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T H U R S D A Y , F E B R U A R Y 1 9 , 2 0 0 9 Big “I” National News
On the Hill
The Economic Stimulus Package’s Impact on Small Agencies
Some Big “I” members may benefit from small business tax breaks.
This week, President Barack Obama signed the American Recovery and Reinvestment Act, also known as the economic stimulus package, into law. The new law will inject $787.2 billion into the economy including an estimated $298 billion in tax relief. The Big “I” Capitol Hill team has dissected the 407-page bill and produced the following partial list of items that may impact the thousands of small agencies that create the backbone of the independent agency system. Nine-month COBRA extension and subsidy: Employees involuntarily terminated between Sept. 1, 2008 and Dec. 31, 2009 are eligible to receive a 65% government subsidy on their COBRA premiums for up to nine months. The subsidy does not include individual filers with incomes of more than $125,000 and joint filers making more than $250,000. A provision in an earlier draft that would have extended COBRA coverage for terminated employees older than age 55 or those with more than 10 years of service with their employer, until they became eligible for Medicare, did not make the final legislation. Five-year net operating loss carry-back extension: Small businesses (defined as businesses with less than $15 million in annual receipts) that experienced net operating losses (NOLs) in 2008 may apply their losses to the past five tax years (2003-2007). Under current law, businesses are allowed to carry back their losses for the past two years (2006-2007). Small businesses can use their NOLs to offset future taxes or as a refund of taxes paid from 2003-2007. One-year extension of bonus depreciation: Businesses may continue to write-off 50% of depreciable property (e.g. business equipment and computers) purchased in 2009 for use in the United States. One-year extension of enhanced small business expensing: Small businesses may continue to write-off up to $250,000 of capital expenditures incurred in 2009 subject to a phase out once capital expenditures reach $800,000.
S-corporation changes: The S corporation built-in gains holding period was reduced by three years (from 10 to seven years) for 2009 and 2010. Currently, when a taxable corporation converts into an S corporation, the S corporation must hold its assets for 10 years to avoid a tax on gains that existed at the time of the conversion. The new law also includes a number of provisions that may benefit individuals and families, including a work pay tax credit, a first-time homebuyer refundable tax credit and a one-year sales tax deduction for new vehicle purchases.
Margarita Tapia (margarita.tapia@iiaba.net) is Big “I” director of public affairs.
P&C Trends
Pinching Pennies: Saving on Space
Agencies are taking advantage of the “buyer’s market” and saving on real estate.
If there is a bright spot in today’s economy, it’s most evident to those looking to purchase real estate. It’s a buyer’s market and low interest rates and bargain property prices have created opportunities for independent agencies to expand their offices and save money. Although the majority of real estate bargains exist in the residential sector due to the subprime mortgage crisis and subsequent home foreclosures, there are more and more opportunities to save in the commercial sector as well, according to Bob Pettinicchi, executive vice president of InsurBanc. “In general, it’s a good time to be in the market for space, whether you’re renting or buying,” says Pettinicchi. “Bargains depend on the part of the country and the vacancy rate for office space, (but) there may be opportunities for agencies that are financially strong to take advantage.” Pettinicchi notes that most agencies are currently exercising caution when it comes to large purchases, including real estate. He believes the general uncertainty in the markets is causing many agencies to adopt a “wait and see” approach. One agency that’s not waiting is Watkins Insurance Agency in Austin, Texas. Patrick Watkins, president of Watkins Insurance, says his agency was finally able to purchase the second floor of its office building after recent market activity drove prices down. “The out-of-pocket cost was similar or less than what we were paying in rent, so it was a major win for us,” says Watkins. “It’s definitely a buyer’s market, and pricing is more beneficial today than it has been in a number of years.” Watkins advises other agencies in owner-occupancy situations to look closely at purchasing their properties while the market is favorable. He notes that while the lending environment has gotten much tighter, many lenders are willing to provide reasonable terms to owner-occupants. Watkins’ agency, which has nine locations around Texas, is also taking advantage of current prices to re-negotiate leases on some of its properties. Watkins acknowledges it’s a gamble since the market could become even more favorable but says he prefers to lock in while bargains exist. Agencies renting their office space are also finding deals; Gary Trippe, chairman and CEO of Oswald Trippe & Company, Inc. in Fort Myers, Fla., says rent is falling in his area and he plans to take advantage when his agency’s lease is up for renewal later this year. According to Pettinicchi, commercial leases often run as long as five years, so agencies don’t have many opportunities for re-negotiation. Editor’s note: This article is the second in a series entitled “Pinching Pennies,” which explores cost-saving measures for independent agencies. For more cost-saving tips, read “Recession-Proof Your Agency” in this month’s IA magazine.
