Yesterday's PropertyCasualty360 reported on FitchRatings' latest views on the status of reserves in the Property and Casualty (P&C) insurance industry. For those new to this world, 'reserves' are the funds set aside to pay the future costs for claims.

Reserves can be "adequate", which means the dollars set aside look to be enough to cover future liabilities; "deficient", which means there aren't enough funds; or "redundant", which means they are more than adequate. In Fitch's view, "U.S. property and casualty loss reserves remain within an adequate range as of year-end 2010, and the potential for large deficiencies emerging in the near-term is limited".

That's good news, but before you start smiling, know that another analyst views reserves as "deficient".

So, who cares?

Well, you should.

If reserves are adequate, insurers won't need to charge new policyholders more to make up for losses already incurred. If they are deficient, rates are going up. And if they are redundant, than new customers may well get a discount, as there is 'extra' money lying around to help cover their claims.

It's not quite that simple, but you get the picture.

What is notable is where the two analysts agree: both believe workers comp is under-reserved. Keefe Bruyette Woods says the deficit is $2.3 billion and Fitch did not provide a figure in their release.

With work comp reserves at the end of 2010 totaling about $115 billion, that's a deficiency of about 2%.

What does this mean for you?

Another sign that the market may be firming. Or at least not softening any more.

Posted by Joe Paduda at 6:11 AM | Link to this post | Comments (0)

Bob Hartwig of the Insurance Information Institute talked about his optimistic views of the economy, a somewhat different perspective than he shared with the audience at last year's NCCI Issues Symposium.

Hartwig does not expect a 'double-dip' recession, and believes we'll see a significant expansion in employment - and therefore work comp payrolls and demand for commercial insurance - later this year and into 20110.

Projections shared with the audience included significant growth in commercial insurance, albeit growth that will be spotty and vary significantly across the country. At this point it appears the states from Texas north are going to see the most growth the soonest, it would be great if these states actually had residents.

Hartwig sees unemployment dropping to near 9% by the end of this year. That's a 0.7 point improvement over April numbers, a significant move. I'd note that compared to other economists he's pretty optimistic as others see employment staying well above the nine percent figure.

Hartwig (and panel members) veered off into politics, decrying the Stimulus Bill as ineffective in creating jobs, citing no visible impact on workers comp policyholder types or volume. A credible and well-respected source, Macreconomic Advisers, noted recently: "we still estimate that the peak effect of the stimulus on employment will reach about 2.5 million by the end of this year before then fading gradually." Other economic experts have similar or somewhat lower projections, but for Hartwig et al to infer the Stimulus Bill was ineffective was inaccurate.

Panelists discussed the potential for a Federal Office of Insurance Information, noting its function is to collect information and has no regulatory authority per se. The current financial reform bill includes funding for the Office while limiting its role and functions.

The panelists opined the health reform bill may help contain comp medical costs, as it will increase health insurance coverage and thereby reduce the need for work comp payers to fund 'non-comp' care. John Leonard of MEMIC noted that there is a 'lot of good' in the reform bill, but it's too early to tell exactly how much, and how, reform will affect comp. John Hill stated that if the proposal helps to weed out inefficiencies in the health care system, that will be a positive, as will the impact of increased coverage on the overall health status of the population.

There was one more session last Thursday that I'll write about later this week.

Posted by Joe Paduda at 8:05 AM | Link to this post

Eight months ago I reported AIG was buying business - slashing prices for property and casualty insurance coverage in an effort to hold on to current customers and hopefully land a bit of new business. Now comes a report from Bloomberg that analysts have confirmed what some brokers and most of their competitors have known for months - Chartis (the name of AIG's core insurance business unit that's been separated from the rest of the 'old' AIG) has been accused of 'aggressive' pricing by analyst Todd Bault of Sanford C Bernstein, a charge that's been leveled for months by Chartis' competitors.

Simply put, it appears that about a year ago AIG execs decided to cut prices on liability, workers comp, and some other lines of insurance to retain business and generate cash flow to prevent the company from going under. It worked then, but at a cost that's becoming apparent now.

There's a lot to consider here - the possible impact of AIG's alleged pricing actions on extending the soft market; effect of underpricing on reserve adequacy; and consequences for the likely spinoff/sale of Chartis. I've discussed most of these topics here on MCM, but to save you the trouble of clicking thru, here's the summary.

First, I'd be remiss if I didn't acknowledge that AIG execs are denying the charges, with AIG Chief Financial Officer Robert Schimek claiming their rivals' charges "reflect a big degree of frustration by the marketplace that they've been unable to unseat the Chartis organization in the vast majority of business." That's not exactly true, as AIG reported insurance sales dropped 13% in the most recent quarter while the combined ratio increased to 105.2, results significantly worse than those of competitors Liberty, ACE, and Chubb.

Reserve adequacy
Last winter, I heard from sources ranging from headquarters staff at large competitors to several brokers around the country that AIG was quoting rates for P&C coverage that had only a ephemeral relationship to the actual cost of risk. The sense then was AIG was doing anything it could to add premium, and thereby build up the companies' financials. AIG's desperate effort to add premium dollars, staved off deeper financial trouble, but as I noted back in March, "the shortsightedness of this approach will become obvious. Even more obvious than it is today. Claims will come in, reserves will be needed to fund those claims, and it is possible, if not likely, that there won't be enough capital to fund future claims."

Soft market
AIG's pricing actions, to the extent that they were 'real', were but one of several factors contributing to the depth and duration of the current soft market . But those actions can't be discounted; as one of, if not the, largest writers of property and casualty insurance in 2009, any discounting by AIG would send tremors thru the entire industry. The company had long been known, and highly respected, for its underwriting expertise. When brokers and risk managers received quotes from AIG at very attractive rates, many likely turned to the other carriers bidding on their business and said something along the lines of "if AIG can charge me this, why can't you?" Sure, some, or most, knew that AIG's pricing may not have been realistic, but all's fair in love, war, and insurance, and using one company's bid to beat down another's is common practice.

Chartis sale
According to Bloomberg, "AIG shareholders and the federal government face considerably more uncertainty than they may have anticipated," Bault said. "AIG would likely have to take some kind of reserve charge" before selling its Chartis property-casualty business or holding a public offering for the division." That sale will be a key piece in the 'taxpayer repayment program'; we've kept AIG from going under, and if we are going to get our money back, a sizable chunk will have to come from the sale of Chartis. I noted last month that the disposition of AIG's assets was proceeding rather well, and should have added a reminder about the pricing issue.

What does this mean for you?

If you work for Chartis, know that I wrote this with reluctance. As I said in November, AIG's destruction was the result of poor management oversight and a wildly out-of-control finance unit. The women and men who work at Chartis and most of the other AIG companies do a very good job, work very hard, and take justifiable pride in their work. Here's hoping their talent and abilities are enough to overcome poor decisions by their erstwhile superiors.

Posted by Joe Paduda at 7:33 AM | Link to this post

After this spring's ugly display of ignorance in the form of public pillorying of undeserving AIG personnel, what happened to AIG?

Well, hard as it is to believe, mostly good stuff. There was a big push to sell assets in the spring, a push that, for very good reason, didn't result in many sales. That's a good thing, as buyers were looking for fire-sale prices, and for a while it looked like the Feds were eager to dump as much of AIG as possible regardless of the financial consequences. It's our good fortune the sales didn't happen then.

To date the company has sold off assets amounting to about $8 billion, while also reporting solid financial results for the last quarter - and in anybody's book, $1.8 billion is pretty solid.

The company that brought down the giant, AIG Financial Products, is slowly being unwound, with credit derivative exposure reduced by some seventeen percent since January 1 of this year - but it's still $1.3 trillion.

And the new CEO promises that taxpayers will be reimbursed, and AIG will arise again. At least the stock markets took heart, pushing the company's value up some 30% on the strength of not much more then Benmosche's cheerleading.

Earlier this year, AIG sold auto insurer 21st Century to Zurich's Farmer's division for $1.9 billion, got a quarter-billion dollars for AIG Private Bank Ltd. and $680 million for AICredit, while netting $1.1 billion from the public offering of shares in reinsurer Transatlantic Holdings Inc.

Still on the books are American International Assurance Co. (valued at $25 billion) and American Life Insurance Co., ($18 billion) and Chartis' book value is about $38 billion. And according to Reuters, AIG's Taiwan life unit Nan Shan Life "could attract a bid of about $2 billion", and AIG is in talks to sell two Japanese life insurers, AIG Edison Life Insurance Co and AIG Star Life Insurance.

One of the pricier assets still on the block is airplane owner International Lease Finance Corp, which has been valued anywhere from $2.5 to $8 billion. The tight credit markets appear to be the obstacle to a deal for now.

Against those assets, AIG owes the taxpayers about $88 billion as of June 30, 2009.

Meanwhile, the core insurance business has a new name - Chartis - and a bit of a new attitude. The Chartis folks I've spoken with are happy to be out, away and on their own, without the derivative mess looming over them like the merchant of death. There are still lots of hard feelings, but less handwringing and more of a 'we've got work to do' attitude. And internally they are getting the work done, making progress on a number of fronts particularly in underwriting and claims.

I'd expect to see Chartis go to an IPO in the next couple of years, after the credit markets loosen up and valuations start to climb. While taxpayers may not get all of our money back, a little patience and a lot of hard work on the part of AIG folk past and current may minimize the damage.

Here's hoping that those same politicians who insulted, degraded, denigrated, and verbally assaulted AIG execs back in the spring are adult enough to commend these folks if and when they deserve it.

Holding your breath?

Posted by Joe Paduda at 6:38 AM | Link to this post

With yesterday's announcement that AIG is pressing forward with the creation of AIU Holdings, the move to separate the ongoing insurance operations from the rest of the AIG businesses is well on the way.

As I noted over a month ago, the AIU Holdings entity will likely be offered in an IPO, or at least a substantial minority share will be sold to the public. This just makes sense, as it allows AIG to sell a very big, profitable, solid operating unit for the best possible price.

Last year the component pieces of AIUH accounted for about $38 billion in total revenue, provided a broad range of property and casualty insurance, and operated in most countries around the world.

The separation of AIUH from related companies (e.g. International Lease Finance, United Guarantee) is taking a bit longer than the Feds or AIG board would like, but the time is needed to extricate AIU Holdings from its closely related sister companies, thereby reducing the concern about potential future liabilities thereby making the new entity more attractive to potential entities. While ILFC is a potentially very attractive asset and will likely sell for close to $10 billion, United Guaranty is a mortgage insurer...and has to be split off to allay fears among potential buyers about the real estate industry.

