the audit

The Trouble With Insurance Reporting

The business press accepts insurance industry assumptions that are utterly bogus—and, yes, it matters a lot.
May 3, 2007

You know me as The Audit, a mild-mannered, bespectacled, some would say underachieving critic and interpreter of the business press—just another New York metrosexual with a $72 haircut.

I read the business news. It’s what I do.

In fact, though, I lead a double life. Beknownst to my supervisors here at Columbia, I am also the chief underwriter and deputy War Eagle first-class of The Insurance Transparency Project, a shadowy journalistic organization funded indirectly by a dapper globe-trotting Hungarian billionaire/philanthropist, who may or may not be linked to one Victor Navasky, both of whom, in any case, have been known to hold left-leaning views at one time or another.

Actually, yucks, aside, I’m a Katrina Media Fellow for the Soros-funded and chaired Open Society Institute, covering the insurance industry’s response to Hurricane Katrina. As such, I have had the opportunity both to read extensively of the insurance trade and mainstream press and compare it to what I found while reporting from New Orleans and environs, and coastal Mississippi.

Regular business-press readers are probably aware of ongoing disputes between some policyholders and their insurers, particularly State Farm Insurance and Allstate Insurance Co., which together control more than half of the Louisiana and Mississippi homeowners’ markets, along with Nationwide, USAA, and others.

Many of you may be under the impression—because of stories like the one in The Wall Street Journal I’ll mention below, and others in The New York Times and elsewhere that I’ll get to in succeeding posts—that:

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1. The insurance industry suffered terrible financial setbacks in 2005—the year of Katrina—the worst annual losses in the recorded history of insurance.

2. Triple-digit premium increases, while regrettable because of the additional burden they represent to struggling homeowners and their job-killing effects on the regional economy, were necessary to offset the risk from future hurricanes.

3. With their solvency at risk, insurers must also curtail coastal coverage, leaving the worst risks to inefficient, bureaucratic state-owned insurers.

4. Policyholders who chose to live near the coast and yet failed to purchase flood insurance from the National Flood Insurance Program are banking on public sympathy, tort lawyers, and demagoguing politicians to force insurers to pay for flood damage explicitly excluded from insurance contracts.

5. Insurance is a particularly risky business.

Audit Readers, all five notions are not only false, but demonstrably so, and while a couple of points are in dispute in some quarters, they shouldn’t be. Despite the fact that each of those assumptions lack support, my friends in the business media repeat them ad nauseam , distorting the insurance debate beyond all recognition.

This is about how arguments are framed in the tug-of-war between industries and the business media. Industries and companies have public-relations strategies, and there’s nothing wrong with that. Insurers, for instance, always say they had a terrible, horrible year, having “suffered” “catastrophic” “losses,” from man-made and natural “disasters” of one kind or another; and when that becomes impossible, as in 2006, when profits were over the moon, they say they will have a terrible year soon.

Why? Don’t most businesses want to talk about how well they’re doing? Yes, but with insurance, it’s better to say you had a bad year because “suffering losses” means you get to do two things: raise premiums and off-load risks, such as covering wind damage, onto the government in the form of state-owned insurance companies known as “wind pools” or FAIR plans. Believe me, Wall Street understands the game and knows not to listen.

Business-press readers don’t generally know this, nor, for that matter, do most business writers and editors. But insurance reporters do, or should.

The point: just because insurers say something doesn’t make it so. The Audit only asks that industry assumptions be examined critically. This goes double for the so-called “wind-water” debate in which insurers, who don’t cover flood damage, assert in thousands of cases that rising water did all the damage while hurricane-force winds did none. Zero. As policyholders ruefully joke, Katrina must then have been history’s first windless hurricane. Spend 15 minutes down there and you realize the assertion is ludicrous.

And if you don’t think any of this matters, it is safe to say that you have not spent much time recently in Hancock, Harrison, and Jackson counties in Mississippi, or New Orleans, Plaquemines, St. Tammany, and St. Bernard parishes in Louisiana.

Either that or you are a heartless bastard.

Oh, and you might also think that Gulf-coast insurance claimants are: 1. Illiterate. 2. Litigious. 3. Devious. 4. John Kerry voters. 5. Unable to understand the nature of a contract. 6. Something-for-nothing welfare cases and/or rich people fussing about second homes. 7. Not still living in FEMA trailers, inside of which one cannot properly swing a dead cat.

You would be wrong about that, too.

Further, you might think that the presiding judge in the federal court for the Southern District of Mississippi, L.T. Senter, is a hack; that the Mississippi bar—on both sides—is unsophisticated; that Louisiana and Mississippi juries are runaways; that because 98 percent of Katrina-related claims are settled, by definition, 98 percent of claimants, or even 1 percent, are happy.

