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NEW YORK—While insurance industry returns this year likely won't reach last year's levels, there is reason to be optimistic about industry performance in the near term, according to some industry "outsiders" who gathered to discuss industry issues last month.

Moderating the "View from the Outside Looking In" panel at the annual Property/Casualty Insurance Joint Industry Forum in New York, Robert Hartwig, president and chief economist of the Insurance Information Institute, noted that 2006 was a record year for the property/casualty industry with its best return on equity in 20 years.

Driving those results was strong underwriting performance, he said.

"Overall I think the industry's returns probably peaked in 2006," said Jay Gelb, senior vp and senior nonlife insurance equity analyst at Lehman Bros. Inc. in New York. While much of the industry's 2006 performance reflects the year's low catastrophe losses, Mr. Gelb noted that going forward the industry will benefit from a strong balance sheet, leading him to project industry earnings growth of 10% to 13% through 2008.

Settling in

While growth in net written premiums is expected to be low in 2007, Matthew Mosher, group vp global property/casualty ratings at A.M. Best Co. Inc. in Oldwick, N.J., said he doesn't see that as a concern.

"I think what you're seeing is a type of settling," Mr. Mosher said. In commercial lines, insurers are still putting a considerable focus on risk even if there is downward pressure on pricing, he said.

"There's still more upside for P/C insurers' stocks," Mr. Gelb said. "Going forward, I would say the stocks still have room for upside, mainly because insurers' balance sheets are solid, earnings remain at good levels, there's still pricing power."

On the personal lines side, Brian Sullivan, editor of Risk Information Inc. in Dana Point, Calif., also said he is not concerned about personal lines price. "We've seen more pricing discipline, particularly in personal lines in the past five years, than I've seen in my entire career," he said.

Regarding the likelihood of industry consolidation in the near future, Mr. Gelb said he is seeing some activity in acquisition of renewal rights rather than outright company acquisition. "But when you think about it, basically I wouldn't be surprised to see the pace of acquisition activity increase in the next two or three years," he said.

Asked whether some companies are still too exposed to windstorm risk, Mr. Mosher said he thinks companies have improved their position in several ways.

"I think there are a lot of companies that have done a much better job of managing their exposure," Mr. Mosher said. In addition, many companies have done a better job in the quality of data they're capturing, paying attention to that data as well as managing their long-tail exposures.

On the subject of whether pricing is becoming too aggressive in commercial liability lines, Mr. Gelb said his company is seeing "slightly downward trends" in pricing for directors and officers and workers compensation coverage.

But a Lehman Bros. survey of 75 large buyers suggested that overall pricing will be flat and policy terms will remain restrictive. "The risk manager also expects a stable market. We heard that from 85% of the risk managers," the Lehman Bros. analyst said.

Mr. Mosher had a similar view, saying there has been some moderation in rates, but he doesn't see significant deterioration in terms and conditions or limits.

LOCAL RESPONSE

Responding to a question put to the panel about local reaction to industry profits, George Dale, Mississippi's commissioner of insurance, said each line of business has to stand on its own in each state and must deal appropriately with the local exposures.

"We in Mississippi don't want to be paying for forest fires in California," Mr. Dale said. "And California doesn't want to be paying for hurricanes that hit Bay St. Louis, Miss."

Since Katrina, Mr. Dale said his goals have been settling claims with policyholders and making sure the insurance industry continues to exist in Mississippi. Some of the "well-intentioned" politicians in his state don't seem to understand that second goal, he said.

Mr. Mosher said the new Democratic majority in Congress probably improves the chances of passing some extension of the federal terrorism reinsurance backstop. Mr. Gelb agreed, though he wondered whether a bill concerning federal insurance regulation would ever move forward.

"I think the opportunity for (Congressional passage of an) optional federal charter for property/casualty companies is zero," Mr. Sullivan said.

"In 2004 we had four large storms crush Florida. In 2005 we had two tremendous storms hit the Gulf. And we've seen almost nothing happen" in terms of a federal catastrophe plan or federal insurance regulation, Mr. Sullivan said.