< PreviousAsset Management 38BEST’S REVIEW • SEPTEMBER 2022 casualty carriers in addition to life companies, she said. “When you start to talk about some of those financials, that gets into an area where you really need some deep expertise to really understand what’s going on inside the entity—what type of lending they’re doing and how you as the lender will ultimately get paid back,” Beaulieu said. Ed Kohlberg, an AM Best director, said that sort of investing is tailor-made for newer players in life insurance. The admitted assets of private equity-owned insurers swelled since the 2008 financial crisis, while at the same time, traditional insurers, stymied by low rates and on a hunt for yield, grew more willing to enter into investment partnerships with PE firms.The interplay became symbiotic, as the firms saw insurers both in-house and external as a new market for the credit and lending products they sell. “Not so much for the current players, I think it’s new players in the marketplace that have an expertise about private placements,” Kohlberg said. “I’m talking about the investment managers, companies that come and start getting into the insurance business. They might have a more aggressive allocation to private placements than traditional companies.” A traditional life insurer that has a hypothetical 10% allocation in the asset class may not see as much utility for the investments as yields rise in the public market, Kohlberg said. At the same time, they could comprise 15%-20% of portfolios for the newer companies that may have a greater appetite for private placements. “The traditional players might not still be in that spot where they feel they need to increase that private placement allocation,” Kohlberg said. “It depends company by company and by liability profile.” In its research, AM Best found during the period 2009-2019 purchases of private placement actually exceeded the number of public bonds bought in the life and annuity, property and casualty, and health segments. In life and annuity, the portion of bond holdings consisting of private placements reached 35.5% from 24.9% at the start of the period. Property and casualty also saw an increase to 16.3% compared to just 5.1% in 2009. “You wonder how high that number can get,” Lund said. “Now there are some more attractive numbers in the public markets, so I think potentially you can start to see that number slow down.” Kohlberg of AM Best said there’s another factor at work that guarantees private placements will remain: lack of tradeability. He was quick to point out that the market has remained solid and companies have grown more comfortable in the relative safety of the loans. Still, nothing comes without even a small level of risk. “There isn’t a public market for this like a stock where if you aren’t happy you sell it,” he said. “There is no marketplace like that and sometimes you’re stuck with a nonperforming one.” BR “The traditional players might not still be in that spot where they feel they need to increase that private placement allocation. It depends company by company and by liability profile.” Ed Kohlberg AM Best Asia | Europe | North America In expert hands, they can bring a symphony to life. It’s the same with asset management. Just as every orchestra has instruments and musical scores, every asset >>}iÀ >ÃÌÃÜViVÌvÌÃ>`«À`ÕVÌð ÕÌ>wiÞÌÕi`Ìi>vÌ>iÌi`iÝ«iÀÌÃV>LÀi>Ì i new life into a symphony as well as an insurance or pension plan portfolio. At Conning, we possess a deep Õ`iÀÃÌ>`}vÌ iÛiÃÌiÌii`ÃvÃÕÀiÀÃ>`«ië>Ã>`> } iÛiviÝ«iÀÌÃiÃÌÀ>Ìi}V >ÃÃiÌ>V>Ì>`>ÃÃiÌ>LÌÞ>>}iiÌ° } >Ã`iÛi«i`>Ài«ÕÌ>ÌvÀ«>ÀÌiÀ}ÜÌ ViÌà >``iÛiÀ}Û>ÌÛi>`VÕÃÌâi`ÃÕÌÃÌ >Ì i«Ì i>V iÛiÌ iÀw>V>LiVÌÛið LEARN MORE ABOUT OUR ASSET MANAGEMENT CAPABILITIES AT CONNING.COM. ©2022 Conning, Inc. All Rights Reserved. L/H Mutual Insurers 40BEST’S REVIEW • SEPTEMBER 2022 Photo by Kim Bjorheim US Mutuals Find Stability Key Amid Turbulence Following a Good 2021 Penn Mutual Life Insurance Co. led its mutual peers in growth of 2021 admitted assets. A mix of stability, investment returns and the mutual structure itself earned the company a place alongside two other mutuals posting double-digit returns. by Terrence Dopp D ave Raszeja, chief financial officer at Penn Mutual Life Insurance Co., ticks off a list of the company’s achievements in 2021: It registered its best sales year ever with $275 million worth of life products distributed; admitted assets grew; and it celebrated over a decade with consecutive annual revenue growth of 9%. At the heart of the company—and why it was able to perform so well in a turbulent year—is