This Week In Coverager (May 4-8, 2020)

Shefi, Avi & Nick review Coverager news stories for the week of 5-4-2020.

Discussed – AIG, Blackboard, Metromile, Root

Watch here:

 

Transcript

Nick
Hello, everyone. This is our newest episode. Hopefully, it's something that we can continue for a very long time.

This is an idea that I had because the Coverager newsletter is so rich with information. I thought why not have a week-in-review? So tentatively, we're going to call this this week in coverture. But we'll leave the title up in the air for now. And as you can see I have the leaders of Coverager, Shefi and Avi. Welcome to our first episode of this week in Coverager.

Avi
Hi everyone,

Shefi
Hello.

Nick
So let's kick this off by Shefi. I'll kick it over to you. Was there anything particularly noteworthy on the different sets of articles

were published or posted this week in and covered her

Shefi
Biggest story still developing story is everything that happened with AIG and Blackboard. So to recap, AIG announced that it's placing Blackboard into a run off, and, you know, Blackboard is their technology focused subsidiary

team of maybe around 140 people. So it was a shock. And, you know, when we wrote the article that we kind of looked at the timeline,

AIG said that they've made that though they came to this conclusion during March. But for Blackboard it's been business as usual and actually heightened business at least since April. So we're talking hiring people, let me know higher up people bringing them into Blackboard. You wouldn't do that if you think if you think that this journey is going to last. It was talking a lot more state filings that we've seen, especially in April. And even, you know, this. Well, it was even like a day before the announcement was made. So this makes me think that, you know, there's obviously a disconnect.

Nick
Yes. I was gonna say that. Yeah,

Shefi
Blackboard management and AIG and you know, the tagline when when I wrote about erasing Blackboard, I was just I was thinking of Blackboard, but then I saw that Blackboard uses the word to it's for them it's about erasing inefficiencies and to me insurance, it's hard enough to erase inefficiencies. It's even harder to erase politics. And I think, you know, using Coronavirus that is the lamest excuse because this is not a pandemic/flood that this has to be something else. There's more to this story. Obviously, there are a lot of players in the room here and AVI can talk more about that because you're talking

About a collaboration between 2 Sigma IQ between Attune between Blackboard even for us to understand what each one brings to the table was confusing at times. But at the end, and I think based on also feedback that AVI got from speaking to different individuals, you know, Blackboard had from an innovation standpoint, a really solid product in an area that we don't see innovation a lot. So Avi, I think you can add some more color to this.

Avi
I think it's interesting because hearing beyond the industry, everybody talks about COVID-19 in the sense of, let's be more efficient, let's do things in a better way, let's cut costs. And speaking with Blackboard's employees, they really believed in the platform. They said how the technology was a real game changer. These are people that have been in the industry for a very long time, so you got to give them credit that they know what they're talking about. So why would you, you know, seal that off? Why would you do that? If it is an innovation unit, they are being more efficient, why wouldn't you want to actually invest more? And you know, see how you can expand on that unit. And to me again, when it was a surprise for many of the employees so how was AIG really committed to innovation if the innovation unit was you know, they they didn't see it coming? So that's to me like is the why would you do with them? I don't understand why would you invest even that money it may not be so much for AIG but why would you even go on a journey knowing that you don't want to see it through?

Nick
Do we do we know any of the history with Blackboard in by that? I mean, is Was it a shell company that had existed before got transformed into Blackboard? Or was it an insurance company that was just sprouted out from scratch with licensing, to trying to understand, you know, how much capital commitment AIG had towards keeping that thing alive? I, to me, I think one of the least underrated aspects or advantages that insurance company has is that license and to just kind of shutter not that they're giving up that license. I don't think that's what they're doing but to just sort of shutter it and keep it alive but not have it accept any business is a big head scratcher to me because it's like the I thought they were using it for the thing that was the most valuable. Do you know any of the background around Blackboard?

Shefi
Well, it was basically Hamilton USA, right? That was

Nick
Oh, that's right.