Veronica DeVore (veronica.devore@iiaba.net) is Big “I” writer/editor.
P&C Trends
Plunging Profits and an Uncertain Future
Recent report from A.M. Best notes 2008’s woes, cautiously predicts more stable 2009.
Property-casualty profits plunged sharply in 2008, according to a recent report by A.M. Best Co., with net income down nearly 80% to $14 billion. The special “Review & Preview” report from the ratings company also predicts an uncertain, but generally stable year for the p-c industry.
It comes as no surprise that last year was one of the least profitable the industry has seen in a long time; 2007 and 2008 are expected to mark the first back-to-back decrease in written premium since 1932-1933, and underwriting profits took a $21.5 billion hit. However, a positive outcome of 2008 is that unlike many of its counterparts in the financial services sector, the p-c industry remains well-capitalized despite a 10% decrease in policyholder surplus. In general, A.M. Best predicts p-c rates will flatten and then begin to harden by early 2010. Premiums have already started to harden in directors & officers (D&O) and errors & omissions (E&O) lines, both of which have seen a spike in claim activity due to the subprime meltdown and credit crunch. However, A.M. Best does not foresee an end to the soft market in other areas until the second half of 2009. A rebound from 2008’s troubles will be equally slow in coming; 2009 net income is expected to increase only modestly to $37.1 billion with an underwriting loss of about $6.4 billion. “While the collapse of the financial markets was swift, recovery isn’t likely to be as quick for the p-c industry, with yields not expected to improve from 2008,” says A.M. Best. “(We expect) very modest growth in the industry’s investment earnings amid a weak economy, stagnant cash flows and low interest rates.” A.M. Best also predicts that mergers & acquisitions (M&A) will be tempered by market uncertainty. Recent credit concerns brought M&A activity to a halt in the second half of 2008, and most p-c companies will likely continue to struggle to raise enough capital for such activity in 2009. Catastrophe losses always add a degree of volatility to industry predictions, but A.M. Best currently foresees an above-average hurricane season that will add four points to the p-c industry’s combined ratio in 2009. Assuming catastrophe losses hover around normal levels the expected combined ratio for this year is 101.1. Although 2009 is expected to be another difficult year for p-c insurers, A.M. Best currently rates both the personal and commercial sectors as “stable,” citing the industry’s conservative investment risks have kept it afloat during the economic crisis.
“(We remain) somewhat concerned regarding the risks that lie ahead, including further deterioration of the economy; continued high levels of catastrophic activity; and the ever-present regulatory uncertainty in key markets,” the company says. “The stable outlook…represents (our) view that most carriers will be able to effectively manage through these issues, given the favorable risk-adjusted capitalization and the initial indications of the soft-market conditions subsiding.” Veronica DeVore (veronica.devore@iiaba.net) is Big “I” writer/editor.
L&H Trends
Navigating Unfamiliar Retirement Waters
Laws designed to give retirees flexibility may also create confusion.
Most people realize that 2008 was a horrible year for the stock market. It was, in fact, the worst year's performance for the Dow Jones Industrial Average in more than 75 years. The downturn had broad implications for everything from college endowment funds to community and non-profit foundations, but one of the biggest impacts was on retirement accounts.
Retirement accounts created a vexing tax inequality last year. Accounts including IRAs, 403(b)s and 401(k)s (if the accountholder is no longer working) must take a required minimum distribution (RMD) or face penalties. The account holder must take the RMD in the year they turn 70.5, although they have until April 1 of the following year to actually take it. After that first year, they must take the RMD by Dec. 31 of each year. If they fail to take the RMD, the amount not taken will be taxed at 50%.
