Rising Costs and Their Impact on Insurance Companies' Earnings

Sources of Rising Costs in the Insurance Industry

Inflation, increased loss costs, and rate hikes in auto and homeowners insurance are key sources of rising costs in the insurance industry. Companies like Travelers, AIG, Allstate, Chubb, and Progressive are experiencing these pressures, leading to higher premiums and adjustments in pricing strategies.

"In Business Insurance, net favorable PYD of $34 million resulted from approximately $300 million of better than expected loss experience in workers' comp across a number of accident years, largely offset by about $250 million of strengthening in general liability driven by Umbrella for accident years 2021 through 2023." --- (TRV, earning call, 2024/Q2)

"While the impact of rising interest rates on our General Insurance segment increases the benefit of investment income, the current and medium-term inflationary environment may also translate into higher loss cost trends." --- (AIG, sec filing, 2024/Q1)

"Let's review the broad-based profit improvement on Slide 3. So revenues were $15.3 billion in the first quarter, reflecting a 10.9% increase in Property-Liability earned premium and that, of course, was primarily due to kick rate increases in both auto and homeowners insurance." --- (ALL, earning call, 2024/Q1)

"Our homeowners pricing was up 14.6% in the quarter, while the loss-cost trend remains steady at 10.5%.Turning to our International General Insurance operations, net premiums were up over 16.5% in constant dollar." --- (CB, earning call, 2024/Q2)

"The growth in personal auto, commercial auto, and Property primarily reflected rate increases taken throughout 2023, in response to rising loss costs, that continued to be earned through the first quarter 2024." --- (PGR, sec filing, 2024/Q1)

Impact on Underwriting Margins and Claims Expenses

Rising costs are impacting underwriting margins and claims expenses through various factors such as loss cost trends, reinsurance costs, and premium adjustments (TRV). Companies like Allstate are countering this by raising rates and reducing expenses (ALL). Chubb focuses on maintaining reasonable margins despite increasing loss costs (CB).

"Underlying underwriting margins can be impacted by a number of factors, including variability in non-catastrophe weather, large loss and other loss activity; changes in current period loss estimates resulting from prior period loss development; changes in loss cost trends; changes in business mix; changes in reinsurance coverages and/or costs; premium adjustments; and variability in expenses and assessments." --- (TRV, sec filing, 2024/Q2)

"Allstate Protection auto insurance results reflect execution of a comprehensive plan to restore margins through higher rates, lower expenses, underwriting actions and claims process enhancements." --- (ALL, press release, 2024/05/01)

"We are trading growth for a reasonable underwriting margin. We are trending financial lines loss-costs at just over 5%.On the consumer side of North America, our high net-worth personal lines business had another outstanding quarter, with premium growth of over 12%, including new business growth of 30%." --- (CB, earning call, 2024/Q2)

"These ratios are relative measurements that describe, for every $100 of net premiums earned, the amount of losses and loss adjustment expenses (which for General Insurance excludes net loss reserve discount), and the amount of other underwriting expenses that would be incurred." --- (AIG, sec filing, 2024/Q1)

"All of our Property policies have 12-months terms. B. Profitability Profitability for our underwriting operations is defined by pretax underwriting profit or loss, which is calculated as net premiums earned plus fees and other revenues less losses and loss adjustment expenses, policy acquisition costs, and other underwriting expenses." --- (PGR, sec filing, 2024/Q1)

Effect on Investment Income

Investment income for insurance companies has risen due to higher yields, increased reinvestment rates, and strong operating cash flow. Companies like Allstate, Travelers, AIG, and Chubb have reported significant gains in net investment income, driven by their fixed income portfolios and strategic financial management.

"Investment income increased primarily due to higher yields and extension of fixed income maturities over the last 18 months." --- (ALL, press release, 2024/05/01)

"Core income of $1.096 billion increased $126 million, primarily due to higher net investment income and a higher underlying underwriting gain, partially offset by higher catastrophe losses." --- (TRV, press release, 2024/04/17)

"General Insurance net investment income on an APTI basis was $762 million, an increase of 2% from the prior year quarter driven by higher reinvestment rates from fixed maturity securities and loans, partially offset by lower alternative investment returns, particularly private equity, and a reduction in assets due to the 2023 divested businesses." --- (AIG, press release, 2024/05/01)

"• Pre-tax net investment income was $1.4 billion compared with $1.1 billion in the prior year period, primarily due to strong operating cash flow, higher reinvestment rates on fixed maturities, and the consolidation of Huatai Group." --- (CB, sec filing, 2024/Q1)

"Our high-quality investment portfolio continued to perform well, generating after-tax net investment income of $727 million, driven by strong and reliable returns from our growing fixed income portfolio and higher returns from our non-fixed income portfolio." --- (TRV, press release, 2024/07/19)

Rising Operational Costs and Their Impact

Rising operational costs, driven by higher catastrophe losses, have significantly impacted insurance companies' earnings. Chubb's combined ratio increased by 4.2 percentage points, while Allstate faced $731 million in catastrophe losses, leading to premium rate adjustments.

