Insurer Financial Results: 2007

Executive Summary

The U.S. property/casualty insurance industry’s net income after taxes slipped $3.8 billion, or 5.8%, to $61.9 billion in 2007 from a record $65.8 billion in 2006. [1]1. This study defines the U.S. property/casualty industry as all private property/casualty insurers domiciled in the United States, including excess and surplus insurers and domestic insurers owned by foreign parents. The data in this report is based mainly on insurers’ statutory financial statements as supplied to ISO by April 9, 2008, and excludes foreign subsidiaries of U.S. insurance groups. All figures are represented net of reinsurance, unless otherwise noted. Throughout this report, figures may not balance because of rounding. As a result, the industry’s GAAP rate of return on average net worth (RONW) — a key measure of overall profitability — decreased to 10.7% in 2007 from 12.7% in 2006.[2]2. GAAP stands for Generally Accepted Accounting Principles, the accounting basis used by most industries. Unless otherwise stated, the figures in this report are based on Statutory Accounting Principles (SAP), the accounting basis used by insurers when preparing the Annual Statements they submit to state regulators.

Fueled primarily by the industry’s net income, policyholders’ surplus — insurers’ net worth measured according to Statutory Accounting Principles — increased $31.6 billion, or 6.5%, to a record $517.9 billion at year-end 2007 from $486.2 billion at year-end 2006.

ISO’s analysis reveals the declines in net income and overall profitability in 2007 were directly attributable to deterioration in underwriting results caused by weakness in premiums and increases in the costs of providing insurance protection. Net gains on underwriting dropped $12.1 billion to $19.0 billion last year from $31.1 billion in 2006. The industry’s statutory combined ratio — a key measure of losses and expenses per dollar of premium — deteriorated to 95.6% in 2007 from 92.4% the year before.

Despite the deterioration in underwriting results and the declines in net income and overall profitability in 2007, results for the property/casualty industry remained unusually strong. At 95.6% in 2007, the industry’s combined ratio was the second best since 1959, when ISO’s data begins. Similarly, at $61.9 billion in 2007, the industry’s net income was the second highest for any year since 1959, both before and after adjusting for inflation. And at 10.7% in 2007, the industry’s GAAP rate of return exceeded the industry’s average GAAP rate of return for the years 1971 to 2007 by 0.7 percentage points.[3]3. 1971 is the first year for which ISO has data for the property/casualty insurance industry’s GAAP rate of return on average net worth.

While the property/casualty insurance industry’s results for 2007 were unusually good compared with its past results, insurers once again failed to achieve rates of return commensurate with those of firms in other industries. The Fortune 500 consists of the 500 largest industrial and service corporations in the United States. ISO estimates that the median GAAP rate of return on average net worth for the Fortune 500 in 2007 was 16.5% —5.8 percentage points more than the GAAP rate of return for the property/casualty insurance industry as a whole and 4.5 percentage points more than the GAAP rate of return for large insurers.[4]4. ISO estimated the median GAAP rate of return on average net worth for the Fortune 500 using the median GAAP rate of return on year-end shareholders’ equity published by Fortune magazine. This study classifies an insurer as “large” if the insurer accounts for more than 0.5%of the industry’s net written premium. In 2007, thirty-six large insurers each wrote more than $2.2 billion in premiums.

Nonetheless, analysis of insurers’ results for the past few years and other data indicate that those results led to an escalation of competitive pressures and lower prices in many insurance markets, though conditions remained difficult in some coastal insurance markets exposed to hurricanes.

Net Income and Return on Net Worth

The industry’s $61.9 billion in net income in 2007 consisted of $72.7 billion in operating income and $9.0 billion in realized capital gains on investments, less $19.7 billion in income taxes.[5] 5.Throughout this report, unless stated otherwise, the phrase “income taxes” and the phrase “federal income taxes” both refer to federal and foreign income taxes as shown in insurers’ statutory Annual Statements.  (See Table 1.)

