T H U R S D A Y ,  S E P T E M B E R   2 5 ,  2 0 0 8 

 Big “I” National News

P-C Trends
Liberty Mutual Closes Safeco Acquisition
Gary Gregg outlines structure, branding changes to carrier.

It’s official. By formally closing the deal on Safeco, Liberty Mutual is now the fifth largest property-casualty carrier in the U.S. with more than $32 billion in direct written premium based on 2007 results for both companies. 

But the transition is about more than just bringing Safeco into the fold of Liberty Mutual’s Agency Markets business unit, says Gary Gregg, president of Liberty Mutual Agency Markets. The new Liberty Mutual Agency Markets will provide its products and services through three major operating units and a specialty company: Regional Companies Group—Commercial Lines, Safeco Personal Lines, Liberty Mutual Surety and Summit (workers’ comp company). All Liberty commercial lines policies will be marketed under the regional companies’ respective brands, while all personal lines policies will be marketed under the Safeco name.

“Both organizations previously had some specialization, and we’re seeing increasing specialization across and within agencies,” says Gregg. “(With this new structure), we’re focusing on our specialization. But it’s not a wholesale adoption --- we’re working to preserve Safeco’s good commercial lines products, and we’re doing the same thing as we transition personal lines products to Safeco.”

Gregg says Liberty will focus on an orderly transition over the next 18 months. “If you’re doing business with Safeco today, there will be no disruptions,” he says. “As with our other acquisitions, we’ll work to have no confusion in the marketplace.” Liberty will start the branding transition for personal and commercial lines with new business later this year, and then with 2009 renewals.

Gregg notes that one of the biggest strengths of the transition is maintaining the regional company structure. “Agents really like our approach and value the close relationships,” he says. The changing personal lines landscape influenced the decision to change the branding structure. “In personal lines, you need a strong national brand with the level of advertising that direct and captive companies have to be able to compete,” he says. “We’re investing the Safeco brand nationally, which will position us well to grow with independent agents.”

Michael Hughes has been appointed executive vice president, Agency Markets and president, Safeco Insurance. Hughes had been executive vice president, Insurance Operations for Safeco. Paula Reynolds, formerly chairman, president and chief executive officer of Safeco, will be leaving the organization after a short transition period. Scott Goodby, executive vice president, Agency Markets and president, Regional Companies Group, will continue to lead the commercial lines organization.

Liberty Mutual’s Agency Markets now ranks third in personal lines and fifth in commercial lines in the independent agent distribution channel. “In a time of uncertainty, our ability to successfully execute acquisitions will hopefully inspire confidence,” Gregg says. “Being part of a group with a large capital base and strong balance sheet will be essential (for all insurance companies) as we look forward.” 

Katie Butler (katie.butler@iiaba.net) is editor-in-chief of IA.







VIEW: On the Hill
AIG’s Financial Woes Not Likely to Cause Domino Effect
OFC supporters wrong to spin AIG situation.

The leadership of the Independent Insurance Agents & Brokers of America (the Big “I”) does not believe that the American International Group’s (AIG) recent problems will have a domino effect on the entire insurance industry. The Big “I” also concluded that the Federal Reserve’s decision to lend up to $85 billion to AIG is appropriate in the face of the escalating concern about the potential impact of AIG’s economic challenges. 

Given the problems of AIG, consumers may have many questions regarding the stability of their own insurance providers. Virtually all experts agree that the insurance industry is financially secure. The financial strength of an insurance company is important, and AIG’s insurance subsidiaries are fundamentally sound. 

Over the past week a handful of politicians and insurance industry trade associations have incorrectly attempted to use the AIG bailout as an argument to federally regulate the rest of the insurance industry through an optional federal charter (OFC). The Big “I” believes the problems of AIG shouldn’t be used as an excuse for a wholesale overhaul of insurance regulation. While the AIG bailout is a huge blow to the financial services industry in this country, even a simple analysis of the practices that led to its dire situation shows that state insurance regulation and AIG’s insurance subsidiaries, which represent only one-third of AIG’s business, are not responsible for its current predicament. State insurance regulators are doing their job and the industry, as a whole, is stable.  

The complex corporate structure of AIG also has resulted in confusion by some about the distinction between the parent company’s financial strength and the ability of its insurance businesses to meet their obligations to policyholders. The federal government loan provides AIG with needed liquidity, preventing a crisis that could have set off a chain reaction in the financial markets. It’s important to note that AIG’s insurance entities are separate units or subsidiaries that are restricted from transferring assets to related entities without regulatory approval to facilitate their ability to pay claims. Despite some assertions to the contrary, the health of AIG’s state regulated insurance businesses proves how effective state commissioners are in regulating the insurance market, especially when it comes to solvency. 

The Big “I” will continue to closely monitor developments regarding AIG and its potential impact on independent agents and also will continue to fight against misguided proposals to create an OFC. State regulation is by no means perfect and it could use targeted reform to modernize the market, but its problems have nothing to do with the AIG situation. If anything, the Big “I” believes that the failure of AIG is fuel to fight against OFC and highlights the strengths of state insurance regulation.

Margarita Tapia (margarita.tapia@iiaba.net) is Big “I” director of public affairs.







