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Big “I” National News

P&C Trends

Liberty Mutual to Acquire Ohio Casualty
Gary Gregg speaks to IN&V about multi-billion dollar deal.

Liberty Mutual Group and Ohio Casualty Corporation announced earlier this week that they have entered into a definitive agreement in which Liberty Mutual will acquire the Ohio-based insurer for approximately $2.7 billion.

In the agreement, the Boston-based Liberty Mutual will gain The Ohio Casualty Insurance Company and the five other property-casualty insurance companies in the Ohio Casualty Group by purchasing all outstanding shares of Ohio Casualty’s common stock for $44 per share.

The purchase, which will be funded with cash on hand and short-term debt, has been approved by the board of directors for both companies, but is waiting on approval from Ohio Casualty shareholders and customary regulatory approvals and conditions. The deal is expected to close in the third quarter of this year, according to Gary Gregg, president of Liberty Mutual Agency Markets.

With the acquisition, Ohio Casualty will become part of Liberty Mutual Group’s Agency Markets business unit, a move Gregg says should have little effect on consumers, agencies and the products they offer.

“If you look at our 11 operating companies, Liberty Mutual has 6,500 agencies, Ohio Casualty has 3,400 agencies,” he says. “We have been able to use publicly available information to evaluate the degree of overlap and there is not significant overlap in our combined agencies plans.”

Liberty Mutual has yet to announce its plans for the Ohio Casualty brand pending finalization of the deal, but Gregg praised Dan Carmichael, president and chief executive of Ohio Casualty for his leadership within the company.

“Dan Carmichael and his team have done a terrific job---they’ve really created a super regional powerhouse,” Gregg says. “They have a tremendous operation and strong relationships with independent agents and when you look at the Liberty Agency Markets this just strengthens our commitment to [the] independent agency community. Because of anti-trust issue and regulatory issues, we’re not allowed to make comments about Ohio Casualty’s future…we’re competitors and we will remain competitors until the filings are complete.”

So what does the acquisition mean for independent agents who are appointed with  both companies?

“It will significantly strengthen our independent agency force and this will permit us, when we go through transition process, to combine the best people, technology and products and services among the two companies,” Gregg says.

Michelle Payne (michelle.payne@iiaba.net) is Big “I” writer/editor.

P&C Trends

Independent Agents Remain Strong Market Contenders
Newly released Big “I” market share study shows agents holding their own.

Despite enormous ad campaigns by direct writers and captive companies, independent agents are holding their own in a market where competition is fierce, according to the recently released 2005 market share study, conducted by the Big “I.”

Even with prices softening in 2005, the property-casualty market grew to $473.32 billion in direct written premium, an increase of $8.74 billion from 2004. The independent agency system was responsible for $280 billion of the market and amassed an additional $4 billion in production, accounting for almost half of the national increase.

The commercial lines p-c market on a whole continued to expand in 2005, growing 1.5% to just over $250 billion. The independent agency maintained its dominance of the commercial lines market, with just below 80% of the market share. This is down slightly from last year, but the model continues to increase premiums with just less than $2.5 billion in new business. In comparison, both captive agency carriers and direct response carriers had less than 0.5% increases in market share.

The personal lines market overall grew to $223 billion in 2005, a 2.2% increase, with independent agents adding almost $2 billion in premium to the market. In previous years, independent agents had new premiums of more than $4 billion in 2004 and $6.6 billion in 2003, so 2005 definitely showed a slow down. The big direct-response carriers added $1.7 billion in premium, which was only a 1% increase despite record-breaking consumer advertising campaigns. The direct-response companies wrote more than 11% of the personal lines market compared with less than 1 % of the commercial lines market. In past years, gains for direct writers meant losses for captive agency carriers, but that was not the case in 2005. National agency carriers lost 2.3% of the market, compared to only about a 1% for captive agents. A bright spot for the independent agency model: regional independent agent carriers grew their personal lines market by more than 1%.

The study also showed a slowdown in the private passenger car insurance market---a trend not to be taken lightly, given that personal auto accounts for 73% of personal lines and 35% of the entire p-c market for 2005. Though totaling $163 billion in premium, the market only saw a 1% increase for the year. In personal auto particularly, direct-response agencies used huge advertising and marketing campaigns to steal market share at the expense of independent agents. Even though they produced nearly 35% of the premium, independent agents lost almost 4%of the market, while captives were down just 1.2%.

The report, recently completed by the Big “I”, was contracted out for the 11th time to the A.M. Best Company. A.M. Best supplies the year-end industry market share and company expense data. The Big “I” analyzes this data annually to asses the state of the independent agency system.

Patrick Royal (patrick.royal@iiaba.net) is Big “I” director of public affairs.

Legal Advocacy

Department of Homeland Security to Issue Subpoenas on Katrina
Insurance companies may be investigated for mishandling storm claims.

In a filing with the Securities and Exchange Commission (SEC), Allstate Corporation disclosed that it will be receiving a subpoena from the Department of Homeland Security (DHS) for documents on homeowners’ claims stemming from Hurricane Katrina.

