T H U R S D A Y ,  M A Y  2 8 ,  2 0 0 9 

 Big “I” National News

P&C Trends
M&A Activity Continues Despite Economy, Soft Market
Study shows agency mergers & acquisitions are “down, but not out.”

While the marketplace for mergers & acquisitions has slowed significantly since the onset of the recession and credit crisis, a new report from Reagan Consulting shows buying and selling has not stopped altogether, and driving factors behind M&A activity still exist.

Brian Deitz, a consultant at Reagan Consulting who researched and assembled the study, entitled “Down But Not Out,” does not deny the uncertainty currently surrounding today’s market activity. He says organic growth among agencies, which is down 0.6% in 2009, continues to be a struggle for both agency owners and the industry as a whole. However, he was pleased to find the market hasn’t fallen as far as some industry analysts have indicated. Between 2006 and 2008, strong public broker valuations during a soft market, abundant capital and bank entry and expansion contributed to a particularly aggressive M&A marketplace, and Deitz expects M&A activity to return to a level somewhere between that aggressive arena and today’s dropped-off activity.

“Right now, we’re in a situation where a couple things are aligned to conspire against M&A activity, such as the soft market, the economy and the liquidity crisis,” says Deitz. “The future will be a middle ground between the low activity we see now and the hyperactivity we saw in 2006-2008.”

Other factors tempering M&A activity are uncertainties in the political arena, where possible health care reform and capital gains tax increases remain unresolved; the persistent soft market; and the general uncertainty regarding agencies’ ability to grow in today’s market. As the report puts it, “there is nothing a market dislikes more than uncertainty.”

Brokers and banks, the primary seekers of acquisitions in past years, have both slowed their acquisitions activity. A predictable buyer group no longer exists and agencies must look to new players entering the acquisitions arena. Of the five major public brokers cited in Reagan’s study, only two continued to acquire agencies heading into 2009: Brown & Brown and Gallagher. Together, those brokers represented 27.7% of transactions in 2008 and both continue to seek M&A partners in 2009. The outlook is a bit more uncertain for the other three public brokers examined, which included Marsh, Aon and Willis. Marsh and Aon are venturing into the middle-market arena, and Willis has not acquired many middle-market businesses with the exception of its acquisition of HRH in 2008.

Banks’ acquisition activity has been declining steadily since 2002, when they were completing a hefty 40% of announced agency acquisitions. In 2008, the top three bank buyers represented half of banks’ insurance acquisitions, and declining capital since then may spell the end of the bank acquisition trend. However, Reagan’s study highlights several factors that could turn things around. Wells Fargo and BB&T, two of the largest acquirers of independent agencies, continue to perpetuate bank-insurance activities, while banks seeking non-interest income may turn to insurance as a way to offset economic challenges. Finally, small, regional banks might spearhead a resurgence in M&A bank activity because they have the greatest potential for growth and seek the most non-interest income sources.

Michael McCarron, whose agency brings in around $1.25 million in revenue per year, is taking advantage of fewer major acquisitions players in the marketplace to make some agency purchases of his own. McCarron, president of Lakeside Insurance Center, LLC in Arvada, Co., says many agencies whose owners or principals are nearing retirement are interested in selling because they don’t have many other options. He admits capital may be hard to come by for future acquisitions, but he plans to use an owner-carry financing model if the bank cannot provide 100% financing.

“I’m certainly using the market turmoil as an opportunity,” McCarron says. “It’s created a vacuum for mid-sized agency players to create an acquisition. With fewer dollars chasing agencies, I can purchase for lower values.”

Any agency hoping to sell must consider valuations, which have been a thorn in agency owners’ sides since they fell dramatically from their 2007 and 2008 levels. Reagan’s study points out, however, that valuations have not reached record lows; instead, they just returned to levels similar to those before the market “boom” in 2006–2008. Madelyn Flannagan, Big “I” vice president of education and research, says the recent valuation decline may be the reason behind the large number of small agencies (less than $1.25 million in revenue) reported by Reagan; the 2008 Agency Universe study from the Big “I” did not report quite as many small agencies.

“Agency revenue might be way down, which we wouldn’t have seen in 2008,” says Flannagan. “We will have to see in (the) 2010 (Agency Universe Study) whether some small agencies are gone.”

