In insurance, Des Moines narrows gap with Hartford
April 21, 2013 by Victor Epstein
Industry and economic challenges push more companies to look to Midwest
Apr 14, 2013
Written by
Victor Epstein
Des Moines, “the Hartford of the Midwest,” is narrowing its namesake’s lead as the insurance capital of the United States, driven by insurers moving operations from Northeast cities to more affordable alternatives in the Midwest.
Insurance employment rose 13 percent to 24,100 jobs in the Des Moines area from December 1992 to December 2012, according to data from the U.S. Bureau of Labor Statistics. That nearly matches the national growth rate of 13.4 percent. Insurance employment in the Hartford area fell 31 percent to 40,500 jobs during the same period.
The Hartford area has lost nearly as many insurance jobs since 1992 — 17,900 — as there were in the entire Des Moines metropolitan area back then.
“The trends are moving in opposite directions,” said Bob Hartwig, president of the Insurance Information Institute in New York City. “There’s been a reduction in Hartford metro insurance jobs for some time. Over a 20-year period it’s quite remarkable, although it’s only one or two percent a year.”
Industry experts say the shift is due to the cheaper business expenses and more affordable cost of living in Midwest cities like Des Moines, and the growing specialization of the huge multiline insurers that once predominated in Hartford. Others cite more favorable regulations in Iowa.
The trends could continue, experts say, as insurers faced with lower interest rates and investment incomes seek out cheaper business costs. In addition, while Hartford insurers cut jobs and divisions, major employers in Des Moines are investing. Principal Financial Group, for example, plans a $238.5 million renovation of its downtown campus.
The gains in Des Moines reflect those taking place in nearby Kansas, Minnesota, Nebraska and Missouri. Their employment surged by a collective 34 percent to 181,100 jobs from December 1992 to December 2012 in the federal category for “insurance carriers and related activities.”
The more than $1.1 trillion U.S. insurance industry plays a crucial role in both the Des Moines and Hartford metropolitan economies. It dates back to 1810 in Hartford — when the company that bears its name was founded — and to 1867 in Des Moines. Now, they’re each home to a disproportionately large share of insurance headquarters.
There are 212 insurance companies headquartered in Iowa and 119 in Connecticut. Industry experts say the Iowa companies tend to be smaller.
“We still think of ourselves as the U.S. insurance capital,” said Catherine Smith, a former insurance professional who was named Connecticut Commissioner of Economic and Community Development two years ago by Gov. Dannel Malloy. “This governor has put a much stronger emphasis on outreach to the insurance companies that are already in Connecticut as well as those outside of the state to really revitalize the growth of the industry.”
Industry trends favor Des Moines
Insurance industry consolidation has affected both the Hartford area, which has 1.21 million people, and the Des Moines metro area, which has 588,999, during the past 20 years. However, buyers have been more likely to retain newly acquired operations in the Midwest than in the Northeast because of the moderate business and living costs, Hartwig said.
Des Moines insurers typically pay their employees about 21 percent less than those in Hartford, but provide them with 37 percent more buying power as a result of the relatively cheaper cost of living, according to the Bankrate.com cost-of-living calculator.
The average wage in Des Moines was $44,910 in May 2012, versus an average wage in Hartford of $54,290. The latter would have to be about $61,692 to have the same buying power, according to Bankrate.com.
“On a relative basis, Des Moines has a much lower cost of operating compared to Hartford and it has a much better quality of life,” said Larry Zimpleman, chief executive of the Des Moines-based Principal Financial Group. “As companies continue to be faced with reducing expenses, locations like Des Moines look better and better — highly skilled workforce, low cost of living, good schools, shorter commutes, etc. … People are now excited to come to Des Moines to live, which was less true 10 to 20 years ago.”
Iowa’s cost-of-living advantage extends to everything from rent to energy to home prices.
“There’s a cost benefit of doing business in central Iowa as opposed to larger Midwest cities or cities on the coast,” said Chris Littlefield, chief executive officer of Des Moines-based Aviva USA. “The cost of living here for employees and the cost of doing business for corporations is very favorable. … Housing is affordable, the schools are excellent, commute times are short and the entire region is very family-oriented.”
The higher costs are taking a toll on the Greater Hartford insurance industry, which accounted for 22 percent of the metro area’s $79.6 billion economy in 2010 and 10.8 percent of Connecticut’s $221.3 billion economy. The insurance industry accounts for 20.4 percent of the Des Moines area’s $38.87 billion economy and 8.5 percent of the state’s $140.95 billion economy.
Thanks to Connecticut job losses, the ratio of insurance employees to population in metro Des Moines now easily surpasses that of Hartford. About one of every 24 Des Moines residents now draws a paycheck from the “insurance carriers and related activities” sector, compared with one of every 30 Hartford residents.
“They’re seeing an exodus of businesses to lower-cost locations,” Hartwig said, noting that some traditional headquarters operations can now be performed elsewhere because of technological advances. “The Hartford insurance industry has gone through a lot of changes in the past 20 years and the factors impacting it have not had as much of an impact in Des Moines. A lot of Hartford-based companies have been acquired and assimilated into other companies and their offices have been rolled up.”
