Archive for December, 2008
After New York Success, Niche Insurer Tries To Conquer New Worlds - Steven Wevodau
Paula L. Stepankowsky
“It’s important for investors to focus on companies with strong balance sheets and companies that have niche markets, and Tower fits that very well,” said Michael Grasher, an analyst at Piper Jaffray.
Doing the extra work necessary to sell insurance products to smaller customers (think delis and dry cleaners) has paid off for New York-based Tower, which went public in 2004 and has shown solid gains in earnings and assets since then.
Difficult Business
Because of its niche, Tower hasn’t had the problems other insurers have had in the last year, Grasher says.
“It’s a very difficult business to write at that end of the market and have the economies of scale to handle all these policies,” he said.
Because of its focus on smaller businesses, Tower’s pricing has held up relatively well despite soft conditions in the overall property and casualty business at present, says Raj Sharma, an analyst at Polestar Investment Research.
“Their niche is the smaller market, but only where they can underwrite profitably in the next two to three years,” Sharma said. “If not, they don’t do it.”
On the competitive front, big insurers such as Allstate aren’t set up to be profitable in this niche, and smaller competitors are fragmented and not as well capitalized, says Sharma, who owns some Tower stock through funds he manages.
Tower’s strategy to raise capital also helps differentiate it from competitors, analysts say. While other insurance companies might sell stock to raise capital, says Sharma, Tower makes acquisitions to get access capital that it then deploys in other parts of its business.
“What Tower does really well is how it gets additional capital without diluting shareholders’ base,” Sharma said.
Despite challenging conditions in the broader markets this year, Tower Group reported net income of $16.7 million, or 72 cents a share, compared with net income of $14.4 million, or 62 cents a share, in the 2008 third quarter ended Sept. 30.
Excluding realized investment gains or losses, a common performance measurement for insurance companies, the company’s net income was $18.5 million in the quarter, a 28% increase over year-ago figures, and its diluted earnings were 79 cents a share, a 27.4% increase.
Total third-quarter revenue increased to $130.7 million, a 16.7% gain over $112 million the previous year. Gross premiums written increased to $157.2 million in the third quarter, a 23.1% increase from the year-ago period.
Company officials weren’t available for comment because of the pending acquisitions, but Chief Executive Michael Lee said at the time of the third-quarter release that thanks to measures the company took during the past year to strengthen its investment portfolio, Tower’s balance sheet “remains strong and well positioned to support our business plan going forward.”
Tower has said it expects fourth-quarter earnings per share, excluding realized investment gains and losses, to be between 80 and 85 cents a share, and for the year between $2.85 and $2.90.
For 2009, Tower forecasts diluted earnings of between $3.20 and $3.40, excluding realized investment gains and losses and including the effects of the two acquisitions announced in August.
Analysts surveyed by Thomson Reuters expect the company to earn 81 cents in the fourth quarter and $2.87 for the year. For 2009, analysts expect the company to earn $3.25.
The two pending acquisitions will increase the company’s geographic reach, which has historically centered around New York City and its boroughs, New Jersey and Pennsylvania. Tower has also moved into the wholesale market in Texas, California and Florida, and it has licenses in 11 states.
“I do believe that Tower can expand at a faster rate than they have been,” Sharma said, “but they play it safe. They don’t want to get stretched.”
New Acquisitions
In one transaction, Tower will acquire Castlepoint 15ldings (NasdaqGM:CPHL - News), which will expand Tower’s underwriting capacity and diversify its business, particularly in the reinsurance market, analysts say. Shareholders are scheduled to vote on this transaction at the end of January.
In the second transaction, Castlepoint 18einsurance Co., a Bermuda-based subsidiary of CastlePoint, will acquire Hermitage Insurance Group, a specialty property and casualty insurance subsidiary of Brookfield Asset Management. This deal is anticipated to close after Tower’s acquisition of CastlePoint.
The Hermitage transaction gives Tower an insurance platform covering 29 states and the District of Columbia, as well as subsidiaries with admitted licenses in 10 states. The transaction also gives access to 150 new retail agents in the Southeast who have no overlap with Tower or CastlePoint’s existing operations, analysts say.