Flannagan adds that small agencies are finding creative ways to forge partnerships without going through with a full merger or acquisition; for example, they may share a computer system or office space in order to save on costs.

Deitz agrees very small agencies may struggle a bit more if they are looking to sell because bigger buyers want “more bang for their buck.” However, he is also quick to point out that smaller agencies still have significant market share; those bringing in less than $2.5 million in revenue hold 40% of the market and continue to make attractive acquisitions targets.

“The M&A market is still alive, it hasn’t stopped,” says Deitz. “It has slowed but there are still successful transactions taking place today. Depending on your needs and situation, the M&A market can still be a very viable option.”

Veronica DeVore (veronica.devore@iiaba.net) is Big “I” writer/editor.

 

P&C Trends
Impairment Rates in Top Insurer Chartering States
Market stress brings the threat of agency E&O claims.

A recent edition of Insurance News & Views examined the likely relationship between inflation and insolvencies—but where are those insolvencies most likely to occur? As it turns out, there are significant differences among states and, while inflation, underwriting losses and insolvencies would presumably impact states evenly, history shows the rate of actual insolvencies from such marketplace stresses is less than even.

There are about 2,700 licensed property-casualty insurers nationwide, each domiciled in one of the 50 states. Insurer concentration ranges from 231 insurers domiciled in Texas to two in Wyoming. For purposes of examining insolvency rates, only states with 50 or more domiciled insurers as of 2007 were examined. States with fewer than 50 insurers provide a less credible sample. There have been about 22 p-c insurer insolvencies per year from 1969-2008---using the state where they are chartered, you can determine a rate of insolvency per 100 insurers.

 
Source: A.M. Best Company and the Insurance Information Institute 

The graph indicates notable peaks in insolvency rates in Texas, Florida and California. There are also notably low rates of insolvency in Wisconsin, Connecticut, Iowa and Ohio. Wisconsin stands out as a state with an unexpectedly high number of domestic p-c insurers as well a low rate of financial impairments. In addition, the states with high rates of insolvency are more subject to catastrophes than those with low rates, with the possible exception of North Carolina. Finally, the state of domicile is less of a predictor of insolvency for larger insurers, since larger insurers tend to write business in many states.

All agents should be aware of the potential for insolvency because of the possible liability arising from insurer impairments. In some instances, independent agents have been sued for placing coverage with insurers that become insolvent and cannot pay claims. One of the more frequent instances of legal action against agents occurs when coverage is placed with carriers with assessment features requiring policyholders to contribute toward claim payments for other insureds in the event of the insuring entity’s impairment.

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

For more information on E&O coverage and insolvency, check with your Big “I” state association for an assessment of the insolvency coverage in your policy (www.independentagent.com/eo, then click on “Request a Quote.”) Also visit www.independentagent.com/vu and click on “Insurer Insolvency Resources.”

 

On the Hill
Natural Disaster Legislation Introduced in the  House
Bill will help spur debate on growing issue.

Rep. Ron Klein (D-Fla.) recently introduced H.R. 2555, the Homeowners’ Defense Act, in the House which addresses the growing problems homeowners face in the aftermath of natural disasters.

The four main provisions of the bill each create a program intended to help prevent potential insolvencies and to make the private insurance market more stable, ultimately making catastrophe insurance more available before and after a major disaster. The Big “I” supports the goals of each of the following programs, but also encourages Congress to consider some modifications, including changes to the reinsurance title of the legislation.

The National Catastrophe Risk Consortium is a program that would allow multiple states to pool their catastrophic risk, with the goal of achieving an economy of scale and risk diversity that will lead to a lower cost of reinsurance than states could achieve independently.

The Catastrophe Obligation Guarantee Program would authorize the federal government to guarantee debt issued by eligible state catastrophe programs to assist in the financial recovery from natural catastrophes.

The Federal Natural Catastrophe Reinsurance Fund would allow the Treasury Department to write reinsurance contracts covering truly catastrophic-level events.

The Mitigation Grant Program would establish a grant program in the Treasury Department to develop, enhance and maintain programs that prevent and mitigate losses from natural catastrophes.  

While the Big “I” applauds Congress’ consideration of a national reinsurance backstop for natural disaster insurance, such a backstop would better encourage private market participation in problematic markets if it allowed insurance company access instead of just state catastrophe funds. Efforts to advocate that Congress consider a solution utilizing the private markets instead of merely state catastrophe funds will remain at the top of the Big “I” agenda on Capitol Hill.

