Insurance issues take back seat in Mass. governor's race

Insurance issues have taken a back seat to crime and taxes but there is evidence that the candidates locked in the race to succeed Massachusetts Gov. Mitt Romney do have insurance on their radar.

Republican Kerry Healey has made deregulation of auto insurance a key issue in her campaign. Her Democratic rival, Deval Patrick, while not opposing auto insurance reform, has stressed making the state's new health insurance law work and going after businesses that cheat the state's workers compensation system.

Healey includes car insurance reform among her priorities for improving the state's business climate, along with cutting taxes on small business. She includes competitive rating for car insurance, which was pushed by her boss, Mitt Romney, on a list of 50 practical ideas she says she would pursue if elected.

"People are often rewarded for good behavior, unless of course, you are a Massachusetts driver. In the Commonwealth, good drivers have to pay for the bad driving habits of others. If this doesn't sound fair, that's because it isn't. Drivers should pay premiums that reflect their own driving records. Over 60 percent of all drivers have clean driving records and by reforming the state's auto insurance system, good drivers will save money and benefit from lower rates," she states.

Health mandate
Under the state's new law that mandates individuals carry health insurance, businesses with more than 10 employees pay $295 per worker per year if they fail to provide health insurance to their employees. Healey opposes this employer contribution.

"I will not accept any attempt to link healthcare reform with a new tax on business," she has said. "We will never be able to effectively compete with our neighboring states -- let alone the rest of the world -- until we recognize that our jobs and our workers are already taxed too much."

Patrick has taken a different stand. "Implementing health care reform in Massachusetts is one of the biggest challenges the next governor faces," Patrick says. He argues that the landmark law passed with the support of the business community, health care professionals, advocacy organizations, and consumer groups and therefore the "contribution of all those groups will be necessary in bringing health care to all Massachusetts residents."

As part of his plan to make government more efficient, Patrick stresses workers compensation, specifically the act of employers misclassifying salaried or waged workers as independent contractors. "This allows employers to avoid payment of workers' compensation premiums, unemployment insurance assessments, tax withholdings, and other mandated benefits. Meanwhile, employers that play by the rules are unfairly penalized," says the Democrat.

Patrick cites a Harvard/UMass Boston study that found that the state treasury loses an estimated $152 million due to misclassification, the unemployment fund loses up to $35 million, and the workers' compensation system loses an estimated $91 million.

Healy also supports letting cities and towns purchase health coverage for employees through the state Group Insurance Commission.

Re-Conn.-ecting state's residents with pride as insurance capital

In August, a dozen Connecticut insurance companies and associations launched a non-profit coalition to reconnect the state's own residents with its sizable insurance industry. Insure Connecticut's Future hopes that its efforts -- from newspaper advertising to a new website, www.bestpolicy4CT.com -- will remind residents that the insurance industry remains essential to the state economy and an integral part of their everyday lives.

"For many, many years, anyone anywhere could tell you that Connecticut was 'the insurance capital of the world,' and state residents took pride in that fact," said Brian MacLean, executive vice president and chief operating officer, St. Paul Travelers. "Today, many residents are unaware that the industry is still a top employer generating jobs in other industries, a leading taxpayer and a major contributor to the state's quality of life -- and that's our fault. We need to be better communicators, about what Connecticut means to us, and what we mean to Connecticut."

In addition to being a top employer, insurance premium taxes equal to almost half (45 percent) of what all other private companies paid in corporate taxes in 2004 combined. Insurance companies' donations equal one-quarter of all corporate giving in Connecticut (more than $20 million in 2005), and employees of these companies contribute thousands of hours of time every year in their local communities.

Members of the coalition are Aetna, Anthem Blue Cross and Blue Shield, ConnectiCare, Genworth Financial, The Hartford Financial Services Group, Inc., The Hartford Steam Boiler Inspection and Insurance Co., MassMutual Financial Group, The Phoenix Companies, Prudential Financial and St. Paul Travelers. Coalition partners include the Insurance Association of Connecticut, and the Insurance and Financial Services Cluster.

Why agents oppose contingent commission settlements

Imagine for a moment a state legislator introducing a bill that made it illegal for businesses to pay year-end bonuses to their sales forces.

Then imagine that this piece of legislation also made it mandatory that all businesses provide written notices to their customers disclosing the portion of the cost of each individual product that goes to compensating that firm's sales force, specifying a percentage or dollar amount for each individual item or transaction, and requiring that a written notice be provided to and signed by the consumer before any sale can be completed.

And then imagine that this legislation also included a provision requiring all businesses to lobby for laws and regulations making the payment of year-end bonuses illegal.

Clearly such a bill, were it ever to be introduced in any state legislature, would be instantly dead on arrival, and with good reason. No lawmaker in his or her right mind would ever seriously propose such an attack on how the American free enterprise system operates.

Unfortunately, that's what we are now seeing -- not in the form of legislation, but rather in proposed agreements to settle pending litigation.

Zurich case flaws
On Sept. 15, 2006, the National Association of Professional Insurance Agents (PIA National) filed a friend-of-the-court brief in the U.S. District Court for New Jersey. PIA is requesting a delay in preliminary approval of a class settlement with Zurich Insurers until flaws in a mandatory disclosure statement are corrected. Our filing also raises other serious questions regarding restrictions on some contingent commissions.

PIA did not take this step lightly. Unfortunately, we had no other option.

