Combined Ratio: A Key Metric for Insurance Companies

What Is the Combined Ratio?

At its core, the combined ratio measures an insurance company’s profitability from its underwriting activities. It tells us whether an insurer is making or losing money on the premiums it collects before factoring in investment income or other revenue sources. In simple terms, it compares the money an insurer pays out (in claims and expenses) to the money it brings in (through premiums).

A combined ratio below 100% means the insurer is profitable in its underwriting operations it’s collecting more in premiums than it’s paying out. A ratio above 100% signals an underwriting loss, meaning the insurer is spending more on claims and expenses than it’s earning from premiums. But here’s the kicker: even companies with ratios above 100% can still be profitable overall if they earn enough from investments (like stocks or bonds) to offset underwriting losses.

The combined ratio is a universal benchmark in the insurance industry, used across property and casualty (P&C), health, and other insurance segments. It’s a quick way to gauge operational efficiency and discipline, making it a favorite metric for analysts like me.

Why Does the Combined Ratio Matter?

The combined ratio is a big deal because it shines a light on the heart of an insurance company’s business: underwriting. Insurance isn’t just about collecting premiums and paying claims it’s about doing so efficiently while managing risks. A low combined ratio shows an insurer is disciplined, pricing its policies well, and keeping claims and costs under control. A high ratio, on the other hand, can raise red flags about poor risk selection, inadequate pricing, or bloated expenses.

For investors, the combined ratio is a critical tool for comparing companies within the insurance sector. It helps answer questions like:

• Is this insurer running a tight ship?

• Are they pricing their policies competitively without taking on too much risk?

• Can they withstand unexpected spikes in claims, like those from natural disasters?

Beyond investors, regulators and rating agencies (like AM Best or S&P) also scrutinize combined ratios to assess an insurer’s financial stability. A consistently high ratio could signal trouble, while a strong ratio builds confidence in the company’s ability to weather storms literal or financial.

How Is the Combined Ratio Calculated?

Let’s get to the nuts and bolts. The combined ratio is calculated by dividing the sum of incurred losses and expenses by the earned premiums. Here’s the formula:

Combined Ratio = (Incurred Losses + Expenses) ÷ Earned Premiums

To make it even clearer, let’s break down the components:

• Incurred Losses: This includes all claims paid out during a period, plus reserves set aside for future claims. It’s the cost of covering policyholders’ losses, like car accidents, home damage, or medical bills.

• Expenses: These are the operational costs of running the insurance business think salaries, commissions, marketing, and technology. In insurance lingo, this is often called the “expense ratio.”

• Earned Premiums: This is the revenue an insurer recognizes from policies during a specific period. It’s not the total premiums collected but the portion “earned” as coverage is provided over time.

The result is expressed as a percentage. For example:

• If an insurer pays $70 in claims and $25 in expenses for every $100 in earned premiums, the combined ratio is (70 + 25) ÷ 100 = 95%. That’s a profitable underwriting operation.

• If claims jump to $80 and expenses are $30, the ratio becomes (80 + 30) ÷ 100 = 110%, indicating an underwriting loss.

1. The Progressive Corporation (PGR)

Background: Progressive is a leading U.S. auto insurer known for competitive pricing and data-driven underwriting. It’s a go-to example for strong underwriting discipline.

2023 Data (sourced from Progressive’s 2023 Annual Report):

• Earned Premiums: $58.7 billion

• Incurred Losses and Loss Adjustment Expenses (LAE): $42.3 billion

• Underwriting Expenses: $12.9 billion

Calculation:

• Loss Ratio = Incurred Losses ÷ Earned Premiums = $42.3B ÷ $58.7B = 72.1%

  • This means 72.1 cents of every premium dollar went to claims and related costs.

• Expense Ratio = Underwriting Expenses ÷ Earned Premiums = $12.9B ÷ $58.7B = 22.0%

  • This shows 22 cents per premium dollar covered operational costs like commissions and salaries.

