State Farm retreats in Gulf

State Farm retreats in Gulf; won't offer new policies in Mississippi. State Farm's decision Wednesday to stop writing new home and commercial policies throughout Mississippi could prompt other insurers to retreat further from the Katrina-battered region, industry groups and legal experts say. State Farm — which insures about one of every three Mississippi homes — is the first company since Hurricane Katrina to stop offering new policies throughout a state in the Gulf Coast area. Its move underscores the precarious nature of the region's insurance. Since the hurricane, insurers have cut back on homeowner policies in affected coastal areas. The decision Wednesday is one State Farm came to "reluctantly," says company spokesman Phil Supple, partly because of the torrent of lawsuits and rulings in Mississippi since Katrina and the uncertainty of pending legal battles. The move doesn't affect existing policyholders, at least for now.

This morning there was a story on CNN where some talkinghead was making a big stink about how this was unfair. I don't understand.

Here's how I see the matter. State Farm obviously is in the insurance business to make money; surely nobody expects them to write unprofitable business. Insurance in hurricane-prone areas is unprofitable, prompting State Farm to pull out. One's first thought might be that rather than pull out State Farm could instead try to make the business profitable by raising prices (although that might prompt the talkingheads to call *that* unfair).

So why doesn't State Farm raise prices? Because the market won't bear it. Essentially the economics of the matter are that homeowners in hurricane areas want the perks of living by the water, etc., without collectively assuming financial responsibility for the casualty losses that accompany this decision. Clearly homeowners in areas not subject to hurricanes are not going to accept higher premiums which would essentially subsidize those living in hurricane areas. Hence, the only economically viable decision is to pull out. Eventually, the supply of insurance dries up and prices will go up. Economics 101. Why are CNN and other news sources are acting like something horrible is going on here?

New Position at Hewitt - SVP of Corporate Development & Strategy

Hewitt Associates today announced that it has appointed Matthew Levin to the new management position of senior vice president, corporate development and strategy, effective immediately.

That will certainly add fuel to the fire of the rumors that Hewitt is planning to divest its HRO business.

Matt Levin's resume:

IHS Group - September 2004 to September 2006 - Senior Vice President of Corporate Development and Strategic Planning, in which role he was responsible for 10 (very small) acquisitions as well as the company's 2005 IPO

Hudson Highland Group - July 2003 to September 2004 - global operations officer for the human capital solutions business (quite a step up from his previous job at Sibson)

Management consultant (about 2 years) specializing in strategic planning and organizational effectiveness at Sibson & Company, which back then was a unit of Nextera Enterprises and is now a unit of Segal

Graduate of the First Scholar Program at First Chicago (now JPMorgan Chase), where he worked (about 2 years) in corporate finance covering the energy and media industries

MBA from the University of Chicago, BA from Northwestern University

Some additional background that may be of interest:

Steven Denning, Chairman of the investment firm General Atlantic LLC, sits on the boards of both Hewitt and IHS. General Atlantic is IHS's largest shareholder (14.3%) and Hewitt's second largest shareholder (13.3%).

Schwarzenegger reverses direction

California Gov. Arnold Schwarzenegger proposed a sweeping plan to mandate universal health care in the nation's most-populous state, putting forth measures that would require employers to pay into the health-care system as well as tax hospitals and doctors to help offset medical coverage's spiraling costs.

[The whole story can be found in today's WSJ.]

Last year, Schwarzenegger vetoed a bill by California's Democrat-controlled legislature that was not much different from what he is now proposing himself.

CRUSAP publishes final report

www.crusap.net

A lot of the sillier recommendations did not make it into the final draft. That's good. The ridiculously over-long 13-page executive summary is now 15 pages long. That's bad. Who said actuaries are bad communicators?

CRUSAP

Critical Review of the U.S. Actuarial Profession

The main paper is 72 pages long; the executive summary is 13 pages. No wonder so many people think actuaries are poor communicators.

It's a very worthwhile read, though, if you are interested in the "State of the Profession." Comments are welcome through October 31st.

FAS158 Released

This Statement improves financial reporting by requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. [...] An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006.

Biggest change in pension accounting since FAS87. First PPA now this. This is an interesting year to be working in pension.

Course 7

I passed Course 7.

http://examresults.soa.org/course7/c7-seminar071006.htm

I am now an Associate of the Society of Actuaries.

http://www.soa.org/ccm/content/exams-education-jobs/exam-results/new-associates---september-2006/

So now I can actually call myself an actuary.

