Monthly Archives: February 2011

TweetWeek through Feb. 26

What’s the news across the nation?

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The importance of loss reserving in one chart

 

Reversal of fortune

AIG is such a big company, and its reserves have deteriorated so much in recent years that with yesterday’s release of its 10-K, I decided to look here and here. Yipes!

I took a couple of shortcuts, but they don’t affect things much. I haven’t adjusted for the discount in loss reserves, which is worth a billion or so. And I haven’t adjusted for assets sold over the years, but as far as I can tell that would actually make things a bit worse by a billion or so.

Update: An earlier version of this chart simply lowered capital by the amount of the reserve deficiency. But of course there should be an offset for income taxes owed. There’s also additional premiums that would be booked on retrospectively rated policies. I allowed 35% of reserves, which doesn’t seem unreasonable, since the company had a tax rate of about 29% in 2001. That leaves a bit under $2 billion for the retros and anything else. So my capital estimate could be off here by a couple billion – more than my lunch money, certainly, but not enough to change the message.

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Claim of the week: When bears attack

No bear puns or jokes or anything. This is a tragic case of an 11-year-old killed by a bear.

During the trial, lawyers for Samuel Ives’ family argued the U.S. Forest Service was negligent for failing to close the campground after a bear confronted another camper there earlier in the day. They say the agency should have closed the site until the bear was killed.

Read the article and see how much liability you think the Forest Service should have.

NZ earthquake: How bad?

This week’s earthquake in Christchurch could be the worst insurance catastrophe since Hurricane Ike hit Texas in 2008, according to early reports.

AIR estimates insured losses between US$3.5B and US$8B. JP Morgan estimates $12B. (Ike came in at $12.6B in the U.S. alone, $20B including all Caribbean basin countries, with all numbers updated for inflation).

I don’t have access to the letter to clients that contains Morgan’s estimate, but it sounds a bit like the analyst doubled the loss estimates from September’s New Zealand earthquake, which looks like a $5B to $6B event.

AIR’s original estimate for the September earthquake was $2B to $4.5B, and reinsurers spent much of the fourth quarter raising their estimates on that loss. Bumping AIR’s $4.5B up a third gives you $6B. Doing the same to the $8B estimate gets you around $10.5B.

Before being too harsh on the cat modelers, I should note Scientific American reports the fault whose shifting caused both earthquakes was unknown before it, well, started shifting last year. (h/t Risk Market News via twitter)

I should also point out that AIR’s estimates exclude demand surge – when construction costs soar because raw materials and contractors increase prices because labor and material are in short supply. And I can’t think where demand surge would be greater than an antipodean city of 400,000 struck by two major earthquakes in six months.

So there’s a case to be made that the $12B estimate is low. I think it’s fair to say the city would take decades to rebuild without the reinsurance industry.

For some perspective, $12B is equal to around 10% of New Zealand’s GDP. That would be equivalent to a $1.4 trillion insured loss in the United States.

How bad is that? An asteroid striking Manhattan could create $1.2 trillion in property losses, RMS has estimated (pdf), though that number appears to be total property losses. Insured losses would be somewhat less.

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TweetWeek through Feb. 18

What I was saying when I wasn’t saying much:

  • Book Review: Fatal Risk http://ow.ly/3YRvd || The rise and fall of AIG, in a soon-to-be-published book.
  • Insurance Times – Insurers lead the way in green rankings http://ow.ly/3Y8t3
  • Europe’s Solvency II to have major U.S. impact: Analysis | Business Insurance http://ow.ly/3XTxX
  • “Friendly Fraud” On the Rise » Insurance Industry Blog http://ow.ly/3WQFc || When an acquaintance steals your ID.
  • Quinn sale uncertain in wake of election – Postonline http://ow.ly/3Wzjj
  • Starting today, it’s man vs. machine on Jeopardy. Whom are you rooting for? http://ow.ly/3WfO7
  • Jolie’s ‘Salt’ Wins Award for Riskiest Film of 2010 – WSJ.com http://ow.ly/3W4kc ||Angelina did own stunts; her injury could trigger claim

Strictly personal: new gig

Starting next week, I’ll be guest blogging at Terms + Conditions, published at the Insurance Information Institute web site. Announcement is here.

It’s quite an honor, as over the past four years, blogger Claire Wilkinson has done terrific work and has built a substantial audience. But Claire will be taking a well-deserved blogging break for a few weeks. I’m flattered they asked me to fill in, and I hope I can do half as well as she has.

I’ll still post here – probably the same schedule I’ve adopted since Jan. 1 – one or two blog posts a week and a dozen or so tweets.

I won’t cross-post (post the same article on both sites), because it has always annoyed me when bloggers do that. Anyway, they are different blogs with different approaches and different readerships.

