P-C Prices Still Falling For Start Of 2009, With No Sharp Turnaround Expected

While there has been much talk about how the commercial insurance market is finally poised to harden, there is little evidence of any turnaround in the latest “Market Barometer” survey, which indicated that rates for January declined an average of 9 percent—the same level as the in last two months of 2008.

While the composite rate index level seen in the latest pricing barometer signals that the depth of price-cutting may have bottomed out, the market as a whole has certainly not reversed direction, observed Richard Kerr, chief executive officer of MarketScout, the Dallas-based electronic insurance exchange that puts together the monthly survey.

“Insurance executives are forecasting and closely monitoring the prospects for much needed rate increases in 2009,” he noted. But Mr. Kerr said the recession presents a daunting challenge, with the health of the U.S. and world economy playing a large role in the fortunes of insurance companies and brokers.

“Lower payrolls and receipts are resulting in lower premiums and severe pressure on expense rates,” he said. “Insurers and brokers are faced with diminished premium bases before they even consider the terms of renewal or rates.”

Mr. Kerr noted that if a firm’s exposure base is down 20 percent, and it renews 90 percent of its customers, it only captures a true premium renewal rate of 72 percent.

“The resulting lower retention puts incredible pressure on new business initiatives in order to maintain premium volume, all while insureds are trying to save even greater amounts of money across the board,” he said.

As a result, he predicted, “more insureds will take bids in 2009, and insurance companies will be forced to participate in the process. While we expect upward movement in prices, we don’t expect dramatic swings in the near term.”

By coverage class, MarketScout reported that January rates declined on average by:

• 10 percent for businessowners policies.

• 9 percent for commercial property and general liability.

• 8 percent for commercial auto and crime.

• 7 percent for business interruption, umbrella/excess, workers’ compensation, professional liability, employment practices liability and fiduciary liability.

• 6 percent for inland marine and surety.

• 5 percent for directors and officers.

Reductions by account size were found to be sharpest for large accounts (from $250,001 to $1 million in premiums), which were down 10 percent. Medium-size accounts (from $25,001 to $250,000) were down 9 percent, while small accounts were down 8 percent.

By industry class, MarketScout found manufacturing and service industries to be down 10 percent; contracting, 9 percent; habitation, 8 percent; public entities, 7 percent; and transportation and energy, 5 percent.

Insurance Industry Advises Small Businesses Not to Skimp on Coverage

Insurance coverage is an expense that many small business owners might be tempted to cut back on or even forgo as they try to cut costs during the recession. They're making a bet that they won't need the coverage, but it's a bet they could lose.

Spring floods aren't too far off in the future, to be followed inevitably by tornadoes and the hurricane season. And there are the more mundane disasters that can also threaten a business -- fire, theft, power outages, even someone being injured on the premises.

Loretta Worters, vice president for communications of the Insurance Information Institute, a New York-based trade group, said insurance may seem like a lower financial priority for some small business owners right now.

"They're facing all these challenges today: rents are rising, financing hard to get,'' she said. "Things are daunting to them, but one thing they have to think of is the whole issue of being underinsured.''

An underinsured business doesn't have adequate coverage for disasters or incidents like fires, thefts or accidents. But even companies that aren't cutting back their coverage might be unwittingly uninsured. Worters noted that a business might have made improvements to its building or bought new equipment, and if an insurance policy isn't adjusted upward, payments could fall well short of the replacement costs.

At the same time, she noted, real estate values have fallen and so it might make sense for some companies to reduce coverage.

Still, an owner uneasy in this economy might decide to play the odds and either cancel a policy or cut it back too far. Or, make a mistake out of ignorance, by buying insurance to cover damage from forces such as wind, rain, hail and fire, and not checking to see what isn't covered. For example, damage from flooding or earthquakes isn't covered in such policies. That coverage has to be purchased separately.

Some owners might also decide against business interruption insurance, which is available in what's known as a business owner's policy, or BOP, which also includes property coverage. Business interruption insurance makes the coverage more expensive, but it can mean a company's survival when it can't operate because of a disaster; this type of policy covers a company's expenses and lost profits.

Many workers who have been downsized over the last year have decided to start businesses out of their homes, and many are likely to be underinsured because they mistakenly assume their homeowners coverage will protect them. The same can apply in the case of a vehicle used for both business and personal purposes.

Worters said some homeowners or standard auto policies may include a small amount of business coverage. For example, she said, someone who does freelance writing at home might not need an additional policy. But, the important thing is to check -- nobody wants to find out there is no coverage when a client coming to visit, trips over the family dog and falls.

And, Worters said, the additional coverage may come in the relatively inexpensive form of an endorsement to your homeowners' policy.

Owners of businesses in certain industries should also be aware of policies tailored to their line of work -- for example, restaurant owners might want to take out policies to cover food spoilage.

The Insurance Information Institute has information on its site, www.iii.org/individuals/business. It explains different kinds of general business coverage such as businessowners' policies and business interruption insurance. It also has sections describing the insurance needed by specific industries such as retailing, manufacturing, farming, food service and lodging.

The National Association of Insurance Commissioners, which represents state insurance officials, also has a Web site, called Insure U for Small Business at www.insureuonline.org/smallbusiness.

Information about flood insurance can be found at the federal Web site www.floodsmart.gov.

