For the first time in a decade, Allstate (ALL -1.72%) announced an underwriting loss in its annual earnings. Despite raising premiums by double digits, the insurer failed to keep up with inflationary pressures in the economy.
Its performance signals a more extensive problem across the industry. Insurers are grappling with rising prices and increasing claims costs, sending ripple effects across the economy. For consumers, this means higher prices. For investors, it means insurers have pricing power on their side. Here's how Allstate plans to address its recent shortcomings and what to expect going forward.
Allstate's loss comes while the industry faces challenges
Last year Allstate posted a net loss of $1.4 billion -- a drastic swing after posting a net profit of $1.5 billion just one year earlier. The insurer faced a challenging environment and saw costs to resolve claims rise dramatically.
The company responded to rising costs by raising the premiums charged. During the year, its premiums written increased by 10.7%, mainly due to higher premiums charged on policies and not so much to growing its customer base. Despite these increases, Allstate saw its policies lose money for the first time in a decade.
One measure of profitability in the insurance industry is the combined ratio. This ratio takes the total claims costs plus expenses, divided by premiums taken in, and shows how profitable (or unprofitable) an insurer's policies are. A ratio under 100% is the goal because it means an insurer is taking in more money than it's paying out in claims and other operating costs. Allstate's combined ratio was 106.6% last year, the highest ratio since 2011.
Allstate isn't the only insurer struggling to keep up. Higher costs burdened the property and casualty (P&C) industry during the year. According to a report by Insurance Information Institute, the combined ratio across the entire P&C industry last year is expected to be around 105.6%. Insurers have struggled with rising costs due to Hurricane Ian, Winter Storm Elliott, and "a significant deterioration in the personal auto line," the report said.
Data sources: Progressive and National Association of Insurance Commissioners. Industry data for 2022 is through Sept. 30. Chart by author.
Here's how Allstate plans to bounce back
In response to rising costs, Allstate is working to get back to profitability by raising premiums, reducing expenses, and limiting policy growth. It raised auto rates across 38 locations in the fourth quarter, increasing 11.2% on average. The company will continue to raise rates until it restores profitability to its automotive business.
One thing investors can take away from this is that the insurance business is highly cyclical. Insurance markets go through "soft" and "hard" periods. During a hardening market, insurers see higher claims costs and losses due to higher prices or increased catastrophic events. Because the entire industry is affected, these periods bring rising premium costs for customers.
Also, insurers may look to scale back their policies, and customers could have difficulty finding coverage for their car or home. On the surface, it doesn't seem great for insurers, but during times like this, insurers can raise premiums without losing too many customers. Insurers' flexibility in raising rates is one reason they can make solid investments that can ride out inflationary periods.
Premiums will continue to rise, according to experts
The Insurance Information Institute expects insurance markets to remain hard for a couple more years. It cites inflation as being persistent for insurers. But it's not just economic inflation that insurers have to worry about. Social inflation is another factor that keeps claims costs elevated.
Social inflation is "the trend of rising insurance costs due to increased litigation, plaintiff-friendly judgments, and higher jury awards." The Institute estimates that social inflation has risen by 14% during the 2010s. Social inflation can reflect the mood of society and who should be held accountable for risk. For insurers, this means a tightrope act of raising premiums to balance out rising claims costs -- and for customers, insurance policies will keep getting more expensive.
For Allstate investors, it's comforting to know that its struggles aren't because of some flaw in the business. Instead, the entire P&C industry faces challenges in policy pricing. The chances are good that Allstate will return to profitability. However, times like this put into perspective those companies that are head and shoulders above the competition -- like Progressive, which churned out another profitable year of insurance policies despite the harsh environment.