San Diego County Fund suffers big loss

San Diego County's pension fund (not to be confused with the scandal-ridden city pension fund) was named Public Plan of the Year last April. Its investment returns were consistently ranked at the top of pension funds for its size. It had a winning strategy--at least until this week. Much of the fund's strategy was based on a basket of hedge funds. Overall, the fund had $1.3 billion, or a fifth of its total portfolio, in hedge funds. One of the hedge funds in the county's portfolio was Amaranth Advisors, the Connecticut fund that announced it had suffered big losses in natural gas trading. The county does not know how big its losses will be or will this be just the tip of the iceberg or just an isolated incident. (New York Times)

Let me see if I have this straight. A fund takes the highly risky decision to invest 20% of their assets in hedge funds, some of which invest in things like gas trading futures ... and this earns them the Public Plan of the Year award? What the ...? No wonder the pension industry is such a mess.

Schwarzenegger to the rescue

California Governor Arnold Schwarzenegger (R) stated that he will veto a bill passed by state legislators on August 31 that would have made California the first state to provide health care to all its residents under a single-payer, government-run program. The California Health Insurance Reliability Act (S.B. 840), would have created a publicly financed health care program and agency, the California Health Insurance System, to replace private insurers. Individuals and businesses would have paid an annual premium, based on income, to the state. State funds currently allocated to health care would have also gone into the new program.

Now for something completely different...

Above the Law is on a mission. Our quest: to find the hottest ERISA lawyer in America. Pension law. And yes, it's just as boring as it sounds. But just because a practice area is a sleepy backwater doesn't mean its practitioners can't be hotties. To the contrary, ERISA lawyers have more time than overworked M&A attorneys to tone their bodies at the gym and get facials at the spa. So we're expecting to see some pulchritudinous practitioners in this contest. We'll accept nominations until -- eh, until whenever we feel like it, depending on the response rate. We realize there is a distinct possibility that we will end up with zero nominees for this hotties contest. We'll cross that bridge when we come to it. Assuming we receive enough nominees of both genders, the men and women will compete in separate categories. After this competition, you'll never think of ERISA the same way again. The next time you hear the words "ERISA preemption," instead of getting sleepy, you'll get turned on...

If Boomers Have It All, What's Left?

Baby boomers could become known as the generation that took it all, leaving their successors to pay the bills and take the risks the boomers did not have to accept. Look at pensions. Corporate bigwigs (many of them boomers) are protecting their pensions but reducing or eliminating the benefit for younger employees. Instead, younger workers will get defined contribution plans that put all the risk on their shoulders. Companies have deluded themselves into believing that younger employees welcome, even love, the changes. The changes are modern and hip. Portability, direct control, and risk are in. Young employees may end up doing very well. If not, there is a problem. (The New York Times, 01-Sep-2006, National ed., p. C1)

CFA Level 3

I passed the CFA Level III exam in June. I've already had my experience verified and approved, so I should get the CFA charter in the next batch in September.

Pension Protection Act

President Bush today signed the Pension Protection Act of 2006 ("PPA") into law. Big changes to pension funding, effective 1/1/2008. Probably the biggest change to pension law since the passing of ERISA in 1974.

Edited to add link to a PPA blog
http://qualifiedpensionconsulting.com/ppablog/

IBM Decision Overturned

A three-judge panel of the Seventh Circuit Court of Appeals in Chicago yesterday ruled IBM did not discriminate against its older employees in 1999 when it converted its pension plan to cash balance. The decision reverses a 2003 federal court ruling that the change discriminated against older workers. The decision also saves IBM from having to pay up to $1.4 billion to 140,000 older employees and retirees who were affected by the conversion. In its ruling, the appeals court acknowledged that older workers were correct in perceiving "that they were worse off under the cash balance approach" than the defined benefit approach, but "removing a feature that gave extra benefits to the old differs from discriminating against them." The plaintiffs intend to ask the full appeals court to reconsider the ruling.

Maybe if this decision had come down in 2003 IBM wouldn't have frozen their plan.

News from Hewitt

A very insightful article...

Hewitt announced the departure of Michael Salvino, co-leader of its HRO sales and accounts group. The announcement comes on the heels of the announced resignations of Hewitt’s CEO Dale Gifford and Bryan Doyle, president of HRO. Hewitt doesn’t appear to have a successor in place for Salvino. According to some industry observers that could be hinting at a sale of its HRO business. By any standards, the three departures signal a major shakeup only two years after the merger of Hewitt and Exult was announced. At the time of the announcement, the merger was regarded as nothing short of a defining moment in the history of HRO.