 

Operating income — the sum of net gains (losses) on underwriting, net investment income, and miscellaneous other income — fell $11.9 billion, or 14.1%, in 2007, primarily as a consequence of the $12.1 billion, or 38.9%, decline in net gains on underwriting last year. Net investment income rose $2.3 billion, or 4.5%, to $54.6 billion in 2007 from $52.3 billion in 2006. But miscellaneous other income fell $2.2 billion to –$1.0 billion last year from $1.2 billion the year before.[6]6. The $2.2 billion adverse swing in miscellaneous other income in 2007 reflects a special transaction in which one U.S. insurer assumed $9.3 billion in liabilities from a foreign entity in exchange for considerations valued at $7.1 billion, some tax benefits, and the opportunity to earn investment income on the funds held to pay down the liabilities.

Partially offsetting the decline in operating income, realized capital gains rose $5.4 billion to $9.0 billion in 2007 from $3.5 billion in 2006. In addition, income taxes fell $2.7 billion to $19.7 billion in 2007 from $22.4 billion in 2006.

The $3.8 billion decrease in net income after taxes in 2007 spurred a 2.1-percentage-point decrease in the property/casualty industry’s GAAP RONW to 10.7%. But in recent years, catastrophe losses, environmental and asbestos (E&A) losses, and changes in the adequacy of reserves for other claims have all had a significant effect on insurers’ reported financial results. ISO’s analysis indicates that, if not for abnormal catastrophe losses, E&A losses, and changes in reserve adequacy, the industry’s GAAP RONW would have fallen 4.5 percentage points to 10.2% in 2007 from 14.7% in 2006, instead of declining 2.1 percentage points to 10.7% from12.7%.[7]7. When calculating adjusted GAAP rates of return, ISO smoothed catastrophe losses, excluded E&A losses as defined for purposes of the Notes to Financial Statements included in the statutory Annual Statements insurers file with state regulators, and restated other losses to eliminate changes in reserve adequacy.

Adjusted for abnormal catastrophe losses, E&A losses, and changes in reserve adequacy, the industry’s GAAP RONW averaged 8.8% from1997 to 2007 — 1.1 percentage points more than the average RONW based on reported results. That is, the combined net effect of abnormal catastrophe losses, E&A losses, and changes in reserve adequacy from 1997 to 2007 was to lower rates of return by an average of 1.1 percentage points.

Further analysis reveals a long-term downward trend in insurers’ overall profitability. Using averages to smooth the effects of cycles and random shocks, the property/casualty insurance industry’s average GAAP RONW fell to 7.3% in the decade ending 2007 from 9.4% in the decade ending 1997 and 11.9% in the decade ending 1987.

Underwriting Results

The deterioration in underwriting results in 2007 reflects both weakness in premiums and growth in losses and other costs of providing insurance protection.

Net written premiums declined 0.6% in 2007 to $440.8 billion from $443.5 billion in 2006, with the decline in net written premiums last year being the first since 1960, when ISO’s premium growth data begins. Though net earned premiums rose $3.6 billion to $439.1 billion in 2007 from $435.5 billion in 2006, growth in net earned premiums slipped to 0.8% last year from 4.3% the year before.

Analysis of economic and market data indicates the weakness in premiums reflects softening in insurance markets resulting from insurers’ recent profitability and growth in insurers’ capacity as measured by growth in policyholders’ surplus. In particular, as net written premiums declined 0.6% in 2007, the gross domestic product of the United States increased 4.9%, with the gap between growth in premiums and growth in the economy widening to 5.5 percentage points in 2007 from 1.9 percentage points in 2006.[8]8. Changes in gross domestic product reflect both real growth in the economy and inflation. U.S. government Consumer Price Indexes (CPIs) for personal lines insurance also suggest insurers’ recent profitability and growth in capacity led to softening in insurance markets. Countrywide, the CPI for tenants’ and household insurance and the CPI for motor vehicle insurance both increased 0.4% in 2007 — far less than the 2.8% increase in the CPI for all items, the 3.5% increase in the CPI for motor vehicle repairs, and the 4.2% increase in the CPI for repair of household items.

