Financial Analysis Market Report

Table of Contents

EXECUTIVE SUMMARY

• Premium registered in 2022 was $11.7 billion for companies on the LASLI and $4.6 billion for companies not on the LASLI (Lloyd’s $2.3 billion). Premiums from LASLI and Non-LASLI companies increased by 25.3% and 35.6%, respectively, compared to 2021.
• All LASLI insurers with a Financial Strength Rating from AM Best are rated A- (excellent) or better. Five LASLI Groups currently have negative outlooks on their financial strength ratings from AM Best. One of the five also had their rating downgraded.
• Total number of LASLI companies stood at 135 at December 31, 2022, an increase of five from December 31, 2021. During the first quarter of 2023 two additional insurers were added to the list and one was removed (back dated to December 2022), making the current total 136.
• Several companies applying for the LASLI are in the pipeline—four are currently with the California Department of Insurance (CDI), eight are being reviewed by the SLA.
• Statutory financial results for the US LASLI insurers that have submitted their 2022 results showed improved profitability for the second straight year. Net income increased by 59.6% for 2022 compared to 2021.
• Lloyd’s of London market reported increased underwriting profitability however also was impacted by significant investment losses.
• Berkshire Hathaway group continued to be the largest insurance group for premiums registered by the SLA in 2022. Berkshire Hathaway Companies were 9.1% of the total registered premiums up from 7.4% in 2021. The next largest was Markel Corporation which represented 4.4% of the total and AIG with 4.2% of the total.
• Berkshire Hathaway’s acquisition of Alleghany Corporation (Alleghany) was completed in October of 2022.

PREMIUM REGISTERED — 2022 (JANUARY THROUGH DECEMBER)

^{1 Totals may not equal the sum of components due to rounding.}

• Total premium and fees registered in 2022 increased 28.0% from prior year.
• Premium registered from LASLI insurers is primarily from US ($11.2 billion) versus Non-US ($0.4 billion) companies. The count of LASLI insurers is up five from 2021 to 135 at 2022.
• Premium registered from Non-LASLI insurers continue to be led by Lloyd’s syndicates ($2.3 billion, up 13.6% from $2.0 billion in 2021).
• Besides Lloyd’s, the three largest Non-LASLI insurers by premiums registered are Progressive Corporation subsidiary, Blue Hill Specialty Insurance Company, Inc. (US; $282.0 million), Kinsale Insurance Company (US; $198.2 million), and Trisura Specialty Insurance Company (US; $163.7 million). Other Non-LASLI insurers with significant premium registered include Palomar Excess and Surplus Insurance Company (US; $114.0) and Homesite Insurance Company (US; $100.3 million).
• SLA Financial Analysis Department monitors LASLI insurers closely—a benefit to the broker community as well as to the California home state insureds. Non-LASLI insurers with a significant California market presence are monitored, though reviews are more limited in scope.

LASLI APPLICANTS

• Seven insurers added to the LASLI since January 1, 2022. Currently, CDI is reviewing four LASLI Applications and the SLA is reviewing eight other LASLI Applications.

LASLI WITHDRAWALS SINCE NRRA IN 2011

• One LASLI withdrawal during 2023 (effective during 2022) due to the sale of Catlin Specialty Insurance Company from AXA XL to Applied Underwriters.

PREMIUM REGISTERED BY AM BEST FINANCIAL STRENGTH RATING JANUARY THROUGH DECEMBER 2022

^{Chart excludes premiums in suspense and other premiums that are not allocated to a company}