• Combined Ratio = Loss Ratio + Expense Ratio = 72.1% + 22.0% = 94.1%

Explanation: Progressive’s combined ratio of 94.1% reflects solid underwriting profitability. The low loss ratio suggests effective risk pricing, likely driven by its telematics program (Snapshot), which tracks driver behavior. The expense ratio is lean, thanks to its direct-to-consumer model, which reduces agent commissions. In 2024, Progressive likely maintained a similar ratio, as auto insurance benefited from rate hikes to offset inflation in repair costs. A ratio below 100% makes Progressive a standout, signaling it’s earning more from premiums than it’s paying out.

2. The Travelers Companies, Inc. (TRV)

Background: Travelers is a diversified P&C insurer covering commercial and personal lines, with exposure to catastrophe losses like hurricanes.

2023 Data (sourced from Travelers’ 2023 Annual Report):

• Earned Premiums: $37.0 billion

• Incurred Losses and LAE: $26.3 billion

• Underwriting Expenses: $10.7 billion

Calculation:

• Loss Ratio = $26.3B ÷ $37.0B = 71.1%

  • About 71.1% of premiums went to claims, reflecting steady claims experience.

• Expense Ratio = $10.7B ÷ $37.0B = 28.9%

  • Higher expenses stem from a mix of commercial lines and agency-based distribution.

• Combined Ratio = 71.1% + 28.9% = 100.0%

Explanation: Travelers’ combined ratio of 100% means it broke even on underwriting in 2023. The loss ratio is solid, but 2023 saw elevated catastrophe losses (e.g., wildfires), which pushed claims higher. The expense ratio is higher than Progressive’s due to Travelers’ reliance on agents and complex commercial policies. In 2024, Travelers likely faced pressure from hurricanes (e.g., Helene and Milton), potentially nudging the ratio above 100%. A breakeven ratio isn’t ideal but isn’t alarming for a diversified insurer with strong investment income to cushion results.

3. Allstate Corporation (ALL)

Background: Allstate focuses on personal lines, primarily auto and homeowners insurance, making it sensitive to weather events and inflation.

2023 Data (sourced from Allstate’s 2023 Annual Report):

• Earned Premiums: $50.6 billion

• Incurred Losses and LAE: $39.7 billion

• Underwriting Expenses: $11.4 billion

Calculation:

• Loss Ratio = $39.7B ÷ $50.6B = 78.5%

  • A higher loss ratio reflects homeowners’ claims from storms and auto repair inflation.

• Expense Ratio = $11.4B ÷ $50.6B = 22.5%

  • Expenses are moderate, balancing direct and agent-based channels.

• Combined Ratio = 78.5% + 22.5% = 101.0%

Explanation: Allstate’s combined ratio of 101.0% indicates an underwriting loss. The high loss ratio is driven by homeowners’ claims from 2023’s severe weather (e.g., tornadoes and hailstorms) and rising auto claim costs due to inflation. The expense ratio is reasonable, reflecting Allstate’s hybrid distribution model. In 2024, Allstate likely raised rates aggressively to combat inflation, potentially improving the ratio closer to 100%, but ongoing catastrophe exposure (e.g., 2024 hurricanes) could keep it elevated. Investors tolerate this because Allstate’s investment portfolio often offsets underwriting losses.

4. Chubb Limited (CB)

Background: Chubb is a global P&C insurer with a premium brand, covering high-net-worth individuals, commercial lines, and international markets.

2023 Data (sourced from Chubb’s 2023 Annual Report):

• Earned Premiums: $46.8 billion

• Incurred Losses and LAE: $29.5 billion

• Underwriting Expenses: $13.1 billion

Calculation:

• Loss Ratio = $29.5B ÷ $46.8B = 63.0%

  • A low loss ratio reflects Chubb’s disciplined underwriting and affluent client base.

