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STORIES
2001: Terror,
Mold and More
Last year
will be remembered for the terrorist attacks that destroyed the
World Trade Center in New York, downed four commercial planes,
killed thousands and created the biggest losses in insurance history.
Almost everything that happened in the insurance
industry in 2001 was cast or recast by the Sept. 11 terrorist
attacks. Property/casualty insurance, life insurance, reinsurance,
underwriting, claims handling--nearly every aspect of the industry
was profoundly affected. Concerns and developments that seemed
significant before the disaster faded into the background after
the attacks.
If 2001 had been like any other year, the medical
malpractice coverage dilemma in Pennsylvania and West Virginia,
which caused rates to go up and major writer St. Paul Cos. to
cut back its exposures, would be a top insurance news story. Plans
by State Farm and American International Group to withdraw from
New Jersey's private passenger auto market would make the list,
too. It would be hard to ignore China's entry into the World Trade
Organization or the industry's ongoing concerns about financial
and medical privacy for policyholders, critical use of the Internet
and health insurers' exodus from the Medicare+Choice program.
But a majority of last year's most compelling
stories described the industry in the aftermath of the attacks.
Only a few stories were not directly connected to the disaster,
and two of those--initial public offerings and mergers and acquisitions--could
not be told without considering the effects of the Sept. 11 events.
News of mounting losses by insurers was foremost
for weeks after the disaster and will continue to make headlines
in 2002. Questions of whether the destruction of the World Trade
Center in New York was one insured loss or two and how the federal
government will respond to insurers' plea for a national reinsurance
pool in case of another terrorist attack were examined and re-examined.
According to MIB Group Inc., the number of life insurance applications
in October 2001 in the United States and Canada rose by 8.6% over
those in October 2000 and by 26% over September 2001, and the
hardening property/casualty market solidified almost overnight.
Insurance analysts and underwriters estimated
workers' compensation losses from the catastrophe could range
from $1 billion to $6 billion, making it one of the hardest-hit
insurance lines and forcing underwriters from now on to consider
the likelihood of job-related injuries and disabilities resulting
from terrorism. The reinsurance industry was stunned by Sept.
11 losses on policies that included no additional premium to cover
terrorist acts.
Escalating losses for mold damage claims, which
caused State Farm, Allstate and Farmers to stop writing new business
covering water-related damage in Texas, was one of the few top
issues that appeared to stand totally apart from the terrorist
attacks. It gained stature because of its spread across the nation
and its bridging of personal and commercial lines.
WTC Disaster: One Insured Event or Two?
The insurance world is watching to see how the
courts answer the $3.5 billion question: Should the destruction
of the World Trade Center be considered one insured event or two?
 Swiss
Re, which is responsible for 22% of the claims on the center,
filed a lawsuit in U.S. Federal Court for the Southern District
of New York in Manhattan to confirm that the collapse of the trade
center should be considered one loss, which it said would limit
liability to $3.55 billion. Larry A. Silverstein, who signed a
99-year-lease on the World Trade Center in July, filed a counterclaim,
saying the destruction counted as two events, which would raise
the total liability to $7 billion.
The lawsuit "is extremely important in
its own right, because $3.5 billion is at stake, and it is the
first lawsuit to be filed," said Robert Hartwig, chief economist
with the Insurance Information Institute. "However, insurers
aren't waiting for the outcome of the lawsuit. Insurers are already
sharpening the language in property policies all across the country
to prevent this dispute from arising again."
The debate is deceptively simple. On one side,
Swiss Re contends events of Sept. 11 should count as a single
loss. On the other side, Silverstein said the complex was destroyed
when two separate airplanes from two separate airports were hijacked
and intentionally crashed into two separate buildings.
Complicating the case, both sides disagree on
what contract paper binds them.
There wasn't a formal insurance policy in place
at the time of the disaster. Swiss Re maintains that it agreed
to bind itself on the basis of a policy form provided by Willis
Inc., the broker that wrote the World Trade Center business. That
form, WillProp 2000, provides that "occurrence shall mean
all losses or damages that are attributable directly or indirectly
to one cause or to one series of similar causes. All such losses
will be added together, and the total amount of such losses will
be treated as one occurrence irrespective of the period of time
or area over which such losses occur."
Silverstein's law firm, Wachtell, Lipton, Rosen
& Katz, said that when Swiss Re signed the binder on July
9, Swiss Re twice struck out proposed language and replaced it
by hand with language saying the binder would be subject to wording
agreeable to Swiss Re. These alterations were "material,"
the Wachtell firm argued, meaning the coverage wasn't pursuant
to the WillProp 2000 form.
