Insurance Risk-Takers Stand To Make Gazillions
Two of the many things that impact the real estate market are property taxes and property insurance premiums. Since this is a real estate-related blog, I feel it is okay for me to pass comments once in ahwile about both these subjects, but make no mistake, this is not going to become a political blog even though some of my comments may border on politics.
So, here are some things about insurance that you need to know that I found out only recently.
A select group of risk-taking investors stand to make huge -- and brother, I mean huge -- gains if the weather holds in the southeastern United States. Problem is, the money that represents the profit to these investors comes from the outrageously high premiums you and I pay to insure our properties.
Here's the story, and I'm piecing this together from info from the Associated Press that I've read during the past few weeks ...
First, you need to understand what a reinsurance company is, then I'll tell you about something called a sidecar. Essentially, reinsurance is another form of insurance that is purchased by insurance companies. Think of it as insurance for the insurance company. If there is a huge disaster and the insurance company is faced with big losses, the reinsurance company steps in to help pay large claims from policyholders. This helps to spread out the risk in cases involving disasters and keeps the insurance company solvent.
During the last year, a handful of reinsurance companies placed a bet. They bet that this year would be light on hurricanes along the Gulf and Atlantic coastlines of the United States. In the process of accepting the reinsurance business from insurance companies, the reinsurance companies wrote policies with exceptionally large premiums. In other words, they charged the insurance comapnies out the proverbial wazoo for reinsurance. This was simply a way of hedging on their bet that the weather would hold good for an entire year despite what the hurricane predictors were saying.
What does this mean? It means that for each calm day in the Atlantic and Gulf of Mexico, these reinsurance companies get one day closer to securing hundreds of millions of your dollars that they did not have to pay out as reinsurance claims to insurance companies.
Your dollars? You bet. Here's why. The costs for that reinsurance, plus a little extra margin of profit I'm sure, has been passed along to you in the form of significantly higher insurance premiums. That's how your insurance company gets the money to pay for it's reinsurance policy. So, all the hurricane-free weather that we've enjoyed this season has served only to line the pockets of the billionaires who control reinsurance companies.
Who are these people? And how much money are we talking about?
Does the name Warren Buffett sound familiar to you? Yes, we're talking about the same Warren Buffett who just gave away billions to charity. According to the AP, two divisions of Buffett's Berkshire Hathaway company stand to make gazillions if the weather continues to hold. Then there's a little outfit called RenaissanceRe Holdings Ltd. This company is headquartered in Bermuda and they specialize in going into areas that have just had a disaster because that is where their pricing and terms are most attractive. This company is doing so well that its stock, which is traded on the New York Stock Exchange, was selling for $55 per share on Monday, the 2nd of October. That stock price is up almost 50-percent from where it was a year earlier.
At this point you need to get to know a new term in the world of investments and insurance. That term is sidecar. A sidecar is a group of investors who provide investment capital to cover risk for a specified period of time, say a year to two years. So, you may have a sidecar that provides reinsurance capital funding for wind damage in Florida for a year or two. The sidecar investors leave the management of the insurance programs to the insurance experts, but they generally share in both the premiums and profits, and -- if things go badly -- the losses. So, there is an element of risk in sidecars.
But sidecars are proving to be highly profitable right now because there have not been any major hurricanes this year. The AP reports that Rob Bredahl, president of reinsurance brokerage firm Benfield, Inc. of New York, is predicting returns of 20 to 30 percent or more for many sidecar investors this year. By comparison, the Dow Jones Induatrial Average is up only 9 percent and most people feel it has been a pretty darn good year in the stock market. So, this give you an idea as to why people are willing to take a risk with sidecar investments.
So, there's a 20 to 30 percent upside for the sidecar boys. To understand the profits being made, you have to understand the magnitude of the investments made in sidecars. Highfields Capital Management oversees $8-billion in sidecars; Third Avenue Management invested $2.3-billion. Now, if you make a 20 percent profit on $8-billion in one year, you've made a couple of bucks.