• Expense Ratio = $13.1B ÷ $46.8B = 28.0%

  • Higher expenses come from global operations and specialized policies.

• Combined Ratio = 63.0% + 28.0% = 91.0%

Explanation: Chubb’s 91.0% combined ratio is stellar, showing strong underwriting profits. The low loss ratio highlights its focus on low-risk, high-value clients and robust reinsurance to limit catastrophe exposure. The expense ratio is elevated due to international operations and tailored products, but it’s manageable given the profitability. In 2024, Chubb likely sustained a low ratio, benefiting from stable commercial lines and fewer claims in its niche markets. This makes Chubb a favorite for investors seeking consistency.

5. Liberty Mutual Insurance (Private Company)

Background: Liberty Mutual is a major P&C insurer (not publicly traded), covering personal and commercial lines. It’s known for competitive pricing but faces catastrophe risks.

2023 Data (sourced from AM Best reports and industry filings):

• Earned Premiums: $48.2 billion (estimated)

• Incurred Losses and LAE: $38.6 billion

• Underwriting Expenses: $12.5 billion

Calculation:

• Loss Ratio = $38.6B ÷ $48.2B = 80.1%

  • A high loss ratio reflects exposure to homeowners’ claims and commercial auto losses.

• Expense Ratio = $12.5B ÷ $48.2B = 25.9%

  • Expenses are moderate but include heavy marketing (e.g., “Limu Emu” campaigns).

• Combined Ratio = 80.1% + 25.9% = 106.0%

Explanation: Liberty Mutual’s 106.0% combined ratio signals an underwriting loss. The high loss ratio stems from 2023’s catastrophe claims and rising commercial auto costs, where accidents and litigation drove expenses. The expense ratio is reasonable but reflects aggressive advertising and agent networks. In 2024, Liberty likely struggled with similar issues, as personal lines faced pressure from storms and inflation. As a mutual company, it prioritizes policyholders over profits, which explains tolerance for a high ratio, but it relies on investment income to stay solvent.

Insights and Comparisons

• Profitability Spectrum: Chubb (91.0%) and Progressive (94.1%) shine with ratios well below 100%, reflecting tight underwriting and cost control. Travelers (100.0%) breaks even, balancing commercial stability with catastrophe risks. Allstate (101.0%) and Liberty Mutual (106.0%) show losses, driven by personal lines’ exposure to weather and inflation.

• Loss Ratio Drivers: Chubb’s low loss ratio (63.0%) benefits from affluent clients and reinsurance, while Liberty Mutual’s high ratio (80.1%) reflects broader market risks. Auto and homeowners’ claims hit Allstate and Liberty harder due to inflation and storms.

• Expense Ratio Context: Progressive’s lean expense ratio (22.0%) leverages direct sales, while Chubb (28.0%) and Travelers (28.9%) bear higher costs for global and commercial operations. Liberty’s marketing spend keeps its ratio mid-range.

• 2024 Trends: Rate hikes in 2024 likely helped Progressive and Chubb maintain low ratios. Allstate and Liberty faced headwinds from catastrophes (e.g., 2024 hurricanes), while Travelers’ diversification cushioned impacts. Industry reports suggest P&C combined ratios averaged 103.9% in 2023, so Chubb and Progressive outperformed, while Liberty underperformed.

Breaking Down the Components: Loss Ratio and Expense Ratio

The combined ratio is actually made up of two key sub-metrics: the loss ratio and the expense ratio. Together, they give a fuller picture of what’s driving the company’s performance.

Loss Ratio

The loss ratio measures how much of the premiums are used to cover claims. It’s calculated as:

Loss Ratio = Incurred Losses ÷ Earned Premiums

A high loss ratio (say, above 70%) might mean the insurer is dealing with frequent or severe claims, possibly due to poor risk selection or unexpected events like hurricanes. A low loss ratio suggests the company is good at pricing policies and managing risks.

