Financial Analysis Market Report

Table of Contents

EXECUTIVE SUMMARY

• Premium registered in year-to-date (YTD) 2023 from January through April was $3.8 billion for companies on the LASLI and $1.6 billion for companies (primarily Lloyd’s syndicates and US insurers) not on the LASLI. Premiums from LASLI and Non-LASLI companies decreased by 5.9% and 2.7%, respectively, compared to the same period in 2022.
• 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 these five also had its rating downgraded.
• The total number of LASLI companies was 137 as of April 30, 2023, an increase of two from December 31, 2022. The current LASLI insurer count reflects the addition of three new insurers and the removal of one insurer during the first four months of 2023.
• Eleven LASLI applications are in the pipeline for review—three currently with the California Department of Insurance (CDI) and eight with the SLA.
• Two mergers and acquisitions deals were completed in the first quarter of 2023, affecting the following LASLI groups: AmeriTrust Group, MS&AD Insurance Group Holdings, Inc., and Transverse Insurance Group, LLC.
• In the first quarter of 2023, Brookfield Reinsurance announced its acquisition of the Argonaut Group, with the deal expected to close in the second half of 2023.
• On May 9, 2023, AM Best downgraded the financial strength rating of the Hallmark Insurance Group to C++ (Marginal). On May 10, 2023, Hallmark Specialty Insurance Company voluntarily withdrew from the LASLI. On May 15, 2023, AM Best withdrew the C++ (Marginal) rating as the group requested to no longer participate in AM Best’s interactive rating process.

PREMIUM REGISTERED — 2023 (JANUARY THROUGH APRIL)

• Total premium and fees registered through April 2023 decreased 4.9% year-to-date compared to the same period prior year.
• Premium registered from LASLI insurers was primarily from US ($3.7 billion) versus Non-US ($0.2 billion) companies.
• The count of LASLI insurers was 137 as of April 30, 2023, up by six from 131 as of April 30, 2022.
• Premium registered from Non-LASLI insurers continue to be led by Lloyd’s syndicates ($0.7 billion, down 13.3% from $0.8 billion in the same period for 2022).
• Besides Lloyd’s, the three largest Non-LASLI insurers by premiums registered are Blue Hill Specialty Insurance Company Inc. (US; $88.9 million), Associated Electric & Gas Insurance Services Limited (Non-US; $83.9 million), and Kinsale Insurance Company (US; $70.5 million). Other Non-LASLI insurers with significant premium registered include Palomar Excess and Surplus Insurance Company (US; $54.5 million), Southlake Specialty Insurance Company (US; $51.8 million), Trisura Specialty Insurance Company (US; $50.8 million), and Homesite Insurance Company (US; $43.0 million).
• SLA Financial Analysis Department monitors LASLI insurers closely—a benefit to the broker community and California home state insureds—while the monitoring/review of Non-LASLI insurers with significant California market presence are more limited in scope.

LASLI APPLICANTS

• CDI is reviewing three LASLI applications and the SLA is reviewing eight other LASLI applications.
• Three LASLI applications were added to the LASLI since January 1, 2023.

LASLI WITHDRAWALS SINCE NRRA IN 2011

• One LASLI withdrawal occurred during the first four months of 2023 (but with a removal effective date of December 29, 2022) relating to the sale of Catlin Specialty Insurance Company by AXA XL to Applied Underwriters. Subsequent to April 30, 2023, one insurer (Hallmark Specialty Insurance Company) withdrew from the LASLI.

PREMIUM REGISTERED BY AM BEST FINANCIAL STRENGTH RATING

YEAR-TO-DATE 2023 (JANUARY THROUGH APRIL)

• The overall credit quality of rated LASLI companies is strong, with an AM Best financial strength rating of Excellent or Superior. Berkshire Hathaway, Chubb, and Tokio Marine are the largest operating groups with financial strength rating of A++ by premium registered for the last five years.
• Lloyd’s syndicates, including those with missing or invalid syndicate numbers, wrote $0.7 billion (13.0%) of the 2023 year-to-date 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.
• One Non-LASLI insurer—Conifer Insurance Company (Conifer)—with a B+ financial strength rating, wrote $1.1 million (0.02%) of the 2023 year-to-date premium registered.