Shefi
I swapped it rebranded it Blackboard which I thought was a great brand, obviously new website looked fresh. Brian Dupperault came from Hamilton USA and was acquired for $110 million. But I think even a bigger scratch in my head is still how the whole announcement came down. Because when AIG went to the press with their earnings call through during the evening, Blackboard management said, Hey, you know where our plan B is basically to look for an investor or someone that will help us continue on our own. Now, keep in mind, even if Blackboard will find a suitor, AIG has to approve of that suitor. Right so they could have made a joint statement once and eliminate, eliminated all the confusion that we feel that the people that we speak with our sensing, but they didn't do that. So what happened to the whole "we're a team". Yeah. And the truth is, I don't think AIG is a really solid team. I think there's so much history behind that company. And the people that are currently driving the lead at AIG, Brian Dupperault. Peter, we've, you know, Peter was described to me as a numbers person. And Blackboard right now isn't really about numbers. It's about establishing or realizing how to use technology in an efficient manner. And truth be told, it is only this year that they've actually started to make good effort and see return on how they were, you know, playing around with technology...takes exploration, especially in middle market.

Avi
I think, to me, I think in general and this is something that we see in Coverager and sometimes at least I, I kind of I feel like I make that mistake. It's not fair to judge startups or, you know, innovative initiatives over such a short period of time...we're forgetting that a lot of these big insurance companies that are big day, have been in business for hundreds of years. It took them time to get to where they are today. And if you don't remember how long it took you to be what you are. And you're not giving enough time for new ideas, new products to shape and you know, have that impact. And it's not fair because again, you had that time. You You did it, no one was coming every year saying, Oh, your loss ratio is this are you lost like that? Or because he talks about cost cutting all the time, so they could have made some cuts at Blackboard made it even more efficient? Maybe they didn't need 140/150 people sure, but just like AIG doesn't need all these peoples. I feel like They don't treat sometimes a lot of these innovation units and startups in general as an industry or feel as someone you know, of their own, and that's here to try to do something better.

Nick
Yeah.

Shefi
But that's a really good point. Because when we were covering layoffs of Insurtech Well, because of the pandemic, so firing people should be the last resort, you could reduce hours, you could ask to reduce certain units you don't just you know, there's has to be something more that says, Okay, we're placing Blackboard into runoff and but the way they also communicated It is also an issue. So now for AIG,

Nick
it's, it's hard to me, it's hard to think, think through the long term when you're being measured quarterly. And that is, you know, it's I think it's a conflict between how we, you know, Avi I don't know if it's fair or not fair. It's just that I don't I don't think we're not using the same set of metrics. And so if AIG is judging their performance, quarter by quarter, Blackboard never had a chance.

Avi
Yeah, no. Right.

Shefi
So why drag innocent employees into this?

Avi
They promised them big stuff? Why would you do that?

Nick
think it you know, at some point and aren't we sort of seeing this across the board with like, these innovation arms of these insurance companies haven't really delivered anything. And it was something that I've been worried about all along. I worked at a carrier that had an innovation lab. And I remember going down there being all excited and just watching a bunch of kids playing with drones. And I said, Nothing is going to come out of this. They might even build some tech, but this will never see the insurance light of day, no one's going to connect this to insurance. And that that sort of that experience.

And sort of stuck with me through this. And now we're seeing a lot of these innovation hours. They're just quietly disappearing, fading away. And it's I think it's a big concern going forward with insure tech, I think, given the pandemic, I think a lot of a lot of insure Tech's probably will go out of business. I think that's, that's a problem. And if the insurance industry itself can't figure out how to support these new technologies, I kind of throw my hands up in the air and like, what, what is going to happen here?

Unknown Speaker
A FinTech company will figure out how to support these technologies and backtrack into internet.

Avi
You know, I think

Unknown Speaker
somebody's gonna figure out how to do something.

Avi
Yes, it may not. It may not be from insurance, and it may require insurance companies to look beyond insurance to figure a lot of these things. But I mean, this is an interesting point. And this brings back to the metro mile story, which is What happened last week, but I think it's relevant. So, Metro mile, there was something interesting when I was speaking to employees, they kept on comparing themselves to route. And they looked at route as a company that is growing in an unsustainable way. And every Metro mile employee that I spoke with, kept on saying how Metro mile is profitable. And I was saying, What do you mean profitable? their loss ratio they had in the 70s, while route was, you know, over 100. And they looked at that measure, and they said, we're doing something right. We're growing the right way. Of course, their combined ratio was very high, because they were so focused, I think, I really think they took a lot of the criticism by some industry experts saying you need to look at your loss ratio or don't grow too fast or things of that nature. They actually improve their loss ratio over three years. But then look what happened. They Very slow route in the meanwhile, was running and running and running and, you know, not stopping for a second to think. And I really think that hurt them. So they kind of they listen to the advice, but it hurt them. So to me this is a question I want to ask you. What is the balance? So you say don't go too fast. But then when you try to focus, then you have you have to pay engineers and data science people and you know, technology cost money, and investors give you a lot of money to grow fast. That's the idea of getting investment. So where's the balance? Should insurance startups raise less money?

