Mutual insurers eye rate adequacy, financial strength remains strong: AM Best

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Mutual insurers eye rate adequacy, financial strength remains strong: AM Best

The U.S. mutual property/data segment relied on investment income to maintain strong overall financial performance and increase surplus in the face of underwriting volatility and severe weather activity, according to an AM Best report.

To combat underwriting losses and rising reinsurance costs, mutual insurers have been targeting rate adequacy, with further rate increases expected in the second half of 2024 and continuing into 2025, AM Best said.

AM Best’s report, “US Property/Casualty Mutual Insurers Resilient Despite Perpetual Volatility,” found written premiums to grow by about 13% in 2023, the largest increase in mutual premiums in a decade.

AM Best found listed mutuals reported net income of $9.3 billion in the first half of 2024, compared with a net loss of $11.7 billion in the first half of 2023.

While mutual insurers have been able to get more premiums to cover additional losses, the solution of seeking more rates to offset costs has met with pushback, said Lauren Magro, financial analyst, AM Best.

“Insurance regulatory regimes differ by state, with some being more conservative than others, leading to delays in approval and implementation,” Magro said.

The top 10 mutual insurers with the highest shares account for 72% of net premium written (NPW) as well as 72% of direct premiums written.

State Farm Group leads the pack with about 25% market share, more than double that of Liberty Mutual, the next highest-rated mutual.

About two-thirds of mutual insurers’ products are comprised of three lines: auto liability for passengers, multi-risk for owners, and property damage for passengers. In these times, mutuals applied considerable price adjustments, AM Best reported.

NPW in private passenger motor vehicle physical damage increased in 2023 by more than 22% to approximately $12.9 billion, while private passenger auto liability and homeowners multiple risk increased by more than 12%.

The industry rating agency said mutuals are refining their underwriting standards, with many implementing higher minimum deductibles. Some mutuals have tightened eligibility requirements by excluding homes or roofs that are over a certain age. Others diversify their exposures by going more into commercial lines, which are considered less volatile to severe weather events. However, nearly two-thirds of mutuals are geographically concentrated in a single state.

Many mutuals were subject to a greater degree of weather-related losses in 2023 than in 2022, AM Best said. The segment reported a combined ratio of 109.7% in 2023, driven by an increase in the pure loss ratio and partially offset by a lower underwriting expense ratio.

Meanwhile, mutuals had a harder time securing reinsurance coverage and had to pay higher reinsurance costs with tighter terms and conditions. Reinsurance has reduced certain coverages, such as unlimited total reinsurance.

“As catastrophe retentions increase, many mutuals rely more heavily on their own capital in the event of a severe event and drive those losses directly to the bottom line,” AM Best said.

Growing surplus

The policyholder surplus at the end of 2023 was just under $400 billion for the mutual sector – an improvement over 2022, but still lower than in 2021. AM Best said the change in surplus was mainly driven by a return of unrealized capital gains.

Bonds represent approximately 60% of mutual fund portfolios, with equities representing approximately 20% of investment allocations.

The significant rise in interest rates has led mutuals to pursue strategies to provide a more stable and definitive cash flow. More than 36 percent of listed mutuals maintain a “strongest” balance sheet, the rating agency said, while 52 percent have a “very strong” rating. Most of the surplus is found in mutuals with the highest financial rating.

“Mutuals rated as ‘strongest’ had a total policyholder surplus of more than $300 billion in 2023, significantly outpacing all other rating levels, which cumulatively hold less than $100 billion,” AM noted Best.

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