You would be wrong on all counts, but it wouldn’t be your fault.

Let’s look at a story from last November, which I cite not because it’s particularly bad—it’s actually good—but because on its way to making an interesting point about a big shift in Allstate’s strategy, it swallows whole assumptions I find bogus. First, the headline (emphasis mine):

Risk and Reward:

Hurricane Losses Prompt Allstate
to Pursue New Path.

Cutting Coverage on Coast,
It Eyes Big Opportunity to Insure Boomers’ Lives
– Challenges of a Personal Pitch[1]

Now this paragraph:

On the housing front, Messrs. (Edward) Liddy and (Thomas) Wilson (the former and current CEO) say Allstate has little choice but to pare exposure to disaster-related losses and look for growth in other areas. The company is one of the top five home insurers in all 15 states curving along the U.S. coastline from Texas to Rhode Island, according to A.M. Best Co., a ratings service. It lost $1.55 billion in the third quarter of last year, largely due to the storms. Mr. Liddy’s annual cash bonus, which is tied to Allstate’s results, fell to $538,351 last year from nearly $3.7 million in 2004.

Audit Fans, Allstate posted a loss in the quarter, but—as the following paragraph tells us—did not suffer a loss for the year, the worst “loss” year in the history of insurance. (Why do I keep putting quote marks around “loss”? Bear with me.) In fact, it posted a healthy profit.

Note out how this is framed:

Allstate’s revenues have been climbing steadily in recent years, from $28.87 billion in 2001 to $35.38 billion in 2005. But its net income has fluctuated, climbing from $1.16 billion in 2001 to $3.18 billion in 2004, but dropping to $1.77 billion last year. This year, the industry is on track to report record profits, in large measure because of a hurricane-free storm season.

Net income has fluctuated? I don’t mean to be smart, but of course it fluctuated. Allstate is an i-n-s-u-r-a-n-c-e company. It spreads risk—over time, over geography, over different lines of insurance. Insurance is supposed to be risky. To give a little perspective, Allstate’s horrible net income is about what Dow Jones & Co., this particular paper’s publisher, posted in revenue last year. DJ’s 2006 operating income was $106 million. Allstate’s CEO, Liddy, made a third of that recently all by himself by selling some of his Allstate shares.

This is a bad year?

Investors aren’t fooled. Go to Yahoo Finance, type in ALL, Allstate’s stock symbol, and compare the stock’s performance to the S&P 500 over five years. And, by the way, the S&P did just fine during the period.

And what if, as a federal court in New Orleans has now found, at least some profits are coming out of claims denied improperly and in bad faith?

And listen, if you’re going to mention that the industry is on track to report record profits in 2006, you should at least mention when the previous record was set: 2005, the year of Katrina.

That’s right, the worst “loss year” ever was also the best profit year since ship owners began sharing risk together at Lloyd’s Coffee House in London in the eighteenth century. How can that be? Here’s a hint: the insurance world’s use of the term “loss” is a misnomer. It’s just a claim that’s paid and has nothing to do with the profit/loss we normally associate with an income statement, which, trust me, is what counts.

An insurer who complains about having to pay claims is like Ford complaining about having to make cars. It’s what they do.

I could go on—and I will! Insurers by law are required to keep a policyholders’ surplus for unexpected claims, those that hit with unforeseen severity—like Katrina. But in 2005—annus horribilus, year of Katrina, Rita, Wilma, and Dennis—insurers had enough left over after profits, buying back shares, paying dividends, paying Ed Liddy and Tom Watson’s salaries, etc., to add to this reserve by $35 billion. Industry surplus now stands at a record $495 billion, ten times the size of the worst-ever property-casualty disaster (Katrina) on record.

My point: If the surplus is for emergencies, when are we going to have one?

Listen, I pick on this story by a fine reporter at a great newspaper, and, yes, I will pick on others. This is not a question of me being more perceptive, more moral, more sensitive, less mainstream media, and certainly more smarter than anyone else. I’ve just had the benefit of a year off the newspaper treadmill to think about things like this.

So, with apologies to The Insurance Transparency Project and its questionable staff, here is an alternative headline, which, I submit, a responsible mainstream business publication could run, depending on how you want to frame it, based on the same facts as those found in the Allstate story:

Take Money, Run
Netting $7 billion-plus
Over Five Years,
Allstate Cuts Coastal Coverage.
“Disastrous” ’05 Net: $1.77 billion

[1]The Wall Street Journal, A1, November 27, 2006.

Dean Starkman , CJR’s Kingsford Capital Fellow, runs The Audit,’s business desk. Megan McGinley, a CJR intern, and Elinore Longobardi, an Audit staff writer, provided research. This story and the two following were supported with a grant from the Investigative Fund of The Nation Institute, for which we are deeply grateful.