“Tower Group has to hit a home run in the integration of these two acquisitions,” said Grasher, adding that the company has the knowledge and experience to execute the transactions smoothly. “If they do, the growth that investors have become accustomed to will be seen in 2009.”
New Year’s Resolutions for the Boardroom
POSTED BY STEVEN WEVODAU
After an unprecedented year in business, directors striving for better governance in ‘09 might want to adopt these three proposals
By any standard, 2008 was a jaw-dropper of a year. In the past few months we’ve witnessed things that seemed improbable just 12 months ago: the failure of Lehman Brothers, the fire sales of Bear Stearns and Merrill Lynch (MER), and the bailouts of AIG (AIG) and the U.S. auto industry. So what lessons can boards of directors take away from this annus horribilis? Here are some suggestions for New Year’s resolutions that directors might want to consider:
Resolution No. 1: Engage the Entire Board in a Comprehensive Strategy Review
The world has changed in the past few months. If your board was really on its game, it would’ve made time on your board agenda in the third or fourth quarter for a comprehensive review of your corporate strategy. This doesn’t mean a brief update from the CEO on “How might the financial crisis impact our business?” It means taking the time to get input from all of the directors on their perceptions of:
• where they see the company’s strengths and weaknesses relative to competitors in this changed environment;
• what they see as the key challenges and risks now facing the company;
• what modifications they view as appropriate to the corporate strategy—and what concerns they might have about strategic implementation going forward into 2009;
• and what opportunities for the company they might see arising from the change in financial conditions.
Most CEOs vastly underleverage their boards on strategy issues. In tough times, it’s tempting for a CEO to want to “tell” directors what changes will be made strategically rather than solicit their perspectives and expertise. However, if you have gathered a team of directors into your boardroom who have solid business experience and relevant backgrounds—and you’ve taken the trouble to educate them well about the particulars of your business—this is the time to realize the fruits of your investment and use the board as a helpful resource and valuable sounding board in a tough business environment.
This isn’t to suggest in any way turning strategic decisions over to the board; strategy is the mandate of the CEO. However, CEOs who have made the effort to draw out board perspectives on key strategic underpinnings typically generate valuable new ideas from doing so and ultimately achieve genuine alignment between management and the board on strategic issues. That can be invaluable in a challenging business environment.
Resolution No. 2: Ensure that the Full Board Is Updated by Its Committees on Risk and Compensation Issues at Least Once a Year
Two key issues stole much of the governance spotlight in 2008: risk and executive compensation. In most cases, the oversight of financial risk issues is delegated to the Audit Committee or a special Risk Committee (Lehman Brothers, for example, actually had a Risk Committee, although it only met twice in 2006 and 2007). At least once a year, the committee with risk responsibilities should do a full-scale review of key risk issues with the entire board. To prepare for this session, the committee chair should send an e-mail or place calls to directors who are not members of the committee asking what they see as the key risks facing the company and which of those they have particular concerns about.
This way, the committee chair can ascertain that the working session will address concerns of noncommittee members. Moreover, this exercise often surfaces concerns on which the committee may not have been focused, yet which deserve attention.
Executive compensation has become such a heated topic that it, too, deserves an annual review. Most boards have a practice whereby the Compensation Committee chair provides an update at board meetings on key developments in this area. While this practice is a good one, it’s simply not enough in an environment where this issue is under such unprecedented scrutiny.
Once a year, the committee—and its compensation consultants—should provide a working session for the full board on all aspects of the executive compensation programs, including the committee’s philosophy on pay levels and peer groups, short- and long-term incentive plans, stock options, and other equity-based pay vehicles as well as pension, benefits, and perquisites. Moreover, a session of this nature should be included in every new director’s board-orientation session regardless of whether he/she is becoming a member of the Compensation Committee.