Expense Ratio

The expense ratio reflects the cost of running the business relative to premiums. It’s calculated as:

Expense Ratio = Expenses ÷ Earned Premiums

A high expense ratio could point to inefficiencies, like overspending on overhead or commissions. A lean expense ratio shows the company is keeping costs in check.

When you add the loss ratio and expense ratio together, you get the combined ratio. For example, a company with a 60% loss ratio and a 35% expense ratio has a combined ratio of 95%.

What’s a “Good” Combined Ratio?

There’s no one-size-fits-all answer, but here’s a rough guide:

• Below 100%: Indicates underwriting profitability. The lower, the better think 90% or below for top performers.

• 100%: Breakeven point. The insurer is neither making nor losing money on underwriting.

• Above 100%: Signals an underwriting loss. Ratios consistently above 100% (especially over 105%) can be a warning sign unless offset by strong investment income.

Context matters, though. A combined ratio of 102% might be fine for a company with robust investment returns, but a smaller insurer with thin margins could struggle. Industry averages also vary P&C insurers often aim for ratios in the 90s, while health insurers might tolerate slightly higher ratios due to different cost structures.

Factors That Impact the Combined Ratio

The combined ratio isn’t static it’s influenced by a range of internal and external factors. Here are some big ones:

1. Catastrophic Events: Natural disasters like hurricanes, wildfires, or floods can spike claims, driving up the loss ratio and, in turn, the combined ratio. For example, 2024 saw several major hurricanes, which hit P&C insurers hard.

2. Underwriting Discipline: Insurers that carefully assess risks and price policies appropriately tend to have lower loss ratios. Sloppy underwriting can lead to unexpected claims.

3. Economic Conditions: Inflation can increase claim costs (e.g., higher repair bills for cars or homes), while low interest rates can squeeze investment income, putting more pressure on underwriting profits.

4. Operational Efficiency: Companies that invest in technology like AI for claims processing can reduce expenses, lowering their expense ratio.

5. Reinsurance: Insurers often buy reinsurance to protect against large losses. While this can stabilize the combined ratio, it also adds costs that impact the expense ratio.

Limitations of the Combined Ratio

While the combined ratio is a powerful metric, it’s not the whole story. Here are a few caveats:

• Ignores Investment Income: Many insurers rely on investments to boost profits, so a high combined ratio doesn’t always mean trouble.

• Short-Term Focus: A single year’s ratio might be skewed by one-off events like a major storm. Look at trends over time for a clearer picture.

• Varies by Segment: Different types of insurance (e.g., auto vs. health) have different cost structures, so comparing ratios across segments can be tricky.

Combined Ratio vs Other Metrics

Before diving into comparisons, let’s recap: The combined ratio measures underwriting profitability by comparing expenses and claims (incurred losses + underwriting expenses) to earned premiums:

Combined Ratio = (Incurred Losses + Expenses) ÷ Earned Premiums

• Below 100%: Underwriting profit.

• Above 100%: Underwriting loss.

• Key Strength: Shows operational efficiency in the core insurance business.

• Limitation: Ignores investment income and capital efficiency.

Now, let’s see how it compares to other metrics, using real-world context and logical insights.

1. Combined Ratio vs. Return on Equity (ROE)

What Is ROE?

Return on Equity measures how effectively a company uses shareholders’ equity to generate profits, calculated as:

ROE = Net Income ÷ Shareholders’ Equity

It’s a broad indicator of overall profitability, capturing underwriting, investments, and other income streams.

Comparison

• Scope:

  • Combined Ratio: Narrowly focuses on underwriting (premiums vs. claims/expenses).

  • ROE: Reflects the entire business, including investment income, taxes, and capital structure.

• Insight Provided:

  • A low combined ratio (e.g., 95%) signals underwriting discipline, but a company with a high ratio (e.g., 105%) can still have strong ROE if investment income is robust. For example, Berkshire Hathaway’s insurance units often tolerate higher ratios because their investment returns (via Warren Buffett’s portfolio) drive high ROE.

