Insurance Transparency Project

I-Fans,

It was a night of a 1,000 stars. Martin Sullivan. George Dale. Pierre Ozendo. Jim Schiro. Paula Rosput Reynolds. Paula Abdul. Gwyneth Paltrow and Apple. Derek Jeter. Clive Owen(1). Even so, ITP War Eagle, resplendent in cufflinks and his brand new Brioni, was, in my opinion, the belle of the ball.

And what can one say about New York’s Waldorf-Astoria Hotel? Quel Magnifique! The chandeliers, the distinguished oak-paneled lobby, the menacing doormen every five feet, the dust, the thoughts-of-suicide-provoking Sir Harry’s Bar, the ancient carpets. Hey, Waldorf (owned by Hilton): I got two words for you: “Cap Ex.”

Listen, I joke around. But ITP thanks III(2) for its sense of humor and hospitality. ITP is also grateful that Bob Hartwig, the president, is too busy to respond to these blogs. ITP would hate for its long-cherished beliefs to be demolished.

Jokes aside, the news out of the conference came from the first panel, when Mississippi Insurance Commissioner George Dale debunked a NYT story yesterday that said the state and State Farm were in talks to settle 639 Mississippi wind claims for $80 million.

(By the way, this wasn’t even close to a scoop. Anita Lee’s Sun Herald readers knew this on Dec. 28. By the way, it’s considered common courtesy — not the Times’s strong suit — in the newspaper business to acknowledge something was reported elsewhere first.)
ITP will have a lot more to say about this proposed deal, but I will draw readers’ attention to this paragraph:

“To close the deal, State Farm wants the approval of Mississippi’s attorney general, Jim Hood, and the state’s insurance regulator, George Dale, lawyers close to the talks said. As a condition of the deal, these lawyers said, Mr. Hood would be required to drop a criminal investigation into State Farm’s handling of claims as well as a civil lawsuit against State Farm and other insurers.”

Dale said the story “jumped the gun” and no deal has been reached. ITP doesn’t know if it’s even possible to “drop” a criminal investigation as part of a civil settlement. ITP doesn’t really care. ITP isn’t interested in paying policyholders, frying insurers, or vice versa. ITP wants to know what happened on the Gulf and of course opposes any deal that keeps important insurer-performance data from the public domain. Usually such deals involve confidentiality agreements. War Eagle takes a dim view — a very dim view – of those. With all due respect to Commissioner Dale, Attorney General Hood, distringuished plaintiffs’ lawyer Richard Scruggs and the policyholders themselves, ITP goes on, no matter what they decide to do.

But why be gloomy after such a magical night? In the interest of brevity, I’m going to keep this, um, short.

The backdrop to the conference was the industry’s record profit forecast for 2006 — $60 billion — the best year since the late 17th century, when George Dale was still an assistant principal at Moss Point High School, and its so-called combined ratios in the low 90s, the best since the 1950s.

I-Fans, combined ratios are important. They measure losses and expenses against premiums collected. If your combined ratio is below 100, that means you’ve earned money after your expenses, which is in addition to what you earn on investments while you hold policyholders’ money. There is nothing wrong with low combined ratios, at least in theory.

Jay Gelb, a stock analyst from Lehman Brothers, forecast that the industry’s rate of return on its capital, would stay in the 10% to 13% range through 2008. I-Fans, listen up: 10-year Treasury Bills are paying 4.5%. These kinds of returns are measured in hundreths of a percentage point. Even my pal Bob Hartwig would acknowledge, those are extremely generous returns. (Yes, he would also say, it’s in the middle of the pack of the S&P 500. And I would counter that Allstate, a proxy for the business, has clobbered the S&P in the last five years, so investors are clearly looking at something else. And since he’s not here, I win the argument.)

To be fair, as Zurich’s CEO Jim Schiro pointed out, these are unusual times, and much cautionary talk was in the air about the need to maintain pricing discipline and to look over the long term, when insurers haven’t done as well. High returns in the past have caused capital to rush in and uneconomic pricing competition to occur, contributing to the industry’s traditional wild cyclicality, much , interestingly, like two of my old beats, paper and real estate. (Yes, I do get the glamour beats, don’t I?)

And, to be sure, Katrina overhung the meeting, I feel, at least atmospherically. There were many nervous jokes and remarks about outstanding lawsuits, Senator Lott’s current anti-insurance attitude, reputational “black eyes,” regrettable political demagoguing and the need to educate policyholders and politicians about why profits and Katrina claims have nothing to do with each other.
But the most thoughtful note was struck by Marc Racicot, president of the American Insurance Association, the industry’s main D.C. lobby, and, you will recall, a former Montana governor and chairman of the Republican National Committee and of President Bush’s 2004 reelection committee. Racicot warned the audience, which included most all of the industry’s most important figures, that the industry is entering a “precarious environment,” politically.

“I think we have reached a pivotal moment in the property/casualty industry in this country,” he said. The result, he added, could entail “big changes in a sytem as old as the Civil War.”

ITP agrees. He didn’t precisely spell out what he meant, but I suspect he was talking about the Katrina overhang, looming Congressional and Department of Homeland Security investigations of the property/casualty business and the flood program, respectively, and poposals to revoke insurers’ anti-trust exemption and reorder the state-based regulatory system. Oh, and the whole health insurance thing.

There’s a lot more to say, but ITP will leave it there except to note that it did take heart from two things and was disturbed by another thing.

ITP noted favorably Mr. Racicot’s call for “shared responsibilty” in solving various insurance dilemmas and the need for civility. I also applaud his call to help make insurance “a value proposition,” instead, I assume, of a political football. Fair enough.

But ITP was really impressed by Paula Rosput Reynolds, president and CEO of Safeco Corp., who, like ITP, is new to the industry, having spent her career at an Atlanta energy-services holding company, AGL Resources.

The only woman in sight, Reynolds told the group it needed to change its very relationship to, or at least the form of its discourse with, its customers. “We don’t even know how to speak to consumers,” she said, particularly given the high and increasing financial literacy of baby boomers. (She also applauded automated underwriting, which, in ITP’s view, is so long overdue it’s not even funny. Where is this industry’s Charles Schwab?)

And that bring me to my final point. For the three people out there, plus Mom, reading this and for what it’s worth, ITP noted an attitude toward customers that, I found, faintly, but disturbingly, how shall I put it, condescending. I refer to the constant talk about customers’ need to be educated and their tendency to fall under the sway of trial lawyers, unnamed demagogues and opportunistic politicians, clear references to Scruggs, Hood, Rep. Gene Taylor and, I suppose, these days, Senator Lott.

I won’t get into names in the interest of courtesy, but ITP noted too many references to consumers’ traditionally “uninformed” responses to insurance questions, their wanting to have things all ways — shared risk, but low rates — their irresponsible insistence on living near the coast and the fact that they don’t “stay up at night worrying about underwriting issues.”

Frankly, you don’t hear that kind of talk about readers at newspaper conferences. You really don’t. Nor do you hear it about customers at paper industry, packaging or real estate conferences. You just don’t.

The ITP spirit is the spirit of respect and civility. War Eagle is just offering an observation to think about. Sorry, this was not at all brief.

(1). President and CEO of AIG; Mississippi Insurance Commissioner; CEO of Swiss Re America Corp.; CEO of Zurich Financial Services; president and CEO of Safeco Corp.

(2)Insurance Information Institute, industry-backed reserach organization.
Correction and private note to Frozen Athlete: You are correct. It’s “Vestimenta.” I spelled it wrong two ways.