One problem with this requirement is the time frame given for valuing the account for the purposes of calculating the RMD. For any given year, the RMD is determined by dividing the prior year's retirement account balances as of Dec. 31 by a life expectancy factor. For example, a single 75-year-old taxpayer would find on the IRS's Uniform Lifetime Table a life expectancy factor of 22.9. If the taxpayer had $100,000 in a retirement account as of Dec. 31, 2007, the 2008 RMD would be $4,367 ($100,000 / 22.9 = $4,367). The problem with the RMD rules stems from the fact that required distributions in 2008 are based on plan balances from Dec. 31, 2007, while the stock market saw large declines in October and November of 2008. In other words, since the stock market declined so much in 2008 retirees would be forced to take a higher RMD on a balance that had declined substantially.
However, the reality is that most retirees in their 70s have the majority of their IRA account in CDs, fixed account products paying a stated interest rate and bonds. So, in most cases, the decline in the stock market did not significantly alter their overall account value and, as a result their RMD was not significantly altered. In addition, the actual provision of the law was signed by President George Bush on Dec. 12, 2008, so the late-year change in the law added to the potential confusion. Since the change did not pertain to 2008 withdrawals, but rather to 2009, there is ongoing confusion for many retirees about what they have to do and in what year. The confusion is also being amplified as people focus on their 2008 tax return, due April 15. Yet the relief for the RMD is for 2009, not 2008.
Independent agents involved in retirement plans should be prepared to help their customers determine the best course of action. It is possible that some retirees will be confused about whether they needed to take a RMD in 2008 versus 2009 and risk the possibility of receiving a substantial excise tax for not taking their RMD by the end of 2008. This type of situation requires customized service, as many retirees needing to withdraw money out of their IRA to meet their living needs may now be unsure about the best course of action. Agents can expect more information to come out in the consumer media as people seek clarification about how the rules will work in 2009. Dave Evans (dave.evans@iiaba.net) is a certified financial planner and IA l-h contributing editor.
Forms & Substance
Covering Weather and Off-Premises Power Failure
Storms can cause unique claims situations when the lights go out.
The Virtual University recently received a call from an agent called who insures a chain of 17 restaurants. He has one blanket building and personal property policy for all locations, and has blanket business income coverage. Six of the locations sustained direct physical damage in a hurricane. The damage was relatively minor, things like a sign blown down, window(s) broken, and minor roof damage. The power grid was down all over the county, but as best the agent knows there was no case where the power lines were yanked off the locations. As a result of the damage and no power, the stores closed for five to seven days. (The 72-hour wait for business income to kick in was eliminated down to zero hours.) The agent said that as far as he can tell the stores could have opened with the minor damage had there been power in the area. The company is denying the business income claim based on the “off premises utility failure” wording. While it’s not an ISO form, the language tracks ISO. That wording is below. The agent feels there should be coverage under the windstorm peril. Is it covered? If so why, and if not, is there a way to remedy it? B. Exclusions
1. We will not pay for loss or damage caused directly or indirectly by any of the following. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any sequence to the loss.
e. Utility Services
The failure of power or other utility service supplied to the described premises, however caused, if the failure occurs away from the described premises. Failure includes lack of sufficient capacity and reduction in supply.
But if the failure of power or other utility service results in a Covered Cause of Loss, we will pay for the loss or damage caused by that Covered Cause of Loss. This exclusion does not apply to the business income coverage or to extra expense coverage. Instead, the special exclusion in paragraph B.4.a. (1) applies to these coverages. It’s amazing how few businesses carry the necessary coverage, particularly restaurants, grocery stores, florists and other businesses dependent on power for refrigeration, heat or processing, the absence of which would result in significant losses. Many parts of the country are subject to widespread power outages from hurricanes, tornadoes, storms, freezing precipitation, etc. To protect themselves from storms, businesses need the following endorsements: CP 04 17 — Utility Services – Direct Damage
CP 15 45 — Utility Services – Time Element
CP 04 40 — Spoilage Coverage The power failure exposure from storms is significant, so care should be taken to advise clients of coverage options in such areas. For more on power failure and to read the entire article, click here. Bill Wilson (bill.wilson@iiaba.net) is director of the Big “I” Virtual University.
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