Premium increases give boost to insurers' profits, share price.

HIGHER insurance premiums over the past couple of years have worked out badly for policyholders, but pretty well for local property and casualty insurers.

After at least two years of successive rate increases, Mercury General Corp., 21st Century Insurance Group and Farmers Insurance Group are seeing the results in fatter bottom lines, if not uniform increases in their stock prices.

In the past month, Mercury General and 21st Century have recorded big increases in their quarterly net income, while Farmers, a unit of Swiss-based Zurich Financial Services Group, previously reported half-year earnings to insurance regulators indicating its financial position continues to improve.

But with indications that the tight market might be softening--some insurers are even lowering rates here and there--could earnings and stock prices be the next to falter?

Don't count on it, although the days of wholesale rate hikes are over, according to industry analysts.

"They will continue to show earnings improvement, and I would say overall what we are looking at is a moderation in rate increases," said Andrew Colcannon, an analyst with A.M. Best Co.

That's welcome news for an industry that has only recently recovered from the stock market decline, the terrorist attacks, and the aftereffects of years of under-pricing policies.

Local recovery

Los Angeles-based Mercury General, a big California auto insurer that also writes some homeowners coverage, had seen its earnings drop by more than half from 1998 through 2002. But so far this year, they have nearly tripled.

For the third quarter ended Sept. 30, Mercury General reported net income of $49.6 million, compared with $18.5 million for the like period a year ago. Premiums written jumped to $590.2 million from $491.6 million.

The company has also recorded improvement in its key "combined ratio," a measure of how much of the premium dollar is being spent on claims and administrative costs. Anything over 100 means the company is losing money on an underwriting basis and must make up for it in investment income.

Mercury General saw its combined ratio drop to 93.4 percent for the quarter, and investors have responded positively to the numbers, driving up the stock from a 52-week low of $33.50 on Feb. 10 to a 52-week high of $50.30 on Nov. 3. It was trading at just under $48 a share last week.

Investors also got good news when Mercury reported receiving only 120 damage claims from homeowners after the recent Southern California fires. Those will shave 23 cents a share off future earnings.

During a recent conference call, Chief Executive George Joseph warned that competition is heating up in the automotive market as fewer competitors have sought rate increases. "There is no question that the competitive environment is tougher than it was," George said.

Another issue: Mercury has been unloading long-term bonds and moving into shorter-term securities as it anticipates a future rise in interest rates. The moves have cost $400,000 in investment income during the third quarter but put it in position to take advantage of higher rates later.

Improving bottom line

With the same idea in mind, 21st Century also saw lower yields in the third quarter, as it cut its position in long-term bonds. For the third quarter, net income was $12.7 million, compared with a net loss of $45.2 million for the like period a year ago. Revenues were $315.8 million, up from $249.4 million.

Its stock action has been less dramatic, with shares trading at $13.69 as of Nov. 19, up from a 52-week low of $11.20

Part of the problem is that American International Group Inc., the multinational insurance giant, holds 62.6 percent of the shares after bailing out 21st Century in mid 1990s following the Northridge earthquake. That has turned off investors who see little chance for big stock gains with the insurer so closely tied to AIR.

And Chief Financial Officer Mel Spinally said the Northridge quake remains an issue, what with 1,718 open claims at the end of 2002. "Once we can tell everybody that's done, it's over, the pressure will be relieved on the stock," he said.

There has been an improvement in its combined ratio, which dropped to 96.6 percent in the third quarter from 118.8 in the like period a year earlier.

Farmers Insurance Group is not publicly traded, but it accounts for 25 percent of the income of its Zurich parent. One year ago, Farmers was reeling from $787 million in losses in 2001.

But a series of rate hikes across both personal and commercial lines, as well as more disciplined underwriting, turned that around and the group earned $13.5 million in 2002, according to A.M. Best. The company has also cut its losses to $83.8 million in the first six months of the year, compared to $136 million last year. Also, the combined ratio has been brought down from 117.3 percent in 2001 to 102.6 percent in the fast six months of this year.