ISO MarketWatch® data shows that premiums on renewals for all ISO MarketWatch commercial lines in December 2007 were 3.5% below year-ago levels.[9]9. ISO MarketWatch® tracks rates on renewals for commercial auto liability, commercial auto physical damage, products liability, premises and operations liability, businessowners, commercial fire, and commercial allied lines, by class and statistical territory. Among the ISO MarketWatch lines, decreases in premiums on renewals ranged from 0.6% for products liability to 6.4% for commercial fire coverage.

Annual averages of monthly ISO MarketWatch data show that premiums on renewals for commercial insurance policies rose 2.6% in 2004 but then declined 1.3% in 2005, 2.0% in 2006, and 3.3% in 2007.

As net written premiums declined last year, overall loss and loss adjustment expenses (LLAE) increased $14.8 billion, or 5.2%, to $298.6 billion in 2007 from $283.8 billion in 2006. Overall LLAE increased despite a decline in catastrophe losses. According to ISO’s Property Claim Services® (PCS®) unit, catastrophes occurring in 2007 caused $6.7 billion in direct insured losses to property (before reinsurance recoveries), down from the $9.2 billion in direct insured losses to property caused by catastrophes occurring in 2006.[10]10. The PCS® data for direct insured property losses from catastrophes cited in this study is on an accident-year basis, excludes loss adjustment expenses, and is for all insurers, including residual market insurers, as well as foreign insurers and reinsurers. The data about direct catastrophe losses is based on information available through May 19, 2008, and is subject to change as more information about the cost of settling claims from past catastrophes becomes available. Including additional development of losses from the catastrophic hurricanes of 2005 and loss adjustment expenses, ISO estimates that the net catastrophe LLAE included in insurers’ financial results fell to $7.2 billion in 2007 from $12.3 billion in 2006.[11]11. ISO’s estimate for the net catastrophe LLAE included in private U.S. insurers’ calendar-year 2007 results includes $0.2 billion in upward revisions to U.S. insurers’ estimates of their net LLAE at ultimate from the hurricanes of 2005.

ISO estimates that noncatastrophe LLAE increased $20.0 billion, or 7.4%, to $291.4 billion in 2007 from $271.4 billion a year earlier. Contributing to this increase, the LLAE incurred by mortgage and other financial guaranty insurers rose $8.6 billion to $10.8 billion in 2007 from $2.2 billion in 2006, consequent to problems in mortgage and other credit markets. Also contributing to the increase in noncatastrophe LLAE, newly incurred environmental and asbestos losses on policies written long ago rose to $3.1 billion in 2007 from $2.1 billion in 2006.

Moreover, Fast Track data compiled by ISO and other statistical agents indicates that increases in claim severity contributed to growth in overall LLAE, at least for the personal lines.[12] 12. Fast Track does not provide severity or frequency data for commercial lines Based on Fast Track data, paid claim severity for private passenger auto bodily injury liability increased 6.0% in 2007, and homeowners paid claim severity (excluding catastrophe losses) jumped 9.8%. In addition, Fast Track data shows increases in claim frequency for some personal lines and coverages. For example, homeowners paid claim frequency (excluding catastrophe losses) climbed 3.2% in 2007.

Other underwriting expenses — primarily acquisition expenses; other expenses associated with underwriting, pricing, and servicing insurance policies; and premium taxes — also rose in 2007 as net written premiums declined. Other underwriting expenses increased $1.9 billion, or 1.6%, to $119.0 billion last year from $117.1 billion in 2006.

Partially offsetting the increases in LLAE and other underwriting expenses, dividends to policyholders fell to $2.4 billion in 2007 from $3.4 billion the year before.

