NEW YORK -- Despite posting one of the largest single-day point drops in history early last week, the stock market's volatility does not pose a significant risk to the property/casualty insurance industry.

Not only is the insurance industry overcapitalized, making losses from declines in industry stocks seem small in comparison, but the industry also has only a small equity exposure. Fixed securities account for the majority of the industry's invested assets.

Analysts say that while a drop in the stock market may not affect the solvency of property/casualty insurers or cause them to raise prices, it could cause insurers and brokers to re-think making or completing acquisitions.

On Monday, Aug. 31, the Dow Jones Industrial Average fell 512.61 points, or 6.36%, which was the second-largest point drop after a record 554.26 point drop last October (BI Nov. 3, 1997).

The Dow rebounded Tuesday, regaining more than half of its loss the previous day and closing up 288.36 points. The Dow continued to decline through the end of the week, however, closing on Friday at 7640.25, for a total loss for the week of 411.43 points.

Analysts say that while last Monday's correction was a big day for Wall Street, it was a non-event for the property/casualty industry.

"The good news is, I don't think any company's solvency was threatened due to the decline in the stock market," said Alan M. Levin, managing director of insurance ratings at Standard & Poors Corp. in New York.

S&P analyzes the percentage of industry capital exposed to equities.

Even at 122%, the largest equity exposure risk posted by an insurer, a 10% drop in the stock market would only lower that company's capital base by 12.2%, Mr. Levin said.

At the end of 1997, 43% of the property/casualty industry's total capital was exposed to equities, according to S&P.

"The bottom line is, there is a modest amount of risk to the industry from the stock market, but it's not a driving risk," said John L. Ward, chairman of Cincinnati-based Ward Financial Group, an insurer management consulting and investment banking firm.

According to the 1998 Ward's Results (BI, Aug. 24), the property/casualty industry's total preferred and common stock holdings as a percentage of invested assets was 25.4%, Mr. Ward said, noting that only a portion of that percentage is made up of common stock, which is more volatile than preferred stock.

"It's a big chunk, but the whole industry is not invested in equities," he said. Bonds and fixed income securities represent 66.1% of the industry's total invested assets. "That shows you where the real weight is."

Barbara Stewart, president of Stewart Economics Inc. in Atlanta, added that because the industry has so much capital and so much surplus relative to what it is writing, even if a company has 60% of its surplus exposed to equities and there was a 50% decline in stock value, that still only represents a 30% decline in surplus.

"It's hard to imagine this market having much of an effect on pricing and appetite for business," Ms. Stewart said. "Unrealized capital gains have represented more than half of the gross (increase) in surplus for the past three years. There's a lot to give back."

Analysts do say, however, that a declining stock market potentially could halt some merger and acquisition activity within the industry.

"I do see a potential where a drop could slow acquisition activity," Mr. Ward said. While stock swap transactions would take the biggest hit, due to the stock values decreasing, cash deals also could slow due to a big drop in the market, he contends.

"If a company has lots of assets in the stock market, a drop in the market would lower surplus," he explained. A company, therefore, might be "less interested in making a cash deal for an acquisition."

S&P's Mr. Levin agreed. "Insurers have been using stock to make acquisitions in recent months. If the market stays depressed, they may be less inclined to make those deals," he said.

Timothy J. Cunningham, a principal with Insight Management Group in Chicago, which puts together brokerage deals, said that a falling stock market also could have a negative impact on acquisitions activity in the brokerage market, but only in "very isolated, specific" incidents.

For example, if a big drop in the stock market occurs sometime between the letter of intent and the closing of a deal, and it negatively impacts the value of the transaction, "the seller party might get cold feet," he said.