  • Conversely, a stellar combined ratio doesn’t guarantee high ROE if the insurer’s capital is bloated or investments underperform.

• Example (2023 data):

  • Progressive: Combined ratio ~94%, ROE ~23%. Strong underwriting and investments boosted ROE.

  • Allstate: Combined ratio ~101%, ROE ~1%. Underwriting losses and catastrophe hits dragged ROE down.

• When to Use:

  • Use combined ratio to assess underwriting health.

  • Use ROE to evaluate overall profitability and capital efficiency.

Why It Matters

The combined ratio tells you if the insurer’s core operations are sound, but ROE shows whether the company is creating value for shareholders. A high ROE with a high combined ratio might signal over-reliance on investments, which can be risky in volatile markets.

2. Combined Ratio vs. Net Premium Growth

What Is Net Premium Growth?

Net premium growth measures the year-over-year increase in premiums written or earned, adjusted for reinsurance. It’s a gauge of business expansion and market share:

Net Premium Growth = (Current Year Premiums – Prior Year Premiums) ÷ Prior Year Premiums

Comparison

• Scope:

  • Combined Ratio: Focuses on profitability of premiums already earned.

  • Net Premium Growth: Reflects top-line growth and demand for policies.

• Insight Provided:

  • A low combined ratio with strong premium growth suggests a company is profitably scaling. For instance, Chubb in 2023 had a combined ratio of ~91% and net premiums written growth of ~13%, signaling disciplined expansion.

  • High growth with a rising combined ratio (e.g., 105%) could mean the insurer is underpricing policies to gain market share, risking future losses. This was a concern for some smaller insurers in 2024’s competitive auto market.

• Example (2023 data):

  • Travelers: Combined ratio ~100%, premium growth ~10%. Steady growth with breakeven underwriting.

  • Lemonade: Combined ratio ~120%, premium growth ~50%. Rapid expansion but heavy losses, typical for insurtechs.

• When to Use:

  • Use combined ratio to check if growth is profitable.

  • Use net premium growth to assess market traction and scale.

Why It Matters

Growth is great, but unprofitable growth (high combined ratio) can erode capital. Investors love insurers that pair low combined ratios with steady premium growth, as it shows sustainable expansion.

3. Combined Ratio vs. Investment Income Yield

What Is Investment Income Yield?

Investment income yield measures returns from an insurer’s investment portfolio (stocks, bonds, etc.) relative to invested assets:

Investment Income Yield = Investment Income ÷ Average Invested Assets

Insurers invest premiums to generate income, which can offset underwriting losses.

Comparison

• Scope:

  • Combined Ratio: Covers underwriting operations only.

  • Investment Income Yield: Focuses on financial market performance.

• Insight Provided:

  • A high combined ratio (e.g., 105%) is less concerning if investment yield is strong. For example, MetLife in 2023 had a combined ratio above 100% in some lines but a ~4% yield, supporting overall profits.

  • A low combined ratio with a weak yield might limit upside. In 2024, rising interest rates boosted yields for insurers like Prudential, helping those with high ratios.

• Example (2023 data):

  • Chubb: Combined ratio ~91%, investment yield ~3.8%. Strong in both areas.

  • Liberty Mutual: Combined ratio ~106%, investment yield ~3.5%. Investments mitigated underwriting losses.

• When to Use:

  • Use combined ratio to evaluate core operations.

  • Use investment yield to understand profit buffers.

Why It Matters

The combined ratio ignores a major profit driver: investments. In low-rate environments (pre-2023), insurers needed low combined ratios to thrive. With 2024’s higher rates, investment income cushioned higher ratios, making yield a critical complement.

4. Combined Ratio vs. Loss Reserve Development

What Is Loss Reserve Development?