Business Income's Non-Coinsurance Options

Business Income Agreed Value

Business income agreed value suspends the coinsurance condition for 12 months. Qualifying for agreed value protection still requires the insured to complete the Business Income Report/Worksheet (CP 15 15) at the beginning of the policy period and every year thereafter. If an updated worksheet is not completed annually, the policy reverts back to a coinsurance form with all its applicable penalties. So this is not the best option if the insured and/or the agent are trying to avoid the worksheet.

"Agreed value" signifies that the insured and the underwriter agree up front on the amount of "insurable" business income subject to loss. The insured agrees to carry that pre-determined amount of coverage; in return the underwriter agrees to pay the entire business income loss up to that limit without the application or consideration of coinsurance or the actual business income (if the insured underestimated).

To clarify, the insured is not required to carry or limited to the 12-month business income amount calculated using the worksheet. The amount is and should be based on the estimated "period of restoration" and the percentage of a year that period represents. Calculating the "period of restoration" and ultimately the coinsurance is still necessary and was detailed in several earlier posts. All ISO-published coinsurance percentages are available for use with the agreed value option (50, 60, 70, 80, 90, 100 and 125%).

For an easy example, assume the insured estimated that a full year is required to return to "operational capability" and selects 100 percent coinsurance (estimated "period of restoration" / 12 = maximum coinsurance percentage) to account for the estimated time. Should the insured choose the business income agreed value option with 100 percent coinsurance, they are now committed to purchasing the full 12 month business income estimated amount ("J.1."). If the insured purchases any amount less than the required amount calculated, they are subject to a loss payment penalty.

The agreed value penalty is calculated exactly like the coinsurance penalty except that it has nothing to do a miscalculation of the actual business income during the coverage period. This penalty is assessed because the insured failed to purchase the amount of coverage they and the underwriter agreed would and should be in place. In essence, the insured is penalized for not meeting contractual requirements, whereas the traditional coinsurance penalty is assessed to assure the insured carries proper coverage and that the insured collects ample premium for the exposure.

An example of the difference between business income agreed value and traditional coinsurance is attached. For sake of the example, assume this insured is a manufacturing operation that underestimated the actual business income earned during the coverage period ("period of restoration") when completing the CP 15 15. All the necessary information for the calculation and comparison is found in the attachment.

Without the agreed value option the insured could have been out-of-pocket more than $61,000. How much greater would the uninsured amount have been had this been a much larger manufacturing entity? Hundreds of thousands of dollars could be left for the insured to pay.

Business income agreed value is a useful coinsurance-suspending option. Since the insured and the underwriter agree to the exposure and coverage amounts in advance, there is no question whether there is enough coverage at the time of the loss. Only a total shutdown exceeding the estimated maximum period of restoration will show the effects of any underestimation of the business income amount.

Activating this option increases the business income premium by about 10 percent compared to the traditional coinsurance coverage. However, business income agreed value has the lowest rate per $100 of protection when compared to the two remaining non-coinsurance options.

Monthly Limit of indemnity

This option to traditional coinsurance allows the insured to completely avoid coinsurance and sidestep the requirement of completing a business income report/worksheet (although that should no longer be an issue). There is no real up-front calculation associated with this option; the only calculation done is at the time of the loss, to decipher the maximum limit available during any one 30-day period.

Two decisions are required with this option: 1) the limit of coverage; and 2) the "monthly limit of indemnity" coverage fraction. No "formal" income calculations are done, so the limit is little more than a guess made by the insured. The second decision requires the insured to choose from among the three available "monthly limit" fractions: one-third (1/3), one-fourth (1/4) and one-sixth (1/6).

The monthly-limit fraction serves to cap the amount of coverage available in any 30-day period. The chosen amount of coverage is multiplied by the fraction to arrive at the maximum pay out during any 30-day period. For instance, if the insured purchases $300,000 of coverage, the maximum amount available in any 30-day period is:• 1/3 monthly limit = $100,000 maximum available for each 30 day period;• 1/4 monthly limit = $75,000 maximum available for each 30-day period; and• 1/6 monthly limit = $50,000 maximum available for each 30 day period.

One myth surrounding this option is the function of the denominator in claims settlement and payout. Some believe and teach that the denominator (the bottom number) limits the number of months the insured will get paid. That is, if the insured chooses 1/3 monthly limit of indemnity they will only be paid for three months of lost business income. That is fully and completely false, unless the limits are completely used in the first three months.

The denominator serves NO OTHER purpose than to limit the amount the insured can receive in any one 30 day period. Continuing with the above example, the insured choosing 1/3 monthly limit has up to $100,000 available for any 30-day period during the period of restoration." Business income loss payments will continue until the insured uses up the full $300,000 or returns to full "operational capability," whichever comes first. If it takes six months to use up the entire $300,000, that's how long the policy will pay.

Monthly limit of indemnity, contrary to its name, is actually a "non-indemnity" option; meaning that the amount of coverage has no real or known relationship to the insured's business income exposure or estimated "period of restoration." As such, the insured is entitled to receive the entire amount regardless of how long it takes. Again, the only two limitations are: 1) the monthly limit (as decided by the fraction); and 2) a return to "operational capability" before the limits are completely used.

If coverage is provided using the CP 00 30 (Business Income (and Extra Expense) Coverage Form), it is important to remember that the fraction does not apply to the extra expense coverage. However, the amount needed to cover any extra expense must be added to the business income limit purchased.

