Cheat Sheet Q&A:
Topic: Florida home insurance companies
Just my comments that I sent to my family about homeowners insurance companies in the State of Florida… These guys keep just going in and taking out Citizens insurance policies, charge higher rates, and then going out of business. I hate to see what will happen WHEN we finally get hit with a storm. Most of these new insurance companies will not survive.
Just saw this announcement -- so we have 2 CEO's from 2 insurance companies that both failed, starting up a new insurance company together. They will probably assume Citizens policies to get started in business, and all those poor schmucks (customers) will be stuck with this crappy new company because the politicians in Tallahassee want to get rid of Citizens, who is BY FAR the financially strongest company in the State of Florida right now.
Canopy Insurance Holdings , a new homeowners carrier is set to launch after raising $50 million in capital. FormerSunshineState (just went bankrupt in May, 2014) CEO Steve Korducki is a consultant with this group and former Edison Insurance Co (was in business for 4 years, went out of business in 2010), CFO Kris Kelly, along with others are putting together the start up business plan.
Bottom Line: Well you covered a lot of ground. Let’s start by looking at how many companies are currently underwriting policies in Florida.
- 27 companies are currently active in underwriting in Florida
- All 27 are underwriting at least some types of homeowners policies in PBC
So how does that compare to the financial crisis?
- At the peak of the financial crisis as few as 13 companies were active in Florida and it’s possible that as few as 9 were still underwriting policies during that time
So in terms of options and consumer choice we’re certainly better positioned today than 5 years ago. To your point though, if they aren’t capable of paying out claims if needed that’s not necessarily a good thing… So are they?
Like any insurance products not all companies are going to be equal in terms of their claims process and financial wherewithal. That being said here’s a bit of history and how it permanently has altered the Florida’s home insurance market.
Historically (since 1900) Florida has had a major hurricane strike the state every nine years. During the 2004-2005 cycle an unprecedented 4 major hurricanes hit the state with a 5th skirting the state (Katrina) and causing record damage in the Gulf. Along with skyrocketing prices for real-estate and construction created complete chaos within the re-insurance market. The key to understanding the stability of the home insurance company you’re using is to understand the stability of their re-insurance. Even the largest in the insurance business rely on re-insurance to pay out claims for catastrophic claims. The biggest problem during that storm cycle is that the majority of insurance companies operating in Florida weren’t anywhere near insured enough for the level of claim activity and escalating price of repairs.
Since that period of time the threshold for reinsurance has increased greatly. The reinsurance market place which was devastated by the financial crisis in addition to the storm cycle has recovered significantly and importantly regulators are more closely monitoring the insurance market. That leads me to one of your other talking points - the former SunshineState insurance company. It is true that the company went under in May and that the executive team at a minimum weren’t properly minding the store (if not worse) but the state was extremely diligent in this case.
State regulators observed accounting irregularities with SunshineState that at a minimum would lead to the inability to properly reinsure going forward as a result state regulators forced them out of business to proactively protect homeowners for a worst case scenario this hurricane season. Last but not least… Citizens.
I’ll speak on two points here. First, Citizens isn’t really a company. They’re an entity of last resort setup and backed by the state. In an ideal scenario Citizens wouldn’t have any insurance policies. They’re a backstop that became the largest insurer in the state out of necessity due to the serve disruption due to the issues of the past described above. As an aside the worst insurance I’ve ever experienced (and through a former real-estate investment firm I owned, I’ve had experience with many) was with Citizens but that’s for another day.
So are there likely to be companies that aren’t operated well to your point? Yes. At the same time our state’s insurance market is in the best position it’s been in at any point in recent memory and more choice in insurance companies is generally a positive.
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Grocery store sticker shock continues how much more you're paying for food:
Bottom Line: I’m updating your average grocery cost at the behest of Jim Edwards who said that his grocery bill just continues to rise. So I decided to compare the average cost of groceries today vs. a year ago today. Here’s the result:
- The average food cost is 7% higher today than one year ago today
So it’s not your imagination. Food inflation has been significant. But that’s not the only place you’re feeling it:
- Gas prices are 4.5% higher today than a year ago
So how much have incomes increased over the same one year period:
- The average income is 1.9% higher today than a year ago today
So yes, the staples of everyday life have risen at a rate that’s significantly higher than our income. That’s likely a significant reason that discretionary spending has been weak so far this year. The truth is that we just have less discretionary income.
Paying off your mortgage quickly:
Bottom Line: Yahoo Finance produced a story on way to pay off your mortgage quickly (here’s a link to the entry): https://homes.yahoo.com/news/five-ways-to-pay-down-your-mortgage-194455327.html . I don’t see eye to eye with them on all of the points cited but I do strongly agree with the premise and the first item they mentioned.
If you have a two income household, buy a home based upon the income of just one of you. That way you have protection against one of you losing your job. It also will enable you to pay down on your mortgage much more quickly and invest at the same time. This is what we’ve done in our home. I like splitting up free cash flow into three groups:
- A third of extra income gets invested
- Another third goes towards extras (vacations, wants, home improvement, etc.)
- The final third goes towards paying off the principal in your mortgage
If you can set your home up this way you’ll make across the board progress in good times and will be protected against the worst case outcome in the bad times.
How stocks are currently valued, how it compares historically & why margin is a bad idea:
Bottom Line: It’s been awhile since I updated the value of the stock market compared to history. As we’re moving into the earnings season I though this would be a good time to do so. For the ease of demonstration I’ll use the S&P 500.
- Current P\E ratio of the S&P 500: 19.56
- Average P\E ratio of the S&P 500: 15.51
So in other words the market is continuing to trade at a significant premium (26% or so) above its historic average. There are a couple of events that may play out later this year that make me a little nervous. First Q\E will likely end in October. While I am glad to see this occur principally, that’s money that won’t be consistently flowing into the financial markets every month, most commonly landing in stocks. The second occurrence would be if the Federal Reserve were to begin to raise interest rates.
Many investors have turned to stocks because of a lack of options in fixed income and other investment classes that aren’t viable due to extremely low interest rates. As interest rates rise, stocks will be less attractive on a risk adjusted basis.
The final concern I have is with regard to the near record levels of margin debt that people are using in the stock market. I don’t believe in using margin at anytime. Part of the reason stocks have continued to rise in value has been the high level of margin debt being used to invest (over $400 billion). We’re off of the record reached in February this year but not far from it. I’m a big value based stock market investor but we’re due for a correction and events later this year may have the potential to make it occur.
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