Top P/C trades kick off official merger talks, due diligence

The top property casualty insurance trade groups could soon get past the flirting stage, although it is too early to ring any merger bells.

In a June 19 memo to the CEOs of the Property Casualty Insurers Association of America, the U.S.’s largest property casualty  trade group, chair Kurt Bock acknowledged he had been exploring a potential merger with the American Insurance Association.

A joint AIA-PCI chairmen’s statement attached to the memo, obtained by Washington Insurance Rider, stated that the AIA and PCI boards have now authorized merger discussions and the accompanying due diligence.

If such a merger occurred, the resulting organization would represent about 60% of the U.S. property casualty market, according to the trades’ leadership. The AIA board chair, who also signed on to the joint statement, is Anthony Kuczinski, CEO of Munich Reinsurance America.

The PCI-AIA vision is for the combined organization, should a merger occur, is to act as the “preeminent” voice for personal, commercial and specialty property casualty companies while also servicing members with information and compliance needs, according to the two chairs’ statement.

grey ceramic landmark during daytime

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Bock, who serves as CEO of mid-sized insurer COUNTRY Financial, noted in his memo that AIA had approached PCI’s board leadership about exploring a strategic alliance, “given the rapidly changing dynamics of our industry.” Bock told his member CEOs that the PCI board would make a recommendation to the full  PCI membership later this fall. PCI traditionally holds its annual meeting in the fall.

 

Over the past few months, the CEO of AIA, John Degnan, and the CEO of PCI, Dr. David Sampson, not only held talks but created reports on a possible “policy alignment” between the two trade groups. The AIA and PCI boards have reviewed the reports and proposed a possible governance structure for a merged AIA-PCI trade organization.

The memo gave no indication of what the new board or organization might look like or who would eventually lead it.

AIA has shed members over the past decade although it has won a few recent new companies as well, but it is still a much smaller organization than PCI. Degnan has been in the job less than a year and has signed on members such as CNA Financial, as well as begun these new merger talks during his brief tenure. AIA had in the past two or so years conducted merger conversations with the Reinsurance Association of America, talks which did not come to fruition.

AIA, under both Degnan and his predecessor, has also been more vocal on international issues such as the covered agreement on reinsurance and is active and present in Washington and at the state level than has PCI.

PCI is a much larger group with almost 1,000 member insurers and reinsurers –and more varied membership. Its members write $220 billion in annual premium, according to PCI’s website and Bock’s previous testimony. PCI is based in Chicago but has a large Washington presence in glass office buildings tucked in front of the U.S. Capitol building, clsoe to Union Station.

AIA has more than 330 companies as members who collectively represent more than $134 billion in annual premiums, according to its website. The 150-plus year-old organization is based in Washington.

PCI is also  heavily involved and influential in Congressional activity, especially before the House Subcommittee on Housing and Insurance. Bock has testified before both the House and the Senate on multiple federal and state insurance issues.

PCI leadership has “consistently underscored that our top concern was to not do anything (sic) that could diminish the value proposition we deliver to our members,” Bock stated in the memo, which was obtained by Washington Insurance Rider.

“This only makes sense if we can see a path forward to gain accretive value first for our members, and secondly for the industry,” Bock wrote.

In the joint statement, Bock and the AIA’s Kuczinski, stated that the “respective Boards of AIA and PCI believe there is great benefit in a more unified policy and advocacy voice for property casualty insurers, given the “unprecedented pace of change in the world” and the resulting potential opportunities and challenges.”

The company CEOs did not detail these opportunities or what they later referred to as “unprecedented challenges.”

Leading issues before the states and Congress and international bodies include new global capital standards, flood insurance reform, the use of data mining algorithms and artificial intelligence, arbitration in legal cases, the use of technology, social policy issues such as firearms, availability and affordability of homeowners and auto insurance, drone use, reinsurance collateral terrorism risk and the advent of self-driving vehicles.

The company executives told members that there is still a lot of work to do before they can make a final recommendation to them regarding a merger.

They underscored industry unity as the driving force behind the “most paramount property casualty issues at the state, federal, and international levels,” and talked about strength in numbers.

Spokespersons for both PCI and AIA were not immediately available for comment, but this story will be updated as needed, and updates noted.

The joint statement made clear that the combined entity would promote  the U.S. state-based regulatory system and also seek to improve it. The Bock memo and joint statement was sent a day after Steve Dreyer assumed the role of director at the Federal Insurance Office at the U.S. Treasury, a top federal insurance job that had been vacant for nearly a year and a-half.

 

Steve Dreyer poised to lead FIO as its future reach is disputed on Hill

UPDATE 2 (and 3) February 2019: We’d be remiss if we did not include this Feb. 22, 2019, coverage, via my work for Investment Advisor magazine, noting that longtime deputy Steven Seitz is now officially FIO director after Dreyer stepped down abruptly after five months: https://www.thinkadvisor.com/2019/02/22/seitz-promoted-to-federal-insurance-office-director-post/?slreturn=20190126144207

UPDATE June 14, 2018: Dreyer expected to assume the FIO post Monday, June 18

The Federal Insurance Office at the U.S. Treasury Department will likely have a new director at its helm this summer.

