The companies that provide Americans with their homeowners and auto insurance made a record $44.8-billion profit last year even after accounting for the claims of policyholders wiped out by Hurricane Katrina and the other big storms of 2005, according to the firms' filings with state regulators.

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. 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.

Boosting Profits
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?

The answer, in part, is that U.S. insurers purchased disaster insurance of their own before the 2005 storms, much of it from overseas firms. Executives said that half — and by some estimates, nearly two-thirds — of the insured losses from last year's hurricanes ultimately will be borne by so-called reinsures, many based in Bermuda and Europe.

In part, it's because of what Hartwig called the "anomaly" of so much of the 2005 storm damage being caused by flooding, which private insurers don't cover and instead rely on Washington to handle through the national flood insurance program.

Remarkable Performance But the industry's remarkable performance also reflects a dozen-year effort by insurers to insulate themselves from the most extreme financial consequences of catastrophe by, among other things, shifting risks previously borne by companies to policyholders and the public.

The effort started after the last big batch of natural disasters in the early 1990s, among them Hurricane Andrew in Florida in 1992, and the Oakland hills firestorm in 1991 and Northridge earthquake in 1994 in California.

The effort has included industry adoption of increasingly sophisticated techniques for analyzing catastrophic risk, as well as self-imposed limits on how much firms will cover and where. It also has included successful campaigns to get states or state-created entities to shoulder such dangers as earthquakes in California and wind in Florida, Texas, Hawaii and elsewhere. And it has involved tightening policy language — by, for example, narrowing the definition of "replacement cost" for homes — in ways that leave individuals bearing more of the burden of putting their material lives back together after trouble strikes.

While premiums for homeowners insurance have increased by more than half since the early 1990s, coverage, especially in disasters, has shrunk. Historically, insurers covered a little more than 60% of total losses in disasters, according to Hartwig, the industry economist. During the 2004 hurricanes in Florida, they covered less than 50%, according to Hartwig's numbers. During Katrina, he said, they covered about 30%, due in part to the high flood damage.

New Trends
In making these changes, the insurance industry has been part of a trend that has picked up steam as the U.S. economy has grown more competitive in recent decades — a shift of financial risks from business and often government to individual households.

"If last year's hurricane season had occurred 10 years ago, it would have been devastating for the company," said Allstate Vice President Fred F. Cripe in an interview. "Last year, it was merely disappointing."

Despite evidence of industry success in reducing its financial exposure in disasters, major insurers — most prominently Allstate — have announced a new round of risk-limiting steps, including approving no new homeowners policies along substantial stretches of the nation's East and Gulf coasts. Several have called for creation of state and federal funds to serve as financial backstops for the industry in the biggest disasters.

The new proposals have drawn fire from a wide variety of quarters. George K. Bernstein, appointed by President Nixon as the first administrator to oversee the government's flood, riot and crime insurance programs, said that private insurers had already pulled out of other risky lines of business.

If It’s not Broke: Why Fix It?
Among insurers, the consensus is that the industry is in the best shape it has been in years. Some argue against tampering with success.

"We've been through some of the worst natural disasters and man-made catastrophes in our history, and had some of the best earnings in the last 20 or 30 years," said Frank W. Nutter, president of the Reinsurance Assn. of America, a Washington trade group.

The Insurance industry covers establishments that collect premiums in exchange for providing financial benefits in the event of loss or injury. Common forms of insurance include life, health and medical, home and property, workers' compensation, automobile, retirement, and title insurance. The industry also includes reinsurance, the practice of insurance companies assuming risk for other insurers. In addition to direct providers of insurance services, the industry also includes brokers and agents that negotiate policies between clients and insurance companies, as well as industry support services such as independent inspectors and claims adjusters.

Life Insurance
Over the past year, the average stock value of the life insurance sector has increased 15.1 percent, according to investment research firm Value Line. Prudential Financial has seen the largest rise in value at more than 37 percent. Many life insurance companies currently have strong cash balances, enabling them to pursue strategies such as acquisitions and share buybacks.

Increased competition in the market is driving industry consolidation. In 2004, Manulife Financial acquired John Hancock Financial. In July 2005, MetLife completed its acquisition of Travelers Life & Annuity, creating the largest life insurance company in the United States. Lincoln National has announced plans to merge with Jefferson-Pilot Corporation in a deal expected to close in early 2006.

Increasing competition and rising interest rates may cut into earnings growth, however. Life insurance products have seen a rise in popularity over the past few years. In response, the number of companies in the market has increased. The increased competition limits the amount insurance companies can afford to raise the premiums they charge to customers. The Federal Reserve has also been incrementally raising the interest rate since June 2004, but long-term rates have remained low. Life insurance is generally a long-term investment. As raising rates reduce the difference between long- and short-term yields, the attractiveness of life insurance products could decline.

Health Insurance
Many Americans rely on their employers for health care converge. The burden this creates for employers is getting heavier. Health care costs are rising and many corporations are faced with growing number of retired employees receiving benefits as the US senior population increases. A proposed overhaul of the federal tax system could make insurance even more costly for employers to provide. A proposal introduced in November 2005 by the President's Advisory Panel on Federal Tax Reform would limit tax breaks for both employers and workers for health benefits to $11,500 of coverage for a family and $5,000 for an individual. Under the current law, there are no limits to the amount of coverage exempt from payroll and income taxes.

A complex new Medicare benefit known as Medicare Part D, operational as of January 1, 2006, is giving companies more options for offering drug insurance to their retirees. Many retirees can expect the plan to lower their monthly health premiums. To encourage employers to maintain drug coverage for their employees, Part D includes $71 billion in employer subsidies over eight years. But the law also allows companies to move a significant portion of retiree drug benefits over to Medicare, forcing the federal government to assume much of the obligation. As a result, some businesses are saving money by decreasing the coverage they provide to retirees.

The Blue Cross and Blue Shield Association intends to charter a bank that will administer high-deductible health plans and their related savings vehicles. While no Blue plan is required to use the new bank for health account administration, most are expected to shift health savings account administration from their current bank partners to the new bank. WellPoint Inc., the largest Blue Cross plan operator, said it plans to remain with its current bank partners, JPMorgan Chase & Co. and Mellon Financial Corp. The new bank is expected to open in the summer of 2006.

The new bank, operated directly by the Blue Cross and Blue Shield Association, would have the advantage of focusing fully on health coverage banking. With potentially lower administrative costs than a full service bank, the new operation will likely see more profit from health savings accounts than traditional banks. And there is clearly profit to be made - according to research from consulting firm Diamond Cluster International, health savings accounts may hold as much as $75 billion of assets by 2010.

The Blue Cross and Blue Shield Association has also entered a debit card co-branding agreement with Visa USA. The deal will allow local Blue Cross and Blue Shield companies to offer Blue-branded debit cards to insured employees of the insurance firm's clients. The cards can be attached to various types of accounts, such as tax-deferred flexible spending accounts, health reimbursement accounts, and health savings accounts.