ISO and PCI Reports Sharp Decline in Volatile Catastrophe Losses Drove Improvement in USA Property/Casualty Insurers’ Full-Year 2006 Results

JERSEY CITY, N.J., April 18, 2007 � Driven by a sharp decline in catastrophe losses from hurricanes and other natural disasters in 2006, the U.S. property/casualty industry posted a $31.2 billion net gain on underwriting for the year. The net gain on underwriting in 2006 stands in stark contrast to the $5.6 billion net loss on underwriting in 2005.

The industry�s positive underwriting results contributed to an increase in its net income after taxes to $63.7 billion in 2006 from $44.2 billion in 2005. Reflecting the increase in net income after taxes, the industry�s rate of return on average policyholders� surplus (net worth) rose to 14 percent in 2006 from 10.8 percent in 2005, according to ISO and the Property Casualty Insurers Association of America (PCI).

Government data and market surveys indicate the improvement in insurers� financial results has led to increased competition in many insurance markets.

The figures are consolidated estimates for all private property/casualty insurers based on reports accounting for at least 96 percent of all business written by private U.S. property/casualty insurers.

Catastrophe Losses

According to ISO�s Property Claim Services (PCS) unit, direct insured losses from catastrophes dropped to $9.2 billion in 2006 from $61.9 billion in 2005.

�Insurers and residents of coastal states dodged a bullet last year. Though the experts were predicting a highly active hurricane season, no hurricanes struck the U.S., giving insurers and the areas hit by the six catastrophic hurricanes that struck in 2005 much needed time to recover,� noted Michael R. Murray, ISO assistant vice president for financial analysis. �Much of the improvement in insurers� underwriting and overall results last year reflects the decline in catastrophe losses from 2005�s record high. Allowing for losses from Katrina, Rita, and Wilma that didn�t emerge until after insurers closed their books for 2005 � and factoring out losses covered by residual market insurers, the Florida Hurricane Catastrophe Fund, and foreign insurers � ISO estimates the catastrophe losses included in private U.S. insurers� net financial results declined by $21.9 billion to $11.7 billion in 2006 from $33.6 billion in 2005. ISO also estimates that catastrophe-related net loss adjustment expenses declined to $0.6 billion in 2006 from $1.2 billion in 2005, contributing another $0.6 billion to the improvement in underwriting results.�

�While meteorological anomalies confounded the experts and helped the U.S. escape major hurricane strikes in 2006, the threat of more frequent and severe storms, combined with the growing population and the increased value of property in the highest risk areas of the country, means that the threat of enormous losses from natural disasters is a financial problem the nation must deal with,� said Genio Staranczak, PCI�s chief economist. �Experts are now predicting that the 2007 hurricane season will be far worse than average, and huge parts of the U.S. remain vulnerable to earthquakes that can strike at any time. Bottom line, natural catastrophes pose a huge and growing threat to consumers and businesses across the country. Insurers, state and federal governments, private businesses, and individuals must continue to better prepare themselves by ensuring that financial reserves are adequate, strengthening building codes and land use regulations, and putting in place catastrophe recovery plans to speed relief to those who need it after a disaster occurs.�

ISO and the PCI noted that hurricanes causing $100 billion or more in losses are a very real possibility. When Hurricane Andrew occurred in 1992, it caused $15.5 billion in insured losses to property, and experts agreed at the time that losses would have been about four times higher, or about $60 billion, if Andrew had made a direct hit on downtown Miami. With the value of insured property having more than doubled since 1992, a storm like Andrew striking downtown Miami today could result in more than $100 billion in insured property damage, according to AIR Worldwide. ISO and the PCI also noted that AIR�s U.S. earthquake model indicates a repeat of the 1906 San Francisco earthquake today could also result in insured losses in excess of $100 billion.

Underwriting Results

The improvement in underwriting results in 2006 reflects both growth in premiums and a decline in loss and loss adjustment expenses.

Net written premiums climbed $18.3 billion to $443.8 billion in 2006 from $425.5 billion in 2005, with written premium growth accelerating to 4.3 percent in 2006 from 0.3 percent in 2005. Net earned premiums rose $18.2 billion last year, increasing to $435.8 billion in 2006 from $417.6 billion in 2005. Earned premium growth accelerated to 4.4 percent in 2006 from 0.9 percent in 2005.

