Cost of Growth: Brokerages and P&C Outpace Health Insurers in Tight Profit Race, SEC Filings Show

US insurance providers faced a significant profitability squeeze from 2021 to 2024, as the top 20 firms saw expenses rise 31% while earned premiums grew only 26%, resulting in a 14% decline in average net earnings. This pressure stems from escalating natural disaster claims, increased regulatory compliance costs, and substantial technology investments. However, segment performance diverged sharply, with insurance brokerages notably outperforming peers by posting a 40% increase in net earnings, while P&C insurers demonstrated more resilience than health insurers. Despite the overall decline in net earnings, diluted earnings per share for the top 20 providers actually increased, signaling a strong return for shareholders amidst challenging operational conditions.

Analysis

The U.S. insurance sector is navigating a period of significant margin compression, with the top 20 providers by market capitalization experiencing a 31% rise in average expenses between 2021 and 2024, which outpaced a 26% increase in earned premiums. This dynamic resulted in a 14% decline in average net earnings for this cohort. The primary drivers of these escalating costs are increased claim frequency from natural disasters, heightened regulatory and compliance burdens, and substantial investments in technology. However, a stark divergence in performance is evident across business segments. Insurance brokerages, including Marsh & McLennan and Arthur J. Gallagher, have excelled, posting a 40% surge in net earnings due to a commission-based model that is less exposed to underwriting risk. In contrast, direct insurers in the Property & Casualty (P&C) segment showed resilience with only a 3% dip in net earnings, while Health & Medical insurers' performance mirrored the top-20 average with a 14% earnings decline. Despite the drop in operational profitability, the top 20 providers collectively increased their total diluted EPS from $370 to $398 over the same period, signaling a strong focus on shareholder returns, likely through share repurchases, which masks some of the underlying operational pressure. These large players are also consolidating their dominance, capturing 75% of the total industry's net earnings in 2024, up from 69% in 2021.

Key Decisions for Investors

• Given their resilient business model and superior 40% net earnings growth, investors should consider overweighting exposure to insurance brokerages like Marsh & McLennan (MMC), Arthur J. Gallagher (AJG), and Brown & Brown (BRO).
• Within the underwriting space, favor best-in-class Property & Casualty (P&C) companies over a broad allocation to the Health & Medical segment, as P&C has demonstrated significantly better earnings resilience with only a 3% profit decline.
• Closely monitor the divergence between rising diluted EPS and falling net earnings, as this suggests shareholder returns may be supported by financial engineering like buybacks rather than core operational growth, which could pose a risk if unsustainable.
• Factor in persistent industry headwinds, including climate-related costs and regulatory pressures, which are forecast to limit overall finance and insurance industry revenue growth to a modest 2.5% annually through 2030.