It isn’t just the existence of inflation that matters for insurance stocks; the question is how and where rising prices show up.
Right now, higher prices for used cars, auto- and home-repair labor and materials are contributing to increasing severity of losses on auto and homeowners insurance claims. At the same time, as people get back to pre-pandemic driving habits, that can increase the frequency of claims. At Travelers TRV 3.19% Cos., loss ratios rose for both home and auto insurance in 2021 over the prior year—in contrast to improvements in business and bond-and-specialty insurance, the company reported on Thursday.
But the upshot of all that on underwriting results in 2022 and beyond will depend on how much rate increase insurers can push through. For auto insurance, this depends partly on state agencies that oversee rates, and also the competitive dynamics among insurers. Travelers said it has started implementing auto rate increases and anticipates additional increases across about 25 states during the first quarter.
This rate process will take time, but if those supply-chain-driven cost-inflation trends abate, it could point to better results in the future. Travelers shares were up nearly 5% Thursday afternoon. Auto insurers Progressive and Allstate aren’t rising to the same degree, but perhaps they could be poised for further gains if investors like their next updates on rate actions.
Meanwhile, business insurance is strong right now, both in terms of underwriting gains and growth. Travelers’ growth in business insurance continues to be driven by improving pricing of insurance rates, but also increasingly by exposure growth. Premium collected is about both the rates customers are paying for coverage and how much is ultimately being covered.
While year-over-year rate growth for renewals in business insurance slowed a bit in the fourth quarter from prior quarters, exposure growth accelerated to its highest level in 15 years. Across the firm, Travelers reported 10% net-written-premium growth in the fourth quarter from a year before, along with record net written premiums in 2021 overall.
Exposure growth can be driven by economic expansion, and helped by businesses resuming after Covid-19 slowed activity. But it also can be aided by inflationary forces. Travelers said wage inflation, for example, is helping to boost overall renewal premiums collected for workers’ compensation insurance, despite continuing pressure on the rates of that insurance.
Inflation also can impact loss-cost trends in business insurance over time. However, for now that is interacting with the effects of working from home on tamping down related business claims, as well as what happens with court reopening and the pace of litigation. Meanwhile, continuing rate increases can help to offset increases in those costs, and overall growth in the business can continue to boost net income. Investors need to watch both sides of the ledger to truly understand the upshot of inflation.
Write to Telis Demos at [email protected]
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