Despite recent storms such as Hurricane Ida, Travelers Cos. last Tuesday still reported generating a positive underwriting result for the third quarter. Its overall combined ratio—a measure of losses and underwriting expenses as a percentage of premiums—was 98.6%, meaning it took in more than it expects to pay out.
Travelers said it relatively outperformed during Hurricane Ida, citing things such as “cutting-edge data analytics” helping it price risk and make efficient claims decisions. The company said its losses were less than what would be expected given its market share in impacted regions.
Travelers shares were up more than 2.5% midday. But shares of Travelers and property-and-casualty insurers broadly are still lagging behind banks and many other financial stocks so far in 2021, even as strong markets are boosting investment results from a year ago and interest rates look poised to rise, benefiting insurers’ vast fixed-income portfolios.
Investors may be worrying about some less acute challenges than catastrophes. For one, results in auto insurance continue to show how much insurers are struggling with the effects of the pandemic on driving. What was a boon last year, as people drove infrequently and incurred far fewer losses, has reversed this year across the industry.
For Travelers, the underlying combined ratio for personal auto insurance, which excludes the effects of catastrophes and prior-year reserve developments, was 97% in the third quarter. That is far less positive than the 81.5% result a year ago.
Part of the issue is a return to normal driving habits. But it is also that when accidents do occur, they can be more expensive to deal with because of shortages for auto parts such as chips, high demand for used cars and higher labor costs. At the same time, insurers may be having trouble using price to compensate for these costs, because they must go through state regulators when seeking higher rates.
“States are pushing back on rate increases given the strong profitability of the business, including the lack of any losses in 2020,” according to Wells Fargo analyst Elyse Greenspan in an August note.
Travelers said on Tuesday that it plans to file for rate increases, and while that will take time to benefit results, it expects to have higher rates in the market in several states by the end of this year. Investors should look for any updates on this in the months ahead.
Some even longer-running challenges also continue to have an impact. Travelers reported an adjustment to its underwriting results in business insurance for exposure to claims related to asbestos. The $225 million unfavorable prior year reserve development, part of an annual review of such exposures, came as Travelers said “the level of claim activity did not decline as much as we had assumed in our previous estimate.”
Notably, though, the pace of rate increases in commercial insurance are doing a far better job of compensating for things such as asbestos or other forms of inflation of claims—like higher jury awards and more aggressive litigation tactics known as “social inflation.” Travelers’ domestic business insurance renewal premium increases of 9.9% in the third quarter continued at a historically high level, the company said. For a diversified player such as Travelers, strong pricing in commercial insurance is a key way to help offset challenges in personal auto.
Insurers may rarely get investors’ animal spirits racing. But right now, they are relatively cheap: S&P 500 property-and-casualty firms overall trade at a discounted forward price-to-earnings multiple versus financials broadly, whereas they were at a premium in the couple of years before the pandemic. So as firms show progress in taming some of these slow-moving challenges, the sector may be steering toward better performance ahead.