This tiny little-known US reinsurer is the Berkshire Hathaway of its sector. Ronald Gift Mullins introduces Grinnell Mutual – the wholesome reinsurance giant for US farm mutuals.

With a market share of 51.1%, this little-known reinsurer ranks as the largest in the US in its specialised market. Not headquartered in one of the major financial capitals of the world, it has been operating for almost a century, reinsuring farm mutuals of the US Mid-West. Its only office is located near Grinnell, Iowa.

The reinsurer’s roots can be traced back to the mid-1800s. As settlers moved to populate the vast plains of US Mid-West, they sought protection from the ravages of prairie fires. These pioneers banded together to protect each other. When fires sprung up, neighbours pitched in to help with labour, materials or money. There was no thought of profit; it was a way of people helping people.

From this neighbours-helping-neighbours concept, the mutual insurance system developed and flourished into efficient modern business organisations. In 1909, an Iowa State association called for establishing a reinsurance organisation for the county farm mutuals, and the company now known as Grinnell Mutual Reinsurance Company was formed.

Today, the reinsurer operates in ten Mid-West states – Iowa, Illinois, Minnesota, Indiana, Missouri, Nebraska, Wisconsin, North Dakota, South Dakota and Ohio. In this territory there are 567 county farm mutuals. Grinnell Mutual reinsures more than 290 of them, making it the largest farm primary reinsurer of farm mutuals in the US. The company has around 700 employees, making it the largest employer in Poweshiek County, Iowa.

Harsh winter storms

Premiums earned in 2006 were $314.1m, a slight increase from $311.1m in 2005. More than three-quarters of the premiums are generated from farm mutuals in Iowa, Minnesota and Illinois. Due to harsh winter storms, other severe weather-related losses and higher loss expenses, net income in 2006 was $23.2m, down almost 37% from the $36.6m in 2005. The combined ratio for 2006 came in at 98%, up from 93% in 2005. Surplus at year-end 2005 was $258.3m; at year-end 2006 it had increased to $287.2m.

Dan Agnew, president and CEO of Grinnell Mutual Reinsurance, was born just south of Grinnell and graduated from a state teachers college in Iowa with majors in mathematics and physical education. He coached basketball and football in neighbouring Newton, Iowa, for two years, then joined the mutual reinsurance company in 1969 as a marketing representative. Advancing through various marketing and management positions, he was named to his present position in December 1991.

He speaks with pride and close knowledge of the operations of the reinsurer. The company stresses the family feeling, according to Agnew, and its success depends on talented people who believe in working together. As proof of this belief, at a recent ceremony honouring employees with 25 years and more of service, there were 109 who qualified out of its staff total of 700. Commenting on the approaching centennial of the company in 2009, he invites mutual members, agents, board members and employees to celebrate this important business milestone. A centennial book is being prepared.

He is not a member of the board of directors. The 12 outside directors are active managers of the farm mutuals that Grinnell Mutual reinsurers. The directors are elected for three-year terms with no term limits. Managers of the small farm mutuals are not on their boards either. “The directors do not micromanage, but they are not disengaged,” says Agnew. “Naturally they are very knowledgeable of our business. They talk to other people in our industry. They bring in their views and we discuss their opinions or suggestions in depth.”

The company earned an “A” rating from AM Best for 2007; a rating it has maintained for more than 20 years. The company is proud of being named to the 2006 Ward’s 50 Benchmark Group – the fourth consecutive year for the recognition. The selection was based on Ward Group’s annual analysis of the property casualty insurance industry. Each year, only 50 companies nationwide in the US are chosen based on achieving outstanding financial results in the areas of safety, consistency and performance over a five-year period.

