They Did It Their Way

When you’re compiling a list of top 10’s, there is always the fear of leaving someone off, admitting someone who maybe does not deserve the billing or having the players out of order of importance. Believe me, those thoughts crossed our minds more than once as we sat down to report on just who made news for 2002 in the insurance industry.

Order of appearance does not necessarily signify greater or lesser importance. Feel free to offer your feedback; we look forward to touching base with you again in 200.

Larry Silverstein — Two is better than one.
A little over a year removed from the terrorist attacks of Sept. 11, 2001, an event that will go down in history as the property/casualty insurance industry’s largest single loss occurrence, Larry Silverstein has a vision for what will become of the site.

For now, Silverstein has begun the rebuilding process, at least through the eyes of an architect.

In November, Silverstein unveiled plans for development of the tower at the World Trade Center site in New York. The new 52-story skyscraper, designed by architect David Childs and developed by Silverstein, will be constructed on the site of the old 7 World Trade Center that collapsed following the attacks on the World Trade Center on Sept. 11. Silverstein’s new building is expected to cost about $700 million.

The project will be paid for with some $800 million in insurance proceeds. If more money is needed, it will come through private financing, likely through the Liberty Bond program designed to help New York recover from the attacks.

That vision, however, may very well take a back seat to what plays out in the courts in the coming months. Silverstein, who has argued that the Sept. 11, attacks on the property were two occurrences, informed Judge John Martin that he would appeal a Sept. 25 ruling involving insurers’ Hartford Fire Insurance Co., Royal Indemnity Co. and St. Paul Fire & Marine Insurance Co.

Martin ruled that the three insurers of the more than 20 involved could deem the terrorist attacks as a single event, which would result in only a single payment to Silverstein. The difference between a single payment and two is several billion dollars.

In a related development, Silverstein asked that a scheduled November trial be moved to next spring. For now, the case is pending in the Second Circuit Court of Appeals. The trial will take place when the appellate proceedings conclude.

Martin Frankel — Saturday banking hours may not be enough to sort this case out.
Martin Frankel, who faced charges for his reported defrauding of more than $200 million from insurance companies in five states, pled guilty in a Connecticut courtroom May 15.

Frankel, who was indicted on more than 30 counts, allegedly obtained control of small insurance businesses in five states—Arkansas, Mississippi, Missouri, Oklahoma and Tennessee—then stole cash from company reserves in the last decade. Frankel reportedly took the money and spent it on private indulgences, including planes, cars and gifts for others. He faces the possibility of up to 150 years behind bars.

Five Southeastern states that lost $200 million to Frankel’s alleged insurance schemes also filed suit against their banks, arguing those institutions should have been prepared for Frankel’s actions.

State insurance commissioners sued AmSouth Bancorp and First Tennessee National Corp.’s First Tennessee Bank looking to recoup funds reportedly stolen by Frankel through illegal wire transfers. Filed in a Mississippi circuit court, the suit sought a jury trial and compensatory damages, according to court papers.

Commissioners from Mississippi, Tennessee, Missouri, Arkansas and Oklahoma claim bank officials should have discovered the unusual nature of transfers in and out of accounts held by insurance companies managed by the respective states. The banks, in separate but similar filings, claim the states had no basis for their lawsuit under federal statutes and regulations.

Michael Segal — Just another typical day in the Windy City.
Michael Segal, the founder and former CEO of Chicago-based broker Near North Insurance, will not forget 2002 anytime soon.

Segal filed a lawsuit in Cook County Circuit Court seeking a total of $700 million in damages from six former employees who joined Aon, also named as a defendant, after a power struggle within the company. Segal, who goes to trial April 7 on federal charges that he improperly appropriated money from a company trust fund, also named five other employees and two insurance companies in what he alleges was a conspiracy against him.

The charges include numerous allegations that the defendants hacked into some 20,000 confidential e-mails, including correspondence with attorneys, copied other Near North company records, and used the information against Segal and the company.

According to a report from the Chicago Tribune, the lawsuit gives vivid details of a power struggle at Near North between Segal and five of his employees whom he claims tried to wrest power from him. Following their failure to do so, he alleges that they left Near North and joined Aon, where they cooperated in the federal investigation against him, and tried to divert business. The purloined e-mails were allegedly sent to the employees, who had gone to work for Aon.