For example, if the insured wants $300,000 business income (BI) coverage and $120,000 extra expense (EE) coverage, he should purchase $420,000 in total protection. The maximum payout is limited to $420,000, but the amount available for extra expense in any one month is not limited by the fractional amount. If the 30-day BI amount exceeds the fractional limit, the entire extra expense loss is still paid. This continues until the total of both BI and EE losses reaches the limit purchased.

Click here for an example of monthly limit of indemnity loss settlement with extra expense coverage (using the CP 00 30). The example assumes $420,000 and 1/6 monthly limit of indemnity. Notice that the payout goes until the limit is used.

Maximum Period of Indemnity

The last and simplest of the non-coinsurance options, the maximum period of indemnity limits business income and extra expense payments to 120 days or until the limit is spent whichever occurs first. Like the monthly limit of indemnity, the amount of business income is little more than a guess.

This is a good option only if there is absolutely no question that the insured can return to operational capability within 120 days. Insureds that qualify might include those that:• Do not require any specialized facilities to operate and can run the business from practically any location. These insureds do not own the building and has quick access to leasable space; or• Can operate using other locations to absorb the production lost at the damaged facility (this is probably rare).

Maximum period of indemnity is a non-indemnity option. Like the monthly limit of indemnity option, the limit of coverage is not based on the actual exposure. Unlike the monthly limit option, coverage is limited to a specific number of days. If the insured does not use the entire limit during the 120 day period, the insured is simply out of luck (to some extent as they still had their business income exposure paid during the 120 days).

Of the three non-coinsurance options, this one carries the highest rate. Of course, the higher rate is somewhat offset by the lower limits likely purchased. This may not be the best option for the insured.

Finishing Up!

With the detailed discussion of the CP 15 15 in earlier posts, looking for a non-coinsurance option out of lack of understanding may not be necessary. However, if an insured is unsure of the amount of expected business income or is unwilling to provide the required accounting data, a non-coinsurance option may be the only way to cover the business income exposure.

Insureds need to understand the options, the costs involved and the limitations on coverage. The paragraphs above have provided a quick overview of the three options available. The next post details extra expense protection and its various coverage options.

South Carolina Celebrates Licensing 200 Captive Insurers Since 2000

The South Carolina Department of Insurance is celebrating issuing its the 200th captive insurance company license.

State Insurance Director Scott H. Richardson presented the license to Hardin Construction Co. of Atlanta, Georgia at a special dinner ceremony in Charleston sponsoired by insurance brokers, captive management consultants and law firms.

"This represents the hard work and dedication of the captive insurance community in South Carolina. We are proud of our captive program and look forward to seeing it continue to flourish," Richardson said. More than 100 invited guests attended the dinner, according to officials.

The state began licensing captive insurance companies in 2000 and has been one of the fastest growing domiciles for captives in the nation

Beazley Acquiring The Hartford's Surplus Lines Insurer, First State

London-based insurer and reinsurer Beazley Group is acquiring Boston-based First State Management Group, an underwriting manager specializing in excess and surplus lines commercial property insurance for $35.4 million in cash.

First State is a subsidiary of The Hartford Financial Service Group and is led by president and chief operating officer Judy Patterson.

The acquisition will significantly increase Beazley's presence as an insurer of mid-sized U.S. commercial property business that does not normally come to Lloyd's. Officials said that First State plans to underwrite around $150 million of gross premium for 2009, balancing the specialty lines business -- professional and management liability business-- that Beazley has been writing locally in the U.S. since 2005.

The Hartford said the move is part of its strategy of moving away from excess and surplus lines business and was not triggered by recent troubles with its life insurance operations.

"This is an agreement we have been working on for many months. We are entering into this transaction to reduce our exposure to excess and surplus lines property insurance, which is not core to our business," said Gary Thompson, executive vice president of The Hartford's property and casualty middle market and specialty lines insurance.

Thompson said First State's livestock and nursing home programs will transition directly to The Hartford.

As of Nov. 30, 2008, First State had gross assets of $10.6 million. First State does not report on its own profit as a standalone entity but instead reports as part of a division of the Hartford Group.

Beazley said it plans to raise additional equity capital through a proposed rights issue and placing, supporting the acquisition of First State and growth at Lloyd's

Florida Rejects State Farm Withdrawal Plan; Requires Major Conditions on Citizens, Agents

Florida Insurance Commissioner Kevin McCarty has offered a withdrawal plan for State Farm Florida Insurance Co. and its parent company with major conditions that were not in the original plan submitted by the insurer.

In his plan, McCarty orders State Farm Florida to permit its contracted agents to place business with other carriers and to not place any of the business it is dropping in state-backed Citizens Insurance.

"State Farm shall not interfere with the appointment of its agents to other private insurance companies to place State Farm Florida policies directly with those other private insurance companies," the plan states.

The insurer must issue pro-rata refunds of premium to any policyholder seeking to voluntarily cancel or non-renew a policy and will not be allowed short-rate the return premium for any policy in any line including auto.

McCarty stressed that he believes the state has private carriers "ready, willing and able" to take up State Farm's business. He said he has spoken with 15 carriers interested in assuming from 50,000 up to as many as 500,000 policies.

"We have ample capacity in the private sector and believe most policyholders will be able to be placed at rates as good as State Farm's or better," he said.

He said he would not have approved a withdrawal for State Farm if his department did not have confidence that private insurers could cover the risks.