Silverstein maintains that the agreement is
bound by a Travelers Insurance binder, which did not define occurrence.
Jacques Dubois, a member of Swiss Re's executive
board and chief executive officer and president of Swiss Re America
Holdings, denied that Swiss Re ever committed to the Travelers
form. "We signed a binder that would use the Willis form,"
he said. "We did not reject the Willis form on July 9. It's
wishful thinking on their part. You're bound by the form you sign.
We signed according to the Willis prop form."
Dubois added that regardless of what form the
binder is based upon, case law in New York would interpret the
catastrophe as one insurable loss.
But Wachtell argued that the leading and controlling
case in point is a 1959 decision by the New York Court of Appeals
in Arthur A. Johnson Corp. vs. Indemnity Insurance Co. That case
involved two adjacent buildings owned by a single property owner
that were damaged when walls protecting the adjacent basements
collapsed 50 minutes apart as a result of a single rainstorm that
flooded a construction trench in front of the buildings. The court
ruled there were two accidents and, hence, two policy limits.
Swiss Re also maintained in its complaint that
the lessees had knowingly underinsured the World Trade Center
property. According to the complaint, Willis had recommended at
least $5.05 billion in coverage, but the lessees had originally
chosen to insure for $2.32 billion before subsequently increasing
coverage to $3.5 billion.
--Meg
Green
Terrorism Reinsurance Pool Sought
Right from the start, the insurance industry
said it could and would pay claims arising from the Sept. 11 terrorist
attacks, but it needed the federal government's financial assistance
if something like that were to happen again soon.
With insured loss estimates ranging from $40
billion to $100 billion in connection with the destruction that
came from the Sept. 11 disaster, insurance representatives told
the U.S. House Financial Services Committee at its Sept. 26 hearing
that the industry could pay claims and intended to. But that's
also when the committee heard insurers' call for the federal government
to establish a reinsurance pool similar to Pool Reinsurance Co.
Ltd., the U.K. reinsurance pool established in 1993 following
losses from bombings in London by the Irish Republican Army.
A reinsurance pool to cover future terrorism
losses became a necessity after Sept. 11, because reinsurers were
no longer willing to cover terrorism, making that coverage unavailable
for primary insurers.
While the insurance industry didn't get the
pool it sought, the House of Representatives did approve a loan
program requiring insurers to pay back any government money spent
to cover future terrorism losses. The one-year program, under
the direction of the Treasury secretary, could be extended as
many as two additional years.
The House's Terrorism Risk Protection Act, H.R.
3210, requires all federal taxpayer costs/assistance to be paid
back, with federal assistance kicking in when losses reach $100
million for small-commercial insurers and $1 billion as an industrywide
aggregate. The federal government would pay 90%, with 10% coming
from the individual company.
The first $20 billion in losses would be assessed
back to commercial insurers over time, and subsequent losses would
be recouped through commercial policyholder surcharges. Under
the House bill, the Treasury secretary has flexibility in determining
assessments and surcharges based on economic conditions, depending
on whether a market is urban, rural or small. The bill also calls
for a study on lifting tax penalties for certain long-term capital
reserves to cover terrorism losses.
 Reinsurers
are not normally in the market for federal reinsurance programs,
but the Reinsurance Association of America actively supported
efforts on Capitol Hill to provide a federal backstop against
future terrorist attacks. That is, as long as it was temporary
and didn't involve tax-deferred reserves and reinsurers could
participate.
A federal backstop to take some of the uncertainty
out of the insurance market and put some sort of cap on potential
losses from acts of terrorism is needed, said Frank Nutter, president
of the RAA, a nonprofit trade association of reinsurers and reinsurance
brokers.
Because companies don't know how much they could
lose, they're not inclined to write coverages. Programs that provide
a cap provide certainty, he said. If a company won't write insurance
up to the cap, reinsurers would have a market in the space between
a company's "risk appetite" and the point when the federal
government would step in, Nutter said.
The House bill's provision to allow insurers
to set up tax-deferred reserves is intended to let insurance companies
build up a fund, without tax penalty, to deal with future terrorism
losses. But the RAA always has questioned the use of reserves
for any type of catastrophe, Nutter said. For one, the fund is
not going to accumulate enough to cover potential losses like
those from Sept. 11, and accountants and tax people like the Internal
Revenue Service are opposed to such reserves, because they can
be manipulated in a financial statement. "It's a way to protect
money from being taxed," he said.