Resolution No. 3: If Important Skill Sets Are Missing from Your Board Table, Go and Get Them
It’s the responsibility of the Nominating/Governance Committee to optimize the composition of the board. If there is relevant experience or important skills needed at the board table (as in the case of boards that lack a single director with industry experience other than the CEO), this committee owes it to the shareholders to address this situation and needs to make this a New Year’s resolution for 2009.
Don’t fall prey to articles proclaiming there are no good candidates to serve on boards; directors’ colleges are full of people dying for their first board seat. A recent series of interviews we at the Hay Group undertook with CEOs on succession planning underscored their desire to place top internal candidates on outside boards as part of their grooming process. One of my clients recently recruited four absolutely top-notch directors on its own, using the company’s internal legal and HR staff to research candidates rather than a headhunter. Their addition has had a dramatic impact on the board’s overall performance.
If there are directors who have no place on the board, the committee needs to step up to deal with this thorny issue. Business writers had a field day lampooning the composition of the Lehman Brothers board, including the Broadway producer who’d been on the board for 23 years and the former actress who retired in 2006 at the age of 83. If you have similar issues, it’s time to engage the Lead Director or chair of the Governance Committee in a “tough” renomination conversation. Your shareholders deserve nothing less. They also deserve processes for impactful board evaluation, as well as individual director evaluation. And if you don’t have these, or what you have isn’t delivering, make that your New Year’s Resolution No. 4.
Boards came under a lot of criticism and scrutiny in 2008, which is unlikely to abate in 2009. But many did an admirable job in helping to steer the corporations they oversee through some very rough waters. These resolutions can be a good start to 2009 for those boards that are committed to providing outstanding governance in the year ahead.
Beverly Behan is the managing director of the Board Effectiveness Practice of the Hay Group and co-author of Building Better Boards: A Blueprint for Effective Governance.
Government’s Best Move in 2008? Letting Lehman Fail - Steven S. Wevodau
It’s conventional wisdom on Wall Street that the biggest government mistake of the last year was letting Lehman Brothers (LEHMQ.PK) fail. I guess the barons of capitalism still don’t get it.
Here’s how the Wall Streeters see it: The March 2008 government bailout of Bear Stearns—if you can call a $2-per-share fire sale a bailout—sent a signal that the feds would not let a big investment bank go down. When Lehman started to sink in early September, the presumption was that the government would prevent an all-out liquidation because of the collateral damage it might cause throughout the financial system. By that logic, when the feds stepped aside and Lehman filed for bankruptcy on September 15, investors were so shocked that credit froze worldwide and the stock markets went into a record plunge from which we still haven’t recovered.
[See the 10 worst assumptions of 2008.]
There’s obviously some truth to that. But as historians unravel the intricate cause-and-effect correlations of the 2008 meltdown, it’s quite possible that a different view will emerge. We know now that Lehman Brothers in the summer of 2008 had many of the hallmarks of a firm destined for failure. It had violated the rules of its own business, taking poor risks and accumulating astounding levels of debt. An incisive New York magazine story details how Richard Fuld, Lehman’s headstrong CEO, turned down offers to buy his firm when there was still a chance to salvage it. A Wall Street Journal exposé shows how Fuld and his Lehman chums, convinced that their firm was impervious to market forces, basically vaporized $75 billion worth of assets by failing to plan for an orderly bankruptcy. “Lehman was a recklessly run company,” says financial historian James Grant, publisher of Grant‘s Interest Rate Observer. “It was hugely leveraged. Management was arrogant. This was a bad firm.”
[See how the smart money turned dumb in 2008.]
Lehman was also an egregious example of corporate greed. Fuld earned about $240 million between 2005 and 2007—$80 million per year—while making the very decisions that would doom his firm. On average, the CEO of a public company listed on the S&P 500 index earns about $15 million a year, according to the Corporate Library—and most of them run companies that earn a profit and stay in business. Fuld and his Wall Street brethren believe they deserved such lavish earnings because they’re smarter than everybody else and can spin a derivative on the head of a pin. Out in the real world, we’re still puzzling that one over.
