Cochran, Caronia: Insurers to See Major Declines in Core Earnings Power

April 12, 2005

Property and casualty insurers will see dramatic declines in core earnings power beginning as early as this summer and extending into 2006, according to a new study by Cochran, Caronia Securities LLC, an insurance industry investment banking firm.

The study shows that the time between property casualty industry pricing cycles will shorten to two to three years instead of the eight year cycles of recent decades. Reduced ability to use finite reinsurance, increased scrutiny by rating agencies and an overall emphasis on transparency will hasten the shift from pricing peak to trough.

The study concludes that commercial and reinsurance sector earnings should be materially below expectations in 2006 and that valuation multiples will likely erode over the next 12 months.

According to the Cochran study, insurance companies will see cash flow in 2006 decline to $40 – $45 billion from an estimated $75 billion in 2004 and show a “surprising over reliance on investment income.”

“During good times, the industry has a cushion in which cash flow exceeds earnings by a wide margin,” said Adam Klauber, CFA and director of investment research for Cochran, Caronia & Co. “That cushion will shrink and you will see an industry shake-out over the next 12 to 18 months.”

“The firms to bet on will be those that have high cash flow and lower than average exposure to claims losses,” he said.

Copies of the Cochran analysis are available at no charge at www.cochran-caronia.com.

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