Long-Term View

It strikes us that the property/casualty industry can’t win when it comes to reporting its financial results. If profitable, insurers are always accused of being greedy at consumers’ expense. But what is the alternative? Take the first-quarter 2007 results just released by the industry. The industry’s net income after taxes dipped to $15.8 billion in Q1 2007 from $16.7 billion in Q1 2006, and its rate of return fell to 12.9 percent from 15.5 percent. The decline in profitability occurred despite the fact that the industry turned in one of its best underwriting performances ever, with a combined ratio of 91.7, down from 92.4 at full-year 2006. As I.I.I. president and chief economist Dr. Robert Hartwig noted in his commentary, the financial performance of the P/C industry during the first quarter was generally excellent, but it also provided confirmation that the industry is now past its cyclical peak in profitability of 14.0 percent achieved in 2006. “The only question that now remains is how long the decline in profitability will last and how many years it will take to get to the bottom,† said Dr. Hartwig. Whether or not you agree with this depiction, the fact remains that insurers cannot meet their objectives unless they are financially successful. Another key challenge facing insurers (unlike other industries) is that the largest portion of their expenses involves losses that are difficult to predict. Check out Dr. Hartwig’s full commentary at http://www.iii.org/media/industry/financials/2007firstquarter/.  

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