So, why should the government have saved Lehman Brothers? Oh, right—because the government saved a bunch of other floundering companies, like Citigroup (C) and AIG and, later, General Motors (GM) and Chrysler, that happened to employ a lot of people and do a lot of business. And because Lehman was so vital to the financial system that it held the world’s economy hostage.
[See 9 reasons this recession will be good.]
Except maybe it didn’t. What we learn from 2008 will help shape major reforms sure to come in the Obama administration and transform the financial system in ways that could last for decades. So, as the Lehman Brothers postmortem begins to solidify, here’s some new thinking on why it may have been perfectly legitimate to let Wall Street’s oldest investment bank fail:
Bear Stearns was the real mistake. There’s clearly a disparity in the way the government handled Bear Stearns and Lehman Brothers. Bear Stearns was smaller, yet the government stepped in to broker the sale of that firm to JPMorgan Chase (JPM) and take over $29 billion worth of bastardized securities that nobody would buy, at any price. The Federal Reserve and the Treasury Department did, in fact, send a strong signal that they would intervene to prevent one firm’s problems from setting off a financial chain reaction. So six months later, with even more at stake, it stood to reason that Lehman would get the same treatment.
But what if the feds had never set the precedent? “Maybe the mistake was rescuing Bear Stearns,” says Mary Miller, director of the fixed income division at investing firm T. Rowe Price. “The Bear bailout gave a false sense of security to the markets. Lehman was the wake-up call.” If the government had let Bear fail completely, there might have been a credit freeze and market plunge in the spring instead of the fall. But it probably would have been less severe. And as Lehman’s troubles mounted, Fuld and his minions almost certainly would have acted differently if they knew that oblivion was a real possibility.
As it turned out, Lehman came to embody the risks of “moral hazard”—the notion that decision makers will behave recklessly if they don’t believe they have to bear responsibility for their own actions.
[See 5 risky assumptions for 2009.]
Lehman may not have triggered the financial meltdown after all. There were so many cataclysms in mid-September that it’s easy to forget who else was reeling. But one day after the Lehman Brothers bankruptcy, the government granted the huge insurance company AIG an $85 billion emergency loan to prevent it, too, from going belly-up. AIG had nearly twice the revenue of Lehman, four times as many employees, and a massive web of investments that the feds clearly thought could trigger a global catastrophe if the firm collapsed.
It wasn’t all that surprising that Lehman, a deeply indebted investment bank, got into trouble when too many risky bets went sour. But the spectacle of a huge insurer like AIG—part of the institutional safety net that’s supposed to prevent widespread catastrophe—suddenly faced with collapse itself was deeply unnerving. “The real surprise wasn’t Lehman Brothers, it was AIG,” Frederic Mishkin, a Columbia Business School professor and former member of the Federal Reserve Board, said in a recent speech. “Who would have thought that an insurance company would have been affected by all this? When that happened, all bets were off.”
If it turns out that AIG’s near-death experience was the most powerful trigger for the financial freeze-up that followed, then Lehman’s failure looks tolerable by comparison. And the bank looks a lot less vital than its Wall Street apologists believe.
Somebody has to fail. Maybe there are a few institutions that are truly “too big to fail.” But most aren’t, and the failure of unsuccessful firms used to be capitalism’s way of clearing the decks for smarter entrepreneurs with fresher ideas and better products. “Success stories are almost always preceded by failure,” says Sydney Finkelstein, a professor at Dartmouth’s Tuck School of Business and author of Why Smart Executives Fail.
It’s like the way nature needs forest fires. It’s nature’s way of regenerating growth. There’s something equally fundamental about the need for failure in a capitalistic society.
Pure free-market capitalism can be ruthless and volatile, which is why we have thousands of government regulations to protect workers and consumers and promote stability. But that doesn’t give companies a license to screw up and then beg for forgiveness—and a taxpayer bailout. As the Category 4 winds of 2008 recede, Lehman Brothers looks increasingly like a firm that we’re better off without. Now that it’s out of the way, maybe somebody with better ideas—and a bit more decency—might take its place.