Farm Mutuals Inc

The mutuals that Grinnell Mutual reinsures are farm mutual insurance companies. Each farm mutual by law can only insure farm property real or personal and town dwellings that are in its home county or contiguous counties. They cannot insure casualty business, autos, inland marine, recreational vehicles, workers’ compensation and other lines. Though reinsurance was the reason for the founding of Grinnell, only about 21% of its $314.1m earned premiums (2006) came from reinsurance transactions.

The balance is produced by direct business written by Grinnell Mutual and Grinnell Select, a subsidiary, with about 1,400 agents who are agents associated with the mutual’s reinsureds. Grinnell Select provides auto insurance coverage for preferred drivers (Elite Program).

In addition to the benefits of providing reinsurance to the county mutuals, agents need to be able to handle all of a client’s insurance needs, Agnew said, and a reinsurance company can offer direct lines that farm mutuals cannot. For example, liability protection, auto, recreational vehicle and crop/hail are a few of the lines of insurance Grinnell Mutual can provide for its independent insurance agents.

As a further service for agents, Grinnell Mutual created the Big M Agency. This agency places risks that are unacceptable to Grinnell Mutual, ranging from nurse’s professional liability to insurance for zoos. Grinnell InfoSystems provides farm mutual insurance companies assistance in developing computerised processing. Its clients now top 125 and this also continues to grow.

It is nearly impossible for a small farm mutual to determine what its maximum level will be for reinsurance in any given calendar year. Grinnell has therefore adapted to this unique scenario. “We create an annual aggregate with no limits, no layers for net fire and windstorm losses incurred during the contract year in excess of an attachment point,” explains Agnew. “We don’t look at their premium income, but we take a close, long look at pure dollar loss against exposure risk, and the mutual’s prior year’s ending volume. We run the figures through a series of formulas which applies a selected load factor. The load factor considers the financial stability of the reinsured mutual and its ability to assume risk. Finally, this gives us an attachment point and that determines the mutual’s premium.”

The amount is adjusted at the end of the year going forward to the next year. “We never penalise one of our mutuals for a mistake in the past. We don’t go back,” Agnew states.

The Lloyd’s connection

All the property business that the mutuals buy from Grinnell Mutual is pooled and the reinsurer then goes to the property reinsurance market via a broker. Grinnell reinsures 70% of its property business with Lloyd’s of London, while the European markets get about 20% and the US receives the balance.

Grinnell Mutual began its association with Lloyd’s back in the 1930s. That the farm mutual reinsurer feels an affinity with 300-year-old market should come as little surprise. Lloyd’s was also borne out of a trade where the pooling of risks became a necessity – only there it was shipping. “We are in for the long haul with our mutuals and reinsurers,” Agnew declares. Facultative is purchased on high value items, such as hog confinements and dairy operation.

Grinnell Mutual’s management takes a conservative approach to expanding its territory. “We had looked at Ohio for six or seven years,” Agnew remembers, “and thought it a good state for us, but we felt there wasn’t a need in the state at that time for us. Then about three years ago that market changed and caused us to look at opportunities there. The market had hardened, and one of reinsurers who handled reinsurance for quite a few Ohio farm mutuals didn’t want to cooperate any longer. So, we travelled to Ohio, visited with the managers of the farm mutuals, and brought back 20 of the 29.”

Expansion into other neighbour states is being considered, including Pennsylvania, Montana, Arkansas, Tennessee and Kentucky. “But we are only in the very early stages of studying the territory,” adds Agnew.

Agnew is opposed to eliminating the collateral rule for non-admitted reinsurers. “I think it is important that the foreign reinsurers post adequate collateral for risks insured in the US. We have had situations,” he explains, “where reinsurers have gone out of business or gone into run-off. Since they had posted collateral we had no losses. We work mostly with licensed reinsurers, and all must be at least ‘A’ rated by AM Best.”

Asked about the possibility of Grinnell Mutual transforming itself into a stock company with the promise of lucrative stock options and big payouts for officers, his answer came quickly and emphatically: “No!”

Ronald Gift Mullins is an insurance journalist based in New York City.