"I could not approve the withdrawal plan State Farm submitted, because, as Florida law states, I believe that plan was 'hazardous' to State Farm policyholders and to the public," said McCarty. "State Farm intended to dump all of its customers into Citizens; and that is not acceptable for their customers or for the people of Florida. We have private companies that are eager to grow their businesses, and I expect State Farm to fully cooperate in facilitating a smooth transition of their policyholders to those companies.

McCarty accused State Farm of "warehousing" policies with state-backed Citizens so that it can offer multiline discounts and write more profitable auto insurance and other policies.

He said the crisis over the insurer's withdrawal "was created by leadership in Bloomington," where State Farm is headquartered.

McCarty's plan also requires State Farm to consider all offers to buy or assume all or part of its business and notify the state of any offers within 48 hours of receipt.

McCarty said the state is pulling State Farm's authority to write new property business insurer in 30 days.

State Farm has the right to appeal the plan. The insurer submitted its preferred withdrawal plan to McCarty and the Office of Insurance Regulation on Jan. 27.

The withdrawal will affect about 1.2 million customers with State Farm homeowners, renters, condominium unit owners, personal liability, boats, personal articles, and business property and liability policies. State Farm is not intending to restrict the availability of auto insurance for about 2.8 million of the insurer's Florida customers - nor the availability of life insurance, health insurance and other financial services offered by agents of State Farm Mutual and its other affiliates.

State Farm has previously rejected the idea of letting its agents place accounts with other insurers.

State Farm now has 21 days to review McCarty's order and to decide whether to abide by it or to request an administrative hearing.

State Farm said it needed time to study McCarty's plan.

"We'll need to study the OIR's opinion more closely, but we do appreciate its quick consideration of the plan. We hope to have further conversations with the OIR to create an orderly process that is best for our customers, our agents and the marketplace," said Chris Neal, Florida Zone State Farm Public Affairs Manager.

Neal noted that State Farm Florida already allows State Farm agents - with state government's backing - to service policies that are transferred out of Citizens to 16 OIR-approved companies.

"It is our sincere hope that we can work with the OIR to establish a way for State Farm agents to service policies directly out of State Farm Florida into OIR-approved companies," he said.

Florida Rejects State Farm Withdrawal Plan; Requires Major Conditions on Citizens, Agents

Florida Insurance Commissioner Kevin McCarty has offered a withdrawal plan for State Farm Florida Insurance Co. and its parent company with major conditions that were not in the original plan submitted by the insurer.

In his plan, McCarty orders State Farm Florida to permit its contracted agents to place business with other carriers and to not place any of the business it is dropping in state-backed Citizens Insurance.
"State Farm shall not interfere with the appointment of its agents to other private insurance companies to place State Farm Florida policies directly with those other private insurance companies," the plan states.

The insurer must issue pro-rata refunds of premium to any policyholder seeking to voluntarily cancel or non-renew a policy and will not be allowed short-rate the return premium for any policy in any line including auto.

McCarty stressed that he believes the state has private carriers "ready, willing and able" to take up State Farm's business. He said he has spoken with 15 carriers interested in assuming from 50,000 up to as many as 500,000 policies.

"We have ample capacity in the private sector and believe most policyholders will be able to be placed at rates as good as State Farm's or better," he said.

He said he would not have approved a withdrawal for State Farm if his department did not have confidence that private insurers could cover the risks.

"I could not approve the withdrawal plan State Farm submitted, because, as Florida law states, I believe that plan was 'hazardous' to State Farm policyholders and to the public," said McCarty. "State Farm intended to dump all of its customers into Citizens; and that is not acceptable for their customers or for the people of Florida. We have private companies that are eager to grow their businesses, and I expect State Farm to fully cooperate in facilitating a smooth transition of their policyholders to those companies.

McCarty accused State Farm of "warehousing" policies with state-backed Citizens so that it can offer multiline discounts and write more profitable auto insurance and other policies.

He said the crisis over the insurer's withdrawal "was created by leadership in Bloomington," where State Farm is headquartered.

McCarty's plan also requires State Farm to consider all offers to buy or assume all or part of its business and notify the state of any offers within 48 hours of receipt.
McCarty said the state is pulling State Farm's authority to write new property business insurer in 30 days.

State Farm has the right to appeal the plan. The insurer submitted its preferred withdrawal plan to McCarty and the Office of Insurance Regulation on Jan. 27.

The withdrawal will affect about 1.2 million customers with State Farm homeowners, renters, condominium unit owners, personal liability, boats, personal articles, and business property and liability policies. State Farm is not intending to restrict the availability of auto insurance for about 2.8 million of the insurer's Florida customers - nor the availability of life insurance, health insurance and other financial services offered by agents of State Farm Mutual and its other affiliates.

State Farm has previously rejected the idea of letting its agents place accounts with other insurers.

State Farm now has 21 days to review McCarty's order and to decide whether to abide by it or to request an administrative hearing.

State Farm said it needed time to study McCarty's plan.

"We'll need to study the OIR's opinion more closely, but we do appreciate its quick consideration of the plan. We hope to have further conversations with the OIR to create an orderly process that is best for our customers, our agents and the marketplace," said Chris Neal, Florida Zone State Farm Public Affairs Manager.

Neal noted that State Farm Florida already allows State Farm agents - with state government's backing - to service policies that are transferred out of Citizens to 16 OIR-approved companies.