Starting in late 2004, several state attorneys general announced that they had uncovered instances of alleged bid-rigging in dealings involving a handful of top-of-the-marketplace mega-brokers in insurance. Proposed settlements in resulting civil actions seek to ban the payment by carriers of certain contingency payments, as well as require the use of disclosure notices that PIA believes are defective, confusing to consumers and possibly illegal.

PIA tried to participate in the drafting of the mandatory disclosure statement in this case, but was unfairly locked out of those negotiations. When the settlement was being crafted in secret, the concerns of agents were not taken into account. Unfortunately, the carriers involved in this process are in no position to make modifications to these imposed results. As a result, we were compelled to file our comments together with our proposed changes to the disclosure statement directly with the court, as a friend of the court, for its consideration.

Beyond our immediate concern about the flawed disclosure document in this case, there are broader issues involved here. PIA objects to this and similar proposed settlements because they would create disparate impact on PIA members' livelihoods by prohibiting the payment by carriers of certain contingency payments.

In the case of the proposed settlement involving Zurich, another provision requires the company to "support legislation and regulations in the United States to abolish Contingent Compensation for insurance products or lines."

First Amendment concerns
This provision raises serious First Amendment questions. We believe that it is not within the purview of these few attorneys general to attempt to bring about changes in the law by requiring firms or individuals who enter into such agreements to advocate for specific legislation and regulations. Officials should not be using their authority to function as lobbyists in a manner that usurps the policymaking role of state legislators. No business should ever be forced by the government to advocate for a particular piece of legislation, just as no individual should ever be required by the government to support one political candidate over another. Such action is a perversion of democracy itself.

PIA is very concerned that if left unchallenged, the kinds of prohibitions on compensation contained in these agreements could be applied to other sectors of our economy, adversely affecting a wide range of small and mid-sized businesses.

Regrettably, settlement agreements crafted since this issue came to the forefront in 2004 have attempted to paint all producers and carriers with an assumption that everyone in the insurance industry who receives performance-based compensation is violating the law. This is clearly not the case.

These settlements propose to fundamentally change the way in which most American businesses operate. Commissions, contingent or not, are a mainstay of our economy. In our industry, they also support critical, professional front line underwriting by agents to assure the financial health and solvency of insurers that we all rely on. Rather than attempting to bring about the elimination of incentive compensation as a means of discouraging abuses of the system, state attorneys general should concentrate on policing such abuses.

PIA condemns illegal actions such as bid-rigging whenever and wherever they occur. Those who violate the law must be punished. But if fairness is the goal, as it should be, then those who have not violated the law should not be punished.

Main Street insurance agents did not commit the alleged abuses that led to these proposed settlements. But these settlement agreements attempt to impose ill-advised remedies for wrongdoing on Main Street agents, who did nothing wrong. That's just not right.

Leonard Brevik is executive vice president and chief executive officer of the National Association of Professional Insurance Agents.

Making Hartford shine again as insurance capital

While other states from Minnesota to New Hampshire compete to attract the insurance sector by lowering premium taxes and extending incentives, Connecticut thinks it has the best offer: an unmatched talent pool of insurance managers, underwriters and actuaries.

Connecticut government, academic and industry leaders are working together to leverage the state's insurance talent pool, selling the state as a Silicon Valley for insurance, as one professor has described it, in an environment of consolidation, globalization, outsourcing -- and competition among states for the high-paying, white collar jobs.

Despite the high-profile takeover of Travelers by St. Paul and Travelers Life by MetLife, insurance is still the top employer in the state, responsible for more than 65,000 paychecks, according to the Connecticut Department of Labor. Another 100,000 are employed in jobs servicing the insurance industry. The combined insurance and financial services provides 22 percent of all jobs in the metro-Hartford and 8 percent of all jobs in the state.

Connecticut still has the most insurer headquarters with more than 70 property and casualty and 32 life and health insurers domiciled here. Companies with a sizable presence in Hartford include Aetna, Genworth Financial, Hartford Financial Services, Hartford Steam Boiler Inspection and Insurance Co., The Phoenix Companies and St. Paul Travelers.

While that's an impressive roster, the job growth from this sector has been disappointing thus far this decade. From 2000 to 2003, the state reported less than 1 percent growth in insurance jobs. From 2003 to 2005, it lost more than 2,500 insurance jobs.

Officials believe the state can do better in building upon its base of insurance employment.

Insurance cluster
The Insurance and Financial Services Cluster is among the key players in selling Connecticut as a desirable location for insurance companies. The cluster is led by members of the industry and supported by educational and government institutions.

According to the head of the IFS Cluster, Robert Flynn, the state's workforce should give it an advantage. "The thing is, we have the highest concentration of insurance underwriters in the nation and things like that are top-notch in terms of what people are looking for."

It's not just the numbers of workers that Connecticut officials tout; it's the productivity and caliber of these professionals. According to the labor department, worker productivity in the state is 23 percent above the national average. The state's workforce is highly educated and well trained. Connecticut ranks third nationally in the percent of population over age 25 who hold a bachelor's degree or higher.

At the same time they promote the job base, these experts acknowledge that insurers weigh factors in addition to the talent pool. At 1.75 percent, Connecticut's premium tax rate happens to be competitive. Proximity to New York, Boston, Washington and major transportation hubs works in Hartford's favor.

