Financial Analysis Market Report

Executive Summary

• Total premium registered in year-to-date (YTD) 2023 from January through August was $11.1 billion, an increase of 0.9% from $11.0 billion for the same period in 2022. Premium registered in YTD 2023 was $7.4 billion for companies on the LASLI and $3.7 billion for companies (primarily Lloyd’s syndicates and US insurers) not on the LASLI. Premiums from LASLI companies decreased by 5.8% and premiums from Non-LASLI companies increased by 17.7% 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 August 31, 2023, an increase of two from December 31, 2022. The current LASLI insurer count reflects the addition of five new insurers and the removal of two insurers during the first eight months of 2023. Subsequently, one additional insurer was added to the LASLI on September 6, 2023.
• Eleven LASLI applications are in the pipeline for review—four currently with the California Department of Insurance (CDI) and seven with the SLA.
• A merger and acquisition deal were completed in the second quarter of 2023 affecting LASLI insurer Independent Specialty Insurance Company (ISIC), in which Markel Group Inc. sold ISIC to Velocity Holdco, LLC. Consequently, ISIC requested to withdraw its AM Best financial strength rating.
• Several property and casualty entities were exposed to the Vesttoo Ltd reinsurance letter-of-credit fraud. Exposed entities reported declines to their June 30, 2023 surplus as a result of provisions set up for reinsurance.

Premium Registered – 2023 (January Through August)

• Total premium and fees registered through August 2023 increased 0.5% year-to-date compared to the same period prior year.
• Premium registered from LASLI insurers was primarily from US ($7.1 billion) versus Non-US ($0.4 billion) companies.
• The count of LASLI insurers was 137 as of August 31, 2023, up by three from 134 as of August 31, 2022. Subsequently, one insurer was added to the LASLI on September 6, 2023, bringing the count to 138.
• Premium registered by Lloyd’s syndicates make up a significant portion of premium registered from Non-LASLI insurers ($1.62 billion, up slightly from $1.57 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; $213.4 million), Mobilitas Insurance Company of Arizona (US; $157.6 million), and Kinsale Insurance Company (US; $149.7 million). Other Non-LASLI insurers with significant premium registered include Associated Electric & Gas Insurance Services Limited (Non-US; $143.9 million), Trisura Specialty Insurance Company (US; $110.1 million), Palomar Excess and Surplus Insurance Company (US; $106.9 million), and Southlake Specialty Insurance Company (US; $106.8 million).
• Mobilitas Ins. Company of Arizona, which is part of CSAA Insurance Group, commenced business in December of 2021. California premium registered for the company grew significantly in YTD 2023 to $157.6 million from no premium registered in the prior year. The company is part of the CSAA Insurance Group rating unit, which has a financial strength rating of A (Excellent) from AM Best.
• 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 four LASLI applications and the SLA is reviewing seven other LASLI applications.
• Six LASLI applications were added to the LASLI since January 1, 2023.

LASLI Withdrawals Since NRRA in 2011

• Two LASLI withdrawals occurred during the first eight months of 2023: Catlin Specialty Insurance Company (but with a removal effective date of December 29, 2022) and Hallmark Specialty Insurance Company (removal effective date of May 10, 2023).

Premium Registered by AM Best Financial Strength Rating Year-To-Date 2023 (January Through August)

• 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 continue to be 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 $1.6 billion (14.6%) of the 2023 year-to-date premium and fees registered, making it one of the largest portion of the Non-LASLI category. All Lloyd’s syndicates reflect the Lloyd’s market AM Best financial strength rating of A.
• Notable growth in premium registered from Non-LASLI US insurers accounting for $1.7 billion (14.8% of market share) of the 2023 year-to-date premium and fees registered compared to $1.0 billion (9.3%) in the prior period, making it the largest portion of the Non-LASLI category.
• One Non-LASLI insurer—Conifer Insurance Company (Conifer)—with a B+ financial strength rating, wrote $2.0 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 September 1, 2023. Ratings “under review” have a “u” indicator after the rating. The rating is for the AMB rating unit that includes the LASLI company. The rating action may only apply to certain companies in the rating unit.
2. Ultimate parent as of September 1, 2023.
3. Premiums registered through August 31, 2023.

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).