Even with a federal backstop, reinsurance contracts
are likely to become shorter and risk specific, rather than years
in length covering a bundle of risks, said Christopher J. Swift,
a partner with KPMG LLP and its national insurance industry director.
The House's bill included liability reforms
that were a source of contention as the House debated the bill.
The bill limits lawsuits to federal courts, limits punitive and
economic damages awards, and caps attorneys' fees.
Those liability protections also were causing
a split in the Senate, which is debating three bills in an effort
to come up with one.
--Dennis
Kelly
P/C Hard Market Becomes Reality
During the first half of 2001, the property/casualty
industry's pricing cycle already was turning to a hard market,
with rate increases going into double digits. But as the industry
was experiencing sparks of a hardening market, the events of Sept.
11 were like pouring gasoline on a brush fire. "Now you have
a full-blown forest fire, where we are seeing renewals coming
in at 50% increases, even 100% or more for various commercial
properties," said Robert Rusbuldt, chief executive officer
of the Independent Insurance Agents of America.
Despite the hardening market, insurers still
face nagging issues, such as rising jury awards, weakening economic
development, reserve deficiencies and rising loss costs, said
Michael L. Lewis, an equity analyst with UBS Warburg.
Because reinsurers were responsible for paying
about 60% of the insured losses for the Sept. 11 terrorist attacks,
reinsurance prices rose, while capacity dwindled, causing primary
insurance rates to increase. "Basically, it's a conservative
industry that's even more so now. [Reinsurers] are sitting on
top of something everyone wants--which is capacity--and are evaluating
how to protect themselves and still be a viable partner,"
said Norm Tardif, president of the management group NiiS/Apex
Holding Group.
 To
assess the impact of the Sept. 11 attacks on Jan. 1 renewals and
the future market, the Council of Insurance Agents and Brokers
conducted a benchmarking survey of its members. According to survey
results, 23% of respondents saw increases of 30% to 50% for medium-sized
accounts, and 35% said large accounts rose 10% to 30% on average
since last year. Survey respondents also reported that primary
carriers had imposed more restrictions and higher deductibles
as well as eliminated blanket limits for some lines. One broker
disclosed that a customer who paid $45,000 for $5 million in trucking
coverage last year is paying $157,000 at renewal.
Brown & Brown's vice president, Jim Henderson,
said not only are prices going up, but insurers are withdrawing
capacity on layers, making it necessary to sell numerous parts
of big deals. For example, one public entity faced a renewal increase
of 30%. On top of that, the $500 million insurance deal would
typically be split among five players, each taking a $100 million
slice. "Now it's taking eight companies to provide the cover
in small amounts," Henderson said.
In its "Insurance Market Overview"
for 2002 for the U.S. casualty market, Willis saw more headaches
ahead for workers' compensation lines. "Workers' compensation,
already under pressure due to increasing claim severity and deteriorating
underwriting results, may now face price increases, carrier demand
for higher deductibles and a change in underwriting strategy,"
according to the report. "Some insureds renewing workers'
compensation catastrophic treaty coverage are being required to
detail all locations with head counts of over 100."
Industry leaders see business continuing to
harden for the next few years. UBS Warburg's Lewis said the current
market environment may be the hardest in memory. Brian Duperreault,
chairman and chief executive officer of Ace Ltd., said this hard
market encompasses the entire property and casualty market and
is global in scope. Chubb's Chairman and CEO Dean O'Hare said
2002 will be a transition year for his company, and the full impact
of the current hard market won't be realized before 2003.
--Lynna
Goch
Reinsurance Markets Uncertain
Global reinsurance markets were in turmoil at
the end of 2001. Already reeling from two years of soft markets
and weak pricing, many reinsurers were staggered by the blow delivered
Sept. 11, when terrorists hijacked four airliners, crashing two
into the World Trade Center and one into the Pentagon.
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Alice Schroeder, an equity analyst with Morgan
Stanley, said reinsurers are facing a "Salomon Brothers moment"--a
time of reckoning for past lapses, when "these companies
must deal with the consequences of their irresponsible underwriting
during the past several years of a soft market, which is forcing
them to pose significant, yet necessary, price increases and changes
in terms and conditions on their customers during a recession."
Warren Buffett, chairman and chief executive
officer of Berkshire Hathaway, told shareholders in a letter that
Berkshire's insurance and reinsurance subsidiaries were "foolish"
for not pricing for "man-made mega-cats" before Sept.
