Economic Downturn Mixed News for WC Insurers; Tornadoes Could Rate Catastrophe Designation; China L

The depressed economy has good and bad news for workers' compensation insurers, said the chief executive officer of the National Council on Compensation Insurance at the group's annual seminar. The good news is there will be fewer and less costly injuries, but the bad news is there will be fewer premiums written, said Steve Klingel, NCCI president and CEO.

Klingel, basing his remarks on data from previous recessions, said insurers' premiums will be affected by smaller payrolls with fewer workers to insure. The greatest impact will be felt by insurers whose business comes from the more affected sectors of the economy.

The hardest-hit sectors, he said, will be the manufacturing and construction sectors. Klingel said as construction slows, comp insurers will see fewer hurt workers from an industry that generally tallies more severe and costly injuries.

There also will be a drop in injury frequency caused by the fact that fewer inexperienced workers will be arriving on the job, said Klingel.

Severe weather over the Mother's Day weekend spurned a number of killer tornadoes that could qualify for the Insurance Services Office catastrophe designation, the firm reported.

Gary Kerney, assistant vice president for Property Claim Service, a subsidiary of ISO, said the company is examining the storms in all the affected states. “We likely will be assigning a serial number to the recent tornadoes but are currently gathering information from other states such as Kansas, Oklahoma, Missouri, Texas, and Georgia in order to assess clearly all of the severe weather situations.”

PCS rates an event as a catastrophe when it impacts a significant number of insureds and inflicts $25 million in damage. The storm front over the Midwest destroyed homes, knocked out power, and reportedly killed as many as 21 people throughout the region.

In terms of fatalities, the worst hit was Missouri, where the state's emergency management agency reported at least 14 people died in the southwestern portion of the state.

Barry County appeared to be the hardest hit with up to 175 buildings affected by tornadoes and a dozen destroyed. Most of the deaths occurred in Newton County, where 12 died.

A modeling firm weighed in with estimates of earthquake damage in China, which it said created property losses of between $10 billion and $15 billion, while an insurance executive said it could mean heavy losses for reinsurers.

Risk Management Solutions, based in Newark, Calif., said its preliminary estimates included infrastructure damage and interruption to economic activity. The firm held off any estimate of insured losses.

Earlier, AIR Worldwide in Boston said the insured loss possibly could hit $1 billion and other losses would be around $19 bil-lion, and EQECAT in Oakland, Calif., which has not yet figured insured loss, said economic damage from the quake probably will not exceed $75 billion.

During a media briefing in New York, William R. Berkley, chair and chief executive officer of W.R. Berkley Corp., speculated some of the world's largest reinsurers will see significant losses from the China earthquake. “My guess is [they] will have losses well into the hundreds of millions because of this earthquake–more than they have made in all the time they've been in China,” he said.

The Hartford Financial Services Group Inc. reported first-quarter net income fell 83 percent, resulting primarily from $648 million in net realized capital losses, but underwriting delivered results above expectations. Included in the capital loss, the insurer said, is a $220 million charge related to the implementation of new accounting standards.

Quarterly net income dropped by $731 million to $145 million, off $2.25 a share to 46 cents a share. Property/casualty operations written premiums were down one percent to $2.6 billion compared with the first quarter of 2007, producing operations net income of $326 mil-lion, off $135 million from the same period in 2007. The 2008 results include $99 million of net realized losses. Despite the losses, the combined ratio improved one point to 87.8.

In other operating segments, personal lines written premiums were $936 mil-lion, flat compared with last year's numbers, with a combined ratio of 89.4. Small commercial grew $3 million to $743 million with a combined ratio of 82.7. Middle market dropped $9 million in written premiums to $743 million. Specialty commercial insurance was down eight percent to $357 million and a combined ratio of 88.

Progressive Corp. warned its stockholders a “mini-tender offer” by Toronto-based TRC Capital Corp. for five million of its shares is more than $2 below the stock's closing price.

The insurer indicated the Securities Exchange Commission (SEC) issued an investor alert regarding such offers, noting “some bidders make 'mini-tender' offers at below-market prices, hoping they will catch investors off guard if the investors do not compare the offer price with the current market price.”

TRC was offering $16.60 per share, which Progressive said was more than four percent below the per share closing price of $17.37 on April 15, the day before the mini-tender offer was commenced, and approximately 11 percent below the preceding Friday's $18.64 per share closing price.