Steve Dreyer, a long-time insurance ratings analyst, will likely step into the position, which has been vacant since January 2017, when the department’s first director stepped down after five and a-half years. Dreyer has been under consideration for months while bureaucratic kinks have been worked out, according to sources. Those obstacles are expected to be cleared soon.

Dreyer, a former managing director for insurance ratings at Standard & Poor’s, subsequently S&P Global Ratings, would have a voice, if not a vote in the Financial Stability Oversight Council, and be instrumental in the Terrorism Risk Insurance Act data collection program.

IMG_3094 Photo courtesy Steve Dreyer

Before retiring last summer, Dreyer had also been active in enterprise risk management and infrastructure risk.

Given his background, Dreyer is interested in predicting and if possible, preventing financial instability in the insurance industry. He wants to know what regulators can do to fulfill this goal, he shared.

One part of this is the development of the international capital standard, or ICS, underway — not just how it is calculated, but how it would be used, according to Dreyer.

Another issue on his radar is the lack of sufficient retirement savings for a many Americans, along with their inability to pay for long-term care insurance costs in particular as a looming crisis for the economy.

While Dreyer acknowledged that this is not strictly an insurance problem, he does see the industry as a central player in it, one that could either exacerbate or ameliorate the problem of long-term care insurance and coverage challenges.  Failure to have the ability to pay for claims would make things worse but the creation of products and processes to help consumers would help, in his view.

As “a student of the insurance industry” for more than 30 years, Dreyer is interested in ways to improve the financial security of Americans who are underinsured or uninsured for risk of flood, earthquake or disability, he stated.

However, as a manager, Dreyer is most proud of the experience he had leading his insurance rating team through the events of  9/11.

He said the event was also an “existential crisis for the industry, as CEOs pondered invoking the war exclusion, and at the same time were looking at losses that were vast and indeterminate at the time.”

Soon after the tragedy struck, Dreyer’s group of analysts had to track down insurance companies for loss estimates while insurers pondered questions on whether to pay enormous potential claims or  face reputational risk. Dreyer and his crew had to meet with colleagues and rating committees with no office and with patchy cell phone service. It took a week to make sure all the analysts were  accounted for, Dreyer said.

Dreyer recounted how his group met in a local pub each day until the offices on Water Street were reopened.

“It is a source of pride to me that we were able to communicate quickly to the market that, in our opinion, the industry WOULD pay claims, they WOULD NOT be bankrupted by doing so, but … could not suffer repeats going forward,” Dreyer emphasized in an email. “I think that it provided some much-needed comfort at the time.

If he assumes the director role, Dreyer would also coordinate closely with counterparts from the Federal Reserve Board, the states and the National Association of Insurance Commissioners on international standards for group capital and the development of other baseline criteria under a global supervisory regime.

He would do so, however, under slightly different statutory conditions than his predecessor, Michael McRaith,  in part due to a new provision in the new Dodd-Frank Act regulatory rollback law.

The recently-signed Economic Growth, Regulatory Relief, and Consumer Protection Act will help shape coordination and consensus between  state regulators and both the Treasury and the Fed.

Although the new law appears to require equal footing among states and federal agencies on the international stage, one law firm has noted that federal powers might prevail. Eversheds Sutherland, in a legal alert dated May 30, noted that the signing statement by President Trump highlighted the executive branch’s constitutional authority “to determine the time, scope and objectives of international negotiations”  in reference to the insurance regulatory provision of the May 24 Act.

In addition, legislation that would curtail some of FIO’s powers is currently brewing in the House Financial Services Committee, although its passage is not a sure thing: the American Council of Life Insurers opposes the modified bill, H.R. 3861, because of its restrictions on “FIO’s structure and scope.”

In a June 5th letter to Rep. Sean Duffy, R-Wis., chairman of the Housing and Insurance Subcommittee, and Rep. Denny Heck, D-Wash.,the ACLI’s CEO Dirk Kempthorne  took aim at the covered agreement language in the bill, provisions that would not allow Treasury/FIO to have the last word over content of the potential language it negotiated with a foreign jurisdiction.

Conversely, the NAIC  supports the bipartisan Federal Insurance Office Reform Act, applauding its requirement for FIO to coordinate more closely with state insurance regulators as well as limiting its power at the international supervisory table.

As director of a post envisioned by the 2010 Dodd-Frank Act, Dreyer would represent the U.S. in international negotiations that could potentially result in another bilateral pact on insurance, known as a covered agreement.

FIO currently has the ability to pre-empt state insurance laws with a covered agreement, which has been a source of tension with parts of the insurance industry and state insurance officials. The European Union and the U.S. reached a pact on reinsurance collateral and other measures in 2017 as part of the first-ever covered agreement.

Under acting director Steve Seitz, FIO and state insurance regulators have been working together recently on a number of initiatives, including reinsurance collateral.  Any future agreements between international jurisdictions and the U.S. FIO and the states have also worked together to consolidate their data collection for terrorism risk insurance information from the property casualty insurance industry.

Treasury did not respond to questions on a FIO director appointment.

Liz Festa, June 6, 2018

 

Update via Investment Advisor magazine: https://www.thinkadvisor.com/2018/11/15/treasurys-federal-insurance-office-director-dreyer/?slreturn=20181015111735