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And there may be a storm brewing in DC. There is definitely a storm brewing in the Caribbean. Apparently there's a record breaking hurricane barrel that is intensifying as it turns through the Caribbean south of Granada. It has regained category four strength after briefly weakening. We're talking top wins of one hundred and thirty miles per hour. Well, Matthew Palazoa is a senior analyst and P and C insurance
over at Bloomberg Intelligence and he joins us now. Now, Matthew, I know you look at the stuff through the lens of insurers, but can you just give us some perspective of how you're looking at this storm.
Yeah, so per perspective. As you had said, the earliest Category four in the Atlantic since two thousand and five. In two thousand and five was one of the worst hurricane seasons on was that Katrina. That was Katrina was one of those storms in that year. So right now it's early, we're looking at it. It seems to be I always look at it. Is it going to impact
the United States? Right? The islands obviously matter, but generally for global insured losses, something on Florida or you know, in Texas, Louisiana, those are the kind of big money loss events. What it looks like is going to happen here is it will probably hit the Yucatan Peninsula, I will probably cross a lot of the islands in the Caribbean south of the Greater Antilles. But so we're looking at that, and we're looking at past events in Mexico.
In two thousand and five there was also a Wilma hit Mexico and caused almost eight billion dollars in economic losses. The insured were a lot less. I do think Birtle's going to slow down though, so it probably wouldn't be that bad.
What's it tell you or what is it the insurance company's telling you about kind of how they view hurricanes, other stream events, saying it's always in the news year, extreme heat, extreme storm, it's extreme. What are the insurance companies say, because they're the ones that actually have, you know, money at stake here.
Get in the game, on in the game. So what they will say is climate change is having an impact. You wouldn't directly blame all these things on climb she It's very hard to exactly say. One of the good things about the global industry though, is that it realprices on an annual basis. Right, Generally, all these policies are written every year, so they can reprice things as they go along. They could leave regions as they go along.
You are hearing these record breaking things. Even last year, which would turn out to be a mild hurricane season, there was a bunch of activity earlier in the season.
So based on that, what the areas in the US, for example, that are exposed to these kind of intense changing storms. Are insurers still ensuring houses there?
Like?
Are they still doing the job? Or has all the stuff changed? That was a really intelligent question. Do the stuff or has the stuff changed?
Some stuff has changed, some stuff hasn't. So the insurers are leaving certain areas, mostly California, honestly, Florida. The Florida market interesting is that wildfires peace, yes, wildfires, and the regulation is tough in some of these states too, So what you saw in Florida was a litigious environment that was driving up a lot of costs, and insures and reinsures pulled out of there. The state has done a
lot of things to address that. So you see insurance companies actually tending to start to go back.
Didn't warn Buffet come go back.
So Buffett Berkshire's reinsurance unit had a big bet on Florida last year. We don't actually know they didn't. They disclosed it at the annual meaning last year. They didn't talk about it this year necessarily, so we don't exactly know if they're there. I would suspect they probably are, but I can't confirm.
Okay, So, but if I'm want to go out and buy a condo down in Florida on the coast, can I get that insured?
You can? What is happening? You probably won't get it insured, by the way, in case you're wondering you can. It will probably be through a Florida company, like a smaller insurance company probably not going to get you know, and you might get an all state I don't know, but you're not going to get one of these probably national name brands. You'll probably get a smaller company, You're definitely going to pay a high price. You may even get it through the state fund. So Alex to your other
question before. One of the things that is happening is that a lot there's an insurer of last resort in a lot of these states, so it's essentially the state insurance company. It's not it's an insurance company, so it's not like just backed by taxpayer money. It's supposed to be self sufficient, but it can always rely on the state. So a lot of people will end up getting insured through those mechanisms.
So what about reinsurance.
So the reinsurance market really, I think is returning to Florida. So these things that were hurting it, it's kind of a wait and see. The prices went up a lot, especially for catastrophe ponent regions stuff like Florida, So it became to pulse point earlier. It became attractive to some companies like Berkshire Hathaway to get back into these markets.
How are these property and casually stocks trading or they did? Are they trading on the fundamentals of each company, Are they faitting on a trade or do they typically trade on interest rates?
How do they trade? So the P and C companies trade less on interest rates than life insurance companies. The life insurance companies are way more levered assets to equity. They have bigger portfolios. Uh, you know these names, they'll tend to move on pricing in the cycle. Sometimes the weather, interest rates will will help. They were kind of in line with the market this year. Some have done better. So the auto insurance companies are doing a little bit better.