The Big “I” has been a leader in advocating for natural disaster solutions, testifying on several occasions before the House Financial Services Committee and the Senate Banking Committee on the need for legislation to stabilize the insurance market for natural disaster risk.

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

On the Hill
Big “I” Praises Reintroduction of Surplus Lines Bill
Legislation provides practical targeted reform of the non-admitted market.

The Nonadmitted and Reinsurance Reform Act of 2009 has been reintroduced in the House of Representatives by Rep. Dennis Moore (D-Kan.) and Rep. Scott Garrett (R-N.J.). The bipartisan legislation is often referred to as the “surplus lines bill,” and the Big “I” supports it as an example of a positive targeted approach to regulatory reform. 

The legislation singles out two areas where there is general consensus for reform: surplus lines regulation and reinsurance supervision. Independent insurance agents and brokers play a crucial role in surplus lines (or non-admitted) insurance, which provides coverage for unique or hard-to-place property-casualty risks.

The bill modernizes surplus lines regulation by making the insured’s home state the source of regulation for individual surplus lines transactions. The bill also seeks to reduce overlapping, multiple-state regulation of both reinsurer financial condition and credit-for-reinsurance on the balance sheets of ceding insurers. This approach helps to preserve the strengths of the state-based insurance regulatory system.

Similar legislation passed the House in previous Congresses with overwhelming support from both sides of the aisle. The Big “I” believes that such strong bipartisan support coupled with nearly unanimous industry approval proves that this model of limited regulatory reform of state regulation is the appropriate and most practical approach.

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

L&H Trends
The Retirement Conversation
Point anxious customers to online retirement planning resources.

There is a great scene in the movie Somebody There Likes Me, starring the late Paul Newman as heavyweight boxing champion Rocky Marciano. While Rocky is at a crossroads trying to figure out whether he wants to go down the right path after scrapes with the law, he stops by his neighborhood drug store and gets some advice from the wise, old proprietor who tells him that life is like wanting a chocolate ice cream soda, but you have to be willing to pay the price for it. 

Many Americans are facing a crossroads of their own this year regarding whether they have enough funds set aside for a reasonable standard of living in retirement. While they are not contemplating a life of crime, they are anxious about being able to have adequate retirement income and insurance to deal with medical expenses, prescription drugs and long-term care costs. Right now many middle-aged people are concerned about their employer’s viability and their jobs. The meltdown of the stock market and resulting decline in most savers’ 401(k) plans, coupled with employers’ benefit reductions, are making many future retirees nervous. So what can the average person do to address this anxiety, and how can independent agents help? 

First, agents should provide links from their Web sites to other relevant sites, such as www.ssa.gov, the Social Security administration’s Web site. The site allows visitors to check on the value of their projected Social Security benefits and provides valuable information on the age for full retirement benefits, adjustment factors for drawing benefits earlier or postponing them, survivor benefits and disability eligibility. The site will provide a starting point for insureds to consider when they might be able to retire, although the rules have and probably will change again. There are other considerations, such asle how Social Security benefits are taxed, rules for divorced spouses on benefits eligibility and how long dependent benefits continue after the death of a parent. Medicare Parts A, B and D and the new variable premiums rates that correspond with retirement income are another factor. Individual Part B premiums for 2009 are $134.90 to $308.30 for high-income earners. In addition, if a person does not have an employer-provided Medicare supplement policy, they will have to bear that additional expense. It varies widely, but is typically several hundred dollars a month, unless the retiree has a Medicare Advantage plan which combines these coverages into a single insurance plan.

Another significant consideration is how handle long term care assistance, which can occur prior to retirement. One out of every four long-term care policies has benefits triggered prior to age 65. Independent agents are well positioned to assist their customers with evaluating which policies’ benefits best suit their needs and budget. Some agents make the mistake of offering only a Cadillac type of policy with a cost that breaks the customer’s budget. Agents should be sure to match up the offerings with the budget realities of their insured. Some long-term care policies allow for additional benefits to be added down the road without evidence of insurability. 

Agents can help relieve the burden of “going it alone” for their customers by having the retirement planning conversation and by providing pertinent information from the government and other sources. And, it never hurts to remind customers that we have to pay our own way in life.

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