In the expectations game, Citigroup (NYSE: C) $2.5 billion loss is great news for Wall Street. Bloomberg News reports that the analysts it surveyed expected a $3.67 billion loss, or 54 cents a share -- so Citi's results were $1.2 billion better than expected. But there were wide variations on what analysts expected Citi to lose -- from 51 cents to 67 cents.

This reminds me of the story of the boy who comes home from school to tell his mother about a grade he got on a test. Rather than bow his head in shame, he walks into the kitchen with head held high and a big smile on his face. And he announces: "Great news mom! I got a 70!"

The key reason for Citi's loss is the $7 billion in credit-related write-downs it took. These included reductions in the stated value of its subprime mortgage exposure and its investments in monoline insurance companies including Ambac Financial Group Inc. (NYSE: ABK) after they lost their AAA credit ratings. Analysts expected write-downs as high as $12 billion.

This post is part of our Big Company, Small Town series, featuring large companies and the small towns in which they are headquartered.

State Farm is the world's largest mutual property and casualty company, which means its owned by its policy holders. In 2007, State Farm Mutual Automobile Insurance Company paid $1.25 billion in dividends to its mutual auto insurance policy holders. (In the interest of full disclosure, I did get one of those checks.)

The corporate headquarters are based in Bloomington, Illinois, where State Farm was founded in 1922 by George J. Mecherle. He thought farmers were being charged too much for car insurance because they don't drive as much as city folk and didn't incur as many loses. Well, the insurance companies available at the time didn't agree with him, so he started his own car insurance company for farmers.

Today, State Farm has grown into the largest insurer of cars and homes in the United States, as well as the leading insurer of watercraft. State Farm is also a leader in insuring Canadian cars and homes. State Farm serves a total of 77 million auto, fire, life, and health policies in the U.S. and Canada with 67,000 employees and 17,000 agents. About half of its employees are involved in claims processing in one of its more than 390 claims offices.

For the purposes of this examination, let's set aside the fact that you can find reliable clinical research that shows that tobacco smokers cost the insurance industry less over their lifetimes than svelte nonsmokers do. This is simply due to the fact that we tend to die sooner. But that's a matter of insurance industry/government/pharmaceutical hijinx, to possibly discuss another time.

That aside, the item I'm bringing forward today is how the issue of lying smokers should be pursued by Whirlpool Corp.(NYSE: WHR). I'll not take issue against Whirlpool's insurance plan demanding a different level of premium payment from smokers. I'll not take issue against Whirlpool asking smokers to document their participation in the addiction. I'll not take issue against Whirlpool taking action against smokers who lied when claiming that they don't smoke. What I do argue against is the ludicrous notion that Whirlpool employees have turned on one another. It appears that's what the company expects us to believe.

Whirlpool management wants you to believe that they had 39 instances of one employee reporting another for serving their nicotine addiction in violation of what should be a confidential declaration of status. Whirlpool expects you to believe that these company "rats" know which smokers lied on their paper work and which didn't. Whirlpool expects you to believe that all policy violators are of hourly status and that violations by management staff either don't exist or aren't yet worth pursuing. Whirlpool expects us to believe that the company itself wasn't at the root of this all.

Markel Corporation (NYSE: MKL), insurer of specialty properties and real estate, recently acquired Specialized Insurance Inc., which focuses on insurance for service garages at car dealers and gas stations. The move is said to be in keeping with Markel's intentions to grow this sector of it's business. Specialized Insurance Inc. already acted as agent for Markel. Financial details of the acquisition remain undisclosed.

Markel has been in the business of insuring specialty properties and other niche markets since 1930. The company issues policies covering everything from archery ranges and railroads to pollution liabilities and paintball tournaments. The company has net annual cash flow from operating activities in excess of 500 million, but that figure has been in annual decline since 2004.

With the pervasive use of computers in our lives, the line between what's mine and yours sometimes gets blurred. I read an interesting post on TechDirt today that describes a patent that Big Blue, International Business Machines Corp. (NYSE: IBM) was awarded. The article, entitled "IBM Patents Real-Time Auto Insurance Surcharges," describes the patent as "Location-Based Vehicle Risk Assessment System, which describes how surcharges will be added to your auto insurance premium when a GPS device reports that you drove into an area in IBM's bad neighborhood database."

While this certainly sounds invasive, it's part of a larger trend in the insurance industry that actually benefits us consumers. In fact, I've written before about Pointer Telocation Limited (Nasdaq: PNTR), a small Israeli firm that markets technology similar to that of Lo-Jack's. In my interview with the Pointer Chairman, Yossi Ben Shalom told investors about a project underway in the U.S. called "Pay as You Go," in which insurance companies are testing programs with technology providers like Pointer that would revolutionize the auto insurance industry.

According to Ben Shalom, "Some people in the industry are talking about a discount or incentive program to build insurance policies on a multitude of parameters. Instead of just selling a policy based on the collective risk profile of the insured, "Pay as You Go" would calibrate premiums on a month-to-month basis based on specific data on how and who drove the car. Imagine a policy that didn't charge a family with a 16-year old driver when he didn't drive the car that month. Which roads the insured drove on, who drove the car, when the car was driven – all this data can be supplied via Pointer equipment to an insurance firm. There are some small pilot tests going on currently which we are involved in. Right now, we're talking about a very small percentage of the overall market but this could be a big driver for Pointer in the future because you need our technology for this."

