California concept increases investments in underserved markets
Insurers get a monetary return on investments in underserved areas through Impact.
Flush with success over its first multi-million dollar deal in California, Impact Community Capital LLC is laying groundwork for a second project. The unique for-profit insurance industry effort, known as Impact, is designed to increase investments in underserved markets of the state.
“I’m very encouraged by the direction Impact is taking,” notes Martin Erwin, an incorporator of the program and counsel for State Farm Insurance. “I expect subsequent deals to move much faster.”
The inaugural project took longer than expected to put together. But once the
idea took hold, insurance companies representing nearly one-third of premium
dollars written in California got onboard. The advantage for insurers is that
they can invest in underserved areas of California, through Impact, and get
a monetary return on their investment. “The idea for Impact is to try to put community deals on the same level as other investments insurance companies make,” Erwin says.
Multi-family rental housing received an infusion of $40.5 million in capital through the initial Impact deal. The insurance industry-owned entity purchased mortgages in that amount from California Community Reinvestment Corporation (CCRC). This freed up money for CCRC to make additional such loans. The mortgages were repackaged by Impact into securities, the majority of which have an investment grade rating, for purchase by insurance companies.
Farmers Insurance Group, an Urban Insurance Partners Institute member, was one of the original creators of Impact. Farmers believes it is important for insurers to be able to make a good investment while channeling money into neighborhood revitalization. The company is convinced the result constitutes a win for everyone.
“It’s important to get a competitive return,” elaborates Laszlo Heredy, vice
president of Farmers Insurance Group. “Everyone can feel good about these kinds
of investments if they’re structured properly. If every partner in the deal
has some ‘skin in the game’ there’s an incentive for all parties to do well
by looking after their vested interests. An outright grant may not have these
same attributes.”Heredy agrees with Erwin that the success of the first Impact transaction, accomplished in August 2000, will make it easier to get additional companies interested in future endeavors. A total of nine insurers, including UIPI member Nationwide Insurance, purchased the securities.
Impact was founded in 1999 by 10 insurance companies, including Allstate, Conseco, Farmers, Pacific Life, PMI Mortgage, SAFECO, State Farm, Teachers Insurance and Annuity Association, 21st Century, and Zenith. Some companies chose not to participate because they believed they could accomplish the same objectives on their own.
The cost of maintaining the entity is borne by all Impact members, based on their percentage of market share in California. For example, an insurance company writing one-half percent of the statewide market would pay one-half percent of Impact’s cost, upon membership.
The next project for the group will be to purchase an estimated $50 million in mortgages, this time focused on single family dwellings. The deal is expected to be wrapped up by August of 2001, or perhaps earlier.
Now that the wheel has been invented in California, the concept could easily be imported to other states with very little setup cost. At least one state, New York, has considered the program.
For additional information on Impact check out www.impactcapital.net, or call (888) 548-5485.
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Home Equity Assurance Program -- Chicago Illinois
Chicago home equity program stabilizes urban communities
Residents in three changing Chicago enclaves do not have that sick feeling in the pit of their stomachs anymore about whether the family home will plummet in value.
Homeowners can participate in a unique state created program that ensures they will get back their original investment. In the ten years since the Home Equity Assurance Program was initiated, property values are stronger.
Two of the three Home Equity Assurance programs are on Chicago’s southwest side and the other is on the northwest side.
“Property values have appreciated significantly,” says Helen Juozapavicius, executive director of the Southwest Home Equity Assurance Program. “We are also seeing new housing starts, which we didn’t see in 1990.”
Residents pay for peace of mind through a special tax of about $20 annually, based on the assessed valuation of their home. Homeowners are not enrolled until they pay a $125 registration fee, which covers the cost of an appraisal. In addition they must remain in the home five years to be eligible for reiumbursement, to promote stability.
“There was a lot of instability in the area ten years ago,” remembers Juozapavicius. “People were relocating to the suburbs, and property values were going up and down like yo-yos.”