Nick
I don't know the answer to that. I know that one. One difference between insurance and other industries, where, you know, take tech, for instance, where it's completely acceptable to lose money on your product over a considerable period of time. The problem with insurance is that nobody wants to buy it and so if you're losing money on it, it probably means you have your price, you're probably pricing wrong or combination of your you have the wrong customers. And that's not easy to fix, no matter how much money you throw at that. So you mentioned the last costs. For some of these, that ends up becoming the key metric because for a lot of these companies insurance has a long history of seeing this companies that grew really quickly with big loss costs. Then when they tried to get the last cost under control, they lost the customers. Right? Because it was it was they were the only reason they got the customers because they were the cheapest and they got the wrong customers when they raise the price. You know it they did get the last cost on the control but they shrank dramatically. It's a big difference in in how investors come into insurance, what their expectations have to be an AVI I will I will tell you, even from my personal experience. I've struggled to reconcile whether insurance is a venture worthy business, because I just don't think this type of business can withstand losses going out indefinitely to acquire other aspects of the business like market share. It has never worked ever, and we have a long history of this is never work. It is not technology.

Avi
You know, it's interesting. I like to always say that insurance when you sell insurance, it's not like you're selling a T shirt, large, medium, extra large, they all same price, but insurance, you get one price, you think it's fair, I get another price. I'm not buying it. I don't think it's fair. And that is another challenge. When you say grow really fast. There's a thing called conversion rates and fair is different to different people. And that is another element and then you mentioned while you attract the wrong customers, and when you do try to become profitable, you increase that rate, and then you see cancellations. So this is a really, you know, a big question, maybe, maybe there's a different way to come and try to figure out insurance maybe provide value in a different way. Like, okay, so customer knows, well, insurance included, but something else. So yeah, if I look at the insurance, it's more expensive than, let's say Geico, but I'm getting something else. So it's kind of, you know, let me stay. Yeah.

Nick
Well, you brought up the T shirt analogy, and I like that. Let's say it with marketing and costs, it cost you $2 to make a T shirt. And let's say you want to get market share. So you're going to sell it for a buck 50 you take 50 cent loss, insurance doesn't work that way. Insurance is is a leveraged product. So you you amplify the loss that's the problem. Right? You can you can undercut your your competitor But you do so in such a way where it's like, I'm not losing $50 a policy per year, I'm acquiring a group of customers that are going to file claims where I could lose many, many, many, many multiples of that $50 I didn't get in the premium. That's the challenge is that the, the product that you're delivering is a leveraged product. You pay you know, my a homeowner's policy, you pay $500 for a $500,000 return. If you get the wrong customer, you're going to be writing $500,000 checks. Why because you didn't charge enough You know, you didn't discourage them. You know, the the lowest price, a company in insurance has to have such a strong back office, strong analytics, strong fraud detection, like the system has to be built up because They're on their backs. They're sort of assuming with the undercutting of price, that they're gonna get people who are scrupulous

Unknown Speaker
that the right word

Nick
is inscrutable. It's always like conspicuous and scrupulous. I never know if I'm using it

Unknown Speaker
the right way rallies in the room.

Nick
So that you know, like So look, look at this whole Metro mile and route system like personal auto is already super competitive. And you have gigantic balance sheets and risk, you know, the risk of someone driving is just one element of the premium. The other element of the premium is, you know, Warren Buffett and Berkshire Hathaway and Geico have a signal growing rapidly why he wants access to that cash. He has a balance sheet that can make the premium really cheap. So he's trying to balance You know, trying to get the safest drivers while also making sure that he's got a continuous amount of cash that's coming in that he can invest. That's tough to compete against when you're a metro mile or whatever, and you're, you know, or route and your, your your business model is is completely on the risk element of the business. And you get you get no additional benefits from having a strong balance sheet. That's tough. You know?

Unknown Speaker
Yeah, it's interesting, very interesting. Yeah.

