Investigators Hound Insurance Industry

Connecticut's insurance companies are busy building profits or shooting for turnarounds this year, but a multitude of investigations looms over the industry here and across the nation.

Many of the probes kicked off last year with New York Attorney General Eliot Spitzer tackling bid-rigging and concealed commissions. The investigations, however, have grown more tentacles and are expected to embroil insurers and brokers through 2005 - and probably beyond.

"It's definitely a cloud," said Robert P. Hartwig, senior vice president and chief economist for the industry-backed Insurance Information Institute. "The headline shock is over with," he said, but "within the industry there's this constant sense of foreboding."

Local insurers including Aetna, CIGNA, The Hartford, St. Paul Travelers and The Phoenix Cos. have received subpoenas from Spitzer and Connecticut Attorney General Richard Blumenthal, or both. At least 42 states have launched some type of inquiry into the industry.

In addition, the Securities and Exchange Commission has been investigating matters related to mutual funds and annuities at such companies as The Hartford and Phoenix.

In his bid-rigging lawsuit against broker Marsh McLennan Cos. in October, Spitzer alleged that the California and Florida offices of The Hartford Financial Services Group Inc. provided bogus bids at Marsh's request. The Hartford has fired two employees for failing to fully cooperate with Spitzer's investigation.

Like other insurers, The Hartford conducted an internal investigation of its practices, but as of mid-February was not ready to declare it complete or discuss conclusions.

Following Marsh's $850 million restitution settlement with Spitzer, more settlements with companies are expected. And more insurance industry arrests are possible on top of the nine guilty pleas that Spitzer's office had extracted from executives by mid-February.

Insurers are also worried about new disclosure requirements that will be adopted because of industry investigations of bonus commissions. Debate continues over how much should be disclosed to insurance buyers about agent and broker compensation.

The industry fears that it will face varying rules from state to state, with each set of rules subject to courts' interpretations. "It likely opens up a legal quagmire," Hartwig said.

At the very least, Hartwig said, "This will be very expensive and very time-consuming." And, because of paperwork, "It will result in a lot more trees being killed."

For consumers and buyers of commercial policies, though, "At the end of the day, fundamentally there will not be a significant shift in how insurance is purchased in America," Hartwig predicted.

Spitzer isn't the only focus this year for insurers in Connecticut and other states. The industry, for instance, is celebrating federal reforms, just passed by Congress, to rein in class action litigation, which insurers say adds to the cost of coverage.

Proposed curbs on medical malpractice awards are also back in the spotlight. And insurers hope to rekindle plans for a federally legislated trust fund that would handle a mountain of asbestos claims.

Also, companies such as The Hartford and St. Paul Travelers and trade groups are pushing Congress again for renewal of a federal backstop for terrorism claims because the legislation will otherwise expire at the end of this year. Hartwig predicts that if the backstop isn't renewed, insurers late this year will pull back from insuring workers' compensation claims for large businesses in major cities.

On the home front, Connecticut's insurers face their own challenges this year, and some, including Travelers Life & Annuity and CIGNA, will lay off employees.

Travelers Life & Annuity and ConnectiCare are being sold. CIGNA Corp. and The Phoenix Cos. Inc. are striving for turnarounds. And the "other" Travelers - The St. Paul Travelers Cos. - is trying to recover from a bumpy merger.

Travelers Life & Annuity and other Citigroup insurance operations in Hartford are being sold to New York-based MetLife Inc. for $11.5 billion in stock and cash. The affected operations employ about 2,000 people in Hartford, including about 150 full-time consultants. MetLife expects to cut local jobs but it isn't saying yet how many.

St. Paul Travelers is still making job cuts stemming from the merger of Travelers Property Casualty Corp. with The St. Paul Cos. on April 1, 2004, but it won't say what the total number of layoffs will be.

St. Paul Travelers is on many analysts' recommended lists because of predicted stock price appreciation, but the company still has to convince investors and Wall Street of the wisdom of the merger. Some critics consider the deal a bailout of St. Paul, and post-merger sales in commercial insurance have disappointed some analysts.

Property-casualty insurers such as St. Paul Travelers and The Hartford face increased price competition in the cyclical industry, which expects further slowing of premium growth this year.

In the turnaround category, health insurer CIGNA, which has lost millions of members after service meltdowns, expects enrollment to stabilize this year and start growing again in 2006. Despite service improvements, some analysts are skeptical about the timetable.

The company laid off about 3,000 workers last year, including 665 in Connecticut, and a smaller number of job cuts is expected this year.

The Phoenix Cos. in Hartford, believed by some investors to be a potential candidate for acquisition, is working for a turnaround. The company has improved profitability but entered 2005 with slumping fourth-quarter 2004 life insurance sales and an outflow of assets under management.

However, Phoenix projects double-digit growth this year in total life insurance sales. The company also says that more money will come into the asset management business and variable annuities than leaves this year - important to Phoenix's fee income.

Aetna and The Hartford, meanwhile, expect solid growth this year and have raised their profit forecasts.

Health insurer Aetna, fully recovered after a four-year turnaround, estimates that it will add about 1 million members this year, having ended 2004 with 13.7 million enrolled.

Aetna had stumbled badly with major acquisitions in the 1990s, alienating doctors, employers and members. The company shed millions of members as it tried to regain profitability and employers bolted.

The Hartford, another favored stock, hit record earnings in 2004 and is well-positioned, analysts say, for further growth this year. The company is the largest seller of variable annuities and one of the nation's largest property-casualty insurers.

A Thomson First Call consensus of analysts forecasts that The Hartford will make $7.43 a share of operating earnings in 2005, compared with $6.62 in 2004. Thomson First Call figures exclude realized investment gains and losses and certain other items.

Consensus reports predict that Aetna is poised to earn $8.88 a share, compared with $7.02 a share in 2004. CIGNA, with shrunken enrollment and revenue, could earn $6.15 a share, compared with $7.79 in 2004.

Analysts forecast Phoenix's operating earnings at 91 cents a share this year, compared with 80 cents a share in 2004, and St. Paul Travelers at $4.50 a share this year, compared with $1.93 a share in 2004, when charges for reserve strengthening sapped profits.

Meanwhile, ConnectiCare has been downplaying potential layoffs from its acquisition by Health Insurance Plan of Greater New York, which has said that it will take many months to identify any job cuts. Farmington-based ConnectiCare, which will operate as an autonomous unit of HIP, hopes to increase enrollment under the new owner.

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