T H U R S D A Y ,   M A Y   5 ,   2 0 0 5

Measuring Up Among the Elite | AIG Errors Amount to $2.7 Billion |  The Benefit of Selling Benefits, Not Features| Big "I" Testifies in Crop Insurance Hearing |  Business Auto Coverage Games| Shea Resigns as President of AMS | Big "I" National News

 

P & C / L & H   T R E N D S
Measuring Up Among the Elite
Insurance’s Place in the Fortune 500

Did you know that Fortune 500 companies pay the salaries of 15% of all gainfully employed individuals in the United States? Did you know that 7.5% of Fortune 500 companies are insurance companies? Did you know that insurance company profits per employee are more than three-times the Fortune 500 average at nearly $65,000 per employee? Fortune magazine published its annual list of the "America’s Largest Companies" on April 18, and the list and accompanying information brings with it no shortage of surprises for inquiring insurance eyes. The more you look, the more intrigue in insurance you see.

First, let’s start with a snap shot of the Fortune 500 companies:

· Revenues of $8.2 trillion (equivalent of $29,500 for every man, woman and child in the United States).

· Profits of $513 billion ($1,833 for every man, woman and child in United States).

· 24 million employees (The United States has a population of 280 million).

By way of background, the Fortune 500 is a list of companies derived by looking at revenues. This is in contrast to the other famous list, the S&P 500, which tracks the largest company market capitalizations. Another important distinction with the Fortune 500 list is that it includes privately held and mutual-type companies as long as they publish financial data to a government agency. In terms of your interest as an insurance agent, this list is the best list for understanding the characteristics of the large tiffany-class insurer.

So what can the Fortune 500 statistics tell us beyond that their revenues per American are about 60-times the per capita income of an East Timorian and their profits are larger than the total domestic production (GDP) of all but 16 of the 180 countries tracked by the International Monetary Fund?

Well, first off, the insurance industry is a big part of the Fortune 500. The chart below shows the proportion of the companies, employees and profits l-h and p-c insurers comprise of the total Fortune 500. Without insurers, the Fortune 500 shrinks by 37, its profits fall by 11% and 750,000 employees are out of work.

Who occupies this tiffany-class of insurer? The table below lists insurance companies categorized by Fortune as P-C insurers (with title insurance and private mortgage insurers removed). Note the table is not sorted in the top-bottom revenue fashion as printed in Fortune magazine. Rather, it is sorted by profits per employee. This is one way of pointing out many insurers in the Fortune 500 are showing up as nicely profitable recently. To be clear, the figures below are after-tax profits per employee, not revenues.

Name	Revenue Ranking	Revenue (Mils)	Profits (Mils)	Employees	Profit/Employee
Cincinnati Financial	500	$3,614	$584	3,884	$150,360
Chubb	161	$13,177	$1,548	11,800	$131,186
Erie Insurance Group	425	$4,555	$572	4,559	$125,466
American Intl. Group	9	$98,610	$11,050	92,000	$120,109
W.R. Berkley	431	$4,512	$438	4,736	$92,483
Allstate	51	$33,936	$3,181	38,700	$82,196
State Farm Insurance Cos	19	$58,819	$5,309	68,681	$77,299
USAA	191	$11,273	$1,597	22,059	$72,397
Hartford Financial Services	88	$22,693	$2,115	30,000	$70,500
American Family Ins. Grp.	313	$6,655	$564	8,238	$68,463
Safeco	285	$7,336	$562	9,200	$61,087
Progressive	155	$13,782	$1,649	27,085	$60,882
Auto-Owners Insurance	407	$4,737	$191	3,274	$58,338
Loews	144	$14,584	$1,231	22,000	$55,955
American Financial Grp.	472	$3,912	$360	6,800	$52,941
Berkshire Hathaway	12	$74,382	$7,308	180,176	$40,560
Liberty Mutual Ins. Group	111	$19,754	$1,245	38,283	$32,521
St. Paul Travelers Cos.	85	$22,934	$955	29,700	$32,155
Nationwide	99	$20,558	$1,010	32,933	$30,668

Next week’s IN&V will look at the excellent profit record of Fortune 500 insurers over the past 12 months, the past five years and then the past 10 years. While recent industry figures are often quoted as saying the industry in 2004 "has made an underwriting profit" and other lukewarm summaries of industry financial results, next week you will see that averages do not always apply to everyone. In fact, contrary to what New York Times columnist said last Sunday in an article about Warren Buffet, this class of insurer has a magnetism well beyond that of "drying paint."