However, I will tweet when I post on I.I.I., and that will end up in my blog’s weekly Twitter roundup. So if you are obsessed with what I have to say, you’ll still be able to get to it via this site.

Better though, check out my new digs – this is a great reason to subscribe to Terms + Conditions.

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For Liberty CEO, actions = words

Ted Kelly, CEO of Liberty Mutual, tells us what he really thinks:

I think insurance stocks stink . . .Until there is some common sense in commercial pricing, we don’t think insurance stocks will be fairly valued.

That was National Underwriter’s takeaway from the company’s earnings release Thursday.

So I’ve built a chart of combined ratios from the Q4 management discussion and analysis (pdf from this web location):

Commercial casualty - get it?

As the chart shows, the company is booking 101.3% for the year, a sliver above 2009. International and personal lines hold fairly steady from a year earlier (100% and 95% respectively). The outlier here is commercial business, up to 110.9%. (Liberty Mutual Agency Corp – independent agents, split about 50-50 between personal and commercial – also rose, but remained below 100% combined.)

Meanwhile, Kelly told Bloomberg News inflation could be between 8% and 9% in three or four years. Consistent with that, the company has been shortening the duration – the average time to maturity – of its bond portfolio. To keep investment income up, it’s letting the quality of its paper slip a tiny bit. Investment in investment grade securities fell to 89% of its portfolio at year end, from 92%, per this chart from p. 37 of the MD&A:

A little slip

So here’s a man who puts his money where his mouth is.

 

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Attention, sports fans: Allstate’s hockey follies

The video’s gone viral, but perhaps you haven’t seen the remarkable shot that has given a bit of a black eye to Allstate Insurance:

Before the shot, contestant Richard Marsh had agreed to donate the money to St. Vincent’s Heart Center and the American Heart Association.

As I’ve mentioned before, these contests are underwritten by an insurance company, a fact that spreads far and wide when the claim is denied. Which happened here.

Turns out the insurance the Indiana Ice purchased calls for the shot to take place behind the red line and Mr. Marsh was a good three feet in front of it. Meaning it was only a 175-foot shot. Claim denied!

The hockey team’s owners have made a donation to both charities.

(This could all be avoided if large blue mascots took their risk management role seriously and directed shooters to the proper spot.)

The big loser here is Allstate Insurance. It sponsors the shot every night.

Continue reading

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Tweetweek through Feb. 12

  • Actuarial Review – February 2011 – The Top Ten Casualty Actuarial Stories of 2010 http://ow.ly/3UBdf
  • Ratings agency Fitch downgrades AIG, Chartis | Business Insurance http://ow.ly/3Ubzz || Down to A, from A+
  • Is AIG Plucking $2 Billion Out of Uncle Sam’s Pocket? – WSJ http://ow.ly/3TMBB || Short answer: No, but US must wait to be paid
  • AIG to take $4.1 billion fourth-quarter charge http://ow.ly/3T7jb || Under-reserved – AIG owns itself again. Let’s see if it can run itself.
  • Insurance Reform Is Not Cost Control http://ow.ly/3T7c3 || The inflation spiral stems from doctors and hospitals. Insurers just tag along.
  • Firms Can Avoid Shareholder Lawsuits with Kid Behavior http://ow.ly/3SDDK ||Fess up, chief!
  • Anglo hopes to be granted green light for Quinn bid by end of week – Irish, Business – Independent.ie http://ow.ly/3Skay
  • PPACA: Sebelius Ponders CLASS Fix http://ow.ly/3Sk5u || Obamacare’s budget-busting hidden entitlement for long-term care
  • RT @InsuranceNote Proposed Solvency II amendments surprisingly wide ranging http://bit.ly/fj4OkD #Insurance UK
  • Best and worst jobs, from actuary to roustabout – msnbc.com http://ow.ly/3RZuj || Of course, ‘roustabout’ sounds a lot cooler
  • Michigan State’s to launch actuarial science program in summer 2011 http://ow.ly/3RSfw

Claim of the Week: Drano edition

From ClaimsJournal:

Two thieves, disguised as Hasidic Jews, forced [jewelry store owner Atul] Shah at gunpoint to open the safe in Dialite [Import]’s office in Manhattan’s Diamond District, then tied up Shah and an employee before leaving with millions of dollars’ worth of jewels, authorities were told.

Wow! Why would ClaimsJournal write about that?

But it was all a hoax, Assistant District Attorney Eugene Hurley said Monday. Authorities have said the gem dealers were six months behind on rent and at least $1 million in debt.

The dealer, like most in the Diamond District, has surveillance video, that prosecutors said the accused tried to delete:

Despite the drain cleaner poured on the surveillance system, investigators were ultimately able to see images of the conspirators removing jewels from the safe and putting in empty boxes hours before the supposed hold-up, Hurley said.

 

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