L.A. Area Quake Insured Loss Seen Under $100 Million

Insured losses are expected to be less than $100 million from the 5.4 magnitude earthquake that struck the Greater Los Angeles area yesterday, a reinsurance brokerage reported.

The estimate came from the Guy Carpenter Instrat unit, which said the earthquake was located three miles south-southwest of Chino Hills, at a depth of approximately 8.5 miles.

AIR Worldwide, the Boston-based catastrophe modeling firm, said based on the latest available information on the seismic parameters of the event, it does not expect “significant insured losses.”

"Building codes in California are among the strictest in the world," said Mehrdad Mahdyiar, AIR earthquake hazard director. He said the company expects “minimal to no damage to engineered structures and residential wood frame from Tuesday's event. Older masonry buildings that have not undergone retrofit may sustain some minor shear cracks and damaged parapets."

Instrat said more than 4.5 million people live in areas impacted by the quake with Modified Mercalli Intensity (MMI) of VI or higher, but only minor damage was reported.

Guy Carpenter noted reports that the earthquake was the strongest to hit the region since 1987 (when a 5.9 magnitude earthquake occurred in Whittier Narrows) and was felt as far south as San Diego.

At least 50 aftershocks have hit the region, the strongest of which was 3.8 magnitude. There have been no reports of serious injuries.

According to the Insurance Information Institute, the 1994 Northridge earthquake--the last major quake to hit California--caused an insured loss of $18 billion to $28 billion in 2007 dollars.

In 1989, the Loma Prieta quake inflicted $11.7 billion in insured damage to the state in 2007 dollars, according to the Institute.

The California Earthquake Authority--the state’s largest earthquake insurer--had $454.5 million in premiums written in 2006, down 9.7 percent from the year before.

The number of California homeowners who have earthquake coverage has decreased from 30 percent in 1996 to about 12 percent today, according to the Institute.

“Our sense is that the passage of time has created a situation where people don’t see the need [for quake coverage,” Mike Barry, a spokesman for the Institute, said in an interview a few months ago, noting that “it has been 14 years since the last big California earthquake.”

U.S. Could Okay 2 Big Insurance Bills In '08, Says Dodd

Sen. Chris Dodd, D-Conn., the Senate Banking Committee chairman, said Congress might manage to push through legislation this year to reform regulation of surplus insurance lines and create an Office of Insurance Information.

But, since neither the surplus lines nor the Office of Insurance Information bills have been acted on by the committee, a lobbyist source noted that lawmakers, “will only have a couple of weeks to put together such a deal.”

Sen. Dodd made his comments during a hearing on insurance regulation during which he voiced surprise at such industry interest in legislation providing a federal insurance regulatory role.

At the hearing, Republicans Sen. Richard Shelby, Ala., ranking minority member and one of the most powerful members of Congress on insurance issues, and Bob Corker, in his first term from Tennessee, both said they would support an optional federal charter for insurers.

Sen. Shelby voiced his support for an OFC in his opening statement, saying that in the two years since the last hearing on insurance, “developments in our insurance markets, as well as regulatory reforms abroad, have strengthened the case that our insurance regulatory structure is out of date.”

His immediate concerns are developments in the “crumbling” bond insurance market. “Because the financial problems of the bond insurers have impacted not only federally regulated institutions, but also our overall economy, I believe that closer scrutiny of bond insurance regulation by this committee is warranted.”

He also cited insurance company investment in mortgage-back securities, noting that while no insurance company “has yet failed during the turmoil in our credit markets, recent economic history suggests that should never be considered outside the realm of possibilities.”

And, Sen. Mel Martinez, R-Fla., a sponsor of legislation reforming the surplus lines industry, told The National Underwriter outside the hearing that Sen. Dodd’s comments marked the first time he had indicated an interest in moving insurance regulation legislation through the Congress this year. “Yes, I am encouraged,” Sen. Martinez said.

Sen. Dodd noted in his comments that "A few years ago, even the notion of a federal charter would have been meet with vehement opposition. It was the third rail."

But, he again questioned state regulators and representatives for insurance trade groups and consumer organizations about the differences between life and property-casualty insurance, and whether life insurance lent itself more to federal regulation than property-casualty insurance.

“I have always felt a case could be made for an OFC for life, but that you can make a very good case that, when it comes to p-c, there are distinctions in tort law,” Sen. Dodd said.

The House passed H.R. 1065, the Nonadmitted and Reinsurance Reform Act, overwhelmingly in 2007.

Similar legislation was introduced in the Senate by Sen. Martinez and Sen. Bill Nelson, D-Fla., as S. 929 in late February 2007, but it has not yet been acted on in the Senate. The bill also has strong support from Sen. Jack Reed, D-R.I.

Currently, the Insurance Information Act, or H.R. 5840, is awaiting House action. Another bill is awaiting House floor action, the National Association of Registered Agents and Brokers Reform Act, also known as H.R. 5611.

It is unclear whether they will be taken up by the full House before it recesses until early September on Friday.

Both were reported out of the Capital Markets Subcommittee of the House Financial Services Committee July 9.

Captives Flourishing In Soft Market, A.M. Best Finds

Although reduced medical malpractice business led to a 15 percent drop in net premiums written by captive insurers between 2006 and 2007, overall their operations benefited from favorable underwriting trends, according to A.M. Best.

A.M. Best analysts told National Underwriter that risk managers have become much more sophisticated in their use of captives. They are holding onto their captives, even during a market when rates are down almost across the board.

In fact, captives are thriving despite the market, said A.M. Best analyst John Andre.

In its special report, “Medical Malpractice Leads Captives’ Premium,” A.M. Best Co. found that:

• Declining premium volume suggests future weakening in captives’ performance, but these companies generally are insulated from sudden, major underwriting losses.
• Captives’ positive results in recent years are igniting competition as traditional insurers encroach on areas that have more flexible pricing in an effort to lessen the soft market’s impact.
• Net premiums written fell 26 percent in medical malpractice, the largest line with nearly one-third of the business for the 177 captives in the special report.
• Solid underwriting results in medical malpractice helped the captive composite’s loss ratio to improve substantially in 2007 to 61.9.
• Despite increases in the expense ratio and policyholder dividends, the combined ratio improved to 92.3, based on the excellent loss ratio.
• The captive composite’s favorable underwriting trends contrasted with a slight deterioration for the overall property-casualty industry.
• Captives’ net income dropped in 2007, as realized capital gains fell from the exceptional level of 2006.
• Like the p-c industry as a whole, captives were impacted by the soft market and the stunted growth of exposures in the current economy.
• Captives have benefited from stable or reduced reinsurance rates, which have allowed companies to increase limits on excess layers.
• Proposals by the IRS last year would have restricted the tax deductibility of loss reserves paid to captives, but concentrated lobbying by industry representatives prompted the IRS to withdraw the proposal.

A.M. Best said its outlook for the captive industry is stable.

