 to 2002 that would qualify as the perfect storm: large underwriting losses, losses in the equity and corporate bond markets and rating agencies on the warpath, downgrading newly weak companies at a time when higher ratings would have helped cash flow. In mid-2002, their regulators delivered the coup de grace, ordering the European insurers to sell their now-depressed stocks and bonds into a falling market. Sell they did, buying safer bonds with the proceeds. Their forced selling put in the bottom of the stock and corporate bond markets in September and October of 2002. Investors with sufficient financial slack, like Warren Buffett, were able to wave in assets at bargain prices.

From this awesome piece by David Merkel.

When discussing that turn, everyone points to the claims costs ticking up and 9/11. But it takes more than that to turn a market.