Monday, April 7, 2014

No. 39: Executive Compensation Disclosure in Nebraska and the Insurance Industry's Effort to Repeal the Requirement

My post No. 38, published one week ago, is entitled "Weakening of Disclosure Requirements Imposed by State Regulators on Insurance Companies." Recent developments in Nebraska prompt this follow-up.

The Hammel Telephone Call
On Friday, March 21, 2014, Paul Hammel, a reporter at the Omaha World-Herald, contacted me by telephone. He said a bill was introduced in January in the Nebraska legislature to repeal a century-old law requiring insurance companies doing business in the state to file executive compensation data with the Nebraska director of insurance. The call was my first knowledge of the repeal effort.

The Hammel Article
On Sunday, March 23, the newspaper published the lengthy Hammel article, which was entitled "Texans target Nebraska law requiring insurance firms to disclose top executives' pay." The article ran prominently; it began at the top of the front page of the newspaper's second section and continued on the second page of that section.

Behind the repeal effort is San Antonio-based United Services Automobile Association (USAA). It is a large company that caters to current and former members of the military and their families. It has top ratings for financial strength from the major rating firms.

USAA paid $50,000 to Mueller Robak, a legal and lobbying firm whose office is one block from the Nebraska state capitol building in Lincoln. Spearheading the repeal effort is USAA Senior Vice President and Associate General Counsel William H. McCartney. He was director of insurance in Nebraska from 1987 to 1994, and he was president of the National Association of Insurance Commissioners in 1992.

The Nebraska Disclosure Law
The executive compensation disclosure law at issue is Section 44-322 of the Nebraska Revised Statutes. The law was enacted in 1913 as part of the reforms that grew out of the Hughes-Armstrong investigation in New York in 1905. The section relates to the contents of annual financial statements filed by insurance companies. Subdivision 1(a)(iii) reads:
The salaries and compensation of the officers and any other information required by the director [of insurance] shall be filed with the director.
The Bill To Repeal
Legislative Bill (LB) 799, as originally introduced, would simply repeal the one-sentence Subdivision 1(a)(iii). A proposed amendment to LB 799 would leave the sentence unchanged and add this second sentence:
All information regarding salaries and compensation filed pursuant to this subdivision shall be maintained as confidential by the director and shall not be subject to disclosure by the director to persons outside of the Department of Insurance except as agreed to by the insurance company or as ordered by a court of competent jurisdiction.
LB 799 was one of several bills on the agenda for discussion at a January 28, 2014 legislative committee hearing. McCartney of USAA testified at length in support of the repeal effort. The only other witness who testified on the bill was Janis McKenzie, executive director and lobbyist representing the Nebraska Insurance Federation, who also supported the repeal effort. Current Nebraska Director of Insurance Bruce R. Ramge was in attendance at the hearing to testify on another bill, but he did not testify on LB 799.

The Arguments
The Hammel article shows some arguments made by those in favor of the repeal effort. State Senator Tom Carlson, an insurance broker who introduced the bill, is quoted as saying the disclosure requirement is unfriendly to business. McKenzie of the Nebraska Insurance Federation is quoted as saying the executive compensation data could be used by a newsletter or opinion-piece writer to create an "image or bias that something is improper." McCartney of USAA is quoted as saying it is unfair to require a private employer to make compensation figures public when other private, licensed businesses and professionals do not have such requirements. He also said that it is unfair to allow competing insurance companies to learn what USAA is paying its company leaders, and that buyers of insurance do not care how much executives are paid.

The Hammel article also shows some arguments made by those opposed to the repeal effort. State Senator Paul Schumacher criticized USAA for paying a lobbyist $50,000 to repeal a law allowing the insurance-buying public to decide whether a company is justly compensating its executives. He also said "there is no public interest served by the repeal of this law," and he urged his colleagues to resist "Texas-style politics." The article quotes Robert Hunter, a former Texas insurance commissioner who is now with the Consumer Federation of America, as saying that insurance companies are almost like public utilities because people must have insurance to drive a car or buy a home, and that it is important for insurance companies to be transparent. The article also mentions that the Nebraska disclosure law, like its counterpart in New York, was enacted in the wake of scandals involving nepotism, including the hiring of relatives who did little or no work for large salaries.

My Executive Compensation Tabulations
In The Insurance Forum, I published annual tabulations of executive compensation for almost 40 years. I obtained the data from insurance companies' public filings with the Securities and Exchange Commission (SEC); the New York Department of Financial Services and its predecessor, the New York Department of Insurance; and the Nebraska Department of Insurance.