And now, while the marriage is still intact, the honeymoon is clearly over. While the union may yet last longer than a typical Hollywood wedding, if the paparazzi could stalk companies, they’d be all over this relationship. I haven’t seen the Las Vegas line, but put the over/under at 18 months and take the under. When the merger first took place it appeared to be the perfect marriage. Hewitt was regarded as the gold standard in benefits outsourcing, setting the paradigm in how total benefits administration was delivered. Exult on the other hand had the most mature of the practices and model of BPO of HR. The orders started pouring in! It would appear, however that the orders came in too fast. Reportedly (and allegedly) implementation became more difficult, and now perhaps Hewitt isn’t competing effectively for the current opportunities.

The rumors had been that Hewitt might be looking to jettison HRO and that Accenture would be the taker. More recently ADP and Fidelity have come into the mix of rumors. The thinking is that another major market player will have better luck in turning the Exult model to profitability. If Hewitt couldn’t turn a profit with it, I don’t think ADP or Fidelity could either. Hewitt was the best at turning administration into profitability. Fidelity and ADP are the best at turning high volume transaction processing into profit. The real problem is that HRO is neither solely administration nor high volume transaction processing. When Hewitt offered services outside of its core model, the troubles began. Now it is hard to tell what the model is. Is it based on Cyborg? Is it a lift and shift of your PeopleSoft or SAP platform? Is it a one-to-many or a one-off model? In the final analysis, we may very well see that the Hewitt-Exult merger did indeed change the way the market views HRO but not in the way in which people may have thought only one year ago.

Drug prices rose sharply

Prices for some of the most widely prescribed drugs rose sharply during the first quarter of the year, according to two separate studies. AARP said prices charged by pharmaceutical makers for brand-name drugs rose 3.9%, four times the general inflation rate. Overall higher prices mean the cost of providing brand-name drugs to seniors rose by almost $240 on average for the 12 months ended March 31. The second survey by Families USA found similar inflation rates among brand-name drug prices. The drug price increases could have a devastating effect on the new Medicare drug program. High drug prices could lead to higher premiums, which could discourage some people from enrolling in the program or staying in the program [the ones least likely to need the service, a concept known as anti-selection in the insurance industry], which in turn could lead to even higher premiums.

Imagine that. Dramatically increasing demand by instituting Medicare drug coverage caused prices to go up dramatically. Who could have predicted such a thing? Certainly not me. I mean, it's not like they explain this in Economics 101 or anything.

PBGC settles with Rennert

The PBGC will stop going after the assets of industrialist Ira Rennert because it has been assured he will keep a disputed steelworkers pension plan for 2000 workers and retirees going after he sells WCI Steel since the potential new owners of bankrupt WCI did not want the underfunded pension plan.

Seeds of Private Health Care in Quebec

Last week, Quebec's Premier Charest proposed lifting a ban on private health insurance for several elective surgical procedures and announced the province would pay for the surgeries at private clinics when waiting times at public clinics and hospitals were unreasonable. The proposal was in response to a Supreme Court decision last summer that said long waits for surgical procedures at public facilities was unconstitutional. The Court then struck down the province's ban on private medical insurance and ordered it to initiate a reform program within a year. The Supreme Court's opinion applies only to Quebec, but it has already generated movement elsewhere. The premiers of British Columbia and Alberta have promised action. All of the provinces are reacting to long waiting lines for some services under Canada's public health insurance program.

PBGC May Take Rennert Hamptons Estate

The PBGC is poised to lay claim to a $185 million five-building, ocean-front estate in the Hamptons with over 100,000 square feet, 29 bedrooms, 39 bathrooms, a 164-seat theater, two bowling alleys, a restaurant-size kitchen, and a garage that holds 200 cars. The estate belongs to Ira Rennert, who built a business empire and fortune by buying distressed companies, often with high-yield junk bonds. One of those companies was WCI which has an unfunded pension obligation of $189 million. The PBGC is threatening an involuntary plan termination and placing a lien on Rennert's house to force him to pick up the tab for the pension plan. This is not the first time the PBGC has gone after the business and personal assets of individuals to satisfy pension obligations. In 1992 it went after Carl Ichan in the TWA bankruptcy.

ACS Affirms No Sale to Private-Equity Investors

ACS announced today that recent unsolicited discussions with a group of private-equity investors regarding a possible sale of the company have ended. ACS has been considering alternatives to enhance shareholder value including the discussions with a group of private-equity investors, as well as the possible dual class recapitalization proposal described in the Company's September 2005 proxy statement.