High vs. low cost
But the state's high overall cost of living (the average insurance carrier salary in the state was $96,647 in 2005) complicate the sales pitch.

"It's just something that executives put into their equation and then it comes out and it looks like negative," concedes Flynn.

While high costs don't help, selling a state as the cheapest for salaries or taxes doesn't always work either.

"That will only work for a short period of time because there will always be this global marketplace and there will always be another country, another state that can do it cheaper," says Barbara Fernandez, who was named last year by Gov. M. Jodi Rell to lead the insurance development office within the Department of Economic and Community Development. The office was set up following the job losses from the Travelers and MetLife merger.

Fernandez, whose 25-year insurance career includes a stint as assistant vice president for international business at The Phoenix, maintains Connecticut's insurance sector is well positioned for globalization. "I've learned that with insurance companies who make decisions about where to locate, it is not an 'either or.' They, the big ones, tend to look at it as a global continuum. So it is, 'I have a business that is located globally in many different parts of the world and where does Connecticut fit in that continuum?' What a lot of employers are saying ... is where we fit is at the very high-end knowledge base. We have insurance company employers where the average salary is a $120,000. The reason for that is they have the people here that can do the product design, the high-end underwriting, the risk management, the research, the very high-end claims work. So they place here those operations and those pieces that require that knowledge."

While global carriers are certainly desirable, Connecticut appreciates smaller companies as well. "There's more growth in the smaller companies, the specially companies, the really boutique type companies," Fernandez contends.

Policymakers hope the state's newer, smaller insurers including One Beacon Professional Partners, Darwin Professional Underwriters and Guilford Specialty Group, will add jobs.

The main job of the IFS cluster is to convince power brokers and residents that the industry is an important part of the state's present and future, according to Flynn. It hasn't been an easy job. "The academics took a while to really understand that if they shifted some of their research focus, or their curriculum focus, that they would have better opportunities for their students, or better research for their faculty. From the policymakers' point of view, it's been difficult ... educating them and building awareness that the industry plays such a critical role. I had to do a lot of the research to show these people that insurance and financial comprises one-third of our gross state product, and making them understand that if we grow that industry, that the overall economy would grow."

The IFS cluster isn't 100 percent effective. Last year, its legislative priority was the interstate compact to streamline the approval process for life and annuity products. It has passed in 26 states -- but not in Connecticut. The group has also urged lawmakers to permit captives and to eliminate a 6 percent tax on law, actuarial and other service firms that insurers use -- measures that have stalled.

The state's major achievements have been in the area of education. With encouragement from the cluster, the University of Connecticut has increased the number of insurance courses. The cluster also worked with Capital Community College to transform its customer service training so that it focuses on insurance.

Working with the University of Hartford, the group initiated a program to support insurance entrepreneurs. "What we found was a number of people that were leaving insurance companies wanted to start their own operations, so we, through the Entrepreneurship Institute, we were able to kind of coach them on the business aspects of starting new firms," said Flynn.

Perhaps the biggest victory has been the IFS University. The U.S. Department of Labor awarded $2.748 million to a partnership that will create the university over the next three years. The partnership includes Capital Community College, the DECD, and the IFS Cluster.

Critical occupations
The industry has identified four critical occupations -- financial managers and analysts, accountants and auditors, agents and brokers, and actuaries -- which are projected to grow and require ongoing skill enhancement. The grant provides funding to develop a curriculum that will provide the skills training required for the four occupations. It will develop the first Associate in Science Degree in Insurance and Financial Services to be offered at the community college level.

According to Brian MacLean, chief operating officer of St. Paul Travelers and chairman of the IFS Cluster, "The primary competitive advantage that Connecticut's insurance and financial services companies have is our talent. This IFS University initiative will ensure that we nurture that talent for the future, enhance our delivery of creative products and services, and expand our ability to compete in global markets."

There has been some good news recently. St. Paul Travelers is adding 600 positions in the state and The Hartford currently has more than 700 job openings.

Looking ahead, the Connecticut Department of Labor estimates that the insurance industry in the state will grow 8 percent over the next six years, with Hartford adding more than 2,000 new insurance jobs by 2010.

Eight percent growth might not be impressive when matched against claims of other states. But Fernandez says these trends must be placed in the context of a state that already has a lot of insurance jobs.

"One of the things that people say, 'Well, this state grew by 20 percent; your state grew by 2 percent.' But you have to remember the base that we have. We have a very large, mature industry. So the state that grew by 20 percent, well they had two insurance carriers. ... A 50 percent growth means they have four. OK?," the DECD executive said.

It's important to be realistic about growth in the insurance sector, according to Fernandez. "They (insurers) are not going to have Internet type growth rates. It's a business that if it grows as the economy grows, and it adds 3 percent or 4 percent on top of that, that's very healthy," she says.

Pennsylvania pursues backup role as 'Wall Street West'

Pennsylvania is trying to convince the nation's top financial services and insurance companies to establish backup operations in the state so that markets can recover quickly in the event of another terror strike on New York.

Gov. Ed Rendell has pledged more than $30 million to "Wall Street West," an initiative to build millions of square feet of office space, improve infrastructure and install hundreds of miles of fiber-optic cable in nine counties.

Executives from more than 20 Wall Street firms were scheduled for a 30-minute helicopter ride from Manhattan to the Pocono Mountains earlier this month to listen to the state's sales pitch, and there are indications that at least one company is about to pull the trigger.