11. "In effect, we and the rest of the industry included
coverage for terrorist acts in policies covering other risks--and
received no additional premium for doing so," he said. "That
was a huge mistake, and one that I, myself, allowed."
Berkshire estimates its losses related to Sept.
11 at $2.28 billion, a number that is still a guess, said Buffett.
"Important questions of liability will likely remain unresolved
for years," he said. "Consequently, neither we nor other
industry participants can be reasonably precise now as to final
losses."
About $1.7 billion of the company's loss is
attributed to its General Re subsidiary, and another $575 million
to Berkshire's reinsurance group, Buffett said.
As Jan. 1 reinsurance renewals began to roll
around, industry observers said that it may be some time before
the market situation is clear. Answers are needed for several
important questions:
What will the federal government offer
in terms of a reinsurance backup for the industry in the event
of another terrorist attack?
How far will reinsurers go to exclude
terrorist-related events from coverages?
What limits will liability coverages see, and will reinsurers
withdraw from such coverages to the extent that certain liability
coverages will no longer exist?
Will the estimated $10 billion or more
in fresh capital, funding new ventures and bolstering existing
reinsurers, ease the capacity crunch, or will it dilute the earning
power of established reinsurers?
On that last point, equity analyst Vincent J.
Dowling of Dowling & Partners conjured up the "prisoner's
dilemma" scenario: "What is good for each start-up is
bad for the group/industry. While each spreadsheet (with projections
of premiums written and loss ratio as the key variables) looks
rational on its own merits, the sum of all the planned spreadsheets
may not be so rational."
As to the government's role, Buffett sounded
an ominous warning for the industry with regard to terrorism:
"Had the attack in New York been nuclear, it is likely that
most of the U.S. insurance industry, as well as reinsurers worldwide,
would have been destroyed," he said. "The only viable
reinsurer for truly large-scale terrorism is the U.S. government."
David Mair, risk manager for the U.S. Olympic
Committee, said the current reinsurance market is somewhat like
the capacity crunch in the 1980s, but terrorism has added a big
twist. "You've got a finite resource in insurance company
capacity or surplus, facing an infinite potential for loss, and
worse than that, an infinite uncertainty of the potential for
loss," he said.
"Everyone is waiting to see what the federal
government is going to do, and that will help the market shake
itself out a little bit," Mair said. "The events of
Sept. 11 have caused what was an already-firming market to go
through some more significant underwriting and price increases."
--David
Pilla
Life Insurance Applications Increase
While the terrorist attacks on Sept. 11 triggered
huge claims on property/casualty insurers, they only slightly
diminished the capital position of life insurers. They also seem
to have stimulated renewed interest in life insurance.
 According
to Tillinghast Towers-Perrin, the World Trade Center disaster
added about 9% to the volume of claims that life reinsurers had
anticipated in 2001, including accidental death and dismemberment
lines. That compares with about 12% more than expected in the
workers' compensation line, 14% in the liability line, 75% in
commercial property and business interruption lines, and 458%
in the aviation line, said Stephen P. Lowe, principal in the company's
Hartford, Conn., office.
Lowe estimated that total claims from the trade
center disaster will fall within a range of $32 billion to $56
billion. But Timothy W. Clark, director of Standard & Poor's
Financial Services Ratings, said the life reinsurance industry's
liability will be only about $2.5 billion. Those losses will be
divided among 26 companies, he said. Direct writers ceded to reinsurers
64% of the mortality risk of life insurance written in 2000, according
to the Society of Actuaries, a trend that intensified over the
past decade.
The annuity business already was down during
the year as the falling stock market scared away variable-annuity
prospects, though the fixed-annuity business improved. Sept. 11
at first caused a further dip in life and annuity sales, but then
the life business rebounded strongly in October. According to
the first MIB Life Index, released in November by the MIB Group
Inc., the number of life insurance applications in the United
States and Canada rose by 8.6% from those received in October
2000 and by 26% over September 2001. U.S. insurers underwrote
more than 1.4 million life applications in October. Before October's
dramatic gains, the trend for life policies had been flat or declining,
MIB said.
Part of the reason for the gains may have been
the life industry's quick and public response to the Sept. 11
disaster. Sy Sternberg, the head of New York Life Insurance Co.
and chairman of the American Council of Life Insurers' board of
directors, publicly testified that this was a time for the industry
to make good on its promises, to be compassionate and to give
assurances that it had the resources to pay. When authorities
were unable to issue death certificates on victims at the World
Trade Center, insurers acted quickly to accept affidavits from
employers instead. Many insurers made an extra effort to contact
families or check to see whether those who worked in the trade
center had any life insurance of which surviving family members
may not have been aware.