• Overall credit quality of rated LASLI companies is strong with AM Best financial strength rating of Excellent or stronger. As a % of premium registered by AM Best financial strength rating, credit quality of LASLI companies is somewhat stronger than Total (all Companies with premiums registered). Berkshire Hathaway, Chubb, and Tokio Marine are the largest A++ operating groups by premium registered for the last five years.
• Lloyd’s syndicates, including those with missing or invalid syndicate numbers, wrote $2.3 billion (13.9%) of 2022 premium and fees registered, making it the largest portion of the Non-LASLI category. All Lloyd’s syndicates reflect the Lloyd’s market AM Best financial strength rating of A.
• Insurers with B++ or lower financial strength ratings wrote $7.3 million (0.04%) of 2022 premium registered and consisted of Conifer Insurance Company (Conifer) and General Insurance Corporation (GIC). Both are non-LASLI companies.
  • Conifer’s ($7.2 million premium registered) B+ financial strength rating was downgraded from B++ in April 2022 with a stable outlook reflective of persistent adverse loss development, inability to organically grow capital and surplus, and limited financial flexibility of parent company. However, management is exploring capital management initiatives; the group is attempting to gain greater economies of scale, invest in technology, seek more attractive reinsurance ceding commissions and explore other expense-saving efforts.
  • GIC’s ($0.04 million premiums registered) B++ financial strength rating, affirmed in October 2022 with a stable outlook, reflects GIC’s strong level of balance sheet strength, adequate operating performance, favorable business profile, appropriate enterprise risk management (ERM), and factors in a neutral impact from the company’s ultimate majority ownership by the government of India. The long-term issuer credit rating outlook was revised to negative from stable reflecting increasing pressure on GIC’s ERM assessment.

AM BEST FINANCIAL STRENGTH RATING ACTIONS AND OUTLOOK/IMPLICATION LASLI INSURERS – 2021 AND 2022

1. AMB financial strength ratings, actions, and outlook/implication per AM Best as of 3/31/2023. Ratings “under review” have a “u” indicator after the rating. Rating is for the AMB rating unit that includes the LASLI company.
2. Ultimate parent as of 3/31/2023.
3. Premiums registered through 12/31/2022.

In addition to a financial strength rating, AM Best includes a rating outlook (stable, negative, or positive) indicating the potential future direction of the rating over an intermediate term (about 36 months). For ratings that are under review, the potential future direction is called a rating implication (negative, developing, and positive) and the forward-looking timeframe is more near-term (typically 6 months).

STABLE OUTLOOK (94.2% of 2022 PREMIUM REGISTERED)

• Most groups have AM Best ratings with a stable outlook, with most ratings affirmed stable (89.6% of 2022 premium registered). This amount is lower than prior year, which was 97.0%.
• The companies with a financial strength rating upgrade include:
  • Berkshire Hathaway Inc./Landmark American Insurance Company, Fair American Select Insurance Company, Covington Specialty Insurance Company (A++): Upgrade for certain Berkshire Hathaway Inc. companies acquired as part of the acquisition of Alleghany. Berkshire Hathaway plans to support the (re)insurance entities it acquired as part of its purchase of Alleghany.
  • HDI V.a.G.; HDI Specialty Insurance Company & HDI Global Specialty SE (A+): Upgrade due to consistent strengthening of balance sheet fundamentals, underpinned by a prudent risk culture and strong and stable operating performance.
  • Virgo Transverse Core LLC/Transverse Specialty Insurance Company (A): HDI V.a.G.; HDI Specialty Insurance Company & HDI Global Specialty SE (A): Positive outlook reflects expectation that HDI V.a.G.’s prudent risk culture and strong and stable operating performance, supported by improved profitability of its primary business segment, will further enhance the resilience of its balance sheet.
• The company with a financial strength rating downgrade include:
  • • SCOR SE/General Security Indemnity Company of Arizona (A): Downgrade reflects the deterioration in SCOR’s operating performance, which is no longer considered supportive to AM Best’s previous strong assessment. In 2022 SCOR reported a sizable net loss and a combined ratio of 113.2%, driven by above-budget natural catastrophe losses and reserve strengthening.

NEGATIVE OUTLOOK/IMPLICATION (1.7% of 2022 PREMIUM REGISTERED)

Several groups and their respective LASLI companies have negative outlooks or implications on their financial strength ratings. The percentage of premium written by insurers with a negative outlook or implication increased to 1.7% of 2022 registered premium compared to 1.2% of 2021 registered premium.

