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T H U R S D A Y , S E P T E M B E R 1 8 , 2 0 0 8
Big “I” National News
P-C Trends
AIG Receives Federal Loan, Looks to Sell Some Assets
Agents should monitor carrier ratings, possible subsidiary sales.
The ripples of the subprime mortgage meltdown continued to reverberate this week as Lehman Brothers Holdings, Inc. filed for Chapter 11 bankruptcy, Merrill Lynch was sold to Bank of America, and of particular importance to independent insurance agents, American International Group received a commitment from the Federal Reserve Bank of New York for an $85 billion loan for 24 months, secured by all the assets of AIG. In return for the short-term loan, the U.S. government is getting a 79.9% equity stake in AIG.
According to various sources, former Allstate Corp. chief Edward Liddy will replace AIG’s Chief Executive Officer Robert Willumstad who is exiting the scene with severance reportedly as high as $8 million. While AIG’s insurance business units and subsidiaries have been described as remaining solvent and able to pay claims, the company’s primary financial setbacks stemmed from selling protection against default exposure for a variety of assets, including subprime mortgages. This made the company more susceptible to problems in the housing and credit markets.
Essentially, banks wrote mortgages and sold them to investors. The investors then packaged the mortgages as securities and sold them to the investment community. AIG wrote insurance on these securities to protect investors in the event of defaults. AIG also put up collateral to back these obligations. The insurance contracts required AIG to provide additional collateral if the company’s credit ratings deteriorated. As AIG's investment portfolio declined, ratings agencies cut AIG’s ratings on Monday, leading to a huge collateral call on AIG obligations covering the mortgage-backed securities.
While AIG’s second quarter assets exceeded liabilities by $78 billion, it has had to write off more than $18 billion in assets during the last three quarters. Accounting rules require companies to “mark-to-market” the value of their assets, and valuing assets accurately is particularly difficult with illiquid assets, such as real estate, which AIG holds in its portfolio. Thus, AIG’s problem has been one of liquidity, not of solvency, which is the reason for a bridge loan by the Federal Reserve Bank of New York.
While consumers and policyholders may not discern a distinction between the liquidity of AIG and the solvency of its insurance business units and subsidiaries, the reality is that AIG’s non-insurance operations created the magnitude of AIG’s liquidity problems. In fact, according to AIG’s press release Tuesday evening, the statutory surplus of AIG Commercial Insurance has increased by 50% to $26.7 billion from 2005. AIG has a number of p-c and l-h subsidiaries, and agents should continue to monitor the ratings assigned to its insurance units and subsidiaries by the major ratings services.
On Wednesday, insurance regulators created a state regulatory working group chaired by New York Insurance Superintendent Eric Dinallo, with Pennsylvania Insurance Commissioner Joel Ario serving as vice-chair, to help facilitate the orderly sale of some of AIG’s insurance assets. Agents should stay up to date on any sales of AIG’s business units and subsidiaries where they have placed business.
The Big “I” has a full compliment of resources for member agents to access. Go to the home page of www.independentagent.com to find a letter from Big “I” President & CEO Bob Rusbuldt, a sample letter to send to insureds, as well as links to other resources on related topics such as insolvency. Visit www.independentagent.com for the latest news as the situation continues to develop.
Dave Evans (dave.evans@iiaba.net) is a certified financial planner and IA l-h contributing editor.
On the Hill
U.S. House Passes Agent Licensing Reform
NARAB Reform Act receives overwhelming support.
Late yesterday the U.S. House of Representatives passed legislation strongly supported by the Big “I” --- H.R. 5611, the National Association of Registered Agents and Brokers (NARAB) Reform Act to modernize and streamline nonresident agent licensing. Reps. David Scott (D-Ga.) and Geoff Davis (R-Ky.) introduced the bipartisan NARAB Reform Act, otherwise known as NARAB II, only a little more than five months ago. Since its introduction, NARAB II has seen swift House consideration. The bill passed the House Capital Markets Subcommittee in July and, because it was not controversial, it bypassed normal procedure and went straight to the House floor without being considered by the full House Financial Services Committee.
The legislation would provide for nonresident insurance agent and broker licensing while preserving the rights of states to supervise and discipline insurance agents and brokers. NARAB would streamline the licensing process and make independent agents more efficient by eliminating costly and redundant paperwork for multi-state agent licenses. The legislation modifies provisions of the Gramm-Leach-Bliley Act to immediately establish a private, non-profit entity managed by a board composed of six state insurance regulators and five industry representatives, including one permanent seat for the Big “I”.
