T H U R S D A Y ,  A P R I L   2 4 ,  2 0 0 8 

Big “I” National News

P&C Trends
Liberty Mutual Group Acquires Safeco Corp.
Transaction will make company 15,000 independent agencies strong.

Liberty Mutual Group announced yesterday that it will acquire Safeco Corporation for approximately $6.2 billion. Safeco will be a part of Liberty Mutual Agency Markets, the business unit that focus on independent agency distribution.

Liberty Mutual will purchase all outstanding shares of Safeco’s common stock for $68.25 per share in a deal that is expected to close by the end of the third quarter. The acquisition has already been approved by both companies’ board of directors, but it is still subject to Safeco stockholder approval and customary regulatory approvals and conditions. Once complete, the acquisition will shift Liberty Mutual from the sixth to the fifth largest property-casualty insurer in the United States based on direct written premiums.

“The addition of Safeco significantly expands and strengthens the Liberty Mutual Group,” says Edmund Kelly, Liberty Mutual Group chairman, president and chief executive officer. “Safeco’s operations and product mix complements our existing Agency Markets operations. Additionally, both organizations have superb surety businesses which, when combined, will form the second largest surety business in the United States.”

With the addition of Safeco, Liberty Mutual Markets will include about 15,000 independent agencies and the pairing is expected to bring increased value to agencies and the company, according to Gary Gregg, president of Liberty Mutual Agency Markets.

“From our perspective, this is all about bringing more value to agents…and more value to ourselves,” Gregg told Insurance News & Views. “Our position is that if we cannot bring value to our agents, then we cannot bring value to ourselves.”

It’s still too early to gauge the effect the acquisition will have on Safeco agencies since that is dependent on the strategic path and operating model the company chooses moving forward, according to Gregg. Whether agents will retain their current producer agreements after the transaction is complete is also yet to be determined.

 “We have to go through transition process…the process itself takes time,” he says. “Before we can close, we’ll have antitrust review, we’ll have regulatory approval in domiciliary states and there’s a shareholder vote on the transaction and these will likely take place before the third quarter. The companies have to operate separately under anti-trust laws…until closing…at that time the senior teams will get together to figure out how best to leverage the group after the close.”

Gregg could not comment on how much the two companies’ coverage areas will overlap, but said the market appetites of both will be strengthened by the deal.

“I think that is one of the things we looked at in due diligence and I think there is a lot of congruency there…but there is also areas where these companies have been innovative and that will broaden our coverage and the products we offer,” Gregg says.

The Safeco acquisition is the second for Liberty Mutual in the last year --- in August 2007 it acquired Ohio Casualty Corp. for $2.7 billion. With Ohio Casualty’s $1.4 billion in premium, the acquisition improved Liberty Mutual’s coverage in the Midwest and Atlantic regions, as well as strengthened it in other areas of the country.

Michelle Payne (michelle.payne@iiaba.net) is IA’s managing editor.




P&C Trends
Mergers and Acquisitions on the Rise
Analysts are projecting a significant spike in M&A in 2008.

Insurance equity analysts are predicting a significant increase in property-casualty mergers and acquisitions (M&A) this year, according to a recent survey by Accenture, a management consulting, technology services and outsourcing company.

The survey, conducted by institutional Investor Market Research Group as part of Accenture’s High Performance Business Research, polled more than 100 insurance equity analysts in 14 insurance markets and found that 71% of those surveyed anticipate a “significant increase” in merger and acquisition activity this year.

“The logic of consolidation within the property and casualty industry, particularly in North America, may be gaining favor as the economy slows and as rates soften,” says John DelSanto, managing director of Accenture’s Insurance practices in North America. “However, our research suggests that analysts might not fully value these transactions without a clear linkage to organic growth or until efficiencies are realized.”

Analysts expect M&A to have a moderate effect on the industry earning superior ratings, but tend to favor organic growth over M&A. Less than half of those surveyed ranked M&A as a valuable use of capital. Sixty-seven percent said M&A within mature markets is important or critical to earning superior ratings over the next three years, but 84% said the same about organic growth. Only 33% described M&A within mature markets as “unimportant” to earning superior ratings over the next three years, compared with 16% who said the same of organic growth.