Meanwhile, companies that buy a Des Moines insurance business often prefer to continue to operate and grow here.
Apollo Global Management’s pending $1.8 billion purchase of West Des Moines-based Aviva USA illustrates this trend. The New York-based private equity fund plans to combine Aviva with its existing insurance arm — which now runs most operations out of Greenville, S.C. — and shift the combined business to West Des Moines under the Athene USA name.
“Aviva is a real game changer for us, and being in Des Moines is going to help us grow the fixed annuity business,” said Jim Belardi, chief executive officer of Athene Holdings. “There are a lot of highly talented people in Des Moines.”
Low interest rates hit Hartford worse
Des Moines insurers have weathered the recession better than their Hartford counterparts in part because they sell different policies and have a different investment mindset, experts say. The Hartford and Des Moines areas are both major players in the insurance annuities industry, which has been hard-hit by low interest rates.
Annuities pay investors a fixed sum of money each year, and the variable annuities that predominated in Hartford before the financial crisis feature guaranteed returns. More Des Moines companies focus on fixed annuities and indexed annuities, which vary with stock market indices.
Northeast variable annuity companies have labored to fulfill commitments made to customers at higher interest rates, and low interest rates make it more difficult for them to invest their assets as profitably.
“There have been some East Coast companies that didn’t manage their balance sheets as prudently as some of the companies here in Des Moines,” said Iowa Insurance Commissioner Nick Gerhart. “They paid the price for it and they continue to pay the price for it.”
Fred Hubbell, a former board member at ING, said Iowa insurers have weathered many storms over the decades. His great, great grandfather co-founded Equitable of Iowa in Des Moines 1867; it was the first life insurer west of the Mississippi River. ING kept Equitable in Des Moines after paying $2.6 billion for it in 1997.
“The insurance companies in Des Moines have a conservative mindset financially, which is very stable over time. They were less exposed to the financial crisis and weren’t hurt as badly as some of those on the East Coast,” he said.
The pressure on Northeastern insurers to change will continue as low interest rates cut into the bond returns that they traditionally have relied on, said Steven Weisbart, chief economist of the Insurance Information Institute.
“Competitive forces are keeping the pressure on cost savings,” Weisbart said, noting that the race for cheaper business costs could eventually lead to outsourcing, too. “Insurers can’t afford to pay the same old expenses in an environment with investment income like this.”
numbers in this story
The federal employment sub-sector called “insurance carriers and related activities” consists of workers engaged in underwriting, annuities and insurance policies, insurance policy sales and employee-related services. It was used for the jobs data in this story.
Tale of the Tape
Population Hartford metro: 1,214,400 Des Moines metro: 588,999 Des Moines insurance jobs: 24,100 Hartford insurance jobs: 40,500 Des Moines insurance employee-to-population ratio: 1:24 Hartford insurance employee-to-population ratio: 1:30 Des Moines metro January 2013 unemployment rate: 6 percent Hartford metro January 2013 unemployment rate: 8.7 percent Source: The metro population figures are from 2012 Census estimates for metropolitan statsitical areas. The jobs and unemployment rates are from the U.S. Bureau of Labor Statistics.
Wages and income Iowa insurers typically pay their employees less, but still provide them with more buying power due to the cheaper cost of living. Median Household Income, 2009-2011…Rank Connecticut…$67,165…3rd Iowa…$51,322…25th The difference is about 31 percent. The Bankrate.com cost-of-living calculator says a Hartford household in would have to make $70,499 — or 37 percent more — to live as well as the same family in Des Moines. Average annual wage as of May 2012 All occupations…Actuaries…Underwriters…CEOs, Iowa: $39,560…$91,510…$60,000…$154,820 Connecticut: $53,760…$115,420…$83,090…$210,070 Hartford MSA: $54,290…$113,330…$83,780…$199,380 Des Moines MSA: $44,910…$90,150…$61,620…$187,200 USA: $45,790…$106,680…$69,200… $176,840 Sources: Bankrate, U.S. Energy Information Administration, AAA Fuel Gauge Report, Bureau of Labor Statistics, U.S. Census Bureau
History
The Des Moines insurance industry grew directly from the needs of a region crossed by the powerful Mississippi and Missouri rivers. “A lot of commerce was taking place on the rivers, and the shippers had exposure,” said Jim Brannen, chief executive officer of FBL Financial Group, which does business under the
“Farm Bureau Financial Services” brand. Vessels carried huge amounts of material, livestock, people and food over the rivers in the 1800s and they needed maritime insurance. Merchants and the frontier communities they served also needed a way to plan for the worst. Their needs attracted maritime and life insurers.
The Des Moines life insurance industry officially began in 1867 — 21 years after Iowa achieved statehood — when attorney Frederick Hubbell and 13 other citizens of the city founded the Equitable Life Insurance Co. of Iowa. Hubbell became its president in 1888 and his family remains active in both the area and the industry today.