Nick
What What else happened this week in coverage? Oh, wait, wait before before we leave this topic, because we sheffy. We talked about this a little bit before we hit record button. AIG also had another announcement.

Unknown Speaker
Yes. Well, calling the pandemic the biggest catastrophic events.

Nick
Yes. So we went from, I'll tell you as an insurance professional, you know this started to occur. You started to see a lot of insurance professionals speaking on Twitter on their blog post talking about nothing to see here. Really no worries that we have to worry about because there's tight exclusions, when SARS hit. All of these, all of these property casualty companies came in and they put these exclusions and one by one, the dominoes are falling arch. AXA Hannover re yesterday announced the charge AIG one by one we're in we're talking already just in a handful of companies. It's already like a billion dollars and didn't Munich Re just announced something as well. So AIG might be right this this could end up being spread out. It could be the largest catastrophe ever to be set the insurance industry?

Avi
I think, to me, one of the most interesting elements is if this will become a habit. So you know, looking back, for example, at nationwide and now and seeing a hybrid model of work from home and you know work from the office, will this become a habit where maybe people go out, go less to restaurants? Will this become a habit where now restaurants are going to say yes, let's become those virtual kitchens. And that has significant implications for a commercial insurance, insuring restaurants, will we see less than very saying less commercial real estate? What is that going to do to a lot of commercial insurers in that space? So that to me is the ultimate question. Is this a temporary thing? Or will this become a habit and individuals and companies are going to say, Hey, we could save money like me because everybody cares about themselves. Like if you restaurant owner they tell you look you could make 50% more versus when you have dine in then unless you really want to see that you know experience that diners face then you're probably going to say yeah let's let's do it let's be efficient everybody wants to be efficient. So that to me is interesting will it become a habit? Will people travel less for business more zoom calls less you know conferences. That is an interesting point and if it doesn't become a habit I think it's going to affect many companies in many different ways. Yeah, Sophie

Unknown Speaker
was looking for the actual cool but yeah, we're we're pretty right. We're pretty spot on. So they called it the largest catastrophe event in the industry's history. I think. I've read a lot of earnings calls recently just about the the COVID and everybody has a different way of framing it. Some prefer to be on the super negative side and some prefer to look on the bright And I get there's a lot of uncertainty. And there's short term impact. And then there is long term. And we don't know really what the long term is. We talked a little bit about this earlier, right? You don't know when they're gonna make a claim. But if you start framing it by line of business, I want to believe that it's not all doom and gloom, right? We have to treat small business differently than we have to treat the travel insurance industry, which is probably hit the most, and we don't know, you know, how, how the behavior is going to pick up if it does pick up when it will pick up I do believe that it will be caught, but I just, you know, I don't have a timeframe for it. Life looks very differently right now. So it didn't impact really mortality rates just yet, but we don't know if that's going to come in three months down the line, or, you know, what is that going to look like? But I just felt like with AIG, it was also you know, just the darkest picture possible. And, and we don't even know if they're being conservative based on what they're seeing in their books or not.

Nick
I'm worried about that, like, based off of the number that they set aside. Is this like a specialist where it's just like every earnings season, the the reserve amount just keeps inching up and inching up. And it goes from 250 million to five to a billion to 1.5 billion to Oh, crap. Like that. It's it's completely possible and I think the other shoe is has not dropped yet. So I think all you need is one court. To come in. All you need is a regulator and it's not even whether you win or lose the claim. It's you're going to have to defend those claims, and there's going to be a massive cost around that. And then I think the final shoe to drop is that if once the settle, I fully expect that policyholders will begin suing their brokers.

Avi
I agree and I agree on that I know of a few brokers that are really afraid there's no other way to put it. from customers, they're very careful what they say they try to refer them to the carrier directly, not saying much checking that they have any no policy in place. Because you know what? I think this is a big problem for the industry. And I wrote about this. How is it that you have so many brokers that everybody talks about the value of an agent and giving advice and all that, and then so many people are genuinely surprised that their business interruption coverage does not cover a pandemic or it needs to have physical damage for it to be covered? Like, no one reads the policy? Yes, it's the responsibility of the policyholder, but why is an agent getting money every year and not making sure customers are aware and I want to ask you another question. Why in January because everybody talks about that. Insurance, we're risk mitigators. we prevent risk and prevention, all that you saw what's happening in Asia, you couldn't give a notification to restaurant or say, listen, we don't know if this is going to be a big deal or not. But if you don't have delivery and takeout, because that's what they do in Asia, maybe you should get it in place instead of having businesses like scrambling last minute trying to figure it out, then maybe you could have minimized the losses a little bit and you could have delivered a better service and you would have been, I would say, a more positive light. Yeah.

