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S&P Insurance Stocks Mixed: Flea Market of Tiffany Class? |  Marsh’s Slow Recovery Time |  Big “I” Hails House Passage of Medical Liability Reform |  Good Old Days of Retirement |  Best Practices: Successful Agency Management and Effective Leadership |  Big "I" National News

 V I E W :   P & C   T R E N D S
S&P Insurance Stocks Mixed:
Flea Market of Tiffany Class?

Last Thursday’s Wall Street Journal contained the article “S&P 500 Hits a Four-Year High.” The article made me wonder how the S&P insurance stocks were doing. Despite the best underwriting result since 1987 and the second-best-ever return in more than 15 years, ISOreported insurers lagged behind return results of other firms. If ISO said insurance was so-so in 2004, how had the S&P and Fortune 500 class of insurers fared in the wake of New York Attorney General Eliot Spitzer’s probes?

Has our Tiffany class gone flea market? Will we find AIG next to the surplus hospital tweezers and deer hoof hat racks? Well…it depends. Certainly if you have all of your 401(k) funds in Marsh stock only to diversify into Berkshire Hathaway, you are disappointed in the past 12 months’ market results. However, other insurers---despite broader industry reports---are doing quite well as perceived by the marketplace.

The chart below provides notable examples of the spread in stockholder assessments based on what they will pay for a share of stock. In the “above the scruff seats,” there are insurers like Chubb and Safeco. AIG and Marsh are in the “obstructed view seats.”

The complete list of mostly p-c insurers that qualify for the S&P 500 are shown in the table below. I took the liberty of adding hyper-conglomerate S&P member GE and also non-S&P member Berkshire Hathaway (*). As you can see, well over half of the primarily p-c insurers in the S&P 500 have outpaced the S&P 500 average value appreciation during the past 12 months.

Source: www.yahoo.com(http://finance.yahoo.com/q/ks?s=”ticker” on 7/31/2005)

* Trivia: How is it that a company as big as Berkshire Hathaway is not in the S&P 500? The first person to e-mail me the correct answer will receive a Big “I” Markets “When Does Insurance Become Interesting?” T-shirt.

Paul Buse (paul.buse@iiaba.net) is a licensed agent and president of Big "I" Advantage, IIABA’s for-profit subsidiary. 

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
Marsh’s Slow Recovery Time

Marsh & McLennan Co. knew the road back to profit wouldn’t be easy. Since it became the first target of New York Attorney General Eliot Spitzer’s investigations into the industry’s compensation disclosure and other practices last fall, Marsh has parted ways with several executives and stopped accepting contingent commission fees. In announcing its second quarter results, Marsh’s financial struggles are evident.

During a conference call with analysts Tuesday, CEO Michael Cherkasky discussed Marsh’s 57% decline in second quarter profits. The company’s net income was $166 million, compared to $389 million a year ago. Difficulty in attracting customers, reputational damage and challenges from a reorganization of the business are among the factors affecting profits, according to Cherkasky.

Cherkasky said that the company does not anticipate recovering from last fall’s regulatory scandal and settlement until at least early 2006.

“The company is still very much in a challenging period where things have not stabilized,” analyst Cliff H. Gallant of Keefe Bruyette & Woods tells The New York Times. “That’s clear in looking at revenues and margins. And they still have a lot of internal issues to straighten out in terms of client relationships and keeping employees.”

A bit of welcomed good news for the broker, Cherkasky signed a new employment contract, the Wall Street Journal reports. Cherkasky, who stepped into the position last October in the wake of Spitzer’s allegations, will receive at least $11 million in 2005 under the contract.

The contract entitles him “to a base salary of at least $1 million, a minimum $2.5 million bonus for 2005 and a one-time ‘retention award’ of $7.5 million in restricted shares and performance-based stock options,” the WSJ says. The contract has an initial three-year term.

In Spitzer-related news, the New York attorney general subpoenaed Moody’s Corporation on July 13 for information about its reinsurer ratings. The move signals a broadening of his probes into the insurance industry.

The subpoena seeks information “related to Moody’s ratings of the financial strength and subordinate debt of reinsurance companies going back to 1999,” according to the NYT. The company says it is cooperating with the investigation.

Other news from the week:

• American International Group, Inc. acquired a controlling interest in Richmond Insurance Co. Ltd., the reinsurance holding company whose subsidiaries participated in transactions with AIG that subsequently were determined to be inappropriately accounted for, according to BestWire. Richmond recently gave up its insurance license to the Bermuda Monetary Authority, which an AIG spokesman described as a “formality” since the holding company did not actually write reinsurance business. AIG is deciding the future of Richmond’s four subsidiaries, which write reinsurance out of Bermuda, Barbados, Ireland and Gibraltar.
• RenaissanceRe Holdings Ltd., along with five current and former executives, face a shareholder lawsuit alleging that investors were “mislead about the firm’s true financial condition and suffered damages as a result,” Business Insurance reports. The complaint was filed Wednesday in a U.S. District Court in Manhattan.

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

O N   T H E   H I L L
Big “I” Hails House Passage of Medical Liability Reform

The Big “I” last week hailed the House of Representatives’ passage of a medical liability reform bill as a great step forward in legal reform.

H.R. 5, the Help Efficient, Accessible, Low-Cost Timely Healthcare (HEALTH) Act, sponsored by Rep. Phil Gingrey (R-Ga.), includes a number of provisions that will reduce the excessive liability burden on physicians and, in the process, increase consumer access to quality medical care. It passed late Thursday. Leading provisions include:

• Three-year statute of limitations.
• $250,000 limit on noneconomic damages.
• Allowance for courts to restrict payment of attorney fees.
• Limitations on punitive damages to “malicious intent” or “failure to avoid unnecessary injury.”
• Limitations on liability for manufacturers, distributors, suppliers and providers of medical products that comply with Food and Drug Administration (FDA) standards.