There may be other repercussions in the life
industry besides the public's rejuvenated interest in mortality-protection
products, said John DesPrez, head of Manulife Financial Corp.'s
U.S. operations in life, annuities and pensions.
DesPrez said Sept. 11 will cause life insurers
and other companies to significantly improve their business-continuation
plans. He also predicted that insurance buyers will be more likely
to seek out companies that are financially stronger as indicated
by their ratings and that this attention to financial strength
could accelerate mergers and acquisitions in the industry.
Estate tax reform was also a big story in 2001.
The law passed by Congress gradually increases the amount of an
estate that is not subject to estate tax, and it lowers the tax
rate until the tax disappears entirely in 2010. But unless Congress
acts before then, the estate tax in 2011 will revert to the version
that existed in 2001. Most observers believe Congress will eventually
extend estate tax relief beyond 2010, but the uncertainties of
the phaseout law kept estate planning alive in 2001, especially
among families with large estates.
--Ron
Panko
Workers' Comp Underwriting Changes
When hijacked jetliners crashed into the World
Trade Center on Sept. 11, the disaster did more than alter the
landscape of Lower Manhattan. It also brought about fundamental
change to the way workers' compensation insurance is underwritten.
Insurance analysts and underwriters estimate
that workers' comp losses from the catastrophe could range from
$1 billion to $6 billion, making it one of the hardest-hit insurance
lines.
Price hikes, more self-insurance and an increased
use of captives can be expected in the workers' comp line, said
Christopher Swift, a partner at professional services firm KPMG
LLP and its national industry director for insurance.
The wide range in the loss estimate takes into
account the long-tail nature of workers' comp benefits. The family
of a worker killed Sept. 11 in New York, excluding police and
firemen, would be entitled to $10,000 for funeral expenses. A
surviving spouse and each surviving child, if any, would be entitled
to $400 a week for the rest of his or her life, unless the spouse
remarries, in which case, the benefit is cut off after two years.
Children receive the $400 a week until they turn 21, but the benefit
would continue under certain exceptions, such as if the surviving
child is in school or disabled.
New York's police and fire departments have
their own compensation system, but most of the city's rescue workers,
including emergency medical services, are entitled to workers'
comp in New York.
Before Sept. 11, the traditional basis for evaluating
a risk profile for workers' comp was the type of work the business
did and the task being performed by employees. This applies in
every state, whether it's a professional athlete or a janitor,
said Scott Harrison, a KPMG LLP partner and head of its insurance
regulatory practice. Actuaries look at the likelihood of physical
injury or disability that could result from a particular occupation.
Until Sept. 11, the location of the business
was a limited factor in workers' comp underwriting, and was taken
into account when cost of living and medical expenses were factored
into workers' comp benefit calculations, he said. "Medical
costs are higher in New York, than Topeka, Kansas."
 Now,
risk analysis has to consider the increased likelihood of job-related
injuries and disabilities resulting from acts of terrorism, Harrison
said.
"Those risks exist without respect to job
classification. Now every employee and every employer is a target
for terror and for injuries on the job site related to some act
of terror. That wasn't the case prior to Sept. 11," Harrison
said. "Actuaries will have to assign some risk-based premium
or rate based on that."
Assessing concentration of risks also is important,
William D. Smith, president and chief operating officer of Kemper
Insurance Cos., said in November during a PricewaterhouseCoopers
conference in New York. "We as underwriters are faced with
underwriting concentration of risks," Smith said. "Most
have lost that skill."
Kemper is asking customers for more information
than it did before, such as how many people are employed and where
they are employed, he said.
There was a time when companies writing homeowners
and property/casualty insurance used a map of a ZIP code or city
block or town and would put push pins into the map to mark locations
where they sold policies.
This "pin map" made it easier to see
if a company had a high concentration of policies in one block,
something it wanted to avoid. "Conceivably, a fire in one
house could spread to another house you've insured," Harrison
said.
Concentrations are tracked electronically now,
but the same principle applies, and Smith's point is insurers
have to brush up on assessing concentration of risks.
Address, location, whether a business is in
a high-rise office building in a major city and how many people
are employed, are all factors that will be considered in workers'
comp underwriting. How much weight actuaries will give to physical
location is not yet known, Harrison said. "Taking these factors
into account may be the prudent decision for an insurance company
to make."
--Dennis
Kelly
Expect More IPOs
Several significant initial public stock offerings
among insurers last year set the stage for more demutualizations
and start-ups in 2002.