Overall loss and loss adjustment expenses declined $27.9 billion, or 9 percent, to $283.7 billion in 2006 from $311.6 billion in 2005. Non-catastrophe loss and loss adjustment expenses declined $5.4 billion, or 1.9 percent, to $271.4 billion in 2006 from $276.8 billion a year earlier.

Other underwriting expenses � primarily acquisition expenses, other expenses associated with underwriting, pricing and servicing insurance policies, and premium taxes � rose $7.7 billion, or 7 percent, to $117.5 billion last year from $109.8 billion in 2005.

Dividends to policyholders rose 85.1 percent to $3.4 billion in 2006 from $1.9 billion in 2005.

The net gain on underwriting in 2006 amounts to 7.2 percent of the $435.8 billion in premiums earned during the period, whereas the net loss on underwriting in 2005 amounted to 1.3 percent of the $417.6 billion in premiums earned during that period.

The combined ratio � a key measure of losses and other underwriting expenses per dollar of premium � improved 8.5 percentage points to 92.4 percent in 2006 from 100.9 percent in 2005.

Two special developments affected the reported trends in premiums and losses. In 2005, one insurer ceded $6 billion in premiums and the same amount of loss and loss adjustment expenses to its foreign parent. And in 2006, one insurer stopped reporting as a property/casualty insurer and instead began reporting as a health insurer. If not for those developments, industry written premiums would have increased 3.5 percent in 2006, and loss and loss adjustment expenses would have declined 10 percent.

�Though insurers� $31.2 billion net gain on underwriting and 92.4 percent combined ratio for 2006 are the best since at least 1959, when ISO�s records begin, underwriting results are both highly cyclical and subject to random shocks beyond insurers� control, with last year�s random shocks including the absence of major hurricanes and earthquakes,� noted Murray. �And insurers need good years to recover from the bad ones. Cumulatively, even including last year�s record gain on underwriting, insurers suffered net losses on underwriting totaling $135.3 billion during the ten years ending 2006 and $434.3 billion since 1959.�

�Moreover, declines in investment yields have eaten into insurers� ability to use investment income to support underwriting operations,� noted Staranczak. �The average yield on insurers� cash and invested assets dropped from 7.3 percent during the decade ending 1986 to 6.5 percent during the decade ending 1996 and 4.8 percent during the decade ending 2006. And all of this means that individual insurers must now achieve better underwriting results than they did in the past just to achieve the same level of overall profitability.�

�Nonetheless, we�re already seeing signs that 2006�s net gain on underwriting is spurring price cuts in many insurance markets. At an adjusted 3.5 percent, written premium growth in 2006 fell far short of growth in the economy,� added Murray. �U.S. gross domestic product (GDP) � a dollar measure of national output � rose 6.3 percent in 2006. That premiums rose only about half as much as GDP is an indication that escalating competition consequent to recent underwriting results is leading to lower prices for most coverages in most locations, despite ongoing problems in coastal property insurance markets.�

�Other evidence that insurers� recent results are spurring competition and leading to lower prices includes a report from The Council of Insurance Agents and Brokers that commercial insurance prices fell an average of 9.6 percent for all sizes of accounts in fourth-quarter 2006, as well as data from the federal government on trends in Consumer Price Indexes for personal lines coverage,� said Staranczak. �Countrywide, the CPI for Tenants� and Household Insurance fell 0.9 percent in 2006, and the CPI for Motor Vehicle Insurance rose just 0.6 percent � far less than the 3.2 percent increase in consumer prices overall.�

Investment Results

Contributing to the increases in net income after taxes and overall profitability, the industry�s net investment income � primarily dividends from stocks and interest on bonds � grew 5.2 percent to $52.3 billion last year from $49.7 billion in 2005. But realized capital gains on investments (not included in net investment income) tumbled 65.4 percent to $3.4 billion in 2006 from $9.7 billion the year before. Combining net investment income and realized capital gains, overall net investment gains fell 6.4 percent to $55.7 billion in 2006 from $59.4 billion in 2005.

Combining the $3.4 billion in realized capital gains in 2006 with the $20.8 billion in unrealized capital gains during the period, insurers posted $24.1 billion in overall capital gains last year � up from $6.3 billion in overall capital gains in 2005.

