T H U R S D A Y ,   O C T O B E R  5 ,   2 0 0 6

Big “I” National News

P-C Carrier Net Income and Profitability Down
Earned premium growth at slowest pace since 1999.

The U.S. property-casualty insurance industry’s net income (after taxes) is down 9.3 % to $28.3 billion for the first half of 2006 in comparison to the $31.2 billion generated in the first six months of 2005, according to a recent analysis.

The findings were released earlier this week in a report by the Insurance Services Office Inc., the Insurance Information Institute and Property Casualty Insurers Association of America. The findings are based on the reports of insurers representing 96% of the country’s private p-c business and cite declining investment results and increased taxes for the drop in income and profitability.

Overall net investment gains fell 9.3 % from $28 billion in the first half of 2005 to $25.4 billion in 2006. Also contributing to the declines, the industry incurred $12.3 billion in federal income taxes during the first half of this year – 20.3% more than the $10.2 billion in taxes in 2005.

While investment results are down and income taxes are up, carriers’s net gains on underwriting increased to $15.1 billion for the first half of the year from $12.8 billion in the first half of 2005. The industry’s combined ratio is also up a percentage point to 92% for the first half of 2006.

“While the hurricane season isn’t over and the potential for catastrophic losses from a natural disaster still remains, insurers’ underwriting results for the first half of 2006 were very solid,” says Genio Staranczak, PCI chief economist. “At 92%, the combined ratio for first-half 2006 was the best first half combined ratio since the start of quarterly records extending back to 1986. Insurers also earned profits on underwriting in the first half of 2005, but catastrophe losses in the second half quickly erased those underwriting profits and more. It is also important to put first-half results in perspective. Insurers lost money on underwriting in the first half of each year from 2003 back to 1986. Summing first-half results for the past 21 years, the industry is still $129 billion in the red in underwriting.”

Net written premiums went up $6.4 billion to $223.3 billion in the first half of 2006 from $216.9 billion in 2005, with written premium growth accelerating to 2.9% in first-half 2006 from 2.2% in 2005. Net earned premiums increased $5.7 billion to $215 billion this year from $209.3 billion in 2005, however earned premium growth declined to 2.7% in 2006 from 3.2% in 2005 and a cyclical peak of 11.8% in 2003. According to the report, the earned premium growth thus far for this year is the slowest pace since 1999, when earned premiums grew by only .9%.

The reported figures for the first half of the year and the first half of 2005 include two “special developments,” according to the analysis, that affected how the results from prior periods compare. In 2006, one insurer engaged in a complex series of transactions as it prepared itself to be sold by its non-insurer parent. Following the transaction, the insurer posted $.5 billion in nonrecurring dividends, which added to its investment income and net income after taxes. The same insurer also saw $1.7 billion of realized capital losses that flowed through net income and an offsetting amount of unrealized capital gains. The other development occurred in 2005 when another insurer received $3.1 billion in nonrecurring dividends for an investment subsidiary as it monetized assets. Without these two special instances, industry net incomes after taxes would have risen $1.2 billion to $29.5 billion in the first-half 2006 instead of $19.7 billion.

“The 3.5% decline in industry investment income in first-half 2006 is a result of special developments not expected to have an influence on investment income going forward,” Staranczak said. “Adjusted for three special developments affecting the data for the first-half 2005 and first-half 2006, industry investment income increased 7.4% in first-half 2006 as insurers’ average holdings of cash and invested assets rose 7.7%.”

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

On the Hill
Big “I” Speaks Out Against Newest Federal Charter Bill
Opposes Royce bill, H.R. 6225, introduced just before recess

The Big “I” came out strong late last week against H.R. 6225, introduced by Rep. Ed Royce (R-Calif.) in the U.S. House of Representatives shortly before Congress recessed for the fall election campaign.

The Big “I” opposes legislation such as H.R. 6225 and S. 2509, introduced earlier this year in the Senate, which would create an optional federal charter (OFC). It instead supports targeted federal legislation to reform the insurance regulatory system, which relies on more than 100 years’ worth of skill and experience the states have as insurance regulators. An example of such a pragmatic approach is H.R. 5637, the Nonadmitted and Reinsurance Reform Act, which would help create uniformity in the surplus lines and reinsurance markets without undermining the current regulatory system.