"There's a lot of new companies being started
up by existing companies, both in reinsurance and in some primary
companies," said M. Evan Lindsay, senior partner, insurance
and financial services, for Heidrick & Struggles. On the property/casualty
side, "rates are hardening, and there's lots of capital pouring
into new company start-ups. I suspect those companies will be
taken public after a decent period of time."
Looking back to 2001, "it was a really
terrible year for IPOs," said Lindsay, but he quickly pointed
out that Principal Financial Group's launch just weeks after the
Sept. 11 terrorists attacks "was a good test" of the
stock market's flexibility and rebound ability.
Principal, another company that decided demutualization
is the way to go, converted Principal Mutual Holding Co. into
a stock company. Principal's $1.85 billion IPO was the "fifth-largest"
launch of 2001, said Lindsay. "It was highly successful and
oversubscribed."
On Oct. 23, the day Principal launched its IPO
of 100 million shares of common stock, its stock rose more than
12%, trading at $20.75 a share by late morning, and was up nearly
14% at closing. Its IPO, which was priced at $18.50 a share, began
trading with a total market capitalization of about $6.7 billion.
"The fact that we were virtually the only
major IPO deal out there certainly was a positive, in a sense
that we got lots of attention," J. Barry Griswell, president
and CEO of Principal Financial Group, said a few days after taking
his company public.
Because of Principal's successful launch, Prudential
Insurance Company of America "should feel good about taking
its IPO out before the end of the year," said Lindsay. Prudential,
which received regulatory approval in October by New Jersey regulators,
anticipated an end-of-year IPO to complete its long demutualization
process. According to Prudential demutualization documents, the
price range for the stock was estimated at $22 to $38 a share.
Prudential's estimates, if on target, would make it the second-largest
insurance IPO in history. As of press time, Prudential had not
yet launched its IPO.
In addition to Principal Financial, the other
big IPOs of 2001 included:
Anthem Inc., which launched what could
be the most successful IPO the health industry has seen yet, according
to one equity analyst. Anthem sold 48 million shares of common
stock Oct. 30 at $36 each to raise $1.73 billion for the company.
Goldman Sachs Group Inc., the lead underwriter of the IPO, increased
the offering by 8 million shares earlier on Oct. 29, after increasing
it by 11.4 million shares on Oct. 26.
Phoenix Cos. priced its IPO of 48.8 million
shares of common stock at $17.50 a share on June 20, when it began
trading on the New York Stock Exchange. Proceeds from the offering
were expected to be $807.9 million and used to compensate policyholders
who receive cash and policy credits; for expenses directly related
to Phoenix's demutualization, and for general corporate purposes.
With its demutualization, Phoenix Home Life Mutual was renamed
Phoenix Life Insurance Co. and is a wholly owned subsidiary of
Phoenix Cos., the publicly traded holding company.
In addition to IPOs, sponsored demutualizations
will become a much bigger force in 2002 and beyond, said Lindsay.
"The one that's most apparent" is Nationwide Financial
Services Inc.'s pending acquisition of Provident Mutual Life Insurance
Co. "We will see more of these, where large, significant
companies provide capital and help mutual companies go public,"
he said.
Under the deal--rare in the past few years of
industry consolidation--eligible members of Provident Mutual would
receive shares of Nationwide Financial Services' common stock,
cash and policy credits totaling about $1.56 billion. The acquisition
would provide Provident Mutual, a midsize insurer, with more resources
to grow and remain competitive.
Both companies would benefit. Nationwide would
receive a career agency force of highly qualified financial planners
that it currently lacks, and Provident would gain access to Nationwide's
powerful independent distribution channels. Provident also stands
to benefit from Nationwide's technology platform, service capabilities
and strong ratings, said Robert W. Kloss, Provident's chairman,
CEO and president.
Looking ahead, many insurers will take advantage
of the post-Sept. 11 hardening market, characterized by a "significant
loss" in capacity, said John S. Scheid, chairman, Americas
Insurance Group, PricewaterhouseCoopers LLP. "We are now
seeing significant capital raising for new company formations,"
said Scheid, alluding to Lindsay's comments. Many companies are
starting offshore underwriting units, he said, including some
notables:
Aon Corp. will invest $200 million in
a new company, Endurance Specialty Insurance Ltd. The plans call
for capitalization of about $1.2 billion, with investments from
"several parties." One party that already committed
to the venture is Zurich Financial Services, which said it will
contribute $200 million through its private-equity affiliates.