NARAB II deals only with marketplace entry and would not impact the day-to-day state regulation of insurance. For agents operating in multiple jurisdictions and those who want to expand their operations, NARAB II would effectively create one-stop producer licensing for additional nonresident licenses. Membership in NARAB would be the functional equivalent of a nonresident insurance producer license issued in any state where the member pays the required licensing fee. Additionally, insurance producers could choose to remain licensed in the traditional manner, obtaining nonresident licenses on a state-by-state basis if operating in multiple jurisdictions or they could apply for NARAB membership. NARAB would not be part of or report to any federal agency and would not have any federal regulatory power.
The Big “I” is an advocate for the state system of insurance regulation and continues to oppose federal regulation, optional or otherwise. However, the Big “I” believes that the state system cannot effectively address certain regulatory problems on its own and believes that there is a vital role for Congress to play in helping to modernize state regulation. NARAB II is the type of targeted federal legislation that makes appropriate reforms to the marketplace and improves state insurance regulation without having to take the unprecedented path of creating a new federal regulator, such as through an OFC. While Senate action on the NARAB Reform Act is questionable this year, the Big “I” government affairs team will continue to lead the industry’s support for this legislation for the remainder of the year and into 2009.
Margarita Tapia (margarita.tapia@iiaba.net) is Big “I” director of public affairs.
P&C Trends
Hurricane Ike Pummels Lone Star State
Insured losses from last weekend’s storm could reach $18 billion.
Hurricane Ike, which battered the Texas coast last weekend, could carry a price tag of $6 to $18 billion in insured losses, according to three major catastrophe risk modeling services.
Ike made landfall in Galveston, Texas as a Category 2 hurricane on Sept. 13 with maximum sustained winds of 110 mph ---- just short of the 111 mph needed to be classified as a Category 3 on the Saffir-Simplson scale. AIR Worldwide Corporation, a Boston-based risk modeling service, estimates the powerful storm’s damage at $8 to $12 billion, with an expected loss of $10 billion.
“As expected, Houston’s high-rise buildings are reported to have sustained major damage to glazing, much like the damage caused by 1983’s Hurricane Alicia,” says Peter Dailey, director of atmospheric science at AIR Worldwide. “Hurricane Ike, which was an extremely large storm at landfall, weakened only slowly and maintained a wide swath of damaging winds. AIR expects wind damage to be widespread, not only along the coast, but also extending well over 200 miles inland from Galveston.”
The Oakland, Calif.-based EQECAT expects losses to be slightly higher than AIR’s prediction with an estimate of $8 billion to $18 billion, based on initial observations and information from the National Oceanic and Atmospheric Administration (NOAA).
Aside from wind damage to commercial, industrial and residential structures, EQECAT’s projected insured losses include business interruption, as a result of the destruction of property; and demand surge, which occurs when the demand for products and services to repair damage significantly exceeds the regional supply.
Risk Management Solutions (RMS) projects losses from Ike will be between $7 and $12 billion, according to preliminary estimates. The company believes the majority of these losses will be due to onshore damage from wind and rain.
“Hurricane Ike remained an exceptionally large storm at the time of landfall – with hurricane-force winds stretching up to 250 miles wide,” RMS says. “The storm’s extensive wind field means that areas well inland experienced hurricane-strength winds. RMS estimates that there is approximately $900 billion of property value in Harris County which includes the city of Houston…Storm surge damage from Hurricane Ike is considerable, however much of this damage will not be privately insured. One of area of potential uncertainty in insured losses is the extent of any flood damage to refineries or other large industrial facilities.”
Ike’s impact on the insurance industry could be historic, according to Fitch Ratings, if the prospective loss estimates are correct. Ike could also potentially push insured catastrophe losses for 2008 to the $25 billion mark --- the highest since 2005.
“Ike could be the third largest insured loss from a hurricane, behind only Hurricanes Katrina and Andrew,” says Fitch Ratings Senior Director Don Thorpe. “Even if actual losses are at the low end of estimates, Ike will likely still rank in the top 10 costliest U.S. hurricane insured losses.”
Fitch has not taken rating actions on any insurers tied to Hurricane Ike or other catastrophe events in 2008 to date, but continues to monitor this season’s activity and its effect on catastrophe losses. The A.M. Best ratings company also doesn’t expect Ike to have a significant financial impact on the insurance sector; however it says the above-normal activity of this year’s storm season could strain market earnings.