"It is our sincere hope that we can work with the OIR to establish a way for State Farm agents to service policies directly out of State Farm Florida into OIR-approved companies," he said.

Report: AIG in Talks to Sell Auto Insurance Unit to Zurich

American International Group is in advanced talks to sell its U.S. auto insurance unit to Swiss insurer Zurich Financial Services AG, a source familiar with the matter said Tuesday.

The auto insurance business is expected to fetch around $2 billion, the source said.

The auto insurance business is part of AIG's U.S. personal lines unit, which includes selling products to high net-worth individuals through its AIG Private Client division. AIG Chief Executive Edward Liddy has said that the private client division is not being sold.

The unit being sold includes the 21st Century Insurance Group business, which AIG took over in 2007 when it bought out the minority stakeholders for $811 million.

AIG and Zurich both declined to comment.

Zurich, the fourth-largest European insurer, has said it was on the lookout for deals that will bolster its North American personal lines and global life insurance businesses.

AIG, once the world's biggest insurer by market value, averted bankruptcy in September with an $85 billion federal bailout. The rescue later swelled to about $150 billion.

On Oct. 3, the insurer said it planned to keep its U.S. property-casualty, foreign general insurance businesses and an ownership interest in its foreign life operations but sell the remainder.

Since then, the insurer has announced the sale of some businesses, including the sale of HSB Group to German reinsurer Munich Re for $742 million and its Canadian life insurance unit to Bank of Montreal for about C$375 million.

AIG shares closed down 12 cents at 92 cents on the New York Stock Exchange Tuesday.

Congress May Probe AIG Pricing, Pay Practices

An influential U.S. congressman, concerned that American International Group Inc's $150 billion federal bailout could be undermining the broader U.S. insurance market, is digging into claims that the insurer is driving down prices to win business.

Rep. Paul Kanjorski, chairman of the House subcommittee on capital markets and insurance, said he has received numerous conflicting reports about "market distortions" in the U.S. property-casualty market, which have prompted him and Spencer Bachus, the top Republican on the U.S. House Financial Services Committee, to ask the Government Accountability Office (GAO) to probe for answers.

At the same time, Kanjorski told Reuters in a telephone interview on Tuesday that AIG's pay practices could come under increasing scrutiny.

"They (AIG) are not under the same controls that other organizations that got (government) money are; but under a new bill that has been passed it will be more involved, what they can and can't do, and we can look back," or claw payments back, said Kanjorski, a Democrat from Pennsylvania.

AIG, the recipient of $150 billion in federal aid last September and November, has irked taxpayers by promising about $1 billion in retention bonuses to employees rattled by its financial woes.

Bad mortgage bets left AIG in a severe cash crunch and on the verge of bankruptcy.

While Kanjorski said he was "very disturbed" by the bonuses, contacting management directly to voice his displeasure, he called the payments a "sideshow" to bigger issues.

"The amount is minuscule in comparison to other potential losses, and destruction of the economy," he said, adding: "We have to keep our eye on the important big ball, not the little ball."

AIG said it would "fully cooperate" with the GAO review.

The government stepped in to avert the insurer's collapse, worried that it could have had global consequences since counterparties -- including some of the biggest U.S. and European banks -- had billions of dollars in exposure through AIG-issued contracts that guaranteed derivatives against default.

While the federal bailout eased such immediate concerns, AIG's ultimate recovery depends on the company's ability to sell off assets to repay a $60 billion federal loan while trying to limit further losses and retain employees and customers spooked by its financial troubles.

At the root of the GAO investigation is whether AIG, empowered by the government assistance it received, is cutting prices to retain customers and gain market share, even as market fundamentals suggest that prices, which have been in decline for several years, need to be raised.

Kanjorski said he expects the GAO study to take a few months, and based on findings, he could then call insurers to testify in an open hearing.

"Our most important job is that they (AIG) carry on, that counterparties are protected, and that we bring about some sort of recovery," Kanjorski told Reuters.

AIG has denied the price-cutting claims made by numerous competitors.

Chief Executive Edward Liddy, in a speech on Dec. 11, said: "It will do us no good to overcome today's financial problems only to find a few years down the road that we are sitting on a pile of unprofitable policies."

In late afternoon trade, AIG shares were off 2 cents to $1.01 on the New York Stock Exchange.

The Hanover Group Sees Profits Shrink

Fourth quarter profits at The Hanover Insurance Group fell 55 percent from $75.8 million a year ago to $34.1 million. Full-year net income dropped nearly 92 percent to $20.6 million, from the $253.1 million the Worcester, Massachusetts-based insurer earned in 2007.

The company said the drop in earnings stemmed from investment losses of $97.8 million, substantially higher catastrophe losses in the company's property and casualty operations and charges related to the sale of its life insurance business.

Total property and casualty pre-tax segment income was $97.5 million in the fourth quarter of 2008, compared to $98 million in the fourth quarter of the prior year. The pre-tax net impact of catastrophes was $14.1 million in the fourth quarter of 2008, compared to $11.3 million in the fourth quarter of 2007. The fourth quarter of 2007 also included a one time benefit of $11.8 million from a litigation settlement, partially offset by a pension related expense adjustment of $7.4 million in the same period.

Excluding the pre-tax net impact of catastrophes, the litigation benefit and the pension expense, Property and Casualty pre-tax segment income would have been $111.6 million in the fourth quarter of 2008, compared to $104.9 million in the fourth quarter of 2007.

