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.