Disasters and the Insurance Industry

In this podcast, Motley Fool contributor Matt Frankel and host Ricky Mulvey discuss:

• How insurers prepare for catastrophic losses.
• What extreme weather events mean for homeowners, car owners, and the commercial real estate market.
• Why Alex Chriss gets an A for his first year leading PayPal.

Then, Motley Fool personal finance expert Robert Brokamp joins host Alison Southwick to answer listener questions about saving for college, finding a financial advisor, and estate planning.

To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our beginner’s guide to investing in stocks. A full transcript follows the video.

This video was recorded on Oct. 08, 2024.

Ricky Mulvey: The PayPal turnaround is one year in. You’re listening to Motley Fool Money. I’m Ricky Mulvey joined today by Matt Frankel. Matt how are you doing?

Matt Frankel: Great. Good to be here. It’s been a little while.

Ricky Mulvey: It has been a minute, but we’re glad to have you back. First story is hurricanes. Thinking of everyone in the path of Hurricane Milton right now, the Category 4 storm is expected to turn Category 5 when it makes landfall in Florida. For the purposes of this conversation, though, we’re going to focus on the business side. The question of who pays after the storm, something that I’m sure a lot of Floridians are thinking about right now. Lot of large insurers, including All State, Progressive, AIG. They’ve taken a small dip, as the storm has grown stronger. One small insurer with a lot of Gulf Coast exposure. It’s called Universal Insurance. That’s fallen 20%. That’s the setup. Are these large insurance companies, Matt, in a decent position to handle the aftermath of Helene and Milton?

Matt Frankel: The short answer is, yes, but insurance companies, their losses are lumpy over time, and for reasons like this. Early estimates if Milton stays on the current track are for about $175 billion in damages. To put that in perspective, Hurricane Katrina, the total damage was about 160. This has the potential to be a very costly storm just because it goes through two major cities on its current track, Tampa and Orlando. A lot of insurers have left Florida for these exact reasons, including the one that I used in my house in Orlando, which we’ll get to in a little bit. But the short answer is, a lot of insurance companies use what are called reinsurers to limit their own risk. These reinsurance companies, which are generally run by big insurers. Berkshire Hathaway has a massive reinsurance operation, for example. It’s laying off some of the risk on other companies. Yes insurance companies are very well capitalized right now, but this does have the potential to be an earnings affecting storm.

Ricky Mulvey: It does. A lot of these insurance companies haven’t been paying out after previous storms. I saw one report that after a hurricane last year, insurers only paid out something like 40% of claims from hurricane damage, and a lot of that is flooding. You mentioned you have a home in Orlando, just from a personal level, how have you seen your homeowners insurance pricing change over the past few years, especially after you said one of the policies had been cut?

Matt Frankel: Well, first of all public service announcement, a lot of homeowners don’t realize that typical homeowners policies do not cover flooding from hurricanes. If you have a name storm, there’s separate flood insurance policies that you can buy. But I do have a house in Orlando. I have basic homeowners insurance. I’m not in a flood zone or anything like that. I bought it in 2021, so not that long ago. Since then, my homeowners premium has gone from roughly $2,000 a year to about $4,300 a year, so more than doubled in the past two years alone. There are a few reasons for that. It’s not just because of storms. That’s definitely a lot to do with it. They were seeing some pretty bad storms, there was Hurricane Ian, not that long ago. But there’s higher replacement costs of homes. Construction materials, the costs are up about 34% in the past couple of years. Medical costs are rising. A lot of homeowners insurance policies have. If someone slips and falls on your property and covers things like that.

The US housing supply is aging. Home prices are up so replacement costs are very high. There’s a combination of reasons, but it’s been really just a perfect storm for the insurance industry. The historical average is about a 5% annual increase in homeowners insurance. Like I said in Florida, a lot of people, including mine, have doubled or more in the past few years.