Total property and casualty pre-tax segment income was $302.2 million for the full year of 2008, compared to $382.3 million in the prior year. The pre-tax segment income in 2008 included significantly higher catastrophe losses of $169.7 million pre-tax, compared to $65.2 million pre-tax in 2007. Excluding the pre-tax net impact of catastrophes, the aforementioned litigation settlement in the fourth quarter of 2007 and a pension related expense adjustment of $6.0 million for the full year, property and casualty pre-tax segment income would have been $471.9 million in 2008, $30.2 million higher than the comparable $441.7 million in 2007.

The Hanover had net premiums written of $597.3 million in the fourth quarter, compared to $561.6 million in the prior-year quarter -- an increase of 6.4 percent.

For the year, net premiums written were $2.52 billion, compared to $2.42 billion in the prior year, an increase of 4.4 percent

"I am pleased that in a year of very significant weather, including catastrophe and non-catastrophe activity, we generated solid pre-tax segment income," said Frederick H. Eppinger, chief executive officer at The Hanover. "Excluding the impact of catastrophes, we showed meaningful growth in pre-tax segment income, which is evidence of the increasing earnings power of our business. While our 2008 premium growth of 4 percent continued to outpace the industry, we remain focused on underwriting discipline, as evidenced by improvements in our ex-catastrophe accident year loss ratios for both the quarter and the year."

S&P Rates Phila. Indemnity, Phila. Insurance; 'AA-'; Outlook Stable

Standard & Poor's Ratings Services has assigned its 'AA-' counterparty credit and financial strength ratings to Philadelphia Indemnity Insurance Co. and its sister company, Philadelphia Insurance Co. (collectively referred to as PHLY). S&P also said that the outlook on both of these companies is stable.

"The supported ratings on both companies are based on their strategic importance to Tokio Marine & Nichido Fire Insurance Co. Ltd. (TMNF) ('AA'/Stable/A-1+) and therefore receive an uplift in the ratings," explained credit analyst Taoufik Gharib. "According to our criteria, these ratings are capped at one notch below the ratings assigned to core group members."

S&P added that "PHLY's stand-alone characteristics include its strong competitive position, strong operating performance, and very strong capitalization. Offsetting these strengths are the company's aggressive growth strategy (including the introduction of new products in a difficult insurance cycle), key-men risk, and relatively high gross property catastrophe exposure.

"On July 23, 2008, Tokio Marine Holdings Inc. (Tokio Marine; the parent company of TMNF) and Philadelphia Consolidated Holding Corp. (the parent company of PHLY) entered into an agreement under which Tokio Marine will acquire all outstanding shares of Philadelphia Consolidated for $61.50/share in cash, a 73 percent premium to Philadelphia's closing price of $35.50. The total transaction value was approximately $4.73 billion and was completed on Dec. 1, 2008."

S&P also noted that the "acquisition of PHLY is consistent with Tokio Marine's strategy of expanding revenues and profits from international markets in the medium and long term. With limited growth potential in the domestic Japanese nonlife insurance market, Tokio Marine has been pursuing an international expansion strategy to achieve business growth and strengthen profitability.

"Therefore, the PHLY acquisition plays a vital and strategic role in the group's strategy, allowing it to establish a significant presence in the U.S., the world's largest insurance market. The acquisition will also let Tokio Marine create a well-balanced global portfolio, including domestic, developed, and emerging markets. Therefore, we view PHLY as a strategically important subsidiary of TMNF.

"PHLY constitutes a significant proportion of Tokio Marine's pro forma consolidated position. For year-end 2007, PHLY's figures were about 6 percent of the group's pro forma net premiums written and about 5 percent of the group's pro forma capital position. More importantly, PHLY's net income was about 23 percent of the group's pro forma figure."

S&P also indicated that it "expects that PHLY's gross premiums written will grow by about 10 percent in 2008. This growth strategy in a weak pricing environment is concerning and could affect future operating results. We expect that the company's competitive position will remain strong following the acquisition. Despite soft pricing and catastrophe losses, operating performance will likely remain strong in 2008, with a combined ratio of 86 percent-88 percent.

"We expect that PHLY will continue to emphasize underwriting discipline and generate strong underwriting results in 2009 in line with historical results," the bulletin continued. "Furthermore, capitalization will likely remain very strong, redundant, and supportive of the ratings in 2009. We expect TMNF to support PHLY's capitalization and financial flexibility if needed, and we expect PHLY to maintain its strategically important status within TMNF. As a result, the ratings and outlook on PHLY should move in tandem with those on TMNF.

Gharib added: "If PHLY is successfully integrated, establishes itself as a cornerstone within the group, and materially contributes to the group's turnover and earnings over the next two to three years, we might decide to view PHLY as core to TMNF. If that were to happen, we would then align the ratings on PHLY with those on the other core group members. Alternatively, we could revise the outlook to negative or lower the ratings on PHLY if its operating performance were to deteriorate significantly and affect its financial profile."

Report Finds Cat Bond Market Resilient in Financial, Property Catastrophes

Catastrophe bonds withstood the impact of onerous market forces in 2008, brought on by turmoil in the global capital markets, according to a new briefing on catastrophe bond market activity.

The cat bond market update, published by Guy Carpenter & Co. LLC, found that as a whole, in terms of issuance volume, 2008 was the market's third most active year since catastrophe bonds were introduced in 1997, accounting for 11 percent of all issuances.