"I think we're so close today that maybe the trigger is already pulled and the first shot is being fired," said state Rep. John Siptroth, D-Monroe.

After the attacks of Sept. 11, 2001, the federal government recommended that financial services companies establish backup sites and devise "business continuity" plans to safeguard their operations against terrorists and be able to resume transactions as early as two hours after an attack.

Boosters say northeastern Pennsylvania, some 80 miles west of New York, is far enough away that it would not be affected by an attack, but close enough to allow for real-time transmission of data over fiber-optic lines -- a critical requirement of the financial sector.

The nine counties involved in the Wall Street West program were chosen because they could potentially be reached by 125 miles of fiber, the distance at which data transmission becomes less than instantaneous. The counties are Lehigh, Northampton, Berks, Monroe, Carbon, Pike, Wayne, Luzerne and Lackawanna.

Separate power grid
The region also is served by a different power grid, transportation network and watershed than New York, as called for in guidelines issued jointly by the Securities and Exchange Commission, the Federal Reserve and the Office of the Comptroller.

Rep. Paul Kanjorski, D-Pa., a member of the House Financial Services Committee, said that while the financial sector has already taken many steps to protect itself, more can be done. "Your electrical system can go down, your water supply can be poisoned, your transportation system can be disrupted," he said.

The first of the "Wall Street West" projects, the 300,000-square-foot Penn Regional Business Center in Monroe County, is scheduled to break ground in June. Developer Larry Simon plans to build a total of nearly 5 million square feet of office space.

Copyright 2006 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Mass. panel urges jail time for employers' safety failures

A legislative panel in Massachusetts is recommending that company officials face criminal charges if they have recklessly failed to protect workers who are killed on construction sites, according to a published report.

"The prospect of criminal convictions and jail time send a powerful and necessary message to companies that might not be deterred by a fine," the report says.

The legislative panel has been reviewing worksite safety since a scaffolding collapse in downtown Boston in April killed two construction workers and a passing motorist. The federal Occupational Safety and Health Administration has proposed a $119,000 fine against the company that employed the scaffold workers.

The report also says the state should require regular inspections of worksites with scaffolds.

But the state Board of Building Regulations and Standards says a 1994 Massachusetts Supreme Judicial Court ruling gave jurisdiction for workplace safety to the federal government.

The report maintains the Massachusetts court decision does not apply to scaffolds.

N.J. helps homes with underground tanks

More New Jersey homeowners may be eligible for loans to help pay for closure or replacement of underground storage tanks. The Petroleum Underground Storage Tank Remediation, Upgrade and Closure Program was previously available only to homeowners with a leaking tank. But a new law gives homeowners the ability to eliminate the risk of an uninsured loss before a leak occurs.

The Professional Insurance Agents of New Jersey, which lobbied for the bill, notes that many homeowners' insurance companies limit or exclude coverage for oil tank leaks, leaving homeowners' exposed to the risk for damages to their own property, as well as the property of others, should a leak occur. This is a substantial risk to which many homeowners with USTs currently are exposed, says PIA.

"Allowing homeowners to access funds to close or replace their UST will benefit all residents of our state by giving homeowners the financial ability to take corrective action before a damaging leak occurs," said Andrew Anderson, CIC, president, PIANJ. "From a purely environmental standpoint, it makes sense to enable homeowners to close or replace an oil tank before a leak occurs. Now homeowners may access the financial resources to take this preemptive action."

Funding assistance is available through the New Jersey Economic Development Authority. Grants and loans of up to $1,200 may be awarded for the closure of non-leaking underground home heating oil tanks. Grants and loans of up to $3,000 may be awarded for the closure and replacement of non-leaking underground home heating oil tanks.

USTs should be replaced with an above-ground storage tank whenever possible.

R.I. candidates spar

Rhode Island Gov. Don Carcieri, Republican, and his challenger Lt. Gov. Charles Fogarty, Democrat, traded bars over taxes, jobs and Beacon Mutual Insurance Co., the state's dominant workers' compensation insurer, during a recent debate.

Beacon Mutual has been accused of granting some customers with ties to board members preferential pricing. Last spring the company fired its chief executive and replaced several board members.

Carcieri, who has been leading the charge against the insurer, accused Fogarty of being silent on Beacon Mutual. Fogarty said that was untrue. He asked Carcieri where his administration was when the allegedly questionable insurer practices were taking place.

The candidates also squabbled over taxes, with Carcieri praising phase-outs in the car tax and reductions to the capital gains tax. He also noted that the General Assembly earlier this year lowered the cap on annual property tax increases for cities and towns.

Fogarty said he supported property tax relief, but disagreed with tax breaks given to just the wealthiest residents of the state.

The candidates also differed on the state's economic progress. Fogarty said the state's unemployment rate is the highest in New England. "We are a great state, we have incredible potential, but we can do a lot better," he said.

But Carcieri said thousands of new jobs have been created under his administration and that high-powered companies were continuing to invest and expand in the state. "We are really in the midst, frankly, of moving this economy forward at a pace we've never seen before," Carcieri said.

Copyright 2006 Associated Press.

Declarations

"I really feel for the business owners in the heart of downtown who have fought so hard to come back after Floyd in 1999."

