T H U R S D A Y ,   M A Y   1 8 ,   2 0 0 6

 Big "I" National News

P & C   T R E N D S
M&As Poised for Explosive Growth
New Conning study finds current market conditions ripe for increased activity.

Current market conditions are breeding an environment ripe for carrier mergers and acquisitions that resembles 1998’s market, which ushered in an era of unprecedented M&As. According to "Mergers & Acquisitions and Public Equity Offerings: Fasten Your Seatbelts!," a new study from Conning Research & Consulting, the number of M&As in 2005 swelled to the largest number since 2001, potentially setting the stage for even more action during the next two years.

Much has already been made about the healthy state of the insurance industry. Despite encountering a record number of catastrophes in the past year---in frequency and severity---the industry still recorded a profit. The study says this healthy financial performance is helping to spur M&A activity.

The study makes parallels between today’s M&A activity and that seen in the 1990s---just before the mega-mergers of the late ’90s commenced. How huge were M&As during that time period? According to the study, in 1999 "the number of transactions in 1998 had more than doubled from a decade earlier, with more than 7,500 transactions and dollar volumes exceeding $1 trillion." That compares to about 3,500 transactions worth $356 billion in 1996.

The study says 2005’s M&A activity could be setting the stage for similar numbers in the next two years. According to the study, 2005 saw 324 transactions worth $50.8 billion. And that number has the potential to grow exponentially.

"There are a number of factors that lead us to expect a continuing increase," says Stephan Christiansen, Conning’s director of research. "The insurance industry is growing capital faster than revenues, and while revenue growth is anemic, prospective profitability appears relatively solid. Stock performance for the industry has been relatively strong as well, with each of the sectors outperforming the S&P 500 from 2002 through 2005. In addition, we believe advantages of scale are increasing in the industry for a variety of reasons."

All industry sectors included in the 2005 study experienced an increase in the value of transactions over 2004’s numbers.

The p-c sector had 49 transactions totaling $9.3 billion. "Operating performance in the p-c sector has been strong in spite of a second year of record catastrophe performance, which has led to an accumulation of capital that is growing faster than prospects for premium growth," the study says. "The financial strength of the industry has increased with retained earnings, stronger loss reserves and further by the additional capital brought into the industry through equity offerings."

P-C companies may trend toward M&As as a means of staying profitable as growth opportunities become more elusive. "Perceptions regarding the risks of M&A transactions may be replaced by new perceptions of the risk of not acquiring business," the study says.

On the life sector side, there were 21 M&A transactions for a total value of $22 billion. Conning expects this number to rise in 2006 "based on the buildup in capital, declining organic growth opportunities, increasing operating complexities in the business and increasing advantages of scale."

Jennifer Sikorski (jennifer.sikorski@iiaba.net) is IA’s associate editor.

P & C   T R E N D S
Auto Rates See Smallest Increase in Six Years

With the public frustrated about rising gas prices, there’s finally some good car-related news to pass along to customers: Auto rates will remain relatively stable in 2006, increasing by just .05%. That’s the smallest increase in six years, according to a new Insurance Information Institute report.

The typical consumer can expect to pay only $4 more for auto insurance in 2006, bringing the national average to $867. According to Robert Hartwig, I.I.I. senior vice president and chief economist, factors behind the rate slowdown include more fuel-efficient cars, fewer accidents, safer cars, improved auto theft technology, better fraud-fighting efforts and gradual licensing laws for teenagers.

However, it’s not all good news. Some parts of the country will experience rate hikes much higher than .05%, according to the report. Not surprisingly, states affected by 2005’s hurricanes fall in that category. The storms wreaked havoc on the auto market in the affected areas, creating nearly 674,000 claims that amounted to $3.2 billion.

And while the number of accidents is decreasing, the costs associated with an accident are on the rise. According to the report, insurers will pay between $15 billion to $20 billion in accident-related medical claims in 2006, which could result in rates rising in ’07.

In addition to higher medical expenses, insurers also face large legal costs associated with auto accidents. "About 60% of auto premiums paid in 2005---almost $60 billion---was for liability coverage," Hartwig says. "As we look at 2006 and into 2007, we see this trend continuing."

A couple factors threaten to halt auto rates’ slowdown post-2006. Chief among them is the potential of some states limiting insurers’ use of credit scores.

"Insurance scores are highly accurate predicators of future loss, allowing insurers to more accurately price insurance and create a more fair and equitable rating environment for all drivers," Hartwig says. "Efforts to ban scoring will lead directly to higher insurance rates for good drivers while, ironically, lowering rates for people who are involved in the most accidents."

Also impacting rates: auto theft. The number of thefts decreased in 2004 by 1.9%, the first decrease in five years, the report says, but that comes on the heels of consistent increases the past five years.

Jennifer Sikorski (jennifer.sikorski@iiaba.net) is IA’s associate editor.

O N   T H E   H I L L
Tax Legislation Around the Corner?
Reforms will benefit Main Street businesses.

The Big "I" praised the House and the Senate for passing, late last week, a crucial tax-cut bill supported by independent insurance agents and brokers.

The Senate late Thursday passed the conference report on the bill, the Tax Increase Prevention and Reconciliation Act, on the heels of House passage Wednesday night. The bill will extend the $100,000 limit on small business expensing to $400,000 through 2009; extend capital-gains and dividend tax cuts through 2010; and create an alternative minimum tax (AMT) patch, all Big "I"-supported provisions.