Nick
I think it gets back to what Jeffrey was saying on how does insurance evolve from here?

Unknown Speaker
What what are we?

Nick
are we are we just transaction takers? I'll tell you like that. That seems completely unsatisfying, right now, to just sell insurance. And I see no way around that obviously, if we are what we say we are this industry, then we have no choice but to start to really be To begin to partner on the risk management side, you're 100% correct like that. We do that for hurricane already. When a hurricane is coming, we start to give advice about things that you should be doing. No one stepped up on this. It's really disappointing.

Avi
Yeah, you know, you This is something that I don't think anyone has ever experienced maybe in 1916 or something back then. But I feel like today with modern technology, all you needed to do was turn on CNN, or see the jokes that were made about Silicon Valley, terrified from this virus, you know, way before the lockdown happened. And again, these are experts, we're talking about insurance experts, people that, you know, this is their living, they know how to mitigate losses. That's what they do. So I think it was a big communication problem. And you said, we're, we're friends. actual business, the reality is, most agents, most insurance companies, they care about selling. That's what they care about always bring on new clients. There's not much of an effort to look at servicing or going over the policy making sure that you're covered. We bought coverage. We don't know if we're covered. We don't know. And I even if I read it, I wouldn't understand.

Unknown Speaker
Now we know. I don't think we know now we know what

Avi
what do we do now is we're going to see a significant rate increase. That's all we do know, we didn't file a claim, but we're going to see a rate increase.

Nick
Okay, so so maybe we can kind of finish it off here, because I'm now hearing rumblings from a lot of insiders that the market is going to significantly harden. So you starting so we're getting into the main, one of the main renewal seasons for natural catastrophes, so the reinsurer is already starting to pass on signal nificant rate increases. I'm seeing it as well. I think it's going to accelerate

Avi
you hearing anything, we're going to shut down our big account to cancel the credit cards. Let them try to collect the money.

Unknown Speaker
I haven't I mean, I've heard as much as you do that see it coming, especially in commercial insurance, but

Avi
we saw a 60% increase in one case, no one talks about that. Yeah. Which you know, that that seems significant. 60%. But,

Nick
so I, I think the industry is very well equipped to kind of muster through this. For one thing, I think it's going to be very much spread out. This is this will be a global phenomenon. It'll hit balance sheets all over the place. I don't think this will necessarily put any individual company out of business. It'll hurt a few. But I think even if we do get to if AIG is correct, and this is 100 plus billion, loss event, right? I think the industry can withstand it because it's going to be very spread out. Usually when natural catastrophes occurs. It's predominantly the reinsurers that kind of take it, you know, with their big balance sheets because they start to hit these very high totals and the reinsurer start to really pick this up. I think it'll be carrier driven and reinsurance driven. My big concern is going into this hurricane season. Can we withstand this in a major hurricane? Right and when's the last time we had a Calif, a major California Earthquake. Like I'm getting a really heavy feeling in my gut, that the, you know, the planets are aligning here. And 2020 could ultimately be like, just absolutely off the charts catastrophic year in ways that we have never even imagined something like my fingers across that somehow we just get through this hurricane season. We can go into, you know, and get past this pandemic and kind of take a take a deep breath here, but that's my big concern.

Avi
2020 has been a very bad year in general, I really, really bad year, but all we can do is really hope and

Unknown Speaker
we hope for the best.

Nick
Yeah. So this is covered your weekend review, and I hope you like the format. We'll go deeper into some of these particular news topics that as we were saying before, sheffy you know, with with tight deadlines, sometimes it's we got to get the story out. But in this particular case, we're going to be able to digest a little bit more so for the audience that's listening there. You know, if you have feedback on how you would like this to look or any particular articles during the week, send us a note, and we'll be sure that we can digest it,

Unknown Speaker
or if they have any questions.

Nick
Yes. Yeah, we'll chew them up. Yeah, maybe we'll have them as guests. Why not? Yes. Because we have the technology. Yeah. So sheffy Thank you. Thank you. Thank you. For everyone that's listening. Stay safe. This is the coverage or weekend review.

Unknown Speaker
Bye everybody. My