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Profitable Underwriting Year for Property/Casualty Insurers Expected in 2006

NEW YORK, January 10, 2006 -- Another profitable underwriting year for property/casualty insurers is expected in 2006, a group of industry observers told insurance executives attending the 10th annual Property/Casualty Joint Industry Forum, held here.

In a session entitled View from the Outside Looking In, a panel comprised of an industry analyst, ratings agency analyst and two editors, said that barring major catastrophes, 2006 is looking good for p/c insurers.

Frank W. Nutter, president of the Reinsurance Association of America (RAA), and moderator of the session, noted that 2005 had been a remarkable year for the industry, with the p/c industry set to record only its second underwriting profit since 1978.

“In 2005, ratings agency Standard & Poor’s (S&P) issued more upgrades than downgrades of insurance companies in the p/c sector for the first time in five years,” said Nutter. “Property/casualty stocks outperformed the S&P 500 by 10 percent and the financials by 9 percent. Only utilities and energy as business sectors, performed better than the p/c sector.”

Looking ahead, Nutter noted that premiums are projected to rise by nearly five percent in 2006, with the combined ratio estimated at 98, and the industry poised to record a return on equity of nearly 15 percent. “2006 may well be another remarkable year.”

Panelists went on to discuss the different market segments of the p/c industry, including both personal and commercial lines.

Brian Sullivan, editor, Risk Information, Inc., observed that for personal lines insurers, 2006 is already a good year, “barring an earthquake in California. “If people started cutting rates today it would really only impact the second half of the year. “

Sullivan predicted that only one of two things would change this. “Either someone will do something stupid, or someone is going to have to come up with a strategy or idea that will break us out of this scenario.”

David Schiff, editor, Schiff’s Insurance Observer, cautioned insurers to enjoy the good times while they are here. “The key is not to get intoxicated by it. It is a cyclical business, but just because the industry is cyclical does not mean we can predict the pattern exactly. Whether it is three years, five years or 10 years in between, it will continue to be cyclical,” Schiff warned.

According to V. J. Dowling, managing partner, Dowling & Partners Securities, while 2006 is looking good for personal lines insurers, catastrophes can be expected to take their toll. “When it comes to homeowners business, we have to look at what are the expected catastrophes, how should we be pricing it, and will regulators allow the pricing to be adequate? I don’t think on a fully loaded basis it is quite as profitable as on the surface,” Dowling said.

Mark Puccia, chief quality officer for Insurance Ratings Criteria, Standard & Poor’s, said the ratings agency expects good times to continue in 2006, assuming normal catastrophe activity.

But Puccia cautioned: “2006 won’t be as good as 2005. Part of the reason for this is that the industry has been bailed out by wonderful claims experience on the auto side. At some point that is not expected to continue and that will lift up the loss ratios. Hurricane Katrina did affect auto; there were a lot of auto losses as a result of flooding.”

Moving on to the commercial lines business, panelists agreed that this sector will not be as profitable as personal lines.

Assuming a normal catastrophe year, S&P’s Puccia said the agency is projecting a combined ratio of around 102 or 103 for commercial lines, compared with a personal lines combined ratio of around 96 or 97.

“We have been disappointed with the pace of deterioration in commercial property lines, in particular,” said Puccia. “This industry has had a hard time with success.”

Looking at broader industry trends, the panelists went on to predict that there would be no widespread consolidation in the p/c sector in the year ahead via the merger and acquisition (M&A) route.

Dowling pointed out that with the industry earning a return on equity of more than 15 percent; no company was looking to get out of this business.

“At the smaller end there could be some consolidation, but there are not as many white elephants out there as in the past and that will slow things down a bit,” Puccia commented.

Sullivan noted that one of the key reasons for the slowdown in industry consolidation is that expanding through M&A in personal lines is not that practical.

“In personal lines it is more logical to grow by taking the customers from the weak sisters. Buying the company tends not to be the most logical when you can just take the customers,” he said.

Several panelists predicted that future consolidation would be organic, with the biggest companies growing their market shares, rather than through M&A.

The Property/Casualty Insurance Joint Industry Forum was created to provide leaders form the widest spectrum of the p/c insurance and reinsurance industry with an opportunity to meet with each other in discussion of topics of general interest.

The sponsoring organizations of the Forum represent a wide spectrum of insurance interests and audiences. They include: ACORD, American Institute for Chartered Property Casualty Underwriters, The Geneva Association, Institute for Business & Home Safety, Insurance Information Institute, Insurance Institute for Highway Safety, International Insurance Society, Inc., ISO, National Association of Mutual Insurance Companies, National Council on Compensation Insurance, National Insurance Crime Bureau, Property Casualty Insurers Association of America and Reinsurance Association of America.

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