Farm Mutuals Survive by Joining Forces
Farm mutuals were founded on the idea that the burden of hard times was lightened when it was shared. There’s strength — and a distribution of risk — in numbers. In that way, the recent spate of farm mutual mergers almost feels like history repeating itself.
However, these mergers are taking place in response to a very different set of conditions from those which prompted communities of 19th-century farmers to band together. A combination of factors — global, national, and local — have together made this one of the most challenging insurance climates in recent memory. For many of these companies, the move to merge is about more than mutual aid. It’s about survival.
“At the recent Mutual Insurance Association of Iowa meeting, we heard one presentation that said there were 14 mergers in Iowa alone,” said Grinnell Mutual President Dave Wingert. “It used to be that if there was one or two in a year, that was busy; for Iowa to be doing fourteen, that’s a lot.”
On a national level, this uptick is multiplied by a factor of nearly five.
“Most of these firms are making operational changes in response to current conditions,” said Dave Wingert. “If those options are either not feasible or insufficient, merging is the next best option. Better to merge than simply to shut their doors.”
GLOBAL PROBLEMS
In the last few years, farm mutual firms, many of them small local companies that have served generations of customers at the county level, have tried to stay afloat in a perfect storm of adverse business conditions. It’s a storm that had its origins in a roiled global reinsurance marketplace.
“Global reinsurers haven’t been profitable in six years,” said Kevin Farrell, vice president for Reinsurance at Grinnell Mutual. “Rising interest rates and poor reinsurance performance have meant that investors in the global market have been shifting their capital to lower risk and higher return investments.”
The global result, Farrell said, has been the emergence of a hard market. For reinsurers in the U.S., this has created a supply and demand problem. With skittish investors in the global market unwilling to supply capital at the very time these companies need it most, companies have been unable to buy the reinsurance they need. This has forced them to boost premiums sky-high and shrink the catastrophic and aggregate insurance coverage they are able to offer in order to offload risk and protect newly exposed surplus.
LOCAL EFFECTS
The macro issues that affect the larger market trickle down to affect the regional, and then the local levels. As the smallest players in the market, the farm mutuals have been especially hard-hit.
“A lot of this has been made worse in our region by the loss experience we’ve had in the last few years,” Wingert said. “We’ve had to draw down in areas where we’re heavily concentrated, and that’s not only true for us; it’s true for our competitors and peers. They don’t have capacity to pass risk along, so they’re scaling back.”
Without ready access to the level of reinsurance farm mutuals have come to depend on, Wingert said, their options are limited and stark: raise premiums to unprecedented (and, for many farm operations, untenable) levels, close their doors, or join forces with other firms.
“These are very small companies that generally buy unlimited reinsurance coverage, which is unheard of in the market,” Farrell said. “Reinsuring small companies like this, that have enormous downside risk, only makes sense for reinsurers like Grinnell Mutual that reinsure a couple hundred companies distributed over multiple states to spread the risk. It can work if you have a large program.”
But there have been few companies able to work with this challenging business model. In addition to Grinnell Mutual, providers have included Farmers Mutual Hail (FMH), Wisconsin Reinsurance Corporation (WRC), and broker Guy Carpenter. These four companies provided reinsurance for more than 95 percent of the farm mutual industry.
At least that was the case until 2023. Last year, partly driven by a series of catastrophic weather events — derechos, tornados and calamitous hailstorms coming one after the other over a three-year period — WRC went out of business and FMH decided to exit the farm mutual sector. In the straightened circumstances ruling the industry, Grinnell Mutual and Guy Carpenter were unable either to pick up the resulting slack or to secure the capital they needed to continue supporting the companies they reinsured. At renewal time at the beginning of 2024, fully 20 percent of these companies learned they would lose access to coverage.
NO PAINLESS ANSWERS
For many of the farm mutuals hit hardest, this was more than a business challenge. It was profoundly personal. According to Neil Alldredge, president and CEO of the National Association of Mutual Insurance Companies (NAMIC), for these companies, staying in business was about preserving their communities and their place in them.
“Many of [the farm mutuals] — a vast majority of them — have been around for over 100 years,” Alldredge said. “And they’ve been very active in the life of their communities. I know of one firm, Washington Town Mutual in Washington Island, Wis., that’s the only mutual serving that town. It’s literally on an island with a year-round population of about 700 people. They only do business there; they give scholarships to local students every year there. That sort of community involvement is very common among these small mutuals.”