Problem is, folks, it's YOUR money paid in as increased insurance premiums. And it is one of the reasons why your premiums have jumped so high so fast.
Now, we have to be fair about this. When a disaster comes, these investments aren't worth the paper they are printed on and losses can be huge. When Katrina and Rita hit last year, Berkshire Hathaway's reinsurance divisions had losses totalling $2.02-billion. I would not have wanted to be holding a sidecar investment then. But so far this year there have been no major storms. So, those same divisions are doing stunningly well with your money. In fact, the Berkshire Hathaway divisions involved with reinsurance will show third quarter gains of about $400-million. Folks, that's $400,000,000 in 90 days! RenaissanceRe will post after-tax operating income of $612-million this year. That's $612,000,000 in 12 months! Where did the money come from? I think you know by now.
"It's just going to be mind-blowing how well they do", said Glenn Tongue in an AP story. Tongue is associated with hedge-fund T2Partners which owns Berkshire stock. Mind-blowing is right. How long will it take them to make up the losses from 2005? And when they do, will they reduce their premiums? Sure.
In the meantime, I guess all you and I can do is complain. Simple fact is that the insurance system is broken. I don't know how to fix it because, as I've written before, it's a combination of big business greed and government incompetence that has gotten us to this point. Oh, and to a certain extent we've done this to ourselves through our love for coastal development combined with city, county and state governments who see coastal expansion as a way to increase property tax rolls. Witness the condo growth along the Pinellas County (Florida) beaches during the past five years. Ah, but that's fodder for another story.
Anyway, I urge you to join the various protests going on now about insurance premiums. I don't really know if it will help because the companies involved are so large they can pretty much ignore consumers, government bureaucrats are ineffective in overseeing premium growth, and politicians don't have an answer to the problem but will certainly accept campaign contributions from the same companies that they are supposed to regulate.
So, that's what I found out recently about the insurance problems in Florida. If you want to stay in touch, keep reading this blogsite and go to my website, www.thestpeterealestatesite.com.
So, here are some things about insurance that you need to know that I found out only recently.
A select group of risk-taking investors stand to make huge -- and brother, I mean huge -- gains if the weather holds in the southeastern United States. Problem is, the money that represents the profit to these investors comes from the outrageously high premiums you and I pay to insure our properties.
Here's the story, and I'm piecing this together from info from the Associated Press that I've read during the past few weeks ...
First, you need to understand what a reinsurance company is, then I'll tell you about something called a sidecar. Essentially, reinsurance is another form of insurance that is purchased by insurance companies. Think of it as insurance for the insurance company. If there is a huge disaster and the insurance company is faced with big losses, the reinsurance company steps in to help pay large claims from policyholders. This helps to spread out the risk in cases involving disasters and keeps the insurance company solvent.
During the last year, a handful of reinsurance companies placed a bet. They bet that this year would be light on hurricanes along the Gulf and Atlantic coastlines of the United States. In the process of accepting the reinsurance business from insurance companies, the reinsurance companies wrote policies with exceptionally large premiums. In other words, they charged the insurance comapnies out the proverbial wazoo for reinsurance. This was simply a way of hedging on their bet that the weather would hold good for an entire year despite what the hurricane predictors were saying.
What does this mean? It means that for each calm day in the Atlantic and Gulf of Mexico, these reinsurance companies get one day closer to securing hundreds of millions of your dollars that they did not have to pay out as reinsurance claims to insurance companies.
Your dollars? You bet. Here's why. The costs for that reinsurance, plus a little extra margin of profit I'm sure, has been passed along to you in the form of significantly higher insurance premiums. That's how your insurance company gets the money to pay for it's reinsurance policy. So, all the hurricane-free weather that we've enjoyed this season has served only to line the pockets of the billionaires who control reinsurance companies.
Who are these people? And how much money are we talking about?