Near North has also sued former employees for violating their employment contracts by going to work for a competitor, and has filed a complaint with state regulators over alleged violations of Illinois rules governing insurance.

Warren Buffett — Variety is the spice of life.
Saying that the company’s insurance operations are rebounding, billionaire investor Warren Buffett informed stockholders that Berkshire Hathaway’s operations were back on track back in late spring. That announcement alone coming from the man who employs well over 100,000 people likely calmed some nervous folks out in corporate America.

Buffett announced that insurance premiums held by Berkshire prior to payouts increased by $1.8 billion in the quarter ended March 31, and the company recorded an underwriting profit of $20 million during the period. That compares with an underwriting setback last year of more than $4 billion, with approximately $2.4 billion of that related to the events of Sept. 11. Buffett added that Berkshire’s largest company, General Re Corp., suffered great impact by Sept. 11, along with some policy miscues.

As the year winds down, Berkshire, whose insurance and manufacturing businesses provide money for Buffett to invest, reported a net third- quarter profit of $1.141 billion, or $744 a share. That compared with a loss of $679 million, or $445 a share, the year before, due to heavy World Trade Center claims.

Excluding $27 million in realized gains from selling investments, Berkshire posted an operating profit of $1.114 billion, compared with a loss of $895 million the previous year.

The rise in profit comes as insurance and reinsurance rates continue to soar after a decade of decreases. Price increases were sped up by a surge in demand for insurance and a tightening of supply after the Sept. 11 attacks on the United States. Buffett’s rapidly growing empire of operating companies— from shoes to candy to energy—are also factors in contributing to higher earnings.

Maurice R. “Hank” Greenberg — Never underestimate the power of Hank.
American International Group, Inc. (AIG) reported that its net income for the third quarter of 2002 was $1.84 billion, compared to $326.8 million in the third quarter of 2001. For the first nine months of 2002, net income totaled $5.62 billion, an increase of 60.8 percent compared to $3.50 billion in the same period of 2001. Those numbers pleased AIG chairman M.R. ‘Hank’ Greenberg, who noted, “AIG had a good quarter. Worldwide General Insurance had record net premiums written of $7.08 billion, up 42.2 percent over the third quarter of 2001. This substantial growth is the result of new business successes as well as rate increases.”

Growing business is something Greenberg has been able to successfully do for a number of years now. His efforts to grow AIG have spanned the globe, including securing business in China. When it was noted that, according to several news reports, an official of the China Insurance Regulatory Commission (CIRC) told reporters at a news conference on June 11 that AIG wouldn’t receive any more licenses for its subsidiaries unless they were at least 50 percent owned by a Chinese partner, Greenberg spoke up. The official refused to be named or quoted directly, which indicated to many observers that he wasn’t announcing a firm CIRC decision.

The subsidiary ownership question held up China’s accession to the World Trade Organization for some months, as European negotiators sought changes to eliminate what they felt was an unfair trade advantage, as AIG is the only foreign insurer with the right to establish wholly-owned branch operations in China. All others must have at least half of the operation owned by a Chinese partner. AIG eventually agreed to limit, but not eliminate, the number of wholly-owned subsidiaries it operates in China, but the scope of this accord is quite vague. AIG has continued to receive licenses without the 50 percent requirement, most recently when it opened a much-coveted office in China’s capital, Beijing. This would indicate that it might still benefit from its “grandfather clause” in its agreements with the Chinese. Greenberg wasn’t about to surrender the company’s rights without a fight. He defended the advantage at the press conference following the opening of the Beijing office, stating, according to a report from Dow Jones Newswires, that “We came to China more than 20 years ago and provided many things for China and worked very hard for U.S. and China relations. Where were the other foreign companies 20 years ago? If they want to continue to complain, I’ll give them a large crying towel.”

Lord Levene — The name’s Levene, Peter Levene.
Breaking a span of more than 300 years, Lloyd’s of London will be headed by a chairman from outside the London Insurance Market, as the Council of Lloyd’s chose Lord Peter Levene of Portsoken, currently vice-chairman of Deutsche Bank, London to succeed Sax Riley, who retires at year’s end.

The 60 year-old Levene has broad experience. A London native, he’s held posts in both private industry and government, notably as chief of Defense Procurement from 1985 to 1991 and as the Prime Minister’s Advisor on Efficiency and Effectiveness from 1992 to 1997.

