Name an industry that's flush with capital but has almost nothing else going for it. The answer? Insurance. "I wish I could say the business is exploding," laments insurance analyst Eric N. Berg of CIBC Oppenheimer Corp. in New York. "While certain areas are doing very well, the rest of it is dullsville."

In both the property-casualty and the life-insurance sides of the business, top-line growth as measured by premiums written has taken only baby steps over the last few years, increasing 3% to 4% a year. And there's no evidence suggesting that 1999 will be any different. Part of the problem is that pricing has been flat while demand is stagnant.

There seems to be no relief in sight. The dismal trends in 1998 will likely continue in 1999, predicts Weston M. Hicks, a senior research analyst at Sanford C. Bernstein & Co. in New York. For the first nine months in 1998, investment income growth for the group was zero, premium growth was 1.6%, and earnings were down 15%. "This suggests that without a lot of premium or investment income growth," there will be "enormous pressure on companies in this industry to either consolidate or restructure in some way," Hicks says.

As underwriting losses start to build, and the industry exhausts its reserves, a day of reckoning is near. "Companies have reached a critical point," says Alan G. Zimmermann of Morgan Stanley Dean Witter. "If they don't take action to raise prices, in some sectors they will see further deteriorating results."

THIN MARGINS. There have been some bright spots due to the strong stock market. Sales of variable-annuity products, for example, jumped as much as 30%. But analysts don't expect the gains to continue. Even if they did, variable-annuity products represent only 5% of the industry's total earnings, because they have such thin margins.

Demutualization is the biggest new trend in the industry. That's when mutual companies that have been owned by policyholders, such as Metropolitan Life Insurance Co., become owned by stockholders. Since mutual companies write 40% of the industry's premiums and tend not to be as bottom-line-oriented as stock companies, demutualization will eventually be a big positive for the industry, according to analysts. But with all the red tape, it usually takes years.

Despite deflationary times, too much competition, too much capital, and growth only in low-margin businesses, some companies are still poised to do well. Bernstein's Hicks is high on businesses that sell policies by phone or mail directly to the customer, on the theory that they have lower expense ratios and thus higher margins. These include Geico, Progressive, Mercury General, AIG, and the Hartford Group. But on the whole, don't expect insurance companies to move from dullsville to Pleasantville in 1999.

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