Malone Named Fla. Citizens Chairman

Florida Chief Financial Officer Alex Sink announced today that James R. Malone has been appointed board chairman for Citizens Property Insurance Corporation, the state’s home insurer of last resort.

Ms. Sink said Mr. Malone’s position at the largest property insurer in Florida is effective Aug 1.

The announcement of the appointment said Mr. Malone, 65, from Naples, Fla., has more than forty years of experience as an entrepreneur, manager and chief executive for several Fortune 500 companies.

Mr. Malone’s “experience leading major corporations and reputation for improving business practices will greatly benefit Florida’s insurance consumers,” said CFO Sink.

She said Mr. Malone would come to his post with “sound finance and management principles that will help ensure the largest property insurance company in the state operates with the transparency that the people of Florida expect.”

Mr. Malone is listed as the founding managing partner of Naples-based Qorval LLC, an investment banking, financial advisory and turn-around firm, and as chairman of Boyne Capital Partners.

Ms. Sink’s announcement said his efforts “focus on improving company business practices, particularly during times of change and adversity.”

She said Mr. Malone previously led several Florida companies, including Brown Jordan International (Jacksonville), Avborne Heavy Maintenance (Miami), Anchor Glass Container (Tampa), Family Private Care (Palm Beach) and Amerifactors (Orlando). Additionally, he is a director of Regions Financial, Birmingham, Ala., and Ametek of Philadelphia.

He served as a member of the Business Council for the United Nations in New York for 20 years.

RMS Puts Dolly Loss At Less Than $750 Million

Risk Management Solutions, the latest catastrophe modeler to evaluate insured losses from Hurricane Dolly, said they would amount to less than $750 million—less than some previous loss forecasts.

The loss estimate for the Category 2 storm that hit Texas yesterday includes wind, flood and storm surge damage to residential, commercial and industrial properties.

Newark, Calif.-based RMS said the figure also includes crop damage and business interruption resulting from power outages. RMS said some 500,000 people would be impacted by the storm.

Yesterday, catastrophe modelers Boston-based AIR Worldwide and Eqecat, headquartered in Oakland, Calif., released their own loss estimates.

AIR said losses could be anywhere from $300 million to $1.2 billion with an expected (mean) loss of $600 million.

Eqecat gave a preliminary estimate of insured loss of less than $800 million.

Christine Ziehmann, director of model management at RMS, said in a statement: “The largest uncertainty in the loss estimate comes from potential flood damage. The amount of rainfall is currently well below the level of extreme historical events in the area, like Hurricane Amelia in 1987, which resulted in 48 inches of rain, and Beulah in 1969. If the flood damage is limited, then we expect the total insured loss to come in much lower than $750 million.”

Tropical storm warnings remain in effect in some portions of Texas as Dolly was downgraded to a tropical storm with sustained winds of 45 mph by early this morning, according to the National Weather Service’s National Hurricane Center.

The Weather Service said the storm is expected to dump 8-to-12 inches of rain, and up to 20 inches in isolated areas, over portions of southern Texas and northeast Mexico.

Hurricane Dolly came ashore yesterday afternoon near South Padre Island with maximum sustained winds reaching near 100 mph, the Weather Service said.

Dolly is moving inland on a north-northwest path and is expected to produce isolated tornadoes over south central Texas today.

There were numerous reports of damage from the storm. Texas Gov. Rick Perry declared 15 counties disaster areas and has requested federal disaster aid. As of yesterday, the state said more than 2,800 people were in shelters.

In Mexico, there is the danger of flooding from the heavy rains and 500,000 people were without drinking water when a water treatment plant was damaged.

No deaths have been reported from the storm.

Dolly Damage By One Estimate Could Exceed $1 Billion

Hurricane Dolly crashed into Texas today whacking the coastal resort town of San Padre Island with winds up to 100 mph and inflicting heavy flooding as it moved north.

Catastrophe modeling firms had widely differing figures on possible insured loss that could be involved.

Boston-based AIR Worldwide said it could be anywhere from $300 million to $1.2 billion with an expected (mean) loss of $600 million.

Eqecat, based in Oakland, Calif., in an early preliminary estimate, said insured loss would probably be less than $800 million.

The Category 2 storm on the Saffir-Simpson scale tore roofs and pushed over commercial signs as heavy rain poured down at up to five inches per hour.

Tom Larsen, Eqecat vice president, said his firm did not expect a lot of damage to natural gas well platforms in the Gulf of Mexico near the Texas coast because they were above the level of waves, which approached 40 feet.

Disruptions to energy operations were expected to be minimal, he said. The severe flooding, he added, could mean losses for insurers with commercial line multiperil risks and business interruption policies.

However, Mr. Larsen said, his company lacked data on that coverage in the area and the uncertainty surrounding possible flood damage made losses difficult to predict.

AIR said there was considerable uncertainty in estimates due to Dolly's slow forward motion, its significant precipitation and the uncertainty in its future direction as it tracked inland. The company noted that a 10 mile difference north or south has considerable impact on losses.
AIR estimated insured losses in Mexico as less than a quarter of U.S. insured losses.

Peter Dailey, director of atmospheric science at AIR Worldwide, said by 2 pm EDT Dolly had diminished to a Category 1 hurricane with winds below 95 mph.

Many Texas homes, he said, are likely to suffer damage to roof shingles and wall coverings, and “there may also be damage to unprotected windows from the wind-borne debris.”

Mr. Dailey said “the dominant construction type of insured properties in Mexico is confined masonry, which should fare reasonably well.”

AIR noted information from the U.S. Interior Department’s Minerals Management Service that oil and gas producers in the Gulf of Mexico yesterday had shut down about 5 percent of production.

The firm said Dolly's track is well south of the heaviest concentrations of offshore assets and no lasting shutdowns are expected. “Physical damage to platforms and rigs is likely to be quite limited, with any insured losses dominated by business interruption,” said Mr. Dailey.

As the hurricane arrived, Robert Hartwig, an economist and president of the Insurance Information Institute, issued a statement noting that “Texas is among the riskiest places in the United States for insurers to operate."

According to I.I.I. figures, the top five private home insurers in Texas and their respective market shares are State Farm, 29.6 percent; Allstate, 14.9 percent; Zurich, 13.1 percent; USAA, 7.7 percent; and Travelers, 5.5 percent.

The top five commercial insurers and their market shares according to I.I.I. are Zurich, 14.8 percent; Travelers, 9 percent; Hartford Fire & Casualty, 8.4 percent; ACE Ltd., 6 percent; and Nationwide, 5.7 percent.

Mr. Hartwig noted that Texas and Louisiana were the two states affected in September 2007 when Hurricane Humberto became the only major windstorm to make landfall in the United States last year.

No hurricanes struck the United States in 2006. Prior to that, the last windstorm to hit the U.S. coastline was Hurricane Wilma, which swept through Florida in October 2005.