• Three groups and their respective LASLI companies had their ratings affirmed with negative outlooks:
  • United States Fire Group Inc./Mercer Insurance Company (A): Execution risk associated with the implementation of the enterprise-wide strategic plan intended to improve operational and financial performance given competitive market conditions, as well as ongoing exposure to catastrophe events that could potentially result in additional pressure on balance sheet fundamentals.
  • Fidentia Fortuna Holding, Ltd./Canopius US Insurance, Inc. (A-): Pressures on Canopius’ groups balance sheet strength assessment. The group’s risk-adjusted capitalization decreased and is expected to remain at that level through 2022. Underwriting results showed a moderate recovery in 2021, after underperformance during the period 2017 – 2020.
  • Cornell Capital GP II GP LLC; Vault E&S Insurance Company (A-): Negative outlook due to continued operating volatility, which has led to consistent underwriting and pretax operating losses on a statutory and adjusted basis since inception. The outlook considers the impact of the recently implemented reinsurance program. While it is anticipated that the reinsurance program will reduce the severity of losses, underlying challenges remain that management is addressing through several corrective actions. The group also is expected to manage anticipated growth effectively as it pertains to risk accumulations, the influence of current weather patterns and financial performance.
• One group and their respective LASLI company with ratings under review with negative outlooks:
  • Hallmark Financial Services Inc./Hallmark Specialty Insurance Company (A-u): Under review with negative implications following the announcement that Hallmark Financial has entered into a transaction with Core Specialty Insurance Holding, Inc. to sell its specialty business. Transaction mitigates a material capital decline in 2022 related to significant adverse reserve development. Significant execution risk remains related to restoring profitability across Hallmark’s retained lines. 
• One group and their respective LASLI company had their ratings downgraded and their ratings are under review with a negative outlook:
  
  • Rockingham Mutual Group, Inc.; Rockingham Insurance Company (A-): Rating action reflect deterioration in underwriting and operating results over the past three years that no longer support the adequate operating performance. The group’s underwriting performance has been impacted negatively by losses from its commercial and specialty program business, weather-related events and increased loss severity in their homeowners and auto physical damage books of business. The increased severity was due partly to higher inflation and supply chain issues. Outlook is negative to reflect the mounting pressures on the group’s balance sheet strength due to its elevated underwriting leverage metrics, adverse loss reserve development and elevated reinsurance dependence.

POSITIVE OUTLOOK/IMPLICATION (2.3% of 2022 PREMIUM REGISTERED)

• Groups and their respective LASLI insurers with affirmed ratings and positive outlooks were as follows:
  • Assurant, Inc.; Voyager Indemnity Insurance Company (A): Positive outlook reflects the expectation that the group’s operating fundamentals and future capital generation should remain favorable over the intermediate term. The group’s ability to generate strong earnings and cash flow through operations on a pre-dividend basis, along with having a strong parent, Assurant, Inc., are considered in the revised outlooks.
  • Hamilton Insurance Group, Ltd.; Hamilton Insurance DAC (A-): Positive outlook reflects the expectation that Hamilton will maintain its improving trend of profitability and continue generating earnings that are accretive to the group’s balance sheet strength.
  • Core Specialty Insurance Holdings, Inc.; Starstone Specialty Insurance Company (A-): Positive outlook reflects the improving business profile of the consolidated Core Specialty group, following its expansion initiatives in 2021 and recent integration of Lancer Insurance Group. Core Specialty has demonstrated an ability to source seasoned and profitable books of business, while continuing to track closely with goals for key performance indicators. While Lancer Insurance Group contributes to the overall Core Specialty strategy, its outlooks are stable due to the lack of history of contributing to and being supported by the greater Core Specialty group.
• One group and its respective LASLI insurer with positive implications as rating is under review:
  • Fosun International Holdings Ltd.; Century Surety Company (A- u): Rating action reflects the announcement on April 12, 2022, of a definitive agreement under which Accident Fund Insurance Company of America and its subsidiaries will acquire Star Insurance Company and its subsidiaries (collectively, AmeriTrust Group).

