Insurance

​The following headlines have been reprinted from The Penn Wealth Report and are protected under copyright.  Members can access the full stories by selecting the respective issue link.  Once logged in, you will have access to all subsequent articles. 

---

ALL $191

CB $272

TRV $242

​17 Jan 2025

The California wildfires' effect on the cost of insurance

For all of the horrific destruction we have witnessed as a result of the California wildfires, fanned not only by the Santa Ana winds but also by a lack of leadership at the state and local levels, we cannot ignore the economic impact in general and the specific effect the disaster will have on insurance companies and policyholders.​

Thus far, the economic cost of the disaster has been placed at upwards of $250 billion, with insured losses perhaps hitting the $30 billion mark. The three most-affected publicly traded companies are Allstate (ALL $191), Chubb (CB $272), and Travelers (TRV $242), as they are the most exposed to the homeowners' market in the state. With the median home price in much of the affected area hovering above $2.5 million, Chubb could be the most affected due to its focus on luxury homes. While all three of these companies have sound financials, with each carrying a respectable debt-to-equity ratio between 30% and 40%, this situation will put that financial strength to the test. Furthermore, the state legislature put a one-year moratorium on the cancellation of renewals in the affected areas—but expect cancellation rates to skyrocket after that period is up.

Of course, the insurance companies and policyholders in the state won't be the only ones affected. I once called our insurance company to see why our rates rose some 40% over the span of two years despite having never filed a claim, and was told it was due to natural disasters in Texas. It seemed like a bizarre answer at the time, but homeowners across the US are almost certain to pay the price for these wildfires through another big round of premium increases. The current national average for homeowner's insurance in the United States is between $1,750 and $2,500, depending on region. Expect those premiums to rise at a double-digit rate in 2025.

It could be worse. Right now around 20% of Californians in high-risk areas are on the FAIR plan, the "insurer of last resort," paying exorbitant rates for poor coverage. We could see that number doubling after the state-mandated moratorium period ends. As for the state's already tight budget (due to infuriating issues which we won't get into), only the first billion of FAIR plan payouts will be covered by a consortium of insurers; another $2.5 billion will come from reinsurers. That leaves California policyholders and, let's face it, taxpayers on the hook for the rest. Expect the backlash against California's so-called leaders to be epic.

Does this horrific disaster present an opportunity for investors with respect to the insurance industry? Not particularly. Though the insurers mentioned in the story have seen their share prices bounce back after the initial hit, the unknowns are too great for us to go value shopping just yet. We currently have no insurers or reinsurers in any of the Penn strategies.

---

LMND

Online insurance provider Lemonade files to go public
(10 Jun 2020) Move over fintech, now there is insurtech, which promises to "disrupt the insurance industry through innovation and online efficiencies." Only time will tell just how disruptive a force it will become, but we will soon have a new metric to measure its success. Lemonade, the insurtech firm backed by SoftBank, has filed to go public. Reviewing the startup's 08 June filing with the SEC, it plans to raise $100 million in an IPO and trade on the New York Stock Exchange under the symbol LMND, with Goldman Sachs and Morgan Stanley underwriting the deal. According at the company's website, Lemonade offers home and renters insurance "built for the 21st century." The company uses artificial intelligence and machine learning to increase efficiencies, thereby creating savings (at least in theory) for its customers. While the company, which has been around since 2016, is not profitable (it lost $36.5 million on $26.2 million in revenues last quarter), that doesn't mean shares won't take off when they begin trading within the next few months. Investors are hungry for IPOs, as there was a dearth of new offerings during the heart of the pandemic. Should you invest? While we could see the stock spiking out of the gate, our advice would be to remain patient—odds are good it will be trading below its IPO price within months after the launch. As for Masayoshi Son's SoftBank, the VC firm desperately needs a win following the massive losses it took in WeWork, Sprint, and Uber—putting a serious dent in Son's 300-year master plan.

---

Inflation may be muted, but not when it comes to your auto insurance rates
(15 Feb 2018) Did you notice a hike in your auto insurance premiums lately, despite having no new claims? It's not you, it's your insurance company. Technically, it is your insurance company trying to cushion the blow of higher expenses. In a typical year, auto insurance rates tend to go up at the rate of inflation. This past year, however, they were up an average of 7%. There are several factors for the big rate hike, predominate among them is distracted driving, i.e. jugheads trying to text on their smartphone while they should be paying attention to the road. While there were slightly fewer deaths in America last year from traffic accidents (thanks to improved safety technology), the number of incidents rose. With more advanced systems in the vehicles, the insurance companies are shelling out more money for repairs. Sadly, we are all paying the price as the insurance companies struggle to remain profitable in an era of juvenile behavior behind the wheel.