After sizable surplus slide, Calif. auto insurer reiterates rate hike urgency

Weeks after warning that the lack of rate increases on its California private-passenger auto book “puts [our] ability to continue business at risk,” Wawanesa General Insurance Co. issued additional context as to its prospective financial challenges in its annual statutory statement.

The California Department of Insurance has stepped up its pace for approving private auto rate increases in recent months after what some in the industry have characterized as a moratorium that dated back to shortly after the declaration of a global pandemic in March 2020. Those actions have come too quickly for some consumer advocates, who argue that carriers have failed to provide the full amount of COVID-19 premium relief that they allege is owed to policyholders, but not fast enough for carriers who believe their current rates are deficient and have been for some time.

The situation appears especially acute for Wawanesa General given the concentration of its business in the California private auto market and the significance of the surplus erosion it experienced during 2022. While the company ended the year with an authorized control level risk-based capital level ratio comfortably above any action levels at 458.9%, it warned in the statutory filing that the lack of California private auto rate increase approvals would cause the ratio to tumble to 99.8% by July 2024.

Wawanesa General amassed net underwriting losses totaling $206.9 million during a six-quarter stretch through Dec. 31, 2022, according to data compiled by S&P Global Market Intelligence, with combined ratios ranging from a low of 117.5% in the fourth quarter of 2022 to a high of 150.3% in the third quarter of 2022.

The resulting net losses of more than $167.0 million caused Wawanesa General’s surplus to plunge to $163.8 million as of Dec. 31, 2022, from $379.3 million on June 30, 2021. This, in turn, led to the significant decline in the company’s authorized control level RBC ratio from 990.9% at the end of 2020.

Under the California Insurance Code and consistent with the applicable National Association of Insurance Commissioners model act, a property and casualty insurer’s authorized control level RBC ratio would be at the company action level at between 151% and 200%; the regulatory action level between 101% and 150%; the authorized control level at between 71% and 100%; and the mandatory control level at 70% or below. Wawanesa General’s estimated July 2024 RBC ratio would be within the authorized control level. The California Insurance Code gives the insurance commissioner the discretion to place a company with an RBC ratio at that level under regulatory control to the extent he or she deems it to be in the best interests of the company’s policyholders, creditors, and the general public.

Wawanesa General noted in the statutory filing that its estimates are subject to “considerable variability where actual results could materially differ.” The biggest variable may be its ability to secure approval for its filed rate increases.

The company continues to seek either a 39.0% increase over the rates it currently has in effect or, alternatively, successive approvals of a previous filing for a 6.4% rate increase, followed by a 30% hike. The last published correspondence between the California Department of Insurance and Wawanesa General on the most recent filing occurred on Feb. 14, and the filing shows a status of “pending state action.”

Throughout much of the past two years, the private auto insurance business across geographies has been beset by rapidly rising loss costs due to inflationary pressures on the amounts needed to repair and replace damaged vehicles along with higher severity of bodily injury claims and increased frequency of comprehensive claims. Data posted by the NAIC as of March 2 showed a 2022 direct incurred loss ratio in the private auto business of nearly 80.2% on a preliminary basis. That would rank as the highest for the U.S. property and casualty industry in the private auto business in at least the last 25 years by a margin of 7.7 percentage points. Wawanesa’s California private auto experience was even worse as its direct incurred loss ratio in that market was 103.0% in 2022.

Carriers have generally been more successful outside of California in obtaining rate increases, which will help them combat the effects of surging loss costs that are so evident in the 2022 data.

Berkshire Hathaway Inc., for example, reported in its annual report on Form 10-K that average premiums per voluntary auto policy at GEICO Corp. rose by 11.3% in 2022. The Allstate Corp. said in its 10-K that it implemented rate increases of 19.8% on Allstate-brand auto policies across 54 locations in 2022. Wawanesa General, meanwhile, has obtained multiple rate increases on its considerably smaller Oregon private auto book but last implemented a California private auto rate hike in 2018. California private auto business accounted for 89.7% of its total-filed direct premiums written in 2022.

The company said in the statutory filing that its high levels of concentration by business line within a single geography potentially subject it to “severe” effects from economic forces and the regulatory environment within California.

The statutory filing also confirmed the steps Wawanesa General previously referenced in the rate filing to liquidate its equity portfolio in response to its diminished surplus and redeploy the proceeds in fixed-income and short-term cash investments. Bonds accounted for 82.8% of its cash and invested assets as of Dec. 31, 2022, up from 75.8% a year prior, with cash and short-term investments responsible for 17.1%, up from 5.1%.