Status quo a 'recipe for failure' as some P&C mutuals confront financial stress

Several especially difficult years for mutual property and casualty insurers amid fallout from an uptick in severe convective storm activity in select geographies have necessitated a reconsideration of decades-old business practices and corporate structures. Data in S&P Global Market Intelligence's recently released 2024 US Property and Casualty (P&C) Insurance Market Report provides additional context on the extent of the challenges.

The cumulative 2022 and 2023 combined ratios for mutuals and other entities with mutual-like features, including stock insurers that are part of mutual insurance holding company structures, reciprocal exchanges and risk-retention groups, totaled 109.2%, excluding policyholder dividends. That exceeded the combined result for the remainder of the industry by a staggering 12.6 percentage points. The gap is only slightly narrower when analyzing just those entities currently organized as mutuals, as the three largest such entities by net premiums written, State Farm Mutual Automobile Insurance Co., Nationwide Mutual Insurance Co. and Auto-Owners Insurance Co. Inc., each produced 2023 combined ratios at the group level in excess of 113%.

A variety of factors explain the divergence: an overweight presence in the embattled homeowners and private auto business lines by the mutuals and mutual-like entities in tandem with an especially difficult reinsurance market for property-focused insurers with business concentrated in states and regions prone to severe weather, to name a couple. Prior to this latest stretch, the cumulative 2015-through-2021 combined ratio gap between the mutuals and mutual-like entities and the rest of the industry was only 1.5 percentage points, and the former collection of entities outperformed the latter four times in those seven years.

While we project a return to underwriting profitability for the industry as a whole in 2024, the mutuals and related entities are likely to remain in the red if for no other reason than the amount of ground they need to make up. The homeowners and farmowners business lines accounted for 24.8% of mutuals' 2023 direct premiums written, 10.8 percentage points above the rest of the industry's concentration in those lines, which could further complicate matters. We project that the homeowners and farmowners combined ratio on an industrywide basis will remain well above 100% in 2024 even as the private auto business returns to an underwriting profit.

Closing the gap will require more than just patience and the passage of time. As such, some carriers have opted for a combination of both targeted remediation and broader restructurings.

Mutual insurance holding company conversions have emerged among the primary means of restructuring. This option, where a mutual converts to a stock insurance company that is part of a newly formed mutual insurance holding company, affords greater strategic and financial flexibility while preserving the essence of mutuality.

To date in 2024 alone, Wisconsin-based West Bend Mutual Insurance Co. converted to the stock West Bend Insurance Co., effective Jan. 1. Michigan-based Hastings Mutual Insurance Co.'s successor, Hastings Insurance Co., became a stock subsidiary of the newly formed Amicrest Mutual Holding Co. on April 1. On July 1, Indiana-based Brotherhood Mutual Insurance Co. Inc. converted to a stock insurance subsidiary of the newly formed Brotherhood Mutual Holding Co. Another Indiana-based company, Indiana Farmers Mutual Insurance Co., had expected its conversion to take effect the same day.

Grinnell Mutual Reinsurance Co. could be the latest Midwestern mutual to pursue that approach as S&P Global Market Intelligence has confirmed that management of the Iowa-based insurer and reinsurer intends to present a mutual insurance holding company conversion plan to the board in August. Upon formal board approval, the plan would be subject to policyholder and regulatory approval. The Iowa Insurance Department has posted a notice for an Oct. 30 public hearing on the prospective conversion. The reorganized company to be named Grinnell Mutual Reinsurance Co. S.I. (for stock insurer) would become a subsidiary of Grinnell Mutual Holding Co.

The move is notable given Grinnell Mutual's role as a leading reinsurer of mutual companies and its history of public advocacy for the concept of mutuality. But it is not particularly surprising given the context of CEO Jeffrey Menary's statements in each of Grinnell Mutual's two most recent annual reports and the difficult market conditions the company has encountered.

Significant windstorm activity and the resulting reinsurance market capacity crunch contributed to significant underwriting losses, net losses and, in turn, surplus erosion in 2022 and 2023 at Grinnell Mutual and many of its upper Midwest-focused cedants. The cumulative 2019 through 2023 direct incurred loss and defense and cost-containment expense ratios on homeowners business in Iowa and Minnesota, two of Grinnell Mutual's four-largest states for reinsured business based on the headquarters states of its 2023 cedants, exceeded 100%, for example, reflecting multiple severe weather events throughout that stretch. Compounding matters, not only did many town, county and farm mutuals in Grinnell Mutual's primary operating territory struggle to obtain reinsurance in 2023, the company itself said it only placed a portion of its aggregate excess-of-loss retrocession contract amid "soaring" prices.

Menary, in a call to action in Grinnell Mutual's 2022 annual report, urged Midwestern insurers to react quickly to challenges stemming from "record-setting catastrophic weather events," various other inflationary pressures, and emerging technological breakthroughs.

"Doing things as we always have is a recipe for failure," the CEO wrote. He later added, "Our industry as a whole, Grinnell Mutual, our mutual members, and the agents who represent us must be willing to make significant changes to survive."

The mutual insurance holding company conversion would seem to represent such a significant change but the flexibility associated with the structure in and of itself does not guarantee favorable short- or long-term outcomes. Our analysis of the 2022 and 2023 financial results for more than 40 P&C groups that had converted to a mutual insurance holding company structure prior to 2024 found that their cumulative combined ratios before policyholder dividends of 108.0% were still well above the result for their non-mutual and non-mutual-like peers.

Several mutual insurance holding companies have taken further action to reposition themselves for a challenging environment.

Hastings Insurance, following its successful conversion, announced plans to pull out of Iowa as part of "some difficult decisions" it has had to make given the "high rate" of severe convective storm activity it has faced.

"The impacts of these weather events have been catastrophic, in some instances, and disruptive across the board," Hastings Insurance said in a July 2 filing.

Virginia-based Rockingham Insurance Co. and Maryland-based Frederick Mutual Insurance Co., each of which are part of mutual insurance holding company systems, revealed plans to exit portions of their respective businesses.

Iowa-based GuideOne Insurance Co., as previously reported, engaged in a search for a strategic business partner to bolster its capital base two years removed from a mutual insurance holding company conversion. The result was a permanent capital infusion of $200 million from a newly formed entity sponsored by Bain Capital LP in exchange for its back-office operational functions and associated long-term servicing agreement.

Grinnell Mutual's Menary suggested in the company's 2023 annual report that the industry respond to the current challenges and pursue a return to profitability by relying on the basics that have served it well for decades: proper pricing, disciplined underwriting, diligent claims management and so forth. But, he added, the current confluence of circumstances also necessitates consideration of "new solutions" to perpetuate the system of farm mutual insurers that the company had been formed in 1909 to support.

^{This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.}