Virginia Gov. Timothy M. Kaine in declaring a statewide emergency after as much as 12 inches of rain fell on central and southeastern Virginia, swelling the Blackwater River and flooding the city of Franklin. As many as 120 businesses and 35 homes suffered damage in the worst flooding since Hurricane Floyd in September 1999.

Charitable kick-off
"New York could be our most important division. New York is the world capital of insurance."

Bill Ross, CEO of the Insurance Industry Charitable Foundation, upon the launch of a New York division. The California organization believes collective industry giving can be more effective and garner more recognition than individual company efforts. The New York division has set a goal of $3 million in community grants to nonprofits within its first two years. American International Group gave $400,000 to launch the East Coast division. Other founding members include Endurance Global Insurance Group; Excess Line Association of New York; LeBoeuf, Lamb, Greene & MacRae LLP, Munich Reinsurance of America Inc., ABD Insurance Services Inc., Benfield Group, Chubb Group and Enterprise Rent-A-Car.

Hurricane forecast
"We have experienced average hurricane activity through September. August was inactive, but September had above-average activity. We expect October to have below-average activity largely due to developing El Nino conditions in the central and eastern Pacific. November activity in El Nino years is very rare."

Colorado State University hurricane expert William Gray upon downgrading his forecast for the 2006 Atlantic storm season again. He now predicts no intense hurricanes.

Terrorism coverage take-up
"The general trend observed in the market has been that as insurer retentions have increased under TRIA and policyholder surpluses have risen, prices for terrorism risk have fallen and take-up rates have increased."

The report by the President's Working Group on Financial Markets Terrorism Insurance in concluding that the Terrorism Risk Insurance Act "appears to negatively affect the emergence of private reinsurance capacity because it dilutes demand for private sector reinsurance."

Main Street settlement

"Main Street insurance agents did not commit the alleged abuses that led to these proposed settlements. But this settlement agreement attempts to impose a remedy for wrongdoing on Main Street agents, who did nothing wrong. That's just not right."

National Association of Professional Insurance Agents Executive Vice President Len Brevik, who asked a court to delay approval of a class settlement with Zurich Insurance involving compensation disclosure.

It Figures

1777
The year George Washington and his troops trained at Valley Forge, Pa. Officials at this national historic park are exploring ways to clean up asbestos from beneath the ground where Washington and his troops camped. The chemicals, discovered by workers laying fiber-optic cables in 1997, likely came from a factory that manufactured asbestos products for years before shutting down in the late 1970s. The site covers more than 100 acres of what was known as the grand parade ground, where daily training and drilling took place and where the French Alliance was signed in 1778.

84
The Interstate between Cheshire and Waterbury, Conn., where federal investigators are looking into faulty storm drains installed in a $52 million improvement project. Fixing the problems could cost the state millions of dollars. Conn. Attorney General Richard Blumenthal is also conducting an investigation. He said his probe would "support claims for monetary recovery and other remedies as appropriate."

$38 million
The amount in damages the town of Newark, Del., was ordered to pay in a federal court in a lawsuit involving construction of a new reservoir. "Oh, my God," Mayor Vance Funk III said after learning of the jury award. Funk did not know whether the city's insurance would cover the full award. The city is appealing the award. The jury sided with Donald M. Durkin Contracting Inc., which accused the city of breach of contract.

7
The number of new carriers that have entered the New Jersey auto insurance market since reforms were enacted in 2003. Direct-seller 21st Century Insurance Group became the seventh in what New Jersey Banking and Insurance Commissioner Steven Goldman called a "significant milestone" for consumers.

2
The number of police officers charged with setting an SUV on fire to obtain insurance money to buy a Cadillac Escalade. The Maryland State Fire Marshal's Office said Elizabeth Lauren Anderson and Randy Dorsey have been charged in the crime. The two police officers are dating, authorities said.

1,779
The number of civil aviation accidents reported in 2005, which is up from 1,717 in 2004. Total fatalities fell, from 636 to 600. Small scheduled airlines had six accidents in 2005, compared with four in 2004, according to the Insurance Information Institute.

HRH, Hub stock prices soar; B&B grows wholesale premium to $1 billion

Stock Price Activity: Brokerage stocks have varied through the first three quarters of 2006. Brokers such as Hilb Rogal & Hobbs and Hub International are having an exceptional year, with their stock trading up 11.7 percent and 13.0 percent respectively. However the two largest brokers in the United States, Marsh & McLennan and Aon, have traded down 9.8 percent and 4.6 percent respectively. Arthur J. Gallagher has also been down significantly, 10.7 percent, through Sept. 30, 2006.

M&A Activity: Brown & Brown, through its subsidiary Hull & Company, has quickly amassed approximately $1 billion in annual wholesale premium volume. On Sept. 30, Brown & Brown announced several acquisitions of property/casualty wholesalers. Hull expanded its presence in the Northeast with the acquisition of Delaware Valley Underwriting Agency, Inc. and Residential Underwriting Agency Inc. The aggregate annualized revenues of the acquired entities are $15 million. Brown & Brown also agreed to acquire two other wholesalers, Penn Independent Corp. and Apex Insurance Agency Inc. In September, Jardine Lloyd Thompson Group plc announced that it reached an agreement with Alliant Insurance Services Inc. for the sale of its U.S.-based P/C insurance and employee benefits businesses. The consideration is $100 million, including $5 million of deferred consideration payable by installments at the end of 2008 and 2009, subject to the profitability of the businesses being sold. The net consideration on completion after transaction costs, including retention bonuses, is approximately $85 million, or 12.5 times profit before tax of $6.8 million in 2005. The proceeds will be used to further enhance JLT's financial position including debt reduction. JLT will continue to operate specialty U.S.-based aviation and wind power insurance businesses and reinsurance operations.

