Insurance Transparency Project

Fellow Residual Risks and Other Surplus Lines,

ITP made a mistake yesterday when it said the secretive deal announced between State Farm and the Scruggs firm involved 640 policyholders now in litigation. In fact, the deal, known as the Woullard Agreement, would involve State Farm holders who have not yet filed suit. ITP regrets the error and sometimes regrets having “transparency” as its middle name.

Ok, ITP will be traveling to the Gulf at the end of February to look for itself, but the general impression left by Rebecca Mowbray and others at the Times-Pic is that the Louisiana recovery is sinking into a bayou, and insurance is a big reason.

Don’t take my word for it. This Mowbray story says that $122 million in state tax credits for 97 projects to build more than 11,000 units of affordable and mixed-income housing may go unused because construction and insurance costs are too high.

“But developers say that with insurance costs having risen from 200 percent to 600 percent on apartment complexes since Hurricane Katrina, tax credits aren’t enough to plug the gap.”

She goes on to explain that tax credits are usually sold to investors and are geared to allow developers to turn $1 million in credits into $10 million in equity. In return for the credits, developers agree to rent some apartments at reduced prices.

But:

“Despite the power of the tax credits, the insurance problem is so serious that many of the much-heralded housing tax credits might go unused.”

A quote from Tim Leonhard, an executive at CharterMac (NYSE: CHC), a specialty real estate lender, who says:

“The insurance literally is going to kill deals. Only the strongest of the strong property owners, those with the deepest pockets, are going to be able to get deals done,” Leonhard said. “The vast majority of developers don’t have the financial ability to do that.“

And here’s Charles Fontenelle, a Metairie based agent:

“I’ve got about 20 deals on my desk, and we’re just waiting. The wait is because the insurance costs are too high,” Fontenelle said. “We tell them what the numbers are today, and they go back to the lenders, and they say, ‘We can’t approve this because you’re not going to make any money.’ “

It’s a terrific story, a nerd’s feast, a detail-filled wonk-fest about tax credits that few people will read and no one will remember when they talk about how bad the local paper is. But that’s OK, I’m sure Mowbray has gotten several raises since Katrina and is now up to about $325,000/year.

Meanwhile, the Grey Lady’s Citizen Nossiter reminds us that New Orleans may wind up only half its former size, and that it’s
dangerous.

I know I’m wearing out my welcome with my insurer pals, and even War Eagle’s charms can hardly soften the dings their industry gets from ITP basically every day. But, the industry in 2005 added at least $33 billion to its surplus, which now stands north of $600 billion. The worst-ever Katrina et al cost $60 billion.
And here’s III(1)’s definition of policyholder surplus:

“The amount of money remaining after an insurer’s liabilities are subtracted from its assets. It acts as a financial cushion above and beyond reserves, protecting policyholders against an unexpected or catastrophic situation. “

And here, again, is Allstate’s stock chart for the last five years versus the S&P, which hasn’t done bad either.

And here’s Allstate’s press release from last October announcing another $3 billion stock buyback program in 2007, adding to the $12.5 billion in buybacks over the last 10 years, in addition to the $5.8 billion paid in stock dividends.

And only because Buck’s been drinking again, here’s a piece in Crain’s Chicago Business about Ed Liddy(2)’s $33 million stock sale earlier this month.

ITP agrees with Bob Hunter (3) and believes it’s on insurers to justify price increases and share buybacks at the same time.

But, and here is where I’m over my head: ITP believes the problems are structural, not personal: artificially small markets and lack of transparency may not be the cause, but they don’t help.
(1) Insurance Information Institute, leading industry-backed research organization.
(2) Retired chairman and CEO of Allstate.
(3) Head of Consumer Federation insurance section, former Texas insurance commissioner, Carter/Ford-era federal insurance administrator, well-known boulevardier. Read his white paper on the site , first item.