Slabbed Daily June 1, 2009: Hurricane Season / Toxic Paper Edition

Save your life and evacuate. Or stay to make certain your wind insurance pays. Decisions decisions….

Its that time of the year – the beginning of another Hurricane season complete with advance news stories why our insurance rates need to rise yet again. Some evac stories always make it to the mix and it is there we start with this Melissa Scallan Sun Herald story:

Womack and other state officials are encouraging residents to go north, not east or west and to leave by alternate rather than primary routes, such as U.S. 49.

Some of the new and less-traveled routes include Mississippi 605 and Mississippi 67, which tie into each other and lead to U.S. 49. Wayne Brown, Southern District transportation commissioner for the state Department of Transportation, encourages residents to take highways such as Mississippi 15, 57, 63 and 29.

“If people stick to those, in my opinion, they’ll have much less traffic to deal with,” Brown said.

The state has agreed again this year to allow south Louisiana residents to use Mississippi interstates to evacuate.

If asked by Louisiana Gov. Bobby Jindal, Mississippi will contraflow interstates 55 and 59, which means traffic in all lanes will flow north.

On I-55 contraflow will end just south of Brookhaven. On I-59 it will end just south of Hattiesburg.

Some exits will be open so motorists can get gas and food, Brown said, but those could be closed intermittently.

“We’re going to let them get off, but if that stop becomes congested we’ll close the exit,” he said.

Bob Chapman, emergency services manager for MDOT, said contraflow is one reason department officials encourage Mississippi residents to leave as early as they can.

“We can’t contraflow U.S. 49 for our residents because there are too many access points,” he said.

“The main emphasis is to evacuate early and go where you want to go.”

Next up is the obligatory Insurance (Mis) Infortmation Institute’s annual news plant explaining that costly Hurricanes are the reason rates are so expensive. What the story fails to mention is that insurers are paying out less in claims as a percenatge of their revenues than ever thus losses can’t be the true reason rates are sky high, coverage is scarce despite III’s paid shill Robert Hartwig’s protestations to the contrary. We pick up the AP story as published by the Houston Chronicle (h/t Mrs Sop):

As the 2009 hurricane season arrives, many homeowners are finding insurance is either more expensive, or harder to get.

Homeowners from New York to Florida and in the Gulf Coast region are again seeing premiums rise and coverage change. And more are being dropped completely by their carriers as insurers try to limit their exposure in high-risk areas.

“They just don’t like being in the business … too much risk,” said Scott Hall of Market Street Advisers, a financial advisory firm in Wilmington, N.C.

Homeowners’ insurance premiums are up about 3 percent nationwide and probably more in some coastal areas where the potential for damage is greater, according to the Insurance Information Institute, a New York-based industry group. The hurricane season starts Monday and runs until Nov. 30.

Several factors are affecting premiums and coverage, including the $26 billion insurers paid out on catastrophic losses last year and the impact of financial market turmoil on the companies’ earnings. Changes in state regulations are also driving some premiums higher.

Late last year, Allstate Corp. and State Farm Insurance Cos., two of the nation’s top home and auto insurers, raised premiums in states including Texas, saying the increase was needed to offset a rising number of claims. Hurricanes Gustav and Ike hit the U.S. in September.

Northbrook, Ill.-based Allstate also implemented policy changes that raised deductibles and stopped offering coverage in high-risk coastal areas including downstate New York.

“We continually review all those items and make the necessary adjustments,” said Allstate spokesman Mike Siemienas.

Meanwhile, State Farm Florida, a subsidiary of the Bloomington, Ill.-based insurer, is trying to pull out of the Florida market after the state denied the company’s request for a 47 percent rate hike. Company officials have said they need the increase to remain financially viable. Discussions with regulators are continuing.

