Rising Interest Rates: Effects on Insurance Premiums and Investment Income

Impact on Insurance Premiums

Rising interest rates have led to increased insurance premiums, with Allstate reporting a 3.4% year-to-date premium impact. Competitive and economic conditions also influence premiums, as noted by Travelers. Hartford's pricing strategy considers future net investment income, which is affected by interest rates.

"Rate increases for Allstate brand homeowners insurance have resulted in a premium impact of 0.7% for the month of March and 3.4% year-to-date." --- (ALL, press release, 2024/04/18)

"Net written premiums from both renewal and new business, and therefore earned premiums, are impacted by competitive market conditions as well as general economic conditions, which, particularly in the case of Business Insurance, affect audit premium adjustments, policy endorsements and mid-term cancellations." --- (TRV, sec filing, 2024/Q2)

"The Company seeks to price its insurance policies such that insurance premiums and future net investment income earned on premiums received will cover underwriting expenses and the ultimate cost of paying claims reported on the policies and provide for a profit margin." --- (HIG, sec filing, 2024/Q1)

"During the first quarter 2024, on a year-over-year basis, average written premium per policy grew 14% in personal auto, 10% in core commercial auto, and 2% in Property." --- (PGR, sec filing, 2024/Q1)

"The underlying combined ratio of 85.3 improved by 7.6 points compared to the prior year quarter with the improvement driven by higher average earned premium and moderating loss cost trends.Prior year reserve re-estimates, excluding catastrophes, had only a minor impact on current quarter results as favorable development in personal auto and homeowners insurance offset increases in personal umbrella liabilities and commercial auto reserves related to the transportation network contracts we began exiting in late 2022.Turning to Slide 5." --- (ALL, earning call, 2024/Q2)

Effects on Investment Portfolios

Rising interest rates impact investment portfolios by necessitating diversified strategies to manage credit risk and exposure (HIG). They significantly affect investment returns, fee income, and net investment spreads (AIG). Expanding investment options enhance portfolio diversification and output (PRU). Companies maintain sufficient marketable securities to cover obligations (PGR), and well-positioned portfolios with modest credit losses and effective hedging (MET).

"The Company manages its credit risk by managing aggregations of risk, holding a diversified mix of issuers and counterparties across its investment, reinsurance and insurance portfolios and limiting exposure to any specific reinsurer or counterparty." --- (HIG, sec filing, 2024/Q2)

"Changes in the interest rates, credit spreads and equity market environment can have a significant impact on investment returns, fee income, advisory and other income, guaranteed income features, and net investment spreads, and a moderate impact on sales and surrender rates." --- (AIG, sec filing, 2024/Q1)

"And in addition, the investment options that are available to the industry are expanding and they're providing opportunities to grow investment capabilities while enhancing portfolio diversification and generating greater output from our portfolio as well." --- (PRU, earning call, 2024/Q1)

"Based on our portfolio allocation and investment strategies, we believe that we have sufficient readily available marketable securities to cover our claims payments and short-term obligations in the event our cash flows from operations were to be negative." --- (PGR, sec filing, 2024/Q1)

"Overall, the investment portfolio remains well positioned. Credit losses continued to be modest and our hedging program performed as expected." --- (MET, earning call, 2024/Q1)

Overall Profitability Impact

Insurance companies are experiencing improved profitability across various lines, including special lines, auto, and National General business, driven by favorable combined ratios, strong growth, and strategic pivots towards profitable growth. This trend is evident in companies like Progressive, Allstate, AIG, Travelers, and Hartford Financial Services Group.

"The special lines profitability during the first quarter contributed just over a 1 point favorable impact to our total Personal Lines combined ratio." --- (PGR, sec filing, 2024/Q1)

"And then I think it's important to point out in National General, we continue to see really strong growth in that business along with really strong profitability that we're encouraged by." --- (ALL, earning call, 2024/Q1)

"Only one? Yes, you only get one. And it will be hard for you. Okay. It'll be underlying profitability including cap Because it's like it's you premium out the door to us and then you got losses going out to pay losses and we want to drive profitability in the company." --- (AIG, conference, 2024/05/29)