The announcement followed last week's $1.9 billion sale of AIG's auto insurance business to Farmers, a subsidiary of Zurich Insurance. The disposition of other assets is not moving very quickly - in general their value is decreasing due to decline in revenues as policyholders move to what they perceive to be more stable, safer insurance companies. Notably, AIG failed to sell some of its overseas insurance operations earlier this year, and has now decided to hold onto the units and consolidate them with other businesses.

The decision made by the Board and the Federal government back in early March to halt the firesale has proven (so far) to be the right one. This has allowed the businesses to be separated out, thereby reducing concerns on the part of buyers and potentially increasing proceeds from the sale.

That said, what will drive value will be the economy; if it grows, more insurance will be sold and investment returns will increase. If it continues to fall, so will the value of AIG's component pieces.

Posted by Joe Paduda at 6:50 AM | Link to this post

As I noted earlier, word in the market is AIG is aggressively pursuing P&C business, working very hard to hold onto current customers and aggressively cutting prices to get new ones. This is at least in part the reason premiums in the fourth quarter dropped by 22%.

AIG is the largest writer of workers' comp, the primary provider of all P&C insurance to the Fortune 500 (97% have at least part of their insurance program with AIG), a major player in transportation where it is the prime insurer for many airlines, shipping, and trucking companies, probably the largest writer of construction wrap-up policies, and a major source of capacity in the excess and catastrophic market.

While I don't know what the big insurer is doing in all these markets, I do know that they are aggressively slashing prices on both new prospects and renewals in the commercial markets in an effort to hold on to customers and add as many new ones as possible. Anecdotally, this is happening in Florida, Connecticut, Texas and New York; it may well be occurring elsewhere.

This runs counter to a piece in today's WorkCompCentral. Regulators have been watching AIG for signs of potentially severe price cutting, and according to WCC:

"Orice M. Williams, the GAO's director of Financial Markets and Community Investment, told the House Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises on Wednesday that her agency is in the middle of reviewing the AIG financial bailout. The analysis includes investigating how receiving money from the Federal Reserve Bank of New York and the U.S. Treasury Department has affected competitiveness in the commercial property/casualty market.

"According to some of AIG's competitors, federal assistance to AIG has allowed AIG's commercial property/casualty insurance companies to offer coverage at prices that are inadequate for the risk involved," Williams told the panel.

But she said GAO so far has failed to confirm those allegations.

"State insurance regulators, insurance brokers and insurance buyers said that while AIG may be pricing somewhat more aggressively than in the past in order to retain business in light of damage to their parent company's regulation, they did not see indications that this pricing was inadequate or out of line with previous AIG pricing practices," she said."

Brokers I've spoken with indicate the price-cutting is taking the form of AIG underwriters aggressively quoting most of the business submitted by brokers. In the past, AIG could be highly selective, using its acknowledged expertise in underwriting to carefully pick the risks it deemed worthwhile, and ignoring the rest.

No more.

Pressed by an urgent need to generate capital, several contacts indicate AIG seems to have all but abandoned underwriting discipline (at least in the commercial markets in the states noted above).

Meanwhile, many of our elected officials are screaming about the payment of bonuses that amount to one-tenth of one percent of all taxpayer investment in AIG. This is political grandstanding at its worst - and most counter-productive. Instead of fighting over who said what when to whom how, they should be watching more closely the business practices of the largest insurer ever to be publicly owned. Instead of calling for the offing of their heads, our politicians should be ensuring AIG continues to operate intelligently - and for the benefit of its shareholders, who are mostly we taxpayers. It is encouraging that Williams and her colleagues are watching this closely, but my sense is the price-cutting is more prevalent than her findings indicate.

What does this mean for you?

AIG may well generate more cash over the short term. And in the worst case, increase the chance that they will fail over the long term; in the best case, reduce the company's value to future buyers thereby slashing the return we'll get on our investment.

Posted by Joe Paduda at 7:31 AM | Link to this post

No, they're not eating cake or fiddling while Rome burns - but that's the impression you'd get from watching TV or listening to the radio talking heads. I'm referring to the AIG execs currently in the pillory for accepting bonuses after losing $43 billion last year.

This is a rather significant digression from MCM's headline topic, but one that is so topical that I spent most of yesterday doing television interviews on the subject. Yesterday morning I tried to make the point to Fox Business News viewers that 116,000 AIG employees not working for AIG Financial Products should not be tarred with the same brush used to paint AIGFP's 450-odd workers. AIGFP lost $43 billion last year, or about a hundred million dollars per employee - likely a record for any erstwhile-profit making enterprise.

On Nightline last night, about fifteen minutes of interview were left on the editing room floor in favor of two sound bites - one of which had me noting that the AIGFP execs should not take their bonuses, as they did not, by any civilized measure, earn them.

Easy for me to say. In fact, this statement came after several minutes of back and forth wherein I described the high-pressure environment, the relentless competition, the brutally stressful world that is AIG senior management - not as a justification for getting bonuses for blowing $40 billion, but rather to show that individuals who survived in that environment very likely felt they had earned their financial rewards. Here's an earlier post describing the cultural roots of the problems.

At the end of all the hysteria and hand-wringing, the bonuses are due and payable. Not paying them would result in litigation and further delay in cleaning up the mess. To date AIGFP has reportedly closed out fully a quarter of its CDS positions; in all liklihood this would not have happened if the staff was fired/shot/drawn and quartered. As AIG's owners the faster they fix this the better for us.

Yes, the Obama Administration should do everything it can to limit those bonuses, but not at the expense of successfully winding down AIGFP's positions. Lets be adults here, and to quote the President, not 'govern out of anger' but rather out of intelligence. Sure, it makes great politics, but that doesn't get we taxpayers a dime of our investment back.

Cool, calculating, careful thought will.

Posted by Joe Paduda at 6:22 AM | Link to this post | Comments (7)

There have been many complaints about the $150 billion pumped into AIG by we taxpayers, from the Fed Chairman, Senators, individuals, and MCM readers.

AIG is not too big to fail; it is too 'connected' to be allowed to fail. AIG provides the underpinning for many pension funds and retirement plans; its financial instruments guarantee the returns for pensioners. It backs up the investment of many banks. It owns many of the airlines' airplanes, planes that might be repossessed if AIG goes under. AIG insures many Fortune 500 companies, and is among the largest writers of workers comp in the nation. It is a large individual auto insurer as well.

An article in today's LATimes lays out a few of the myriad ways AIG is involved in the economy and individuals' lives. It also describes how we got here:

" Beyond the more or less predictable consequences of letting a company like AIG go down are the murkier possibilities known as "systemic risks" -- most of them arising from AIG's rush in recent decades into all sorts of highly speculative businesses that were a huge departure from the staid world of insurance.

Some experts say what these ventures have done is make an AIG or a Citigroup that's "too interconnected to fail." And it's not just the size that would matter. AIG's interconnectedness with other companies, markets and economies is so huge and convoluted that it's almost impossible to foresee what all the consequences of collapse would be.

The prime example of this problem is about $500 billion in unregulated credit default swaps held by AIG. Those complex financial instruments are essentially insurance policies taken out on mortgage-backed securities and other assets. The swaps were designed to pay out money to buyers who got caught in exactly the type of financial crisis taking place right now.

In essence, AIG was committed to insuring hundreds of billions, if not trillions, of dollars in investments. When the housing market crashed and the economy nose-dived, those investments tanked as well. And AIG was liable for the losses -- a liability so large that it is now overwhelming the rest of the company, including the still-profitable parts.

What's worse, because credit default swaps were unregulated and the layers of transactions so arcane that they are difficult to understand clearly, the true cost is essentially impossible to measure with certainty. Once the dominoes began to fall, no one knew where the process would end."

What the Feds have done with the latest re-configuration of the bail out is to buy time - months during which the company can sell off assets, write down losses, and separate out the still-viable businesses from the essentially-bankrupt. As I predicted a week ago, the domestic insurance business will in all likelihood be spun off, raising billions to begin the repayment process. The Asian businesses will be carefully packaged for sale, a step necessary when potential buyers backed out ten days ago. The auto and life business will also be separated, sanitized, and sold off.

The resulting funds will go a long ways to paying us back. Not all the way, but a long way.

That's all good. What isn't good is AIG's desperate effort to add premium dollars, an effort that by several accounts is leading the company to abandon all pretense of underwriting. Sources from headquarters staff at large competitors to several brokers around the country indicate AIG is quoting rates for P&C coverage that have only a ephemeral relationship to the actual cost of risk. The sense is that AIG is doing anything it can to add premium, and thereby build up the companies' financials.

So, down the road - say in a couple years, the shortsightedness of this approach will become obvious. Even more obvious than it is today. Claims will come in, reserves will be needed to fund those claims, and it is possible, if not likely, that there won't be enough capital to fund future claims.

What does this mean for you?

A very tough market to sell into - for now. By mortgaging its future, AIG is guaranteeing it will survive for a while, and may well be assuring its eventual demise.

Posted by Joe Paduda at 7:44 AM | Link to this post

That's how NYS Insurance Commissioner Eric Dinallo characterized AIG's derivative business during testimony yesterday. Mike Whitely of WorkCompCentral reported on the Senate hearings this morning, saying:

"American International Group's financial products unit amassed a portfolio of shaky credit default swaps, futures and other derivatives with a notional value of $2.7 trillion before regulators stepped in to stop the bleeding last September, New York Insurance Supt. Eric Dinallo said Thursday.

"For context, that is equal to the gross national product of France," Dinallo told the U.S. Senate Banking, Housing and Urban Affairs Committee. "Losses on certain credit default swaps and collateral calls by global banks, broker dealers and hedge funds that were counterparties to these credit default swaps are the main source of AIG's troubles."

There are lots of moving pieces here, but the most current problem is the inability of AIG to sell off assets to meet credit obligations. I discussed this issue in a series of interviews on Fox Business News earlier this week; the video is here and here.

Posted by Joe Paduda at 8:59 AM | Link to this post

The announcement today of the largest ever quarterly loss in US history hit the market hard, and will result in massive changes at AIG. These changes will include continued efforts to sell off assets, transfer of more control to the Federal government, and the spin off of domestic insurance operations.

