Profitability is likely to remain stalled as the industry continues to be wracked by sweeping change and a host of new players

Insurers face another year of overcapacity, low productivity, and unprofitable pricing. Consolidation, which is supposed to solve all three problems, will continue to keep everyone on edge. "A good case can be made that it's an industry in search of a future," says Bob Stein, head of Ernst & Young's national insurance-consulting group.

Competition in the property-casualty industry is driving down premiums, offsetting investment gains. Rating agency A.M. Best Co. says the sector will post pretax operating income of $14 billion in '97, down 22% from '96. Consultant Towers Perrin says U.S. companies' costs for business insurance--excluding health policies--fell for the third year in a row in '95, with more of the same expected through '97.

Property-casualty insurers' return on equity should be just 5% in 1997, according to A.M. Best, as bad as in 1994, the year of the Northridge (Calif.) earthquake. Says St. Paul Cos. Chairman and CEO D.W. Leatherdale: "The short-term picture is getting worse."

Life insurers are also in worse shape. Premium growth has barely exceeded the inflation rate for 10 years, and the typical life agent still sells only one policy a week, the same as 20 years ago. Although annuities and other investment-oriented insurance products are booming, their margins are low. Profits for life insurers should grow about 10% in 1997, to $18 billion, on revenues of $577 billion, up about 7.5%, says A.M. Best. But little of that is from new business: Most of the gains will come from investments.

No wonder life insurers will have a hard time competing with the nimbler mutual-fund industry in 1997. Analysts expect life insurers to fight back by finding new distribution outlets for their policies, such as banks and brokerages. Some may even buy investment companies, as Phoenix Home Life Mutual Insurance Co. did in 1995 by purchasing 60% of Duff & Phelps Corp.

Newcomers to insurance will keep looking for chances to buy assets on the cheap and wring out costs. Financier Sanford I. Weill bought Travelers Group Inc. in 1993, and in April, 1996, bought the property-casualty unit of Aetna Life & Casualty Co. for $4 billion. Weill says he remains a buyer, as does leveraged-buyout house Kolhberg Kravis Roberts & Co., which almost bought Xerox Corp.'s former insurance units in 1996 and remains flush with cash.

Then there's General Electric Co., whose capital-services business has been an aggressive acquirer of insurance companies. Jeffrey Sawyer, who heads Deloitte & Touche's insurance-consulting practice, says he expects further consolidation in 1997. "There's a vast middle ground of companies that are deer in the headlights," says Sawyer.

Another force for change is globalization. Few expect large global insurers to stay out of the U.S. market, the world's largest. If 1996 is any guide, this year should prove one of ever more turmoil for this once-staid industry.