"But I think that both of those things, I think, demonstrate that what you're seeing is improved profitability in auto across the industry and a pivot towards profitable growth very consistent with the conversation and the messaging that we're sharing. Unidentified Analyst: Thank you." --- (TRV, earning call, 2024/Q2)

"Moving to Personal Lines. Our first quarter financial performance demonstrates progress towards restoring targeted profitability in auto, as we continue to address current loss trends." --- (HIG, earning call, 2024/Q1)

Demand for Insurance Products

The demand for insurance products is influenced by the introduction of new offerings, such as Travelers' new automobile insurance product, and various factors impacting new business premiums, including product modifications and competitive changes. Additionally, Prudential highlights Pension Risk Transfer as a significant growth driver.

"One thing I would point out, and I referenced a little bit earlier, we do have our new automobile product that we've rolled out across all Business Insurance in our express select underwriting route model and also in our transactional middle market business, our TCAP [ph] product." --- (TRV, earning call, 2024/Q1)

"No other adjustments are made for limited-payment contracts. The amount of annualized new business premiums for any given period can be significantly impacted by several factors, including but not limited to: addition of new products, discontinuation of existing products, changes in credited interest rates for certain products and other product modifications, changes in premium rates, changes in tax laws, changes in regulations or changes in the competitive environment." --- (PRU, sec filing, 2024/Q1)

"First, PRT remains a great source for organic growth. It represents one of the few products that can allow us to originate billions of insurance liabilities in a single transaction." --- (PRU, earning call, 2024/Q1)

Regulatory and Competitive Landscape

Insurance companies are navigating a complex regulatory and competitive landscape. Allstate and Travelers highlight market opportunities and competitive pricing, while Progressive and Prudential focus on regulatory challenges and risk management. Allstate also emphasizes the strategic importance of acquisitions and regulatory relationships for growth.

"And we're looking at those markets through the size of the opportunity of the market and the competitive landscape of how much we could carve." --- (ALL, Investor Day, 2024/06/25)

"It's Alan. I'll start and then turn it over to Greg. Hard for us to comment for competitors, but we do think that in the pricing we've been able to achieve with these retentions, you do see a reflection of the competitive environment." --- (TRV, earning call, 2024/Q1)

"Brian Meredith: Okay, sorry. I was asking more about E&S capabilities in maybe homeowners or commercial or plans to have some of those excess and surplus line capabilities. Just given the regulatory and risk landscape out there?" --- (PGR, earning call, 2024/Q1)

"I'm just wondering if you can give us an update on the regulatory environment in Bermuda and how that's changed, if at all, over the past year if the CMA is more involved in improving potential deals or input structure of transactions." --- (PRU, earning call, 2024/Q1)

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Strategic Responses to Rising Rates

Insurance companies are strategically responding to rising interest rates by adjusting reinsurance goals, increasing renewal written prices, and reviewing capital allocation. AIG achieved risk-adjusted rate decreases, HIG raised auto and homeowners' premiums, and Allstate is conducting strategic reviews to optimize capital allocation.

"We were able to execute on all of our strategic reinsurance goals this quarter, achieving risk adjusted rate decreases and lowering or maintaining retentions across all of our major purchases. The outlook for the second half of 2024, particularly with respect to natural catastrophes is uncertain." --- (AIG, earning call, 2024/Q2)

"Written premiums in second quarter 2024 were $913 million compared with $802 million in second quarter 2023 with: Renewal written price increases in auto and homeowners of 23.5% and 14.9%, respectively, in response to elevated loss cost trends." --- (HIG, press release, 2024/07/25)

"We do continually look at capital allocation and our choices. And as the outcome of the strategic review becomes clear, we will be transparent and share that with you as those thinkings evolve." --- (ALL, event transcript, 2024/06/25)

"This progress was supported by our strong financial position. Turning to Slide 3, I will focus my remarks this morning on the strategic actions we are taking to expand access to investing, insurance and retirement security, and how they position us to address the evolving financial challenges of our customers around the world." --- (PRU, earning call, 2024/Q2)

"Renewal written pricing increases were higher for both automobile and homeowners, primarily in response to recent higher loss cost trends as well as higher insured values in homeowners." --- (HIG, sec filing, 2024/Q1)