VIEW: P&C Trends
Economics 101 in 2008
Agents need to stay educated to assist insureds.

It seems like the crisis on Wall Street has been averted, but there’s a lot more in store for the economy in the coming months and years. In order to accommodate the additional borrowing for the massive government bailout, the ceiling on the United States national debt will be raised to a record $11.5 trillion.

The U.S. economy will soon have an even larger financial burden to bear and there are still more companies lining up for government bailouts. It has been reported that the “Big Three” U.S. auto makers – Ford, GM and Chrysler – are looking for government assistance to the tune of $25 billion to allow them to create more fuel efficient automobiles. Against this backdrop is the ticking clock of the country’s demographics and pending retirements of the baby boomer generation, which means that there are huge financial issues in funding Social Security, Medicare and Medicaid. The subprime mortgage meltdown also continues to play a major role in the current economic equation as more and more people are unable to make their payments. Given that housing prices are still falling, have little incentive to try to keep their house.

The silver lining to the Wall Street meltdown is that individual households may introspectively consider focusing on what they need, not what they want. The publicity on the massive leveraging in the economy will lead to more reliance on personal responsibility as people realize the government isn’t going to continue on a path of massive budget deficits. 

The net result of this turbulence is that more consumers will seek assurances from their financial institutions and agents/advisors that the financial organizations they deal with are good stewards of their assets. Agents will need to take every reasonable step to ensure that the companies that they deal with are financially sound. This is a daunting task for agents, but at least one avenue – independent ratings services – will continue to increase their scrutiny of insurance companies’ financial health and call for even greater transparency of financial instruments that are held as insurance company reserves.

It’s ironic that in this environment of direct writers and online insurance providers, that it is more important than ever to understand the needs of the customers, their risk tolerance, budget and other objectives, before recommending a product. Clearly, the notion that insurance is a commodity is false.  Independent agents need to help their customers weather this storm and assist them in achieving financial security.

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




P&C Trends
2008 Catastrophe Losses Mounting
This year is on pace to be one of the most costly in two decades.

Earlier this year, ISO’s Property Claims Service (PCS) identified the first quarter of 2008 as the most costly in terms of catastrophes for 10 years. Forecasters estimated damages of $3.35 billion in 22 states due to one severe winter storm, seven tornado/thunderstorms and one workers’ compensation catastrophe (sugar refinery explosion). That unfortunate start to the year was then nearly doubled by the end of the second quarter with total catastrophe losses estimated at $6.05 billion through six additional catastrophes now affecting 27 states. The tally at the end of the second quarter put 2008 second only to 2001 in losses, but 2008 still had the most declared catastrophes of any January to June period.

PCS hasn’t yet released estimates for the third quarter, but 2008 will very likely be in the top five with totals from the various catastrophe modeling organizations ranging from $18 billion to $33 billion. The graph below illustrates the approximate midpoint of that range, making the nine-month total for 2008 on pace to be one of the most costly catastrophe years in the last two decades. And, as mentioned in last week’s edition of Insurance News & Views, a substantial portion of hurricane season still lies ahead.


*Source: Insurance Information Institute and ISO PCS.

Paul Buse (paul.buse@iiaba.net) is president of Big I Advantage^SM and a licensed p-c agent.




Agency Management
Producer Equity --- Good or Bad Idea?
A forced acquisition of a producer’s equity can eliminate an account’s long-term profitability.

It is difficult to convince producers that when you hire them, compensate them, support their sales efforts and then support the customers while they receive renewal commissions that the business “belongs” to the agency, not to the producer.

The producer is a part of the team that drives business to the agency, convinces the prospect to buy from the agency, convinces the carriers to provide the right product at the right price to facilitate the customers buying decision and satisfies the client after the sale.

The producer is an integral part of the team, as is the marketing representative who develops the product and places it with the carrier; the service representative who maintains primary communications between the agency and the client; and the claims representative who assures that the claim service provided to the customer by the agency lives up to the customer's expectation.

If the producer wants to buy out an owner’s portion of the equity in his/her book of business, the return an agency owner achieves will likely not return as much as he/she has spent in acquisition and service costs to acquire and maintain the account (unless it’s more than five years old).

For instance, if an account generates $1,000 of commission, the combined acquisition cost (including advertising, the cost of marketing to unsuccessful prospects, the cost of marketing to the carriers and the commission to the producer on the sale) can easily cost $2,000, according to the Agency Consulting Group, Inc.’s Acquisition Study. Based on a 5% per year premium growth, the agency will net a 7% profit at the end of the third policy year.

If the owner achieves a 50% equity position and the agreement of value is twice the commission payable over three years, and the producer leaves and buys the business after the third year, the agency will net $1,319 over six years --- a 7% return for its cost basis. If the agency is asked to buy out the producer, the combined acquisition costs will take five years to recoup (assuming another producer is assigned to maintain and retain the account and earns renewal commissions).

Equity relationships with a producer can work under very specific guidelines. For more on this topic, click here.

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Al Diamond (al@agencyconsulting.com) has spent more than 30 years in the insurance industry working for stock companies, direct writers, agencies and as an independent businessman.