Despite notable premium growth in 2022, elevated inflation led to higher claims costs resulting in a $31 billion underwriting loss for U.S. property/casualty mutual insurance companies, according to a new AM Best report.
Best’s Market Segment Report, “Secondary Perils, Inflation Underlie Volatile Operating Results for Mutuals,” reported that mutual insurers’ personal automobile and property lines were hardest hit by inflation, as claims costs throughout 2022 and into 2023 continued to rise.
Despite adjustments, rapid onset made it difficult for the rated mutuals to avoid the impacts, the report added.
Mutuals remained largely resilient in 2022, despite economic challenges, by shifting their focus to profitability, “implementing aggressive rate changes, ensuring adequate insurance-to-value and refining risk selections through tighter underwriting guidelines.”
Rated mutual insurers’ focus on rate adequacy led to an increase of net premium growth to 9 percent in 2022, more than in any year in recent history, according to the report.
“Pricing was a top priority for mutuals, which generally rely on sound operating earnings to build capital,” said Lauren Magro, financial analyst, AM Best. “Given ongoing rate actions to address economic inflation, premiums are likely to keep rising. However, there will be some offset from reinsurance costs, which are expected to stay elevated over the near term.”
As a result of rising inflation, higher natural catastrophe losses, secondary peril losses and social inflation, P/C mutuals reported a combined ratio of 109.9 in 2022.
The increase in premium levels led to a slight decline of the underwriting expense ratio.
“Some mutual insurers are shifting toward commercial lines to diversify their exposures,” said Brian O’Larte, director, AM Best. “Over the past five years, rated mutuals have lowered their exposures to the personal lines by more than three percentage points. Though still exposed to severe weather, the commercial lines side tends not to fluctuate as much as personal lines would in the event of a catastrophe.”
Mutuals’ policyholder surplus declined in 2022, the first time it has done so in the last decade. Volatility on the underwriting side combined with a decline in the equity markets, made it especially difficult for insurers to grow surplus.
Though the entire property/casualty industry has experienced difficulty over the past year, AM Best indicated that many rated mutual companies remain financially strong, the result of mutuals’ market share changing slightly over the past decade. This is indicative of the segment’s operating philosophy and core values, with a strong focus on long-term stability from a financial and operational perspective.