Some niche providers of property insurance to homes and farms in rural portions of the upper Midwest face existential concerns more than a year after a series of destructive convective storms in the region led to material surplus erosion for the carriers and their reinsurer.
Steep catastrophe-related losses taken by Wisconsin Reinsurance Corp., a key reinsurance provider to dozens of small town and county mutual insurers in Wisconsin, Missouri, Iowa, South Dakota, Arkansas and Illinois, led first to the company's retrenchment during the second half of 2022 and then to its rehabilitation at the behest of the Wisconsin Office of the Commissioner of Insurance on June 21, 2023.
The void left by the company has sparked a wave of merger activity among Wisconsin town mutual insurers that have struggled to obtain the reinsurance protection required by statute from alternative sources in a capacity-constrained market. The Wisconsin Reinsurance Corp. rehabilitation plan repositions the company as a direct writer of insurance, a consolidator of town mutuals and the administrator of a town mutual reinsurance pool.
There were 51 Wisconsin town mutuals operating at the end of 2022, according to data posted by the Wisconsin regulator, down from 60 a decade earlier and 73 in 2002. That number has since declined significantly and could fall further as Wisconsin Reinsurance Corp.'s new posture raised questions about the ability of some remaining town mutuals to maintain their licenses.
Despite town mutuals' small size and relatively limited market presence, the situation cannot be viewed in isolation as constraints on reinsurance capacity during a period of elevated catastrophe losses have led some of the largest US property insurers to reevaluate their risk appetites.
A business model in peril
Severe storms along a frontal boundary on June 15, 2022, struck rural sections in western and northeastern Wisconsin particularly hard. They contributed significantly to the direct incurred loss ratio of 70.0% that the town mutuals collectively posted in 2022, up from 49.7% in 2021 and a 10-year average of 49.1%. Town mutuals' aggregate capital and surplus fell by 8.3% in 2022, according to an S&P Global Market Intelligence review of data disclosed by the Office of the Commissioner of Insurance. But the challenges facing town mutuals and similar entities in neighboring states did not spontaneously materialize, nor are they entirely financial in nature.
The companies, a number of which trace their roots to the 19th century, have long been burdened by concerns about management perpetuation, an absence of geographic diversity and high cost structures. Their median expense ratio of 54.2% in 2022 was more than double the overall expense ratio for the US P&C insurers that file annual statements with the National Association of Insurance Commissioners. Reinsurance is critical to their business models as Wisconsin requires town mutuals that provide coverage against windstorm or hail to obtain unlimited aggregate excess-of-loss coverage, and Wisconsin Reinsurance Corp. was one of only three reinsurers serving that market.
This became particularly problematic given the losses Wisconsin Reinsurance Corp. itself sustained from the 2022 storms. Its 2022 catastrophe losses of $75.9 million was slightly higher than its cumulative total for the previous four calendar years. The resulting net loss triggered a decline in the reinsurer's surplus to $22.3 million as of Dec. 31, 2022, from $43.3 million on the same date a year earlier, with its authorized control level risk-based capital ratio falling to 205.9%.
Wisconsin Reinsurance Corp. was forced to non-renew some of its business and require higher retentions from its remaining cedants. It also retained an investment bank to pursue options for raising capital.
Those efforts did not succeed, however, and Wisconsin Reinsurance Corp.'s financial standing deteriorated further through the first half of 2023, leading the Wisconsin regulator to file its rehabilitation petition for the company and the affiliated 1st Auto & Casualty Insurance Co. on May 23.
In the meantime, seven town mutuals agreed to merge with peers or full-fledged domestic mutuals between June 16, 2022, and May 5, 2023. While board resolutions in support of the transactions typically cited improved financial strength, diversification and operating efficiencies, three of the merging town mutuals, Trade Lake Mutual Insurance Co., Farmers Town Mutual Insurance Co. and Holland Mutual Fire Insurance Co., also referenced reinsurance availability concerns.
Consolidation accelerated after Wisconsin Reinsurance Corp.'s rehabilitation proceedings began with eight merger agreements entered between June 23 and Sept. 15. There have also been three transactions structured as town mutual to domestic mutual conversions in combination with affiliations with existing domestic mutual Mt. Morris Mutual Insurance Co. In most cases, the targets reported the receipt of an order from the Office of the Commissioner of Insurance directing them to confirm their plans for obtaining reinsurance for 2024 or other steps they intended to take to maintain their licenses.
