THURSDAY, APRIL 15, 2010 

                                                Big “I” National News




P-C Trends
More Mergers & Acquisitions on the Horizon?
Insurance industry conditions converge to create an environment ripe for deals.

Remember when you were a USF&G agent and then became a St. Paul agent and finally a Travelers agent? Or when you wrote your first bank with Fidelity & Deposit and then watched it become a part of Zurich Insurance Group?  Or when the national association saw the 2005 acquisition of its endorsed agency E&O provider, Westport, by Swiss Re? Insurer mergers and acquisitions have generally been quiet for in 2008 and 2009. But some are predicting that is about to change.

About a year ago, Deloitte LLP, the well known auditing and consulting firm, published its “The 2009 Insurance M&A Outlook.” That report concluded that industry mergers, which had fallen off, would increase again in the coming year. The firm predicted large financial institutions and insurers would likely to seek ways to divest their non-core insurance businesses and pressure would build to shore up shortfalls in capital.  If the last two weeks is any indication, the trend may have come a bit later to the property-casualty side of the business, but there may be signs of mergers to come. Two weeks ago, Utica National announced it will add a 200 employee operation from Illinois to its 1,250 person operation in upstate New York.  This week, reports surfaced that XL Capital of Bermuda (4,011 employees) was a likely acquisition target of Munich Re (47,250 employees).

The Deloitte paper cited five scenarios as being conducive to insurance industry M&A activity: fallout from catastrophes, the beginning of a hard insurance market, the beginning of a soft market, after major changes in regulations and when investment returns are low. Four out of five isn’t bad!  With the first quarter of 2010 being cited as one of the highest ever in terms of catastrophe losses, hope that the insurance cycle will at some point turn from soft to hard, investment returns at historic lows and the prospect of dramatic financial institution regulatory change on the horizon, the industry may indeed see conditions result in a dramatic increase in the number of insurer acquisitions in the rest of 2010.



Source: Deloitte, LLP, “The 2009 Insurance M&A Outlook: Opportunity in an Uncertain Environment"

Perhaps the biggest influence will be, however, that the prices of insurers are at historic lows. This was cited as a primary driver in Munich Re’s purported interest in XL Capital. The chart above outlines insurer price to book valuation of a group of insurers tracked by Deloitte. With a nearly 30% drop in the prices of acquired insurers from 2004 to 2008, (and in some cases stock prices that fell further in 2009 and which have recovered only partially in 2010) an increase in mergers certainly seems likely.

Paul Buse ( paul.buse@iiaba.net) is president of Big I Advantage^® and a licensed p-c agent.





P-C Trends
Mediocre at Best
Despite improvement over previous year, 2009 insurance industry return remains well below long-term average. 

It’s better—but the question is, better compared to what?

Despite the fact the insurance industry posted a 2009 rate of return nearly ten times better than 2008’s performance, the sector remains battered. Net written premium growth has been negative for three consecutive years, with net written premium growth falling to a new record low in 2009. Data extending back to 1959 indicates that the previous record lows were negative 1.3% in 2008 and negative 0.6 %in 2007 and that, prior to recent declines, net written premiums rose every year through 2006.

Private U.S. property-casualty insurers’ net income after taxes rose to $28.3 billion in 2009 from $3 billion the year before. Insurers’ overall profitability as measured by their rate of return on average policyholders’ surplus (or statutory net worth) increased to 5.8% last year from 0.6% in 2008. But insurers’ recovery from the recession and financial crisis remained incomplete, with their $28.3 billion in net income for 2009 being less than half of their $62.5 billion in net income for 2007. Similarly, insurers’ 5.8% overall rate of return for last year was less than half of their 12.4%rate of return for 2007.

Driving the increases in insurers’ net income and rate of return in 2009, net losses on underwriting fell by $18.1 billion to $3.1 billion in 2009 from $21.2 billion in 2008, as claim costs (loss and loss adjustment expenses) dropped $31.3 billion, according to ISO and the Property Casualty Insurers Association of America (PCI).

Driven by the decline in claim costs, the combined ratio — a key measure of losses and other underwriting expenses per dollar of premium — improved to 101 percent in 2009 from 105 percent in 2008.

