A New York Times article this week reported troubles in Iowa and insurers pulling up stakes from the Hawkeye State, leaving the homeowners’ insurance market. The exits were prompted by horrendous financial results driven by off the charts weather patterns. I’ll detail more about the state of the Iowa market further in the piece but it is worth beginning with what makes a healthy insurance company
Insurance Company Fundamentals
Well-managed insurance companies have ample financial strength to withstand the most destructive natural and man-made catastrophes. It is, after all, their job. They are in business to make policyholders whole after unexpected loss events. The building blocks of insurers’ financial strength are a conservative investment strategy, low asset leverage, and sound risk management, with prudent risk selection and risk-adjusted rating. Insurers’ durability is demonstrated by the number of insurer financial impairments in any year typically not exceeding single digits, amounting to a small fraction of one percent of the country’s 2,651 property & casualty insurance companies. The fact that many insurers have been in business for over 200 years is a testament to their financial staying power, with fortress balance sheets. The stellar historical performance of insurance is, however, under attack. Insurers are failing in greater number than usual, and in unexpected places. Above and beyond unique issues plaguing the perennial homeowners’ insurance problem child states Florida and California, insurers are failing or pulling up stakes in many states in between.
Salt of the Earth Mutuals
Many insurance companies, especially those structured as mutuals, have been in existence for close to or more than 200 years. Such multi-centenarians, including Providence Mutual (founded 1800), the Hartford (founded 1810), and [not to be confused with The Hartford] Harford Mutual (founded 1842), Vermont Mutual (founded 1828), are still going strong. The Philadelphia Contributionship has been around since Ben Franklin founded it in 1752.
A study of mutuals by insurance research firm Conning found that there are close to 400 mutual insurance companies operating today. A large swath of them was formed in the 19th century by immigrants to the rural Northeast and Midwest who felt overcharged by big city stock insurers, so they banded together to form mutual insurance companies. The mutual structure meant they were owned by their policyholders, something that encouraged policyholders to have prudent risk management practices, minimizing losses, exerting downward pressure on price. Because mutuals are not publicly-traded, they are immune from pressures from shareholders and analysts to deliver quarterly profits and annual dividends. They are managed strategically for the long term. The mutual insurance model has been a success. Close to half the country’s long-term best-performing insurance companies were mutuals, even though mutuals account for a relatively small segment of the total P&C industry. Mutuals therefore have historically punched above their weight. This proud history is, however, being challenged by unusual loss activity, leaving many mutuals taking it on the chin, and some down for the count.
Most mutual insurers are distinguished from national publicly-traded insurers by having a strong connection to their community. Several of the best-performing mutuals have been one-state writers, capitalizing on relationships with the local agency plant and local risk knowledge. It is telling, therefore, that among the insurers pulling out of Iowa is Celina Mutual, founded in Celina, Ohio, in 1914.
What Changed in Iowa Last Year?
The 2023 results for some Iowa homeowner insurers are staggeringly poor. The 2023 loss ratios shown below for a representative group of Iowa homeowner insurers are dangerously elevated. An acceptable direct loss ratio is 70 percent, to which is added 30 points of expenses, yielding an underwriting break-even 100 percent combined ratio, to which is added approximately 8 points of investment income, generating a modest profit. But the loss ratios for this group are far above 70 percent.
| 2023 Iowa Homeowners’ Insurance Direct Incurred Loss Ratio, in % | |
| Grinnell Mutual | 290 |
| Westfield | 253 |
| Celina | 217 |
| Farmers Mutual Hail | 164 |
| Midwest Family Mutual | 160 |
| State Farm | 137 |
| Hastings | 131 |
| Allstate | 106 |
Source: S&P Capital IQ Pro
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Lousy Iowa Weather in 2023
A recap of severe Iowa weather in 2023 in the Des Moines Register makes the encounter with the elements look like a mismatch between a trim 155-pound middleweight and a 400-pound sumo wrestler. To wit:
- 2023 began with an ice storm, followed later in January with over 10 inches of snow
- The tornado season kicked in earlier than ever in 74 years of records, starting with two January twisters and 72 in the year, 20 above normal, with baseball-sized hailstones
- The summer brought more storms, including derechos (straight line wind at hurricane force) in late June
- A heat wave hit in the summer, ushering in a drought lasting the rest of the year
- In the last four months, the drought worsened, with rivers at record law stage, threatening water potability
- The year closed with record-breaking heat
Insurance Obituaries
The number of insurers entering liquidation or receivership in 2023 was close to twice the 2022 level, with 13 entering liquidation in 2023, compared to eight in 2022. When an insurer cannot meet its financial obligations, the insurance commissioner in the carrier’s home state begins the rehabilitation process. If the insurer cannot be rehabilitated, it is deemed insolvent, the insurance commissioner orders liquidation and it is put into the hands of the state insurance department as receiver. A cursory look at some property & casualty insurance failures reveals the impact of off-the-charts destructive weather, and demonstrates that even the oldest insurers are not immune from the impact of exceptionally severe weather.
Missouri-based Cameron Mutual, founded in 1892, was driven into liquidation in December, 2023, after feeling the effects of the excessively severe weather events in the year.
Wisconsin Re, a reinsurer of several dozen tiny town mutuals and county mutuals in Arkansas, Illinois, Iowa, Missouri, South Dakota and Wisconsin, also formed in 1892, entered rehabilitation in June. Its failure led to many of its cedants scrambling to find reinsurance protection.
Arkansas-based United Home Insurance, founded in 1868, was liquidated in November.
Kansas-based MutualAid eXchange (MAX) received a liquidation order in August. MAX, organized as a reciprocal, focused on mutual aid ministries and faith-based risks, was buffeted by severe weather.
Looking Ahead
The conventional wisdom that insurers are financial monoliths with unassailable fortress balance sheets is being tested by some of the most severe and destructive weather events ever experienced. There is no universal antidote to the storms’ wrath. The best response is to double down on what the most successful insurers have done historically — pursue a conservative investment strategy, have low asset leverage, and sound risk management, with prudent risk selection and risk-adjusted rating. Then knock on wood.
Editor’s Note: This blog has been updated to correct that Celina Mutual was founded in Celina, Ohio. It was incorrected stated to be founded in Iowa. We apologize for the error.
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