The Wisconsin Reinsurance Corp. cedants that specifically cited the company's rehabilitation in their board resolutions in support of their respective merger agreements or conversion applications were as follows: Marcellon-Courtland-Springvale Mutual Insurance Co.; Yorkville & Mt. Pleasant Mutual Insurance Co.; Bristol Town Insurance Co.; Racine County Mutual Insurance Co.; Kenosha County Mutual Insurance Co.; Tri-County Mutual Town Insurance Co.; Fall Creek Mutual Insurance Co.; Bloomington Farmers Mutual Insurance Co.; Mt. Pleasant-Perry Middleton Mutual Insurance Co.; and Wisconsin River Mutual Insurance Co., the successor by merger to Merrimac Lodi Mutual Insurance Co. and Berry & Roxbury Mutual Insurance Co.
Another town mutual, All-Star/Newark Mutual Insurance Co., said that it received a directive from the Wisconsin regulator to confirm its plans for 2024 reinsurance despite not being a Wisconsin Reinsurance Corp. cedant. In response, the company said that it had been informed by Grinnell Mutual Reinsurance Co. that coverage would not be offered for the coming year. It ultimately informed the regulator on Sept. 15 that it entered a merger agreement with Franklin Farmers Mutual Insurance Co., a fellow Grinnell Mutual cedant that will be offered coverage for 2024. This transaction is also unique among those entered subsequent to the start of the Wisconsin Reinsurance Corp. rehabilitation proceedings in that the target will merge into another town mutual. Beyond Mt. Morris, the other town mutual consolidators have been domestic mutuals Forward Mutual Insurance Co. and Mutual of Wausau Insurance Corp.
Assuming completion of all of these transactions, some of which remain subject to regulatory and policyholder approvals, there would only be 32 Wisconsin town mutuals remaining by our count, and that number could fall even further. The Wisconsin regulator gave Wisconsin Reinsurance Corp.'s town mutual cedants until Aug. 11 to divulge their plans for remaining in compliance with the reinsurance requirement for 2024 and until Sept. 1 to provide evidence supporting the option they selected. In addition to mergers, conversions and affiliations, town mutuals unable to satisfy the reinsurance requirements also may opt to transfer their business to a similarly organized peer or voluntarily dissolve.
If town mutuals did not meet those deadlines, the regulator said it would take administrative action, up to and including the initiation of liquidation proceedings. This article includes reference to the town mutuals for which merger and/or conversion notices have been posted on the Wisconsin regulator's website as of Sept. 25.
Wisconsin Reinsurance Corp.'s namesake state accounted for $29.2 million of its $48.9 million in assumed premiums in 2022, according to an S&P Global Market Intelligence review of its Schedule F disclosures. Missouri ranked as its second most-active state as measured by the number of cedants, 14 Missouri Chapter 380 county, town and farmers' mutual property insurance companies, and assumed premiums. The fallout from the reinsurer's rehabilitation has reached the Show Me State as Meramec Valley Mutual Insurance Co.. merged into CFM Insurance Inc. in recent months.
Broader implications
Wisconsin town mutuals generated only $58.8 million in direct premiums earned in 2022 relative to the more than $2 billion in homeowners and farmowners reported by NAIC filers in the state. But the relevance of the challenges they are facing extends well beyond their size.
Facing tight reinsurance market conditions, persistent loss-cost inflation and elevated natural catastrophe activity in recent years, national carriers such as Farmers Insurance Group of Cos., The Allstate Corp. and The Progressive Corp. have limited their exposure to certain geographies. Virtually all property insurers have sought and will continue to implement sizeable rate increases.
While direct incurred loss ratios in the homeowners line are likely to improve on a year-over-year basis in the third quarter in the absence of a major catastrophe during the last week of September, the first half's result marked a 12-year high for the first six months of a calendar year.
The net effect is that consumers could face escalating availability and affordability concerns as the larger carriers retrench to reduce volatility and the smaller carriers become increasingly squeezed by the combination of limited options in the reinsurance market and their expense structures.