A town hall meeting for all employees hosted by CEO Edward Liddy is in process even as I type this, and there are several key takeaways so far. First, the company will combine the American International Underwriters and Commercial operations units into one entity to be called AIU Holding; it will include 44,000 employees and operate in130 countries; this latter is somewhat surprising, but sources confirm AIU Holdings will retain foriegn P&C operations. The new entity's CEO will be Christian Moore. This is a bit of a surprise as many employees expected Nicholas Walsh (the current AIU leader) to head up the new business. Moore is currently President and CEO of AIG P&C group; Walsh will be vice chairman and the chair will be named later.

At this point AIG has not publicly announced how they will handle employee stock, but the company is looking to implement increases in compensation and pay bonuses in March as previously announced. These comp changes are pending approval of the Feds, who will be consulted before any plans are finalized. Sources did indicate there appears to be some effort to establish a mechanism to provide stock and/or options to employees of AIU Holdings, but no details were available.

Liddy did not announce extensive staff reductions. However, earlier internal communications asked managers to take a look at their budgets and see where they can cut. No goals were provided; management was just asked to reduce wherever possible.

Beyond that, no other new news came out during the call, but Liddy did say that 'the goal is to keep as many people as possible'.

Given the company's desire to demonstrate it is doing all it can to raise capital, do not be surprised if there is movement on this fairly quickly. As I noted last week, these operations are profitable and solid, and as soon as the credit markets return to something approaching normalcy, there will be plenty of folks willing to buy into what is a strong business.

What does this mean for you?

That would be a good move. Operations could continue, policyholders would be protected, and a big chunk of money given back to the taxpayers.

Posted by Joe Paduda at 11:23 AM | Link to this post | Comments (1)

Hurricanes, both meteorological and financial, may well bring an end to what has been one of the softest of markets.

Gustav, Ike, and their to-be-named seasonal relatives have hammered the reinsurance markets, with Lloyd's of London recently announcing losses totaling $12 - $18 billion for the season's first two major storms. Lloyd's also suffered from a dramatic reduction (>60%) in investment earnings, even though the vast majority of the syndicates' funds are invested in government securities. The combination of storms and poor investment returns cut Lloyd's members' earnings in half.

The role Lloyd's plays in the international insurance market is a bit obscure to those not immersed in the P&C world. P&C insurance companies write policies for fire, auto, oil wells, pipelines, environmental liability, airplanes, and just about every other physical and financial risk you can think of (and many you can't, such as credit default swaps). They don't want all the risk themselves, so they pay part of the premium they collect to other insurance companies, called reinsurers, to take part of the risk off their hands.

When reinsurers raise rates, primary insurers are forced to do the same. That's likely to happen; Lloyd's (which is actually a group of individuals and companies and not a single entity) members will certainly want a better return on their capital than they are receiving today. That and the potential for higher losses from future storms will cause them to raise premiums and be more cautious about the risk they take - both measures that will force primary insurers to follow suit.

While reinsurer rates and coverage terms are key, they are not the only factor likely to turn the market. The demise of AIG and write-downs at other insurance companies with exposure to the credit markets make it critical that insurers raise more funds to bolster declining capital. The best way to do that is to charge new customers more, and sock away some of that additional cash (hopefully in investments that mere humans can actually understand).

The other technique is to reduce their exposure by being more careful about the risks that they do write.

Expect workers comp premiums to rise, along with property rates. Premiums for longer tail lines, like WC, liability, environmental impairment will likely increase further faster than sort-tail lines, but we can expect insurance rates to increase across the board.

The P&C market has been soft for several years. Those days look to be over.

Posted by Joe Paduda at 7:21 AM | Link to this post | Comments (1)

Jon Coppelman of Workers Comp Insider fame has a very funny take on how Hank Greenberg would have led AIG's executive session discussion of the $75 billion loss.

Jon's talent is lost on us here; he clearly needs a literary agent!

Posted by Joe Paduda at 4:25 PM | Link to this post

In all the commentary and discussion about the source of AIG's problems I've yet to read or hear what may be the most important contributor - the company's culture.

There's no question AIG was long considered one of the world's best run insurance companies. AIG is legendary for its intramural hypercompetitiveness. The company would rather one of its subsidiaries lose an account or prospect to another internal subsidiary than to an outside firm. The rewards (up till now) for winning those competitions have been huge - the top execs at AIG become Starr Partners, a highly lucrative status.

AIG's hundreds of subsidiary companies compete against each other for insurance business, talent, resources and recognition. The rules are few, but ironclad - chief among them return an underwriting profit (make sure the combined losses and admin expense is less than premiums). All investment income accrues to the parent organization, where various investment entities compete to deliver the best results.

By several accounts, one result of this business model has been a consistent under-investment in non-revenue driving IT, and a lack of emphasis on paying claims. AIG was one of the first insurers to embrace the web to sell to consumers and small businesses; it also infuriated regulators and medical providers when it screwed up the consolidation of workers comp medical processing by eliminating regional processing centers. Bills were lost, repeatedly processed incorrectly, and paid to the wrong provider.

The company's auto business has grown substantially over the last decade, yet many insureds are none too happy with the company. An article several years ago highlighted complaints from some of AIG's commercial clients; here's an excerpt:

"AIG was losing more than $210 million on auto-warranty claims, provoking the ire of the company's longtime chairman and chief executive, Maurice R. "Hank" Greenberg, according to court documents. As a result, in mid-1999, a newly installed team at AIG's auto-warranty division began to reject thousands of claims -- including half of the claims that its own contractor, a claims-handling company, recommended be paid, according to court papers."

I had the pleasure of working for AIG a bunch of years ago. At that time, AIG's CEO and Chairman, Hank Greenberg, used to have Presidents' meetings every month where the presidents of AIG's subsidiaries would present (very briefly) a summary of how their business was doing. My sub was not doing particularly well, which is probably why I was asked to attend the meeting representing my boss's boss.

Greenberg started at one end of the large U shaped table, with the first of about 25 presidents. After the brief presentation (two minutes or so) he'd grill them - with the temperature on 'sear'. Fortunately, I was second on the flame, and still in shock when he asked me who I was and what I was doing there. After about thirty seconds of my babbling, he dismissed me as too low in the hierarchy to be worth his time and moved on.

I proceeded to watch as a couple dozen middle aged execs went thru their inquisition sessions. Most seemed to be doing a pretty good job, delivering solid results and expanding revenues, and a couple were doing very well. Despite that evident success, all were scared, several terrified, and at least a couple so distressed that I found them in the men's room throwing up.

Although Greenberg departed several years ago, according to several insiders this culture still exists - the hypercompetitiveness, coupled with huge rewards for success and caustic tongue lashing from your superiors for anything but success. The combination of the two may have contributed to the company's recent problems. Execs who are scared of their bosses are not likely to be first in line to tell them that the great investment in mortgage-backed securities or rate swaps has blown up. The turmoil in the executive suite may have distracted top management from tracking these issues as closely as they should have. The constant hectoring from Greenberg (after he was kicked out as a result of Spitzer investigation) certainly soaked up C-suite bandwidth that would have been well-applied to assessment of investment strategy.

That's not an excuse, but may be a lesson.

Posted by Joe Paduda at 7:08 AM | Link to this post | Comments (2)

AIG may not be alive and well, but it is still functioning. That's the good news.

The real news is the source of the financial lifeline thrown to the big insurer - the state of New York. Gov David Paterson has authorized AIG to access $20 billion in capital currently locked up in subsidiary companies to increase the company's liquidity (free cash on hand). The Governor's permission essentially gave AIG more capital from internal sources, capital that the company had been desperately seeking (with little luck) from outside backers.

The $20 billion is half of the company's immediate cash needs; sources indicate the firm is also looking to sell assets to come up with the other $20 billion. Tops on that list may be the General American, the auto insurance business, and AIG's aircraft leasing subsidiary, long one of the company's most profitable ventures, which would generate between $7 and $14 billion in proceeds.

The problem with selling International Lease Finance Corp. (the aircraft finance arm) is it is very profitable, generates lots of cash, and is particularly advantageous for AIG due to tax matters. ILFC buys aircraft and leases them to airlines, taking deductions for depreciation and other expenses that it can use to offset earnings - deductions that are more valuable for AIG than they would be to another owner.

AIG would very much like to hold onto ILFC, and it is just possible it will be able to do so. The Fed hired Morgan Stanley to help figure out what to do about AIG, and at this point it looks like the recommendation, and possible short term solution, is for Morgan to put together a pool of capital from JPMorgan Chase and Goldman Sachs to help AIG survive the current liquidity crisis.

And just to make the situation even more difficult, reserves for claims from Ike will also be hitting AIG's financial statements in the next few weeks. While it is too early to tell precisely what AIG's exposure may be, the company is one of the 'second tier' carriers in terms of property market share in that area, a position that will likely result in substantial claims costs.

Posted by Joe Paduda at 4:29 PM | Link to this post

Founded primarily to do business in China by Cornelius Starr (by all accounts both a good person and terrific businessman), insurance giant AIG has long been among the largest property and casualty insurers in the world.

That history may have a final chapter, written this week. Some reports indicate AIG may not make it past Thursday. At this moment the stock is trading at $12 a share, down 30% today and 83% from its 52 week high. The share price is now trading well below the company's (reported) book value of $29 a share. That book value appears to be highly suspect, as it includes $20 billion in subprime mortgage securities, carried on the books at a discount of 31%.

The fall of AIG has a human dimension that is rather close to home; I worked at AIG in the mid-eighties, and know a number of individuals who continue to get their paychecks from the company. Most have a good chunk of their savings in the company's heretofore terrific employee stock plan - savings that have all but disappeared as AIG craters. AIG's senior management is rough, brutally competitive, arrogant - and historically very successful. That success has been delivered by the company's 116,000 employees, many of whom now find their previously rosy financial future has been destroyed.

To show how fast things move, AIG stock is now at $5.89, fifteen minutes after I started this post.

The trigger for a collapse would be the threat by ratings agencies to downgrade AIG's credit rating - a move that would allow AIG's counterparties to pull their capital and business out of the company. Many of AIG's insureds require the company to maintain an "A" rating from AM Best or similar rating agency, and if the rating declines the policyholders have the right, and in some cases the legal obligation, to cancel their coverage and move it to an A rated firm.

