American Family Reports a Loss

It's March, and that means that insurance companies have tallied up their results and reported them to either their stockholders, policyholders, and regulators. The publicly-traded companies such as Progressive and Allstate have already submitted their filings to the SEC a while back, but the mutual insurance companies (which are only required to submit reports to their state regulators and policyholders) have a little longer to do so.

American Family, an 80 year-old mutual insurance company based in Wisconsin was one of those companies, and its results reflected the tough times that many Midwestern insurers went through in 2008. Overall, the company lost $298 million in 2008, vs. booking a $82 million profit in 2007. Hurricane Ike (which surprised everyone by tearing its way up the Midwest after flattening Galveston and flooding Houston), harsh Winter snowstorms and tornadoes took their toll. While the company took in a whopping $5.8 billion in auto and home insurance premiums (it's one of the largest auto and home insurers in the country), it paid out $4.4 billion in claims and $2.2 billion in salaries and agent commissions. This means that American Family lost money on every policy it sold. Even $560 million of investment income and a small profit from its life insurance business wasn't enough to put the company into the black for the year.

Of course, the company is not going out of business anytime soon. "AmFam's" net worth totals over $4 billion, and the company has more than $11 billion of cash and investments available to pay claims. Policyholders may not be celebrating, however, as the company will want to avoid a repeat performance in 2009, and may try to raise rates, or at least become more picky. This situation is interesting, since policyholders literally own the company - they are imposing rate increases on themselves. Now, American Family policyholders probably don't feel like owners, and don't have the foggiest idea how to run an insurance company - that's what they hire management for - but people who are writing their PhD dissertations on game theory could probably find a rich trove of material here.