Disclosure: no positions
OneBeacon Charitable Trust Donates to Greater Boston Food Bank - Steven Wevodau
The OneBeacon Charitable Trust has made contributions to 15 food banks across the country serving areas where OneBeacon has a strong presence. A total of $50,000 has been donated on behalf of OneBeacon employees through the OneBeacon Charitable Trust.
The OneBeacon Charitable Trust is a tax-exempt private foundation under Section 501(c)(3) of the Internal Revenue Code managed by employees of OneBeacon Insurance Company. As one of the oldest property and casualty insurers in the United States, OneBeacon traces its roots to 1831 and the Potomac Fire Insurance Company. Today, OneBeacon’s specialty insurance products are available countrywide, and commercial and personal lines are offered in select geographic territories primarily through a network of independent agencies.
OneBeacon’s U.S. headquarters is in Canton, Massachusetts. The company is publicly traded on the New York Stock Exchange under the symbol “OB”.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This press release may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts, included or referenced in this release which address activities, events or developments which we expect or anticipate will or may
occur in the future are forward-looking statements. The words “will,” “believe,” “intend,” “expect,” “anticipate,” “project,” “estimate,” “predict” and similar expressions are also intended to identify forward-looking statements. These forward-looking statements include, among others, statements with respect to OneBeacon’s:
- growth in adjusted book value per share or return on equity;
- business strategy;
- financial and operating targets or plans;
- incurred loss and loss adjustment expenses and the adequacy of its loss and loss adjustment expense reserves and related reinsurance;
- projections of revenues, income (or loss), earnings (or loss) per share, dividends, market share or other financial forecasts;
- expansion and growth of our business and operations; and
- future capital expenditures.
These statements are based on certain assumptions and analyses made by OneBeacon in light of its experience and perception of historical trends, current conditions and expected future developments, as well as other factors believed to be appropriate in the circumstances. However, whether actual results and developments will conform to our expectations and predictions is subject to a number of risks and uncertainties that could cause actual results to differ materially from expectations, including:
- claims arising from catastrophic events, such as hurricanes, earthquakes, floods or terrorist attacks;
- recorded loss and loss adjustment expense reserves subsequently proving to have been inadequate;
- the continued availability and cost of reinsurance coverage;
- the continued availability of capital and financing;
- general economic, market or business conditions;
- business opportunities (or lack thereof) that may be presented to it and pursued;
- competitive forces, including the conduct of other property and casualty insurers and reinsurers;
- changes in domestic or foreign laws or regulations, or their interpretation, applicable to OneBeacon, its competitors or its clients;
- an economic downturn or other economic conditions adversely affecting its financial position;
- other factors, most of which are beyond OneBeacon’s control; and
- the risks that are described from time to time in OneBeacon’s filings with the Securities and Exchange Commission, including but not limited to OneBeacon’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007 filed February 29, 2008.
Consequently, all of the forward-looking statements made in this press release are qualified by these cautionary statements, and there can be no assurance that the actual results or developments anticipated by OneBeacon will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, OneBeacon or its business or operations. OneBeacon assumes no obligation to update publicly any such forward-looking statements, whether as a result of new information, future events or otherwise.
Source: OneBeacon
Lehman filing cost creditors $75B
POSTED BY STEVEN WEVODAU
An analysis by Lehman Brothers Holdings Inc.’s restructuring professionals shows the company’s emergency bankruptcy filing could have eliminated up to $75 billion in potential value for its creditors, The Wall Street Journal reported Monday.
Had Lehman Brothers been able to pursue a more orderly filing –including the sale of assets prior to filing for bankruptcy protection—the bank might have had time to sort out its derivatives portfolio and a maintained some value, the Journal reported from an analysis by Alvarez & Marsal, the bankruptcy advisors.
Losses through derivatives alone could cost creditors up to $50 billion, the Journal reported.
The Journal reported it is too soon to know how much money the company’s creditors will recover through bankruptcy proceedings. Unsecured creditors of the failed brokerage have said in court filings they are owed $200 billion.
