More P/C Carriers With Less Surplus: Aon Ward Analysis

As we continue into 2024, many property/casualty companies are primed to grow their businesses, but not all have adequate levels of surplus to support premium growth, an Aon Ward executive said during a December 2023 webinar.

Jeff Rieder, partner and head of Ward Benchmarking, noted that many organizations in the U.S. P/C insurance industry recovered nearly all of their policyholder surplus “and then some” — during the first half of 2023 after a down year in 2022. But by the end of the third quarter of 2023, surplus levels had fallen back down to where they were at the beginning of the year, he said.

Speaking at Aon’s U.S. P/C Performance Outlook webinar in late December, Rieder said Aon is estimating just a 1%-2% decline in overall policyholder surplus through the first nine months of 2023 industrywide, but added that more significant individual dips will particularly challenge many smaller organizations that “have lost more surplus than perhaps they’re able to withstand.”

“By rough estimates, about 15% of the U.S. P/C industry is being affected by severely detrimental surplus conditions,” Rieder said. “Some companies are growing [premiums] at levels that are far greater than they’re able to grow their surplus.”

Through third-quarter 2023, about 170 U.S. carriers are operating with 20% less surplus than they began with in 2021, he said. Of those, 103 had lost more than 30% of the surplus they had at the beginning of 2021 by the end of third-quarter 2023.

And just in 2023, over 30 carriers had lost 30% — or more — of their surplus since the beginning of the year.

“This will certainly have a big impact, and we want to recognize that that’s going to challenge companies in terms of how they’re approaching 2024 and beyond,”

Rieder said during a portion of the webinar devoted to a review of key performance metrics.

During the rest of the webinar, Rieder and Charlie Gall, associate partner and Ward P/C practice leader, reviewed inflation trends, insurance labor trends and AI usage trends in the insurance industry.

Rieder and other analysts from AM Best, Standard & Poor’s and Fitch presented industry outlooks in December last year and early this year, highlighting personal lines challenges — not just in auto but in homeowners lines — and the impacts of severe convective storm losses, changing reinsurance appetites and one component of inflation, elevated shelter costs, on carrier results.

Toward the end of the webinar, Rieder stressed that the financial position of the industry as a whole still remains very strong. “With a favorable fourth quarter here, we still have a chance to get back to over a trillion [dollars] in total policyholder surplus,” he said, referring to the industrywide total at midyear 2023.

“But I don’t want to minimize the impact [of financial challenges] on many particularly personal lines-focused organizations … Several have gone into rehabilitation or liquidation, and we’re seeing many that are dealing with surplus positions that are in some cases half of what they were at the beginning of the year,” Rieder said.

“There will be some organizations that will be certainly stressed. The volatility of losses and rising cost of reinsurance and inability to get adequate rate is going to certainly stress the financial strength of those organizations,” he said.

At one point, Rieder displayed a bar graph showing global insured catastrophe losses which impacted property insurers, split between primary perils, shown in green, and secondary perils in gray. The bar for the year 2023 through the end of October, indicating a $92 billion total, was almost completely gray, indicating that convective storms, wildfire and winter weather were the bulk of the 2023 loss total — a stark comparison to any of the prior eight years. A note on the graph indicated that $55 billion of the $92 billion — 60% of the total — represented U.S. insured convective storm losses.

Midwest Suffers

While much has been written about troubles on the coasts in 2022 and 2023 — in California and Florida — Tim Zawacki, principal insurance analyst, S&P Global Market Intelligence, brought the focus to the middle of the country during S&P’s early December webinar, “IN/sights: Outlook and Trends for U.S. Insurers–What to Expect in 2024 and Beyond.”

“What we’re seeing in recent years is that the severity and the impact on the industry of convective storms, which are not as bound by geography as hurricane and wildfire, has perhaps changed the thinking [about] states like Iowa, South Dakota, Wisconsin,” said Zawacki, highlighting the high property insurance loss ratios for insurers that fueled reinsurance industry responses and eventually depleted surplus positions.

“You’re seeing reinsurers become more reluctant or not at all willing to write business for companies that are heavily concentrated in the upper Midwest,” he said. “We’re seeing in Wisconsin, in particular, the town mutual model that’s existed for 150 years really get washed under in this fallout from the reinsurance market just not having the appetite to be so geographically concentrated among cedents that may have small balance sheets,” he said.

Zawacki has written a number of articles on the S&P GMI website detailing problems in the Midwest, including one article about the impacts of 2022 and 2023 storms on Wisconsin Re, a reinsurer of Midwest town and county mutuals now in rehabilitation, and another article on the decision of Wisconsin-based SECURA Insurance to exit the personal lines market — a move Zawacki suggested other carriers squeezed by rising costs and rising cat losses would follow.

In a separate article published in Insurance Journal, Jerry Theodorou, director of the Finance, Insurance and Trade Policy Program for R Street Institute, who is a former director of Insurance Research for Conning, described the convective-storm driven troubles of Wisconsin Re and a half-dozen Midwest carriers either in rehabilitation, liquidations or receivership or experiencing surplus declines of 40% or more.

Rating agency AM Best reacted to the surplus hits at two of them, Badger Mutual Insurance Co. and Germania Farm Mutual Insurance Association, with ratings downgrades, pushing Milwaukee-based Badger’s financial strength rating to C++ (marginal) from B+ (good) in October last year, and Texas-based Germania’s down to B (fair) from B++ (good) in August.