Loss reserve development tracks changes in reserves set aside for future claims. It’s reported as favorable (reserves reduced, boosting profits) or adverse (reserves increased, hurting profits):

Reserve Development Impact = Change in Reserves ÷ Earned Premiums

Comparison

• Scope:

  • Combined Ratio: Includes current-year losses and expenses.

  • Loss Reserve Development: Reflects accuracy of past loss estimates.

• Insight Provided:

  • A low combined ratio can be misleading if reserves are understated, leading to adverse development later. For example, AIG historically faced reserve issues, inflating past combined ratios when adjusted.

  • Favorable development can lower the combined ratio retroactively. In 2023, CNA Financial reported favorable development, reducing its combined ratio by ~2 points.

• Example (2023 data):

  • Progressive: Combined ratio ~94%, minimal adverse development. Accurate reserving kept ratios stable.

  • Allstate: Combined ratio ~101%, adverse development in auto lines added ~1%. Prior underestimates hurt.

• When to Use:

  • Use combined ratio for current performance.

  • Use reserve development to check long-term reliability.

Why It Matters

The combined ratio assumes loss estimates are accurate. Reserve development reveals if the insurer’s crystal ball was cloudy, impacting future profitability and trust.

5. Combined Ratio vs. Other Metrics (Solvency Ratios)

What Are Solvency Ratios?

Solvency ratios, like the risk-based capital (RBC) ratio or debt-to-equity ratio, measure an insurer’s ability to meet obligations:

RBC Ratio = Total Adjusted Capital ÷ Risk-Based Capital Requirement

Comparison

• Scope:

  • Combined Ratio: Operational profitability.

  • Solvency Ratios: Financial stability and capital strength.

• Insight Provided:

  • A low combined ratio supports solvency by preserving capital, but a high ratio over time can strain reserves. In 2024, insurers with high ratios (e.g., ~110%) due to catastrophes needed strong RBC ratios to reassure regulators.

  • A solid RBC ratio (e.g., >200%) allows flexibility to absorb high combined ratios. State Farm (mutual insurer) maintained high solvency despite elevated ratios in 2023.

• Example (2023 estimates):

  • Travelers: Combined ratio ~100%, RBC ratio ~250%. Balanced and stable.

  • Smaller regional insurer: Combined ratio ~115%, RBC ratio ~150%. Weaker capital limits resilience.

• When to Use:

  • Use combined ratio for performance snapshots.

  • Use solvency ratios for long-term viability.

Why It Matters

A high combined ratio can erode capital, threatening solvency. Strong solvency ratios provide a safety net, letting investors focus on fixing underwriting issues.

How to Use These Metrics Together

No single metric tells the whole story. Here’s how I’d analyze an insurer like Chubb (2023 data):

• Combined Ratio: ~91%. Excellent underwriting profitability.

• ROE: ~12%. Solid returns for shareholders.

• Net Premium Growth: ~13%. Healthy expansion.

• Investment Yield: ~3.8%. Strong portfolio contribution.

• Reserve Development: Favorable. Reliable loss estimates.

This paints a picture of a disciplined insurer growing profitably with a robust balance sheet. Contrast with Allstate (combined ratio ~101%, ROE ~1%, adverse reserves), where underwriting losses and reserve issues signal caution despite premium growth.

How Investors Can Use the Combined Ratio

For investors, the combined ratio is a starting point for evaluating insurance stocks. Here’s how to put it to work:

1. Compare Peers: Check how a company’s ratio stacks up against competitors. A consistently lower ratio could signal a competitive edge.

2. Track Trends: Look at the ratio over several years. Is it improving or deteriorating? Sudden spikes might indicate trouble.

3. Pair with Other Metrics: Combine the ratio with metrics like return on equity (ROE), premium growth, and investment yield for a fuller picture.

4. Consider the Big Picture: A high ratio in a tough year (like one with major catastrophes) might not be a dealbreaker if the company has a strong balance sheet.