Ricky Mulvey: In North Carolina they’re going to be looking at basically how they’re going to raise home insurance rates. This is from the insurance department in North Carolina Rate Bureau. This was policy rate changes. They were looking for a few years ago, but the hearing is happening a couple days from now. Basically these insurance companies are looking for an average of a 40% rate increase for these homeowners insurance policy, so 4% rate increase in the mountains, then up to 99% in some beach areas. You talked about how these costs have been spread out. They’re lumpy payments but you have reinsurance companies. You have a lot of homeowners under the same policy. But do you think we’re seeing these hurricanes affect insurance costs across the board? Homeowners’ insurance in the middle of America, maybe even car insurance for as I’m seeing a lot of those rates sky rocket as well.

Matt Frankel: A lot to unpack there. First of all, in North Carolina, I wouldn’t be surprised if that 4% figure in the mountains changes after Hurricane Helene because that’s where it affected in the North Carolina Mountains. I mean, first of all, I hope everyone out there is safe and things like that, and if you live in that area. What we’re talking about is just stuff. I hope you’re all safe. There is a lot of weather related dynamics, not just hurricanes, by the way. For example, hail related events now cover about 12% of all homeowners claims, that’s up from about 9% three years ago. We’re seeing a lot of different weather related claims. You hit on a good point. These are rate increases they tried to enact a few years ago. With insurance companies, it’s retroactive in a way. It’s very backwards looking. The rate increases you see because they have to get them approved. Like you said, they have to get their insurance increases approved. My home value jumped a lot in 2022, but my insurance cost is jumping this year because we’re just now seeing those rate increases worked in. That’s a really good point. Like I said there’s a lot of different costs at play. The North Carolina Coast is very weather prone in certain areas.

I’m not surprised to see they’re trying to increase the premiums. You mentioned, it’s not just the coastal states. The average car insurance premium, I don’t know if you know this, Ricky, is up 22% this year on average and that’s after a 24% jump last year. The average auto insurance policy in America is about $2,500 right now, and the biggest three states that we saw a 50% rise this year alone is California, which makes sense because that’s a coastal state. But the other two that grew over 50% are Minnesota and Missouri, not places you would normally associate with the biggest impacted by weather events. You’re seeing this insurance crisis, a lot of people call it play out across the United States, not just in the coastal areas.

Ricky Mulvey: One angle we haven’t talked about is commercial real estate. How are you seeing these insurance policies affect the CRE market, which I know you closely follow?

Matt Frankel: The short answer is in the real estate investment trust market anyway, we’re really not yet. There’s a couple of reasons. One, a lot of the real estate investment trust and the public markets use what are called triple net leases, which pass the insurance cost onto the tenant. Triple net leases, it’s very common among single tenant properties. If you pass a Walgreens, that’s probably a triple net leased property. That means that the tenant has to pay taxes, building maintenance, and insurance expenses. The REIT isn’t responsible for that. But when you’re talking about eats that have multi tenant properties, let’s say Simon Property Group, which is a mall owner. There’s different ways of dealing with it. Simon in that specific case, owns an insurance company. They have a subsidiary insurance company, and they self insure a lot of their properties. This isn’t really affecting them as much. It’s because it’s a self insurance situation. But if this insurance crisis continues, a lot of companies, especially if you have a high office concentration in like Miami or something like that could start being affected.

Ricky Mulvey: Let’s move on to a brighter story. I don’t have a good transition for this.

Matt Frankel: Fair enough.

Ricky Mulvey: It’s about PayPal, because just about one year ago, Alex Chris joined the company after 19 years with Intuit first earnings call in early November. He came in strong, promising a more focused company. Later he went on CNBC, promising to shock the world. We’ve seen a lot of that. The company has become more profitable. Earnings have gone up. What’s happened this year under Alex Chris that would not have happened under the previous CEO, Dan Schulman you think?