A telltale sign that the situation has turned around is the relative lack of housing stock available for resale. A significant amount of rehabilitation also is underway.
Although 60,000 homes are eligible to participate in the Southwest Home Equity Assurance Program, only about 4,500 do so. While that may seem surprising, much of the program’s benefit has been psychological. “The idea of the program is to instill confidence,” Juozapavicius confirms.
The strategy has worked, as evidenced by the lack of claims paid by the program. Only 11 claims, averaging $5,500, have been paid for a total of 60,000.
The Southwest Home Equity Assurance Program decided some the collected surplus should be put to use helping residents obtain low or no interest home improvement loans, which began this fall.
Other cities have been looking at the Chicago programs with interest. Baltimore initiated a similar plan a few years ago.
The plans interest the insurance industry, since stable neighborhoods provide less risk to insure. The industry helped come up with the idea for the program.
“We put a lot of thought into developing a risk pool that would give community residents a stake in the outcome through taxation,” reflects UIPI President Suzanne Reade, who worked on the initiative while with CNA.
Details about the Southwest Home Equity Assurance Program can be found at www.swhomeequity.org or by calling (773) 434-8220.
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Local Initiatives Support Corporation -- New York, New York
LISC takes risks to revitalize urban communities
Some of LISC’s programs offer insurers the opportunity to get an investment return.
Artists are thriving in a formerly deteriorating enclave of Indianapolis, thanks to a unique investment partnership being duplicated in other cities across the U.S.
The conversion started about two years ago when the Southeast Neighborhood Development Corporation (SEND) stepped in to renovate two huge eyesores in the Fountain Square area of Indianapolis. One was a vacant five-and-dime store and the other an abandoned carburetor factory.
Although SEND knew it wanted to renovate the buildings to attract artists, the community development corporation (CDC) lacked money to get started. So the organization did what it had done many times before—contacted the Local Initiatives Support Corporation (LISC) for a loan.
LISC is a not-for-profit organization dedicated to rebuilding communities through support to community development corporations. Former U.S. Treasury Secretary Robert Rubin is chairman of the board.
“The biggest advantage is that they’re willing to take risks that a traditional lender would not,” says Bill Taft, president of SEND, which has partnered with UIPI on projects. “The loan rates are affordable, and they’ve also funded some of our staff capacity in the area of economic development.”
The
nearly $600,000 infusion from LISC was made even though the two Indianapolis
buildings, totaling 145,000 square feet, had been vacant for years with no tenants
lined up. LISC’s confidence was well founded with both structures now successfully
housing primarily arts related businesses.The Indianapolis projects represent a minuscule portion of the 11.2 million square feet of commercial and community space built or rehabilitated with LISC’s help since 1979. The corporation operates local programs in 38 cities and 66 rural areas, involving hundreds of CDCs. A creation of the Ford Foundation, the now independent LISC has raised billions of dollars from investors, lenders and donors to fund revitalization. Several insurance companies are supporters.
Urban Insurance Partners Institute member Mutual Assurance Society of Virginia, Richmond, has invested money in LISC locally through the insurer’s foundation. “It gives us a chance to participate in helping the city rebuild,” says Gerald Roach, president of Mutual Assurance Society of Virginia. “We feel it is so important to do something locally.”
Pulitzer prize winning newspaper columnist Clarence Page is impressed by LISC’s accomplishments. At the Indianapolis office’s annual meeting this fall Page remarked, “It is downright humbling for me to be here.”
Page spoke about the rebirth of cities nationwide and LISC’s role in the resurgence. “You have been such a part of the solution in the face of so many problems,” he complimented.
The rebuilding has been attained, in part, through the help of company investments in LISC products. Select programs offer the opportunity for insurers and other types of businesses to get a return back on their financial outlay.
“It depends on what they invest in as to what the rate of return will be,” defines Andrew Mooney, senior program director in LISC’s Chicago office.