Also contributing to the increases in insurers’ profits and profitability, their net investment gains — the sum of net investment income and realized capital gains (or losses) on investments — rose 23.2% to $39 billion in 2009 from $31.7 billion in 2008.

Reflecting the industry’s net income and unrealized capital gains on investments (not included in net income), policyholders’ surplus — insurers’ net worth measured according to Statutory Accounting Principles — rose 11.8% to $511.5 billion at year-end 2009 from $457.3 billion at year-end 2008. Nonetheless, surplus at year-end 2009 was down 1.2% compared with surplus at year-end 2007.

“Though insurers’ 5.8% rate of return for 2009 was nearly 10 times their 0.6 percent rate of return for 2008, insurers’ overall rate of return remained below its long-term average,” said Michael R. Murray, ISO’s assistant vice president for financial analysis.  “During the 51 years from the start of ISO’s annual data for the insurance industry to 2009, insurers’ rate of return averaged 9.1%. The industry’s subpar performance last year reflects a combination of negative rates of return for mortgage and financial guaranty insurers and modest single-digit rates of return for other insurers.”

Katie Butler (katie.butler@iiaba.net)is editor in chief of IA.





P-C Trends
Travelers Joins Trusted Choice^®
Industry-leading carrier is latest brand movement company partner.

The Travelers Companies, Inc. has joined the Trusted Choice^® consumer branding program for independent insurance agents and brokers. A leading provider of property-casualty insurance for auto, home and business, Travelers is one of the largest independent agency insurance companies in the U.S. A component of the Dow Jones Industrial Average, Travelers is rated A+ (Superior) by A.M. Best, and built its success by providing innovative insurance and risk protection products and services.

“Working with an independent agent is an excellent way for consumers to choose the right insurance to meet their individual needs,” says Brian MacLean, president and chief operating officer of Travelers. “At Travelers, we are dedicated to our continued partnerships with independent agents. With 13,000 agents and brokers around the country who sell our policies, we want to help them grow their business. We’re pleased to support Trusted Choice^® as a means to promote the unique expertise and high quality customer service independent agents provide.”

“Travelers is a premier global brand of insurance and one of the largest writers of property-casualty insurance through independent insurance agents,” says Robert Rusbuldt, Big “I” president & CEO. “Joining Trusted Choice^® further demonstrates its commitment to the independent insurance agency distribution system and confirms its strong belief that independent agents are the trusted advisors for consumers.”

Trusted Choice^® was launched by the Independent Insurance Agents & Brokers of America (IIABA or the Big “I”) and several independent agency companies to highlight the benefits independent agencies and brokerage firms offer consumers—choice of companies, customization of policies and advocacy support. It is the premier consumer brand for independent insurance agents and provides national advertising and other strategic tools to reach consumers.

Trusted Choice^® educates consumers about the benefits of using independent agents and brokers for their insurance needs: choice of companies, customized policies and advocacy support. Trusted Choice^® is the consumer marketing identity for over 10,400 independent insurance agencies and brokerage firms and 54 leading insurance companies. 


L-H Leads
Capital Gains Tax Bites Estate Tax
Beneficiaries of smaller estates receiving assets with large capital gains—like many small businesses—will suffer from the repeal of the estate tax.

Most insurance agents are well aware of the fact that in 2010 there is no federal estate tax, although there are a number of states that have a state estate tax. Accordingly, many advisors may have a false sense of security that they do not need to be very concerned about estate taxes until 2011 when the ten year sunset of the Bush tax cuts, including the reduction and elimination of the federal estate tax, ends. As a result, estate taxes will then be reintroduced at a threshold and rate yet to be determined by Congress (or, if Congress fails to act, the federal estate exemption reverts to $1.5 million of assets with a tax rate of 55%).