2008 has been awful for AIG - the company lost over $18 billion so far, due in part to the drop in value of the company's investments in mortgage-backed securities and other credit-related investment declines. The credit market collapse - which has affected several big banks, Merrill Lynch, and Lehman Brothers, is also hammering AIG.

I'll be thinking about the potential implications of this mess more later today, especially for what it may mean for the soft market and what parts of the company may be sold off by an acquirer.

In the meantime, it may well be that a collapse of AIG would cause the insurance market to harden rather quickly, as current policyholders scramble to obtain coverage, brokers push their clients to buy only from insurers with very low credit risk exposure, and insurers raise rates to add capital to bolster their financials.

Posted by Joe Paduda at 9:38 AM | Link to this post | Comments (1)

The periphery of the trade show floor at RIMS is where you'll find innovators - new companies, with new ideas and concepts, new solutions to old problems, all described by their owners, founders, and top execs. To give credit where credit is due, this isn't my observation but rather one made by friend and colleague Peter Rousmaniere.

The choice spots on the exhibit floor are occupied by the seniority; RIMS assigns spots according to how many years an exhibitor has been attending, These spots are taken up by the big carriers, brokers, software suppliers, and managed care firms. Not a lot in terms of innovation here, although there are a couple of interesting new solutions to old problems.

Medata's at RIMS with a new booth, new team, and renewed commitment to customer service. Long hampered by a (to be generous) lackadaisical approach to customer service, Medata is back, looking to take advantage of the turmoil in the market created by Coventry's aggressive push to consolidate share; ACS' acquisition of CompIQ; and the sale of FairIsaac's bill review unit to Mitchell Medical.

Coventry is promoting a medical triage/first notice/network direction product that they've been working on for over a year. Early indications are the service can help reduce frequency - significantly. Kudos to the 900 pound gorilla; although the product looks a lot like Medcor's version (which was developed earlier) at worst it shows Coventry knows a good thing when it sees it.

Medcor's service combines the best of nurse triage, first notice and provider network direction, reducing the number of calls the payer (or its designees) need to make and the calls the injured worker needs to answer.

Datacare has a unique data aggregation platform, enabling payers to capture and integrate all documents in one location and automate links between UR and bill review - an all-too-often ignored but nonetheless critical part of the medical management process.

Paradigm has been in business for 15+ years, but this is the first year they've exhibited at RIMS. The company's newest offering is a chronic pain program, which has shown strong results after a five-year development effort.

More tomorrow after my feet recover.

Posted by Joe Paduda at 11:14 PM | Link to this post

Last week it was the World Health Care Congress (perhaps the best conference I've ever attended in terms of content and quality). This week it is RIMS, the annual property and casualty get together, where brokers schmooze and vendors vend and risk managers are feted by carriers, TPAs, managed care firms and consultants.

Here's what I'm looking for at RIMS 2008. New and different approaches to managed care, approaches that are not merely based on discounted care, but outcomes. And not just lip service or 'we're seriously studying this' but programs that are in place, working, and delivering results.

Straight talk from vendors - what they can, and cannot, do. Results they've been able to deliver, and the keys to that performance. (Knowing that vendors can't be successful unless payers work cooperatively with them)

Evidence that payers are not just talking about outcomes and smaller networks and 'the right docs' but actually doing something.

New trends, products, ideas, and companies - something that has been in short supply in this industry for too long.

Stay tuned.

Posted by Joe Paduda at 8:21 AM | Link to this post | Comments (2)

As I reported last week, the softening market will inevitably lead to a significant increase in the number of mergers. Add another deal to the list.

In a deal just announced, Liberty Mutual is buying Safeco, the Seattle-based P&C carrier, for $6.2 billion in cash. The transaction is valued at $68.25 a share, and marks the second major acquisition by Liberty in the last few months.

Safeco will be part of Liberty's Agency Markets business, a venture that was initiated by Liberty Chairman Ted Kelly several years ago. Prior to that, Liberty was a direct writer, and only sold thru its captive sale force (disclosure - I sold for LM for several years). The Agency Markets unit has been quite successful in helping Liberty land clients that would not buy direct, but had strong relationships with brokers.

Safeco joins America First, Indiana Insurance, Montgomery, Ohio Casualty, Peerless, Colorado Casualty, Golden Eagle, and Liberty Northwest as well as Wausau and Summit Holding.

The current financial state of the P&C market makes it highly likely, and I would even say inevitable, that more deals get done, and soon. There is more capital out there than places to park it, and with organic growth difficult and very expensive (the market is soft enough, and even Liberty can't keep cutting prices forever) insurers looking to grow are going to have to do so thru acquisition.

Posted by Joe Paduda at 10:20 AM | Link to this post | Comments (2)

The laws of supply and demand are making their impact felt in the P&C insurance industry - there is just too much capital chasing too few risks. Industry watchers have been surprised by how quickly P&C insurance premiums are dropping. For the first time since 1943, total premiums actually dropped last year - a result of price cutting by insurers and a worsening economy.

Profits are not falling as fast as revenues, but there have been significant declines, with the latest numbers indicating the P&C industry's 2007 after-tax profits dropped 5.8% from 2006 to 2007. The net impact of the decline in revenue and profit is a 2007 return on equity (actually policyholder surplus, the industry's proxy for RoE) of 12.3%, compared to a Fortune 500 RoE of 13.9%.

Yet capital still loves the insurance industry. It is still generating a profit based solely on underwriting (not taking into account investment returns), a happy event all too rare in the P&C business. And many in the industry are talking about how this time will be different, because they have better information, are more disciplined, will underwrite better, and won't repeat the mistakes of the late nineties. Just like they said last time.

What's this all mean?

Over the short term, better pricing for insurance buyers, and better coverage terms as well.

Continued blood-letting in the TPA market, which is getting uglier by the minute as normally self-insured risks buy insurance for less than their TPA's loss pick. (Tough time for CorVel to get into the TPA market...)

And a significant increase in the number of mergers. Cochran Caronia published an insightful study last year linking the M&A cycle to the insurance cycle (and presented same at last summer's AMCOMP conference). In that report, they predicted a 10-15% price drop for P&C insurance this year - so far, that looks spot-on, adding credibility to their forecast. Cochran expects reinsurers to invest in MGAs and buy or merge with primary carriers.

Primary carriers will also acquire other insurers and/or buy up MGAs to "capture the incremental underwriting income." Liberty Mutual's purchase of Ohio Casualty a year ago, and HCC's acquisition of Kendrick and Associates are but two examples.

When will this stop? If reinsurers get hit hard (think hurricanes), there is a man-made disaster, or the world-wide economy picks up steam quickly, things could turn. Until then, insurers will slowly bleed themselves until they can't take it any more.

Then the market will start to rebuild itself, on the rubble of the insurers who were convinced that this time they would be smarter.

Posted by Joe Paduda at 7:07 AM | Link to this post

The market is softening - and fast. For workers comp and D&O, significantly faster than pundits (myself included) expected - D&O rates are down 19% and WC has declined 11%.

Even property rates are down, by 6%.

Why so much so fast? Simple - too much capital plus an economic recession, equals too many insurers looking to get more than their share of a shrinking pie.

Expect price competition to heat up over the next three quarters, and more than a few carriers to leap right across the stupid line.

Posted by Joe Paduda at 5:30 PM | Link to this post

Surgical devices left inside a patient. Dispensing the wrong medication or the wrong dosage. Giving a patient the wrong blood type in a transfusion. Serious pressure ulcers incurred while hospitalized. Infections from catheterization in the ICU.

These are among the 'never-ever' events - incidents that should never, ever happen during an inpatient stay. CMS recently decided to stop paying hospitals for care required due to certain"preventable complications" — "conditions that result from medical errors or improper care and that can reasonably be expected to be averted" (NEJM, 10/18/07). The list includes air embolisms, certain infections, patient falls, pressure ulcers and the like.

HealthPartners in Minnesota was one of the first payers to identify the problem and take action, way back in 2002. Now, other commercial health insurers, notably Wellpoint and Aetna, are planning to move beyond CMS' list and eventually refuse payment for 28 events. These events, identified by the National Quality Forum are also under review by the Blue Cross/Blue Shield Association, United Healthcare, and CIGNA who may decide to stop paying for them.

And the Leapfrog Group's membership, which includes many of the country's largest employers, is also asking providers to not bill for these events.

It is not just the payers; hospitals themselves are starting to see the light. Hospital associations in Massachusetts and Minnesota have agreed to not charge payers or patients for these events, which include "wrong-site and wrong-patient surgery, patient death or disability due to wrong use of blood or blood products and medication errors, and follow-up care needed to bring the patient back from such errors."

The largest payer in the nation, CMS, has decided that paying for certain medical errors is bad policy. So has two of the largest health plans, along with one of the best-run health plans in the country. Our biggest companies have joined the "no pay for mistakes" movement. Hospitals themselves have decided it is inappropriate to charge for their screw-ups.

So why are workers comp payers reimbursing hospitals for 'never-evers'? I don't have any empirical evidence that WC payers are not paying for these events. In fact, given the lax payment policies of most payers, I'd be very surprised if more than a very few (if any) payers have the ability to deny payment, much less a policy to do so.

What does this mean for you?

There is clear precedent for non-payment for medical errors. Moreover, workers comp payers may find themselves in the rather awkward position of trying to justify their payments for conditions that their clients have publicly stated are not reimbursable.

Posted by Joe Paduda at 6:58 AM | Link to this post | Comments (1)

The relatively mild hurricane seasons of the past two years and the lack of other catastrophic weather events has been largely responsible for the significant profits generated by reinsurers. Indications are the happy days of low losses and high profits are ending, as reinsurance premium rates are on the decline.

That's good news for primary carriers, and also for policyholders - companies, governments, taxpayers, and individuals - for two reasons.

Declining premium rates mean primary insurers spend less on reinsurance. In turn, primary carriers' profits increase, and/or they cut their policyholders' premiums.

Continue reading "Why reinsurance rates matter" »

Posted by Joe Paduda at 1:43 PM | Link to this post

in the property/casualty industry probably occurred earlier this year. The latest numbers indicate premium growth is flat and profitability is down, albeit from a stratospheric level.

The flat premium growth is especially troubling as it coincided with a period of significant economic expansion(up 4.8%). When businesses are growing and selling more stuff, they need more inputs - and the additional raw materials, transportation, workers, new equipment, and new facilities drives up insurance costs - there's just more stuff to insure.