Paul Buse (paul.buse@iiaba.net) is a licensed agent and president of Big "I" Advantage, IIABA’s for-profit subsidiary.   T O P

 

P R O D U C E R   C O M P E N S A T I O N   I S S U E   U P D A T E
AIG Errors Amount to $2.7 Billion

American International Group, Inc. announced May 1 that it is delaying its annual 10-K filing for a third time and revealed that its internal investigation has turned up approximately $1 billion in accounting errors above its earlier-estimated $1.7 billion. In addition, the company will re-state its financial statements for 2000-2003 as well as its first three quarters of 2004 and last quarter of 2003. The restatement will reduce AIG’s net worth by approximately $2.7 billion, or 3.3%.

According to an 11-page AIG statement, the accounting errors that the restatement will address "appear to have had the purpose of achieving an accounting result that would enhance measures important to the financial community and that may have involved documentation that did not accurately reflect the nature of the arrangements." The statement also says that inaccurate transactions or entries "may also have involved misrepresentations to members of management, regulators and AIG’s independent auditors."

"We now know that there were serious issues with our internal controls, and that it is necessary for us to address those issues and strengthen our controls," AIG President and CEO Martin J. Sullivan said.

The New York Times points out that, "AIG clearly hopes that its itemized review will convince investors that it has identified all the problems in its operations and corrected them."

The Wall Street Journal says, "The latest list of potential accounting foibles sheds additional light on AIG’s penchant for artful accounting and indicates that the insurer’s books were misleading for at least several years."

AIG’s statement singles out among its control deficiencies "the ability of certain former members of senior management to circumvent internal controls over financial reporting in certain circumstances."

The WSJ does not identify former CEO Maurice "Hank" Greenberg and former CFO Howard I. Smith by name as the senior management who circumvented internal control systems for financial reporting, but does note that "people familiar with continuing review by two outside law firms say the references included Mr. Greenberg and Howard I. Smith." According to the WSJ, two outside law firms are writing a report to be included in AIG’s 10-K filing that casts the two men in "unflattering" light.

Greenberg’s lawyer David Boies refuted AIG’s wording, issuing a statement that said, "Those decisions were made not merely by former senior management, but by present senior management, including operational heads and the company’s present directors and auditors.

"Accounting decisions are often matters of judgment, and particularly in light of changed circumstances, a different regulatory climate and an understandable desire to avoid conflicts with regulators, it is understandable that prior decisions would now be second-guessed."

Greenberg had another fan this week in Berkshire Hathaway CEO Warren Buffett. Speaking at the company’s annual meeting April 30, Buffett told the audience that "Hank Greenberg was the number one man in insurance. He developed an extraordinary company in his lifetime."

He also said that he may soon announce a $1 billion insurance company acquisition.

Meanwhile, Willis Group Holdings announced a first-quarter net income of $72 million—a 51% decrease from one year ago. The company cited its recent settlements with regulators, which cost $9 million in legal and administrative fees and $51 million to establish a reimbursement fund to compensate policyholders, and the loss of contingent commissions as factors in the decrease. To help compensate for the loss, the company plans to cut approximately 500 positions.

"We have confronted and put behind us a number of issues during the first quarter," Chairman and CEO Joe Plumeri said in a statement. "The resulting changes we are embracing in our business model define this transitional period in the new world of insurance."

Ace Ltd. recently completed its internal inquiry into reinsurance transactions and found that reinsurance deals "were generally structured in a way to provide for appropriate risk transfer," said Ace CEO Evan Greenberg on an April 27 conference call, Bloomberg News reports.

Greenberg continued to say that the company’s review uncovered "a few" additional incidents of "behavior inconsistent with company policies."

Receiving subpoenas in the past week were Hannover Re and General Electric Co. The U.S. Securities and Exchange Commission subpoenaed German reinsurer Hannover Re for information about its "nontraditional products," and also subpoenaed GE for information on "loss-mitigation products." Additionally, Georgia Insurance Commissioner John Oxendine issued more than 100 subpoenas for information on finite reinsurance transactions.