“This is a fascinating time to be joining the team at Lloyd’s,” Levene commented. “Sax Riley, Nick Prettejohn and their team have set the market firmly on the course towards reform and wholesale modernization. My task, working alongside Nick, is to complete the work they’ve begun. Lloyd’s has already succeeded in making a series of major improvements to its operation since the mid-1990s. The goal of a modern, transparent and profitable business for the 21st century is well within our grasp. This modernization will be my top priority as chairman.”

Next to James Bond, Levene may know London and its way of operating best as he positions Lloyd’s into 2003 and the years to come.

Fired CEO’s — After the fall.
It is not often that being replaced in your position would get you into a Top 10 list, but a number of CEO’s managed that trick in 2002. In one nine-day period in September no less than four company heads were shown the door. Bob Mendelsohn, director and Group CEO of the U.K.’s Royal & Sun Alliance, on Sept. 12. The next day Gianfranco Gutty resigned as the Chairman of the Board of Italy’s largest insurer, Generali SpA. In the week that followed Lukas Mühlemann stepped down as chairman and CEO of Credit Suisse, the parent company of the Winterthur Group, and, bringing attention to a continent away, Paul Batchelor was forced out as the CEO of Australia’s AMP. Throw in Rolf Hüppi from Zurich and Jacques Blondeau of SCOR, and you could field a starting five and sixth-man off the bench for an NBA team.

With the possible exception of Gutty, all of them were reportedly forced out because their company stock prices dipped after they failed to achieve the results expected by their larger shareholders.

The change of seasons from summer to fall took on a new meaning with this cleaning of the industry’s house.

J. Patrick Gallagher — Say, can I buy your company?
Growing his company and continuing a family legacy, J. Patrick Gallagher, who heads Illinois-based A.J. Gallagher, has had quite a year.

Gallagher, whose grandfather founded the company, topped the list of the country’s seven best CEO’s as determined by TheStreet.Com. According to the report, “During his tenure, the company has climbed from being the eighth-largest insurance brokerage in the world to the fourth. Arthur J. Gallagher has also smartly diversified into risk-management and financial services under Gallagher’s watch, in part through acquisitions.”

Gallagher has been the company’s CEO since 1995.

Jim Stanard — Growth is good.
Company growth would highlight the story for RenRe and its chairman and CEO, Jim Stanard. “Gross premiums written for the first nine months of 2002 have more than doubled compared to 2001,” Stanard noted recently. “Each of our four major business segments—catastrophe reinsurance, specialty reinsurance, structured products, and individual risk—are strong contributors to our 25 percent annualized operating return on equity in the third quarter. Moving forward, we will continue to focus on building shareholder value by aggressively pursuing growth opportunities while maintaining our commitment to disciplined underwriting in all our business.”

Jack Byrne — Back to the high peaks.
The White Mountains Insurance Group CEO certainly has his plate full these days. Jack Byrne recently returned to the role of chief executive, a position he had vacated for nine months to lead a company subsidiary. Byrne had departed the post in June to run OneBeacon, which White Mountains purchased June 1.

White Mountains Insurance Group, Ltd. finished the third quarter of 2002 with a fully converted tangible book value per share of $249, which is a $24 increase since the start of the year. Investment gains and improving underwriting results in its insurance and reinsurance subsidiaries contributed to the positive results.

Honorable Mentions — Rod Fox (Benfield Greig-Blanch); Tom Gallagher (Fla. Insurance Commissioner); Harry Low (Calif. Insurance Commissioner); Jose Montemayor (Texas Insurance Commissioner); Dean O’Hare (Chubb); Nick Prettejohn (Lloyd’s); Gregory Serio (N.Y. Insurance Commissioner).

Photo Credits:
Silverstein-Reuters;
Frankel-http://abcnews.go.com;
Segal-www.chicagobusiness.com;
Buffett-www.forbes.com;
Greenberg – www.forbes.com;
Levene-www.lloydsoflondon.com;
Gutty-www.dalmazia.it;
Mühlemann– www.ecommercetimes.com; Batchelor-www.bizcatalyst.com;
Gallagher-www.thestreet.com;
Stanard-media.corporate-ir.ne;
Byrne-OneBeacon Insurance

Topics Lawsuits Carriers Profit Loss Excess Surplus Reinsurance Mississippi China Market A.J. Gallagher London Lloyd's Tennessee AIG