its structure as a mutual company, he said. “In some respects my job as a mutual company CFO is easier than the same position at a public company,” Raszeja said. “We both look to maximize value for our stakeholders but at a public company, they also need to allocate that value between their clients and stock ownership.” He continued: “Folks in the distribution space understand the Penn Mutual story—and the mutual story more broadly—and I think in volatile markets like during the pandemic or all of the things we’ve seen externally, the safe havens of the mutual structure and the long-term decision making really resonate.” In the mutual structure, each policyholder essentially owns a piece of the company, meaning the company’s sole purpose is providing insurance protection to them without a concern over shareholders. The insured population shares any profit, buying them some degree of independence from a focus on quarterly earnings and share price. Igor Bass, a senior financial analyst with AM Best who analyzes life and annuity insurers, said 2021 was a good year to be a mutual life insurer. The structure essentially allows them to remain focused on policyholders rather than stock owners. Additionally, mutual companies tend to have higher levels of capitalization than their publicly traded counterparts, he said. That capitalization allows some freedom in the way they invest that their publicly traded peers don’t always have. Mutuals generally don’t have the pressure to meet return on equity or return on revenue targets and improve book value to generate a higher share price quarter over quarter. For Penn Mutual, its admitted assets grew by 12.8% to $37.7 billion in the biggest yearly gain among mutual insurers in the Best’s Rankings of the Top 25 US Life/Health Mutual Insurers—2022 Edition ranked by 2021 admitted assets. Penn Mutual was among a trio that saw double-digit growth in the metric, with Pacific Life and Securian Financial each posting gains of 11.5%, according to the ranking. All of this comes at a time when the later stages of the COVID-19 pandemic, along with the rise of Key Points Yield: Penn Mutual, Pacific Life and Securian Financial all posted double-digit growth in admitted assets to lead mutuals in the category. Turnover: In the cases of both Penn Mutual and Pacific Life, 2022 saw transitions at the top that were filled in-house. Structure: By nature of their structure, mutual companies are unfettered from some of the short-term financial reporting and quarterly earnings requirements of publicly traded carriers. This fosters longer-term thinking, company officials said. Terrence Dopp is a senior associate editor. He can be reached at terry.dopp@ambest.com.41BEST’S REVIEW • SEPTEMBER 2022 “One of the things the mutual structure really allows is that it allows us to focus on the long term … when you’re focused on the long term you really make decisions that pay off during times of market volatility.” Dave Raszeja Penn Mutual Life Insurance Co. L/H Mutual Insurers 42BEST’S REVIEW • SEPTEMBER 2022 inflation and market volatility as balance sheet forces, caused uncertainty across the life industry and entire economy. “So they are able to take a little bit more risk and get rewarded for it,” Bass said. “They have room to do that because of the structure and the capitalization they have versus the stock companies. They are under pressure from shareholders—price and performance-wise. These mutual insurers are not.” Higher capitalizations can often translate into a willingness to accept risk of credits a little further down the ratings scale, remaining safe but carrying a slightly higher yield as a way to deploy excess capital, according to Bass. At the same time, being free from mandatory reporting under the Securities and Exchange Commission can free up some resources. “You used to talk about mutuals as the old sleeping giant,” he said. “They’re just moving along and making money and not just going with what the market is doing.” Raszeja said the company’s format was key to allowing it to look beyond “accounting noise” and approach what turned out to be a rocky year with a longer-term outlook that paid off. “One of the things the mutual structure really allows is that it allows us to focus on the long term,” Raszeja said. “And when you’re focused on the long term you really make decisions that pay off during times of market volatility.” In a turbulent 2021 and 2022, it can’t be overlooked that turnover in the top-ranked leadership came from within in the case of both Penn Mutual and Pacific Life. After serving as chief