Claims costs aren't dropping - the medical CPI (which is far less than the WC CPI) was up 5%, the cost to repair autos was up as well (auto insurance is the single largest component of the P&C industry).

So what's happening? Simple. Insurers want to generate more profits so they sell more insurance. And that requires them to cut prices to compete. Which, in about two years, will result in significantly higher losses.

Yes, the underwriting ratio of 93.8 (first nine months of 2007) is one of the industry's best-ever numbers. Profits will decline from here on out, until 'pricing discipline' returns. Which, if history is any guide, will happen in 2-3 years.

What does this mean for you?

If you have P&L responsibility, send up a flare and document it. The good times are coming to an end.

Posted by Joe Paduda at 7:03 AM | Link to this post

Live it up while you can, because tomorrow is coming - and it probably won't be near as nice as today.

That's the message from a recent report on the property/casualty insurance industry, which by all accounts is enjoying halcyon days.

Continue reading "Woe is the P&C industry" »

Posted by Joe Paduda at 9:32 AM | Link to this post

If only it were that easy. I'm talking about the legislation proposed in Michigan to allow motorcyclists to ride without helmets. If they are dumb enough to do that, fine. Except we end up paying their health care bills, which is most definitely not fine.

Continue reading "Should we just let Darwin decide?" »

Posted by Joe Paduda at 1:53 PM | Link to this post | Comments (5)

May well be more lightly attended than this year, if a very spotty survey of exhibitors is any indication. Vendors, who accounted for at least half of all attendees, were uniformly unhappy about exhibit floor traffic in New Orleans this year.

Continue reading "RIMS next year" »

Posted by Joe Paduda at 9:17 AM | Link to this post

There was not one, but two (2) fire alarms in my hotel last night. So what, you say?

Here's what. The hotel is chock-full of risk managers, safety professionals, underwriters, and property/casualty claims execs. And not a one of them followed the mechanical lady's pleas to "exit the hotel quickly and calmly by using the stairs".

"Risk manager" is a professional designation, not a personal attribute.

Posted by Joe Paduda at 6:49 PM | Link to this post

Dozens of brand spanking new workers comp pharmacy benefit managers (PBMs). Last year at RIMS every aisle was packed with shiny new booths staffed by folks who, as swiftly became painfully obvious, were rather new to WC.

Either they didn't want to come to New Orleans (they are definitely missing out) or they are out of business, or out of the comp business. Most likely they found their group health contracts, systems and processes, and cost management techniques just didn't work in the highly-regulated, state-specific, first-dollar-every-dollar world of WC.

We'll miss their enthusaism and humor-generating ability ("and how many members do you have? what kind of tiered copays are you using? let me tell you about our unique formulary that controls costs!") and trinkets.

Sort of.

Posted by Joe Paduda at 8:22 AM | Link to this post

Disaster preparedness and recovery and storm and weather forecasting are new to, and very obvious on the exhibitor floor at RIMS. Since this year's annual conference is in New Orleans, that's no surprise.

The disaster theme began in the morning keynote, where an official from CDC talked about the potential for a pandemic.

While disasters natural and biological may be the theme, the common nuts and bolts of risk management are more what attendees are after. Several risk managers were left scratching their heads after the keynote.

The consensus was "well, that was kind of interesting, but the chances for a pandemic are pretty small, and there are a lot of other issue out there that I'm really worried about...like TRIA renewal, the insurance cycle, property rates..."

The disaster folks do have cool videos and charts, and have spent big bucks on their displays.

The other interesting attendee is Blackwater, the private security and protection firm that has been very visible in Iraq of late. They are pitching protection for American companies' overseas locations and employees, and may have a ready audience among oil companies operating in Nigeria and the mid-east.

All in all, a different flavor this year, one that is just a bit disconnected from the real concerns of most risk managers.

Posted by Joe Paduda at 7:30 AM | Link to this post | Comments (1)

I’m attending the annual gathering-of-the-property/casualty-industry-tribes, vendor trinket-and-trash -ree-for-all, expense-account-depletion event known as RIMS (Risk and Insurance Management Society’s annual meeting), and will be blogging from New Orleans for the next three days.

Before I dive into the exhibit hall, a quick note complimenting the organizers for their commitment to the local folks. This year RIMS coordinated a volunteer day, wherein insurance types donned working garb (jeans., not suits) and headed out to communities in the city to continue the clean up from Katrina.

This was not only a great thing for the organizers and organization to do, it may well have been a sobering experience for the risk managers. Few have ever seen the likes of the devastation they were cleaning up yesterday. Picking up debris while surrounded by broken glass, trash-strewn streets, empty lots and condemned buildings can’t help but add raw appreciation of the reality of “risk”; risk that in most cases has been viewed solely from a financial perspective.

This Risk:Real World may well be worth repeating.

Posted by Joe Paduda at 1:21 PM | Link to this post

More evidence is emerging about the rather minimal impact medical malpractice has on medical costs.

Continue reading "Debunking the med mal monster" »

Posted by Joe Paduda at 5:49 AM | Link to this post | Comments (14)

The financial reporting season for publicly traded companies using the calendar year is just about over. AIG's numbers look rather good, with a 34.1% improvement in net profits on revenue growth of 3.9%. Sure, the company has had its struggles with regulators, but the overall results are quite impressive.

The increase in profits came on the heels of a $1.8 billion increase in reserves for workers comp claims over 2005. The reserves were bumped up despite an improvement in the loss ratio for the DBG operation (domestic business group, the home of most of AIG's work comp business) from 82.5% in 2005 to 69.1% in 2006.

Continue reading "AIG - profits and reserves" »

Posted by Joe Paduda at 6:19 AM | Link to this post | Comments (5)

Seventy years. That's how long its been since the P&C insurance industry enjoyed profit levels like today's. The Dust Bowl was in full blow, there was no TV, half the people worked on farms, and Roosevelt II was just getting started.

The good old days are back.

Continue reading "Happy days are here again" »

Posted by Joe Paduda at 6:20 AM | Link to this post

In a move designed to reassert control over the mechanisms of government, Pres. Bush recently signed an executive order requiring all regulatory directives be approved by political appointees. (registration required)

This will have a significant impact on occupational health initiatives, regulations, and enforcement.

Continue reading "Regulation v insurance" »

Posted by Joe Paduda at 7:34 AM | Link to this post | Comments (1)

In what will come as no surprise to anyone, Congress will eliminate the pending cut in Medicare physician reimbursement. Not only that, but docs who agree to report certain data to CMS will actually get a 1.5% increase in reimbursement from the Feds.

If you listen very closely, you can almost hear the medical community's resounding "yippee".

The reasons docs are not exactly ecstatic about the news are two-fold.

Continue reading "Medicare reimbursement's downstream impact" »

Posted by Joe Paduda at 9:58 AM | Link to this post | Comments (2)

Cypress Care, one of the leading Workers Comp Pharmacy Benefit Management firms, has just announced the company has received a "strategic investment" from Dallas-based Brazos Private Equity Partners. The company has also added David George (former President of AdvancePCS) to the management staff; George will be taking over the CEO spot from co-founder Hank Datelle and has also made an investment in Cypress Care.

The press release contains the typical comments about all parties' delight at the deal and enthusiasm for the future. As one who has been directly involved, I can attest that in this case, the PR has it right. David George is a highly experienced and very well respected managed care pro with stints at United Healthcare and on the Board of Concentra, Inc. Bart Hester, a former colleague of George's at AdvancePCS will be joining Cypress as EVP Account Management and Strategy; the rest of the Cypress senior management team including co-founder Lisa Datelle and President Marc Datelle are all staying with the company.

Note - Cypress Care is a Health Strategy Associates consulting client an dsponsors our annual Survey of Prescription Drug Management in Workers Compensation.

Posted by Joe Paduda at 10:39 AM | Link to this post

The soft market, that's what.

While I'm somewhat reluctant to cite bomb-thrower Robert Hunter of Americans for Insurance Reform, he does make a good point. AIR's recent pronouncement that the med mal crisis appears to have abated in large part due to the underwriting cycle is correct.

My take is the med mal crisis is largely an invented one. Yes, it is a problem for specific specialties and in specific areas. But it is NOT due to large jury awards; it is a result of insurance cycles and pricing.

Posted by Joe Paduda at 6:56 AM | Link to this post | Comments (2)

The march off the cliff has begun in earnest. A new survey indicates underwriters are starting to hold their collective nose and write business that would not have merited a "no thanks" a year ago. As usual, larger risks are getting the best deals, but even small accounts are seeing discounts at renewal.

Continue reading "Off the cliff we go!" »

Posted by Joe Paduda at 6:54 AM | Link to this post | Comments (1)

Florida is one of, or perhaps the only, state to have as an official elected position a state CFO. The incumbent is supposed to oversee state spending, review state contracts and investigate insurance fraud among other functions. Florida's CFO is also part of the four person cabinet along with the governor, attorney general, and Commission of Agriculture and Consumer Affairs.

Obviously, the CFO would have a broad and deep impact on the state's insurance industry, the provision of same, and purchase of insurance by the state. That makes it interesting for we insurance types.

Continue reading "Florida's State CFO race" »

Posted by Joe Paduda at 6:31 PM | Link to this post

OK, for the last and final time, Zurich and StPaul-Travelers are not merging, one is not acquiring the other, there are no due diligence conversations going on, books have not been exchanged, and whatever else I can say to convince the rumour hounds that this one has no basis in fact.

Could they merge at some point in the future? Perhaps. But there are no substantive discussions going on today, and there would be if the two companies were thinking about doing a deal.

How do I know? And do I know with 100% certainty? No to the latter, but 95% yes. As to sources, colleagues in both organizations have been denying this for months, and StPaul-Travelers went so far as to issue a denial. And a pretty firm one at that.

Sheesh. I wonder if Oliver Stone is behind all this nonsense...

Posted by Joe Paduda at 7:55 PM | Link to this post

Projections for insurer profits this year are looking pretty rosy, at least according to Fitch Ratings. For most property and casualty insurers, profits are up over last year at this time, losses are down, and premium growth continues to trend slightly upward as well.

As always, profits are only as solid as tomorrow's weather forecast, and few insurance execs think they're out of the woods yet.