A market rate of return is provided for investments in the National Equity Fund (NEF), which is affiliated with LISC. NEF enables for-profit companies to invest in affordable housing projects through tax credit syndicators like LISC. A number of insurance companies are investors in the fund.
Companies also can provide grant money, loans and equity dollars to LISC efforts.
In Illinois, LISC has been talking with the insurance industry about the need for equity funds. “We need to have longer term money that will in the long haul provide a return to the investor,” says Mooney.
Details on LISC programs can be found at www.liscnet.org on the World Wide Web and by calling LISC headquarters at (212) 455-9800.
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Social Compact -- Washington, D.C
New studies help insurers pursue urban business
Pilot project finds spending power in two urban neighborhoods is higher than in suburbs.
A picture can be worth a thousand words, or void of meaning. Take two Chicago area communities, wealthy north suburban Kenilworth and low-income Little Village, a mostly Mexican-American enclave on the near southwest side.
“Driving through Kenilworth and seeing those incredible homes, you automatically think of the riches there,” elaborates Jennifer Davis of Allstate Insurance Company, who lives in Chicago.
“The concentration in places like Little Village is not nearly as apparent to the uninformed eye,” she says. “However, the riches and the buying power are there. Failure to see it provides a glaring example of the need to adjust perceptions to match the realities that exist.”
A Washington-based nonprofit organization called Social Compact is trying to
change the lens through which people see inner cities. A study by the group
of two Chicago neighborhoods, Little Village and South Shore, boasts groundbreaking
results.The spending power of Kenilworth and Little Village seems be cut and dried when looking at U.S. census data. Kenilworth has a medium household income in excess of $100,000, while Little Village’s is one-fifth that, at $22,000. When Social Compact dug deeper, using private business data and additional sources of information, the group found Little Village actually has twice the spending power of Kenilworth.
How can that be? For one, the population is much more concentrated in Little Village, prompting per-acre spending to be significantly higher. Second, cash transactions for services such as house cleaning, painting and child care often go unreported, Social Compact found. Third, credit histories of residents frequently are unavailable due to a preference for check cashing services, instead of traditional financial institutions.
“Our concept is that you don’t have to go thousands of miles away to overseas emerging markets. There are opportunities in our own backyards,” explains Amy Whittle, new markets development director at Social Compact.
Allstate has experienced the economic strength found in Little Village firsthand. An Allstate agent garnered an account base double the Illinois average. Another local business, McDonald’s, boasted revenues second highest among more than 100 McDonald’s restaurants in the Chicago area.
“Allstate started in cities and we’ve always had a gut feel this is a good place to do business. Our business results bear this out,” Davis says. “But to have independent data that absolutely provides you with information you can use to build business cases is very helpful.”
The Emerging Neighborhood Markets Initiative, a pilot project by Social Compact, has been so successful it is being expanded to other cities nationwide. Social Compact’s overall goal is to fuel sustainable and successful private sector development in underserved areas.
The group plans to complete studies of 10 additional neighborhoods, including ones in Washington, D.C., and Houston, by year-end. A template of sorts is being developed by the organization that eventually can be applied to inner-city areas across the country.
The knowledge gained will be useful to insurance companies looking to pursue business opportunities in urban areas.
“Insurance companies can benefit from seeing inner-city areas that are stable, have strong asset bases and could be potentially strong customers,” Whittle notes.
Allstate’s Davis sees several ways the information is important to insurers. “It helps you determine where you are going to place your offices, the right kinds of products for the environment, where to market, and as a company guide for philanthropic efforts,” she says. “It’s a concentrated way of targeting your business.”
For more information about the Social Compact initiative, check out the organization’s Web site at www.socialcompact.org.
The Urban Insurance Partners Institute will feature other model urban initiatives in subsequent newsletters, and on UIPI’s new Web site, which will be initiated this fall.
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