"The combined ratio increased 4.2 percentage points, due to higher catastrophe losses. Global Reinsurance: Net premiums written increased 40.3% to $411 million and included a 12.5 percentage point benefit related to a large structured transaction. Life Insurance: Net premiums written were $1.58 billion, up 24.5%, or 27.6% in constant dollars, with growth of 31.7% in International Life and 12.0% in Combined Insurance North America. All comparisons are with the same period last year unless otherwise specifically" --- (CB, press release, 2024/07/23)

"Total catastrophe losses for the first quarter were $731 million, pre-tax. Rate increases for Allstate brand auto insurance resulted in a premium impact of 0.9% for the month of March and 2.4% year-to-date." --- (ALL, press release, 2024/04/18)

Regulatory Changes and Their Impact on Earnings

Regulatory changes can significantly impact insurance companies' earnings by affecting cash flows, interest rates, and premium rates. Companies like Progressive, AIG, Allstate, and Travelers acknowledge the need to adapt to regulatory shifts, which can alter market conditions, premium calculations, and overall financial stability.

"We believe cash flows will remain positive in the reasonably foreseeable future and do not expect we will have a need to raise capital to support our operations in that timeframe, although changes in market or regulatory conditions affecting the insurance industry, or other unforeseen events, may necessitate otherwise." --- (PGR, sec filing, 2024/Q1)

"For additional information on the impact of market interest rate movement on our Life and Retirement business, see Executive Summary – Regulatory, Industry and Economic Factors – Impact of Changes in the Interest Rate Environment and Equity Markets." --- (AIG, sec filing, 2024/Q1)

"And we are walking in regulated markets. So when a regulator comes and says that you need to change this, we do this exactly as you do and we feel your pain and we know what you're going for. So we are working with them in Level I and not from here." --- (ALL, Investor Day, 2024/06/25)

"When business renews, the amount of net written premiums associated with that business may increase or decrease (renewal premium change) as a result of increases or decreases in rate and/or insured exposures, which the Company considers as a measure of units of exposure (such as the number and value of vehicles or properties insured)." --- (TRV, sec filing, 2024/Q1)

"Risk Factors – Regulation in the 2023 Annual Report. Impact of Changes in the Interest Rate Environment and Equity Markets" --- (AIG, sec filing, 2024/Q1)

Impact on Customer Premiums and Retention

Rising costs have led to increased customer premiums across the insurance industry, with companies like Chubb, Travelers, Allstate, and Progressive reporting higher net written premiums driven by rate increases and strong retention. Despite these cost pressures, retention rates remain high, indicating customer loyalty amidst premium hikes.

"The increase in consolidated net premiums written for the three months ended March 31, 2024, reflects growth across most product lines driven by strong premium retention, including rate and exposure increases, and strong new business." --- (CB, sec filing, 2024/Q1)

"In Business Insurance, we grew net written premiums by 9% to $5.6 billion. Renewal premium change in the segment remained very strong at 10.6%, while retention remained high at 86% and new business increased 8% to a record $691 million." --- (TRV, press release, 2024/04/17)

"Allstate brand net written premiums increased 13.9% compared to the prior year quarter, primarily driven by implemented rate increases and policies in force growth due to strong new business growth and higher retention." --- (ALL, press release, 2024/05/01)

"Year-over-year changes in our core commercial auto products were as follows: Growth Over Prior Year Quarter 2024 2023 Applications New 2 % 2 % Renewal 0 7 Written premium per policy 10 1 Policy life expectancy Trailing 12 months (15) (14) The increases in net premiums written in our Commercial Lines business reflected growth in all of our BMTs, except our for-hire transportation BMT, which continued to be adversely impacted by challenging freight market conditions that have continued to cause a decline in the active number of motor carriers in this BMT." --- (PGR, sec filing, 2024/Q1)

"Premiums Net premiums written increased $401 million, or 9.4 percent, for the three months ended March 31, 2024, reflecting strong new business and retention, including rate and exposure increases." --- (CB, sec filing, 2024/Q1)

Role of Technology in Managing Rising Costs

Insurance companies are leveraging technology to manage rising costs by rapidly deploying new solutions, innovating product development through IT, and investing in backend process improvements. This approach helps them stay ahead of trends and enhance operational efficiency.

"And they've done that by introducing a technology that is rapidly deployed. For example, in the last 2 years, on average, every quarter, we were able to launch 5 new accounts." --- (ALL, event transcript, 2024/06/25)

"With that, we're always trying to stay ahead of the trends. So think of in the direct channel, think of usage-based insurance, all those things, even though they're -- they become actually a part of the product, they start with IT and our ability to have innovative technology." --- (PGR, earning call, 2024/Q1)

"So it requires that level of sophistication, but we have been investing in technology to start the back end to make that a lot quicker." --- (ALL, Investor Day, 2024/06/25)

Future Outlook and Predictions

Allstate anticipates significant future benefits from its strategic shift to an enterprise-level product strategy, leveraging its scale and capabilities. Additionally, the company's diverse portfolio and broad customer base are expected to drive substantial growth potential, despite rising costs.

"In summary, the shift to an enterprise level approach to product strategy represents a significant evolution in how we operate, allowing us to lean into our strengths, take advantage of our scale and growing capabilities and optimize our returns to achieve greater overall success.While relatively early days, we're excited by the progress we're already seeing and expect to see greater benefits into the future." --- (ALL, Investor Day, 2024/06/25)

"So I think the combination of diversity and deep breadth of portfolio and products and customers is what makes this opportunity truly unique and the potential is, in our opinion, enormous into the future." --- (ALL, Investor Day, 2024/06/25)