Matt Frankel: I like that you used the term focused because Pinterest was not focused under the previous leadership, PayPal was not focused. Remember they wanted Pinterest. PayPal wanted to buy Pinterest at one point, and no one really knew why. I still really don’t know why they wanted to buy Pinterest. It’s not just Alex Chris that’s new. The entire leadership team is brand new. Alex Chris is actually the longest tenured person in the C suite right now. Very new team. He is making some big moves that aren’t necessarily reflected in the company’s numbers yet. You mentioned more focus they’ve done a great job of cutting costs. It’s driven profitability higher. The stock is up by about 40% from the lows as a result. But just to name a few of the moves they’ve made recently. In May, they announced they were creating an advertising platform, which makes a lot of sense. PayPal and Venmo have an unmatched amount of consumer spending data they can leverage.

They introduced a product called fast lane checkout that speeds up the online checkout process by about a third compared to traditional methods. Some of their biggest competitors like Adian have already adopted PayPal. They’ve partnered with PayPal to offer fast lane to their US customers. Adian in particular plans on rolling it out worldwide. They announced PayPal everywhere, which, it’s a debit card program essentially. That’s the industry leading cashback debit card. It’s competitive with most credit card cashback programs. It can stack with these offers that PayPal gives. PayPal launched its largest ad campaign ever. You might have seen the Will Ferrell PayPal ads that are on right now. More recently in mid September, they announced a partnership with Shopify where they’re going to become an additional online payment processing option for Shopify payments in the US. Previously that relationship was just in France. Shopify just for context. They had $41 billion of payment processing volume in the last quarter alone. That could be a needle moving partnership. The key thing is these moves can both add users and boost monetization of the platform, and they’re not reflected in the numbers yet. Once you announce a partnership, it takes more than a month or two to really work itself into the company. Really interesting moves, very active, is fair to say, and it’s focused. They’re focusing on what they do best, providing an online checkout experience, not on random bolt on acquisitions that no one really knows why they’re doing them.

Ricky Mulvey: It’s a lot of movements, a lot of focus. The stock has been rewarded, as you mentioned, with a 40% increase since over the past 12 months. But if you were giving Alex Chris a letter grade for 360 feedback, we’re all giving each other feedback here. What letter grade would you give Alex Chris for his first year on the job?

Matt Frankel: I’d have to say in A. I’m a PayPal investor. I became a PayPal investor shortly before Alex Chris started. When the stock was pretty low and everything, he’s preserved what’s great about PayPal in terms of it’s user base. He actually returned growth to the user base, which remember user growth really slowed down and went negative for a bit after the COVID surge dried up. Previous manager was just planning on the growth happening forever, indefinitely. Remember they said they were going to reach a billion users before too long. Really he’s executed on what he said. They’re a more focused operation. I don’t know if any of these shock the world moves yet. They all make very good sense, adding a faster checkout option, creating an ad platform. Those are all things that make sense with PayPal’s core business. But if they’re successful, the numbers certainly could shock the world. Like I said, all these are not reflected in the numbers yet, so we don’t know if they’re successful. There’s always that risk. But in terms of what he’s done so far, I’d have to say an A.

Ricky Mulvey: As he goes into his sophomore year, as we start this fall, what storylines are going to be watching and grading Alex Chris on?

Matt Frankel: Now I want to see things reflected in the numbers. This was even referred to this as, I think a transformational year or a transitional year or something to that effect. Now that you’ve got some of these pieces in place, I mean he made a big higher in the ad platform, for example, pretty recently. Now that we have all these pieces in place, we want to see some results. We want to see the company return to growth, which, a year ago, when he took over, PayPal was essentially priced like it was never going to grow again. Like it was going to constantly decline over the years. Now we’ve seen that it’s growing at a double digit rate, earnings-wise at least. If they can return it to user growth and increase monetization of the platform, if that ad platform could become billion dollar revenue stream, which isn’t out of the question, progress toward those things are what I’m looking for this year.

Ricky Mulvey: I own some shares in PayPal, so it’s certainly a story line. I’m going to continue to watch. Matt Frankel. Appreciate you being here. Thanks for your time and your insight.

Matt Frankel: Of course, thanks for having me.

