Reserve Strengthening Leads to 103 Combined in 2021
The year 2021 was one of successes and struggle for Midwest Family Mutual (MFM). December not withstanding, storm activity was down last year. MFM incurred $12M of net storm losses in 2021 which represented a 6% weather related loss ratio. That compares to a 11% weather related loss ratio over the past five years. More prominent use of wind/hail deductibles in states that experience more frequent severe convective activity along with pinpointed use of cosmetic roof exclusions and ACV valuation aided a lower number. That reprieve was more than offset by poor prior year development primarily brought on by inflation. Construction materials and labor costs impacted property losses that were under-reserved in prior years, and social inflation manifested itself in the form of higher settlements and jury awards. The latter is something the industry as a whole is experiencing with well-funded plaintiff bars, and jury decisions are clouded by the higher compensation they see being paid to CEO’s and sports stars. Ultimately, it’s a cost that’s being borne by employers who are paying much higher premium payments today than they were just five years ago. We continue to advocate and provide a diligent defense for our policyholders with an eye towards fair, prompt, and equitable settlement.
At Midwest Family Mutual, we try to control premium costs as much as possible. While we’ve been forced to increase rates to compensate for inflated losses, we operating more efficiently which has led to industry leading expense ratios. That, in turn, allows for a higher permissible loss ratio and more competitive premiums in targeted lines and classes. Our deficient prior year reserve development required more aggressive strengthening in 2021 resulting in what we anticipate to be an anomalous combined ratio of 103. This was the first year since 2011 that we’ve experienced an underwriting loss. Our underwriting loss required more vigilant underwriting and inflated pricing especially in the latter half of the year. Despite a more defensive posture, we were able to grow our written premiums by 7.2% from $217M to $232M. Coming into 2022, we’re optimistic that our book is in a healthy place and our reserves are adequate. The pain we paid in the last year will lend itself to anticipated underwriting profitability in 2022. As such, we’ve budgeted 9% growth and will pursue a more aggressive posture in pursuit of new business.
Not all was gloomy in 2021. Historically high stock returns padded what ended up being a record investment return of $14M. In addition, higher interest rates lowered our pension benefit obligation which had another $5M pre-tax impact on surplus. In all, our surplus grew from $119M to $132M during a year in which we experienced an underwriting loss. Also, our First Class Portfolio new business more than doubled from $2.3M to $4.7M in 2021 with the addition of new Sales Reps to aid Agency quoting. We’ll want to more than double that new business again to over $9M in 2022 in order to reach our overall FCP premium goal of $20M.
In 2021, we expanded Midwest Family Advantage (MFA) to seven new states. Those were Colorado, Kentucky, Michigan, Montana, New Mexico, Oregon, and Pennsylvania. MFA is a wholly owned subsidiary of MFM that offers workers compensation for tougher to place risks. This company now overlaps all non-monopolistic states where MFM writes. MFM entered three new states as well. We are now writing a full array of commercial lines in the states of Kentucky, Michigan, and Pennsylvania. Commercial auto and garage are not yet available in Michigan and Pennsylvania. Our 2022 plan includes new Agency appointments in Kentucky, but we won’t likely appoint new Agents in Michigan and Pennsylvania in 2022. We’re prepared to write multi-state risks with locations in those new states, but they’re primarily there as levers for future growth.
MFM had a moratorium on Agency appointments in 2021 as we looked to drive our growth from existing relationships. Despite weekly requests for contracts, we felt it prudent to focus on growing the businesses with which we’re already contracted. In 2022, we’ll strategically appoint 20 new Agencies with 5-10 coming in the state of Kentucky. Our state expansion positions us to be more selective in our Agency appointments. That provides more enhanced contract value to our existing Agencies and allows for us to appoint only the best. Despite industry consolidation of the Agency and Broker ranks, we continue to be selective in our appointments. In this way, we can ensure quality advice and consultation for our Policyholders.
All in all, we’re excited about our 2022 prospects. As an insurance carrier that prides itself as a relationship company, we’ll be more free in the coming year to do what we do best… discuss and creatively assess the merits of various risks in a way that creates a win for our Agent and a win for their Customer. The future is bright…
Aaron W. Boyd, MBA, CPCU, CIC
President & Chief Operating Officer
Midwest Family Mutual