Many coastal homeowners in southwest Texas have windstorm and hail coverage through the Texas Windstorm Insurance Association (TWIA), which sells policies to those residing in parts of Harris County and 14 other Texas counties along the Gulf Coast.

According to I.I.I. data, private insurers in the voluntary market have windstorm and hail deductibles that range from 0.5 percent to 25 percent and from $100 to $5,000. Some insurers require a minimum deductible, typically 2-to-5 percent.

Tokio Marine Buys Philadelphia Consolidated For $4.7 Billion

Japanese insurer Tokio Marine Holdings Inc. (TMHD) said today it will acquire Philadelphia Consolidated for $4.7 billion, and analysts saw the transaction as a good deal for the Bala Cynwyd, Pa.-based property-casualty insurer.

Analysts said the price should make Philadelphia Consolidated stockholders happy and the acquisition will provide opportunity for TMHD to expand its presence in Europe and the United States.

The companies said TMHD will acquire all outstanding shares of Philadelphia Consolidated, for $61.50 per share in cash, through TMHD's wholly owned subsidiary, Tokio Marine & Nichido Fire Insurance Co., Ltd. (TMNF).

Robert Farnam, an analyst with Keefe, Bruyette & Woods, said he had seen Philadelphia Consolidated as an acquisition target, but the sale was for more than he had expected. He said he had guessed it would go for 2.4- to 2.7-times book, “and they went for 2.75.”

He and other analysts said that from what the companies said in a briefing it appeared that Philadelphia Consolidated would be able to operate in a relatively autonomous fashion and there would be no layoffs involved.

Mike Grasher of Piper Jaffray said based on what management said Philadelphia Consolidated had “done their homework and looked into other suitors and came away with Tokio Marine as the best fit.”

He noted that risks are always involved with integrating companies, but it sounded as though Philadelphia Consolidated would be left alone to do its business while “ratcheting up their product in other markets.”

South America and Canada are markets that TMHD would like to use Philadelphia Consolidated to enter, and the U.S. company’s products “may play well in Europe,” he said.

Standard & Poor's said it was affirming the Japanese firm’s ratings with a stable outlook. It said that given TMHD’s recent acquisition of London-based Kiln Ltd., the firm is “challenged to promptly consolidate the acquired companies into the group and establish group-wide management and risk management systems.

If TMHD’s overseas business progresses as planned, S&P said the firm could be due for an upgrade.

Philadelphia Consolidated has 47 offices and approximately 1,400 employees across the United States. The companies said the transaction would combine Tokio Marine's financial strength and international market knowledge with Philadelphia Consolidated’s product development capabilities and multichannel distribution expertise.

Shuzo Sumi, president of Tokio Marine, said in a statement, "Expansion of revenue and profits from international business is the driving force of Tokio Marine's mid- to long-term growth strategy. The acquisition of Philadelphia Consolidated is consistent with our aspirations of expanding globally and realizing a well-balanced business portfolio.”

He called Philadelphia Consolidated “an excellent strategic fit for us.”

“When opportunities to acquire a premier organization arise, the best response is to act," Mr. Sumi said.

James J. Maguire, Philadelphia Consolidated’s chairman, said, "I founded this company in 1962. This is a great opportunity for us to take the company to the next level, and as a demonstration of our commitment, the executive management team and I will be making a substantial investment in TMHD's stock promptly after closing of the transaction, and I will become a member of the International Strategic Committee of Tokio Marine.”

James J. Maguire Jr., Philadelphia Consolidated’s chief executive officer, said his company’s management is “committed to the successful growth of the business and delivering a performance which will continue our superior level of achievement.”

“Joining the Tokio Marine Group with its international reach will fuel the next stage of our growth and will provide numerous benefits for our customers, brokers, agents and employees.”

The Pennsylvania firm will provide a platform for Tokio Marine, while Tokio Marine's “credit quality and overall financial strength will open up additional avenues of expansion, further enabling the combined company to generate enhanced returns," he said.

Mr. Sumi said the firms believe “we share common fundamental values and a business philosophy, and we look forward to a long and successful partnership."

The companies announced the profits and losses of Philadelphia Consolidated will be consolidated into TMHD's financial statements from fiscal year 2009 and will deliver greater earnings consistency throughout the insurance pricing cycle.

The boards of directors of both companies have unanimously approved the transaction and key family shareholders, representing approximately 18 percent of Philadelphia Consolidated's outstanding shares, have agreed to vote in favor of the transaction.

The acquisition is subject to the approval of Philadelphia Consolidated shareholders and the approval of various regulatory authorities in Japan and the United States. The transaction is expected to close in the fourth quarter of 2008.

Fox-Pitt Kelton Cochran Caronia Waller acted as financial advisors to Tokio Marine for the transaction and Sullivan & Cromwell LLP provided external legal counsel. Merrill Lynch & Co. acted as financial advisors to Philadelphia Consolidated and WolfBlock LLP provided external legal counsel.

Florida Zero-Collateral Rule Moves Ahead

Foreign reinsurers with triple-A ratings from two rating firms would not have to post collateral under a new Florida Office of Insurance Regulation published Friday.

Florida and New York, in advance of action by the National Association of Insurance Commissioners, have been moving ahead with new rules to alter longstanding collateral requirements for reinsurers.

Ed Domansky, a spokesman for the OIR, commented via e-mail that the next step in the process will be a state cabinet meeting on the proposed rule, for which no date has been set.

In New York, Joe Fritsch, director of insurance accounting policy, said recently that his state insurance department had done an outreach to the industry concerning revisions in collateral requirements and had received a lot of responses.

He said the responses have been reviewed and changes have been made to the proposed rule change, and that all industry responses will get an answer. He said the department hopes to have its regulation done by end of summer.

The New York changes, he said, will be very consistent with the NAIC collateral reform.

In Florida, the new rule would eliminate collateral requirements for reinsurers with surplus in excess of $100 million and a secure financial strength rating of triple-A from S&P, Moody’s, Fitch or A.M. Best.

Reinsurers with less than a top rating would have to post collateral, with the percentage increasing for each notch they were rated below triple-A.

The Florida rule would apply only to property-casualty insurance.

Among other sections of the regulation is a requirement that reinsurers would have to:

• Document that they submit to the jurisdiction of U.S. courts.
• Have an agent for service of process in Florida.
• Agree to post 100 percent collateral for their Florida liabilities if the reinsurer resists enforcement of a valid and final judgment from a U.S. court.

A Hurricane Threat For Texas

Three tropical storms were reported over the weekend and forecasters predicted that one of them could hit the U.S. mainland later this week.

Storms Cristobal and Dolly formed in the Atlantic, while Hurricane Fausto originated in the Pacific.

The National Weather Service said Tropical Storm Dolly may reach hurricane status sometime late tomorrow or early Wednesday with sustained wind above 75 mph.

