Despite a slew of catastrophe losses, property-casualty insurerslast year posted their first underwriting profit in 26 years,totaling $5 billion, according to a study by the Insurance ServicesOffice (ISO) released today.

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Jersey City-based ISO said those results came in the face ofslowing premium growth, and that insurers' net income after taxesand overall profitability rose for the third consecutive year assurplus climbed to a record high.

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The information was contained in the company's Insurance IssuesSeries study Insurer Financial Results: 2004.

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ISO said insurers' net income after taxes rose to $38.7 billionin 2004, from $30 billion in 2003.

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The company found that insurers rate of return on average networth (based on Generally Accepted Accounting Principles) climbedto 9.4 percent last year, from 8.9 percent.

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Surplus jumped to $393.5 billion from $347 billion.

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Improvement in underwriting results, ISO said, drove the $8.7billion increase in net income, with the $5 billion net gain onunderwriting in 2004 constituting a $9.9 billion positive swingfrom the $4.9 billion net loss on underwriting in 2003.

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The study said that underwriting results for 2004 reflect afirming in insurance markets that began in mid-1999 and gatheredmomentum through mid-2002.

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However, "premium growth slowed in 2004 as a result ofconditions in insurance markets, raising serious questions aboutunderwriting profitability going forward," said Carole J. Banfield,ISO executive vice president - Information Services.

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She added that "with today's investment yields, underwritingresults must be better than they used to be for insurers to achieveany given overall rate of return."

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Insurers' GAAP rate of return last exceeded 15 percent in 1987,when it was 17.3 percent even though the combined ratio==a keymeasure of losses and other underwriting expenses per dollar ofpremium==was 104.6 percent then.

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Achieving a 17.3 percent rate of return with investment results,tax rates and financial leverage like those in 2004 would requirethat the combined ratio improve to about 88 percent==roughly 17percentage points better than the combined ratio for 1987, andabout 10 percentage points better than the 98.1 percent combinedratio recorded for 2004, ISO said.

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Ms. Banfield commented that, "The other reason insurers didn'tcelebrate their results for 2004 with champagne and fireworks isthat, even though their rate of return rose to itshighest levelsince 1997, it remained low compared with long-terms norms and therates of return earned by firms in other industries."

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ISO found that insurers' 9.4 percent rate of return for 2004 was0.5 percentage points less than their average rate of return from1971 to 2003. And the median GAAP rate of return for the Fortune500 in 2004 was 14.9 percent==5.5 percentage points more than theGAAP rate of return for the insurance industry and 4.8 percentagepoints more than the 10.1 percent rate of return for largeinsurers.

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Other points mentioned in the study:

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o The combined ratio improved 2 percentage points to 98.1percent in 2004 from 100.1 percent in 2003.

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o At 98.1 percent, the combined ratio improved to its best levelsince 1978, when it was 97.4 percent.

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o Underwriting results improved even though written premiumgrowth slowed to 4.7 percent from 9.4 percent in 2003 and 14.3percent in 2002.

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oAs premium growth slowed, growth in net loss and lossadjustment expenses accelerated, climbing to 3.8 percent in 2004from 1.8 percent in 2003.

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o Contributing to the growth in loss and loss adjustmentexpenses, catastrophe losses more than doubled to $27.5 billion in2004 from $12.9 billion in 2003.

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o Net income in 2004 benefited not just from improvement inunderwriting results, but also from the fact that net investmentincome rose $900 million last year to $39.6 billion. Realizedcapital gains on investments climbed $2.7 billion to $9.3billion.

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The 78-page study also provides analyses of results by line ofinsurance and reinsurers' results. The study also reports on trendsin surplus, financial leverage, operating cash flows, insurerinsolvencies, mergerand acquisition activity, industryconcentration and performance of insurance stocks.

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ISO provides members and customers with products and servicesthat help measure, manage and reduce risk.

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