• Most insurers have AM Best ratings with a stable outlook, with most ratings affirmed stable (86.9% of YTD 2023 premium registered).
• Five 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.
• Fairfax Financial Holdings Limited (Fairfax)/Hudson Excess Insurance Company, Hilltop Specialty Insurance Company (A+): Upgrade for certain Fairfax companies as part of the Odyssey Group Holdings, Inc. rating unit. The rating upgrades recognize the removal of ratings drag from Odyssey Group’s parent company, Fairfax, which has demonstrated sustained improvement in its overall credit profile in recent years (by reducing debt leverage and improving overall operating performance, while maintaining consistently sound balance sheet strength 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.
• ProAssurance Corporation/NORCAL Specialty Insurance Company (A): Upgrade reflects the implicit and explicit support provided by ProAssurance Group following management’s integration efforts since its acquisition of NORCAL Specialty Insurance Company (NORCAL) in 2021. Also considered is NORCAL and its subsidiaries’ strategic importance to the group, common management, and significant earnings contributions. 
• Two groups and their respective LASLI companies with a financial strength rating downgrade include:
• SCOR SE/General Security Indemnity Company of Arizona (A): Downgrade from A+ (Superior) 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.
• United Fire Group, Inc./Mercer Insurance Company (A-): Downgrade from A (Excellent) was driven by the downturn in the group’s operating performance through June 30, 2023, which included $53.0 million in reserve strengthening across multiple casualty lines and across multiple accident years, elevated catastrophe losses, a small number of large surety losses, and the impact of surety reinsurance reinstatement premiums.

• Five 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.
• Skyward Specialty Insurance Group, Inc./Houston Specialty Insurance Company (A-): Positive outlook is driven by the group’s operating performance, which is reflective of a sustained trend of improving underwriting results since 2020 following a change in executive leadership, as well as consistent investment income. Following a period of underwriting volatility, management instituted several correcting initiatives to refine its underwriting focus and risk selections as a specialty lines writer, and improved underwriting profitability has been noted since that time in its targeted niches. The group also has benefited from numerous parental capital contributions to support its operations.
• 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.

• Two groups and their respective LASLI companies with affirmed ratings and negative outlooks:
• 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.
• Two groups and their respective LASLI company with a rating under review and a negative outlook:
• Pine Brook Capital Partners II (Cayman) AV, LP/Clear Blue Specialty Insurance Company (A- u): Under review with negative implications given the current uncertainty around Clear Blue’s ability to rely on certain letters of credit, posted to back reinsurance placed by Clear Blue with certain reinsurers. The ratings will remain under review pending continued discussions with Clear Blue’s management and their ability to replace certain programs and/or letters of credit to allow for proper reinsurance credit at the time of financial statement filings.
• GuideOne Mutual Holding Company/GuideOne National Insurance Company (A- u): Under review with negative implications given AM Best’s concerns with a significant decline in surplus and risk-adjusted capital ratios. GuideOne has taken initial steps to seek out capital solutions and the transaction would likely take the form of an affiliation or mutual holding company merger combined with reinsurance and/or other capital guarantees; a successful transaction could mitigate a material decline in GuideOne’s risk-adjusted capitalization. The decline was caused by a significant deterioration in surplus in 2022 driven primarily by a net loss, along with unrealized capital losses. The net underwriting loss reflects significant prior-year reserve development of the GuideOne’s direct, open market excess and surplus specialty business that has now been exited, as well as current accident year reserve strengthening due to rising loss costs and an increase in claims frequency (particularly in the aforementioned excess and surplus business).
• 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.

• 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

¹ Information as of  8/31/2023.
² Names of LASLI Subsidiaries or Applicants are followed by either a (T) for Target or an (A) for Acquirer.
³ LASLI/Eligible Subsidiaries includes LASLI companies but excludes Lloyd’s Syndicates and NRRA eligible subsidiaries with premium registered below a minimum threshold. For 2022, the threshold is $10.0 million.

• 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.
• Independent Specialty Insurance Company: Velocity Holdco, LLC completed its acquisition of LASLI insurer, Independent Specialty Insurance Company, a member of State National Group, a division of Markel Group Inc on June 27, 2023. State National and its subsidiaries executed an amendment to its inter-company pooling agreement to reduce Independent Specialty’s participation in the pool to 0.0%. Consequently, Independent Specialty withdrew its financial strength and long-term issuer credit ratings by AM Best, effective July 6, 2023.

Hot Topics – Developing

• Vesttoo Letter of Credit Fraud: Vesttoo Ltd., which has filed for Chapter 11 bankruptcy protection, said “pervasive and systemic misconduct” by a “limited set” of executives and other third parties was responsible for dozens of fraudulent letters of credit.
   
  According to Standard & Poor’s, five insurers embroiled in the Vesttoo Ltd. reinsurance letter-of-credit scandal have formally quantified the initial financial impact, with the company most severely affected (Homeowners of America Ins. Co.) facing temporary regulatory supervision by the Texas Department of Insurance after its surplus plunged to a negative $29.6 million as of March 31, 2023. The June 30, 2023 surplus levels of Clear Blue Ins., Highlander Specialty Ins. Co, Rock Ridge Ins. Co, and Clear Blue Specialty Ins. Co. marked declines of more than 22.8%.
   