In producer compensation debate news, IBA West had a huge hand in defeating California Insurance Commissioner John Garamendi’s proposal (SB 938) to impose new fiduciary duties on insurance agents and brokers.

The California Senate Banking, Finance and Insurance Committee received more than 2,300 letters from agents, brokers and their clients against the proposal, and IBA West members visited with legislators the day of the vote.

"This is a huge, huge victory for insurance brokers and agents and for consumers," said Steve Young, IBA West general counsel, "and an equally huge defeat for Mr. Garamendi."

Jennifer Sikorski (jennifer.sikorski@iiaba.net) is IA’s associate editor.  T O P

 

L & H   T R E N D S
The Benefit of Selling Benefits, Not Features

Financial products continue to evolve and offer sophisticated features and riders. It can be easy to get caught up in the technical aspects of a particular product and lose sight that customers buy products to solve a problem and meet their needs.

There is an old sales story that illustrates this point: A furnace salesman had spent an hour with a prospect who owned an older house with an inefficient heating system. At the conclusion of the presentation, the prospect did not buy even though the salesman had explained the BTU output, superior engineering and various attributes of his company’s best system. He later bumped into a competitor at a sales conference, and as they swapped stories, the competitor mentioned that he had just sold a new system to a prospect on Oak Street. The furnace salesman said that he had tried his best but the prospect wouldn’t buy despite all the features of his product. The elder salesmen mentioned that he hadn’t talked much about his furnace but stressed to the prospect how his kids wouldn’t catch colds even on the chilliest nights and that the prospect didn’t have to worry about it breaking down.

The salesman made the sale by selling the benefits of the product, not the features. When it comes to products like life insurance, it’s tempting to expound on the sales illustrations that project future cash values, net present values, etc. However, think about what will motivate prospects—their families being able to stay in the house or paying for college in the event of a death. Those are the goals that motivate prospects to pull out their checkbooks. It’s important to know your product and to be able to handle questions.

Think about your favorite medical doctor. Is it the one who uses Latin terms to describe your condition? Or is it the one who explains your condition, what you can expect, and what you can do? The ability to take the complex and make it simple is a great attribute for professionals in any field.

The next time you are in front of a prospect, remember to listen to their goals. When you make a product recommendation, be sure to explain it in terms of how it can meet their needs; don’t get sidetracked with the minutia. Insurance is a product that definitely needs to be sold.

Dave Evans (dave.evans@iiaba.net) is a certified financial planner and life-health contributing editor for  IA magazine.   T O P

 

O N   T H E   H I L L
Big “I” Testifies in Crop Insurance Hearing

The Big "I" testified Wednesday before a House subcommittee on the ongoing question of the Premium Reduction Plan (PRP), which potentially opens the door for unqualified and poorly-trained individuals to sell crop insurance.

Norman Nielsen, president of Preston, Iowa-based Associated Insurance Counselors Inc., testified on behalf of the Big "I" before the House Agriculture Committee’s Subcommittee on General Farm Commodities and Risk Management on the overall issue of the Federal Crop Insurance Program (FCIP) and the effect PRPs will have on it.

"Certainly this is a matter of vital importance to independent agents who sell crop insurance, as well as to farmers, but its ramifications go beyond just those segments," says Patrick O’Brien, Big "I" director of federal government affairs. "The larger question here, which is of interest to all independent agents and brokers, is whether individuals without the expertise and the statutory requirements of insurance agents will be allowed to sell insurance plans. This is potentially a very slippery slope, and it is crucial that we nip it in the bud."

Nielsen noted the association’s staunch opposition to the PRP and also questioned the motives of the federal Risk Management Agency (RMA) in allowing one company to continue offering a PRP after the Federal Crop Insurance Corporation (FCIC) board suspended PRPs until completion of the rule-making process.

"If this is RMA’s idea of promoting competition in the industry, then the future looks very bleak for anyone involved in the delivery of this important risk management program, and I shudder to think of the impact it will have on America’s agriculture producers," Nielsen said.

