As the US mutual insurance industry turns its sights toward 2023, many companies believe they are operating in the most dynamic reinsurance environment that the market has experienced in 15 years. The accuracy of that perception is revealed as part of a deeper look into today’s reinsurance market featured in the fifth annual Mutual Factor report released last week by the National Association of Mutual Insurance Companies (NAMIC) and Aon, during NAMIC’s 127th annual convention in Dallas (USA).

The latest report, Mutual Factor 2022 – 5 Years Later: How Performance, Structure, and Focus Set Mutual Insurance Companies Apart, again compares performance metrics over the past 12 months and over a five-year time frame, in addition to AM Best (an ICMIF Supporting Member) credit ratings impact and new emerging issues. As part of its ongoing look at key industry stakeholders, the 2022 report includes takeaways and observations from a series of in-depth interviews with leaders of the reinsurance industry.

Neil Alldredge, NAMIC President and CEO, believes the 2022 report offers both data and insights that are particularly relevant in today’s market. “After five years, the annual Mutual Factor report has come of age, providing a comprehensive analysis of the financial performance of the mutual insurance sector, along with insights and perspective into how the mutual structure has survived, based on feedback from one its key stakeholder groups.

“What we learned from the 2022 thought leadership study is just how closely aligned in philosophy and goals the mutual industry is with the reinsurance industry,” Alldredge continued. “The biggest takeaway from this new report is the value that each sector recognizes and places on the other, and how they continue to support each other in protecting the lives and property of policyholders.”

The 2022 Mutual Factor report conducted a series of in-depth interviews with 24 CEOs and senior executives from leading reinsurance companies in the US, Germany, the UK, and Bermuda. Companies ranged in size from small to very large global firms and included both publicly held and mutual companies. Specific highlights include:

• Most reinsurers believe that extreme weather events are becoming more frequent and more severe. Many of these events (eg  derechos, wildfires) are unmodeled and the true extent of risk may be unknown. These events have had a negative impact on reinsurers’ earnings in recent years.
• Economic inflation, while expected to be short-lived, is a key year-end consideration. Social inflation is a looming concern and considered a more insidious problem by reinsurers.
• Reinsurers see mutuals as a desirable and a stable part of their portfolios. Yet, some very large reinsurers value working with the largest mutual insurers, feeling it is uneconomical to deal with smaller, regional mutual companies.
• Growth is not a key criterion used by reinsurers in assessing the financial health of mutual insurers. In fact, rapid growth is a red flag, unless there is a solid strategy behind it. In general, reinsurers look at results, ratings agencies, key ratios, and management as the most important factors.

From a market performance standpoint, the 2022 Mutual Factor report found that the US mutual insurance industry ended 2021 with strong performance overall, with a record surplus of more than 13% growth. And despite a challenging first six months of 2022, the industry saw a return to some pre-pandemic normalcy. The annual update evaluated nearly 30 performance metrics for mutual insurance companies in 2021 compared to other insurer categories and assessed the impact of rating agency criteria on mutuals. Among the key findings on financial performance:

• In Q2 2022, the policyholder dividend ratio for mutual insurers was normalized to pre-pandemic levels at around 1%. Stock insurers’ dividend ratios remained flat through the pandemic as they returned money to insureds through premium credits.
• Mutual insurers ran at an underwriting loss as a result of the challenging quarter for the industry. The combined ratio for mutual insurers for Q2 2022 was 113.8% compared to 97.0% for stock companies, which operated at an underwriting profit, aligning with their focus on returns.
• In 2021, the US industry hit a record USD 1.053 trillion in capital and surplus, growing 13.3%from 2020. Mutual insurers grew by 10.1%, while stock companies grew by 15.8%. The growth in surplus was mainly attributed to increase in unrealized capital gains and insurer income from the soaring stock market and declining interest rates. Mutuals’ five-year compound average growth rate of 7.4%, while stock companies’ five-year surplus growth rate of 9.1%, has been bumped up by strong 2021 results.
• The pace of increase in capital and surplus was slightly slower than that of premium growth in 2021, therefore increasing leverage industrywide – and thereby decreasing the amount of capital standing behind each dollar of premium written. Mutual insurers were slightly less leveraged than their stock counterparts in 2021, with USD 1.49 in policyholder surplus backing up each dollar in net premiums written compared to USD 1.45 for stock insurers.
• Decreasing and low interest rates remained a challenge for the insurance industry in 2021, with yields on invested assets remaining under 3.0% for mutual and stock companies alike, at or close to their lowest levels since the beginning of the financial crisis in 2008. Yields are slightly lower for mutual insurers, suggesting a somewhat more conservative fixed-income portfolio. However, the first half of 2022 saw a stark shift in this trend with rising yields and interest rates.
• The return on average surplus for the mutual segment was 3.5% compared to 8.5% for stock insurers. Mutual insurers typically operate with lower returns on surplus, i.e., equity, given their less leveraged positions, and because policyholders, not external shareholders, are the owners of the company and benefit in other ways from their relationship with insurers, eg policyholder dividends and lower pricing.

NAMIC consists of more than 1,500 member companies, including seven of the top 10 property/casualty insurers in the United States. The association supports local and regional mutual insurance companies on main streets across America as well as many of the country’s largest national insurers. NAMIC member companies write USD 357 billion in annual premiums and represent 69% of homeowners, 56% of automobile, and 31% of the business insurance markets.

In ICMIF’s recent Global 500 for 2022 report, ranking the world’s largest mutual and cooperative insurers, 207 of the 500 largest mutuals (in both life and P/C business) globally were based in the USA: including seven of the 10 largest mutual insurers in 2022.