According to the latest Mutual Factor report released by the National Association of Mutual Insurance Companies (NAMIC), insured catastrophe losses in the United States continued at heightened levels through the second quarter of 2023, presenting a challenging start to the year and having a significant impact on the financial performance of the property/casualty insurance industry. This came on the heels of a difficult 2022. Within this environment, the report found, the mutual insurance segment faced increasing pressures from weather and reinsurance factors yet has held steadfast in its focus on policyholders. These and other key issues impacting today’s insurance market are addressed in the sixth annual Mutual Factor report released by the National Association of Mutual Insurance Companies (NAMIC) and global professional services firm Aon during 128th NAMIC Annual Convention last month.

Neil Alldredge, NAMIC President and CEO, believes the 2023 report offers data and insights that are particularly relevant in today’s market. “The mutual industry is feeling the impact of a confluence of factors including extreme weather, litigation abuse, inflation, rising reinsurance costs, and other economic pressures,” he said. “Everything, everywhere, all at the same time captures the unprecedented scope of the current conditions facing insurers, yet despite this difficult time, the 2023 Mutual Factor report demonstrates that mutuals have the strength and stability to withstand what is fast becoming a new era of risk.”

With the publication of The Mutual Factor 2023 – How Performance, Structure, and Focus Set Mutual Insurance Companies Apart, NAMIC has again compared performance metrics over the past 12 months and over a five-year time frame, in addition to AM Best credit ratings impact and new emerging issues.

Patrick Abbe, Aon Executive Managing Director, US Regional and Mutual Strategic Growth Leader, reflected on the joint effort with NAMIC. “We continue to be honoured to work with NAMIC on this important report that highlights the significant strength of the mutual segment, the considerable amount of value it delivers to policyholders, and the challenges the industry is currently facing. The team at Aon is pleased to support those efforts through our continued collaboration.

“The 2023 Mutual Factor highlights the strong capital position of the mutual insurance segment, reflecting the industry’s continued commitment to strengthen balance sheets to support policyholders and the broader economy through these unprecedented times,” Abbe continued. “The report emphasizes a continued and evolving perfect storm of challenges for the industry. The impacts of inflation, severe weather, a difficult reinsurance market, and a volatile economic environment are contributing to carriers’ challenging operating results through the first half of 2023. Through collaborative efforts, our aim is to help the industry navigate this volatility and help shape better decisions. The industry works diligently with all constituents to enhance insurance operations, allowing the mutual insurance segment to maintain its critical function in our lives and in our economy.”

The latest Mutual Factor report found that the mutual sector ended 2022 with an increase in losses and loss adjustment expense; the growth in net earned premium did not offset these losses that resulted in a higher loss and LAE ratio (76.4%) compared to 2021 (72.5%) for the industry. As with past Mutual Factor reports, the 2023 report evaluated nearly 30 performance metrics for mutual insurance companies in 2022 compared to other insurer categories and assessed the impact of rating agency criteria on mutuals.

Key findings on the financial performance of mutuals in the US include:

• The combined ratio for mutual insurers for Q2 2023 was 113.2, compared to 97.9 for stock companies, which operated with an underwriting profit, aligning with their focus on returns. Catastrophe losses throughout large sections of the US are also having a significant impact on the financial performance of the mutual industry.
• Despite more orderly midyear reinsurance renewals that led to a modest reprieve in reinsurance pricing and terms and conditions relative to January renewals, natural catastrophe-exposed property risks have continued to experience a volatile and challenging market environment. Through Q2 2023, insured catastrophe losses in the US continued at heightened levels, presenting a challenging start to the year.
• In 2022, the industry lost capital and surplus, a 6.4% decrease from the record high of USD 1.053 trillion in 2021. Mutual insurers shrank by 8%, while stock companies lost 5.4%. The loss in surplus was mainly attributed to challenging underwriting results and investment volatility. On a five-year basis, the industry has grown surplus with mutuals’ five-year compound average growth rate 8.5% and stocks companies’ five-year surplus growth rate 11.4%.
• The decline in capital and surplus has led to higher premium leverage industrywide thereby decreasing the amount of capital standing behind each dollar of premium written. Mutual and stock insurers held USD 1.26 in policyholder surplus backing up each dollar in net premiums written through 2022.
• Over a five-year period, stock insurers held USD 1.19 per USD 1 in direct written premium, compared to USD 1.24 for mutual insurers. Historical trends continued in 2022, with mutual insurers operating less leveraged as they held USD 1.15 per USD 1 in direct written premium compared to USD 1.11 per USD 1 in direct written premium for stock insurers.
• Mutual companies are well capitalised with median Best’s Capital Adequacy Ratio at the VaR 99.6 of 58%, 7 percentage points higher than stock companies at 51%. Eighty-nine percent of mutual companies also have the “Strongest” or “Very Strong” balance sheet strength, compared to 81% for stock companies.