A hurricane watch is currently in effect from Rio San Fernando, Mexico, across the border to Port O’Connor, Texas.

A tropical storm warning was issued for the Yucatan Peninsula of Mexico and discontinued this afternoon.

Tropical Storm Cristobal came within 30 miles of the North Carolina coastline near Cape Hatteras before proceeding northeast and is expected to proceed in that direction off the U.S. coast for the rest of the week. The National Weather Service said the storm is expected to begin breaking up late tomorrow. Winds reached maximum sustained speeds of 65 mph today.

Minor flooding was reported from Cristobal, which the National Weather Service said would drop up to four inches of rain in some places.

Hurricane Fausto was not being called a threat to any of the American mainland as it speeds out in the Pacific with sustained winds up 80 mph. The storm was last located 475 miles west/southwest of Cabo San Lucas, Mexico and is expected to weaken in the coming days as it heads further west into the Pacific.

In a statement Neena Saith, catastrophe response manager with catastrophe modeler RMS, said, “While most forecast models suggest favorable environmental conditions for the storm [Dolly] to intensify over the Gulf of Mexico, there are wide discrepancies in its estimated strength, ranging from a weak tropical storm to a strong Category 1 hurricane.”

She said the timing between some models and the National Weather Service’s National Hurricane Center differs by 12 hours but all agree Dolly will become a hurricane. The National Hurricane Center said Dolly could become a hurricane by late tomorrow while others put it by early Wednesday.

The storm should reach landfall by Thursday, she said.

Ms. Saith went on to say that temperatures in the southern Gulf of Mexico are “sufficiently warm” to strengthen a storm. Dolly could drop up to 10 inches of rain across the Northern Yucatan and some evacuation has been ordered.

Lloyd’s Well Positioned For Soft Cycle, Moody’s Says

Increased central assets and other factors have all enhanced the minimum security offered by Lloyd's of London for all syndicates, but a key component is underwriting discipline, Moody's Investors Service said in a new report.

The special comment—titled "Lloyd's of London: Better Positioned than in Previous Cycles; an Attractive and Effective Trading Platform”—finds that with the effective resolution of Equitas, the runoff arrangement for asbestos and environmental claims, and the introduction of enhanced controls since the last downturn, Lloyd's remains an attractive and effective trading platform.

According to the report, Lloyd’s global franchise, access to diversified business, the ability to trade using letters of credit and its reduced capital requirements, based on its partial mutuality, offset disadvantages such as the potential for additional costs due to mutuality, the need to improve efficiency and applicable U.K. tax rates.

"The market has benefited from the good trading conditions of recent years, benign loss experience and increasing central resources," Robert Smith, a Moody's vice-president/senior analyst and author of the report said in a statement.

Moody’s noted, “Aggregate market returns on average equity for 2007 and 2006 have been 29 percent and 31 percent, respectively, with the five-year return on average equity to 2007 of 19 percent.”

Mr. Smith told National Underwriter that a key focus at the moment, with the market declining as it is, is underwriting discipline.

Lloyd's, Moody’s said, is still awaiting the ultimate test of its newly emplaced procedures and revised membership profile in an insurance downturn, with management of the underwriting cycle crucial over the next few years.

“Essentially, we’re looking at the FPD [Franchise Performance Directorate] having the first chance to confirm their effectiveness in enforcing underwriting discipline in a downturn,” said Mr. Smith.

He explained that the FPD was set up in 2003 to “ensure that Lloyd’s didn’t go through a period as they had done in the previous down cycle in recording significant losses,” which happened between 1998 and 2001.

“That’s what the Franchise Performance Directorate was set up to counteract, and the market’s been in an upturn since, following a period that had culminated in Lloyd's recording a loss of ₤3.1 billion ($6.002 billion), including World Trade Center losses, on an annually accounted basis in 2001,” he said.

Moody's said Lloyd's is better positioned than in previous cycles prior to an insurance downturn due to increased central resources and the significantly improved controls introduced in recent years.

State Farm Fla. Seeks 47.1% Home Rate Increase

State Farm Florida, which last year cut its home insurance rates by 9 percent, filed a request with regulators yesterday for a 47.1 percent increase.

The company, which is currently not writing new home insurance business in the state, said it sought an increase from the State Office of Insurance Regulation to “cover the expected costs of loss and operating expenses”

Edward Domansky, speaking for the OIR, said because the request was for more than 15 percent, it automatically would be the subject of a hearing, which will be held Aug. 12 in Tallahassee.

He said staff actuaries and analysts were already doing a thorough review of the filing to make sure it complied with state regulations, and to ensure the rates sought are not “excessive, inadequate or unfairly discriminatory.”

A few weeks ago, Farm Bureau requested a 28.4 percent rate hike that is due for a July 30 hearing.

Last year, an Allstate request for rate boosts up to 41.9 percent were put on hold after the company refused a regulatory request for documents, arguing it involved disclosing trade secrets.

A court battle ended with a ruling in OIR’s favor, and the matter will now be the subject of a Sept. 15 proceeding before the Florida Division of Administrative Hearing that will examine whether Allstate falsely certified its September rate filing and falsely asserted trade secrets.

Michael Grimes, a spokesman for State Farm, said in 2006 the company sought a 52 percent rate increase, which was eventually halved.

“While this rate increase poses a difficult situation for our customers and our company, it is the only responsible choice. We must stabilize State Farm Florida’s financial condition in order to pay our customers’ claims, particularly those due to catastrophic events such as hurricanes,” he said.

According to a State Farm briefing paper, at current rate levels, State Farm Florida “will soon be unable to cover expected costs of loss and operating expenses.”

Fitch: 2007 Worst Underwriting Year For Mortgage Insurers

A rating firm reported today that 2007 will probably add up as one of the worst underwriting years in the modern history of the U.S. mortgage industry.

Fitch Ratings, in an update to its June 2007 finding “Across the Board Delinquencies Are Up,” said the mortgage insurance industry, despite steps to improve business prospects, is not over its troubles and they may, in fact, get worse before they improve.

Its report concluded that the mortgage insurance industry “will continue to post significant losses well into 2009.”

The firm’s examination of mortgage insurer delinquencies uses data and analysis that extends mortgage insurance origination and performance trends with the benefit of a further year of loan-level data.

Fitch said for a number of key mortgage insurers last year was a year of rapid growth, and this 2007 vintage will increasingly account for losses in 2008 and 2009 that will stress the mortgage insurers' balance sheets over the intermediate term.

“The mortgage insurance industry underestimated both the scope and severity of the decline in residential mortgage markets that became increasingly acute in 2007.

“Initial industry optimism over increased demand and better premiums in early 2007 reversed over the second half of the year, and by the early fourth quarter the industry was significantly tightening underwriting guidelines to limit damage from ongoing poor mortgage origination standards and the prospect of substantial and widespread housing price declines,” the report said.

But industry changes did not go into complete effect until this year and mortgage insurers are now burdened with a large 2007 vintage book of underperforming business,” Fitch found.