Nonetheless, even with the deterioration in underwriting results last year, underwriting remained unusually profitable. At 95.6% in 2007, the combined ratio was 8.4 percentage points less than the average combined ratio for the forty-nine years from 1959 to 2007. But lower investment yields and financial leverage mean that combined ratios must now be better than they were in the past for insurers to achieve the same level of overall profitability they once did. For example, the industry’s 10.7% GAAP RONW for 2007 was 6.6 percentage points less than the 17.3% GAAP RONW for 1987, even though the 95.6% combined ratio for 2007 was 9.1 percentage points better than the 104.6% combined ratio for 1987.

ISO’s analysis indicates that, if not for abnormal catastrophe losses, E&A losses, and changes in reserve adequacy, the industry’s combined ratio would have risen 7.6 percentage points to 96.5% in 2007 from 89.0% in 2006, instead of increasing 3.2 percentage points to 95.6% from 92.4%.[13]13. When calculating adjusted combined ratios, ISO smoothed catastrophe losses, excluded E&A losses as defined for purposes of the Notes to Financial Statements included in the statutory Annual Statements insurers file with state regulators, and restated other losses to eliminate changes in reserve adequacy.

Adjusted for abnormal catastrophe losses, E&A losses, and changes in reserve adequacy, the combined ratio averaged 101.6% from 1997 to 2007 — 1.7 percentage points less than the 103.2% average combined ratio based on reported results. That is, the net effect of abnormal catastrophe losses, E&A losses, and changes in reserve adequacy from 1997 to 2007 was to raise combined ratios by an average of 1.7 percentage points.

Analysis of data since 1970 reveals a long-term slowing in premium growth and a long-term increase in combined ratios. During the thirty-eight years from 1970 to 2007, net written premiums rose an average of 7.4% per year and the combined ratio averaged 105.1%. But during the nineteen years from 1989 to 2007, premiums rose an average of 4.2% per year — less than half of the 10.8% average annual rate of increase in premiums during the nineteen years from 1970 to 1988. And even with the unusually low combined ratios for 2006 and 2007, the average combined ratio for the nineteen years ending 2007 was 105.6% — 1.1 percentage points more than the 104.5% average combined ratio for the nineteen years ending 1988. The long-term slowing in premium growth and the long-term increase in combined ratios may have contributed to the long-term downward trend in insurers’ overall rates of return.

Investment Income

Reported net investment income grew $2.3 billion to $54.6 billion in 2007 from $52.3 billion in 2006. But growth in investment income slowed to 4.5% in 2007 from 5.2% in 2006, as the yield on insurers’ average holdings of cash and invested assets edged down to 4.4% from 4.5%. In turn, the decline in the yield on cash and invested assets reflects trends in interest rates, with the average yield on ten-year Treasury notes receding to 4.6% in 2007 from 4.8% the year before. If not for the decline in the yield on cash and invested assets, investment income would have increased at the same rate as insurers’ average holdings of cash and invested assets, which rose 6.3% in 2007.

Further analysis reveals a long-term slowing in the growth of investment income, with the average rate of growth in investment income dwindling to 2.8% per year in the decade ending 2007 from 5.6% per year in the decade ending 1997 and 15.2% per year in the decade ending 1987. The long-term slowing in the growth of investment income mirrors trends in interest rates and associated declines in the yield on insurers’ cash and invested assets. The average yield on ten-year Treasury notes fell to 4.9% in the ten years ending 2007 from 7.3% in the ten years ending 1997 and 10.6% in the ten years ending 1987, as the average yield on insurers’ cash and invested assets dropped to 4.6% from 6.3% and 7.4%.

The long-term slowing in the growth of investment income also reflects trends in insurers’ holdings of cash and invested assets. The rate of growth in insurers’ average holdings of cash and invested assets slowed to 5.3% per year in the decade ending 2007 from 8.1% per year in the decade ending 1997 and 12.6% per year in the decade ending 1987.