The Journal reported that creditors might only recover 10 cents on the dollar –or about $20 billion – given the current bond market.
The disorderly bankruptcy filing also pushed down the value of other Lehman Brothers assets, hurting recovery efforts, the analysts told the paper.
Lehman Brothers tried and failed to get a government rescue. When the bank filed for bankruptcy protection, it triggered a panic on Wall Street that led to bailouts of American International Group Inc. (NYSE:AIG). Other banks have collapsed or been sold in the wake of the credit crisis.
Atlanta Business Chronicle
FDIC is set to sell IndyMac - Steven Wevodau
The agency plans to unload IndyMac to group of private equity and hedge fund firms. Questions remain as to whether its aggressive loan modification plan will continue.
NEW YORK (CNNMoney.com) — A group of investors is on the verge of buying the one of the nation’s largest failed banks.
IndyMac Bank,which was taken over by the Federal Deposit Insurance Corp. after it collapsed in July under the weight of risky mortgages, is set to be bought by a group of private equity and hedge fund firms, accordingto a source familiar with the situation. The consortium includes investment firms J.C. Flowers & Co. and Dune Capital Management, as well as hedge fund Paulson & Co.
Neither the FDIC nor any of the potential buyers could be reached for comment. The agency has said it expects a deal to be announced by year-end.
The California thrift’s collapse is the most expensive bank failure in U.S. history. The FDIC expects to spend $8.9 billion protecting the customer deposits at IndyMac, which had $19 billion in deposits and $32 billion in assets when it failed. The final cost will depend on how much the agency receives in the sale.
Co-founded by Angelo Mozilo of Countrywide fame, the bank has 33 branches. It specialized in Alt-A mortgages, which do not require a borrower to provide proof of their income. Alt-A borrowers, like their subprime brethren, are defaulting on their mortgages in droves.
Of the 25 banks that have failed so far this year, IndyMac is the only one the FDIC could not immediately sell. Last month, the agency expanded the pool of bidders for failed banks by allowing those without bank charters to bid for the institutions. Bidders would need to obtain charters before the deal closes.
The likely consortium of bidders have applied for a federal holding company charter under the name HoldCo LLC, according to the source. This charter is for institutions in several lines of business in the financial industry.
The FDIC would have to bless the purchase before the Office of Thrift Supervision would provide the charter. The deal may not close until late January or February, the source said.
Though its troubles have since been dwarfed by the trillions the federal government is spending to prop up the nation’s financial sector, IndyMac has served as a high-profile experiment in loan modification.
FDIC Chairman Sheila Bair, who has long advocated for more aggressive foreclosure prevention efforts, has used the bank to put her streamlined loan modification plan into effect. IndyMac officials have sent letters to at least 23,000 delinquent borrowers and have verified incomes and had completed modifications for over 7,500 loans, as of mid-December. Thousands more workouts are in the pipeline.
Bair has sought to replicate her program nationwide, though Bush administration officials have balked at the $24 billion pricetag. However, other banks are adopting the program, most notably Citigroup (C, Fortune 500), which was forced to implement it as a condition of its November government bailout.
What will happen to IndyMac’s modification program under the new owners remains to be seen.
Based in New York, J.C. Flowers is a global private equity group that focuses solely on the financial services sector. Established in 1998 by J. Christopher Flowers, it has invested more than $11 billion of capital in the sector. Its name was linked with last-minute offers for Lehman Brothers and American International Group (AIG, Fortune 500) in mid-September, before the former filed for bankruptcy and the latter received an $85 billion government bailout. The firm backed out of a $25 billion bid for Sallie Mae last year, prompting a high-profile legal battle with the student lender, which ultimately dropped its lawsuit.
Christopher Flowers, who runs J.C. Flowers, bought a tiny bank in northern Missouri with $14 million in assets in August. At the time, he hinted at plans to expand.
Dune Capital, also headquartered in New York, was founded in 2004 by two former Goldman Sachs executives, David Neidich and Steven Mnuchin. It specializes in real estate finance, though it has also invested in casinos. Mnuchin had worked for financier George Soros and serves on the board of Sears Holdings, the retailer run by hedge fund manager Edward Lampert.