Ten acquisitions were announced in August, including the largest acquisition of the year. Lockton announced it has reached a definitive agreement to purchase Alexander Forbes International Risk Services, the international brokerage operation of Alexander Forbes Limited, the world's ninth largest insurance broker, for $170 million. The transaction will make Lockton the largest independent, privately-owned global insurance broker. The combined business will have more than $600 million in revenues and 3,700 professionals with locations in Europe, North America, Latin America, and Asia. The Alexander Forbes business to be acquired had 2005-06 revenues of $202 million.

Capital Raising Activity: Brooke Corp. announced the sale of 20,000 shares, representing $20 million of its newly designated Perpetual Convertible Preferred Stock Series 2006. The net proceeds will be used to repay a $10 million promissory note issued during the second quarter of 2006 for the purpose of contributing capital to Brooke Corp.'s finance company subsidiary to help it fund a growing loan portfolio. The remaining net offering proceeds will be used to support the growth of Brooke Corp.'s subsidiaries, including growth through additional product and service offerings made available to Brooke insurance agency franchisees.

LMC Capital LLC is a national investment banking firm focused exclusively on the insurance industry. Services include industry-specific advisory relating to mergers and acquisitions, capital raises and valuations. Contact: 704-943-2600, Info@LMCCapital.com, or visit www.LMCCapital.com.

Banks' insurance revenues, insurance brokerage fees up

The nation's bank holding companies increased their total insurance revenue 1.1 percent to $21.4 billion in the first half of 2006 from $21.2 billion during the same period in 2005. Bank holding companies' income from insurance brokerage fees rose more than 23 percent during the same period.

CitiGroup, Wells Fargo & Co., Countrywide Financial Corp., and HSBC North America Holdings Inc. led all bank holding companies with significant banking activities in total insurance fee income in the first six months of 2006, according to findings by Michael White Associates and the American Bankers Insurance Association.

The findings are based on data reported to the Federal Reserve Board by 990 top-tier large bank holding companies (BHCs). The analysis measures the growth of the bank insurance business and provides some benchmarks that gauge bank insurance performance.

"While the industry's growth in total insurance revenue slowed in the first half of 2006, insurance brokerage fee income rose rapidly," said Valerie Barton, associate director of ABIA.

"Larger banking organizations experienced exceptionally strong double-digit growth, much of which derived from organic growth in insurance brokerage fee income as agency integration and cross-selling accelerate."

BHCs' insurance brokerage fee income climbed 23.1 percent from $4.98 billion in the first half of 2005 to $6.13 billion in the first half of 2006, as 639 bank holding companies (64.6 percent of all top-level large BHCs reporting) engaged in sales activities that produced insurance brokerage fee income.

During the first six months of 2006, 644 bank holding companies (65 percent of all top-level BHCs reporting) earned some type of insurance-related revenue, compared to 1,395 in the first half of 2005.

Fewer bank holding companies reported total insurance revenues because, earlier this year, the Federal Reserve redefined "small" BHCs as those with less than $500 million, instead of $150 million, in consolidated assets. This reduced the total number of BHCs that must report detailed call report information by 1,300 and the number of BHCs that reported total insurance fee income in the first half of 2006 by 751. In addition, 81 BHCs reported earning some insurance underwriting fee income from underwriting or reinsurance activities.

The analysis includes a ranking of the top 50 bank holding companies on the basis of the absolute dollar amount of total insurance revenue (earnings from sales and underwriting) and on the basis of total insurance revenue as a percentage of the institution's total non-interest income.

Supreme Court agrees to hear insurance credit scoring cases

The U.S. Supreme Court has agreed to hear one hour of oral arguments on insurers' use of credit reports, based on appeals filed by Safeco Insurance Co. of America and GEICO General Insurance Co., which was supported by friend of the court briefs submitted by insurance associations. The insurers disagree that they should have notified people about adverse information in their credit reports.

At issue is whether the Ninth Circuit erred in holding that a defendant can be found liable for a "willful" violation of the Fair Credit Reporting Act ("FCRA") upon a finding of "reckless disregard" for FCRA's requirements. According to the court docket, the decision conflicts with the unanimous holdings of other circuits that "willfulness" requires actual knowledge that the defendant's conduct violates FCRA.

According to the questions presented with the appeal in GEICO General Insurance Co. v. Edo, the FCRA requires a user of consumer credit information to notify a consumer when the consumer has been treated adversely on the basis of his or her credit information. If a consumer shows that a user's failure to send an adverse-action notice was negligent, the consumer is entitled to recover actual damages. But, if the consumer makes a higher showing and proves the user's failure to send an adverse action notice was "willful," the consumer is entitled to recover statutory damages between $100 and $1,000 (in lieu of actual damages) and punitive damages.

According to the Supreme Court, a conflict exists between the Fourth, Fifth, Sixth, Seventh and Eight Circuit courts, and now the Third and Ninth Circuit Courts, over the mens rea, or criminal intent, required for a "willful" violation of FCRA.

