PREMIUM HIKES BUOY INDUSTRY.

Byline: Evan Pondel Staff Writer

With higher costs and a shaky economy weighing on the insurance sector, Farmers Insurance Group is maintaining a more profitable course.

The third-largest property and casualty insurer in California reported consolidated net income of $192.6 million in its most recent quarter, compared with $180.7 million in the same period a year ago. The company attributes its improvement to an industrywide recovery.

``Farmers is starting to rebound from what was a challenging period,'' said Mary Flynn, a spokeswoman for the Los Angeles-based company.

Industry analysts say that period isn't over, with insurers like Farmers staying afloat by raising premiums to counter sour investments and rising costs.

``It's almost inaccurate to stay the economy is the real problem when it's rising costs that are generating the greatest rate increases more than anything else,'' said Joseph Annotti, spokesman for industry trade group the National Association of Independent Insurers. ``And while rising costs are still a concern, they are coming down and we should see some improvement though 2003 and 2004.''

But the California Department of Insurance is far less optimistic.

``The insurance industry is upside down in every category,'' said Norman Williams, a spokesman for the department. ``As a result of rising costs, it's becoming difficult for consumers to afford insurance.''

While consumers have the ability to shop around for better premiums, insurers improve their standing by investing in the bond market. In 2000, property and casualty insurers allocated 64 percent of their invested assets in bonds, and 23 percent in common stock, according to the association.

``The demand and enthusiasm for bonds is great right now among insurers because it's safe,'' said Dreyfus Neenan, an equities analyst with Morningstar. ``The only problem with a bond investment is if the insurer needs to liquidate.''

Fast access to cash is particularly important as many insurers have experienced a spike in water damage claims. The NAII said the number of these claims that have resulted in litigation of coverage for mold exposure - virtually unheard of only a few years ago - cost homeowners insurers more than $1 billion in 2001, five times the cost in 2000.

Farmers' greatest obstacle right now resides in Texas. The company was entrenched in a dispute with the state last year over how it priced its policies. Then, in August, the company stopped writing homeowners insurance policies for new customers, according to The Associated Press.

Farmers will allow about 2,000 Texas agents to write up to 10 new homeowners insurance policies starting Monday. The company said the policies can be written only for households that have auto insurance through Farmers, reports said.

Evan Pondel, [phone]

evan.pondel(at)dailynews.com