Looks like IBM wants to get in on a project that could ultimately lower our auto insurance premiums. Clearly, no one wants their insurance company or anyone spying on them but with the right incentives and consumer protections, this new technology and new program could be great, no?

Zack Miller is the managing editor of IsraelNewsletter.com and a former equity analyst for a leading multinational hedge fund.

An op-ed in today's Wall Street Journal wonders (subscription required) whether Eliot Spitzer's high-profile demands for change at AIG (NYSE: AIG) and Marsh & McLennan (NYSE: MMC) did more harm than good:

"In both cases, Mr. Spitzer issued ultimatums to the company boards that they had to replace their CEOs, or else he'd indict the company," the paper says. "Both companies have struggled ever since."

Before we get on Spitzer too hard, it's worth noting that almost all companies see their stock prices go down following the announcement of investigations and charges. News items like this generally reflect serious problems at the company -- and mark the first time investors become aware of certain issues that the company hadn't previously disclosed. If regulators worried about driving down share prices by launching investigations, they wouldn't be able to launch any investigations! Ultimately, investors are protected by zealous enforcement of the law.

However the notion of an Attorney General essentially installing at executives at public companies is frightening one and hopefully the failure of Mr. Cherkasky -- his resignation as CEO prompted a 5% run-up in the stock -- will put an end to experiments like this one for a long time to come.

Ideally institutional shareholders would lobby for strong upper management replacements in the face of scandal.

Aon (NYSE: AOC) thinks that risk brokerage and consulting has the best future, in terms of margins and growth.

To that end, the company announced Monday that it is selling off its underwriting businesses. Combined Insurance Company was sold for $2.4 billion to ACE Limited (NYSE: ACE), while Munich Re bought Aon's Sterling Life segment for $352 million.

Yes, even in the massive insurance business, this is a good chunk of change for Aon.

From today's (subscription required) Wall Street Journal:

Employers who provide health insurance often use financial incentives, such as contributions toward premiums, to encourage workers to participate in wellness programs like smoking-cessation courses.

Now some employers are wielding a stick as well as a carrot. Employees at some companies who are overweight, smoke, or have high cholesterol, for instance, and who don't participate in supplementary wellness programs, will pay more for health insurance. In extreme cases, employees' insurance deductibles could rise by $2,000.

Of course, this is generating some scandal and talk of possible lawsuits.

It reminds me a little bit of my favorite scene from favorite scene from Spinal Tap, where Nigel Tufnel explains to an observer that the band's amps go to 11, rather than 10. The incredulous man asks how that really makes them go louder -- they only go to a certain volume, regardless of what number it's labeled.

Similarly: Charging a premium for engaging in an unhealthy behavior is not different from offering a reward for not engaging in the same behavior in any sort of meaningful way.

This seems like one big labeling issue, but it should give trial lawyers something to keep them busy.

Over the past 12 months, the S&P Supercomposite Life and Health Insurance Index has risen by 10.73%, outpacing the 2.29% gain in the S&P 500 index and the 18.17% loss in the S&P financial index -- which has an equivalent exchange-traded fund, the Financial Select Sector SPDR ETF (AMEX: XLF).

Unlike other financial shares, many of which have suffered the ill effects of billion-dollar writedowns and continuing upheaval in global credit markets, some insurance stocks have been seen as something of a safe haven. With their large investment portfolios, insurers have also benefited from strength in global equity markets, at least until recently.

No doubt the question remains open whether life and health insurers are immune to the contagion being felt elsewhere. Regardless, the appearance of a bearish double top in both the absolute and sector-relative charts suggests the group is due for at least a short-term pullback.

Michael Panzner is a 25-year veteran of the global stock, bond, and currency markets and the author of Financial Armageddon: Protecting Your Future from Four Impending Catastrophes and The New Laws of the Stock Market Jungle.

Insurance holding company James River Group, Inc. (Nasdaq: JRVR) will be acquired by a member of the D.E. Shaw Group, based in Bermuda. The acquisition should be finalized by the end of December 2007. James River Group is not seeking a buyer because it is in financial trouble. Far from it. The company posted good numbers in its recent 3Q 2007 earnings release. Underwriting profit for the quarter increased 10% to $11 million, not including $1 million spent in acquisition costs. Net income increased to just over $10 million, with diluted earnings per share (EPS) up 9% to $0.63. Excluding year-to-date (YTD) acquisition costs of $3 million, YTD EPS of $1.82 represents a 20% increase.

James River's Workers' Compensation unit posted significantly higher profit margins, due both to lower losses and better management of expenses. Net investment income increased $1 million to $6.3 million, a 20% gain. Buried in the earnings release, however, is the fact that the company holds $4.3 million worth of sub-prime mortgages in its investment portfolio. This may be a problem down to road for the new owners. James River Group is currently rated A- by A.M. Best Company.

