Weather and Inflation Have Not Been Kind to Vermont Mutual

For Vermont Mutual Insurance Group, which has been around since 1828, the past few years have been among the most challenging in its history.

“The disruption was not from a single event, but a confluence of disrupters that had successive negative impacts on our business…a perfect storm if you will,” Daniel C. Bridge, chairman, president, chief executive officer, explained in his 2023 annual statement.

Supply chain delays, high inflation, climate change, expensive reinsurance — Vermont Mutual has felt the effects of them all. It has even had to deal with the flooding of its own headquarters in Montpelier.

AM Best took note of the challenges the insurer has been facing. It revised its outlooks to negative from stable for Vermont Mutual Insurance Group, which includes Vermont Mutual Insurance Co. and its fully reinsured subsidiary, Northern Security Insurance Co, and its fully reinsured affiliate, Granite Security Insurance Co.

AM Best cited recent “volatility in its operating performance,” influenced by material property exposure within the group’s footprint. That is at odds with the group’s historically favorable results, AM Best noted.

However, AM Best added, near-term capital management plans are expected to “materially improve the company’s capital position.”

AM Best has also affirmed Vermont Mutual’s Financial Strength Rating of A+ (Superior) and the Long-Term Issuer Credit Ratings of “aa-” (Superior). for the tenth year in a row. The credit ratings reflect Vermont Mutual’s balance sheet strength, which AM Best assesses as very strong, as well as its strong operating performance, favorable business profile and appropriate enterprise risk management. The balance sheet strength is further reinforced by strong liquidity, favorable loss reserve development, as well as modest underwriting leverage.

Furthermore, AM Best said that the insurer’s “comprehensive reinsurance program provides substantial protection from severe events without excessively increasing reinsurance dependence.”

The group’s “significantly better-than-average loss ratios reflect strict adherence to underwriting guidelines and price adequacy initiatives,” AM Best added.

This performance is partially offset by an elevated underwriting expense ratio, driven by higher commission costs typical of New England writers. While strong operating earnings have been driven by a steady stream of investment income and material underwriting earnings in most years, the ratings agency noted that patterns have deviated in recent periods with underwriting earnings being challenged by weather-related losses and inflationary trends.

2023 Review

In his review of 2023, CEO Bridge openly acknowledged the climate change and inflation challenges, along with reinsurance challenge.

He wrote that inflation and supply chain delays caused by the global pandemic and geopolitical conflicts drove up the cost of property and automobile claims, while weather events were “more frequent and more severe.” Also, the reinsurance protection it needed grew significantly more expensive.

According to Bridge, inflation drove up the cost to repair homes, cars and businesses by approximately 30%. The weather proved very costly for Vermont Mutual with a 30-hour freeze in February and a severe wind storm in December together accounting for nearly $70 million in losses and adding 12 points to the insurer’s combined ratio in 2023.

There was also the reinsurance challenge. “As inflation drove up the replacement cost of properties we insure, we required additional catastrophe reinsurance protection and purchased $140 million more coverage at a cost of nearly 40% more than our expiring premium,” he continued.

And Mother Nature and climate change delivered another blow. Historic flooding in Vermont in July left the insurer’s Montpelier home office inoperable. That meant the staff resorted to largely remote work while the company undertook a “significant rebuilding project” that Bridge said will continue with the help of local contractors into mid-2024.

In the end, the “perfect storm” of 2023 resulted in a combined ratio of 106.8% for Vermont Mutual. That compares to a 101.67% combined ratio for the entire property/casualty insurance industry for 2023, according to AM Best.

Vermont Mutual’s combined ratio for 2022 was 99.5%. That year the company faced the economic downturn, inflation and an increase of building costs plus a significant number of large losses. For 2021, the insurer achieved a combined ratio of 91.4%.

Had the catastrophes not added 12 points to the combined ratio of 2023, the financial results would have been “better than planned,” he noted, explaining that the company still grew premium by 13.6% to $720 million and, thanks in part to a healthier investment market, it grew policyholder surplus by 2.5% to $743 million.

He estimated that recovering from sudden cost increases generally takes 18 to 24 months in the industry and that through the rest of 2023 the company “made great progress towards that recovery” while continuing to help others suffering losses in 2023. Despite its own woes, it managed to contribute more than $1 million to local charities in 2023.

“We were pleased to have responded to those suffering loss in 2023 and are proud of our record charitable giving, even as we managed through our own significant challenges,” Bridge wrote.

Despite the challenges the company experienced in 2023, it still implemented improvements to both systems and infrastructure, including introducing a self-service portal for agencies, a home inspections app and an online portal to allow customers to submit claims online. The company says 2024 will mean continued development of new software tools to enhance workflows and efficiencies, service to agents and policyholders, and flexibility and speed to market for future updates.

It is also working to turn the flooding of its headquarters into an opportunity to both renovate the entire building and completely reevaluate its work space to accommodate its hybrid work program. This will include introducing a “hoteling” platform designed to maximize available office space.

As for insurance results going forward, AM Best cited management plans that are expected to “materially improve” the company’s capital position.

“We continue to take all necessary steps to return profitability to our historic industry-leading level,” the company says in its annual statement, referring to “data driven initiatives, management of business costs, operational improvements, and the exploration of new cutting edge capabilities” as well as continuing to rely on its “strong relationships” with its agency and other business partners.

Vermont Mutual is represented by more than 800 independent agencies and insures more than 300,000 policyholders. It offers personal and commercial insurance in Connecticut, Maine, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont.

Photo: This image made from drone footage provided by the Vermont Agency of Agriculture, Food and Markets shows flooding in Montpelier, Vt., Tuesday, July 11, 2023. (Vermont Agency of Agriculture, Food and Markets via AP)

Topics Vermont