  Homeowners of America Ins. Co and the Clear Blue group accounted for more than two-thirds of the $1.3 billion in letters of credit issued to 49 individual property and casualty US-domiciled cedants in the name of China Construction Bank Corp. (CCB) to collateralize reinsurance agreements. Clear Blue group combined held $577.3 million in CCB letters of credit at year-end 2022 and Homeowners of America Ins. Co reported $300.0 million. Other noteworthy cedants included Trisura Group Ltd. subsidiaries, which reported $66.7 million, Palomar Specialty Ins. Co. reported $23.5 million, Guide One Mutual Holding Co. subsidiary reported $35.1 million, United Automobile Ins. Co reported $24.4 million, Root Insurance Co. reported $18.6 million, Sutton National Ins. Co. and Sutton Specialty Ins. Co combined reported $17.4 million, and Accelerant Specialty Ins. Co. reported $13.5 million.
   
  Accelerant Specialty Ins. Co. established a $19.2 million provision, which compounded the impact of a $25.1 million decline in its surplus. Its June 30, 2023 surplus of $20.4 million marked a decline from the originally reported December 31, 2022 value of $67.5 million.
   
  US property and casualty cedants reported more than $57.0 billion in letters of credit as collateral for reinsurance agreements as of year-end 2022. Subsidiaries of Citigroup Inc. were linked to upward of $8.4 billion of that amount, which ranked highest for any banking group.
• Stamping Office Premium and Transaction Report: Surplus lines premium reached nearly $36.0 billion (representing a 15.9% increase over the same period in 2022) and premium bearing transactions neared 2.9 million (an increase of 2.6% during the year compared to the year prior) through the first six months of 2023, according to the 2023 Midyear Report of the U.S. Surplus Lines Service and Stamping Offices. Comparing 2022 and 2021 surplus lines market data, key lines of business were identified as: auto liability, auto physical damage, disability/A&H, inland marine, liability (non-professional), multi-peril, professional liability, property, and residential/homeowners/other personal property. Stamping office states accounted for 64.0% of all US surplus lines premium volume in 2022.
• Berkshire to Exit California Homeowners Market: AmGUARD Insurance Company, a Berkshire Hathaway Inc. subsidiary and personal and commercial property and casualty carrier, said it would cease writing homeowners business in California beginning August 21, 2023 (with the withdrawal of the program effective for policies with an expiration date of November 14, 2023 and later). The Company entered the market in 2019 and quickly expanded to produce $69.9 million in homeowners direct premiums written in the state in 2022, accounting for 19.4% of its overall national volume in that business line.
   
  Of the top 35 individual homeowners carriers based on 2022 direct premiums written, including both State Farm General and AmGUARD, at least 19 have implemented or intend to implement measures to reduce their California homeowners writings. These 35 entities collectively accounted for 87.6% of the $12.5 billion in homeowners direct premiums written in California in 2022, according to S&P Global Market Intelligence.
• P&C 2^nd Quarter Underwriting Loss: An elevated level of natural catastrophes and persistent challenges in the private-passenger auto business sent the US property and casualty industry to its worst second quarter in more than a decade, according to S&P Global Market Intelligence (S&P). S&P preliminarily calculated a combined ratio of 106.5% for the second quarter and 104.3% for the first half of 2023 based on a consolidation of results reported by more than 2,400 individual entities, representing increases from 103.6% and 99.8% for the same collection of entities in the comparable periods in 2022. The first half combined ratio also represents a 12-year high.
   
  The second-quarter net underwriting loss of $15.4 billion increased from $8.7 billion in the year-earlier period to the highest level in a comparable quarter since 2011. The personal lines-focused group led by State Farm Mutual Automobile Insurance Company alone accounted for $3.9 billion and $7.2 billion of the industry’s second-quarter and first-half underwriting losses, respectively. Additionally, wildfires in Hawaii bode ill for third-quarter results.
   
  Of the 37 individual entities that generated underwriting losses of $100.0 million or more in the second quarter, 29 produced a majority of their 2022 net premiums written from the personal lines. The Allstate Corp.’s Allstate Insurance Co. had the industry’s largest second-quarter underwriting loss at $2.1 billion with State Farm Mutual Auto in second ($2.0 billion) and State Farm Fire and Casualty Co. in third ($1.6 billion).
• Second Quarter Catastrophe Losses: The Allstate Corporation, The Travelers Cos. Inc., and The Progressive Corporation had the highest second-quarter catastrophe loss increases among US property and casualty insurers, according to an analysis by S&P Global Market Intelligence.

Premium Registered by Ultimate Parent¹ – Top 20 Insurer Groups – 2023 (January Through August)

1. Ultimate parent per AM Best as of  September 1, 2023.
2. Status as of September 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 September 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 August)

1. Source: Standard & Poor’s as of September 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.