The problem in 2010 deals with the interrelationship between the estate tax and the value of assets received by heirs when they go to sell inherited assets that have a low cost basis by the decedent.  An example makes this easier to digest.  Let’s look at recently deceased independent agent John Smith who opened his independent insurance agency after returning from serving his country in the Korean War. John’s daughter, Sue, is a widow with three children approaching college age and whose late husband did not believe in life insurance. John had arranged for a buyer of his agency for $2.5 million (and his basis was very low— only $100,000), but died before he completed the sale. As John’s health declined in 2009, his local attorney was not concerned about estate taxes knowing that the value of John’s estate was worth less than $3 million as his wife had predeceased him.  And, he did not want John to sell the agency and have to pay capital gains taxes while he was alive.  Instead, when John’s doctor made it clear that the prognosis was grim with almost no chance of surviving until 2011, his attorney believed they had done the proper planning to maximize the value of the inherited estate to John’s daughter and grandchildren.  So, this story should end with Sue getting the step-up in basis and receiving $2.5 million in the proceeds—correct?

If you answered yes, then you find yourself in the same boat as many advisors who assume that there would be no taxes due on the eventual sale of the agency by Sue given the size of the estate and the step-up in basis. However, the repeal of the estate tax has resulted in the possibility of capital gains taxes as in 2010, with a capital gains exemption of $1.3 million and then any appreciation over the exemption taxed to the beneficiary at 15%. This means that Sue will owe capital gains taxes on $1.2 million ($2.5 million sale of the agency less the $1.3 million capital gains exemption) which results in a capital gains tax of $180,000 ($1.2 million x .15%). Had John died in 2009 and stock had been inherited by Sue and then sold, John’s stock would have received the step-up in basis and Sue would not have had to pay any capital gains taxes. Of course, early in 2009 the conventional wisdom was that Congress was definitely going to address the estate tax situation, but health care reform became the lead legislative issue and estate taxes took a back seat.

Ironically, the beneficiaries of large estates will benefit from the repeal of the estate tax in 2009, whereas, the beneficiaries of smaller estates receiving assets with large capital gains—like many small businesses—will suffer adverse tax consequences. Independent agents should have a conversation with their clients to discuss whether this possibility could be applicable to their situation.

Dave Evans (dave.evans@iiaba.net) is a certified financial planner and an IA l-h contributing editor.


Agency Management
Fix the Top Mistakes in Agency Web Design
Is your site sending the wrong message?

Does your agency’s online presence reflect the in person user experience?

Unfortunately, many agency Web sites communicate a bad image of the agency and provide little, if any, reason for a client or prospect to return. The following are some common Web site design mistakes that, if fixed, can have a great impact on the success of an agency’s online presence.

First, splitting a page into frames is very confusing for users since frames break the fundamental user model of the Web page. All of a sudden, users cannot bookmark the current page and return to it, URLs stop working and printouts become difficult. In addition, don't try to attract users to a site by advertising the use of the latest Web technology. Mainstream users will care more about useful content and the agency’s ability to offer good customer service.

Next, a Web page should not emulate Times Square in New York City in its constant attack on the human senses: give the user some peace and quiet to actually read the text! Use scrolling text and animation sparingly and never on every page. Also, in an effort to get in the game, many agencies accept cookie cutter Web sites from companies that they represent. Most of these Web sites are worthless and, worse yet, are providing the agent with a false sense of security.

All pages that come from the agency’s home page should include a clear indication of what Web site they belong to, since users may access pages directly without coming in through the home page. For the same reason, every page should have a link to the agency’s home page and contact information. In addition, few users scroll beyond the information that is visible on the screen when a page comes up. All critical content and navigation options should be on the top part of the page and should not require scrolling.

Don’t assume that users know as much a Web site as the site’s designers. Users need support in the form of a strong sense of structure and place. Provide a site map and let users know where they are and where they can go. Also, every site needs a good search feature since even the best navigation support will never be enough.

Agents may wonder why they should waste time and resources providing links to companies that they represent. What benefit does it provide the agency or its customers? In many instances, the company Web site is much more helpful and better designed than the agency's own site. Also, most company Web sites have an agency search function and will tell clients of another agent who might be closer to them.

Finally, maintenance is a cheap way of enhancing the content on a Web site, since many old pages keep their relevance and should be linked into the new pages. Of course, some pages are better off being removed completely from the server after their expiration date. Also, even Web sites with high-end users need to consider download times. Bandwidth is getting worse, not better, as the Internet adds users faster than the infrastructure can keep up.

Click here to read this entire article.

Jack Fries (jfries@JackFries.com) has more than 33 years of experience with both companies and insurance agencies.