How P/C Mutual Insurers Perform Compared to P/C Industry

September 30, 2015

Mutual property/casualty insurers tend to underperform the property/casualty insurance industry as a whole in several areas of performance, a new report says.

However, the A.M. Best report notes, the mission of a mutual insurance company can be very different from that of a stock insurer even though the organizational structures of the two forms of insurers are not as different as they used to be.

According to the A.M. Best report, which highlights differences between U.S. property/casualty mutuals and the overall P/C sector, the differences between the mutual and stock insurance companies’ organizational structures are much less defined today than they were when mutuals were first formed. Several mutuals have multi-state or national operations that in some cases perform in much the same way as their stock counterparts, A.M. Best says..

According to the report, while consumer behavior may not be influenced by organizational structure, the focus of management is. In a mutual company, policyholders maintain a defined set of rights and they also have ownership interests. Accordingly, the mission and performance expectations for a mutual can vary widely from those of its stock counterpart.

In terms of performance, A.M. Best-rated P/C mutuals have generally underperformed the overall P/C industry over the past five years on a loss ratio basis. The ratings agency says this is primarily due to weather-related losses.

Also, combined ratios, which vary significantly across rated mutual companies, generally underperformed the total P/C industry over the past five years. Nearly 75 percent of rated mutual reported combined ratios below 100 percent.

While the population of rated mutuals is diverse, the top 10 writers make up approximately 70 percent of the total direct premiums written (DPW) for these companies, with the top two mutual companies, State Farm Group and Nationwide Group, having 40 percent and 13 percent of total DPW, respectively.

Other findings of the A.M. Best report include:

  • Overall mutual companies report a solid level of capitalization, as measured by Best Capital Adequacy Ratio (BCAR). While results vary by company, over 75 percent of mutual companies rated by A.M. Best maintain BCAR scores in excess of 250.
  • While averaging about 10 points higher than the total P/C industry, mutual companies’ investment portfolios remain largely conservative with modest common stock holdings relative to surplus. More than half of rated mutual companies hold less than 25 percent of surplus common stock.
  • Reflective of the low interest rate environment and similar to the overall insurance industry, mutual companies struggle to find yield in their investment portfolios. The highest companies are earning just over 4 percent, while the lowest yielding companies are less than 1 percent.

A.M. Best said that while it understands the differences in the operating philosophies, an insurance carrier must have a “clearly defined strategic position and solid enterprise risk management capabilities” if it is to be successful in today’s competitive environment.

According to a new report from the The International Cooperative and Mutual Insurance Federation (ICMIF), the entire mutual and cooperative insurance sector including life insurers writes 37 percent of the total U.S. market and has grown 29 percent between 2007 and 2014 compared to 3.4 percent for the total U.S. insurance industry. Also, the entire mutual sector’s share of the total U.S. insurance market increased from 29.8 percent in 2007 to a record high 37.1 percent in 2014, the report said.

There are almost 1,800 mutual insurers active in the U.S., according to ICMIF.

Sources: A.M. Best, ICMIF

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