Capital Gains

Combining insurers’ $9.0 billion in realized capital gains in 2007 with their $0.5 billion in unrealized capital losses, insurers posted $8.4 billion in overall capital gains last year — down 65.0% from $24.1 billion in 2006. The decline in overall capital gains stems from developments in financial markets. In 2007, the S&P 500 index of common stock prices rose 3.5% — less than a third of the 13.6% increase in the S&P 500 in 2006.

In 2007, insurers’ capital gains on common stocks amounted to an estimated 4.0% of the value of common stocks held by insurers at the start of the year — 0.5 percentage points more than the increase in the S&P 500 last year. Analysis of data extending back to 1980 reveals a high correlation between changes in the S&P 500 and insurers’ capital gains on common stocks. The S&P 500 rose in twenty-two of the twenty-eight years from 1980 to 2007, and insurers posted capital gains on common stocks during each of those years. Conversely, the S&P 500 declined in six of the twenty-eight years ending 2007, and insurers posted capital losses on common stocks in five of those years. But insurers’ capital gains on common stocks have tended to fall short of increases in the S&P 500. From 1980 to 2007, increases in the S&P 500 averaged 9.8% per year, and insurers’ capital gains on common stocks averaged 8.8% of the value of their holdings at the start of each year.

Policyholders’ Surplus and Leverage

The property/casualty industry’s $517.9 billion in policyholders’ surplus at year-end 2007 was a record high, both before and after adjusting for inflation. On an inflation-adjusted basis, surplus at year-end 2007 was 3.6% more than surplus at year-end 2006, the previous record.

But growth in surplus dropped to $31.6 billion last year from $60.5 billion the year before. Additions to surplus last year included $61.9 billion in net income after taxes and $3.2 billion in new funds paid in. Those additions were partially offset by $0.5 billion in unrealized capital losses on investments, $32.0 billion in dividends to stockholders, and $0.9 billion in miscellaneous charges against surplus. (See Table 2.)

 

The biggest contributor to the slowing in the growth of surplus was a $21.1 billion adverse swing to $0.5 billion in unrealized capital losses on investments in 2007 from $20.6 billion in unrealized capital gains on investments in 2006. Other factors contributing to the slowing in the growth of surplus include the aforementioned decline in net income after taxes, a $7.3 billion increase in dividends to stockholders, and a $0.6 billion decline in new funds paid in. Partially negating those developments, miscellaneous charges against surplus receded to $0.9 billion in 2007 from $4.9 billion in 2006.

Leverage ratios, such as the premium-to-surplus ratio and the LLAE-reserves-to-surplus ratio, provide simple measures of how much risk each dollar of surplus supports. The industry’s premium-to-surplus ratio fell to a near-record-low 0.85 last year from 0.91 in 2006 and a cyclical peak of 1.30 in 2002. The LLAE-reserves-to-surplus ratio also declined in 2007, falling to 1.03 in 2007 from 1.06 in 2006 and a cyclical peak of 1.38 in 2002.

Since rising to a record-high 2.75 in 1974, the premium-to-surplus ratio has been trending downward. The average premium-to-surplus ratio fell to 1.01 in the decade ending 2007 from 1.34 in the decade ending 1997 and 1.90 in the decade ending 1987.

The average LLAE-reserves-to-surplus ratio declined to 1.16 in the ten years ending 2007 from 1.79 in the ten years ending 1997 and 1.94 in the ten years ending 1987.