Thirteen issuances, all but two of which occurred in the first half of the year, brought USD2.7 billion in new and renewal capacity to market in 2008, according to Guy Carpenter's findings. After a record-setting year in 2007, cat bond issuance in 2008 fell 62 and 52 percent in terms of risk capital and number of transactions, respectively.

The report also found that after the events of mid-September 2008, several firms that were planning catastrophe bond issuances for the fourth quarter elected to defer those issuances to the first quarter of 2009. As a result, the total amount of risk capital outstanding dropped 14.5 percent, from USD13.8 billion at year-end 2007 to USD11.8 billion at year end 2008.

"Put to the test by the unprecedented circumstances of 2008, the cat bond market proved its resilience as the market absorbed the impact of concurrent financial and property catastrophes," said David Priebe, chairman of Global Client Development at Guy Carpenter. "And, while cat bond spreads did increase during the tumultuous days of September, they did not do so at the same rate as the credit markets generally."

"We see an increasing number of companies integrating catastrophe bonds into their reinsurance purchase decisions as an important complement to fill gaps in traditional capacity," said Chi Hum, global head of distribution, GC Securities.

"We expect to see more transparency and tightened collateral requirements in 2009," added Priebe. "Cat bond issuance activity likely will eventually rebound as conditions improve, and as an asset class, cat bonds should offer improved utility for both sponsors and investors."

Other report findings include:

Ambiguity became a key factor ─ Ambiguity in the (re)insurance market as a whole - and outright distress in the global financial markets - was the primary driver behind the sharp drop in fourth quarter cat bond issuances year-over-year.

Non-correlation with broader credit markets demonstrated ─ Non-correlation initially was called into question in the case of four cat bonds that were marked down due to the loss of their total return swap (TRS) counterparty. As more details emerged, however, the moral hazard issues endemic to other credit related asset classes were ruled out as systemic concerns for the cat bond market, though they are potential areas for improvement for future transactions.

Risk capital above average ─ The USD2.7 billion issued in 2008, which came to market at a time when reinsurers had excess capital on their balance sheets, was higher than the 11-year average of USD2.1 billion. Despite continued buybacks and dividends - and favorable pricing for cedents - carriers saw a benefit to transferring risk to capital markets.

2009 Outlook ─ Disciplined risk and capital management, as well as funding diversification will persist as critical focus areas during 2009. In this type of environment, the cat bond market offers significant value to both sponsors and investors and therefore issuance activity should revive in the coming year. The extent of the revival will hinge on the prevailing supply and demand conditions for risk transfer capacity in both the traditional reinsurance and capital markets.

Guy Carpenter's intellectual capital website, www.GCCapitalIdeas.com, leverages blog technology, including Real Simple Syndication (RSS) feeds and searchable category tags, to deliver Guy Carpenter's latest research as soon as it is posted. In addition, articles can be delivered directly to BlackBerry devices and other personal digital assistants (PDAs).

State Farm Pulling Out of Florida Property Insurance Market

Florida is losing its largest property insurance company.

State Farm Florida Insurance announced today it is beginning the process that will allow it to non-renew policies and halt all sales of homeowners or other property-related policies in the state.

The withdrawal will affect about 1.2 million customers with State Farm homeowners, renters, condominium unit owners, personal liability, boats, personal articles, and business property and liability policies.

It will not affect the availability of auto insurance for about 2.8 million of the insurer's Florida customers - nor the availability of life insurance, health insurance and other financial services offered by agents of State Farm Mutual and its other affiliates.

Florida law requires that the company submit a withdrawal plan for approval by the Office of Insurance Regulation within the next 90 days, and then give insureds 180 days notice of any non-renewals.

Insurance Commissioner Kevin McCarty, who has regularly sparred with State Farm over rate increase and information requests, said he was not surprised by the move and vowed to closely scrutinize any plan.

The company cited its "substantially weakened financial position," which it tied to its inability to obtain regulatory approval of property insurance rate increases.

State Farm Florida said that it is submitting a two-year plan that seeks to limit disruptions for customers, and if approved, will allow customers time to find coverage with other insurers.

Jim Thompson, president, State Farm Florida, said the insurer was left without options in the state.

"Faced with steeply declining resources to cover future claims and expenses, State Farm Florida has little choice. This is not an action we wanted to take, but one we must take given the realities of the Florida property insurance market. We regret the impact this will have on our customers, employees and agents in Florida," he said in a statement.

Thompson said that Florida's hurricane exposure poses a tremendous financial risk to any property insurer but maintained that even without a hurricane, State Farm Florida's operating costs have risen as day-to-day claims have increased both in their number and severity. During the first three quarters of 2008, a year with relatively modest catastrophe impact and no major hurricane, State Farm Florida saw its surplus reduced by $201 million.

The company said that state-mandated discounts have further contributed to the reduction in revenues.

In July, State Farm Florida filed for an overall statewide homeowners insurance rate increase of 47.1 percent. This filing was disapproved on January 12 by McCarty and the OIR.

"The state itself faces similar challenges as it deals with the fragile financial condition of government backed Citizens Property Insurance Corp.," Thompson said. "State Farm Florida is a private company and must have adequate capital to ensure financial stability. And it is our responsibility to our policyholders to provide a sound financial framework for the coverages we offer."

McCarty said the action, while disappointing, was anticipated.