“M&A winners will focus on rigorous deal discipline and early post-merger integration planning in order to quickly realize synergies and demonstrate a path to profits,” DelSanto says.

In addition to projecting this year’s M&A activity, Accenture also asked analysts’ what they think the industry’s biggest challenge will be in 2008 and “climate change and environmental issues” was ranked as the No. 1 issue. Coming in second was “aging systems and IT modernization,” with 57% of analysts reporting that IT investment in areas including policy administration, claims management, process optimization and call centers, is crucial to the industry in the next three years.

Analysts also listed the following as major concerns for the industry: new regulations and reforms, cross-border competition, terrorism and geopolitical instability, growing risk to investment portfolios, changing customer demographics, workforce demographic changes and competition from banks and capital market firms.

Michelle Payne (michelle.payne@iiaba.net) is IA’s managing editor.




P&C Trends
Property-Casualty Net Income, Profitability Tumble in 2007
Report attributes declines to industry’s plunging net gains on underwriting.

Net income, after taxes, for the property-casualty industry fell 5.8% to $61.9 billion in 2007, and the industry’s overall profitability, measured by the its rate of return on average policyholders’ surplus, also fell 12.3% last year from 14.4% in 2006, according to ISO and the Property-Casualty Insurers Association of America (PCI).

According to a report from ISO and PCI, the decline in income and profitability can be attributed to a decrease in the p-c industry’s net gains on underwriting, which took a 38.9% plunge to $19 billion in 2007 from $31.1 billion in 2006. The combined ratio increased 95.6% last year from 92.4% in 2006 --- the second best ratio since 1959. However, the improvement wasn’t enough to offset the underwriting results, which paled in comparison to other industries, according to Michael Murray, ISO assistant vice president for financial analysis.

“With full-year 2007 investment results, financial leverage and tax rates, ISO estimates that the combined ratio would have had to be more than two percentage points better — 93.3% — for insurers to have earned the same 13.9% long-term average rate of return as the Fortune 500,” Murray says.

ISO and PCI attribute the deterioration in underwriting results to weak premiums and the increase in loss and loss adjustment expenses. Net premiums declined from $433.5 billion in 2006 to $440.8 billion last year and written premium growth fell to negative 0.6% last year from positive 4.2% in 2006. Net earned premiums did improve to $439.1 billion last year from $435.5 billion in 2006, but the increase was countered by a 0.8% slip in earned premium growth from 4.3% in the previous year.

“Based on data extending back almost five decades, the decline in written premiums in 2007 is the first on record,” says David Sampson, PCI president and chief executive officer. “Despite ongoing problems in some coastal property insurance markets, government data suggests that escalating competition is cutting into premiums. All else being equal, one would expect premiums to rise as the economy grows and inflation increases the amount of insurance people need. However, written premiums fell 0.6% in 2007 even though the nation’s gross domestic product increased 4.9%.”

It’s too early to tell whether the decline in income and profitability will continue through 2008, according to Sampson, but the industry’s health will pivot on whether it behaves as it has during previous soft markets.

“The million or billion-dollar question at this juncture is whether there has been a fundamental change in the dynamics of insurance cycles that will lead to a soft landing or whether competitive pressures will continue escalating as they have in the past,” he says. “Quite frankly, it is just too soon to tell. One factor suggesting the possibility of a soft landing is that many insurers now have more sophisticated tools and systems, enabling each of them to monitor its own pricing and underwriting more carefully and to make adjustments more quickly. But in the final analysis, people still make all the critical decisions, such as how to set the parameters in decision-making tools.”

Michelle Payne (michelle.payne@iiaba.net) is IA’s managing editor.




L&H Trends
A Holistic Approach to Insurance
Take advantage of P&C and L&H expertise in your agency.