We probably talked about that in the past, but they were having huge increase in the loss costs, so cars were more expensive to fix and that is kind of abating a bit. So those names have done better.
What about rates, So FED cuts interest rates, how does that affect the insurance market? And does it matter as much? Considering that some of these places are gonna get hit no matter what because of all the changing.
Weather, so it won't matter on the underwriting side much. Potentially it could in that interest rates could they help investment income, which could subsidize underwriting, But realistically lower interest rates will hurt investment income depending on how low they go, maybe not dramatically. It probably does not change underwriting decisions though, But net net lower rates are a bad thing for these companies.
All right, i'mp buying property and casualty insurance stocks. What kind of dividend yields am I getting on these things?
They're not dramatically high. I mean they're you know, probably less than what you'd get on the SMP. I mean it's like it's two or three percent. I don't think they love to be locked into returning capital, so they'll favor share a purchase instead. And are they doing that, yeah, I mean they're buying back shares. They'll they'll tend to pause during hurricane season.
This is.
By some estimates. Quote the hurricane season from Hell coming up that that was a headline. Was clickbait or not, but it was a headline. So you may see, you know, the second third quarter repurchase slow down. But that's usually the main mechanism.
What about consolidation in this industry. You mentioned some state smaller players, say in Florida. What does that wind up looking like?
I don't think you're gonna see big consolidation in the industry. So there's a completely separate issue with liability loss reserves where they write these they write these policies and then many years later they may have claims on them. And that is starting to rear its head in terms of we didn't get maybe great pricing years ago, So I think it's going to be a headwind to large consolidation.
You may see it on the smaller side. Companies that I don't necessarily even cover, like those maybe smaller Florida names might get scooped up. There are companies that are starting up and taking policies out of the state fund, which is not necessarily consolidation, but it's kind of helping and that's a business. But when when they get whacked by a hurricane, you know, we'll see how those companies do.
What's the best idea in insurance these days? What people want to talk about the most.
I mean, the reinsurance story seems to have played out a little bit. You know that the reserves are an issue, Climate change is an issue. Cyber insurance is a kind of big issue. You've seen this now with the auto dealers, right. Some estimates say it could be the biggest line of insurance eventually. What the insurance companies have done historically is kept limits very low on this, so even in a
big event, they're only paying out a small amount. But someone say it's actually an uninsurable risk that it's completely correlated. So they want to stay away from things that could affect a huge group like a flood that could flood a state or something like that. This is something they could shut down, you know, swaths of the country, so they want to stay away from it.
Well, we appreciate it, thank you very much, Matthew Palizoa. A Bloomberg intelligency covers everything insurance and reinsurance and then by de facto you're like a storm analyst and does the weather for us as well. So we do appreciate that. But that's kind of scary, right, like already a category four storm and it's.
Only what is it because the map, Yeah, yeah, Matt's got a great the map from the one of those mapping people that go out there and coming cutting right across the Caribbean, right across the also hitting the Mexican peninsula, So that could be harsh for our good friends and like cancoon things.
Like that bikes. Yeah, it doesn't look very good there.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on Apple card Play and Android Auto with a Bloomberg Business app. You can also listen live on Amazon Alexa from our flagship New York station, Just Say Alexa playing Bloomberg eleven thirty.
Wait Busy twenty four hours for Boeing. The US Justice Department plans to charge Boeing with criminal fraud after finding the company violated a twenty twenty one deferred prosecution agreement tied to two previous fatal crashes, and Bloomberg News was reporting that late yesterday, and then just hours later, Boeing announce a plant to buyback Spirit Aero Systems. As Charlie is just reporting a supplier that hit it spun off
two decades ago. They're gonna pay four point seven billion dollars in a bid to improve manufacturing stock today up about two and a half percent of down about twenty eight percent year to date. So it's got the Lady's song. What's happening at Boeing? Very busy over there with George Ferguson, he covers the airlines, he comes to aerospace companies for Bloomberg Intelligence. Joe, I mean, George, how do you put into context what's happened to Boeing over these last several years?
Where does the company go from here, So.
I guess the way I put it in context would be a lot of air outsourcing at Boeing, including Spirit Aerosystem A couple of decades ago. Seven eight seven was one of these watershed events where they were trying to outsource large portions of the manufacturer and even does I say engineering is probably the better term than design engineering on that airplane. And now I think, you know, the company in the midst of pulling some of that supplier base back in so they can control quality and uh
and improve production output. So I think I think that's where they are, and the and the weekends events are I think all, uh, you know, steps on the path to improving production, eliminating distractions, improving quality. There's there's more to come, more to do, and they need a strong recovery in the second half. They can't burn cash like
they've been burning. But that, you know, That's what I would say kind of where we are right now as we're in the process of cleaning that whole whole outsourcing mess up.