White Mountains Insurance Group Ltd.
will form a Bermuda-based property/casualty reinsurer that
will initially focus on property business through the broker market.
White Mountains expects the reinsurer to be capitalized with at
least $1 billion. White Mountains will be a founding shareholder
and is expected to invest at least $200 million.
RenaissanceRe Holdings Ltd. plans to
launch a new Bermuda-based property/catastrophe reinsurer. DaVinci
Reinsurance Ltd. would have initial capital of $500 million, with
room for expansion if demand for capacity grows. State Farm Mutual
Automobile Insurance Co. will contribute $200 million, and RenaissanceRe
will put up $100 million, with the balance coming from other investors.
Renaissance Underwriting Managers Ltd. will manage the new company.
Aon's biggest rival in the brokerage
business, Marsh & McLennan Cos., said in September it's launching
Axis Specialty Ltd., a property/catastrophe reinsurer, through
its subsidiary MMC Capital Inc. Axis' initial capital is expected
to be $1 billion.
Overall, as of mid-November, more than $12 billion
in new capital was raised or was planned to be raised, since Sept.
11, Scheid said.
--Fran
Matso Lysiak
M&As Create New Competencies
Insurance industry mergers and acquisitions
that led the news in 2001 placed a lot of emphasis on market share
and distribution, but that emphasis is likely to change. The two
most notable deals for 2001 were American International Group
Inc.'s $23 billion acquisition of American General Corp. and the
$1.3 billion merger of WellPoint Health Networks Inc. and RightChoice
Managed Care Inc.
 The
AIG-American General deal was "a very significant acquisition"
for AIG, said M. Evan Lindsay, senior partner, insurance and financial
services, for Heidrick & Struggles. "It gave them a leadership
position in the life insurance market in the United States and
made them a player in the distribution of annuities through banks."
Early in 2001, American General's chief executive officer claimed
that the deal would eventually create the No. 1 life insurance
company in the world.
On the health side, the WellPoint RightChoice
merger will provide opportunities for both companies. WellPoint
will gain access to a large market share in Missouri and other
states in the Midwest, as well as access to the HealthLink system
from RightChoice, which will improve WellPoint's technological
base. At the same time, RightChoice will gain access to additional
markets through WellPoint to expand. RightChoice operates in Missouri
as Blue Cross & Blue Shield of Missouri.
Lindsay said there were other significant mergers
and acquisitions during 2001 that could have gotten lost in the
wake of the AIG-American General deal:
Bermuda-based White Mountains Insurance
Group Ltd.'s $2.17 billion acquisition of CGU Insurance Group,
the property/casualty subsidiary of the United Kingdom-based CGNU
plc. With the sale, CGU Insurance, with 2000 revenues of $4.4
billion, assumed a new name--OneBeacon Insurance Group.
XL Capital Ltd.'s acquisition of Winterthur
International for $600 million in cash, in a deal that boosts
XL's European operations and expands its worldwide risk-management
business.
Hartford Financial Services Group Inc.'s
$1.12 billion cash acquisition of the individual life insurance,
annuity and mutual fund businesses of Fortis Financial Group Inc.
The deal makes Hartford the third-largest writer of variable life
insurance in the United States, the company said.
Swiss Re's $2 billion acquisition of
the life reinsurance unit of Lincoln National Corp.
Mergers and acquisitions are likely to take
on a whole new look--and meaning--because of the Sept. 11 terrorist
attacks.
"Well-capped companies will try to acquire
expertise in underwriting and reinsurance," Lindsay said.
"Companies that don't have a strong reinsurance business
will look pretty seriously at acquiring reinsurance operations,
because of hardening rates and the amount of capital that's available"
to do these deals, he said.
Another expert agreed. The so-called "flight
to quality" takes on more dimensions, since the terrorist
attacks had such a "profound impact" on virtually every
aspect of the insurance industry, said Clint Harris, vice president
of insurance research and publications at Conning & Co., who
authors Conning's mergers and acquisitions reports.
Two of the questions insurance company executives
will have when determining whether a merger or acquisition would
be a good fit in 2002 and beyond, Harris said, concern the impact
the merger or acquisition would have on the financial strength
of the company and whether it would enhance the ability to accept
risk.
Another expert offered other prognostications
on mergers and acquisitions for 2002.
"I would expect to see a trend of continuing
investment from foreign players in the U.S. marketplace,"
said John S. Scheid, chairman, Americas Insurance Group, PricewaterhouseCoopers
LLP, who pointed to an increasing number of European players entering
the U.S. market, such as Aegon, ING and Allianz. He expects this
to occur not only in the property/casualty segment, but in asset
accumulation and annuities also.