Independent insurance agency principals could learn something from how major law firms convey the collective expertise of their firm. Go to any law firm Web site and it lists a broad range of services that the firm provides to assist clients in virtually any area of the law.

Agents can learn something from these firms because as more independent agencies provide life -health insurance services to compliment their property-casualty expertise, they should be integrating their expertise to provide a holistic risk perspective to customers.

Consider a situation where the life insurance agent has the signed life insurance and disability insurance applications and premium checks. Does the agent then ask their customer about what they would do if an uninsured motorist, with very little in the way of personal assets, hits them or a member of their family? Most people don’t think about this sort of situation. While some people, particular affluent people, are concerned with being sued for their or their family members’ acts of negligence and the resulting exposure for large liability lawsuits --- they may not consider the financial impact when someone hits them.

Looking at the entire exposure in a holistic fashion means reviewing customers’ life insurance needs, disability insurance, automobile policy, personal umbrella coverage and even long-term care in the event they are hit by an underinsured or uninsured motorist.  It’s difficult for any single individual to know the nuances of all of these coverages, which is to the advantage of a full-service independent insurance agency. Is a direct writer of auto coverage going to discuss all of these ramifications? Is a captive company agent going to have the expertise?  The answer to both questions is no. 

This creates a perfect situation for an independent insurance agent who is meeting with a client for the first time. The agent can explain that their agency provides a 360-degree look on behalf of the client to assess their personal and commercial risk management needs. A financial planner may do a fine job reviewing an individual’s life, disability and retirement planning needs and making suggestions regarding their investment portfolio, but if their client gets in a serious automobile accident, the client may have devastating financial consequences if the other driver was underinsured and the client had inadequate UM/UIM limits. 

Take the time to explain to customers how an agency can address all their needs in a very time-efficient way and you won’t have to be concerned about them shopping elsewhere.  Instead, you will have a client for life and, if you remember to ask them, you’ll gain referrals to their friends that need this same level of professional assistance.

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




Agency Management
The Retention Myth
The reason customers stay with an agency isn’t always satisfaction.

In polling hundreds of insurance agents about their competitive advantage, 90% to 95% responded that their competitive advantage is “great service.” When asked how they know great service is their competitive advantage, a popular response is, “Well, if we didn’t have great service, our retention rate would not be so high.”

The belief that high retention is indicative of great service is a dangerous siren. Agents want to believe customers like them or they would leave. Unfortunately, retention rates sometimes lead agents down a course of deception. Customers typically stay with an agency for many reasons other than good service. In fact, very little correlation exists between high/low retention and good/bad customer service.

If good service doesn’t keep retention rates high, what does? One reason is few agents are asking customers for their business, so customers tend to stick with their current agent even if their current agent provides poor service. Other than call-ins, walk-ins and lucky breaks, not much new business gets written in many agencies. If no one is pulling customers away, customers do not leave. The result is high retention rates.

Suppose an agency is actively soliciting business from other agencies. What is required to steal a customer away from other agencies? Most producers say they need a 10% price advantage to get a new customer if all else is equal. Since a consistent 10% price advantage rarely exists, it is the exception if an agent can convince a customer to leave. Therefore, again, retention is not indicative of great service. It is more indicative that the price is less than 10% higher than the competition’s.

An agency that thinks it has great service, and therefore a competitive advantage, when it doesn’t leads to disaster because then agencies forego creating real competitive advantages. The solution is to use more specific measurements. One example is referral percentages. A superior agent should achieve a 25% referral ratio. For example, if a producer has 100 accounts, they should get 25 referrals and write at least 50% of them. Another great example is a 90% or more customer satisfaction score on customer surveys. Customer loyalty is another measurement. How loyal are your customers? Download the Loyalty Acid Test at www.loyaltyrules.com to find out.

Using retention as a management tool to indicate customer satisfaction will often lead agents to a cruel end. True indicators take more work to identify, but are worth the effort.

To read the entire article, click here. 

Chris Burand (info@burand-associates.com) is the president and owner of Burand & Associates, LLC.