Given the company's impending acquisition, CEO J. Adam Abram offered no guidance for 4Q 2007, nor held a conference call to discuss 3Q 2007 numbers.

As noted, given the current choppy/consolidating market conditions, adding a few defensive plays is a prudent strategy. Humana Inc. (NYSE: HUM) is an insurer worth an evaluation.

Humana's Medicare and Medicare prescription business, 50-state presence, likely substantial membership growth, and cost controls make it an "insurance company of significance." Another major positive: the currently underserved Medicare population, and an expanding Medicare demographic, the latter courtesy of the U.S. baby boom generation's retirement. HUM closed Thursday up $3.43 to $76.93.

The qualifiers? Competition on HUM's commercial business side is a hurdle, but overall, the risk/return for this stock is favorable.

[Note: Technical analysis agnostics stop reading here; all others continue.]

Technically, Humana's chart looks strong. The stock did straddle its 50-day moving average this summer, but has since remained solidly above it, while also clearing $65-$68 resistance. With a new 52-week high recently in place and a P/E of 21, HUM is not cheap, but it's a reasonable price to pay for this safety-and-growth hybrid.

Stock Analysis: Humana is a low-risk stock. Investors with an investment horizon longer than 1 year should be rewarded from HUM's shares. A preferred entry price if one were to buy would be below $75, if the market presents that opportunity. Sell / Stop Loss: $47.

Continuing with our defensive stock series: given the current choppy / consolidating markets (or perhaps worse), Aflac (NYSE: AFL) is an insurance play that undoubtedly will add stability to your portfolio.

Efficient Aflac provides supplemental health and life insurance in Japan and the U.S. that cover special conditions.

Aflac Japan's insurance policies help pay for costs not covered under Japan's national health care system. A well-known company in Japan, Aflac's U.S. strategy mirrors its Japan operations: identify relevant products, implement a time-tested distribution system, emphasize efficiency, and build brand awareness. In the U.S., brand awareness has been built via the "Aflac duck," a successful ad campaign featuring a courageous, perseverant duck. Aflac's shares were down 88 cents to $64.88 in Thursday afternoon trading.

Given the current choppy, consolidating market conditions, adding a few defensive plays is a prudent tack. Among insurers, Aetna Inc. (NYSE: AET) is worth a review.

Aetna's wide product offerings and comprehensive coverage is an operational strength, as is its geographic footprint. These factors, along with cost controls, should enable Aetna to maintain solid earnings growth in 2007-2009. The Reuters F2007/F2008 EPS estimates for AET are $3.43/$3.89.

What should one not expect from Aetna? Ill-conceived, poorly-researched endeavors. Aetna is a deliberate, move-forward-cautiously operation with a corporate culture that reflects many of the values of the land of steady habits, its home state of Connecticut. Aetna's shares rose $2.08 to $54.98 in Thursday afternoon trading.

A recent study has found that employer efforts to cheer up employees -- getting them treatment, phone counseling, etc. -- makes sense for more than just altruistic reasons.

The research, conducted by the National Institute of Mental Health, found that, on average, depressed employees who receive aggressive attention from their bosses worked about two weeks more during the year-long study. Workers are also more likely to keep their jobs when they receive aggressive help, which can reduce the costs of recruiting and training new employees.

According to the Associated Press, "The researchers haven't finished a formal cost-benefits analysis but early results suggest savings from more hours worked averaged to about $1,800 per employee. That far exceeds the program's initial $100 to $400 per worker cost. The benefits also likely exceed other costs, including drugs and therapy too, the researchers said."

Hopefully this will change the way that so many employers perceive depression and its treatment. The productivity costs of depression can be just as real as a broken leg, and employers should provide aggressive treatment options, both for their own benefit and the benefit of the worker.

As my colleague Doug McIntyre noted yesterday, Wal-Mart Stores, Inc. (NYSE: WMT) has furnished the world with details on how it is improving health insurance benefits for its million-plus U.S. employees. After years of of tussling with unions, the media, employees and just about anyone else about how it so "shabbily" treats employees when it comes to benefits, it wants the world to know what it's up to.

Now, Doug's right about this benefit increase costing Wal-Mart -- it will. In fact, it could not have come at a worse time, as Wal-Mart seems lost and misguided even as it has become the world's largest retailer by revenue. Sales in the U.S. are flat and the company's image (like it has been in the last year) is swirling in the toilet. So, for Wal-Mart shareholders, capital expense increases are probably not what needs to show up on the company's books right now.

On the other hand, marketing rules the world (not product quality), so Wal-Mart's attempt to give its employees over 50 ways to customize medical coverage along with free spousal coverage and $4 generic drug copays will probably increase its image with the Bentonville bashers out there. I've not seen every detail yet, but such expansive health care options are really hard to find, even at many Fortune 500 companies.

Will Wal-Mart see an improved public image due to the benefit changes? It should, as it at least deserves recognition if not minor applause here. Whether that image brush-up changes into revenue gains is anyone's guess. But, if you've left Wal-Mart for greener shopping pastures due to the way employees are treated, will this move get you back in the door any time soon? If so, then mission accomplished for Wal-Mart.