risk officer, Raszeja took the chief financial officer’s chair in March 2020, two weeks before the pandemic forced the closure of Penn Mutual’s Horsham, Pennsylvania, campus and sent employees into remote-work mode. Former Chairman and Chief Executive Officer Eileen McDonnell announced in September 2021 that she was assuming the position of executive chairman of the Penn Mutual board of trustees and David O’Malley would assume her role at the start of 2022. The Big Picture To put three mutuals’ performances in perspective, the life insurance industry as a whole saw a drop of 0.9% in 2021 to $3.28 trillion in total life issued, according to AM Best data. At the same time, while admitted assets grew 6.3% to $8.7 trillion, Penn Mutual—ranked No. 45 on that list—saw about double that rate, as reported in the Best’s Rankings Top 200 U.S. Life/Health Insurers — 2022 Edition. Topping the wider industry list of admitted assets was Prudential of America Group, which saw its admitted assets grow 7.3% to about $560.1 billion. The largest annual growth was No. 48 Resolution Life US Group, whose admitted assets jumped 124.4% to $34.9 billion. Raszeja cites two factors for driving Penn Mutual’s performance in 2021. In April, the company borrowed $500 million in a 40-year surplus note at 3.8%, bolstering capital at attractive rates before the rise of interest rates and increased costs associated with such a move. At the same time, the investment portfolio posted strong returns. Specifically, he said the return on partnerships—alternative investments where the company is a limited partner investing with general partners—was 40%-50%. Returns of that size allowed the schedule BA asset class, which is about 5% of Penn Mutual’s portfolio, to push it to an overall 7% return. Raszeja points out that the mutual structure isn’t a Get Out of Jail Free card allowing the company to shirk its responsibility to its trustees and policyholders. He calls mutuals the ultimate in stakeholder capital—an enterprise that strives for more than profit for the sake of profit. “I think we still need to answer to quarterly and annual numbers, but management is able to look trustees and policyholders in the eye and explain when there is an accounting noise problem that has to do with short-term volatility,” he said. “It doesn’t give us a pass, but it gives us a path to make the right decisions.” Looking back, 2021 was a colorful year dominated by supply chain issues and inflation. The Consumer Price Index for All Urban Consumers, a common gauge of inflation, rose 7.5% from January 2021 to January 2022, a nearly four-decade high. Reacting to rising inflation, which has proven to be stickier than initial presumptions, has been top of mind for insurers and economists throughout 2022. The Federal Reserve raised interest rates on July 27 by 0.75 percentage point, its fourth interest rate increase of 2022 meant to curb inflation. While insurers had long bemoaned persistently low interest rates, the increases brought their own set of problems as rising benchmarks created volatility and Russia’s Feb. 24 invasion of Ukraine brought more uncertainty. In addition, concerns grew over a recession in the United States. 43BEST’S REVIEW • SEPTEMBER 2022 Another Mutual’s Story At Pacific Life, which saw an 11.5% growth in admitted assets to $186.2 billion, strong stock market performance propelled the growth even as the company paid out a record $3.4 billion in coronavirus-related life claims. Pacific Life spokesman Steve Chesterman referred to an annual letter to policyholders. “As a mutual holding company, we have the benefit of long-horizon thinking, which aligns with our products and services, and allows us to invest in and focus on the needs of the future,” the letter said. “We are focused on markets and areas that present growth opportunities across our businesses while continuing an unwavering prioritization of the needs of our customers.” On April 1, Darryl Button took over as president and chief executive officer following the retirement of long-time CEO Jim Morris. Button, formerly chief financial officer, is just the 15th chief executive in the company’s 154-year history, according to Pacific Life. “Our company and industry were built to manage and respond in times of crisis, backed by a long- term promise that we will be here when you need us the most,” Button said in the letter. Going Forward While being a mutual company has its benefits, Raszeja said it doesn’t free Penn Mutual from economic realities. In the remainder of 2022, he sees geopolitical risk as a big question for