Until the subpoena is served, the specifics of what will be sought are unknown. Some speculate that the subpoena stems from a call for an investigation by legislators who believe some insurers attempted to treat Katrina losses from wind damage as damages from flood to make them potentially eligible for coverage under the National Flood Insurance Program. Allstate’s SEC filing stated that the subpoena is related to the investigation authorized by Congress in 2006 regarding insurers participating in the National Flood Insurance Program. That authorization for the investigation was inserted into an appropriations bill by Senator Trent Lott (R-Miss.), who was suing State Farm in a dispute regarding his own losses from the storm. Lott’s suit against State Farm has now been settled.

Some industry leaders do not believe that a subpoena from DHS is necessary. In press reports, Robert Hartwig, president of the Insurance Information Institute, said, “The Department of Homeland Security has already reviewed the flood claims files and uncovered no evidence of a pattern of abuse.”

State Farm, another insurer subject to allegations that it has not handled Katrina claims properly, has stated that it has not been notified that it will be receiving a subpoena on this matter from DHS. State Farm has said that it has been cooperating with the federal investigation into the flood claims stemming from Hurricane Katrina.

For more information, contact Kathleen Graber, associate general counsel, at 703-706-5432; kathleen.graber@iiaba.net.

Producer Compensation Update

Willis Refuses Proposed Supplemental Compensation
Brokerage says compensation plans should be more transparent.

On April 30, insurance broker Willis Group Holdings Limited announced that it would not accept “supplemental compensation plans recently proposed in the marketplace by certain carriers.” While the proposed supplemental compensation plans were not specifically identified, Willis did indicate that the proposed plans contain “performance-driven elements that make lump-sum payments contingent on factors such as retention, growth and profitability---features that rendered contingent commission plans incompatible with conflict-free transparency and our clients’ best interests.” Willis went on to say that such plans “are best housed in an agency relationship.”

Willis stressed that compensation plans for brokers need to be completely transparent so that the client can be sure “that their broker is acting objectively to get the best deal done for the client.”

“As currently designed, the proposals do not afford a conflict-free environment for the client and we are not going to take them,” says Joe Plumeri, chairman and CEO of Willis.

According to Willis, it is irrelevant if the calculation of additional compensation is done prospectively or retrospectively since both are contingent. Plumeri noted that the decision for Willis was not based on the legality of supplemental compensation, but rather was based on principle.

In a press article covering the Willis announcement, at least one analyst from Bear Stearns is noted as speculating that the decision by Willis not to accept supplemental compensation will make it more difficult for others to take such payments. Other brokers have stopped accepting contingent commissions, including Aon, Marsh and Arthur J. Gallagher. It is unknown if carriers will develop new compensation plans that address the concern Willis raised of a potential conflict of interest.

Willis voluntarily stopped accepting contingent commissions as a result of the chain reaction of lawsuits, allegations and new compensation and disclosure policies set off by the 2004 lawsuit filed by then-New York Attorney General Eliot Spitzer against Marsh & McLennan Co. charging it with bid-rigging and steering.

For background information on producer compensation issues, see “Producer Compensation Remains Heated Issue” in the   Jan. 4 IN&V or the members-only section of the Legal Advocacy page at www.independentagent.com, under Producer Compensation: Legal and Business Issues/IA magazine.

For more information, contact Amy Hendricks, Big “I” assistant general counsel, at 800-221-7917; amy.hendricks@iiaba.net.

L&H Trends

Straight From the Pages
A serious lesson about Social Security from a not-so-serious book.

The new book “Boomsday” is a political satire about the future of Social Security, but its message is more serious than it seems.

According to Rodney Barfield’s book review, the premise of the book is whether mass suicide is the “answer to Social Security’s intractable insolvency.” Main character Cassandra Devine and her “Whatever Generation” (age 18 to 35) are furious that the government lays heavy taxes on their generation to pay for the extravagant retirements of 77 million seniors. Eventually, Devine calls for government-sponsored “voluntary transitioning,” a.k.a. voluntary suicide for seniors, with government tax exemptions serving as the reward.

While “Boomsday” does poke some morbid fun at serious issues, the lesson for independent insurance agents is that as the baby boomers continue to age and eventually retire, the implications will indeed be serious for the country and the economy. The only way to eventually pay for unfunded Social Security and Medicare entitlement programs will be to raise the payroll tax on the workers and/or decrease or postpone benefits. How this will happen and what it will mean are not known at this time, but a remedy is needed.

Individuals who don’t want their future retirements to depend on the government need to take steps to save for retirement. They also should purchase long-term care insurance to shelter whatever assets they have. The recently enacted Pension Protection Act of 2006 expands the use of the Long-Term Care Partnership Plan, which allows more states (currently 25) to offer their residents the opportunity to purchase a long-term care insurance policy that shelters assets commensurately with the amount of benefits they receive from the policy. For example, if they receive $250,000 of benefits, they would be able to shelter $250,000 of their assets above the Medicaid thresholds.

Midway into 2007, there is little doubt about the inability of the government to come to grips with setting aside money to fund Social Security. This will result in the continued postponement of a normal retirement age and will continue to diminish workers’ confidence that they will have adequate retirement income. The best course of action is a disciplined approach that calls for regular savings and the purchase of policies to transfer risk. Independent agents should be ready to meet this need through their agency.

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