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Mass. launches review of insurers’ executive pay

JOSEPH G. MURPHY

JOSEPH G. MURPHY

The state Division of Insurance has launched an unprecedented examination of executive compensation at Massachusetts insurers after disclosures that Liberty Mutual Holding Co. paid its top executive roughly $50 million a year.

The agency sent letters to roughly 100 Massachusetts insurers requesting details on how they set executive pay, including minutes from company meetings. It asked companies to report the pay for every board member, officer, or employee earning more than $100,000 a year in 2010 and 2011.

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The agency plans to compile the information in a report, rather than to challenge outsize pay packages. In an interview Thursday, Massachusetts Insurance Commissioner Joseph G. Murphy repeated his view that the agency needed to be concerned with the amount insurers paid executives only if the amount could threaten an insurer’s financial health and impair its ability to pay future claims. That is rarely the case with large, profitable insurers such as Liberty Mutual.

“If we saw some aberration where it was negatively affecting their solvency, we would probably drill down and perhaps take action,” Murphy said. “But if it’s the question of ‘Does ACME Insurance pay John Smith $5 million or $25 million?’ that is really not our role. It’s not for us to make that judgment.”

The agency decided to launch the examination after the Globe reported two months ago that Liberty Mutual, the largest insurance company based in Boston, paid former chief executive Edmund F. “Ted” Kelly roughly $200 million over the past four years, making him one of the highest paid chief executives in the country. The disclosure irked watchdog groups because Liberty Mutual is mutually owned by its policyholders, so any surplus profits should be distributed to customers as dividends or invested back into the company.

In addition, the company failed to disclose Kelly’s pay last year either to its policyholders or regulators, though Kelly later said that he earned around $50 million last year, similar to what he made in the three previous years.

“There’s been a lot of attention recently,” Murphy said. “We thought it was important to collect a little bit more information.”

But Senator Mark Montigny said the state does not need another study, it needs legislation to give policyholders at mutual insurers the same rights as stockholders at public companies.

“It’s very clear there is nothing left to study,” said Montigny, a New Bedford Democrat. “We need legislation — and very strict legislation.”

Montigny cosponsored a Senate budget amendment that would require mutual insurance companies to publicly disclose executive pay, give policyholders a vote on their compensation, and require directors who set compensation to be independent. The Senate approved the amendment, but it was not in the House budget. A conference committee is reconciling the House and Senate versions of the budget.

Attorney General Martha Coakley’s office, which represents ratepayers, praised Murphy for seeking information about compensation, calling for executive pay to be considered by the insurance division before approving rate increases.

“Insurers seeking rate increases should justify their expenses and explain why costs should be passed along to policyholders,” said Brad Puffer, a spokesman for Coakley. “We believe [the Insurance Division] should carefully scrutinize all the factors — including executive compensation.”

Governor Deval Patrick, who appoints the insurance commissioner, has previously called Kelly’s pay “breathtaking,” but said it isn’t the government’s role to dictate how much private companies pay their workers. Patrick’s office declined to comment Thursday.

The Division of Insurance is charged with licensing insurance companies, making sure they can afford to pay out any potential claims, reviewing rate increases for many types of insurance, and taking other steps to protect consumers. It approves rates on some types of insurance, and can reject them if discriminatory or unreasonable.

Executive pay has became a hot topic nationally following the financial crisis, and scrutiny has intensified in Massachusetts following the Liberty Mutual revelations.

Murphy said he decided to seek more information from insurance companies in case he is called to testify before the Legislature on potential new rules.

He noted, however, the state already collects extensive data on executive compensation. Like some other states, Massachusetts requires insurers to file an annual report listing the compensation for its chief executive, board members, and other top executives that are considered public documents. In addition, it periodically gathers more detailed information when it examines financial practices at individual insurers every few years.

Murphy said his office plans to use the additional information from the recently launched examination to prepare a broader report on industry executive compensation practices. He said the report would probably include aggregated statistics, however, rather than specific information about practices at each company.

State regulators also plan to review minutes of board and compensation committee meetings to ensure companies are following their own rules regarding compensation. Not following them could signal deeper problems with their operations and financial health, a spokesman said.

In addition, the agency is trying to determine how many insurers failed to report pay for executives who served only part of the year. Liberty Mutual said it omitted Kelly’s pay from its 2011 compensation report filed to the state because Kelly retired as chief executive halfway through the year, even though he was probably the company’s highest paid employee last year and remains chairman of the board.

John Cusolito, a Liberty Mutual spokesman, said the company plans to comply with the new request. Springfield-based Massachusetts Mutual Life Insurance Co., another major mutual insurer, declined to comment. A spokesman for the Massachusetts Association of Health Plans, which represents health insurers, said it is still reviewing the request.

Todd Wallack can be reached at twallack@globe.com. Follow him on Twitter @twallack.
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