Does the name Warren Buffett sound familiar to you? Yes, we're talking about the same Warren Buffett who just gave away billions to charity. According to the AP, two divisions of Buffett's Berkshire Hathaway company stand to make gazillions if the weather continues to hold. Then there's a little outfit called RenaissanceRe Holdings Ltd. This company is headquartered in Bermuda and they specialize in going into areas that have just had a disaster because that is where their pricing and terms are most attractive. This company is doing so well that its stock, which is traded on the New York Stock Exchange, was selling for $55 per share on Monday, the 2nd of October. That stock price is up almost 50-percent from where it was a year earlier.
At this point you need to get to know a new term in the world of investments and insurance. That term is sidecar. A sidecar is a group of investors who provide investment capital to cover risk for a specified period of time, say a year to two years. So, you may have a sidecar that provides reinsurance capital funding for wind damage in Florida for a year or two. The sidecar investors leave the management of the insurance programs to the insurance experts, but they generally share in both the premiums and profits, and -- if things go badly -- the losses. So, there is an element of risk in sidecars.
But sidecars are proving to be highly profitable right now because there have not been any major hurricanes this year. The AP reports that Rob Bredahl, president of reinsurance brokerage firm Benfield, Inc. of New York, is predicting returns of 20 to 30 percent or more for many sidecar investors this year. By comparison, the Dow Jones Induatrial Average is up only 9 percent and most people feel it has been a pretty darn good year in the stock market. So, this give you an idea as to why people are willing to take a risk with sidecar investments.
So, there's a 20 to 30 percent upside for the sidecar boys. To understand the profits being made, you have to understand the magnitude of the investments made in sidecars. Highfields Capital Management oversees $8-billion in sidecars; Third Avenue Management invested $2.3-billion. Now, if you make a 20 percent profit on $8-billion in one year, you've made a couple of bucks.
Problem is, folks, it's YOUR money paid in as increased insurance premiums. And it is one of the reasons why your premiums have jumped so high so fast.
Now, we have to be fair about this. When a disaster comes, these investments aren't worth the paper they are printed on and losses can be huge. When Katrina and Rita hit last year, Berkshire Hathaway's reinsurance divisions had losses totalling $2.02-billion. I would not have wanted to be holding a sidecar investment then. But so far this year there have been no major storms. So, those same divisions are doing stunningly well with your money. In fact, the Berkshire Hathaway divisions involved with reinsurance will show third quarter gains of about $400-million. Folks, that's $400,000,000 in 90 days! RenaissanceRe will post after-tax operating income of $612-million this year. That's $612,000,000 in 12 months! Where did the money come from? I think you know by now.
"It's just going to be mind-blowing how well they do", said Glenn Tongue in an AP story. Tongue is associated with hedge-fund T2Partners which owns Berkshire stock. Mind-blowing is right. How long will it take them to make up the losses from 2005? And when they do, will they reduce their premiums? Sure.
In the meantime, I guess all you and I can do is complain. Simple fact is that the insurance system is broken. I don't know how to fix it because, as I've written before, it's a combination of big business greed and government incompetence that has gotten us to this point. Oh, and to a certain extent we've done this to ourselves through our love for coastal development combined with city, county and state governments who see coastal expansion as a way to increase property tax rolls. Witness the condo growth along the Pinellas County (Florida) beaches during the past five years. Ah, but that's fodder for another story.
Anyway, I urge you to join the various protests going on now about insurance premiums. I don't really know if it will help because the companies involved are so large they can pretty much ignore consumers, government bureaucrats are ineffective in overseeing premium growth, and politicians don't have an answer to the problem but will certainly accept campaign contributions from the same companies that they are supposed to regulate.
So, that's what I found out recently about the insurance problems in Florida. If you want to stay in touch, keep reading this blogsite and go to my website, www.thestpeterealestatesite.com.
-30-
posted by Terry Ward at 4:25 AM
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