Ricky Mulvey: Before our next segment, this quote from Machiavelli. “People should either be caressed or crushed. If you do them minor damage, they will get their revenge. If you need to injure someone, do it in such a way that you do not have to fear their vengeance.” That quote is why I’m asking you to vote for Motley Fool Money in the 2024 Signal Awards. We’re in the business in finance category and right now, we’re in the lead for the listeners Choice Awards. I’d like to get further with that. I want to get ahead of our competition. If you’d like to join this campaign, please vote for us at the link in the show notes.

Up next, Robert Brokamp joins Alison Southwick to answer the personal finance questions you sent us about saving for college, finding a financial advisor, and estate planning.

Alison Southwick: Our first question comes from Cathy. Love the show and appreciate the helpful information. Thanks, Cathy and you’re welcome. In the estate planning episode on October 1, you mentioned that a person would not need to worry about taxes on an inheritance unless it was more than 10 million. While that is true for federal taxes, my estate planning advisor indicated that the limit is much lower in some states. For example, in Oregon is currently one million dollars. Can you suggest any options for reducing or eliminating this other than setting up residency in a different state?

Robert Brokamp: Well, Cathy is making a really good point. Since she mentioned taxes on inheritance, let’s start by talking about the difference between estate taxes and inheritance taxes. An estate tax is someone passes away, the executor values everything in the estate, files the final tax return. If they have to owe estate taxes, they pay the taxes, and then the money goes to the heirs. An inheritance tax is paid by the people who inherit the money. You get an inheritance from your mother and you owe taxes on that. There is only a state taxes at the federal level, but there are six states that have inheritance taxes, and I’ll talk a little bit about that later. Now, as I talked about in that October 1st episode, you don’t have to worry about the estate tax unless you die with more than $10 million. The actual specific number in 2024 is 13.6 million that’s per person. If you’re married, you can have twice that and not worry about estate taxes. It’s actually technically a unified estate and gift credit, and I’ll talk about why that’s important a little bit later. Those limits are higher due to the Tax Cuts and Jobs Act of 2017. Those will sunset in 2026 unless a future Congress and President do something about that. At that point, they’ll drop to somewhere between six and seven million, again, twice that for married folks. Now, if you do pay state taxes, it’s only the amount above those amounts, and the rates range from 18%-40%. You may be wondering, what’s factored into the total value of my estate? It’s basically everything you own.

Your investment accounts, your retirement accounts, including your Roth accounts. People love the Roth because the distributions are tax-free but it does get included in your estate value, real estate, personal possessions, you know, jewelry, things like that. This gets a lot of people insurance if you own it. If you have your own insurance policy, you own it it’s worth a million dollars you die, $1 million will get added to your estate. For most people, it probably makes sense for someone else to own the policy on your life, maybe a spouse or a trust, and I’ll mention a little bit about that later as well. Now, let’s talk about the states. Twelve states and the District of Columbia oppose an estate tax. The exemption limits are lower than that federal exemption except in Connecticut. Now Oregon has the lowest at one million. Cathy’s estate planning expert is right that people in Oregon should be thinking about estate taxes. Fortunately, the tax rates are generally lower in states than that federal rate ranging from 1%-20%, but it depends on the state.

On top of that, as I said, previously, six states impose an inheritance tax, and those range from 6%-16%. Maryland is the only state that has both an estate tax and inheritance tax. Now, let’s say you’re worried that your estate will be either subject to federal or estate taxes. What can you do? Really, the overall strategy is just to have less money by the time you die. You can do that in a few ways. First of all, you might want to give money to heirs and charities while you’re still alive. This is becoming more popular.

A common phrase that’s used to this is that it’s better to give money with a warm hand than a cold one. If you’re confident that you’ll have a sizable estate, and you won’t need the money, why not give it away now, especially if your heirs are in their, 40s and 50s, trying to raise a family, trying to figure out how to save for their own retirements, maybe pay for kids’ college payments. Just don’t forget to keep enough for yourself, especially considering that you may have to pay for long-term care later on in life. Now, in 2024, each person can give another person $18,000 without worrying about Uncle Sam getting involved. Let’s say you’re married and you have three kids. You can give each kid $18,000, and then your spouse can give each kid $18,000 for a total of $108,000. There are tax issues to think about when you’re giving money away. Now, what if you give more than $18,000 to a single person, you don’t owe extra taxes this year. You have to do is file Form 709 with your tax return, and that amount over $18,000 reduces the 13.61 million estate exemption.