Today's Fitch Special Report, “Delinquencies and Losses Are Up,” is now available on www.fitchratings.com under the following page headers: Financial Institutions > Insurance > Special Reports.

Bank Says P-C Sector Can Weather Fannie/Freddie Exposures

Property-casualty insurance companies’ investment exposures to the financially-stressed Fannie Mae and Freddie Mac mortgage companies are large for some and manageable for most, according to Bank of America.

The bank’s equity research arm said 20 U.S. p-c companies it analyzed have a total of approximately $39 billion invested in securities issued by Fannie Mae and Freddie Mac, of which $37 billion are asset-backed or other debt securities and $2 billion are preferred stock.

It found that the Fannie/Freddie exposures for Horace Mann, W.R. Berkley, Hanover Insurance, ACE, and Selective each represent over 20 percent of their common equity.

But the analysts said those higher exposures do not automatically translate into losses. Riskier preferred stocks represented 7 percent of the common equity of W.R. Berkley, 3 percent for CNA, 2.5 percent for Hartford, 1.3 percent for Cincinnati Financial, and 0.7 percent for American International Group.

Bank of America found exposures for large-cap names are 12-to-17 percent of their common equity. It said for each of the other large-cap insurers (AIG, Allstate, Chubb, The Hartford and Travelers), Fannie Mae-issued securities represent approximately 7-to-9 percent of the companies’ common equity, while Freddie Mac-issued securities represent 5-to-9 percent.

The analysts said that in their view the p-c sector has seen intensified pricing competition across most business lines, but a generally favorable loss-cost environment is leading to continued profitable margins and return on equities.

In personal lines, the competition was found to have increased significantly, putting greater pressure on smaller companies.

Overall, the bank said that the p-c sector’s investments in securities issued by Fannie Mae and Freddie Mac will not ultimately lead to significant write-downs. However, recent pressure for the entities to raise additional capital and concerns about a failure by Fannie and Freddie may lead to spread-widening and mark-to-market losses, the bank added.

If the U.S. government were to assume the liabilities of these companies, the analysts said, one could see some positive marks.

They tabbed the asset categories most at risk as the common and preferred stock, noting that the exposure to common stock is minimal.

For some p-c companies, the amount invested in the debt securities backed by these entities is a substantial proportion of common equity, the analysts report said.

Despite Price Drops, P-C Sector Looks Strong To Conning

The property-casualty insurance industry is in strong financial condition, and it should be able to withstand the current drop in prices and a forecast decline in premium growth, according to a research firm report.

Hartford-based Conning Research, in its latest “Property-Casualty Industry Forecast,” said the pricing outlook for the next three years, ­through 2010, ­ is generally soft for the industry as a whole.

Conning’s report projects a decline in premiums of 0.5 percent for 2008, compared with growth of 0.2 percent for 2007. Premium growth will be 2 percent in 2009, and 3.4 percent in 2010, the firm forecast.

“We project continued deterioration in underwriting margins and implied return on equity,” said Conning analyst Clint Harris.

However, Stephan Christiansen, Conning’s director of research, said that looking beyond 2008, “our forecast contains a somewhat more optimistic view of 2009 and 2010 because we anticipate a modest rebound in the economy and also a moderating competitive environment.

“We project a return to net premium rate increases beginning in some lines as early as 2009. In fact, we are already beginning to observe some insurers taking corrective actions in their markets because of poor results,” he concluded in a statement.

Conning said the largest year-over-year increase in combined ratio is forecast for 2008 at 100.5--up five points from 95.5 last year.

While this reflects a return to normal catastrophe losses, much of this deterioration is self-inflicted, as premium prices and premium rate adequacy continue to fall, Conning said.

The firm predicted a 7.7 percent return on equity for the industry this year and 7.3 percent for 2009.

According to the report, researchers are somewhat optimistic about industry results for 2009 and 2010, projecting “premium rate increases beginning in some lines.” Specifically mentioned is personal auto. Medical malpractice was foreseen as continuing to experience “record profitability.”

Conning said its study--“Property-Casualty Forecast & Analysis”--identifies the key drivers of the industry and forecasts industry growth and performance for 2007-2010.

For more information, see http://www.conningresearch.com/.

Employers Feel Recession Will Not Impact Comp Insurance Claims

Senior level financial executives in a survey said the majority of employers believe their workers’ compensation and general liability claims will be unaffected by a looming recession.

The findings were the result of a poll of 255 financial executives conducted by Guideline, a national research firm, and sponsored by Wausau, Wis.-based Wausau Insurance for its fourth annual Multiline Productivity Poll.

The survey found that 62 percent of the executives feel a recession would create no significant change in workers’ comp claims and 64 percent believe their general liability claims would not change significantly.

Twenty-three percent said they believe workers’ comp claims would increase because of the recession, and 21 percent believe their general liability would rise.

On both questions, 6 percent said insurance claims would decrease and 9 percent said they did not know.

“At a time when media reports raise recession concerns, we believe most employers are maintaining a level-headed risk management outlook,” Susan Doyle, president and chief operating officer for Wausau Insurance, in a statement.

On the workers’ comp side, 71 percent of those surveyed employing 101-500 employees believe there would be no significant change in claims. However, the picture was a little different for larger companies with 5,001-plus employees where 37 percent said they would see no significant change, but 35 percent said they believe their claims would increase.

On the general liability side, broken down by number of employees, the vast majority of respondents—more than 68 percent—believe there would be no significant change in claims.

However, for companies with more than 5,001 employees, the respondents were evenly split at 37 percent saying either there would be no change or an increase in claims.

When asked what is the most important factor when weighing quotes for their property-casualty insurance, 48 percent said it was the total cost of risk while 52 percent said it was the direct cost. In 2007, the results were reversed with 52 percent saying total cost of risk was more important and 48 putting the emphasis on direct cost.

When it comes to being counseled by their agent or broker, 66 percent of the respondents said they are told to consider the total cost of risk in addition to the direct cost of the premium and deductibles for the p-c insurance. This is an increase from last year’s 61 percent.

On the issue of claims expense, 65 percent of the respondents said they save at least $2 or more in lost productivity expenses for every $1 saved by reducing claim expenses for workers compensation.

The findings were generally the same for general liability claims, commercial auto and commercial property where more than 50 percent of the respondents said a $1 reduction in claim expense resulted in savings of at least $2 or more. The findings were generally consistent with the previous two surveys.

The survey also indicates that in 2008 less companies were integrating multiple lines of insurance with one carrier than in 2007—60 percent in 2008 as opposed to 80 percent in 2007. However, most (75 percent) said they achieved significant productivity savings by integrating multiple lines, at least two lines.

Twenty-seven percent of respondents said workers’ comp paired with general liability and 33 percent of respondents said general liability paired with property insurance produced the most productivity savings. Workers’ comp and property insurance came in third with 21 percent of respondents saying the pairing produced the most savings.