• • Conifer’s B+ financial strength rating and stable outlook, affirmed in May 2023, reflect its persistent adverse loss development and inability to organically grow capital and surplus through earnings, as well as the limited financial flexibility of the parent company. However, management has executed capital management initiatives, including utilization of reinsurance, to alleviate capital constraints when necessary. Expense improvement is expected prospectively as the group attempts to gain greater economies of scale, invests in technology, seeks more attractive reinsurance ceding commissions, and explores additional expense-saving initiatives.

AM BEST FINANCIAL STRENGTH RATING ACTIONS AND OUTLOOK/IMPLICATION LASLI INSURERS – 2022 AND YTD 2023

1. AMB financial strength ratings, actions, and outlook/implication per AM Best as of May 1, 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 May 1, 2023.
3. Premiums registered through April 30, 2023.
4. On May 9, 2023, AM Best downgraded the financial strength rating of the Hallmark Insurance Group to C++ (Marginal). On May 15, 2023, AM Best withdrew the rating as the group requested to no longer participate in AM Best’s interactive rating process.

In addition to the assignment of 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 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 six months).

STABLE OUTLOOK (95.0% of YTD 2023 PREMIUM REGISTERED)

• Most groups have AM Best ratings with a stable outlook, with most ratings affirmed stable (90.4% of YTD 2023 premium registered).
• Three groups and their respective LASLI companies with a financial strength rating upgrade were:

• • 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. The rating action reflects the explicit support (significant internal reinsurance support) and implicit support that is associated with being part of Berkshire Hathaway, which possesses vast financial resources and financial flexibility.
  • HDI V.a.G./HDI Specialty Insurance Company, HDI Global Specialty SE (A+): Upgrade due to consistency of strengthening balance sheet fundamentals over the past few years, underpinned by a prudent risk culture and strong and stable operating performance.
  • MS&AD Insurance Group Holdings, Inc./Transverse Specialty Insurance Company (A): Upgrade reflects the role the Transverse Insurance Group (Transverse) will have going forward following its January 3, 2023 acquisition by Mitsui Sumitomo Insurance Company, Ltd. (MSI). The rating action also considers the level of integration between Transverse and MSI and various agreements in place between the companies. Rating also reflects Transverse’s very strong balance sheet strength, adequate operating performance, limited business profile, and appropriate enterprise risk management.  
• The LASLI 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 of EUR 301.0 million and a combined ratio of 113.2%, driven by above-budget natural catastrophe losses and reserve strengthening.

POSITIVE OUTLOOK/IMPLICATION (1.9% of YTD 2023 PREMIUM REGISTERED)

• Four 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.
  • Core Specialty Insurance Holdings, Inc./Starstone Specialty Insurance Company (A-): Rating affirmation and positive outlook remain unchanged following the announcement that Core Specialty Insurance Holdings, Inc. completed its acquisition of Hallmark Financial Services, Inc.’s excess and surplus lines operations. The rating consistency reflects Core Specialty’s post-transaction, risk-adjusted capitalization, which is expected to continue to support AM Best’s opinion on Core Specialty’s balance sheet assessment. The new business could be accretive to Core Specialty’s nominal operating performance and could introduce a modicum of earnings diversification benefit. Uncertainty regarding the execution risk associated with any transaction is inherent. On August 4, 2022, AM Best revised the outlook to positive, reflective of 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.
  • Blue Cross Blue Shield of Michigan Mutual Insurance Company/Century Surety Company (A-): The rating of AmeriTrust Group, Inc. was previously placed under review with positive implications in April 2022, following the announcement that it had entered into a definitive agreement to be acquired by Accident Fund Insurance Company of America, a member of the AF Group whose parent company is Blue Cross Blue Shield of Michigan Mutual Insurance Company. The positive outlook reflects the role AmeriTrust will have going forward following its December 31, 2022 acquisition and considers the level of integration, synergies, and strategic opportunities provided to both companies. The rating has been removed from under review and assigned a positive outlook.
  • 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.