�The near quadrupling of insurers� overall capital gains in 2006 reflects developments in financial markets,� said Murray. �In 2006, the S&P 500 rose 13.6 percent � nearly five times the 3 percent increase in the S&P 500 in 2005. With respect to the outlook for capital gains going forward, the S&P 500 rose a scant 0.2 percent from year-end 2006 to March 30, suggesting insurers� first-quarter 2007 results will not benefit significantly from additional capital gains. Beyond this, any forecast for capital gains is only as good as the underlying forecast for stock prices.�

Pretax Operating Income and Federal Income Taxes

Pretax operating income � the sum of net gains or losses on underwriting, net investment income, and miscellaneous other income � climbed 87.3 percent to $84.6 billion in 2006 from $45.1 billion in 2005. The increase in operating income reflects improvement in underwriting results and growth in investment income, with miscellaneous other income equaling $1 billion in both 2006 and 2005.

Partially offsetting the effect of the increase in operating income on insurers� net income after taxes, the industry incurred $24.2 billion in federal income taxes in 2006 � more than double the $10.7 billion in income taxes the industry incurred in 2005.

Policyholders� Surplus

The property/casualty insurance industry�s statutory net worth, or policyholders� surplus, increased 14.4 percent to $487.1 billion at year-end 2006 from $425.8 billion at year-end 2005. The $61.4 billion increase in policyholders� surplus in 2006 compares with a $34.5 billon increase in 2005.

The increase in surplus in 2006 consisted of $63.7 billion in net income after taxes, $20.8 billion in unrealized capital gains on investments (not included in net income), and $3.6 billion in new funds paid in (new capital raised by insurers), less $24.5 billion in dividends to shareholders and $2.3 billion in miscellaneous charges against surplus.

The $20.8 billion in unrealized capital gains in 2006 constitutes a $24.2 billion positive swing from the $3.4 billion in unrealized capital losses in 2005.

The $3.6 billion in new funds paid in during 2006 is down 75.1 percent from $14.4 billion in 2005.

The $24.5 billion in dividends to shareholders in 2006 is up from $15.6 billion in 2005.

The $2.3 billion in miscellaneous charges against surplus in 2006 is less than half of the $5.1 billion in miscellaneous charges against surplus in 2005.

�With insurers� ability to provide financial protection to those who need it being determined by their surplus � the amount of capital available to bear risk � last year�s $61.4 billion increase in surplus will help insurers meet society�s growing need for insurance coverage,� noted Staranczak. �Moreover, with the law of supply and demand determining the market price of insurance, the growth in surplus and consequent increase in the supply of insurance are contributing to lower prices, benefiting millions of consumers and businesses.�

Overall Profitability

Insurers� overall profitability as measured by their statutory rate of return on average surplus � net income after taxes divided by average surplus during the year the income was earned � climbed to 14 percent in 2006 from 10.8 percent in 2005. The rate of return for 2006 was the highest since 1986, when it equaled 15.1 percent, but it remained well below the record 23.1 percent statutory rate of return for 1977.

By decade, insurers� average rate of return climbed from 9.5 percent during the ten years ending 1976 to 13 percent during the ten years ending 1986 but has since fallen to 9.5 percent during the ten years ending 1996 and to 7.9 percent during the ten years ending 2006.

�The insurance industry�s profitability last year compares quite favorably with its own results during the previous 20 years. But escalating competition and falling prices in insurance markets mean that insurers� profitability is at or near a cyclical peak, even though their rate of return is no better than that of firms in most other industries,� said Murray. �In fact, the insurance industry has a long history of being less profitable than other industries, with insurers� rate of return being less than that of the Fortune 500 in 21 of the 23 years from 1983, when ISO�s data for the Fortune 500 starts, to 2005. During that span, insurers� rate of return averaged 8.2 percent � 5.6 percentage points below the 13.8 percent average rate of return for the Fortune 500.�

Effects of Special Developments on Investment and Overall Financial Results
As noted above, one insurer ceded $6 billion in premiums and the same amount of loss and loss adjustment expenses to its foreign parent in 2005, and another insurer stopped reporting as a property/casualty insurer in 2006 and began reporting instead as a health insurer. Reported figures for 2006 and 2005 also reflect two other special developments that affected how results for the periods compare. In particular, one insurer engaged in a complex series of transactions in 2006 as it prepared to be sold by its noninsurer parent. Consequent to those transactions, the insurer posted $0.5 billion in nonrecurring dividends that added to its investment income and net income after taxes. Also consequent to those transactions, the same insurer posted $1.7 billion of realized capital losses that flowed through net income and an offsetting amount of unrealized capital gains. And in 2005, another insurer received $3.2 billion in nonrecurring dividends from an investment subsidiary as it monetized assets.