With premium-to-surplus and LLAE-reserves-to-surplus ratios now significantly lower than they were in the past, the industry’s ability to meet its financial obligations may have improved with the passage of time. But these simple leverage ratios are often misleading. To the extent that they are affected by changing prices in insurance markets and changes in reserve adequacy, the trends in these leverage ratios are imperfect indicators of changes in insurers’ financial condition. In addition, increases in the number and value of properties in areas exposed to hurricanes and other natural catastrophes mean that insurers must now hold more capital just to be as financially secure as they were before the buildup. Nonetheless, to the extent that the long-term declines in premium-to-surplus and LLAE-reserves-to-surplus ratios mean that insurers are holding more capital relative to the risks they have underwritten, insurers may be using capital less efficiently than they did in the past.

The ratio of cash and invested assets to surplus provides a measure of financial leverage affecting the contribution of investment income to insurers’ overall rate of return. All else being equal, the higher the ratio, the bigger the contribution of investment income to insurers’ overall rate of return. The ratio of cash and invested assets to surplus declined from a peak of 4.27 in 1974 to 2.39 in both 1998 and 1999. That ratio then rose to 2.89 in 2002 and subsequently fell to 2.44 in 2007. Because of the decline in financial leverage since the mid-1970s and the long-term downward trend in investment yields, underwriting results like those produced in the past will now result in lower overall rates of return than they once did.

Operating Cash Flow

Operating cash flow (OCF) indicates the rate at which basic underwriting and investment operations generate cash to fund new investments, dividend payments to stockholders, or other activities.[14]14. Operating cash flow is the sum of underwriting cash flow, net investment income received, and other income received, minus taxes paid.

OCF decreased to an estimated $69.6 billion in 2007 from $84.8 billion in 2006 and a record-high $89.9 billion in 2004.[15]15. ISO’s OCF data extends back to 1979. The $15.1 billion decrease in OCF last year is largely a consequence of an $8.8 billion decrease in net underwriting cash flow to an estimated $40.0 billion in 2007 from $48.8 billion in 2006. Other contributing factors include a decline in other income received and an increase in income taxes paid (a cash outflow). Other income received fell $2.6 billion to –$1.7 billion in 2007 from $0.9 billion the year before. Income taxes paid increased to an estimated $25.8 billion last year from $19.7 billion in 2006. Partially offsetting those developments, net investment income received rose $2.3 billion to $57.1 billion last year from $54.7 billion in 2006.

OCF ratios measure operating cash flow as a percentage of net written premiums, providing an indicator of free cash flow relative to net sales. The industry’s OCF ratio fell to an estimated 15.8% in 2007 from19.1% in 2006. From 1980 to 2007, the industry’s OCF ratio averaged 13.4%. But OCF as a percentage of written premiums varied from a high of 24.2% in 1986, the peak of a historic hard market, to a low of 2.7% in 1999, when underwriting cash flow was –$25.0 billion.

Comparisons with Other Industries

In all but two of the twenty-five years from the start of ISO’s data for the Fortune 500 in 1983 to 2007, the rate of return for the Fortune 500 exceeded the rates of return for both the property/casualty insurance industry overall and large property/casualty insurers.[16]16. The exceptions were 1986 and 1987. From 1983 to 2007, the estimated RONW for the Fortune 500 averaged 14.0% — 5.5 percentage points more than the 8.5% average RONW for the entire property/casualty insurance industry and 5.1 percentage points more than the 8.9% average RONW for large property/casualty insurers.

Analyses in this study also compare property/casualty insurers’ profitability with that of firms in a broad array of other industries, using COMPUSTAT® data obtained from Standard & Poor’s Institutional Market Services.[17]17. Standard & Poor’s Institutional Market Services COMPUSTAT® database includes information on several hundred industries. This analysis is based on data only for the industries for which sufficient information was available for all the years in each period studied. Including industries for which sufficient information was available for only some years might have distorted the results. During the ten years from 1997 to 2006 (the latest year for which complete COMPUSTAT data was available), the RONW for the property/casualty insurance industry averaged 7.3% — 3.6 percentage points less than the 10.9% RONW for 308 other industries. In a ranking from most to least profitable during that ten-year period, property/casualty insurance ranked 223 out of 309 industries. The results were similar when ISO lengthened the analysis to include the ten years from1987 to 1996.

