WOOD STRUTHERS & WINTHROP INC.. NEW YORK

COMMENTS ON THE INDUSTRY

Fire and Casualty The expansion in the earnings of most fire and casualty companies over the past two years has been so large and has emerged so suddenly that it has inevitably led many investors to question its permanence. Such healthy skepticism, however, should not be allowed to obscure the fact that this emergence of profit reflects not only a combination of unusually favorable short term factors, but also long term trends that will continue to benefit the earnings of these companies. Among the favorable, short term developments one might include the unusually large rate increases secured in the private passenger automobile lines in 1969 and 1970, a marked decline in automobile claim frequency during 1970-1972 which remains largely unexplained, and a relatively low level of catastrophe losses over the past two years. Longer term trends that should continue to work in favor of investors and policyholders alike include:

1. Greater pricing freedom and substantially improved rating plans with which to reduce rate lags and maintain adequate rate levels.

2. A continuing trend towards stronger and safer cars to minimize collision and bodily injury losses.

3. The growing use of deductibles by the public in both automobile collision and homeowners contracts that is building a healthy element of co-insurance in this vital segment of the market, and which is helping to lower claim frequency in these lines.

4. More sophisticated and reliable loss reserving techniques, and the use of catastrophe reserves that should minimize year to year fluctuations in earnings.

5. The likelihood that the wage-price stabilization program will continue to limit inflation, particularly in the important hospital and medical lines, to a more predictable and stable rate over the next several years than was true of the late 1960's and early 1970's.

6. The spread of no-fault automobile insurance plans, with their potential for more prompt and equitable settlement of claims, reduced opportunity for loss reserve miscalculations, and with benefits which can accrue from a more satisfied public.

7. Better and more profit-conscious managements that are willing to maximize profit opportunities while trying to avoid many of the losses that in the past have resulted simply from mismanagement, miscalculation, or even a lack of awareness of the problems involved.

WOOD, STRUTHERS & WINTHROP INC..NEW YORK

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There is little doubt that, now that the benefits from the large rate increases in the personal lines have run their course, the industry is entering a more competitive phase. This is also true in the commercial lines, where a greater number of companies are vying for business that has traditionally been serviced by relatively few companies well staffed with loss prevention and claims personnel. Thus, while virtually all companies have shown healthy underwriting margins during this recent period of "easy" profits, the next several years are expected to bring a greater differentiation between the companies in terms of their ability to sustain underwriting margins and to increase earnings. Specifically, this means that those companies that can support their marketing efforts with professional claims, engineering, and other policyholder service staffs, that have strong actuarial departments and well established and reliable loss reserving practices, that enjoy a broad mix of business and the management information systems to detect adverse trends in the different lines of business at an early date, and that can achieve superior investment performance, those companies will produce the best results for their shareholders. Life Insurance The interest in life insurance stocks over the past year seems to coincide with a growing recognition of the quality of the earning power of these companies, and of their ability to grow at a consistent and above average rate. The promise of higher investment earnings because of improved cash flow and higher interest rates, better control of expenses, and more concerted and efficient efforts to increase new premium production should enable many life companies to develop a faster rate of growth in earnings, at least over the next several years, than that which they enjoyed during the 1960's. With a wide number of these companies still selling at average multiples of less than 15 times earnings, the opportunity for meaningful gains exists in these issues. A positive attitude toward the group among investors generally should also be reinforced by the recent adoption of an audit guide for life insurance companies by the Accounting Principles Board. This guide will be mandatory for 1973 results.

WOOD STRUTHERS & WINTHROP INC..NEW YORK

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INVESTMENT POSTURE

For

From the, investor's standpoint, a by-product of a more competitive environment in the fire and casualty industry will be the need to differentiate more clearly than in the past between the various classes of business and their respective profit outlook. example, while it is difficult to see further substantial gains in the earnings from private passenger automobile business over the near term, conditions in the accident and health and homeowners lines remain favorable, and the outlook for the workmen's compensation business is also improving rapidly. Thus, the process of selection in this group should stress those companies in which volume is concentrated in the lines of business that can help their earnings during the next year. Such companies include: Aetna Life and Casualty, CNA Financial, Crum and Forster, Mission Equities, and Republic Financial Services. Other quality companies such as Chubb Corp., St. Paul Fire and Marine, and Safeco might also be included in such a list at lower prices. U.S.F.&G. should continue to be held by long term investors seeking current income together with moderate appreciation potentials.

In the life area, a combination of internal changes, the relative attraction of markets being served, and market price lend appeal to Lincoln National, Protective Life, Provident Life and Accident, United Services Life, and Variable Annuity Life. American General, with two-thirds of its earnings stemming from life insurance, might also be viewed favorably in this context. USLIFE Corp. continues to be recommended for its long term appreciation potential.

(Private

(a) Hospital daily service charges series changed-not comparable with earlier periods. rooms are no longer included, certain tests are added-e.g. lab tests, electrocardiograms, physical therapy, etc. and on base January, 1972-100).

Source: U.S. Department of Labor Consumer Price Indices 1967-100