As a challenging operating environment leads several prominent personal lines insurers to dial back their California presence, including the likes of The Allstate Corp. and the group led by State Farm Mutual Automobile Insurance Co., another embattled carrier has opted to refocus its business in the Golden State and a handful of other markets.
California Casualty Indemnity Exchange has submitted notices of withdrawals in several states in recent weeks, according to documents obtained by S&P Global Market Intelligence, to inform regulators of what it described as the "difficult decision to cease operations" in all but seven of the 43 markets in which it had been operating.
Like many of its peers, the group led by California Casualty produced its highest personal lines combined ratio in upwards of two decades during 2022, and its $77.1 million net underwriting loss was its largest in at least 25 years.
Factors unique to California Casualty's business may have hastened the company's geographical retreat: essentially all of the group's 2022 direct premiums written were concentrated in the personal lines (or personal coverages in what S&P Global Market Intelligence otherwise deems commercial lines), for example. But the kinds of challenges it encountered from the perspectives of claims costs and operating expenses have much broader application in the personal lines space.
While we expect rate increases and various corrective actions to result in significant improvement in personal lines profitability during the back half of 2023 and through 2024 at the industry level, the severity of the circumstances facing individual entities like California Casualty may be such that more dramatic actions are necessary.
Formed in San Mateo, Calif., in 1914, California Casualty said in various regulatory filings that it pioneered the idea of affinity group insurance in 1951 through a partnership with the California Teachers Association. Since then, educators have remained a key part of the company's business through the now 72-year-old relationship with the California organization and an arrangement with the National Education Association that dates back to 2000 through what was originally branded as the A+ Auto and Home Insurance Plus program. The group's retrenchment will particularly impact the latter of those two relationships, and the NEA plans to launch a new auto and home insurance partnership for its members in the fourth quarter with a carrier it has not yet revealed.
The company said it possesses "deep" customer and affinity group relationships in the seven states in which it plans to remain: Arizona, California, Colorado, Idaho, Kansas, Oregon and Wyoming. Those states accounted for 69.5% of the group's total direct premiums written in 2022, but only 66.6% of its incurred losses. NEA Member Benefits continues to pitch auto and home insurance products to its members in those states.
"By aggressively narrowing our geographic focus to a small number of states... we will improve our financial results and start to replenish our capital," the company told various state regulators in filing to withdraw. "This focused geographic footprint allows us to leverage our knowledge and capabilities, while reducing our exposure to jurisdictions where we have had limited success."
California Casualty's group-level incurred loss and defense-and-cost-containment-expense ratio in the states it is exiting was 85.1% in 2022 as compared with 75.5% in those market in which it intends to remain, according to calculations based on disclosures in the group's combined annual statement.
Other insurance companies actively seek business from teachers and teachers unions, including the American Federation of Teachers which has partnered with the Farmers Insurance Group of Cos. to offer discounted auto and home insurance coverage to its members. In Pennsylvania, which ranked as the California Casualty group's sixth-largest state based on 2022 direct premiums written, the state's education association has partnered with subsidiaries of Liberty Mutual Holding Co. Inc. for auto and home insurance coverage. In New Jersey, which ranked second only to the Golden State among California Casualty's largest markets in 2022, Teachers Auto Insurance Co. of New Jersey actively solicits business from educators. Horace Mann Educators Corp. actively solicits personal lines business from teachers on a national basis. Other top-10 California Casualty markets slated for withdrawals include Illinois, Ohio, Maryland and Washington.
California Casualty concluded that its national expansion had "strained our resources" and the group failed to achieve "the economic scale necessary to maintain a reasonable expense ratio and generate a consistent underwriting profit." Inflated costs to repair and replace damaged vehicles in the second half of 2021 and throughout 2022 have impacted every US personal auto insurer, and it appears to have brought the unique challenges facing California Casualty to a head.
"In the past 12 months we have acted to improve our profitability, including working with Departments of Insurance to increase our prices to better reflect the cost of claims, reducing operating expenses, and slowing the volume of new business," California Casualty said in various notice of withdrawal filings. "While these actions have improved our short-term financials, they are not enough to return us to profitability, and our reduced surplus, while sufficient to pay claims and meet our financial commitments, is not enough to allow us to grow. As such, the Company has decided to shift our focus from becoming a national insurance provider to thriving in a smaller footprint."
The company is also required under the terms of a settlement with the California Department of Insurance stemming from a dispute over COVID-19 relief measures to provide more than $9 million in additional credits to its auto insurance customers in that state.
California Casualty's group-level surplus, as calculated by S&P Global Market Intelligence, fell to $134.9 million as of Dec. 31, 2022, from $216.6 million on the same date a year earlier largely as a result of the effects of its net underwriting losses. Its surplus declined to $124.4 million in the first quarter of 2023 as its $16.6 million underwriting loss flowed through the income statement. Over the course of 2022, the group's authorized control level risk-based capital ratio was nearly halved to 300.3% from 599.2% at the end of 2021. A.M. Best issued a two-notch downgrade to the group's financial strength rating in June, citing capitalization concerns.
In addition to the broad retrenchment, California Casualty filed on June 30 for an overall rate change of 15% on its $213.2 million book of California private auto insurance. That filing came on the heels of the June 3 implementation of a 22.4% overall rate increase on the same book of business.
The company intends to begin non-renewing business in the states it is exiting later this year. Since the company uses 12-month policy terms, that process will take some time to play out. Once it does, the company said in its Georgia filing, for example, that it intends to surrender its certificate of authority in that state.
Hypothetically, assuming no change in writings in the seven remaining states, the Golden State would account for 78.1% of California Casualty's overall geographic mix on a pro forma basis, up from 54.3% as originally reported.