“We are very pleased this bill has passed the House of Representatives,” says Charles E. Symington Jr., Big “I” senior vice president of government affairs and federal relations. “It puts into place common-sense legal standards that will reduce the financial burden on physicians. This ultimately will be good for consumers, who have been hit with rapidly rising costs for quality medical care. The out-of-control medical liability system has been a major component in these rising costs.”

“With the possibility of being sued at the drop of a hat, not only have medical costs skyrocketed, but many doctors have retired or gone out of business because they can’t afford their premiums,” says Brendan Reilly, Big “I” director of federal government affairs. “This has been particularly true in specialized fields like obstetrics, to the degree that in many parts of this country, it has become excessively difficult for patients to find doctors for certain medical needs. H.R. 5 is a pro-patient bill that will reduce costs and help good doctors remain in business, and we urge the Senate to pass it as well.”

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

L & H   T R E N D S
Good Old Days of Retirement
Capitalize on Need for Planning

We all have a tendency to wax nostalgic about the good old days. Who doesn’t have a grandparent who has regaled them with tales of watching a Saturday afternoon movies for just a dime and getting a bag of popcorn for a nickel? What tales from the good old days will your parents will tell your children someday? Perhaps something like, “When I retired, our company provided me with a guaranteed monthly income for as long as I lived, and if I die before your grandmother, she will get a monthly check for the rest of her life.”

According to the Securities Industry Association, 44% of private non-farm wage and salary workers participated in a defined benefit pension plan in 1974. By 2004, the percentage dropped to 17%---and most of those covered by a pension plan are government employees.

To make matters worse, a number of troubled companies in the airline and steel industries, among others, declared bankruptcy to dump their retiree medical insurance plans and foist their pension liabilities on the Pension Benefit Guarantee Corporation (PBGC), resulting in greatly reduced pension benefits for veteran pilots.

What's the lesson for independent agents? Retirement planning is not about trying to have as much money as possible. Rather, it is a methodical, informed look at peoples’ assets and then structuring them to handle events such as a health emergency. Help your clients establish guaranteed income, protect against financial medical hardships and implement an estate plan. Additionally, immediate annuities will only become more attractive with higher interest rates, and retirees will need assistance sorting through the new Medicare Part D Prescription Drug benefit options.

The Internet can’t provide this type of assistance; developing a game plan involves face-to-face meetings. Most retiring employees need help reviewing their investment options for the lump sum of their company's retirement plan so that they can have a consistent standard of living in retirement.

Another statistic from the Securities Industry Association is telling: In 1974, there were 208,000 defined contribution plans (mostly profit-sharing plans). In 2004, the total number of defined contribution plans jumped to 840,000. The trend indicates that most people will receive a lump-sum benefit, not a monthly retirement check.

And don't forget that Social Security benefits are no longer based on a universal retirement age of 65. Individuals’ birthdays also determine their eligibility for receiving full Social Security benefits. The good news: There is no longer an earnings penalty for receiving Social Security benefits at age 65 while still working. The bad news: Millions of Americans will have to continue working past age 65 due to inadequate retirement savings. Independent agents can help their customers avoid this problem by creating investment strategies that fit their needs. That way they will tell their grandchildren about the good old days of being able to receive service from a local insurance professional---and that the good old days are here to stay.

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

 V I E W :   A G E N C Y   M A N A G E M E N T
Best Practices: Successful Agency Management
and Effective Leadership

Today's agency leaders are convinced that their agencies are facing new and difficult challenges. The retail, personal and commercial insurance business is changing. Many aspects of business life---and personal life---are changing. To help leaders guide their agencies successfully through this period of change, IN&V leaders in Best Practices agencies do to change and improve.

Successful change efforts begin with a vision. What is the end good? How will agency operations change? What will be the end result? The visions of Best Practices agencies present the future reality---and they may eventually compete for your business.

Effective leaders do not improve by themselves. They generate high levels of productivity and effectiveness by empowering their people to identify and exploit improvement opportunities. Effective leaders ensure that their people are aligned with compelling themes, employee activities focus on achieving present and future goals and objectives.

Effective leaders take a giant step toward high productivity, effectiveness and results by ensuring that their people know what is expected of them, e.g.: goals for production and retention; standards for customer satisfaction, service, quality and for personal performance and behavior.

One of their primary roles is to ensure that their people have the support they need to perform at their best. And support means more than office space and a computer. Many improvement efforts fail to reach their potential because leaders fail to link adequate rewards with the improvement efforts. And we’re not talking big bucks here. We’re talking about the recognition, both financial and non-financial, that people need to deliver their best.

Effective leaders are champions of change. They know their agency needs a lot more than one or two quick-pills and Band-Aids. They know that change and improvement requires a very precious commodity: Time. So they have an unyielding commitment to reaching the agency’s vision, to staying the course and to learning as they go.

Using the guiding principals from the handbook “The Five Practices of Highly Effective Leader,” every agency can institute effective leadership to achieve positive growth and success. You will find tips, tools and techniques for kicking off and sustaining continuous improvement in your agency.

Next week’s article will cover how to develop your vision for change and where to begin.

If you would like to know more about the innovative concepts that the Best Practices program can offer your agency, attend the Best Practices Management Instituteon Sept. 12, 2005, during the 2005 Big “I” Convention in New York.

Madelyn Flannagan (madelyn.flannnagan@iiaba.net) is Big “I” vice president of education and research. This article is the first in a series covering Best Practices agencies’ management strategies.