"The hurricanes will have a very, very substantial impact," said Robert Hartwig, senior vice president and chief economist at the Insurance Information Institute in New York. "The only question is how much, ultimately."

Taken together, Mr. Hartwig noted, the insured losses from Hurricanes Katrina ($34.4 billion at last count) and Rita (between $3 billion and $7 billion) are "basically equivalent to every dime of profit the insurance industry hoped to earn," during the first half of the year.

However, he added that some of that loss will be mitigated through tax credits and other government programs, and that overall, "the industry should have a relatively good fourth quarter, mirroring the first and second [quarter] of this year."

In fact, Mr. Hartwig said that, excluding the third quarter, 2005 would have been "the best year the industry has had in decades" in terms of profitability. Thanks to the storms, he added, "that will not happen."

Instead, Mr. Hartwig predicted that the insurance industry will have a "single-digit [return-on-equity] for 2005"--a year that could have been the high point of the current insurance cycle, he noted.

"Unfortunately, this year would have been the year in which we'd see the peak," he said. Last year was expected to be a high-water mark for the insurance industry, Mr. Hartwig added, but it was also impacted by a series of storms--including a grand slam of four hurricanes that hammered Florida.

The news is not all bad, however, he said, noting that prior to Hurricane Katrina, "the industry was in extraordinarily sound shape financially, which will help cover the losses inflicted by the hurricanes.

Although the hurricanes will prompt a severe loss in the third quarter, Mr. Hartwig predicted that the p-c industry would be able to withstand the hit. "The industry will be able to bounce back," he said, adding that "insolvencies are not really a concern."

As an indicator of this, Mr. Hartwig said that the availability of capital remains high, with $3.8 billion in new capital already announced in the month since Hurricane Katrina hit. This increased availability of capital, he said, will help keep the market from returning to a hardening state.

"There's a lot of wishful thinking out there that Katrina will turn the market hard" in a manner similar to what happened after the Sept. 11, 2001 attacks--a time when the overall market was already turning, Mr. Hartwig noted. "That won't happen."

In fact, he said, "it's easier than ever to raise capital and bring new funds into the insurance business." The "basic effect" of this new influx and availability of capital, he said, is the tempering of any price increases.

While there will, of course, be some rising prices in the wake of the hurricanes, Mr. Hartwig said hikes would likely be "limited and concentrated" to the areas and lines most affected by the storms--particularly homeowners coverage, commercial property coverage and reinsurance for exposures in Gulf Coast areas.

According to consolidated industry results compiled by the Insurance Services Office Inc. and the Property Casualty Insurers Association of America:

o Net income after taxes increased by almost 30 percent to $30.9 billion during the first half, up from $23.9 billion during the same period in 2004. The industry's bottom line profit was higher than any experienced since the Jersey City-based ISO began compiling quarterly records in 1986, both before and after adjusting for inflation.

o Industry surplus as of June 30 was also at a record high both with and without the adjustment--coming in at $412.5 billion, up from $369.2 billion the year before.

o Net gains on underwriting increased 43.5 percent to $13.2 billion in first-half 2005, up from $9.2 billion during the same period in 2004.

o The industrywide combined ratio improved 1.6 points to 92.7, down from 94.3 the year before.

o Investment income also increased dramatically--up 32.7 percent from $19 billion during the first half of 2004 to $25.3 billion this year.

"Insurers' underwriting results for first-half 2005 were truly remarkable," said John J. Kollar, vice president for consulting and research at ISO. "At 92.7 percent, the combined ratio for first-half 2005 was the best first-half combined ratio since the start of quarterly records extending back to 1986."

He added that "record net gains on underwriting in first-half 2005 were all the more remarkable given that, prior to 2004, insurers suffered net losses on underwriting during the first half of every year."

However, the softening market took its toll on premium growth, with net written premiums up only 2.3 percent in the first half to $217.3 billion. That's down from 5.1 percent in last year's first half and is the slowest growth rate since first-half 1999's 1 percent gain. Premiums rose by a much more robust margin in the first half of hard-market year 2003 (10.6 percent) and the cyclical peak of 2002 (12.2 percent).

Meanwhile, the worst catastrophe losses in U.S. history will also take a toll on insurers. Indeed, Katrina and Rita "could cut the industry's rate of return for full-year 2005 by seven or eight percentage points if U.S. insurers have to shoulder the entire burden," according to Gregory Heidrich, senior vice president for policy development and research at PCI in Des Plaines, Ill.

"Once we have good estimates of the losses that will be covered by foreign reinsurers and residual market mechanisms, we'll be able to develop a more precise assessment of the financial impact of Katrina and Rita on the domestic insurance industry," he said.

For First Half:

Flag: By The Numbers

Head: Profits Soar Despite Soft Market

Caption:

The industry's bottom line first-half profit of $30.9 billion was up 30 percent compared to the same period last year, and was bigger than any net income result since ISO began compiling quarterly records in 1986.

For Second Quarter (with Jump):

Flag: Numbers Crunching

Head: Net Income Skyrockets 29 Percent

Caption:

The industry kept up its positive growth in the second quarter, as continued improvements in underwriting fueled rising profits, but Hurricanes Katrina and Rita will force carriers to empty their piggy banks of any gains earned thus far.