“We agree with virtually all insurance industry stakeholders, including consumers, regulators and companies that the existing regulatory system needs greater uniformity and efficiency,” says Thomas Minkler, president of Keene, N.H.-based Clark-Mortenson Agency, chairman of the Big “I” national Government Affairs Committee. “We are long overdue for change; the existing system is slow, inefficient, unnecessarily complicated and expensive. That said, a one-size-fits-all scheme that creates a new federal bureaucracy is not the answer.”

The Big “I” is among the leaders in advocating for meaningful reform of state insurance regulation. Although the need for greater efficiency and uniformity is clear, the Big “I” believes that the creation of a federal regulator and a new federal bureaucracy would create many new problems and conflicts that do not exist under the current regulatory structure.

“An OFC would create more problems than it solves and is not the answer to the current marketplace concerns,” says Charles E. Symington Jr., Big “I” senior vice president for government affairs and federal relations. “We believe that targeted reform will address the existing problems without depriving consumers of the strengths offered by state regulators: knowledge of local marketplace conditions and responsiveness to consumer concerns.”

“While proposals such as an ‘optional’ federal charter or mandatory federal regulation will continue to be debated for years to come, we can achieve true, measurable reform of insurance regulation in the very near future with legislation such as H.R. 5637, the Nonadmitted and Reinsurance Reform Act, which recently passed the House of Representatives with overwhelming bipartisan support,” Symington says.

The Big “I” believes that federal legislation that mandates uniformity where needed and when necessary by preemption and national standards would make the appropriate reforms to state insurance regulation. This approach would overcome state-level impediments to reform and build on, rather than dismantle, the states’ inherent strengths—diversity, geographical uniqueness, innovation and responsiveness to consumers—to meet the challenges of a rapidly changing insurance marketplace.

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

On the Hill
Big “I” Supports Bunning-Conrad Intangible Assets Bill
Legislation would shorten write-offs, create more accurate amortization schedule.

The Big “I” is supporting a bill introduced late last week in the Senate that would allow purchasers of eligible small businesses to write off as much as $5 million of acquired intangible assets over the course of a five-year period.

The bipartisan legislation, S. 3974, introduced by Sen. Jim Bunning (R-Ky.) and Sen. Kent Conrad (D-N.D.), would allow purchasers to more accurately amortize intangible assets acquired through the purchase of small businesses and provide better liquidity to Main Street businesses.

The Senate bill parallels legislation that was introduced in the House, H.R. 4960, “Tax Fairness for Small Business Act,” earlier this year by Chief Deputy Majority Whip Eric Cantor (R-Va.) and Rep. Earl Pomeroy (D-N.D.).

“The top tax priority of the Big ‘I’ is common-sense tax reform on intangible assets acquired through the purchase of one small business by another,” says Charles E. Symington Jr., Big “I” senior vice president for government affairs and federal relations. “Our members applaud Senators Bunning and Conrad for introducing this legislation that will provide tax relief to businessmen and businesswomen across America, and we appreciate the bipartisan leadership we’ve seen on this issue in both chambers of Congress.”

Current law requires intangible assets to be depreciated over 15 years, even though these specific types of assets, such as customer lists, have much shorter shelf lives. In fact, experience has shown that these types of intangible assets have shelf lives closer to five years. The Big “I” consistently has supported shortening the depreciation schedule for intangible assets so that it reflects their useful economic life.

“Modernizing the depreciation schedule will help small businesses by allowing their intangible assets to be amortized more accurately,” says Brendan Reilly, Big “I” assistant vice president of federal government relations. “A shorter depreciation schedule also would allow Main Street businesses to reinvest more money in themselves and their operations.”

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

  L&H Trends
Prepping for Renewal Season

As the health insurance renewal season approaches, independent agents typically expect good news/bad news for their customers.

Based on several surveys that anticipate medical inflation, agents can expect renewals in the 6% to 10% range, depending on the client's size and plan design. On one hand, that is somewhat lower than in the past several years, but it’s still significantly higher than the typical average compensation increase of 3% to 5%.

Recent union contracts have resulted in wage increases due to inflationary concerns in the energy, food and, until 2006, housing markets. Another factor impacting labor costs for employers with a significant number of professionals is the increase in the Social Security Wage Base---around $98,000 for 2007---which will result in a higher percentage increase in wage costs than an average salary increase. As a result, employers will continue to invest in technology to further reduce or postpone adding additional staff. The investment/overhead per employee will also be higher.