NEGATIVE OUTLOOK/IMPLICATION (1.5% of YTD 2023 PREMIUM REGISTERED)

• Several groups and their respective LASLI companies have negative outlooks or implications on their financial strength ratings. The percentage of premiums written by insurers with a negative outlook or implication remained the same at 1.5% of YTD 2023 premium registered compared to the same period in 2022.
• Three groups and their respective LASLI companies with affirmed ratings and negative outlooks:

• • United Fire Group, Inc./Mercer Insurance Company (A): Execution risk associated with the implementation of the enterprise-wide strategic plan 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.
  • 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.
  • Fidentia Fortuna Holdings, Ltd./Canopius US Insurance, Inc. (A-): Pressures on Canopius’ group’s balance sheet strength assessment. The group’s risk-adjusted capitalization decreased at year-end 2021 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.
• One group and their respective LASLI company with a rating under review and a negative outlook:

• • 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 Holdings, Inc. to sell its specialty business. This 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.Subsequent events: On May 9, 2023, AM Best downgraded the financial strength rating of the Hallmark Insurance Group to C++ (Marginal) from B++ (Good) and maintained the under review with negative implication status. The downgrade reflects the adverse arbitration decision related to a loss portfolio contract with DARAG Bermuda Ltd. and DARAG Insurance Limited, resulting in a loss to the Hallmark group estimated to be in the $25-$35 million range. This interim final award, which impacts first-quarter 2023 results, further weakens Hallmark’s balance sheet that previously had lost 26.4% of its surplus in 2022 due to continued adverse reserve development in the group’s retained and discontinued commercial auto lines. Furthermore, the cost structure of the remaining business is negatively impacted by the additional expense associated with the Core Specialty partnership.On May 15, 2023, AM Best withdrew the financial strength rating of C++ (Marginal) of the members of the Hallmark group. At the time of the withdrawal, all credit ratings were under review with negative implications. AM Best has withdrawn these ratings as the group requested to no longer participate in AM Best’s interactive rating process.
• One group and their respective LASLI company with a rating downgrade and a negative outlook:

• • Rockingham Mutual Group, Inc./Rockingham Insurance Company (A-): Rating action reflects deterioration in underwriting and operating results over the past three years that no longer support the adequate operating performance assessment. 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 net and gross underwriting leverage metrics, adverse loss reserve development, and elevated reinsurance dependence. Additionally, the negative outlook reflects AM Best’s concerns regarding the successful execution of the group’s plan to run off its commercial lines book of business and corresponding demonstrated improvement in operating results over the intermediate term.

DEVELOPING OUTLOOK/IMPLICATION (1.5% OF YTD 2023 PREMIUM REGISTERED)

• One group and their respective LASLI insurer with a rating under review and developing outlook:

• • 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

• Argo Group International Holdings, Ltd.: Announced an agreement to be acquired by Brookfield Reinsurance Ltd. in an all-cash transaction valued at approximately $1.1 billion. Argo Group International Holdings, Ltd. owns Colony Insurance Company and Peleus Insurance Company—both currently on the LASLI list.

Hot Topics – Developing

• US Domiciled LASLI Insurer Statutory Data: The US LASLI Insurers reported mixed growth for the 1^st quarter of 2023. In total their direct premiums increased by 7.2% to $15.1 billion for the 1^st quarter compared to the 1^st quarter of 2022. However, the growth was uneven with California and New York premiums decreasing by 1.7% and 2.9% respectively while Texas and Florida premiums increased by 18.6% and 13.7%, respectively. The insurers reported decreased, although still positive underwriting gains and net income when compared to the same period in 2022. The underwriting gain for the 1^st quarter of 2023 in total was $80.9 million compared to $300.7 million in the first quarter of 2022 and the net income was $393.8 million compared to $571.6 million.
• P&C 1^st Quarter Underwriting Loss: The US P&C Industry posted its first and largest net underwriting loss in a first quarter in 12 years according to S&P Global Market Intelligence. Based off statutory data available on May 19^th, the industry had a combined ratio of 102.2% on a net underwriting loss of $7.34 billion in the first quarter. An unusually active period for natural catastrophes in combination with ongoing inflation-related challenges in the private auto business led the industry to produce its highest personal lines direct incurred loss ratio. Commercial lines and mortgage insurers and reinsurers fared best among individual entities.

PREMIUM REGISTERED BY ULTIMATE PARENT¹ – TOP 20 INSURER GROUPS – 2023 (JANUARY THROUGH APRIL)

1. Ultimate parent per AM Best as of May 1, 2023.
2. Status as of May 1, 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 May 1, 2023. Lloyd’s syndicate rating = AM Best rating of the Lloyd’s market.

PREMIUM REGISTERED BY LLOYD’S SYNDICATES WITH MANAGING AGENT¹ – 2023 (JANUARY THROUGH APRIL)

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