Continue reading "P&C Insurance - So far, so good...so far" »

Posted by Joe Paduda at 5:54 AM | Link to this post

In a transaction that surprised many (including me), Atlanta-based claims administrator Crawford and Co. announced it is acquiring FL-based Broadspire Services from investment group Platinum Equity. The deal is valued at $150 million, and will move the combined companies into third place on the list of top property and casualty TPAs (third party administrators; firms that process claims on a fee-for-service basis without taking any insurance risk).

Broadspire CEO Dennis Replogle will be staying with the new company, which likely will go thru some transition and specialization as Crawford figures out where it fits in.

The deal is another in the ongoing parade of consolidation that started with the original firesale of Kemper National Services to Platinum several years ago. Since then, Sedgwick was acquired by Fidelity National and then bought CMI; Broadspire bought Cunningham Lindsey and RSCKO, and several smaller deals were consummated as well.

Rumors had been circulating for some time that Sedgwick CMS was looking at Broadspire, and internal sources at the target company reported that Sedgwick staffers had been at the Broadspire offices in Plantation FL. Sedgwick management has been under serious pressure to increase revenues, and absent serious price cutting, a large acquisition looked to be the most likely route.

If the price seems low, it may be due in part to the timing of the deal. The softening insurance market (which may not be softening for long) makes insurance a better buy in some instances than going self-insured. If the market does turn, Crawford will be able to congratulate itself for buying at the right time.

Posted by Joe Paduda at 7:50 AM | Link to this post

The property-casualty industry looks to be heading for a profitable year, but (no pun intended) storm clouds are on the horizon. The latest prediction comes from Conning and Co, the Hartford, Conn. based insurance research firm.

According to Conning's analysis, 2006 looks very strong, with past price hikes fattening bottom lines. The bad news is the industry can't ever seem to maintain pricing discipline, which is (inevitably) leading to price competition in some lines, which in turn will result in rising loss costs and a decline in return on equity (which isn't all that strong to start with at 9.2% in 2005).

So far, prices have remained flat to slightly down, with mild variations among the various insurance lines (work comp prices are slightly lower, property (outside of hurricane areas) flat, D&O down somewhat...)

The big worry continues to be the storm season, which has been quite mild to date. One knowledgeable source, a reinsurance broker, told me the reinsurers are holding their collective breath while watching the Weather Channel. if the weather continues its' current quiescent state, reinsurers may well recover a big chunk of the losses they incurred over the last couple of years. If not, expect to see reinsurance premiums zoom up for all property and casualty lines, as reinsurers seek to maintain solvency.

What does this mean for you?

Primary insurer profitability follows reinsurer profitability, hope for calm winds.

Posted by Joe Paduda at 7:11 AM | Link to this post

While primary P&C insurance markets appear to be flat to softening, the opposite seems to be occuring in the reinsurance business. According to leaders of several of the top reinsurers, capacity is down while demand is up, the indication of a hardening reinsurance market.

Underlying these macro trends are less obvious factors contributing to this apparent dichotomy. First, the secondary insurers are paying more attention to bottom lines than top lines; looking for profitable business and not just any business. Second, reinsurers are seeking good long-tail line business such as workers comp; these lines also tend to be the least affected by natural catastrophes and provide the longest access to capital as claims are paid out over years instead of months. Third, with interest rates ticking up, reinsurers can find attractive places to invest premiums over the long haul.

And finally, there are a lot of very anxious reinsurance underwriters who break out in a cold sweat when the barometer drops...witness all the press about the season's first tropical depression, a weather non-event that normally would merit nothing more than a slightly extended local weather update in coastal Florida cities.

Posted by Joe Paduda at 6:50 PM | Link to this post

Sedgwick CMS, one of the nation's larger property and casualty TPAs, is getting even bigger. The company will be acquiring Comp Management Inc. (CMI) for just under $200 million.

This marks the first expansion of Sedgwick since its sale to Fidelity National earlier in the year. Sedgwick acquired California-based disability management and administration firm VPA in May. Prior to that deal, Sedgwick had primarily grown organically; the new owners look to be very interested in gaining size and competencies as quickly as possible.

CMI had been on an expansion trajectory of its own, branching out into medical malpractice administration with the acquisition of Octagon in 2003, a deal that also significantly expanded CMI's west coast presence. CMI was owned by investment firm Security Capital Corp. of Greenwich Ct.

Broadspire is another TPA acquired by an investment firm. This deal, which transferred the somewhat-damaged Kemper National Services TPA to Platinum Equity, was the first of a series of acquisitions that have propelled the combined entity into the top tier of TPAs in terms of market size. RSKCO and Cunningham Lindsey were added to the portfolio in 2004. Since that deal, Broadspire has been selling off assets that appear to be tangential to its core claims adjudication business; the disability management operation went to Aetna and Bureau Veritas picked up the loss control/safety division earlier this year.

These deals are not the only sign of interest on the part of the investment community in the P&C world. The level and amount of interest in TPAs has grown exponentially over the past year; my sense is the industry is perceived to be ripe for consolidation; backward in terms of technology, business process streamlining, and operational excellence; and significantly less profitable than it could be.

I agree.

Posted by Joe Paduda at 12:24 PM | Link to this post

2006 will be a good year for insurer profitability, according to Robert Hartwig of the Insurance Information Institute. If the storm season is not unduly harsh and if insurers can maintain some pricing discipline. Those are mighty big "ifs", and while the weather may be unpredictable, the propensity for underwritering discipline to waver is well documented.

There are two components to profits - premiums and claims. And while the claims picture is cloudy, the revenue picture is pretty clear. Premium increases have leveled off to half of one percent, the lowest rate since the nineties. And in spots there has been evidence of rate decreases as insurers try to hold onto profitable business. If the discipline holds, insurers may be OK. If not, we'll have problems.

While insurer profits look good (up 12% over 2004), that is misleading as the industry's return on equity remains below that enjoyed by other, less risky businesses. An RoE of 10.5% is not adequate for an industry that is subject to huge unpredictable losses; investors will find better returns from less-risky investments in many sectors.

As unattractive as 10.5% may be, it is much better than the industry's average results for the last ten years of 7.7%.

What does this mean for you?

Hold on to your hat. Predictions are for the hurricane season to be a bad one, and if a big storm makes landfall in a populated and/or industrialized area, losses will be big and so will rate increases.

Posted by Joe Paduda at 5:58 AM | Link to this post | Comments (1)

The national conference of insurance agents' annual legislative get together featured a panel comprised of CEOs and top execs at some of the nation's leading property and casualty insurers.

The gentlemen discussed terrorism reinsurance and the need for a federal backstop, contingent commissions, state reinsuramce pools, and state v federal regulation. All interesting topics, but I'm most worried about something that doesn't seem to have hit their radar.

Health care costs.

Yes, these guys are P&C insurers - they insure buildings, liability, the environment, cars, houses, businesses, boats and many other things. No, none of them are health plans per se. But they all are facing double-digit increases in the medical expense portion of their claims dollar, have been for years, and don't seem to be paying attention.

In workers comp, over half of the claims dollar goes to medical care; for the largest insurers that's about $1.5 billion annually. Auto insurers also pay a lot of medical expenses, as do medical malpractice carriers and liability insurers.

Yet the top execs don't appear to give medical inflation and health care costs the same attention they give to TRIA, reinsurance pools, or state v. federal regulation.

Maybe that's why their health care costs are going up so fast.

Posted by Joe Paduda at 6:13 AM | Link to this post | Comments (1)

Well, are workers comp rates softening, hardening, or just right?

According to a study released at this year's annual RIMS conference (held in Honolulu...), the market is softening. I'm not sure I buy that, and here's why.

There are lots of moving pieces here that all have an impact on insurance rates: prior year losses; medical cost trend rates; expectations of losses for the coming policy year; claims volume projections; claim cost projections; equity market investment returns; interest rates; the amount of free capital in the market; etc.

So, one would need a supercomputer or really good ouija board to consider all these factors. Lacking either, I'll use the trusty educated guess to prognosticate on the future of rates...

Workers comp rates are down about 3% over prior year renewals. This is due to more favorable investment returns (equity markets are up as are interest rates); a significant improvement in loss ratios in California (home to about 17% of the nation's WC exposure); an expectation that reforms in Texas will significantly reduce costs in that key state; concern about potential claims for property and liability from past and future hurricanes (soaking up capital that could be used to write WC) and perhaps most significant, the continuing decline in claims frequency.

All these factors make for a relatively rosy outlook for comp. In fact, coupling the legislative and regulatory changes with the decline in claims frequency, one could argue that rates should be substantially lower than they are today.

Posted by Joe Paduda at 8:28 AM | Link to this post

Following on the heels of the "revelation" that the Property and Casualty insurance industry experienced a significant drop in profitablility last year comes news that insurance rates appear to be leveling off from last falls' declines. According to an analysis done by Lehman Brothers, the average commercial account saw a drop of 2.7% over their prior rates.

Yes, rates are still dropping - a little. The exception is property insurance, where rates are bumping up significantly, with the greatest increases in catastrophic coverage hitting the 25% range.

Posted by Joe Paduda at 7:56 AM | Link to this post

Weiss Ratings has released its analysis of the P&C industry's 2005 results; it will come as no surprise that results are down due to hurricanes and related disasters.

For those unfamiliar with the industry's risk structure, here's a quick snapshot. Primary insurers, such as Allstate and USAA, sell the policies and usually reinsure some portion of the potential losses with another insurance company. Thus, when big claims, or lots of claims, hit, the reinsurers get hammered.

Such was the case in 2005. Although the number and size of claims were high, reinsurers picked up a big chunk of the losses.
And, insurance companies did a pretty good job of investing premiums and therefore gained substantial returns on those assets. As a result, despite underwriting losses of $4.2 billion, on the whole the industry earned $46.7 billion, up 13% from the prior year.

The entire industry has just over half a trillion dollars in surplus available to pay claims. So, even if a major disaster hits, we should be OK.

What does this mean for you?

With reinsurance rates going up and coverage harder to obtain, expect to see the market continue to waver between hard and soft as underwriters wait for the hurricane season.

Posted by Joe Paduda at 8:22 AM | Link to this post | Comments (1)

The rumors of a potential St. Paul/Travelers merger with Zurich are likely groundless. Sources indicate that reports of a pending deal in the Wall Street Journal between the two insurers are incorrect.

According to a high-level exec at one of the companies, "there are no discussions at any level for either a merger with ZFS or an acquisition of the North American P&C operation."