Other Analyses

Additional analyses in this study report on:

  • the performance of insurance stocks;
  • reinsurers’ results and how they compare with those of the insurance industry overall; and
  • underwriting results by line of business.

1. This study defines the U.S. property/casualty industry as all private property/casualty insurers domiciled in the United States, including excess and surplus insurers and domestic insurers owned by foreign parents. The data in this report is based mainly on insurers’ statutory financial statements as supplied to ISO by April 9, 2008, and excludes foreign subsidiaries of U.S. insurance groups. All figures are represented net of reinsurance, unless otherwise noted. Throughout this report, figures may not balance because of rounding.

2. GAAP stands for Generally Accepted Accounting Principles, the accounting basis used by most industries. Unless otherwise stated, the figures in this report are based on Statutory Accounting Principles (SAP), the accounting basis used by insurers when preparing the Annual Statements they submit to state regulators.

3. 1971 is the first year for which ISO has data for the property/casualty insurance industry’s GAAP rate of return on average net worth.

4. ISO estimated the median GAAP rate of return on average net worth for the Fortune 500 using the median GAAP rate of return on year-end shareholders’ equity published by Fortune magazine. This study classifies an insurer as “large” if the insurer accounts for more than 0.5%of the industry’s net written premium. In 2007, thirty-six large insurers each wrote more than $2.2 billion in premiums.

5. Throughout this report, unless stated otherwise, the phrase “income taxes” and the phrase “federal income taxes” both refer to federal and foreign income taxes as shown in insurers’ statutory Annual Statements.

6. The $2.2 billion adverse swing in miscellaneous other income in 2007 reflects a special transaction in which one U.S. insurer assumed $9.3 billion in liabilities from a foreign entity in exchange for considerations valued at $7.1 billion, some tax benefits, and the opportunity to earn investment income on the funds held to pay down the liabilities.

7. When calculating adjusted GAAP rates of return, ISO smoothed catastrophe losses, excluded E&A losses as defined for purposes of the Notes to Financial Statements included in the statutory Annual Statements insurers file with state regulators, and restated other losses to eliminate changes in reserve adequacy.

8. Changes in gross domestic product reflect both real growth in the economy and inflation.

9. ISO MarketWatch® tracks rates on renewals for commercial auto liability, commercial auto physical damage, products liability, premises and operations liability, businessowners, commercial fire, and commercial allied lines, by class and statistical territory.

10. The PCS® data for direct insured property losses from catastrophes cited in this study is on an accident-year basis, excludes loss adjustment expenses, and is for all insurers, including residual market insurers, as well as foreign insurers and reinsurers. The data about direct catastrophe losses is based on information available through May 19, 2008, and is subject to change as more information about the cost of settling claims from past catastrophes becomes available.

11. ISO’s estimate for the net catastrophe LLAE included in private U.S. insurers’ calendar-year 2007 results includes $0.2 billion in upward revisions to U.S. insurers’ estimates of their net LLAE at ultimate from the hurricanes of 2005.

12. Fast Track does not provide severity or frequency data for commercial lines

13. When calculating adjusted combined ratios, ISO smoothed catastrophe losses, excluded E&A losses as defined for purposes of the Notes to Financial Statements included in the statutory Annual Statements insurers file with state regulators, and restated other losses to eliminate changes in reserve adequacy.

14. Operating cash flow is the sum of underwriting cash flow, net investment income received, and other income received, minus taxes paid.

15. ISO’s OCF data extends back to 1979.

16. The exceptions were 1986 and 1987.

17. Standard & Poor’s Institutional Market Services COMPUSTAT® database includes information on several hundred industries. This analysis is based on data only for the industries for which sufficient information was available for all the years in each period studied. Including industries for which sufficient information was available for only some years might have distorted the results.