Insurers Saw Record Gains in Year of Catastrophic Loss

Top executives described the profit -- an 18.7% increase over the previous year -- as a fluke, the product of gains in other lines of insurance besides homeowners and a very good year for their investments.

They said that even with the increase, insurers face deep problems that can be fixed only by substantial premium hikes, a scaling back of commitments by several firms to the most disaster-prone portions of the country and, according to some, a greatly expanded role for the state and federal governments in insuring individuals against the largest of catastrophes.

"Unless insurers can get relief, you're going to see a pullback by the private industry," warned Robert P. Hartwig, chief economist of the industry-funded Insurance Information Institute.

"We're not being good stewards of our investors' capital or our policyholders' surplus if we keep doing business where we can't make money."

In fact, the property casualty insurance industry, which provides homeowners and auto coverage, made a considerable sum despite paying tens of billions of dollars to policyholders as a result of Katrina, which is widely described as the largest insured disaster in U.S. history, and a string of other storms.

Besides boosting profits, the industry raised its surplus by more than 7% to nearly $427 billion, according to an analysis of company filings by the National Assn. of Insurance Commissioners, which represents regulators from the 50 states. The surplus is intended to provide a financial cushion in times of high claims.

The industry covered virtually all of its claims and expenses with premiums earned during the year rather than with surplus funds, according to the organization's analysis. The ratio of claims and expenses to premiums was among the lowest in three decades.

The question is: How, in a year that produced an estimated $56.8 billion in disaster losses, nearly twice the previous record and more than twice what insurers paid after the Sept. 11 attacks, is this possible?