the industry but said with no business outside the United States and no meaningful foreign investments the company is on solid footing. He doesn’t see any wholesale shift in how the company manages its portfolio in response to the economic climate going forward, but there could be a shift in new investments. “I would say the decision making that the mutual structure allows is to really keep your strategy unchanged even in volatile markets even though your tactics will switch,” Raszeja said. BR Best’s Rankings Top 25 US Life/Health Mutual Insurers – 2022 Edition Ranked by 2021 admitted assets. ($ thousands) 2021 Rank 2020 RankCompany/GroupAMB# Total Admitted Assets ($000)% Change 11New York Life Group069714$392,916,3265.8 22Massachusetts Mutual Life Group069702365,446,3313.8 33Northwestern Mutual Group069515334,756,1778.4 44Nationwide Life Group070350230,283,7039.2 55Pacific Life Group069720186,151,28111.5 66Guardian Life Group06968590,630,4094.9 77State Farm Life Group07012689,801,8735.5 88Securian Finl Ins Group06956568,586,24111.5 99Western & Southern Finl Group06975457,924,5898.3 1010OneAmerica Group07039949,553,3626.8 1111Mutual of Omaha Group07020340,887,2889.0 1213Penn Mutual Group06972237,688,20212.8 1312Natl Life Group06995336,549,9205.3 1414CMFG Life Group07026233,193,8377.3 1515Ameritas Life Group06979029,192,4486.5 1616Mutual of America Life Ins Co00885128,283,3619.2 1717Sentry Life Ins Group07012510,114,5828.8 1818NGL Ins Group0703585,100,3515.7 1919Physicians Mutual Group0697244,395,6675.2 2021Savings Bank Mutual Life Ins Co of MA0066963,563,5192.2 2120Pan-Amer Life Ins Group0696173,510,7160.5 2222Homesteaders Life Co0065343,451,5726.2 2323Security Mutual Life Ins Co of New York0070342,996,8383.2 2424Amer Enterprise Group0703692,849,8277.0 2525BCBS of Kansas Cos0700312,291,8963.1 Total Top 25$2,110,120,3167.1 Total U.S. Life/Health Mutual Companies$2,120,006,8957.0 Total U.S. Life/Health Industry $8,667,525,6686.3 Note: Data for some companies in this report has been received from the NAIC. Source: - Statement File - L/H, US; data as of June 21, 2022.44 BEST’S REVIEW • SEPTEMBER 2022 Expansion Spurs Growth for US P/C Mutuals Moving Up the Charts Three property/casualty mutual insurers say the use of the independent agents distribution channel, tech upgrades and careful geographic risk spread are key to their increase in business. by Anthony Bellano B usiness growth is measured by many factors, and in the insurance industry, an increase of net premiums written is one of them. Three mutual carriers, Acuity Insurance, Sentry Insurance Co. and West Bend Mutual, appearing in Best’s Rankings of the Top 25 US Property/Casualty Mutual Insurers in 2021, cited Anthony Bellano is an associate editor. He can be reached at anthony.bellano@ambest.com. Key Points The Standings: Four property/casualty mutuals in this year’s top 25 made double-digit gains in net premium growth in 2021, but the rankings for the top six insurers remained the same from last year. Strategies: Two companies that were founded in Wisconsin have expanded beyond the Midwest in recent years. Acuity Insurance is now available in 30 states, and West Bend Mutual is growing through independent agents. Business Plan: Sentry saw big gains in four of its five commercial line segments last year and has spent $600 million in the last 15 years to upgrade all of its technological and analytical systems. P/C Mutual Insurers 45 BEST’S REVIEW • SEPTEMBER 2022 several trends that fueled their double-digit growth in net premiums written. However, it’s not just adding more business but how you add it that is important. Two of the three insurers said expansion into new states was the reason for their NPW growth. Acuity President and CEO Ben Salzmann said expansion is more of a logistical challenge but it pays to have all of your products available in each state in which you have a presence. “You can enter a lot of states with a single product. When we enter a new state, we enter with all the personal and commercial lines products,” Salzmann said. Other business strategies cited are the expanded use of independent agents and the creation of new technology to support that partnership. The Companies Acuity Insurance had an 11.5% change in net premiums written, up from $1.7 billion in 2020 to $1.9 billion in 2021, according to Best’s Rankings. A company spokesman reports that $6.5 million in written premium came from Oregon, a state the company entered for the first time last year. West Bend Mutual Insurance Co., which started in Wisconsin in 1894, has added 10 states in which it