Paulson & Co. was founded in 1994 by John Paulson, who was a managing director in mergers and acquisitions at Bear Stearns. Paulson, who manages $36 billion in assets, is well-known for betting against the mortgage industry. 
Baldwin & Lyons, Inc. Announces Fourth Quarter 2008 Earnings Release Date and Conference Call - Steven Wevodau
Investors and interested parties may also listen to the call via a live webcast, accessible on the company’s web site via a link at the top of the main Investor Relations page. To participate in the webcast, please register at least fifteen minutes prior to the start of the call. The webcast will be archived on this site until February 4, 2010.
About the Company
Baldwin & Lyons, Inc., based in Indianapolis, Indiana, is a specialty property-casualty insurer with a leading position in providing liability coverage for large and medium-sized companies in the transportation industry. Additionally, the company’s product offerings include coverage for private passenger automobile and small fleet trucking as well as a limited program of catastrophe reinsurance assumed.
Forward-looking statements in this report are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve inherent risks and uncertainties. Readers are encouraged to review the Company’s annual report for its full statement regarding forward-looking information.
Contact:
Baldwin & Lyons, Inc.
Press Contact:
G. Patrick Corydon
(317) 636-9800, Ext. 355
corydon@baldwinandlyons.com
Source: Baldwin & Lyons, Inc.
Report: CEO compensation is changing
POSTED BY STEVEN WEVODAU
Triangle Business Journal
While the recent blows to the U.S. financial markets will most certainly dramatically affect CEO compensation reported in 2009, The Conference Board Top Executive Compensation report released last week shows that changes are already under way.
Some of the key findings of the report include:
• Compensation mix has been reallocated toward stock. Almost all industries show a reallocation of compensation towards stock and away from total cash compensation and stock options.
• Cash may be losing share, but the median CEO still earns more of it. Median cash compensation increased in more than two-thirds of the industries studied, as did total compensation overall. The largest median gainer in cash compensation is the insurance industry (up 34.4 percent, to $1,227,371). The only notable negative is construction, with a 22.4 percent decrease.
• Food and tobacco executives are the top earners. Among the 22 industries represented, food and tobacco shows the highest median CEO total compensation. It tops the list with $6.34 million in median total compensation, and $2.7 million in median total cash compensation, followed by utilities, insurance, and financial services (non-banks).
• CEOs already have plenty of “skin in the game.” Of the largest 10 percent of companies in the sample, the median CEO holds about 100 times of his or her salary in total stock and stock options holdings in the company. Across industry, the largest median multiple (94.4 percent) is seen in the financial services industry (non-banks), with the smallest being commercial banks (23.3 percent).
“Companies must assume their top executives’ compensation will come under greater scrutiny from within and without,” said Linda Barrington, research director for The Conference Board, New York City. “The financial market crisis and U.S. recession have contributed to eroding public trust in business leadership.”
From a macro-perspective, The Conference Board reports that median CEO compensation should fall during a recession if such compensation is based on U.S. revenue performance. However, since the current recession did not start until December 2007, it won’t be until next year’s proxy data that the hypothesis can be best tested.
Joy rides and crashes - Steven Wevodau
First of two parts:
Our economy might best be compared with a roller coaster that climbed far higher than it should have, and now plummets farther and faster each day. After a year of placebo-like headlines illustrating the American fantasy that we can overcome any obstacle, December housing starts, consumer prices, payrolls and other economic indicators are suddenly taking their worst falls in many years.
We now know that this isn’t just business as usual or another economic cycle.
The economy is in horrible shape, including the worst job market of my lengthening life. It now appears possible the country will plow through all the rinky-dink intervening recessions, making the Great Depression of the 1930s the next measuring stick. That one lasted from 1929 to 1942, during which the stock market dropped 89 percent, GNP fell 35 percent, and unemployment reached 25 percent. How close will we come to those records?
Americans don’t like to anticipate the dark side. But as a lifetime contrarian, I assure you if one assumes the worst, almost all news becomes good.
