JERSEY CITY, N.J.—Thanks to a much lighter year for catastrophes, U.S. property/casualty insurers are back on solid financial ground.

Nine-month 2006 results announced last week by the Insurance Services Office Inc., the Insurance Information Institute and the Property Casualty Insurers Assn. of America show that insurers posted a $24.4 billion net gain on underwriting. That compares with a $2.5 billion underwriting loss in the year-earlier period.

Third-quarter results also improved sharply, as insurers posted net underwriting income of $9.3 billion in 2006 vs. an underwriting loss of $15.2 billion during the third quarter last year, when Hurricanes Katrina and Rita struck.

The turnaround in results is benefiting insurance buyers as well, by stimulating competition and keeping rate increases at bay in most lines.

But analysts note the insurance business remains cyclical and warn that insurers still trail the combined return on equity of Fortune 500 companies.

In addition, insurers' improved finances could hamper efforts to extend the federal terrorism insurance backstop scheduled to expire at the end of 2007, and the PCI is already mapping its strategy (see story, page 21).

According to the ISO, III and PCI, property/casualty companies' net written premiums increased 5.1%, to $337.8 billion, in the nine-month period, from $321.3 billion a year earlier. Consolidated surplus grew 12.9%, to $467.6 billion from $414.2 billion.

Property/casualty insurers' nine-month 2006 combined ratio also improved to 91.5% vs. 99.9% in the first three quarters of 2005.

Similarly, aftertax net income rose 50.5% to $44.9 billion in the first nine months of 2006, from $29.7 billion for the first three-quarters of 2005.

The annualized return on average policyholder surplus rose to 13.4% for the first three quarters of 2006 vs. 9.8% for the comparable 2005 period.

Helping shore up the industry's financial position was a dearth in natural catastrophes during 2006. According to ISO's Property Claim Services unit, direct insured losses from catastrophes plummeted to $7.6 billion for the first nine months from a record $51.1 billion in the first nine months of 2005. Noncatastrophe loss and loss adjustment expenses also declined slightly, to $201.5 billion for the first nine months of 2006 from $201.6 billion a year earlier.

"This is a very solid year in terms of profitability. It's due primarily to low catastrophe losses, much less than average for the decade," observed Genio Staranczak, PCI's chief economist, who spoke during a conference call announcing the results last week.

Price reductions

Commercial insurance buyers have been enjoying the industry's good fortune as well, said Greg Heidrich, senior vp of policy development and research for PCI.

"Commercial insurance buyers in almost every market except perhaps one--property catastrophe in the most exposed areas--are seeing price reductions," he said.

"The competition is heavy...so policyholders are already seeing the benefits of that," Mr. Heidrich said. "And then if you look at the new entrants, the new capacity, the innovative products, new ways to spread this risk, I think commercial buyers already have seen a strong trend towards lower prices and they're going to continue to see that for the foreseeable future."

While property/casualty insurers may have done well so far this year, the industry has a long way to go to make up for past years' underwriting losses, warned Mike Murray, assistant vp for financial analysis at ISO.

"To put this year's results in perspective, even with underwriting profits in 2006, insurers have made money on underwriting in only two of the last 28 years and in just 10 of the past 47 years," Mr. Murray said. "Since 1990, including this year's profits on underwriting, insurers have suffered $294 billion in net losses on underwriting."

Moreover, while 2006 may have been a good year for property/casualty insurers, the 13.4% annualized rate of return on surplus through the first nine months still trails the ROE earned by Fortune 500 companies, Mr. Murray said.

"From 1983 through 2005...the Fortune 500 earned a 13.8% average GAAP (generally accepted accounting principles) return on net worth. During the same period, the rate of return for the property/casualty industry was only 8.3%. During those 23 years, the P/C industry only did better than the Fortune 500 in two of them: 1986 and 1987," Mr. Murray said.y