The Big "I" opposes PRPs because they potentially promote a reduction of the role of agents in the delivery of crop insurance despite the years of training and expertise agents have with this line of coverage. There are concerns that PRP salespeople will not be qualified or able to offer the same quality of service, as well as the likelihood that companies offering PRPs will "cherry-pick" larger, more profitable farms. If PRPs proliferate, the likelihood of consolidation in the industry becomes greater, which means smaller farms and farmers could be out in the cold for crop coverage.

Cliston Brown (cliston.brown@iiaba.net) is Big "I" director of public affairs/media relations.  T O P

 

F O R M S   &   S U B S T A N C E
Business Auto Coverage Games

A corporate owner or officer wants to insure his personally owned auto on the company’s Business Auto Policy. Heck, he wants to insure all the family vehicles under the BAP. Or how about this one...a corporate owner wants to rent a car, loan it to his daughter’s boyfriend for the summer, and insure under the corporate BAP. With apologies to Joe South, oh the games people play!

Here are some scenarios recently received by the Big "I" Virtual University "Ask an Expert" service. Have you handled similar situations?

1. "We have several Business Auto polices with scheduled vehicles that are owned individually by the corporate officers or family members and they many times do not have a personal auto policy. We realize the best way to insure them is under a PAP; however, producers continue to add vehicles owned individually to business polices thinking they are doing the insured a favor and saving them premium (some have young drivers or bad driving records). What are the best endorsements to add to policy (if we can get carriers to add them) to protect the insured for this exposure as well as protect us from E&O issues?"

2. "When a vehicle is titled to an officer of the corporation, can it be put on the corporate policy? When titled to an individual, can it be put on a business auto policy if the individual is the sole proprietor?"

3. "One of our insureds asked if he rented a vehicle in the name of his corporation and furnished the car to his daughter’s boyfriend for the summer, would his business auto policy provide coverage for the corporation and the driver in excess of the $1 million coverage he will be purchasing from the rental company?

"Note, it will not be a long-term rental as he will be renting for 30-day intervals. While I will not comment on my feelings about the insured’s wisdom in entering into this arrangement, I do have to get back to him with a response.

"His business auto policy does have Symbol 1 for liability. It would appear to me from my research, that Symbol 1 would be broad enough to cover this arrangement even though the rental is not connected to the insured’s business.

"I am sure, however, that the carrier will not be pleased with this arrangement if a claim is ever made. As far as coverage for the operator, it would appear that the ‘Who is an Insured" provision is broad enough to cover this operator as a permissive user. One area where I did see a potential problem is with regard to contractual liability. Under the BAP form, the definition of an insured contract, H(6), indicates ‘That part of any contract or agreement entered into, AS PART OF YOUR BUSINESS, pertaining to the rental or lease...of any ‘auto.’

"Based upon this language I do not believe that the insured would have coverage for a contractual indemnity claim brought against him by the rental company should a catastrophic loss occur. Please comment as to whether the Symbol 1, in your opinion, would be broad enough to cover the insured and the operator he is furnishing this admittedly non-business related rental to, and your thoughts with regard to the insured having contractual liability coverage in this scenario."

OK, you want answers? We’ve got answers. Unfortunately, we’re out of electronic space in this issue of Insurance News & Views, so to read the entire article on the VU Web site, click here.  T O P

 

T E C H   U P D A T E
Shea Resigns as President of AMS

AMS Services announced that Euan Menzies, President and CEO of Vertafore, Inc., will assume the role of President of AMS Services. He replaces outgoing president Dave Shea, who resigned for personal and family reasons. Bothell, AMS Services’ headquarter location in the greater Seattle area, will also become the principal business location for Vertafore. AMS Services will continue to maintain offices across the United States, including in Windsor, Conn. and College Station, Texas.

"Our clients and prospects are extremely excited about the improvements to our existing product families and the new ideas and initiatives we are bringing to market," said Menzies. "Flattening and consolidating the Corporate and Business Unit structures provide us an even more substantial base to build upon and leverage in the future as we continue to strengthen our core products and related operational infrastructure. We thank Dave for the positive impact he has had on our company over the last three years. He brought a passion for this market and the companies in it and he will be missed. Although Dave’s decision was the right one for himself and for his family, I am sorry to lose him and wish him the best of luck in his new endeavors."  
T O P