Shawna Ackerman, who co-chairs the American Academy of Actuaries’ property and casualty extreme events committee, said she has not heard of any mass non-renewals or existing policy changes that are in the works for 2009. But insurers are continuing a process that began after they paid out $23.7 billion in claims — a number adjusted for inflation as of 2008 — on Hurricane Andrew in 1992, trying to limit their exposure, or vulnerability to losses, in coastal areas.

Hurricanes Ivan in 2004 and Katrina in 2005 forced several to pull back further, with many companies re-evaluating policy coverages and raising rates. Ivan caused more than $8.1 billion in losses after adjusting for inflation, while Katrina was the most costly, with losses now calculated at $45.2 billion, according to Insurance Information Institute data.

“Over the last five years, where we’ve seen record catastrophe losses in coastal areas — Florida, Mississippi, Louisiana and Texas — the increases in (premiums in) those areas have outstripped what we have seen nationally,” said Bob Hartwig, the Insurance Information Institute’s president.

Insurers will raise premiums wherever state regulators allow them to, Hartwig said. “In areas where they are not given that opportunity, insurers are going to scale back their exposure.”

Now of course our own insurance commish Mike Chaney has let the State Farm raise rates in Mississippi as did Kevin McCarty in Florida. State Farm has not written a new HO policy in Mississippi in two years or so and is pulling out of Florida after McCarty told them no on their second rate up request. My own opinion is these increases on the Farm are more related to the subprime investments that State Farm crammed into their reinsurance program (along with “sham transactions” with itself) than losses. Those financial wizards got bonuses while consumers get stuck with the bill as the story continues:

In 2007, Florida ranked as the state with the greatest hurricane exposure, facing a potential $2.46 trillion in losses, according catastrophe risk-modeling firm AIR Worldwide Corp. A close second, New York had $2.38 trillion in exposure; and third was Texas with $895.1 billion of exposure.

Current forecasts suggest a less active season than was expected last year, encouraging news for anyone with property or investments that lie within hurricane-prone coastal areas.

The National Oceanic and Atmospheric Administration has predicted nine to 14 named tropical storms this year. The named storms are expected to include four to seven hurricanes, of which one to three are likely to be major storms.

“Even though the forecast for storms this year seems to be down, those of us who are worried about this stuff are concerned that the East Coast is due,” said Charles Williamson, president of AIU Holdings’ Private Client Group, a unit of New York-based American International Group Inc. that offers property casualty insurance. “The East Coast hurricane market, particularly Florida, is very volatile right now.”

Rising prices and deductibles may lead some homeowners to question whether they’re overpaying.

“It is very difficult for consumers to figure out if they are being gouged or not,” said J. Robert Hunter, a former Texas State Insurance Commissioner who is now director of insurance at the Consumer Federation of America, a consumer advocacy group.

“You have to trust your state regulator,” he said, referring to the fact that state officials limit how much insurers can charge.

The $26 billion casualty insurers paid out last year for catastrophe losses was substantially more than they expected. The companies also lost billions of dollars in the financial markets; they use investments to supplement their premium income and create a cushion for when they’re hit by big claims.

People in Houston are still laughing at that last Robert Hunter quote. Hunter, a New Orleans native who has made a name for himself as a insurance consumer advocate must live in lala land if he thinks people will ever trust the merry group of captured regulators known as State Insurance Commissioners to get a good deal from insurers except for maybe themselves via the revolving door. My own opinion is that Robert Hunter is a relic from the horse and buggy days of financial history and is part of the problem but that is another post.

AP writer Ieva Augstums concludes the story parroting an often repeated whopper of a lie with the implication that catastrophe losses are what caused Allstate to hemorrhage large sums of money last year:

For example, Allstate’s catastrophic losses more than doubled in 2008 to $3.34 billion. This led the company to report a loss of $1.68 billion, or $3.07 per share, for the year, compared with net income of $4.64 billion, or $7.77 a share, in 2007.

During the first quarter of 2009, the insurer said, falling investment income contributed to a $274 million loss.