That said, St. Paul/Travelers is in the acquisition mode, and will likely buy something this year.

Posted by Joe Paduda at 10:14 AM | Link to this post

Marsh Mclennan, the nation's largest broker, has once again been hit by a civil suit charging bid rigging, hidden commissions, and RICO violations. This time the suit has been filed in Florida's Lee County.

According to the St. Petersburg Times, one of the issues deals with hidden commission payments from insurers:

"The suit does allege Marsh contracted with Miami-Dade County to provide coverage for services for a flat fee, but received from insurers an additional $140,000 in hidden commissions."

Marsh has condemned the suit, noting it simply repeats the charges filed by (and not coincidentally settled for $850 million by) NY Attorney General Eliot Spitzer.

Thanks to Helen Knight for the tip.

Posted by Joe Paduda at 9:00 PM | Link to this post

The medical malpractice insurance business is either back under control and meeting the needs of the market without the benefit of major and widespread tort reform, or is in crisis, near death, and likely to expire without major tort reform.

Where you sit determines what you see.

From consumer watchdog group Americans for Insurance Reform comes the following excerpt from their press release:

"Americans for Insurance Reform (AIR) released a new study today confirming the wholesale decline of medical malpractice insurance rates nationwide. The AIR study also shows that this phenomenon is occurring whether or not states enacted restrictions on patients' legal rights, such as "caps" on compensation. The medical malpractice insurance "crisis" is over, according to the study.
AIR's study is based on the most recent Council of Insurance Agents and Brokers survey of market conditions, showing that the average rate hike for doctors over the past six months has been 0 percent. This is following similar results for the last quarter of 2004, which saw rates rising only 3 percent at the end of that year. By comparison, rates jumped 63 percent during the same quarter of 2002. "

In contrast, the Council of Insurance Agents and Brokers released their own interpretation of the numbers, noting:

"� to interpret that data to mean that the 'crisis' is over is a gross misrepresentation of the situation," Crerar said. "First of all, having rates stabilize for one or two quarters doesn't mean those rates have gone down. It only means that they have not gone up any farther. It is like saying that just because gasoline costs $2.50 a gallon today, down from $3 a gallon last year, we don't have an energy crisis, and gas is cheap."

CIAB also finds fault with AIR's math, and reading CIAB's interpretation it does appear the Americans for Insurance Reform could do with a little more practice with the calculator.

So, what's the real deal?

Well, the malpractice "crisis" is partially related to insurance cycles (we're in a transition from a hard market to a confused one right now), and as I've noted before, has a relatively small impact on overall health care costs. While the med mal debate is interesting, it is a sideshow - med mal is not a major force in US health care.

That said, the interesting point is that the drop in rates is occuring in states that implemented tort reform and those that did not. Makes one wonder what influence tort reform has on costs...

Posted by Joe Paduda at 10:49 AM | Link to this post | Comments (1)

Wilma, Katrina, et al hammered insurer profits almost as badly as they hit the Gulf Coast, resulting in the insurance industry losing $2.8 billion during the first three quarters of 2005. There is actually good news in this, as the losses forced insurers to stop cutting prices, thereby starting a downward trend in industry financials.

According to "Insurance Journal",

"Before Hurricane Katrina, rate decreases and competition on many lines began to emerge throughout the majority of 2005. However, following this event, the trend of rate declines reversed on some lines of business, particularly in those areas directly impacted by the hurricane, and stalled on others. While this rate environment will have a positive impact on future results, A.M. Best believes the retreat from rate decreases will be short-lived.

The insurance industry's cycles are well-known and well-documented - it marches off the same cliff over and over again, each time promising itself that it won't be that stupid again.

History predicts otherwise.

I'd expect rates to stay somewhat firm, as early forecasts are for a storm season every bit as fierce as the one just passed. And, it is coming up in a few short months.

What does this mean for you?

A chance to tell me what a lousy prognosticator I am if rates plummet.

Posted by Joe Paduda at 5:51 AM | Link to this post

Dr. Robert Hartwig of the Insurance Information Institute recently gave an interview to Insurance Journal on the US property and casualty industry's 2005 results, and made a few predictions about this year. According to Hartwig, 2005 will deliver a combined ratio of 99%, a surprisingly strong result given the impact of the four hurricanes. The weather had a huge effect on results; after stripping out extra-ordinary events, the industry actually would have had a combined ratio of in the 80's. (However, there are always extra-ordinary results, so I'm not sure what stripping them out does�)

Notably, the results of US companies were not hit nearly as hard as those of reinsurers, most of which are located offshore. Hartwig said that 57-67 pct of losses were absorbed by foreign insurers and the residual markets, so the red ink won't show up in US company results.

Despite reinsurers' hits, which resulted in a combined ratio of 124, (the second worst year since 2001), capacity is still there. In fact, about 12 new reinsurers have been formed in the last year in Bermuda and a couple other areas

Hartwig attributed the good financial results to a return to underwriting discipline - insurers got serious after 2001 (after they got hammered in the late nineties by lowering prices way past the stupid line), and although there was weakening of this discipline in commercial property in 2005, it likely returned after the fall's hurricanes. Hartwig was asked if he thought the losses in the fall would mean the emergence of a mini-hard market.

His response - Some analysts think so, but he does not think it will "spill over to casualty markets"; it will stick w commercial property, homeowners, and geographic areas subject to wind risk - no other "spill over" into casualty lines. I don't agree, as the impact will be most significantly felt by reinsurers, who will pass their extra costs along to all their customers in the form of higher premiums. While new reinsurers are forming now, they all know weather patterns are troubling and are going to build a "risk" charge into their prices. So, my sense is the storms will have an impact on all property and casualty lines.

Premium growth came in lower than expected in 2005 due to a semi-softening of the market. The expectation is that it will accelerate to almost 5% in 2006, but Hartwig thinks that's not likely, especially if cat losses return to modest levels. External factors - tort environment issues; the Class action fairness act; issues re med mal, asbestos, stil exist, but there are want fewer things to worry about in 2006 than in past years, e.g. Spitzer investigations have quieted down w brokers settling.

In his view, the Spitzer and other Attorneys General investigations do not have much of an impact directly on brokers' bottom line due to relatively small dollar impact of the fines. However, the indirect impact has been significant due to absence of contingent commissions for large brokers.

One glaring omission occurred when he was asked what he thought the major issues would be for the P&C market. Hartwig never mentioned anything about health care cost inflation. With health care costs driving workers comp, medical malpractice, auto/PIP, general liability, etc, one would think that the industry's inability to keep inflation below the double digits (especially when the group health world rate is well under that level) would raise a red flag.

As long as the experts, like Dr. Hartwig, aren't paying attention, the health care cost problem will continue to be ignored. And that's a big problem.

What does this mean for you?

Hartwig is a well-respected and insightful analyst with broad experience. His opinions are worth considering. My bet is prices stay level or firm somewhat in most P&C lines. As to his ignorance of health care costs, that I just don't get.

Posted by Joe Paduda at 11:14 AM | Link to this post

The extension of the Terrorism Risk Insurance Act was met with lukewarm enthusiasm by the insurance industry, for good reason. However, it was likely the best that could be obtained given the strong political desire on the part of Congress and the Administration to mitigate the Feds' risk.

There have been significant changes to TRIA, which will be in place through the end of 2007. Here are a couple of the key provisions and the impact of same.

1. In 2007 the insurance industry's "deductible" will increase to 20% of direct earned premium from 17.5%. The result - more risk at the insurer level.
2. The share of the risk that the government will take will also decrease from 90% to 85%.

Modeling done by Risk Management Solutions indicates that the World Trade Center attacks, which produced a loss of $32.5 billion, would result in minimal funding through TRIA if they occurred under the 2007 provisions.

The "good news" is RMS predicts there is less than 10% likelihood that any one attack would produce a loss of this size.

What does this mean for you?

There are two components to claims costs - frequency and severity. While all of us fervently hope that no attacks occur, the realists among us are more�realistic. Therefore, while the "new" TRIA does reduce the impact of severity, it does nothing to address frequency.

Several attacks that do not meet the "deductible" would destroy the insurance industry.

Posted by Joe Paduda at 7:11 AM | Link to this post

The property and casualty insurance industry was headed towards record profits last year, only to have Katrina et al blow the black ink right off the books. The latest estimates indicate 2005 will actually result in a net loss for the industry as a whole. This will likely inspire a hardening of the market, as we have been predicting for several months.

The industry-wide combined ratio (losses plus expenses before investment income) should end up around 105% for 2005. While analysts expect 2006 to improve, I wouldn't put much, if any, stock in their predictions - the vagaries and severity of natural disasters have made a mockery out of human predictive capabilities.

From a financial perspective, the industry's hit in 2005 resulted in a Return on Equity (ROE) of 9.5%, hardly a stellar result but not too bad considering historically low interest rates and the up-and-down nature of the equity markets. On the bright side, the renewal of the Terrorism Risk Insurance Act (albeit in modified, and slimmed-down form) for two more years has added a lot of stability to what otherwise would have been a very nervous market.

What does this mean for you?

Pressure on underwriting results should mean a stronger focus on managing claims. Some of the recent initiatives by companies like Crawford indicate more and smarter approaches are in the offing. And that's good news.

Posted by Joe Paduda at 7:11 AM | Link to this post

Sedgwick CMS, one of the leading claims administrators in the property and casualty industry, will be acquired by Fidelity National, the largest title insurance company in the country. This followed a several-month process wherein a number of entities were competing to purchase Sedgwick.

If you haven't heard of Fidelity National (no. 261 on Fortune 500), here's their PR blurb...

"(Fidelity is a) leading provider of core financial institution processing, mortgage loan processing and related information products and outsourcing services to financial institutions, mortgage lenders and real estate professionals. Through its wholly-owned subsidiaries, FNF is also a provider of specialty insurance products, including flood insurance, homeowners insurance and home warranty insurance..."

Looks like a complementary deal - Sedgwick does "outsourced" claims processing, albeit serving a different marketplace and different customers. In the announcement, FNF's CEO said Segwick's acquistion will enable FNF to "leverage our core expertise in title insurance processing and financial transaction processing..."

Perhaps FNF is thinking that their home-grown expertise in processing title insurance and other transactions can be helpful to Sedgwick, or Sedgwick can provide FNF with expertise that will streamline operations at their new parent.

