A catastrophe-laden 2011 and a tornado-filled start to 2012 could have a debilitating impact on smaller carriers, based on the simple premise that they often have a lot smaller of a financial cushion—less business from which to draw and pay claims, analysts say.

When disaster strikes, smaller carriers “can feel the pain more,” says Cliff Gallant, an analyst with Keefe, Bruyette & Woods.

Failures can and do happen. Following the destructive tornado season in 2011 that included widespread devastation in Joplin, Mo., three Barton County Mutual Group companies could not keep up with claims. Regulators got a judge to approve a plan to allow the companies' operations to be merged into the Missouri Farm Bureau.

And because many small and regional insurers follow the mutual business model, they can only grow from within, without access to capital markets.

Mutual companies are “not built to grow,” says Gallant, who notes that larger insurers also have the advertising budgets to more aggressively attract consumers.

“Over time, I think the industry's big guys will get bigger,” Gallant says. “There will be a lot fewer small companies.”

And consolidation is becoming more commonplace already, according to Rich Attanasio, vice president of personal lines at insurance-ratings agency A.M. Best Co. Attanasio has seen larger carriers absorbing smaller peers in certain states, in order to take advantage of the smaller companies' distribution and licensing.

For example, A.M. Best withdrew its ratings of Wisconsin American Mutual Insurance Co. last October after its merger with Western National Mutual Insurance Co.

Nebraska's Battle Creek Mutual Insurance Co. recently affiliated itself, and entered into a quota share reinsurance agreement, with Nodak Mutual Insurance Co. of North Dakota.

For those smaller carriers that intend to stick it out for the long term, their survivability depends on their ability to “stick to their knitting,” says Attanasio. In other words: Sound risk management and sticking to the values that got these companies to where they are now will propel them through bad loss years.

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Some Smaller Carriers on Consolidation Course

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