After record year, P/C industry braces for soft market.

Pleased but not at ease is how the property and casualty insurance industry is reacting to its stellar performance in 2006.

After a record year in which the industry reaped an estimated $60 billion in profits, saw the best return on equity in roughly 20 years, as well as the most impressive combined ratio in about 60 years, caution and discipline remain the key words for most insurers in the new year and beyond.

At the Property/Casualty Insurance Joint Industry Forum in New York City in January, top insurance executives said they expect most businesses to slow down this year.

"We should not declare victory by any stretch of the imagination," said Martin Sullivan, chief executive of American International Group Inc., which saw its most recent quarterly profits in 2006 jump to $4.2 billion, from $1.75 billion the previous year. "The wind hasn't stopped blowing, the earth hasn't stopped shaking, and earthquakes are not seasonable."

James J. Schiro, chief executive officer of Zurich Financial Services said the industry still has a lot of work to do to improve returns, which estimates suggest were in the 14% to 14.5% range in 2006.

"Before we pat ourselves too hard on the back over these returns, think about the returns over the last 20 years. We shouldn't let regulators and consumer groups and everybody get too far ahead of themselves in terms of how these returns actually look," Schiro said.

There are also significant challenges ahead. In the personal lines market, for example, William J. Mullaney, president of MetLife Auto & Home, said he expects to see a continuing slow down. "We're not getting very much in the way of rate increases, and companies are starting to come on aggressively in terms of their pricing..."

Mullaney said the automobile market, which traditionally drives the industry's overall premium, could experience the price cuts.

But Paula Rosput Reynolds, the chief executive of Safeco Corp., said the kinds of price movements that are currently occurring in the auto market are based on the actuarial indications. "You don't see anybody making large moves on products. And really ... what logic would there be to try and get aggressive about something that has such a short tail to it," Reynolds said.

Currently, workers' compensation providers are also enjoying favorable trends. But Schiro said there are two big factors that could significantly impact this line of business. "One of them is medical claims costs and the other is tort reform. We have a new Congress that's going to deal with both issues--I hope. We have to wait and see before we get too enthusiastic," he said.

So, what does this all mean and is the insurance industry optimistic about its future?

Jeffrey Ludrof, president and chief executive officer of Erie Insurance Group, said he's optimistic because of the discipline he sees in the industry. "With a disciplined approach broadly across the industry, I think we have predictable behavior. And with predictable behavior and rational approach, I think we can make well-planned logical decisions and compete effectively."