Eighty percent of those surveyed said they would rather have one multiline underwriting team as opposed to 20 percent who said they preferred separate teams underwriting each line of business.

House Okays Funds For Building Code Enforcement

The House passed legislation yesterday creating a national program that provides awards to local governments for building code administration and enforcement.

The legislation introduced by Rep. Dennis Moore, D-Kan., the Community Building Code Administration Grant Act (H.R. 4461), is designed to provide funding for local and state authorities to enact and enforce strong building codes. It was approved by voice vote.

The bill creates a five-year program that authorizes $100 million to go to local governments over that period.

The legislation caps awards at $1 million per recipient, requires recipient communities to match a portion of funds received, and outlines eligible uses of funds and selection criteria, with preference offered to governments in financial distress.

It also allows local and state authority to maintain and enforce their building codes.

Jimi Grande, vice president for federal and political affairs at the National Association of Mutual Insurance Companies, said the Building Codes Coalition, a group of insurance trade groups which NAMIC helped form, had worked to get the bill through the House.

He added, “Stronger building codes are vital in the effort to protect lives, homes and businesses from the devastating effects of natural disasters.”

Mr. Grande said the money provided through the legislation can also lead to overall savings for American taxpayers.

“Research by the National Institute of Building Sciences indicates that every $1 spent on mitigation at the federal level saves taxpayers $4 in disaster assistance,” he said.

Marc Racicot, president of the American Insurance Association, added that “the evidence is clear and overwhelming that our nation can greatly reduce the disruption of lives and economic losses with the adoption and enforcement of building codes.”

House Panel Okays 3 Insurance Measures

A House Financial Services Subcommittee approved three bills yesterday aimed at improving the insurance regulatory system and increasing the availability of coverage through risk retention groups.

Members of the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises approved the measures by a voice vote. Those passed included the Insurance Information Act, or HR 5840; the National Association of Registered Agents and Brokers Reform Act, also known as HR 5611; and the Increasing Insurance Coverage Options for Consumers Act, or HR 5792.

The OII bill was introduced by the subcommittee’s chairman, Rep. Paul Kanjorski, D-Penn., who noted that it “promoted an idea that I have long held, that the federal government should have an in-house expert on insurance issues.”

Rep. Kanjorski offered an amendment making changes designed to assuage the concerns voiced by some critics of the bill. The amendment created a specific role for the National Conference of Insurance Legislators on the OII’s advisory board, and language giving the OII authority to preempt state laws was clarified to apply, he said, under “very narrow circumstances and with a very detailed procedure.”

Rep. Chris Shays, R-Conn., said the bill struck a “careful balance” between those who believe in federal oversight and those who would keep insurance regulated by the states.

In touching on the issues of state versus federal regulation, the bill drew a mixed reaction from industry groups.

Marc Racicot, president of the American Insurance Association, said the panel’s approval “is a recognition that an immediate need exists for federal expertise regarding the important national and international insurance trends in today’s rapidly changing and globalized marketplace.”

However, David Sampson, president of the Property Casualty Insurers Association of America (PCI), expressed concern regarding the preemption authority the OII would have, although he noted that the PCI has not taken a formal position for or against the bill.

“We advocate that any preemption of state laws, if necessary, be accomplished by legislative action and not simply left to be developed through an administrative procedure,” Mr. Sampson said.

“The legislative process is the most appropriate way of answering public policy questions, such as how to harmonize this proposal with existing laws like the McCarran-Ferguson Act,” he added.

The second bill approved, which revived the NARAB concept for ensuring reciprocal licensing of agents originally conceived of in the Gramm-Leach-Bliley act nearly a decade ago, was introduced by Rep. David Scott, D-Ga., and Geoff Davis, R-Ky., and both noted that it had drawn significant support from both sides of the aisle, as well as backing from state insurance regulators and agents’ groups.

Rep. Scott noted that the bill had been changed to give state regulators a majority, albeit a slim one, on the board tasked with overseeing NARAB, and also noted that the bill was clarified to ensure that state revenues from licensing fees would not be reduced under the bill.

Rep. Davis said that his experience showed the need for the legislation when as a small-business owner he tried to find a single policy covering several employees across multiple states. “Nearly ten years after Gramm-Leach-Bliley, we’re still in need of progress on this issue,” he said.

Rep. Jackie Speier, D-Calif., voiced some concern regarding the bill, noting that nonresident producers “are not going to be prepared” for her state’s system of consumer protection without being required to study it and be tested beforehand.

Agents groups have supported the measure, and Rep. Kanjorski praised their coming together with regulators to help craft the legislation.

Robert Rusbuldt, president and chief executive officer of the Independent Insurance Agents and Brokers of America, said the NARAB bill was an example of how “targeted reforms” could effectively resolve problems facing the insurance marketplace.

“The most serious regulatory challenges facing our members are the redundant, costly and contradictory requirements that arise when they seek licenses on a multistate basis,” he said. “The NARAB Reform Act solves these problems through targeted reform and modernization of nonresident agent and broker licensing without affecting resident licensing.”

The Council of Insurance Agents and Brokers offered its support for the NARAB bill in a letter to committee members signed by the CIAB leadership.

“When the original NARAB was enacted as a part of Gramm-Leach-Bliley in 2000, the first important steps were implemented to achieve some semblance of reciprocity among varying states,” the CIAB said in its letter.

“But the pace of interstate transactions has far outstripped the pace of reform, and we now need the full implementation of an interstate agent/broker licensing clearinghouse with high standards of professionalism for producers, which will better serve the needs of consumers and ultimately lower the costs of insurance.”

In addition, the panel gave its approval to H.R. 5792, which would expand the Liability Risk Retention Act to allow risk retention groups to offer commercial property-casualty coverage. RRGs are currently limited to providing liability coverage.

The bill, according to Rep. Dennis Moore., D-Kan., who introduced it, would have a “modest but important effect on increasing capacity” under the Risk Retention Act.

In addition, a new provision was added that would require the Government Accountability Office (GAO) to examine whether there is unlawful interference in the operation of RRGs by regulators from states outside the state where they are based.

Dick Goff, president of the Self-Insurance Institute of America Inc., praised the addition, saying that the “single regulator” structure envisioned under the original legislation has been compromised by the states.

“These actions have obviously had a negative impact within the RRG marketplace,” he said.

However, the National Association of Mutual Insurance Companies expressed some concerns that the bill could allow for too great an expansion for RRGs, creating what it sees as an unfair competitive environment.

“Admitted carriers are subject to the myriad of state regulations,” said Jimi Grande, NAMIC’s vice president of government and political affairs. “Allowing RRGs, which enjoy a lesser degree of regulation, to provide additional coverages that are readily available in the marketplace would provide a competitive advantage over traditional, conventionally formed insurers.”