"The Ninth circuit held that a company may be deemed to have acted recklessly -- and thereby willfully under the Act -- if the company relied, even in good faith, upon an interpretation of the Act that a court later determines to be 'unreasonable, implausible, creative or unintenable,' even if that interpretation was derived from a legal opinion that the company sought for the very purpose of ensuring compliance with the law," the questions associated with the case state. The high court combined Safeco Insurance v. Burr, 06-84 and GEICO General Insurance v. Edo, 06-100 when it noted it would hear oral arguments.

Hurricane risk reduces prospective profit of homeowners insurance

Increases in homeowners insurance rates have not been sufficient thus far to provide an adequate return on equity on homeowners insurance, making further increases necessary, according to an analysis by Aon Re.

With capital requirements and the cost of catastrophe reinsurance up year over year, especially in states most at risk for hurricanes, Aon Re's analysis of prospective return on equity for the homeowners insurance line is 5.7 percent. A similar analysis in 2005 revealed a 9.3 percent return on equity in 2005. Many insurers seek a return of 14 percent or more.

"Rating agencies are taking an even-closer look at catastrophe risk as they assess insurers' capital adequacy, meteorologists and risk modeling firms expect more and stronger hurricanes at least in the near term, and the increases in homeowners insurance rates that we've seen thus far aren't enough to provide insurers the opportunity to earn back their cost of capital," said Bryon G. Ehrhart, president and chief executive officer of Aon Re Services Inc.

Aon Re's prospective return on equity is 3.5 percent for hurricane-affected states viewed as a group, 8.1 percent for the non-hurricane-affected states. To reach a prospective return on equity of 14 percent, an estimated average rate increase of 43.3 percent would be required for the hurricane-affected states, 11.1 percent for the non-hurricane-affected states.

"The needed rate increase for hurricane states is likely to be large, not only because of the changing views of expected losses due to hurricanes, but also because of the amount of capital that is necessary to operate in those states, which is linked to their risk of catastrophic loss," said Randall Brubaker, senior vice president of Aon Re Services Inc.

Returns on equity at current rates and rate increases for 14 percent return on equity are based on analysis of actuarial support for rate filings of the five leading companies in states making up 80 percent of the U.S., where this information is publicly available. Estimates reflect rate increases filed by these insurers through July 2006.

Insurance charity foundation opens in N.Y.; plans national expansion

A California organization seeking to be a collective voice for insurance industry philanthropy has launched a New York division, kicking off what it hopes will become a nationwide expansion.

The Insurance Industry Charitable Foundation said its New York division, which will have its own local board of governors, is expected to be operational by January 2007, serving New York City and the tri-state area. It has set a goal of providing at least $3 million in community grants to New York area nonprofits within its first two years.

IICF operates on the belief that collective industry giving can be more effective and garner more recognition than individual company efforts. It is meant to complement existing philanthropic efforts of insurers and insurance charitable foundations.

According to IICF, it has channeled more than $12 million in grants to local communities in California and accounted for 60,000 hours of volunteer service from insurance employees.

Plans for the New York division include a Volunteer Week and a community grants fund. The group hopes to engage more than 6,000 insurance industry employees in volunteer community service that collectively would provide 24,000 hours of service. It also plans to hold an annual dinner to raise $1 million for community grants.

Members are asked to make an annual minimum donation of $12,000 to be on the IICF board. Firms donating at least $25,000 are recognized as belonging to the Founders' Circle. Members are expected to participate in campaigns to reach additional industry supporters.

The New York chapter was announced at a meeting hosted by Martin Sullivan, president and chief executive officer, American International Group Inc. at AIG headquarters in New York City. AIG made a sizable six-figure founding contribution to launch the first East Coast division.

Early Founders' Circle members of the New York division, in addition to AIG, include Endurance Global Insurance Group; Excess Line Association of New York; LeBoeuf, Lamb, Greene & MacRae LLP, and Munich Reinsurance of America.

Board member supporters of the New York division thus far include ABD Insurance Services Inc., Benfield Group, Chubb Group and Enterprise Rent-A-Car.

"New York could be our most important division," Bill Ross, CEO of the IIICF, told early supporters at the AIG luncheon. "New York is the world capital of insurance."

Ross indicated that the next stop on IICF's expansion could be Chicago, followed by Atlanta.

Founded in California in 1994, the IICF is a 501(c)3 nonprofit organization. It seeks to "set the standard for corporate giving, and serve as the charity of choice and philanthropic voice of the insurance industry," according to its literature.

For industry companies with internal charitable giving programs, the foundation works as a partner by extending their reach and visibility. For companies and individuals without resources to implement their own outreach, the foundation provides a managed program of charitable giving.

IICF's Ross thanked Sullivan for his leadership and AIG's founding contribution.

"We believe the foundation is unique in helping to create a collective philanthropic effort across the industry," Ross said. "We are working to help communities, while strengthening the impact and awareness of the industry's goodwill. We invite all members of the insurance industry to join AIG and other leaders by investing time and funds to support this collective charitable effort."

"We are proud to help establish the foundation's New York division, engaging leadership from across the insurance industry in support of our community," Sullivan said.

P/C insurers' profitability drops in first-half of 2006

Increased competition will eventually undermine results, says industry analyst

The U.S. property/casualty insurance industry's net income after taxes fell 9.3 percent to $28.3 billion in first-half 2006 from $31.2 billion in first-half 2005 as investment results deteriorated. Reflecting the decline in net income after taxes, the industry's annualized rate of return on average surplus (net worth) fell to 13 percent in first-half 2006 from 15.6 percent in first-half 2005, according to ISO and the Property Casualty Insurers Association of America (PCI).