Clearly the economic problems have reached Cape Cod. The Cape’s many real estate-related industries, once fueled by off-Cape money, become more moribund each day. Our retirement industry, based on rapid life cycle turnover, will become more stagnant as people can’t sell their homes. Recreation represents the only possible positive note; will Cape Cod benefit as the cheap vacation?
Three forms of fuel pumped the roller coaster to its perilous height, all literally paper — financial paper — encouraging increased consumption, and building no lasting economic value.
First, to increase spending (retail sales) and stimulate the economy, we told all Americans that they didn’t have to earn it to spend it: just charge it on your credit card. Who benefited most from this strategy?
Second, as credit card debt became a problem, instead of discouraging use, we encouraged consumers to add credit card debt to their mortgage loans. Indeed, we went further, encouraging consumers to increase mortgages until they couldn’t afford to pay them back either. Who benefited most?
“From Bad to Worse,” by Alan Abelson, summarized these two trends in Barrons magazine on Dec. 8. “The best part of those decadent decades was that even when you spent the last penny of your income and your piggy bank was empty, you could still get plenty of eats, baubles and that giant screen TV with all the whistles and bells, with a swipe of your magical credit card or by leveraging the eternally rising value of your dear old homestead.”
Finally, worst of all, we polluted investment markets with totally unregulated “derivatives,” promising that you too can earn 15 percent annually on your investments, even though the economy grows at a far slower pace. Many probably don’t yet understand what a derivative is — there are thousands of varieties. If you want to know more, read Michael Lewis’ “The End,” in the December issue of Conde Nast Portfolio. Who benefited most?
It’s not that the public wasn’t warned. Warren Buffett noted in his 2002 Berkshire Hathaway Annual Report, “We view them (derivatives) as time bombs, both for the parties that deal in them and the economic system,” after winding down billions of dollars of derivative contracts in the subsidiary of an insurance company he purchased.
Despite these warnings, Wall Street somehow suckered this nation’s best and brightest into the derivatives market, even vaunted Harvard University’s endowment, which paid Wall Street-like bonuses to its investment managers. I wondered, “Where are the Economics Department and Business School faculties in their investment process?”
In fairness to Harvard and other parties, if they received 15 percent for three or four years, they made more than the 40 percent they reportedly lost when the market collapsed. But they obviously failed to plan for the ups and downs. I wonder if Harvard got the bonuses back from the managers.
All three of these trends share the intrinsic feature of widespread self-delusion, acceptance on faith of something too good to be true — that home values or stock prices will always go up — despite ample evidence that bubbles don’t last forever.
Who benefited most from all these bubbles? Well-compensated commission salesmen who sold the products; large financial conglomerates and specialized lending companies (which prostituted the word ‘bank’); China, which made all the goods consumers bought; and, most of all, the highly paid corporate officers and Wall Street executives who hijacked the stock market for their own short-term interests and got bonuses for doing so.
As John Bogle, founder of Vanguard Funds and creator of indexed mutual funds commented in his prophetic book, “The Battle for the Soul of Capitalism,” “owners’ capitalism” got replaced by “managers of capitalism.”
Elliott Carr is the former president of Cape Cod Five Cents Savings Bank, where he continues to work.
AMERISAFE to be Added to the S&P SmallCap 600
POSTED BY STEVEN WEVODAU
About AMERISAFE
AMERISAFE, Inc. is a specialty provider of workers’ compensation insurance focused on small to mid-sized employers engaged in hazardous industries, principally construction, trucking, logging, agriculture, oil and gas, maritime and sawmills. AMERISAFE actively markets workers’ compensation insurance in 30 states and the District of Columbia. The Company’s financial strength rating is “A-” (Excellent) by A.M. Best.
Contacts: G. Janelle Frost, EVP & CFO
AMERISAFE, Inc.
337-463-9052
Ken Dennard, Managing Partner
Karen Roan, Sr. VP
DRG&E / 713-529-6600
Source: AMERISAFE, Inc.
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