As long as carriers continue to practice disciplinedunderwriting, the indicators point to a prolonged soft marketcycle, said a ratings analyst.

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“We don't see a strong market hardening for some time,” saidJames B. Auden, senior director of insurance, property-casualty,with Fitch Ratings in Chicago.

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He said companies are getting adequate returns on theirunderwriting, and while that continues the market will remain inits current soft cycle.

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“We didn't think [Hurricane] Katrina and the events of last yearwarranted a broader hardening market event because rates wereadequate in many areas, so there really wasn't a need forincreases,” he noted.

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His comments came today during a conference call to discussyesterday's release of Fitch's review and outlook report for theinsurance industry.

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What concerns the analysts right now, he said, is how soft istoo soft, where pricing becomes irrational and carriers no longerreceive an adequate rate of return on their underwriting.

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Currently, carriers are underwriting successfully, and with thatsuccess companies will look to expand their markets and possiblyget into risks they have little expertise in. Carriers at thatpoint get into trouble, he said.

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“For the time being, they [companies] are more disciplined, butat some point they will revert back to historical form” and returnto bad underwriting practices, he predicted.

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The last true market-changing event was 9/11, which led to atrue marketwide underwriting event where the industry recorded thefirst net operating loss in its history.

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“It is still in everyone's memory, but how long that will last,I'm not sure,” he commented.

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Carriers, he said, also realized then that they need to earn anunderwriting return on capital and cannot rely upon investments forprofits.

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“You can't be satisfied with 100 combined ratio. In mostsegments, it needs to be 95 or better,” he said.

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In its review, Fitch anticipates the industry will have acombined ratio of 92 percent for 2006 compared with 100.9 in 2005.It will also enjoy a statutory income of $71 billion, “which willsmash previous industry records and represent a 51 percent increaseover 2005.”

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On the mergers and acquisition front, Mr. Auden said there maybe some activity within the industry, but no blockbuster deals. Hecautioned, however, that Fitch has not been very good at predictingsuch mergers.

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