Reflecting the increase in net income after taxes, the industry's annualized rate of return on average policyholder surplus rose to 13.4 percent through three quarters, up from 9.8 percent in the first nine months of 2005, according to figures compiled by PCI and the Insurance Services Office, accounting for at least 96 percent of all business written by private U.S. p-c carriers.

A huge difference was reported in disaster-related claims. According to ISO's Property Claim Services unit, direct insured losses from catastrophes dropped to $7.6 billion in the first three quarters of 2006, plummeting from $51.1 billion in the same hurricane-hammered period the year before.

However, while PCI Chief Economist Genio Staranczak termed the 2006 hurricane an anomaly, he warned that “natural catastrophes still pose a huge threat to consumers and businesses along the Gulf and Atlantic coasts.” The industry, state and federal governments, private businesses and individuals must continue to better prepare by ensuring that financial reserves are adequate, strengthening building codes and land-use regulations, and putting in place catastrophe recovery plans, he added.

In any event, the industry's soaring profitability could pose public relations and political problems for an industry that is taking heat for its handling of 2005 storm claims, as well as the withdrawal of capacity from disaster-prone areas, leaving many policyholders scrambling for more expensive coverage.

Robert P. Hartwig, who takes over this week as president of the Insurance Information Institute, put the numbers into a broader context. For example, he noted that the p-c industry's return on equity for the entire year could diminish because of fourth-quarter reserve increases and a sizable increase in policyholder surplus, among other factors.

“Indeed, it is now quite possible that the p-c industry's ROE for the full-year 2006 will fall short of the Fortune 500 standard for the 19th consecutive year,” he said.

Mr. Hartwig also expressed the traditional lament of the newly flush in underscoring how increased profits mean higher taxes, noting that tax payments by insurers to the federal government doubled to $18.7 billion in the first nine months.

“In fact, the 2006 federal taxes paid are so large that they will exceed the $22.6 billion in insured losses from Hurricane Andrew (expressed in 2006 dollars), the second most expensive natural disaster in history,” Mr. Hartwig added.

Increased profits will also lead to softening pricing as the insurance supply increases with the size of policyholder surplus, industry officials pointed out.

For the short term, however, ISO results indicated that net written premiums grew 3.8 percent through the first nine months of the year–above analyst expectations of 2.8 percent for full-year 2006. The difference, officials indicated, was stronger-than-expected premiums in property coverage in catastrophe-prone regions.

“There is, however, a consensus among analysts that premium growth will slow precipitously in 2007,” Mr. Hartwig said, noting that the Institute's “Early Bird” forecast calls for an increase of 1.7 percent in 2007, which is comparable to the growth rates of the late 1990s–or, as Mr. Hartwig put it, “the depths of the last soft market.”

“For insurers, the premium growth pattern is eerily reminiscent of the soft market of the late 1990s, when the industry recorded growth of 2.9 percent in 1997 and 1.8 percent in 1998,” he noted.

However, he conceded, the expected 2007 combined ratio of 97.6 could make that comparison “superficial or at least premature.”

The industry posted a 91.5 combined ratio for the first nine months of the year–an eight-point improvement from the comparable 2005 period. If the industry maintains that figure through Dec. 31, it will be the best annual result since the 91.2 posted in 1948.

But assuming “normal” catastrophe losses in 2007, the combined ratio is expected to rise to 97.6 next year, with underwriting profits vanishing if catastrophe losses return to previous levels of 2004-05.

Michael Murray, ISO assistant vice president for financial analysis, noted that the 3.8 percent written premium growth fell short of the growth in the economy.

“That premiums rose only about half as much as GDP is an indication that insurers' recent results are spurring competition and leading to lower prices in many insurance markets, despite the ongoing problems in specific markets exposed to natural catastrophes,” Mr. Murray said.

PCI's Mr. Staranczak said that other indications of falling prices included the Council of Insurance Agents and Brokers' survey that showed a 5.3 percent overall decline, as well as the Consumer Price Index homeowners insurance cost figure (down 1 percent) and auto figure (up just .4 percent).

“It is clear that Fortune 500-level ROEs in the neighborhood cannot be generated consistently without a substantial contribution from underwriting, given the murky interest rate situation going forward and continued stock market volatility,” Mr. Hartwig said.

The other major factor for carriers is investment income, which can bolster bottom lines when underwriters fail in that score.

Net investment income grew 2.4 percent for the first nine months of 2006 to $37.5 billion. Combined with the $1.5 billion in realized investment gains and the $12 billion in unrealized gains, insurers posted overall capital gains of $13.5 billion for the first nine months–more than triple the $3.8 billion in the same period last year.

However, “the fact that realized capital gains are tumbling in 2006, despite the rise in stock prices, suggests that insurers are effectively 'banking' unrealized capital gains and holding them to boost profits as underwriting margins shrink in years ahead,” according to Mr. Hartwig.

Since insurers hold only about 17 percent of invested assets in the form of common stock, Mr. Hartwig said the “murky” interest rate situation going forward is much more critical to their fortunes.

Investment officers choosing to lock in falling long-term rates before they fall too far, face the chance that a war or oil-induced inflation shock could send them soaring, he noted. “On the other hand, rates could trend down further, perhaps for years,” Mr. Hartwig said. “Indeed, there is a substantial risk that the Fed will lower rates if the economy begins to falter in 2007.”

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