“Although Hurricane Ike is a sizeable catastrophic event, the overall financial impact to both the primary and reinsurance sectors is expected to be generally manageable given the current overall capital strength of the industry,” says A.M. Best. “As with Hurricane Gustav, it is anticipated that Hurricane Ike will not be a solvency event from an industry-wide perspective. However, A.M. Best expects that Hurricane Ike, as well as the active hurricane season, will bring additional earnings pressure to the market.”
Michelle Payne (michelle.payne@iiaba.net) is IA’s managing editor.
P&C Trends
Stormy Weather Ahead
With half a season left, hurricane activity is expected to continue.
With Hurricane Ike over and no hurricanes or tropical activity of note presently developing, it’s a good time reflect on what this year’s hurricane season has meant to the industry and what might still be yet to come.
In April 2008, a well-know hurricane forecaster from Colorado State University, William Gray, predicted a “net tropical cyclone activity” for 2008 of 160% above normal. While it is still too early to know the final totals, it’s clear by the storm activity so far that he was correct, and this year’s season will be above average.
Perhaps more important is the recognition that about half of the season lies ahead. To make that point, take a look at the major hurricanes since 1966 as an indicator of intense hurricane activity and it's easy to see there may be more in store for the U.S. in hurricane losses this year.
Paul Buse (paul.buse@iiaba.net) is president of Big I AdvantageSM and a licensed p-c agent.
On the Hill
Hurricanes Push the Issue of NatCat
Democrats and Republicans outline national cat plans for first time.
As Hurricane Gustav roared across the Gulf Coast, its impact was felt well beyond the Louisiana coast and extended all the way to Denver and Minneapolis at the Democratic and Republican conventions.
After a summer of companies and associations attempting to focus government’s attention on the pressing issue of natural catastrophe insurance, this fall it appears that both major political parties are, for the first time, going to make a federal natural catastrophe policy a political priority.
The Democratic platform promises the development of “a national catastrophic insurance fund to offer an affordable mechanism for high-risk catastrophes that no single private insurer can cover by itself for fear of bankruptcy.” The Republican platform calls for a ”radical overhaul” of the “federal government’s system for responding to a natural calamity” and says that they “recognize the need for a natural disaster insurance policy.” Neither party details its plan.
Regardless of which party or candidate wins the election, the inclusion of natural catastrophe issues in both major party platforms is a welcome step in furthering this debate.
The simple fact is that more than half of all Americans live within 50 miles of the nation’s coasts, with the collective value of coastal properties from Texas to Maine nearing $7 trillion.
The Big “I” has been a leader on the issue for more than 25 years and has been calling on the insurance industry and the government to recognize economic realities. It is essential that everyone work together to ensure that consumers have natural disaster insurance coverage that is both affordable and available without being a drain on the American taxpayer.
The Big “I” will continue to work with both campaigns, as well as the current Administration and Congress, on solving the issue of natural catastrophe insurance.
Democratic Party Platform
Preventing and Responding to Future Catastrophes
“We will also work to prevent future catastrophic response failures, whether the emergency comes from hurricanes, earthquakes, floods, tornadoes, wild fires, drought, bridge collapses or any other natural or man-made disaster. Maintaining our levees and dams is not pork barrel spending—it is an urgent priority. We will fix governmental agencies like the Federal Emergency Management Agency, ensure that they are staffed with professionals and create integrated communication and response plans. We will reform the Small Business Administration bureaucracy, and develop a real National Response Plan.
“We will develop a National Catastrophic Insurance Fund to offer an affordable insurance mechanism for high-risk catastrophes that no single private insurer can cover by itself for fear of bankruptcy. This will allow states to deal comprehensively with the economic dislocation of natural disasters.”
Republican Party Platform
Domestic Disaster Response
“Americans hit by disaster must never again feel abandoned by their government. The Katrina disaster taught a painful lesson: The federal government’s system for responding to a natural calamity needs a radical overhaul. We recognize the need for a natural disaster insurance policy.
“State and local cooperation is crucial, as are private relief efforts, but Washington must take the lead in forging a partnership with America’s best run businesses to ensure that FEMA’s Emergency Operations Centers run as well as any Fortune 500 Company. We must make it easier for both businesses and non-profits to act as force-multipliers in relief situations. We believe it is critical to support those impacted by natural disasters and to complete the rebuilding of devastated areas, including the Gulf Coast.”
Margarita Tapia (margarita.tapia@iiaba.net) is Big “I” director of public affairs.
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