Other than that, I don't see any "synergies".

You?

Thanks to an anonymous reader for the heads-up.

Posted by Joe Paduda at 5:44 AM | Link to this post

Hank Greenberg, ex Chairman of AIG, has escaped criminal charges at least for now. A spokesman for Eliott Spitzer, NY Attorney General, announced that while civil charges may be pending, no criminal charges will be filed by the state.

However, Mr, Greenberg is not yet out of the woods. According to Insurance Journal, there are two federal investigations still in process, with the potential for federal charge. And, Spitzer is likely to add charges to his civil complaint in the near future.

Spitzer's and other state attorneys' probes of the insurance industry has already resulted in criminal charges filed against over a dozen individuals, hundreds of millions in fines and settlements, and a dramatic reshaping of several venerable firms including Marsh and AIG.

What does this mean for you?

Even though we didn't need any more proof, more evidence that crime, or the appearance of crime, does not pay.

Posted by Joe Paduda at 8:12 PM | Link to this post

The latest information from MarketScout indicates the property casualty insurance market remains soft, with prices continuing to fall in October. This comes as somewhat of a surprise as industry analysts predicted a hardening (price increases) of the market after the disastrous hurricane season.

According to Insurance Journal;
"In October 2005, the composite rate for all lines of property and casualty coverage was down 4%, a slight market correction from the preceding month but still a noticeable composite premium reduction from the 2% increase in October 2004. The total market differential for the last 12 months has been 8%, with a gradual market softening from rate increases of 2% in October 2004 to a rate decrease of 6% in August 2005.

After Hurricanes Rita, Katrina and Wilma hit the U.S. mainland, the market began a measured correcting pace as premium reductions have subsided, particularly in property business. The market appears to be headed towards an overall rate increase sometime in the summer of 2006."

There are likely two main factors delaying the impact of the hurricanes on premiums and coverage. First, many renewals had already been negotiated and agreed upon, therefore the rates were set before the storms hit. Second, primary insurance rates are driven in part by reinsurance rates, coverage limitations, and treaty arrangements. Most of the primary insurer - reinsurer contracts have yet to be renegotiated; when they are you can rest assured reinsurance rates will increase substantially, driving up the cost of insurance to the consumer.

Of interest to many readers, workers comp rates were down 6% year over year in October. However, these rate decreases were driven in large part by significant reforms in California and Florida; rates in most other states did not drop nearly as much as those two bellwether jurisdictions. Of note, workers compensation rates in California have dropped 26.7% since imposition of the reforms at the beginning of this year.

What does this mean for you?

Renew now while you can, before the impact is felt by renewed reinsurance arrangements. As it is, if you have yet to sign a deal, it is very likely too late.

Posted by Joe Paduda at 8:20 AM | Link to this post

The first indication of the financial impact of Rita and Katrina is St Paul/Travelers' announcement that they took a $1 billion charge (after tax) to account for the costs of the two storms in the most recent quarter.

Interestingly, gross premium income was only up 2% from the prior year's quarter. This is yet more evidence of the current soft market in property and casualty insurance. As noted here previously, rates are already heading back up as insurers seek to rebuild reserves after taking hits for the current storm season. Which is not yet over...

Return on equity was a strong 11.9% for the first nine months on an operating basis, even after including the hurricane impact. Without those storms, RoE would have been a very healthy 18.4%.

What does this mean for you?

As indicated here before, strong financial results usually mean prices will be coming down for insurance. However, the recent weather has likely hit confidence levels as well as financials. Thus, I would expect pricing to firm up rather than continue to soften.

Posted by Joe Paduda at 7:51 AM | Link to this post

Early indications are that hurricane Wilma will result in US insured losses of $6 to $9 billion. Although lower wind speeds and the faster movement of the storm contributed to these relatively modest claims (at least in comparison to Rita and Katrina), Florida's strong building codes are also being credited with reducing the storm's financial impact.

When a multibillion dollar storm is considered good news, the P&C markets are in trouble. And adding Wilma's expected impact to that of the season's previous storms makes this far and away the worst season on record in terms of financial damage. Wilma will likely cause additional damage as she moves up the coast, with strong winds and rain now hammering New England and the NYC area.

What does this mean for you?

Your insurance rates are going up.

Posted by Joe Paduda at 11:13 AM | Link to this post

Insurance rates were trending down before Katrina, and risk managers who were lucky enough to lock in prices before the hurricane system got good coverage at lower prices. Those who did not renew before Katrina are getting hit with price increases as high as 20% for property insurance. The study examined employers with insurance renewals before and after the storm hit.

Rates were down for all property and casualty lines. According to Insurance Journal;

"�renewal premiums down on average over five percent against the same quarter last year. Directors and officers liability experienced the steepest decline, falling 8.45 percent. Property premiums fell just under six percent and general liability was down 5.2 percent. Workers Compensation was the only major line that was down less than five percent; that line was down 3.75 percent."

That was before the storm, when record profits encouraged insurers to seek more premiums, leading them to make price and coverage concessions. Industry insiders are not sure whether the storms' impact is short- or long-lived. My bet is the latter. Insurance underwriting is a mix of art, science, and emotion, and the non-stop news of fresh new tropical depressions, with eye-catching graphics, breaking news interruptions, and screaming headlines will make a long term impression on underwriters.

Remember, they don't get fired for charging more or not writing business, they get canned for underpricing deals or doing deals that they shouldn't.

What does this mean for you?

P&C insurance rates are heading up and will stay up for a while. Health care cost inflation will exacerbate the problem.

Posted by Joe Paduda at 7:16 AM | Link to this post

Katrina's impact on the insurance industry will be greater than first anticipated. With insured losses now estimated to be in the $30 billion to $60 billion range, this hurricane is the most expensive event in insurance history.

Losses are from wind, flood, and fire, and will certainly include property, business interruption, fire, flood, environmental liability and impairment, crime, life, and health. The latest estimates from Risk Management Solutions are for losses of $15 - $25 billion for the New Orleans flood alone, with the rest of the costs for other losses due to other causes.

The impact of Katrina will be felt in all lines of insurance around the globe. Because a substantial portion of the losses will be borne by reinsurers, excess premium rates will increase to help cover costs while availability will decrease. In turn, primary insurers will have to raise rates to cover their losses and the increased reinsurance premiums.

Fortunately, Katrina came at a time when overall property and casualty insurance rates have been decreasing. According to MarketScout, property insurance rates dropped 7% over the last year, while workers' comp rates decreased 7%, inland marine 5%, and umbrella/excess 11%. Overall, P&C rates were down 6% over the prior year.

Predictions in the industry are for rates to stay level if not increase slightly. The good news for insurance buyers is the industry is quite healthy with solid profits and substantial increases in reserves over the last two years.

While the insurance industry is much maligned, events like Katrina clearly demonstrate the industry's value to society. By spreading risk across a very wide customer base, the industry will be able to cover losses while continuing to provide coverage for those who desire insurance.

What does this mean for you?

As devastating as Katrina has been and will continue to be, the insurance industry has weathered this most devastating of storms, and will come through in fine shape. That is good news.

Posted by Joe Paduda at 11:20 AM | Link to this post

Katrina will have a significant impact on the world insurance markets, and the impact will be felt quickly in the form of higher prices for many property and casualty insurance lines. Here's how this works.

Insurers price their coverage based on statistical models that take into account the probability of claims occurring and the potential expense of those claims. In those years where few natural disasters occur, insurers do quite well. In bad years, they get hammered, either by one big event or a number of smaller events or, in the worst case, several big events.

Most primary insurers buy "excess" insurance from another firm, such as Lloyd's of London. This excess, or re-insurance, allows the primary insurer to spread the risk, so catastrophic events such as Katrina don't bankrupt them. However, Lloyd's, General Re, Swiss Re, and the other reinsurers end up with significant exposure to this type of event.

Early reports indicate that Katrina's devastation is not nearly as bad as it could have been. This is due to two factors - the storm did not directly hit New Orleans and its intensity was reduced appreciably before it made landfall. Damage to the refineries and platforms appears to be minimal, or at least less than expected. However, estimates are that Katrina will cost insurance companies between $9 and $16 billion. While the upper end of this range is higher than the most expensive hurricane in history, it is well under early predictions of $30 billion.

According to Forbes "The 2004 US hurricane season was the most destructive on record, causing insurance losses of 22.835 bln usd, according to the III.(Insurance Information Institute) The single most destructive hurricane to date is hurricane Andrew, one of only two Category Five hurricanes to hit the US mainland, which left insurers facing claims of 15.5 bln usd in 1992.

The changes in Katrina's direction and intensity were good news for the insurance world, as most properties carry insurance that covers not only the cost of repairing them, but also the income lost when the facilities are out of operation, and any environmental damage resulting from their destruction.

Personal insurance lines losses will likely be quite high, especially in the property and auto lines. Business interruption and property are likely to take a substantial hit as well.

What does this mean for you?

Expect to see insurance prices spike. Reinsurers will have to cover their losses by charging more for excess coverage, driving up primary insurance costs. Primary insurers will have to not only increase prices to pay the higher reinsurance premiums, but to cover their losses as well.

This will be felt across all insurance lines, from workers compensation to homeowners to small business to directors and officers.

Posted by Joe Paduda at 7:21 AM | Link to this post

2004 was another banner year for property and casualty insurers as industry profits (investment income, underwriting, and all others) surged to $42 billion, a 28% increase over 2003 results. Industry capital and surplus increased by $55 billion, or over 11% from the previous year. And, underwriting profits were up $9 billion from 2003's $2.9 billion loss as a result of the industry's combined ratio (losses/claims plus administrative expenses) dropping to 98.9.

Certainly excellent results of which the industry can be justifiably proud. It is indeed a rare event for the industry as a whole to enjoy such stellar returns. That's the good news. The bad news is these results have been a result of increased pricing over the last few years, and there are growing signs that prices are either level or declining for most lines of coverage.

As capital enters this market, and pressure grows on both stock and mutual companies to produce even better results, returns will decline as insurers compete for market share.

What does this mean for you?

If you are a risk, good days are back. If you are an insurer, maintain pricing discipline and keep your "cost of goods sold" under control by managing risk through loss prevention and medical management. Now is NOT the time to scrimp on the basics of insurance - risk selection, loss prevention, and claims management.

Posted by Joe Paduda at 4:28 AM | Link to this post