Contributing to the declines in net income after taxes and overall profitability, the industry's net investment income -- primarily dividends from stocks and interest on bonds -- dropped 3.5 percent to $24.5 billion in the first half of this year from $25.4 billion in the first half of last year. Realized capital gains on investments (not included in net investment income) tumbled 66.4 percent to $0.9 billion in first-half 2006 from $2.6 billion in first-half 2005. Combining net investment income and realized capital gains, overall net investment gains fell 9.3 percent to $25.4 billion through first-half 2006 from $28 billion through first-half 2005.

Also contributing to the declines in net income after taxes and overall profitability, the industry incurred $12.3 billion in federal income taxes in first-half 2006 -- 20.3 percent more than the $10.2 billion in income taxes the industry incurred in first-half 2005.

The figures are consolidated estimates for all private property/casualty insurers based on reports accounting for at least 96 percent of all business written by private U.S. property/casualty insurers.

Underwriting remains solid
Partially offsetting the deterioration in investment results and the increase in income taxes, insurers' net gains on underwriting increased to $15.1 billion in first-half 2006 from $12.8 billion in first-half 2005. The combined ratio improved 1 percentage point to 92 percent in the first half of 2006 from 93 percent in the first half of 2005.

"While the hurricane season isn't over and the potential for catastrophic losses from a natural disaster still remains, insurers' underwriting results for first-half 2006 were very solid," said Genio Staranczak, PCI chief economist. "At 92 percent, the combined ratio for first-half 2006 was the best first-half combined ratio since the start of quarterly records extending back to 1986. Insurers also earned profits on underwriting in the first-half of 2005, but catastrophe losses in the second half quickly erased those underwriting profits and more. It is also important to put first-half results in perspective. Insurers lost money on underwriting in the first half of each year from 2003 back to 1986. Summing first-half results for the past 21 years, the industry is still $129 billion in the red on underwriting."

"Even if we aren't struck by any major storms, we are already seeing signs that recent results are spurring increased competition in insurance markets not exposed to hurricanes and that increased competition will eventually undermine premium growth and underwriting results," noted Michael R. Murray, ISO assistant vice president for financial analysis. "While stories about price increases and insurance availability problems in coastal states hammered by Hurricanes Katrina, Wilma and Rita continue to appear almost daily, the countrywide CPI for tenants' and household insurance dropped 1.5 percent in second-quarter 2006 compared to its level a year earlier, and the CPI for motor vehicle insurance rose a scant 0.3 percent -- far less than the 4 percent increase in consumer prices overall. Moreover, commercial insurance rates fell an average of 3 percent countrywide for accounts of all sizes, according to the Council of Insurance Agents and Brokers."

Overall results
Overall underwriting results improved even though catastrophe losses increased. Catastrophes caused $5.3 billion in insured property losses in first-half 2006, up 71.8 percent from $3.1 billion in first-half 2005, according to ISO's Property Claim Services (PCS) unit.

The improvement in underwriting results in first-half 2006 reflects the excess of growth in premiums over growth in loss and loss adjustment expenses, other underwriting expenses and dividends to policyholders.

Net written premiums climbed $6.4 billion to $223.3 billion in first-half 2006 from $216.9 billion in first-half 2005, with written premium growth accelerating to 2.9 percent in first-half 2006 from 2.2 percent in first-half 2005.

Net earned premiums rose $5.7 billion to $215 billion in first-half 2006 from $209.3 billion in first-half 2005, but earned premium growth slowed to 2.7 percent in first-half 2006 from 3.2 percent in first-half 2005 and a cyclical peak of 11.8 percent in first-half 2003. At 2.7 percent, first-half earned premium growth had slowed to its slowest pace since 1999, when earned premiums grew 0.9 percent.

Overall loss and loss adjustment expenses increased $0.2 billion, or 0.1 percent, to $141.3 billion in first-half 2006 from $141.1 billion in first-half 2005. Non-catastrophe loss and loss adjustment expenses declined $2 billion, or 1.4 percent, to $136 billion in first-half 2006 from $138 billion a year earlier.

Other underwriting expenses -- primarily acquisition expenses, other expenses associated with underwriting, pricing and servicing insurance policies, and premium taxes -- rose $3 billion, or 5.5 percent, to $58 billion in the first half of this year from $54.9 billion in the first half of last year.

Dividends to policyholders rose 16.9 percent to $0.6 billion in first-half 2006 from $0.5 billion in first-half 2005. The net gain on underwriting in first-half 2006 amounts to 7 percent of the $215 billion in premiums earned during the period, up from 6.1 percent of the $209.3 billion in premiums earned in first-half 2005.

"Premiums and losses both would have grown faster if not for a special development affecting reported results," noted Staranczak.

"Even at an adjusted 3.5 percent, written premium growth in first-half 2006 fell far short of growth in the economy," added Murray. "U.S. gross domestic product (GDP) -- a dollar measure of national output -- rose 6.9 percent in first-half 2006 compared to its level a year earlier. That premiums rose only about half as much as GDP is another indication that competition is leading to lower prices in many insurance markets, despite ongoing problems in specific markets affected by last year's record catastrophe losses."