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ORLANDO, Fla. -- The competition between small insurance companies and their larger counterparts is truly a David vs. Goliath story, and on many fronts, Goliath is clearly winning.

Smaller companies typically face relatively higher expenses and generate less in investment returns than the large insurers, according to James E. Bachman, vp at General Re-New England Asset Management Inc. in Farmington, Conn.

Speaking last month at the 103rd annual convention of the National Assn. of Mutual Insurance Cos. in Orlando, Fla., Mr. Bachman said expense ratio is "where things start to get a little rocky for the smaller companies."

He noted that, from 1993 to 1997, companies with less than $25 million in assets had average expense ratios of 35.7%, considerably higher than the industry average of 25.7%.

The "great news" is that smaller companies "tend to have vastly superior loss ratios," than larger ones, Mr. Bachman said.

"However, the price for that looks to be increased volatility in the loss ratio," he said. "So, on the one hand, we have a tremendously wonderful loss ratio for the smaller company, but it's unpredictable."

And smaller companies' investment yields trail those of their larger counterparts significantly, averaging 5.1% for companies with less than $25 million in assets vs. an industry average of 5.9%.

Among the factors affecting smaller companies' investment returns are the heightened impact that certain regulations have on them, Mr. Bachman suggested.

"There are rules that all of us have to live by in the investment of money that is generated in the insurance industry," he said. "As you look at the situation, this is one of the obstacles that is confronting the smaller companies more than the larger organizations."

Among those regulations are the "per name" limits that typically restrict investments, except in U.S. government securities, to no more than 5% of an insurer's admitted assets in a given entities' securities.

For small insurers, that restriction means they are often executing their trades in "odd lots," rather than the "round lots" that typically trade in $1 million increments. Trading in odd lots raises the costs of those transactions.

There are no simple solutions to the problem, Mr. Bachman said, in large part because of external factors such as regulations and the higher execution costs of the small companies' trades.

Small insurance companies can seek to change some internal factors however, that could improve their picture. One is to look for ways to improve operating results, Mr. Bachman said.

Another is to change their investment asset allocation. Smaller companies typically have a greater percentage of their portfolios in U.S. government securities and other securities with higher ratings and shorter maturities than do large companies. Moving some of those investments to higher-yielding securities could be one way to improve investment results.

Changes in management practices and relationships also could potentially help smaller companies improve their competitive position in comparison with the large company "Goliaths," Mr. Bachman suggested. Again, modifying long-held relationships could be difficult "but might be something you want to look at," he said.