does business since 2017. At the end of 2021, those states represented 17% of the company’s $1.5 billion in written premiums, according to a company spokesperson. In 2021, West Bend recorded a 12.9% change in net premiums written from 2020. Sentry Insurance Co. also expanded in 2021, although President and Chief Executive Officer Pete McPartland said the expansion came within states where the company already had a presence. The company saw an 11.2% increase in net premiums written, from $2.6 billion in 2020 to $2.8 billion in 2021. FM Global also saw double-digit growth in 2021. It had a 12.3% change in net premiums written, up from $4.7 billion in 2020 to $5.3 billion in 2021. The company, which declined to be interviewed about the increase, was the highest ranked of the four companies, at No. 6. Sentry was ranked No. 7, Acuity was ranked No. 14, and West Bend was ranked No. 16. State Farm Group topped the overall list with $69.6 billion in net written premiums, up 6.1% from 2020. In fact, the top six companies in Best’s Ranking of the Top 25 US P/C Mutual Insurers all maintained their ranking from last year, while Sentry moved up one spot, West Bend jumped three spots and Acuity remained unchanged. How Expansion Works Successful growth in new markets can mean offering new products, building relationships with independent agents and considering the spread of risk in new geographic locations. “When you enter with workers’ comp, general liability, commercial property, “We were willing to spend significantly [to upgrade all technology and analytics systems]. We are ahead of the industry by a wide margin in terms of having replaced all of our legacy systems. Having replenished all of our technology has been a real boon to us.” Pete McPartland Sentry Insurance Co.P/C Mutual Insurers 46 BEST’S REVIEW • SEPTEMBER 2022 commercial auto, along with homeowners and personal auto, it would be like taking one product into eight new states,” Salzmann said. “Different insurance department personnel are looking at each of the different products.” In 2022, Acuity expanded into Georgia, its 22nd state in the last 20 years. Founded in 1925 in Wisconsin, the company is now set up in 30 states, with a move into Arkansas targeted for January. The ultimate goal is to be set up in almost every state, Salzmann said. At the same time, the company is working on rolling out six new products, Salzmann said. Acuity Vice President of Sales & Communications Wally Waldhart said its current product line already allows the company to “handle virtually any type of commercial or personal lines account.” West Bend Mutual also was founded in Wisconsin. It initially expanded into Minnesota, Illinois, Iowa and Indiana, where it operated for many years before expanding further, President and CEO Kevin Steiner said. He said its relationship with independent agents helped fuel the company’s growth into states such as Tennessee, North Carolina, Virginia and Arizona—locations that were unaware of what West Bend was all about. There was a question as to whether the strategy they had in place in their core states could work in these new states, but they have seen tremendous success because they’ve built strong relationships, Steiner said. “We find ourselves in the No. 1, 2 or 3 spot for all of our independent agent partners,” Steiner said. Those relationships also give them greater access as the independent agent landscape changes due to mergers and acquisitions. “Some of our traditional independent agents have sold to national brokers, private equity firms or become part of an aggregator,” Steiner said. “Even though they become a little different when they’re part of a national broker, we’ve put ourselves in a good position with [those entities].” It’s paid off, financially. Over the last 10 years, West Bend’s combined annual growth has been more than 8%, while the company has recorded a combined ratio of less than 100 each of those years, according to a company spokesman. In seven of the last 10 years, it has been under 95. West Bend also offers all of its products in each state in which it has a presence. “Initially, we just took our specialty division to the new states, but in the last five years, our strategy has been to take our entire company,” Steiner said. “We have a commercial lines division, our personal lines division and we have a specialty division. Now we’re taking all those, which has also helped our growth.” He said they started with geography when considering expansion. “When you write business in Indiana, when you get to southern Indiana, you’re right by Louisville [Kentucky],” Steiner said. “Well, of course the agents all want you to write business there. Initially, it was expansion just by expanding our Midwest footprint, but now it’s expansion to look at spread of risk. For example, we’re now in Arizona. Arizona doesn’t have the same conductive storms and hail that you would see in the Midwest. Now we’re looking at geography to help us diversify our company.” Even as it has expanded outward, though, Steiner said West Bend has not forgotten where it came from. “We still are really focused on how we grow in Wisconsin,” Steiner said. “In those other states I mentioned, we still are interested in growing our relationships with our agents, in growing our premium volume in those states. It’s not like these new states are going to take over. We have a good mixture of growth in our core states and growth in our expansion states.” The Tech Connection West Bend works with 1,500 independent agents across 15 states, according to a company spokesman. Acuity and Sentry also expressed their strong ties with their independent agents as reasons for their success. Acuity relies heavily on independent agents, who prefer to work with Acuity, in part, because the company writes its own software, Salzmann said. “Acuity’s building the latest, greatest cutting-edge software that you can imagine. Independent agents want to choose the software they like the most,” Salzmann said. 47 BEST’S REVIEW • SEPTEMBER 2022 “Instead of buying one software out of 100, we built a headless architecture that can work with all 100, so that the agents can say ‘I want this one instead of that one.’ OK, we interface with that one, too.” Wisconsin-based Sentry offers a full line of property, casualty, and life insurance products, as well as personal insurance through its Dairyland brand, which provides non-standard auto, motorcycle, and off-road insurance. It recently branched out into the independent agent regional business. “That’s middle market commercial insurance written through independent agents who have strong market shares in the communities they are in,” McPartland said. “That is a startup business for us, and it’s now approaching $300 million. It will continue to grow.” Over the last 15 years, Sentry has dedicated more than $600 million to upgrade all technology and analytics systems, according to a company spokesperson. This makes it easier for independent agents to access their systems and do business with them, McPartland said. He said it also makes the company more efficient and competitive. “We were willing to spend significantly on that initiative. We are ahead of the industry by a wide margin in terms of having replaced all of our legacy systems,” McPartland said. “Having replenished all of our technology has been a real boon to us.” In 2021, Sentry saw growth across all its target markets. Highlighted by growth in its regional and trucking businesses, the company saw double-digit growth in net premiums written across its commercial lines. It saw 30.3% growth in inland marine; 22.7% growth in general liability; 19.6% growth in commercial auto; and 11.5% growth in commercial property, according to a chart provided by the company. Adding in the 5.8% increase in personal auto brings the company to the 11.2% overall premium growth number. The commercial auto growth was largely in the trucking business, McPartland said. “We’re one of the largest insurers of long-haul trucking in the country,” McPartland said. “We sell that business through about 75 independent agencies, and all those agencies do is sell long- haul trucking, for Sentry and one or two other carriers. We have someone who runs a long- haul trucking business for us. That person will have an actuarial team, an underwriting team, a product development team that focuses exclusively on long-haul trucking. They have underwriters, and distribution that is dedicated exclusively to it. By having these businesses be separate from each other, we’re able to specialize and drill down.” The regional initiative resulted in Sentry opening an office in Portland, Oregon, a little more than a year ago, and it is currently opening a new office in Colorado. “We’ll get disproportionate growth in the Rocky Mountain states, but we’re not moving into those states for the first time as a company,” McPartland said. While Sentry has expanded within the states in which it already exists, McPartland said the “You can enter a lot of states with a single product. When we enter a new state, we enter with all the personal and commercial lines products.” Ben Salzmann Acuity InsuranceNext >