"The tax bill that both houses of Congress have passed is important to our members and business owners and employees throughout America," says Charles E. Symington Jr., Big "I" senior vice president for government affairs and federal relations. "Raising the alternative minimum tax exemption, allowing greater expense write-offs and decreasing taxes on capital gains will all help our members and their employees by shielding them from unanticipated or onerous federal taxation. We appreciate the action of members in both houses in passing these much-needed reforms."

"We applaud Congress for its work and for doing the right thing for Main Street businesses across the country," says Brendan Reilly, Big "I" assistant vice president for federal government affairs. "We are hopeful that President Bush will sign this important bill into law very soon, and we also look forward to working on making the individual tax cuts permanent, which is important for Subchapter S corporations, which include many main street independent agencies."

Cliston Brown (cliston.brown@iiaba.net) is Big "I" director of public affairs.

A G E N C Y   M A N A G E M E N T
Tap into the Qualities of Greatness

The great heavyweight boxing champion Floyd Patterson passed away last week. Years ago, he lost his title in a fight against Ingemar Johansson during which he was knocked down seven times. When reporters pointed out that he had been knocked down seven times, Patterson retorted that he also had gotten back up seven times. A year later, he beat Johansson and became the first heavyweight boxer to regain his title.

The ability to bounce back from adversity is an admirable quality. Realizing that everyone encounters obstacles in life, employers need to recognize who has the fortitude to overcome roadblocks and get things accomplished.

The new book "Succeed on Your Terms," co-authored by Caliper founder Herb Greenberg and Patrick Sweeney, provides a great roadmap for gaining insights into character traits. Many independent insurance agents utilize the Caliper assessment profile Greenberg developed to learn about potential job candidates before hiring them into the agency. This book differs from others that cover the topic because it incorporates the personality characteristics the Caliper assessment embraces. And as an added bonus, readers can take a free, in-depth personality assessment (a $200 value) to discover their own defining qualities. For agency principals, this is an opportunity to help your employees---and yourself---rediscover (or perhaps discover) the inner self.

The book profiles remarkable individuals who the authors personally met and interviewed. The book looks at such diverse people as Joao Carlos Marlins, who lost the use of one of his hands but still went on to perform a Bach recital at Carnegie Hall, renowned fashion designer Nicole Miller and Muggsy Bogues, the shortest NBA player of all time. Greenberg himself has an inspirational story---he received a doctorate in psychology and founded the internationally recognized Caliper corporation despite losing his sight at the age of 10.

I plan to buy the book for my son for his high school graduation so he can tap into his qualities before he heads off to Ole Miss. I believe young people are especially curious about their qualities, and "Succeed on Your Own Terms" is a great way for them to receive objective feedback about themselves. Consider buying copies for your agency staff and giving them as gifts to customers.

Every year, book review pundits come out with their summer reading recommendations. How many times have you been disappointed by those recommendations? Well, here’s my recommendation, and I don’t believe you’ll be disappointed. To order the book, click here.

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

F O R M S   &   S U B S T A N C E
CGL Additional Insureds: A Risky Business

Probably more than any other insurance policy, the CGL often is used to insure exposures that involve a multitude of parties. In many instances, a party will only enter into a contract or job if named an additional insured on the CGL policy of one or more other parties.

The Virtual University "Ask an Expert" service recently received the following question from an agent on this issue. This article seeks to identify the major pitfalls of relying on additional insured status under the CGL of another party.

"Our prospective insured has asked us a question that I am hard pressed to answer in the affirmative. They are beginning a night club in our city. We have obtained quotes for GL and Builders Risk coverages while the building is going through some renovations. They have come back to us saying that the general contractor has obtained the Builders Risk coverages and then asked, ‘If we are named as an Additional Insured on the CGL of the general contractor, wouldn't that solve the problem while the building is undergoing reconstruction and therefore I will not have a problem?’

"I warned them that they have no control about whether or not the CGL will continue to pay their premiums or may run out of coverage by using up their aggregate, and that they may not be aware of these problems as, even though they have a certificate of insurance, they may not get notified. But other than that, is there any reason I shouldn't go along with her solution?"

An insured should never rely exclusively on additional insured (AI) status for liability protection. Virtually every insured needs its own CGL policy.

If the sub is just added as an AI to the general's CGL policy, the sub is completely reliant on the general for coverage. What if the general's policy cancels for non-payment? What if the limits are too low (all parties must share those limits)? What if the aggregate has been burned up?

What if the general has other claims pending that may leave no funds for claims of the sub? How can the sub present evidence of insurance to get future jobs? Are only ongoing operations covered? What about completed operations?

Keep in mind that AI status only grants coverage while working on behalf of the general contractor, typically for that specific job and often only on the premises. Obviously, the sub is going to have liability exposures far beyond one job.

The AI status provides no automatic insured status.

Also, most forms today provide vicarious liability only; this is simply inadequate to protect the full exposure. If a loss arises out of the sole negligence of the Additional Insured, an anti-indemnification statute may be applicable, not to mention the referenced forms.

These are just a few of the downsides of exclusive AI status. To read more, click here.