ANALYSTS HIT PERFORMANCE OF COMMERCIAL P/C INDUSTRY

PHILADELPHIA - The commercial property/casualty insurance industry isn't writing at a profit and isn't likely to do so for the short term.

That prediction, made by a panel of stock analysts, wasn't the only projection made during Commonwealth Risk Services L.P.'s Third Annual Producer's Forum in Philadelphia late last month. There was a peek into the nature of risk management during the next millennium as well from Business Insurance's 1997 Risk Manager of the Year.

Right now, the outlook for traditional property/casualty insurers isn't all that inspiring, noted the three stock analysts assessing the state of the industry.

"The industry is a brackish pond inhabited by a lot of pretty ugly ducklings," observed Alice D. Schroeder, managing director of Paine Webber in New York. The analysts assessing the present and future of the industry agreed that there's more than a little room for improvement.

"We conclude that the insurance industry is writing at no profit," said Weston M. Hicks, senior research analyst with Sanford C. Bernstein & Co. Inc. in New York. He said he believes the combined ratio for commercial lines is actually around 115%, with specialty lines such as reinsurance running around 105% and personal lines remaining the best performer with a

95% combined ratio.

V.J. Dowling, senior analyst at Dowling & Partners in Hartford, Conn., said he believes the insurance industry's underlying results are really worse than are being reported.

"Real returns on all except personal lines are approaching zero," concurred Ms. Schroeder. Some of the excess capital currently flooding the industry will eventually move elsewhere, she predicted.

Mr. Hicks said he didn't see anything on the horizon that would change the situation. Mr. Dowling said that perhaps - and stressed that there is currently no serious movement to do so - a change from state to federal regulation could have impact on the industry's performance.

The panelists cited several factors that mark companies likely to thrive in the future. These included those with customer loss participation, integrated risk management and multiple distribution systems. Panelists also noted a move toward low-tax jurisdictions. As Mr. Dowling put it, "Bermuda is a better mousetrap, given the tax advantage."

Those companies "waiting for the turn" in market conditions would number among losers, said Mr. Hicks.

Norman L. Rosenthal, president of Norman L. Rosenthal & Associates in Philadelphia, moderated the session.

Judith M. Lindenmayer offered a view of the future from a different perspective as she discussed "risk management in the next millennium." Ms. Lindenmayer, vp-Fidelity insurance and risk management for FMR Corp. in Boston and BI's Risk Manager of the Year in 1997, described how the Japanese management concept of "kaizen" - which was adopted by Fidelity more than a decade ago - fits into risk management.

Kaizen basically holds that if everybody does one small thing better every day, the company will grow, she said.

The concept has served as a catalyst for re-engineering the risk management process at Fidelity, said Ms. Lindenmayer. It has spurred the staffing of a seven-member operational risk management team, the appointment of a chief risk officer to oversee financial risk management and the establishment of a risk oversight committee comprised of senior executives, she said.

The company assesses its risks month by month, because they change that quickly, she said.

"We also deal in what people are calling - and I don't like this word - 'holistic' risk management," said Ms. Lindenmayer. Doing so means analyzing risk from a variety of perspectives - financial, business, market and the like. She noted that for Fidelity, the biggest risk is "reputational," because an investment company that suffers a blow to its reputation may be hard-pressed to recover.

Ms. Lindenmayer closed her talk by offering a new model of enterprise risk management. Though the old model of risk management focused on net income, the new model focuses on cash flow, profit and value orientation. The old model role of the risk manager was that of an insurance buyer; instead, the new model is that of a consultant. Whereas the old risk manager followed a technical style, the new model is a communicator. The old model's objectives were results-driven, and the new model's objectives are results- and process-driven. Finally, the old model followed a philosophy of "no surprises," while the new model's philosophy is to enhance shareholder value, she said.

Commonwealth Risk Services L.P., a Philadelphia-based subsidiary of Bermuda-based Mutual Risk Management Ltd., designs and develops commercial P/C alternative risk financing programs.