So as it relates to the to the to the fraud charges, et cetera. Do they have to pay a boatload of money to people on this or can they spend a boatload of money instead on making sure that their programs are good and their quality control is good.
So I'm going to first, you know, caveat this whole thing with I'm not an attorney, so that you know that we're in some realms there that I don't totally understand, but I believe it's something for five hundred million dollars worth of fines they'd have to pay if they agreed to the current Justice Department proposal, and they'd have to bring in and outside I guess, you know, sort of
quality manager overseer. I think that they have some rights to you know, sort of negotiate over who that would be. So to me, that doesn't sound like in extremely onerous provisions. I think it's something that again they've got to get out of their way to start to build more aircraft and focus on improving their processes, their production processes. So to me, it doesn't sound bad. I don't know what the other sort of legal ramifications are here on that.
How many planes are they building per month now Georgia and where do they need to get to?
So I don't know that we know it looks like the second quarter is going to have less deliveries than the first quarter. We still have to see what the June deliveries were, but through May it was they were a lower trajectory than they were in one queue. I suspect again, you know, things like uh, managing quality down at Spirit or slowing things down. The negotiations with Spirit
have been throwing slowing things down. The discussion with the FAA about the way forward and the processes to make sure the quality is higher has been slowing things down. And we don't know how many of whatever they delivered in two Q was delivered out of the inventory that they already built, right they want to get rid of that inventory, which is you know, I think really onerous on h on efficiency because they need folks to maintain airplanes that are already built and sitting in the desert.
But so either way, we kind of think two Q is going to be below one Q a rough rough quarter, probably a four billion and plus cash use after you know, any sort of maintenance capex. So I think the full story here really is three Q and four Q this year. They just can't keep burning four billion dollars of cash per quarter. And so again I think you see this fury of activity as we enter the beginning of summer at Boeing, and I think it's all about tidying up
these issues. They need a tidy so they can get at building and delivering a lot more airplanes in the second half and lowering cash burn significantly.
I'm just going to the Spirit thing for a moment. So air Bus is going to be taking over parts of Spirit that make components for its own aircraft. How does that work? Does that make it like a super company within Airbus or is it totally going to be absorbed by Airbus? What does that look like?
So, I mean the press release I saw today made me believe that it's going to be fully taken out of Spirit Aerosit at least large portions of it, and pulled into air Bus. I thought much more interesting too in that whole disclosure was Airbus is getting paid like I think it was five hundred and fifty nine million something, just over half a billion dollars to take those businesses,
to take the businesses and take the assets. So we knew that that was a drag on Spirit, and it seems like maybe a pretty significant drag again, I think something that really helps potentially improve Boeing Quality and throughput is a management team not focused on trying to economize, especially on a big loss making contracts like the airbus contracts.
Hey, Georgia, if Bowmen doesn't have enough balls in the air. They also now need to find a new CEO because chief executive officer David Calhoun, he said he's going to step down by year in at the latest.
Who's going to take this job?
Oh, that's George's favorite question.
This is a this is a hard job to take, and they would love to have someone in place, I think to manage these problems and the upcoming ones. I don't know, and there's a lot of speculation in the marketplace. I'd be throwing darts at a dartboard. I just know it needs to be a good manufacturing person, you know, someone someone focused on you know, manufacturing shop floor kind of quality. I will tell you, you know, we're going to step from these two problems. That are they're going
to go on to simmer right. You know, Spirit doesn't get purchased until sometime next year. There's a lot of details to get worked out between now and then. Do OJ's you know, they may agree, there's could be they're trying to negotiate with them, they could decide not to agree end up in a lawsuit. And I'll tell you that as we get in September, one of Boeing's the most important unions will come to the table. That's when
their contract expires. And so I so, so the hits just keep on coming here, I think, and that will be another very interesting challenge because I think those workers probably get some very nice increases. If you get into a strike, that second half recovery at Boeing is really put into question because you can't make airplanes with your most important union striking. And again they're going to want some good pay raises.
All right, George, good stuff, But it's like a full time job just figuring out what's going on with Boeing. But boy, that's one of those companies you feel like too big to fail in so many different ways, but you need to really turn things around. George Ferguson he covers all things airlines aerospace for Bloomberg Intelligence.
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