Keeping these mutuals going is about more than insurance; it’s about community connections. The sense of belonging, and the sense that staying in business means providing a vital service to their community, makes the question of what mutuals can or should do to weather the current storm a least bad choice. If business as usual is impossible and going out of business is unthinkable, then a merger is really the only option. Alldredge said Washington Town is one of the farm mutuals that has survived by going in this direction.
Beyond the fact that merging is better than dissolution, what makes it the right move for farm mutuals struggling to survive this shakeout?
“Merging has the potential to make a company financially stronger, meaning that going forward it will have more of the wherewithal it needs to navigate current market conditions,” Alldredge said.
He said a merger can confer advantages of scale, reduce technology costs, and — though cutting staff isn’t a prospect anyone relishes — savings in personnel costs as well.
“If you’re two 10-person companies that merge, and each company has an underwriter and a claims person, maybe after the merger you don’t need two underwriters and two claims people,” Alldredge said. Also, though the companies involved are often small, a merger can change their geographic footprint, and that can mean a greater distribution of risk.
ON THE FRONT LINES
Scott Lahr, managing partner for Members Mutual Insurance in Storm Lake, Iowa, has a front-line view of the challenges and advantages of mergers. His company merged with Maple Valley Mutual in Aurelia, Iowa, and German Mutual in Pomeroy, Iowa.
“The mergers took effect Jan. 1, 2024, and we’re actively working our way through renewals right now,” he said. There have been both advantages and challenges to bringing the three firms together. The challenges mostly stem from the difficulty of bringing disparate business cultures together. It can be a top-to-bottom change, with alterations in personnel, technology, the setting of premiums, and underwriting practices.
“A lot of these mutuals have been around for 125, 150 years,” Lahr said. “They have their own underwriting guidelines, and not everyone has kept their books in the same way. With us being the surviving mutual, new employees and agencies are having to adapt to our systems.”
He stresses that merging isn’t a one-way street, though. “As we train them up in our guidelines, we’re also learning to adopt the best practices from each mutual. If you’re smart, you take the best practices from all parties involved.”
Additional advantages conferred by a merger include “more territory, a greater spread of risk, and a growth in premium that pushes us away from our attachment points for reinsurance,” Lahr said. “As we get these mergers together, we’re making stronger companies.”
AN ACCELERATING TREND
NAMIC’s Alldredge said mutual mergers aren’t new, and in fact the number of farm mutuals has dwindled since it peaked around 1940. Still, the sector’s recent movement toward consolidation has been undeniable and accelerated.
Alldredge said that there were 14 mergers among NAMIC members in 2019, dropping to one in 2020, but bumping back up again to eight in 2021. When the loss experiences of recent years really began to bite, and a wave of reinsurer non-renewals threatened to swamp smaller firms, the “bump” became a jump.
“In 2023 there were 34 [farm mutual mergers],” Alldredge said, “And since we passed the January renewal season, already in 2024, 67 mergers have gotten underway that we know about. So, a big spike in the last few years, all across the Midwest, but especially in Wisconsin, Iowa, Indiana, Illinois, and Missouri.”
Alldredge said industry observers should definitely expect to see more mergers during the coming year, but “evidence seems to indicate that the pace has slowed.”
THE UNKNOWN
The climate is one of the biggest X-factors in all of this, though scientific opinion has coalesced around the thought that weather events will continue to be severe and pose an ongoing challenge to the insurance and reinsurance industries. Reinsurers, including Grinnell Mutual, will carry on with their efforts to support their members in the challenging times sure to come, but there will likely be some rough waters to navigate yet.
“Over the past two-and-a-half years, we’ve lost 31 percent of our surplus,” Dave Wingert said. “And that’s been amplified by not having the reinsurance available to us that we used to have. We simply don’t have the capital available to continue as we did. Without higher surplus levels, we can’t write as much business since we have a smaller capital base we can put at risk. And we don’t have the fuller reinsurance coverages that enable us to provide as much protection.”
For the farm mutuals, that means the best strategy for surviving and continuing to serve their policyholders may be a revamp of their business practices and a renewed emphasis on the spirit of collective support with which they were founded.
3/2024