US property and casualty insurers have had their most profitable year in almost three decades, turning an underwriting net profit of $5 billion. The bad news is one of the key drivers, strong pricing, has already started to deteriorate.
The great result followed several years of declines that ended with a disastrous 2001, and marked the third consecutive year of improving profits. The improvement, driven by higher prices, a favorable regulatory environment, and more restrictive underwriting, has produced a net profit after taxes of $39 billion. While that sounds like a great pile of cash, the 9.4% return on net worth doesn’t look quite as attractive when compared to other industries or historical results. One of the key reasons – the low rates of return on investment income.
By comparison, the industry had a 17.3% rate of return in 1987 with a combined ratio of 104.6, whereas the 2004 rate was 98.1. For those of us old enough to remember, interest rates and stock market returns were significantly higher in those days, allowing insurers to lose money on an underwriting basis and more than make up for it with investment income. It looks like those wonderful days of double digit returns aren’t coming back any time soon.
So, despite strong underwriting , a mostly favorable regulatory environment, and few very large catastrophic events, the industry can’t even come close to delivering the kinds of returns enjoyed by other sectors. Couple that with the recent evidence of softening prices and continued inability to even focus on, much less begin to control health care expenses, and one cannot be sanguine about the industry’s future results.
The net – if prices continue to soften, those insurers without discipline and a focus on medical expense management (for the lines impacted by medical costs) are in for a rough ride.
What does this mean for you?
Success if you stick to the fundamentals and finally do something about medical.

Reuters reports that Eliot Spitzer, NY Attorney General, is close to a settlement with AIG in the civil lawsuit filed by his office. This would be good news for both AIG and the insurance industry, which has been waiting for the proverbial “other shoe” to drop since the suit was filed earlier this year.
The most visible impact of the issue has been the departure of long-time CEO Hank Greenberg as well as the decline in stock price, with AIG’s stock down 17% (compared to the S&P’s 2 point drop) since the Valentine’s Day announcement. An equally significant, but perhaps less visible result is the loss of management attention on key business issues affecting the company. These include –
—continued major problems with AIG’s new medical bill document management program, exemplified by long delays in payment, lost bills, frustrated health care providers, and regulatory actions
— uncertain strategic direction at recent acquisition American General. AG’s target market definition seems to wander like the needle on a compass in an iron mine. This lack of focus is NOT typical to AIG.
That said, AIG is a very strong company with competent management. If their leaders can once again begin to focus on their business, and correct a decades-long underinvestment in information technology, then it will continue to succeed.
What does this mean for you?
Get crises resolved as fast as possible, and do NOT lose your focus on the franchise. Trite, but true.