Life for Mutual Companies after the “Trump Bump”
September 12, 2017| Von Rick Hartmann
P/C General Industry
Region: North America
“Show me the money!”
Twenty-one years after Jerry Maguire hit movie theaters, that catch phrase continues to transcend generations and industries. In fact for mutual and stock insurers, investment performance continues to be a key driver of profitability.
Post-election, the industry enjoyed a lift from the “Trump Bump.” There was a sharp surge in the Standard & Poor’s 500-stock index and the 10-year Treasury yield jumped to 2.07% on November 9, a day after the election. Furthermore, the P&C industry entered 2017 in very strong financial condition, with surplus standing at a record of $700.9 billion as of December 31, 2016.
As predominantly fixed income investors, however, mutual companies tend to be more focused on interest rates. A full normalization of interest rates is unlikely until 2019. Since roughly 80% of P&C bond/cash investments are in 10-year or shorter durations, most mutual company portfolios can expect to have low-yielding bonds for years to come.1 For mutual companies, earnings will likely continue to be suppressed due to continued low yields on invested assets.
According to Dr. Bob Hartwig, investment earnings are still 15% below the pre-financial crisis peak levels, and he predicts investment income earnings won’t return to pre-crisis levels until 2025.2
A continuation of suppressed yields is projected on returns for 2017; New England Asset Management (NEAM) believes 2017 returns for fixed income portfolios will be slightly lower than 2016 returns. NEAM estimates the mean return for fixed income in 2017 will equal 1.18%, with a probability of a negative total return being 1 in 3.3
What does it all mean?
Indeed, measuring performance between stock companies and mutual companies can be challenging.
Shareholders of stock companies have a preference for underwriting performance and return on equity. Meanwhile, mutual companies have to consider the additional concerns of their policyholders. Specifically, mutual companies mitigate potential limitations from having less access to capital than stock companies by holding more policyholder surplus than stock companies.4
Ultimately, the defining difference between mutual companies and stock companies is that a stock company’s primary purpose is to provide returns to shareholders, while a mutual company’s primary purpose is to provide value to policyholders.5
Mutual companies can demonstrate value to policyholders by moderately growing surplus year over year. However, the presence of continued low investment yields will put more pressure on producing profitable underwriting results in order to grow policyholder surplus.
How then is the industry managing underwriting profitability?
Be sure to read our next post to learn more about how recent trends are impacting underwriting profitability for mutual insurance companies.
- Hartwig, Robert. “Overview and Outlook for the P/C Insurance Industry: Trends, Challenges & Trumponomics” (Gen Re CEO Conference, May 8, 2017).
- Rotatori, William. “Capital Markets Outlook” (Gen Re CEO Conference, May 9, 2017).
- Powell, Lawrence. “What It Means to be Mutual.” 2-13. www.namic.org
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