NEW YORK: AM Best-rated farm bureaus within the U.S. property/casualty (P/C) segment have experienced steady growth in net premiums written (NPW) in the past decade, unlike their life/annuity (L/A) counterparts, which have seen more premium fluctuation, according to a new AM Best report.
Best’s Market Segment Report, titled, “Farm Bureaus: Favorable Ratings Despite Limited Business Profiles,” states that over the past decade, NPW for the rated P/C farm bureaus grew to $14.7 billion from $10.8 billion. Much of the growth has come from four core lines of business—private passenger automobile liability, automobile physical damage, homeowners and farmowners—that accounts for 87% of overall P/C farm bureau NPW.
The rated farm bureaus’ consistently favorable net income since 2011 has led to strong policyholder surplus growth, up by an average 6.6%, with the lowest growth being 4.3% reported in 2016. Since 2011, just 20% of P/C farm bureaus have reported an operating loss each year.
Although the farm bureaus have some longer-tail risk exposure through automobile liability, a line that has dampened earnings, the majority of their product profiles are centered on short- to medium-tailed personal lines products, which have produced consistent gains. In addition, despite higher incurred loss ratios, the average combined ratio for the farm bureau population has been lower than that of the P/C industry since 2013, owing to a more favorable expense ratio, and was 97.7 in 2018.
Given their geographical concentration, external factors have a more limited impact on growth and profitability, so maintaining and improving brand recognition is paramount for many of these companies. Most farm bureaus are single-state writers; however, not all states have equal risk profiles. Farm bureaus need to navigate varied regulatory regimes and climates. Those with the ability to write in numerous states benefit from embedded geographic and product diversification.
Over the past 10 years, the AM Best-rated L/A farm bureau population has seen its aggregated premium fluctuate within a narrow range of $2.5 billion and $2.9 billion. Growth and diversification remain a challenge, given the niche focus of the farmers’ target market. Additionally, the ability to expand geographically is limited, as the L/A farm bureau companies are not permitted to compete against each other in the same states under the same branding.
Much of the premium fluctuation has been in the individual annuity line, whose premiums has grown in just two of the last nine years, and has declined by almost 50% since 2009. Consequently, ordinary life insurance premium now accounts for more than 60% of total L/A farm bureau premium, up from 46% in 2009. Interest rate risk also remains a concern, as offered minimum guaranteed rates on annuities are generally higher than that of the industry as a whole.
The P/C and L/A bureaus remain well-capitalized, as is reflected in their balance sheet assessments. Business profiles are a mixed bag, owing to a more limited geographic reach and the focus on a niche market of farmers, ranchers and agriculture-affiliated individuals/business in rural areas or small cities, but each segment generally has displayed adequate or better operating performance and stability in their credit ratings.