The USAA Filings
Because USAA is a private company, it does not file with the SEC. USAA itself does not operate in New York, and the public filings of its New York subsidiary contain no useful data. Thus Nebraska was my only source of significant executive compensation data for USAA. USAA executive compensation exhibits filed in Nebraska each year contain this notice in italicized, boldface, solid capital letters:
NOTICE: THIS INFORMATION IS PROPRIETARY AND CONFIDENTIAL. DO NOT FILE WITH ANNUAL STATEMENT OR IN ANY OTHER PUBLICLY ACCESSIBLE FILE OR DOCUMENT.
The Nebraska disclosure law contains no provision under which the director of insurance is permitted to maintain confidentiality for the executive compensation data. Therefore, the Nebraska department provides the USAA exhibits to anyone who requests them pursuant to the Nebraska public records law.

The USAA Data
On March 31, 2014, I received the executive compensation exhibits for 2013 that I had requested from the Nebraska department. Among them are exhibits for USAA and four subsidiaries that operate in Nebraska. Because the compensation is allocated among the companies, for each individual I combined the figures in the exhibits filed by those five members of the USAA group.

Shown here in descending order of 2013 compensation are the figures for every person listed in the 2013, 2012, and 2011 exhibits. A dash means there is no information for the person in that year's exhibit. The figures may be understated because they do not include compensation allocated to several USAA subsidiaries that do not operate in Nebraska.

2013
2012
2011
 
 
 
Josue Robles Jr
$6,506,222
$10,485,017
$7,361,163
Kevin J Bergner
4,001,398
3,378,975
-----
Christopher W Claus
3,373,155
3,499,897
3,248,502
Wayne S Peacock
2,689,309
2,743,433
2,678,303
Stuart Parker
2,217,676
2,453,827
5,071,870
 
 
 
Steven A Bennett
2,189,148
2,426,666
2,476,659
Alice H Gannon
1,636,209
1,689,469
1,479,603
Shon J Manasco
1,600,504
692,384
678,122
Kenneth E Rosen
1,550,747
1,511,320
1,290,542
Alan W Krapf
1,519,794
1,657,281
-----
 
 
 
Jeffrey G Nordstrom
1,005,680
1,019,397
808,799
Shawn T Loftus
982,827
813,604
666,251
James E Goral
856,213
859,025
850,317
Gregory J Marion
813,885
649,073
536,883
Carl C Liebert III
734,214
-----
-----
 
 
 
Robert J Schaffer
658,159
502,070
-----
Nadeem Chowdhury
578,001
574,321
621,065
Michael A Merwarth
566,074
-----
-----
Kirby W Wisian
365,985
-----
-----
Rhonda C Noland
133,193
131,130
128,795
 
 
 
Kimberly A Ross
118,130
-----
109,721
Kristi A Matus
-----
-----
2,316,033
Wendi Strong
-----
1,197,461
1,223,264
Elizabeth D Conklyn
-----
-----
1,161,113
Russell A Evenson
-----
-----
836,902
 
 
 
Michael A Belko
-----
-----
530,605
Michael P Egan
-----
510,652
530,278
Stephen K Dunlap
-----
493,702
-----
William H McCartney
-----
399,156
-----
Edwin T McQuiston
-----
-----
387,515
 
 
 
Kim C McCracken
-----
176,770
176,513
Elizabeth A Hammel
-----
-----
169,196
Laurie A Philippon
-----
-----
146,287
Mary G Rutledge
-----
133,393
127,254

General Observations
It would be contrary to the public interest to repeal Nebraska's century-old insurance company executive compensation disclosure law, for at least four reasons. First, insurance companies, even though many are private, are public in the sense that they hold money essentially in trust for the benefit of and later delivery to policyholders.

Second, insurance companies are required to file publicly with insurance regulators a large amount of financial data. How the companies compensate their executives is an important part of that data.

Third, as mentioned in the Hammel article, laws requiring disclosure of executive compensation grew out of scandals that revealed significant abuses, including nepotism. Legislators at the time believed that full disclosure (often called "sunshine") was preferable to restrictions on executive compensation.

Fourth, the information filed pursuant to the executive compensation disclosure law is important to many people inside and outside the insurance industry. Their interest is evidenced by the substantial number of requests that people make for executive compensation data.

Whether USAA and its lobbyists will succeed in their quiet effort to push through the repeal of the Nebraska disclosure law remains to be seen. I say "quiet" because the brief and innocuous description of the bill in the legislative committee statement reads: "Change a filing requirement for insurance companies." A brief and more meaningful description would be "Stop allowing the public to have access to data on compensation of insurance company executives." The Hammel article brought the repeal effort to the attention of the public and I think it reduced the likelihood of repeal.

Some readers may be interested in seeing what would be lost to the public if the repeal effort succeeds. The Nebraska department assembles on a single CD all the executive compensation exhibits it receives. Anyone may obtain the CD by sending $80 to Nebraska Department of Insurance, Attention Sue Williams, P.O. Box 82089, Lincoln, NE 68501-2089. When you send for it, say your request is pursuant to the Nebraska public records law, ask for the CD containing executive compensation exhibits for 2013, and provide a regular address for first class mail.

===================================