In speaking on the bill, Rep. Moore said that it was intended only to allow RRGs to offer coverage for commercial properties, and that the language used in the legislation had been clarified to indicate as much.

U.S. Natural Catastrophe Events Approaching Record Year

This year may prove to be a record-setting one in terms of insurance losses as natural catastrophe events hit numbers not seen in decades, but that would not necessarily translate into a market turning event, insurance representatives said.

During a Web seminar sponsored by Munich Re today, executives from the insurer and Robert P. Hartwig, president and chief economist for the New York-based Insurance Information Institute, discussed the insurance losses suffered from natural catastrophes so far this year and their implications for the industry.

Carl Hedde, head of risk accumulation for Munich Re America, said that using figures gathered by the insurer, within the United States the number of incidents and insurance losses the industry is seeing is reaching record proportions.

For the first half of this year, the number of incidents is exceeding all of the past number of events going back to 1980 with 109 natural disasters so far this year. Last year was the next closest with more than 90 events.

In terms of insured losses, Mr. Hedde pointed out that thunderstorm losses stand at $8.1 billion for the first half of this year, exceeding all previous years going back to 1980.

He warned that while wildfire losses at this point stand at an estimated $30 million, a relatively low figure compared to past years, most of the losses from wildfires occur during the third and fourth quarters.

Peter Hoppe, head of GeoRisk Research and Corporate Climate Center for Munich Re, noted that worldwide “we are on the upper edge of frequency in the past 29 years.”

While the United States and Europe have seen record-setting natural catastrophe events, Asia has experienced the largest devastating natural events from storms and earthquakes.

Mr. Hoppe said winter storms in China during January and February produced the highest insured losses so far this year at $1.6 billion, followed by winter storm Emma in Europe producing $1.5 billion in losses and February’s severe storms and tornados in the United States rounding out the top three at $900 million.

Global climate change is contributing to this increase in extreme atmospheric events, he said, and human activity is adding to these natural perils.

Mr. Hartwig noted that while insured losses are well beyond the past two years, the industry is still a long way away from the losses it experienced in 2005 from Hurricanes Katrina and Rita.

He said whatever losses lie ahead, the industry remains in a very good financial position to withstand severe losses with $522 billion in policyholder surplus.

A worrisome development is the increase in insured value along the Atlantic and Gulf Coasts that has risen from $7.2 trillion in 2004 to $8.9 trillion last year.

“These are very significant sums,” Mr. Hartwig noted.

When asked about whether the current loss trends could halt the decline in insurance rates, Mr. Hartwig said “it is too soon to speculate.” He indicated that no matter how significant the weather-related catastrophe losses could be, it probably would not result in a marketwide turn from soft pricing.

Berkshire Hathaway To Buy Fla. Bonds After A Cat

If the Florida Hurricane Catastrophe Fund needs to float an emergency bond issue to pay for major storm losses, Berkshire Hathaway has agreed to buy up to $4 billion worth, a state official said.

Dennis MacKee, a spokesman for the State Board of Administration, said that through the deal “we are essentially trying to prepare ourselves for a difficult hurricane season.”

The SBA with input from a nine-member council directs the Florida Hurricane Catastrophe Fund.

Under the deal with the Omaha, Neb.-based firm, Florida will pay Berkshire Hathaway $224 million, which will be taken from the Cat Fund’s reserves, in exchange for a guarantee that the insurer will purchase as much as $4 billion in tax exempt 30-year bonds at 6.5 percent. The agreement also includes a requirement that the state’s losses exceed $25 billion before the bond obligation takes effect.

The Florida Hurricane Catastrophe Fund provides coverage for insurers at low rates, and funds those payments via bond offerings.

Spurring the need for a deal, Mr. MacKee said, was not a concern about the Cat Fund and its system, but about the market in which the bonds would be offered.

In the event of a major storm or difficult season, Mr. MacKee noted that Florida wouldn’t be the only state offering bonds to recoup losses, and he said the state wanted to ensure that the Cat Fund would be able to provide swift payments.

Without reaching the arrangement with Berkshire Hathaway, he said, “you really don’t know how quickly you could turn it around, get the funding and do the reimbursement.” The state could have purchased reinsurance for itself, he noted, but added “we saw it as a liquidity issue more than a transfer of risk issue.”

Mr. MacKee acknowledged that “there has been some debate” about the arrangement, given that the state is only paying to ensure that Berkshire will assume its obligation and that “it’s not cheap.” The odds of a $25 billion event, he added, are also “fairly narrow,” but the state opted for what it felt was the safer strategy in making the arrangement.

“The decision was to be prepared,” he said.

Energy Saving Seen Helping Push For Stronger Homes

The recent movement among consumers to pursue energy savings may dovetail with insurance industry initiatives to convince homeowners to properly prepare their dwellings for disasters, an expert in the field said.

Julie Rochman, president and chief executive officer of the Institute for Business and Home Safety (IBHS), said that many home improvements people are considering to save on energy costs will also help to protect against natural disasters.

She noted that properly mounted double-pane windows that seal air in and out to help with heating costs also help protect homes against high winds. The same is true for other improvements such as doors that close securely.

Ms. Rochman said, “There’s a good opportunity for us on the cost side to leverage conversations that are already happening with consumers.”

If consumers are told, “‘You should spend your dollars on X,’ and the green side of them is saying, ‘We should spend the dollars on Y,’ we can say, ‘You know what, you can kill two birds with one stone here. You can take that same dollar and not only save money on energy costs but also make your home more able to withstand natural disasters.’”

Ms. Rochman said research conducted by IBHS showed that consumers are more willing to spend dollars on improvements “if they think they’re getting two benefits rather than one.”

In general, for protecting a home against disasters, Ms. Rochman recommended that homeowners become familiar with the natural catastrophe risks in their areas and prepare adequately for them.

She said the IBHS has a Web site, www.disastersafety.org, that consumers can log onto to assess risks in their area. Ms. Rochman said homeowners enter their ZIP code at the Web site, and then they can see what perils impact their part of the world.

Speaking broadly about the nation’s response to disasters, Ms. Rochman said the United States remains “very reactive” and committed to “picking up the pieces and putting them back in the same places in the same way.”

She said, “Property rights in this country are very sacrosanct,” noting that people can essentially build what they want, where they want, and how they want.

Ms. Rochman added that while the U.S. does not spend a lot of time dealing with the issue of personal responsibility regarding where people build, the country does spend a lot of government and insurance dollars replacing lost property that is built and rebuilt in prime disaster zones.

Ms. Rochman attributed this mindset in part to what she called “weather amnesia,” where people quickly forget about catastrophes that have previously struck an area. “We know how to build better,” she said. “In many cases we just choose not to, and that’s a mistake.”

“Cost is a huge, huge issue,” she said, adding that areas such as Florida and South Carolina have tried to address this issue by offering tax incentives to people who take steps to harden homes against disasters.