The bottom line is that, as part of their retention strategy, agents providing employee benefits need to pragmatically focus on clients’ needs while balancing cost constraints and budget realities. Prior to renewal, work with your corporate clients to confirm their total employee compensation budget and philosophy. When you receive the renewal, you’ll be able to analyze it according to what the employer already determined affordable. If the total cost is higher than anticipated, then design alternatives plans that are less costly and/or shift costs to employees. If the employer is concerned about turnover among the lower and middle-paid employees, cost shifting efforts will aggregate this issue.

Independent agents who assist their clients in strategic health insurance planning by really understanding their clients' business needs will find that they will be able to weather higher renewal costs.

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

Forms & Substance
Auto Accident: PAP or HO?

If an auto accident results in a lawsuit, the personal auto policy (PAP) generally responds. Under certain circumstances, though, the homeowners (HO) policy might respond. In the claim below, both policies respond despite the fact that adjusters for the PAP and HO carriers initially denied the claim. The moral of the story: Read the policy.

The Virtual University “Ask an Expert” service recently fielded the following question:

“A client owns a home and a rental property, and the liability for both are covered under the CPL portion of his homeowners policy. The rental that he owns needed some repairs, so the insured hired a handyman to do the work. The handyman was working at the rental, needed some supplies and went to the hardware store in his own vehicle.

“Upon arriving back at the rental, he lost control of his vehicle, jumped the curb and hit the resident of the house next to the rental. The resident of that house was killed. The handyman had very low auto limits, so the family of the deceased sued the owner of the rental dwelling since the handyman was acting on behalf of the owner.

“Both the homeowners and auto carriers declined the claim. The 1991 ISO HO carrier cited the vehicle exclusion and the auto carrier stated that the handyman's vehicle was not a covered auto under his 1998 ISO PAP.

“I've asked several underwriters and claims adjusters if they knew of a way to cover this exposure and they were unable to come up with a solution. Even the umbrella underwriters said that they really write following form coverage and would not pick up this exposure if the underlyers declined. Any ideas?”

Assuming we're dealing with ISO forms, there should be coverage under both the HO and PAP. That, at first glance, may defy common sense, but don't forget we're dealing with insurance here and logic doesn't always apply. It doesn't matter that HO policies usually don't cover auto exposures; all that matters is what the form says.

The 1991 ISO HO "ownership/maintenance/use" exclusion applies only to vehicles "owned or operated by or rented or loaned to an 'insured.'" The insured did not own, operate, rent or loan the handyman's vehicle. And, since the handyman is not an insured under the HO policy either, the exclusion does not apply to this occurrence.

One would think, at first glance, that an HO policy would not respond to an auto accident, but based on the actual contractual language, it clearly does. Under ISO's new HO2000 program, this claim most likely is not covered...but it is under the 1991 form (which probably explains, to some extent, why ISO "toughened" the exclusion in the new forms).

In analyzing the PAP, you must establish that the insuring agreement applies, that the person against whom claim is made is an insured, and that no exclusion applies.

The insuring agreement simply says, "We will pay damages for 'bodily injury' or 'property damage' for which any 'insured' becomes legally responsible because of an auto accident."

All that's required to trigger coverage is an auto accident that the insured is allegedly liable for.

The definition of "insured" includes, "You or any 'family member' for the ownership, maintenance or use of any auto or 'trailer.’”

The insured is covered for the use of "any auto." Note that nothing requires that he be the user of the auto. So, barring any exclusionary wording, coverage is triggered for the homeowner if his liability is alleged as the result of an auto accident.
 
Examining the exclusions in the 1998 ISO PAP, none appear to apply in this case. In addition, the homeowner also would be an insured under the handyman's auto policy as follows: "For 'your covered auto,' any person or organization but only with respect to legal responsibility for acts or omissions of a person for whom coverage is afforded under this Part."

Since the handyman exhausted his limits, whether or not the homeowner is an insured is probably a moot point.

In any case, as you can see, there appears to be coverage under both the HO and PAP policies of the homeowner, assuming that ISO forms are involved. If not, the same analysis should be performed on the actual forms to see if coverage applies.

For more information, click here.