Industry leaders also say they are seeing pricing increases for reinsurance, or insurance that is sold to other insurers to protect against the risk of losses.

“Insurers are incurring more costs, which means they need to get more underwriting profits,” said commercial property insurer FM Global chairman and chief executive Shivan Subramaniam.

“At some point in time they are going to have to charge clients more money.”

This is why I wish more journalists knew how to use the EDGAR database at the SEC website. Had Ieva Augstums possessed that skill he would have found that Allslate’s 2008 loss was most directly caused by the writedown of over $5 BILLION dollars worth of crap toxic paper and that Allstate’s P&C segment actually posted a profit for 2008. Don’t take my word for it however, simply follow this link and scroll to page 27 to the beginnings of MD&A section of the filing which says the following:

Property-Liability net income was $228 million in 2008.

and this

Net realized capital losses were $5.09 billion in 2008 compared to net realized capital gains of $1.24 billion in 2007.

And of course 2009 has not started much better for the toxic paper moneychangers in Northbrook (Page 33):

Property-Liability net income was $100 million in the first quarter of 2009 compared to $503 million in the first quarter of 2008…..

Net realized capital losses were $359 million in the first quarter of 2009……..

Consumers should pay for this why?? ****(Answer below)

 Beisdes having a good evacuation plan Hurricane season also means consumers need to grab hold of their wallets!

sop 

**** (Answer: So Allstate CEO Tom WIlson can pay himself another 8 figure bonus in 2009.)

4 thoughts on “Slabbed Daily June 1, 2009: Hurricane Season / Toxic Paper Edition”

  1. Too much of the business press are morons who never question the b.s. they are given by guys like Hartwig. The Southern states are notoriously weak regulators who have given the industry exactly the system it demanded. Homeowners are required to buy wind insurance by their mortgages (aka inelastic demand) while the industry is free to manipulate supply and cherry pick what and where and how they cover. The state pools were demanded by the industry yet now the state pools are blamed for victimizing the industry by not forcing homeowners to pay higher and higher premiums so that Bermuda reinsurers can pay 20 percent returns to their investors.
    The premiums are not the problem. Every coastal homeowner already pays several times more in premiums than the expected claims over time. The problem is that a single state pool like Mississippi’s has all its exposure in one place so it has to account for the capital to pay almost everyone at the same time. This is a problem of too much concentrated exposure that premiums alone will never fix. You can’t build up reserves if almost all of the premiums are going to reinsurance because you don’t have enough reserves. You have to manage the exposure by spreading the risk across state lines. A national pool from Texas to North Carolina or to Maine would have only a small portion of the pool affected at one time so it would not need the capital to pay everyone at once. The same or similar premiums that state plans are collecting now would cover the risk much more efficiently in a federal pool. All these economists know that is true but they are prohibited from saying so by their insurance industry benefactors.

  2. I have found the wall street based business press to be whores as a general rule, certain folks at CNBC being the worst offenders. You get better reporting out of the back home business press – journalists like Becky Mowbray at the T/P and Jeff Amy at the MPR being two such examples of solid business reporters.

    On this subject Ieva Augstums’ reporting gets an F due to lack of basic journalistic DD.

    This professor’s webinar on the “failure to deliver” aka “naked shorting” tackles the subject of the Wall Street business press being hookers as well.

    Excellent points Brian.

    sop

  3. and Anita Lee. Agree about Becky Mowbray and Jeff Amy, but don’t forget Anita Lee.
    The local papers’ business sections are not just for investors. That is the difference. They acknowledge that consumers and taxpayers have interests also.

  4. Anita Lee is not a business reporter per se though she has done a bang up job covering the insurance side for the Sun Herald. Don’t know if she’s familar with EDGAR but I do know she is a professional that would check these BS assertions such as what caused insurers to lose money last year and not accept a trade groups word for things without a critical looksie.

    sop

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