Speaking to the level of risks faced by the nation with respect to catastrophes, Ms. Rochman pointed to events over this past year.

She said she has been at IBHS for over six months. “When I got here, literally as I was first walking the halls of IBHS, Southern California was on fire.”

Moving into winter, she noted there had been record winter storms. “We’ve had early flooding, we’ve had tornadoes, we’ve had more flooding, and we’ve had earthquakes in weird places where we don’t normally have earthquakes. I’m waiting for pestilence, and for frogs to come raining down from the sky.”

House Panel Set To Move On Insurance Office Bill

The Capital Markets Subcommittee of the House Financial Services Committee has tentatively scheduled action for July 9 on legislation that would create an Office of Insurance Information within the Treasury Department.

The subcommittee is also weighing whether to process bills at the same time that would allow risk retention groups to sell property insurance and reestablish the National Association of Registered Agents and Brokers, according to several insurance industry lobbyists.

Congress is taking its July 4th recess this week, but will resume work Monday. Because this is a presidential election year, Congress is expected to take off the entire month of August, hold a brief session in September, and not resume work until after the November election.

It is unclear at this time whether the insurance legislation taken up by the subcommittee will then be taken up by the full committee, or go directly to the House floor.

Companion legislation in the Senate for any of the bills that could be taken up next week does not exist at this time.

The Insurance Information Act, or H.R. 5840, would establish an Insurance Information Office within the Treasury Department to provide needed expertise to the federal government on insurance issues and work with the U.S. Trade Representatives in dealing with other countries.

It was introduced in the House April 14 by Rep. Paul Kanjorski, D-Pa., chairman of the Capital Markets Subcommittee. A substitute to the bill as an amendment is expected to be introduced.

The substitute is expected to clarify limits to the OII”s authority to preempt state regulation, as well as mandate that the National Association of Insurance Commissioners’ data and resources be used by OII staff.

The amendment is also expected to add a representative of the Federal Trade Commission to the advisory board that would be established to help the OII office do its work.

Officials of the National Association of Mutual Insurance Companies confirmed that the markup of the OII bill had been tentatively scheduled by the committee.

But NAMIC spokesperson Nancy Grover said her organization wants to see the final draft of the legislation before determining whether it can support it.

“We've been working with Chairman Kanjorski's office, and we appreciate the hard work by members of the subcommittee to address our concerns about the bill,” Ms. Grover said.

“Our remaining concerns include the collection of data—such as annual financial statements and market conduct information—and the preemptive authority of the office,” she added.

The Increasing Insurance Coverage Options for Consumers Act of 2008, H.R. 5792, would allow risk retention groups to offer property insurance. The groups are currently limited to liability coverage. It would also beef up corporate governance mandates for risk retention groups.

The National Association of Registered Agents and Brokers Reform Act of 2008, H.R. 5611, would establish producer licensing on a national basis. The bill provides for one-stop nonresident licensing by establishing NARAB as a private, nonprofit entity managed by a board composed of state insurance regulators and marketplace representatives.

The bill does not set NARAB membership standards—such as for personal qualifications, education, training and experience—leaving that to the NARAB board, which has to “consider” the highest standards in place in the states.

P-C Reserves Seen Strong With Some Deterioration

While property-casualty reserves remained strong in 2007, signs have pointed to some deterioration in the industry’s reserve position, according to a new Conning Research and Consulting Inc. study.

Their report, “Property-Casualty Loss Reserves: Thinner, But is the Tail Getting Fatter?” states that overall industry loss reserve adequacy remains positive, and even improved slightly, but it adds that “with a closer look at reserves aged more than 10 years, we see a need for additional strengthening in some lines of business, particularly in the reserves carried for those older years.”

For core reserves in the most recent 10 accident years, the study reports that reserves “appear redundant by about 8 percent in 2007,” which is up from 6.4 percent in 2006.

While lines such as commercial auto, medical malpractice and personal lines showed “strong evidence for redundancy,” according to the study, deterioration of reserves emerged in workers’ compensation and commercial peril.

Much of the redundancy, says the study, is found in accident years from 2004-2007 despite “considerable releases in reserves over the past two years, primarily from these most recent accident years.” The strong redundancy could be connected to strong pricing dating back to 2003, according to the study.

But the study says that emergence of adverse development for accident years more than 10 years old, called the “tail,” is “persistent.” The study states, “The weight of loss reserves in older years is definitely increasing as a percentage of the total.”

Accident years five years and older, adds the study, made up more than 27 percent of all reserves in 2007, compared to 24 percent in 2002-2004.

In general, the study notes that rate increases and economic conditions have provided the necessary funds for reserve strengthening in recent years. “Over the past five years, premiums have grown significantly faster than losses in most lines of business,” Conning found.

For the last two years, though, the report points out that premium growth has slowed. But over this same period the growth in paid losses has also slowed, due in part to decreases in frequency and possibly increases in deductibles and other loss retention programs.

“As a result,” notes the study, “the loss reserve position has remained strong, and even improved in some lines of business from our previous review.”

The report explains that insurers are usually able to strengthen loss reserves during profitable parts of the underwriting cycle. When pricing erodes, it observes, reserve releases are used to support earnings for a time.

“The industry has been releasing reserves and may have the opportunity to release some more,” the study says. “However, with adverse development in older years and softening pricing and decreasing redundancy in recent years, this part of the cycle may be coming to an end.”

Moody’s Downgrades Two Mortgage Carriers

Moody’s Investors Service has downgraded mortgage insurers Triad Guaranty Insurance Corp. and Republic Mortgage Insurance Company, concluding that the financial strength of both is questionable.

The rating service late Friday reduced the insurance financial strength of Triad to “B1” from “Baa3” and downgraded Republic to “A1” from “Aa3.”

Moody’s said Triad is entering into runoff as of July 15 after Freddie Mac suspended the carrier from writing business as an approved mortgage insurer.

The insurer’s “insured portfolio has deteriorated meaningfully,” Moody’s said, and its capital ratio “is currently in breach of regulatory limits.”

Its negative rating outlook “reflects the potential for further adverse developments,” the rating service added.

Moody’s said its action on Republic reflected the company’s deterioration in capital adequacy and medium-term profitability prospects.

While demand for new business has improved, the rating service said of Republic that it is concerned with the exposures that originated prior to 2008 that have “eroded capitalization, and those exposures remain vulnerable to further economic deterioration.” The outlook on the company is negative.

While it is concerned with the deterioration in the insured portfolio, the insurer’s “risk to capital ratio is currently well within regulatory limits.” It also said its parent company, Old Republic International Corp., “has both the ability and the willingness to increase RMIC’s capital resources to levels consistent with single-A metrics in the near term.

Mortgage and guaranty insurers have been rocked by the subprime mortgage crisis that has produced deep losses for the insurers who insured the loans. Many of the larger affected insurers such as Ambac and MBIA have countered downgrade actions by saying they have the capital capacity to withstand the losses.