If not for these nonrecurring special developments, insurers� net investment income would have risen 12.4 percent in 2006 as insurers� average holdings of cash and invested assets rose 8.6 percent and the yield on those assets declined to 4.3 percent from 4.5 percent. Absent the same special developments, insurers� net income after taxes would have risen $24.3 billion, or 59.8 percent, in 2006, and policyholders� surplus would have increased $64.3 billion last year instead of $61.4 billion. Insurers� rate of return on average surplus would have increased from 10 percent in 2005 to 14.3 percent in 2006, instead of increasing from 10.8 percent to 14 percent.

Fourth-Quarter Results

The industry�s consolidated net income after taxes for fourth-quarter 2006 amounted to $18.8 billion � up 30.7 percent, or $4.4 billion, from $14.4 billion in fourth-quarter 2005. The industry�s net income for fourth-quarter 2006 reflects the excess of $22.5 billion in pretax operating income and $1.9 billion in realized gains on investments over $5.6 billion in federal income taxes.

The industry�s fourth-quarter pretax operating income of $22.5 billion contrasts with its $10.3 billion in pretax operating income in fourth-quarter 2005. Fourth-quarter 2006 operating income consisted of $6.8 billion in net gains on underwriting, $14.8 billion in net investment income, and $0.9 billion in miscellaneous other income.

The $6.8 billion in net gains on underwriting in fourth-quarter 2006 is a $10 billion positive swing from the $3.1 billion in net losses on underwriting in fourth-quarter 2005. Much of the improvement in fourth-quarter underwriting results reflects a decline in catastrophe losses. Direct insured catastrophe losses fell to $1.4 billion in fourth-quarter 2006 from $10.8 billion in fourth-quarter 2005, according to ISO�s PCS unit. Factoring out catastrophe losses covered by residual market mechanisms, the Florida Hurricane Catastrophe Fund, and foreign insurers � and adjusting for the delayed emergence of losses from the hurricanes of 2005 � ISO estimates that the catastrophe losses and loss adjustment expenses included in private U.S. insurers� net financial results fell to $1.5 billion in fourth-quarter 2006 from $6.4 billion a year earlier.

Fourth-quarter 2006 net gains on underwriting amounted to 6.2 percent of the $110.4 billion in premiums earned during the period, in contrast to fourth-quarter 2005 net losses on underwriting amounting to 2.9 percent of the $107.1 billion in premiums earned during that period.

The industry�s combined ratio improved to 95 percent in fourth-quarter 2006 from 103.6 percent in fourth-quarter 2005.

The $6.8 billion in net gains on underwriting is after deductions for $2.3 billion in premiums returned to policyholders as dividends, with dividends to policyholders more than doubling from $1.1 billion in fourth-quarter 2005.

Written premiums rose to $106 billion in fourth-quarter 2006 from $104.2 billion in fourth-quarter 2005, with fourth-quarter written premium growth slowing to 1.7 percent in 2006 from 1.9 percent in 2005. But adjusted for one insurer that stopped reporting as a property/casualty insurer in 2006 and began reporting instead as a health insurer, written premiums rose 2.4 percent in fourth-quarter 2006.

The $14.8 billion in net investment income is up 12.8 percent from $13.1 billion in the last quarter of 2005.

The $1.9 billion in realized capital gains is down $3.5 billion from the $5.4 billion in realized capital gains in fourth-quarter 2005.

Combining net investment income and realized capital gains, the industry posted $16.7 billion in net investment gains in fourth-quarter 2006, down 9.8 percent from $18.5 billion a year earlier.

Unrealized capital gains on investments amounted to $8.7 billion in fourth-quarter 2006 � an $11.7 billion positive swing from the $2.9 billion in unrealized capital losses on investments in fourth-quarter 2005. Combining realized and unrealized capital gains, the insurance industry posted $10.6 billion in overall capital gains in fourth-quarter 2006 � an $8.2 billion increase from the $2.5 billion in overall capital gains in fourth-quarter 2005.

Miscellaneous other income grew to $0.9 billion in fourth-quarter 2006 from $0.3 billion in fourth-quarter 2005.

Net income would have risen more in fourth-quarter 2006 if not for an increase in the industry�s federal income taxes. The industry�s federal income taxes rose $4.3 billion to $5.6 billion in fourth-quarter 2006 from $1.3 billion in fourth-quarter 2005.