Other insurers followed with coverage for businesses as varied as grain mills and farms and risks that ranged from fire to tornadoes. “Some of the East Coast life insurance companies were doing business in Iowa at the time, and the 14 people who founded Equitable noticed that when they paid $100 for life insurance the money went back East and was invested back East,” said Fred Hubbell, the great-great-grandson of Frederick Hubbell. “They figured, ‘Let’s start our own insurance company here in Iowa and invest the money here that people pay for coverage.’”
Talk of the towns
Challenger: Des Moines
“The success of Des Moines is really twofold: It’s the development of indexed annuity products — which has truly been an Iowa-centric product — and very good state regulation, (and) it’s a very friendly environment for insurance. You also have a very educated workforce with Drake University there, which has a lot of actuarial programs. You have real brainpower coming out of there.” Steven Schwartz, insurance analyst at Raymond James & Associates
“We didn’t start from nothing in Iowa. We started with a robust insurance industry and some very talented people, and it’s easier to build on that than to start from scratch.” Terri Vaughan, former Iowa Insurance Commissioner and former CEO of NAIC
“As Hartford shrinks due to mergers and stubbornly high costs, other insurance communities — lightly touched by mergers, with accommodating local governments — are growing.” Bruce G. Kelley, president and CEO of Des Moines-based EMC Insurance Cos.
“This is a great industry to work in. They’re green jobs. They’re high-paying jobs. … You can support a family very well with them.” Nick Gerhart, Iowa Insurance Commissioner
“There’s no question that the sense of community in Des Moines and among the insurance community exists like I’ve never seen it anywhere else.” Jim Brannen, CEO of Des Moines-based FBL Financial Group
“Hartford has been the victim of consolidation, by having companies disappear or downsize as a result of acquisitions. Des Moines, conversely, has been the beneficiary of consolidation. Even when some of our larger companies have been acquired, we have benefited by having the acquirer base large operations here.” Jim Wallace, GuideOne CEO and chairman of the Greater Des Moines Partnership
“I’m not surprised that Des Moines has been growing, because we attract a lot of the back-office operations for the insurance business.” Fred Hubbell, member of the board of directors of ING’s U.S. subsidiary, former CEO of Equitable of Iowa, and former board member of Amsterdam-based ING
“Our insurance regulators in Iowa are different than most. They’re appointed, rather than elected, which makes them less political. They work very closely with legislators and with the industry to craft regulations that are good for both the industry and consumers.” Sheryl Moore, president and CEO of Moore Market Intelligence and AnnuitySpecs.com
Champion: Hartford
“I wouldn’t characterize Hartford as a city whose insurance industry and economic base are on their last legs. The city is going to remain an important factor in the insurance industry for the foreseeable future.” Bob Hartwig, president of the Insurance Information Institute in New York City
“I think Connecticut is still the insurance capital compared to most states on a per-capita basis.” Robert Megna, House chairman of the Connecticut State Assembly’s Insurance and Real Estate Committee
“The Connecticut unemployment rate mirrors the national rate, and we’re still recovering from the recession. It’s not only insurance; we’ve been stagnant for jobs in general.” Carlos Liard-Muriente, Central Connecticut State University economics professor
“We still have our core companies and growing number of smaller companies, (but) in so many ways, we don’t promote ourselves well.” Peter Kochenburger, executive director of the Insurance Law Center at the University of Connecticut Connecticut’s total insurance industry wages grew to $6.6 billion in 2011 from $5 billion in 2002.
“That’s a significant increase — 20 percent or more on wage growth — which shows just how important the industry is to the Connecticut economy.” Thomas Leonardi, Connecticut insurance commissioner
“Connecticut is competing again. … Insurance and financial services are really critical. They’re our sweet spot.” Catherine Smith, Connecticut commissioner of economic and community development
“I really don’t think the fact that Connecticut has a high premium tax rate is a factor in this employment trend. I just think it’s more that Connecticut is perceived to be a high-cost state for business.” Frank Bensics, Central Connecticut State University mathematical science professor and actuary
Understanding annuities
There are three main types of annuities, which are designed to return a regular stream of income to policyholders after a period of initial investment. They’re often used in retirement planning. The three types are fixed, variable and indexed annuities. Fixed annuities: Stable insurance contracts in which the policy-holder receives a fixed amount of dollar payments over a fixed time period. Variable annuities: Insurance contracts in which the payments vary with the performance of the insurer’s investments. These are one of the least stable forms of an annuity because the policyholder receives smaller payments when the investments do poorly and larger payments when they do well. The Hartford area has long been a hotbed for this type of annuity business. Indexed annuities: Insurance contracts in which yields vary with a specific stock market index. They offer a guaranteed minimum return to insulate the policy-holder from catastrophic declines in the index. Fixed and indexed annuity issuers predominate in the Des Moines insurance industry. Insurance categories: Property and casualty insurers cover home, car and business losses. Other majors types of insurance include life insurance, health insurance and annuities. There are also niche providers for everything from funeral insurance to church insurance.