Progressive reported it had 677.5 million shares of common stock outstanding, meaning the TRC offer would be less than one percent of the company.

A California court denied a request by Allstate to stay a regulator's order the firm cut its auto insurance rates by 15.9 percent. Insurance Commissioner Steve Poizner reacted by issuing a statement calling the ruling by Superior Court Judge Peter Busch in San Francisco “a $250 million victory for consumers in California and for Allstate customers.”

Allstate said while disappointing, the ruling “has no impact on the merits of Allstate's appeal, and we believe we ultimately will win the appeal.”

Poizner said the court, by denying a stay, had rejected an effort to delay immediate savings to consumers pending the court action Allstate brought challenging his department's determination that Allstate's existing passenger automobile rates are 15.9 percent in excess of what the law permits.

The Financial Industry Regulatory Authority is advising consumers to look to see whether their mutual funds or other funds have invested in bonds linked to pandemics and other catastrophes.

“Event-linked securities currently offer higher interest rates than similarly rated corporate bonds,” officials at FINRA, Washington, wrote in an investor alert. “But if a triggering catastrophic event occurs, holders can lose most or all of their principal and unpaid interest payments. This is precisely what happened to funds that owned bonds linked to U.S. hurricane risk when Hurricane Katrina struck.”

Catastrophe bonds pay higher interest rates than similarly rated traditional corporate bonds, and some argue investors are overcompensated for the risk they assume by buying CAT bonds, FINRA officials wrote. In addition, CAT bonds perform differently than typical stocks and bonds perform in a bear market.

Supreme Court justices are not sure what to tell lower courts about how to review potential conflicts of interest that might affect disability benefits decisions. The justices heard oral arguments in Metropolitan Life Insurance Company et al. vs. Wanda Glenn, a case involving questions about a benefits determination made by a company that served both as the insurer of an employer-sponsored group disability plan and as the administrator.

The plan was governed by the Employee Retirement Income Security Act. Justices told the lawyers for the parties they are uncertain about what the lawyers want them to write in their opinion.

Chief Justice John Roberts noted the Supreme Court repeatedly has emphasized the importance of employer-sponsored benefit plans. “We want to encourage people to set up ERISA plans,” Justice Roberts said.

The Glenn case deals solely with how the courts should review a benefits determination and not with the merits of the underlying disability claim.

Federal regulation of the U.S. insurance industry probably is coming, but it may not bring quick benefits to insurers or to consumers. Analysts with Fitch Ratings made that argument in an analysis of federal insurance regulation proposals.

“Fitch believes increased federal regulation of the insurance industry is inevitable in the long term,” the analysts wrote.

The Treasury Department's recent declaration of support for giving insurers the option of choosing between state and federal regulation makes passage more likely “than at any point in recent history,” according to Fitch.

Rate reductions are expected to continue for U.S. reinsurance accounts with midyear renewals unless catastrophe losses increase in the near term, reinsurance brokerage Guy Carpenter reported. The brokerage issued a report on the reinsurance market titled “The Market's Mixed Signals: Reinsurance Renewals at April 1, 2008,” which covers the reinsurance market for the United States, Japan, Republic of Korea, and India.

For the United States, the report said rates continued their decline at April 1 renewals, sustaining what was seen for Jan. 1.

The report said looking ahead to midyear renewals, the current trends indicate the declines will persist, assuming losses remain low. However, the report cautioned if predictions of an above-average hurricane season come true, “the industry's two-year string of good fortune may come to a close.”

Liberty Mutual Group announced it has reached an agreement to acquire Seattle-based insurer Safeco Corp. in a transaction valued at $6.2 billion. Liberty Mutual said it will pay $68.25 per share in cash to become the fifth-largest U.S. property/casualty insurer. As of 2007, the combined 2007 direct written premium of the firms was $26.1 billion.

The proposed transaction, approved by the boards of both companies, is subject to approval by Safeco's shareholders as well as regulators.

The transaction is expected to be closed by the end of the third quarter and is not subject to financing contingencies.

Liberty Mutual Group currently is the sixth-largest U.S. P&C insurer, based on the company's 2007 direct written premium of $20.2 billion, while Safeco had 2007 direct written premium of $5.9 billion.

When the transaction is completed, Liberty said Safeco will become part of the group's Agency Markets business unit, which had revenues of $5.6 billion in 2007. Combined, the organization will be represented by about 15,000 independent agencies.