DEVELOPING OUTLOOK/IMPLICATION (1.6% OF 2022 PREMIUM REGISTERED)

• One Group and their respective LASLI insurers with under review ratings and developing outlook were as follows:
  • Argo Group International Holdings, Ltd.; Peleus Insurance Company/Colony Insurance Company (A- u): Rating action reflects the announcement that Argo Group and Brookfield Reinsurance Ltd. have entered into a definitive merger agreement whereby Brookfield Reinsurance Ltd. will acquire Argo Group in an all-cash transaction valued at approximately $1.1 billion. Rating will remain under review pending completion of the acquisition, and until AM Best can complete its assessment of Argo Group’s post-acquisition rating fundamentals.

HOT TOPICS – MERGER ACTIVITY

^{1 Information as of March 1, 2023.
2 Names of LASLI Subsidiaries or Applicants are followed by either a (T) for Target or an (A) for Acquirer.}

• Catlin Specialty Insurance Company: Was sold as a clean shell to Applied Underwriters Inc. Catlin Specialty Insurance Company was owned by AXA SA, and they have transferred its business to current LASLI affiliate, Indian Harbor Insurance Company.
• Argo Group International Holdings, Ltd.: Announced an agreement to be acquired by Brookfield Reinsurance in an all-cash transaction valued at approximately $1.1 billion. Argo Group International Holdings, Ltd. owns current LASLI Insurers Colony Insurance Company and Peleus Insurance Company.

Hot Topics – Developing

• LASLI Insurer Financials: Most of the U.S. domiciled LASLI Insurers have submitted their financial statements for year-end 2022. Of those with financial data the following highlights were noted:
  • Their overall capital and surplus decreased 3.8% to $36.4 billion at year-end 2022 compared to 2021. The decrease was largely driven by a large decrease at one Berkshire Hathaway company, due to change in unrealized capital gains and losses. Of these insurers more than 60% saw their capital and surplus increase year over year.
  • The LASLI Insurers wrote significantly more direct business, up 13.1% in 2022 compared to 2021.
  • For the second straight year the insurers reported a combined underwriting gain, following several years of underwriting losses. In total the underwriting gain was $1.2 billion for 2022 compared to an underwriting gain of $276.7 million for 2021.
  • Net income of the group also increased, by 59.6% to $3.8 billion. This was the largest net income reported for at least the last five years.

• Lloyd’s of London Financials:
  • Highest underwriting profit since 2015 at £2.6 billion ($3.2 billion), helped by average 8% rate increases.
  • Large investment losses cause a full year loss of a £769 million in 2022, compared with a £2.3 billion profit in 2021.
  • Gross written premium grew by 19% to £46.7 billion, with casualty and property both up 25%
  • Combined ratio improved to 91.9% for 2022, helped by prior year releases.

PREMIUM REGISTERED BY ULTIMATE PARENT¹ – TOP GROUPS – 2022 (JANUARY THROUGH DECEMBER)

1. Ultimate parent per AM Best as of March 31, 2023.
2. Status as of March 31, 2023. An insurer merged with and into another LASLI carrier is reported as having a LASLI status if premiums registered are significant.
3. AMB financial strength rating per AM Best as of March 31, 2023. Lloyd’s syndicate rating = AM Best rating of the Lloyd’s market.

PREMIUM REGISTERED BY LLOYD’S SYNDICATES WITH MANAGING AGENT¹ – 2022 (JANUARY THROUGH DECEMBER)

1. Source: Standard & Poor’s as of March 31, 2023, and Lloyd’s List of Active Syndicates & Managing Agents for 2022 Year of Account.
2. All Other includes Lloyd’s premium registered with a missing or invalid syndicate number.