Mergers and acquisitions also will take on a
slightly different facade in future years. "Rather than the
classic acquisition, many companies will be looking at acquisitions
of capabilities, very much like a strategic alliance," he
said. "They won't exchange stock, but partner to get a certain
expertise they don't have now."
A good example of "capabilities acquisitions,"
Lindsay pointed out, was the Wells Fargo-Acordia transaction.
In March 2001, Wells Fargo & Co. said it would buy ACO, the
parent company of Acordia Inc., an independent property/casualty
insurer. Acordia and Wells Fargo Insurance combined will have
$630 million in revenue and 176 stores in 38 states--making it
the largest bank-owned insurance agency in the country. The deal
was to be completed by the second quarter of 2002.
Wells Fargo "didn't want to acquire the
risk part of an insurance operation--but the distribution part,"
Lindsay said, noting that ACO is primarily an insurance distribution
company.
--Fran
Matso Lysiak
Mold Issue Is Growing
Mold became a national issue in 2001. Not only
did one of the largest property/casualty writers have to pay a
$32 million settlement over a lawsuit concerning mold, but a handful
of insurers halted writing homeowners insurance policies covering
water damage in Texas because of the spike in mold claims.
Mold claims arise from water damage caused by
everything from burst pipes to leaky roofs. While some strains,
like stachybotrys, can cause severe damage to a home, the effect
on health is still unproven.
Yet, mold is a growing problem for the insurance
industry. "Mold goes beyond the personal lines area and becomes
a complex and extremely potentially expensive issue for commercial
lines insurers as well as other areas where people will attempt
to prove negligence," said Robert Hartwig, the Insurance
Information Institute's vice president and chief economist.
In June 2001, a Texas jury ordered Farmers Insurance
Group to pay Melinda Ballard and her family $6 million for damage
to her home and its contents, $5 million for emotional distress,
nearly $9 million in attorney's fees and $12 million in punitive
damages. The jury found that Farmers improperly handled Ballard's
water claim, which allegedly allowed mold to form and eventually
take over the family's $3 million home. The case had a huge impact
on the property/casualty industry. "It single-handedly created
anxiety and heightened interest in mold," said Mary Flynn,
a spokeswoman for Farmers. After a court-ordered mediation failed
to produce a settlement, Farmers was ordered by a Travis County
District Court judge to pay $32 million to Ballard. Farmers intends
to appeal the final judgment.
Although mold claims have been filed in every
state and worrisome trends are showing up in Oklahoma and Louisiana,
the mold epicenters are Texas and California. Environmental factors
and the broad coverage offered in the state's HO-B policies combine
to make Texas a hotbed for mold claims, with 50,000 to 60,000
mold claims still open at the end of 2001. The loss ratio in homeowners
insurance in Texas jumped from 50.6 in 1999 to 82.4 in 2000, reflecting
a rise in average paid losses for water-damage claims, which rose
from $300 in 1999 to almost $500 in 2000, with an estimated $700
expected in 2001.
This spike in claim costs caused the top three
writers of homeowners insurance in Texas--State Farm, Allstate
and Farmers--to stop writing new business covering water-related
damage. Farmers, the second-largest writer in the state, went
a step farther and announced in early November it wasn't renewing
600,000 comprehensive HO-B policies as of the end of 2001. Farmers
said it wants to remain in Texas, "but we're bleeding financially
and have to stem the flow. Over the last two years, we had losses
of about $600 million in Texas in the homeowners insurance line,
and about $200 million of that was due to mold claims." Farmers,
the third-largest property/casualty insurer in the United States,
handled 12 mold claims in 1999, 499 in 2000 and by the end of
September 2001, it had handled 8,000 mold claims.
In response to the rise in mold claims in November,
the Texas Department of Insurance announced that as of Jan. 1,
2002, homeowners insurance policies in Texas would retain coverage
for removal of mold related to certain water damage covered by
residential property policies, including the most commonly purchased
HO-B policy. However, the ruling eliminated coverage for high-priced
procedures such as testing, treating, containing or disposing
of mold beyond what is necessary to repair or replace property
that is physically damaged by water. Policyholders have the option
to purchase additional coverage in increments of 25%, 50% and
100% of policy limits to include those procedures.
--Lynna
Goch
Source:
Best's Review, January 2002
Copyright 2002, A.M. Best Company
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