"We have been hearing for months of possible plans to make such a move in Florida, including a document submitted to the Office as recently as Dec. 5 as part of their recoupment filing that showed an anticipated reduction to 655,000 homeowner policies by 2010," McCarty said.

"We will carefully review State Farm's intended plans to ensure that they are in compliance with Florida law; and we will explore all legal options as well," he said.

The commissioner also suggested that the private insurance market could pick up the business State Farm is leaving behind.

"To help ease the transition of policies, Florida already has new companies who are eagerly looking to grow their businesses and will welcome the opportunity to add more customers. I encourage everyone to work closely with their agent to choose a new company that will offer needed coverage at a price you can afford," he said.

As national carriers like State Farm have grown skittish about the Florida market, domestic insurers have been grabbing more business. The jump in domestic market share is partly attributed to the increase in the number of new, homegrown companies that have started in Florida in the past several years.

In 2007, domestic private insurers wrote 39 percent of the multi-peril homeowners market— more than out-of-state carriers (24 percent), State Farm Florida (19 percent) or Citizens (18 percent), according to the OIR. In 1992, domestics wrote only six percent.

Since 2006, about 25 new domestic companies have entered the market. These carriers have introduced about $546 million in new surplus into the property insurance market. Some of the new carriers have benefited from $248 million in state funds made available for capitalization.

If private carriers are not able to assume the State Farm business, it could mean more accounts for state-backed Citizens Property Insurance, which has been shrinking somewhat over the past year.

McCarty noted that he has been working with state Sen. Mike Fasano, R-New Port Richey, on legislation that would limit the number of non-renewals an insurance company can issue in a year.

Florida Chief Financial Officer Alex Sink echoed McCarty that the decision was disappointing and also urged affected consumers to shop around. "Fortunately, there are a number of insurance companies that are committed to helping Florida's families protect their property and assets. The Florida insurance market has become more competitive, and I encourage consumers to shop around when they begin to look for a new policy," Sink said.

One agents' group expressed concern over the effects of the move on the agents involved.

"Right now our thoughts and prayers are with the State Farm agents, who run small businesses in cities and towns all over the state; the uncertainty they face is tremendous and regrettable," said Bob Lotane, speaking for the Florida chapter of the National Association of Insurance and Financial Advisors.

The group urged State Farm to free its agents to enter "brokering agreements outside of State Farm and minimize lost business due to this move."

Lotane also took a shot at state officials. "Unfortunately this was quite predictable; the companies that largely rebuilt this state after the devastating 2004 - 2005 hurricane seasons have largely been reduced to political punching bags," he said.

State Farm Florida was established in 1998 as a stand company. After billions of dollars of losses from a series of 2004 storms, State Farm Florida borrowed $750 million from State Farm Mutual. State Farm Florida has not been able to repay the note due to its financial condition, according to the company.

Greenberg Fights New York AG to Keep Reinsurance Testimony Private

Maurice "Hank" Greenberg, former chief executive of American International Group Inc., has gone to court to prevent New York's attorney general from releasing testimony Greenberg gave in a state lawsuit accusing him of fraud, according to court documents.

Greenberg's efforts to keep the testimony confidential are his latest attempts to rehabilitate his name and reputation, even as the company he once ran struggles to survive after receiving a massive taxpayer bailout.

In 2005, then Attorney General Eliot Spitzer sued AIG, accusing the insurer and Greenberg, now 83, of manipulating financial results and engaging in fraud.

In a motion in Manhattan state court on Jan. 20 by his lawyers Boies, Schiller & Flexner LP, Greenberg said he wanted to keep the testimony, during which he invoked the Fifth Amendment to the U.S. Constitution not to incriminate himself, confidential because it touched on confidential corporate documents.

The motion, a copy of which was obtained by Reuters, seeks a protective order to stop New York's current attorney general Andrew Cuomo from releasing details of the testimony.

"The NYAG, which has long attempted to convict Mr. Greenberg in the court of public opinion, should not be granted this extra-judicial advantage," Greenberg's lawyers wrote.

Greenberg, 83, testified last year in depositions taken by lawyers for the state, and Cuomo's office signaled its intention to release it in a letter late last year.

AIG has received a $150 billion bailout from the federal government. Greenberg, an AIG shareholder, has been critical of the structure of that bailout and the company's management.

TAKES THE FIFTH

The motion said Greenberg declined to answer questions about his role in a reinsurance transaction with Berkshire Hathaway's General Re Corp. that artificially boosted AIG's loss reserves by about $500 million in 2000 and 2001. He also declined to answer questions about this deal in early 2005.

A record of Greenberg's testimony exists in transcript form and on videotape.

Four former General Re executives and a former AIG executive were convicted last year of conspiracy and fraud in a separate criminal case.

Greenberg faces three civil charges, including the General Re matter.

"The NYAG is clearly desperate to keep interest in this shrinking case alive," said Nicholas Gravante, one of Greenberg's lawyers.

A spokesman for Cuomo declined to comment.

Greenberg, who had been with AIG 38 years, quit in February 2005 after disagreeing with the board over legal and regulatory investigations, including Spitzer's.

In 2006, AIG paid $1.6 billion to settle those same matters.

Judge Charles Ramos, overseeing New York's case, has previously said he was frustrated with delays in moving to trial. He has asked that all depositions and document disclosures be made by April 30, and all witnesses be identified by May 29.

Greenberg's lawyers say they are confident the case will never go to trial.