That’s why it’s called the unified gift and estate exemption. Basically, the bottom line is, most people can give away a lot of money without worrying about actually paying any gift taxes. Another way to reduce your estate is to put money in an irrevocable trust, but the amount that you contribute is subject to the gift tax rules, and then you technically no longer own the property, unless you have no control over it, and then the other way is permanent life insurance. The premiums can be very high, but it gets that money and the future growth of that money out of your estate. Life insurance proceeds are income tax-free to your heirs. Just remember, again, that this only works if you don’t own the policy. In many cases, when life insurance is bought to reduce estate taxes, it’s done via an irrevocable life insurance trust, most commonly known as an ILIT. I hope you can see that this can get pretty complicated, which is why we recommend that you see a qualified estate planning attorney, someone who knows your state laws, especially if it’s possible that your estate will be subject to estate taxes on the federal or state level.

Alison Southwick: That was a lot. Our next question comes from Brian. My wife and I have a joint regular taxable brokerage account, and we have part of it earmarked as our child’s college fund. The balance of that portion of the account is around 90,000 currently, and it is invested in an S&P 500 index fund. We did not create a 529 on the chance that our child did not want to attend college. He’s 10 years old now, and as he enters middle school and high school, we should have a better idea of whether or not he will choose to attend college. It looks like he will want to attend college. Could we Superfund a 529 account with the money from this taxable brokerage and avoid having to pay capital gains tax on the portion we contribute to the 529? If so, how does that process work? Are there any got you we should be thinking about in advance of the 529 contribution?

Robert Brokamp: Well, first off, good for you for saving for your son’s potential college expenses and for choosing an S&P 500 index fund because it has been an extraordinary investment over the past decade. That’s good news. The bad news is that you can’t transfer the money that’s in the S&P 500 index fund to the 529 tax-free. You’d first have to sell the investment, and then you’ll have to pay capital gains taxes. You’ll have to decide whether and when to bite the tax bullet, get the money into 529, and then the future growth will be tax-free if the money is used for qualified purposes. Now, you could just keep the money in the index fund and put future college savings in a 529 but just know that if you decide to wait until your kid is close to or in college to sell the index fund, the capital gains will increase your income and reduce your eligibility for need-based financial aid, if you think you’ll get some.

As you think about how your income might affect financial aid, just know that it’s based on the tax return from two years prior. Parents who applied for aid this year were using their 2022 tax returns. As for asset values that you add into the FAS fund, those types of reforms, those are based on the day you file for aid. Now, in the previous question, we addressed gift taxes, and this comes into play here as well. Any contribution to a 529 is considered a gift. It’s subject to that $18,000 annual limit. However, there’s a unique rule 2529, and that you can give up to five years worth of contributions, in other words, $90,000 or $180,000 if you’re married and filing jointly, without it reducing your unified gift and estate credit. But you do have to file Form 709 for each of the subsequent five tax years. Finally, for those who are worried about overfunding a 529, you’re not sure your kids going to go to college, things like that. You can always transfer the money, tax-free to another qualified relative. Also, starting this year, up to $35,000 of unused 529 money can be transferred to a Roth IRA for the beneficiary. Now, there are a lot of rules about this, including the account must have been opened for the designated beneficiary for at least 15 years, and any money and growth in the past five years can’t be contributed and the amount transferred to the Roth IRA must follow all the Roth IRA rules, and that that person must have earned income, their income can’t be above the Roth eligibility limits, and you can only transfer the Roth annual limit each year, which in 2024 is $7,000. It would take several years to get the whole $35,000 into the Roth IRA.

Alison Southwick: Our next question comes from Drew. I’ve been doing a great deal of self-education on personal finance, investment strategies, and retirement planning, and feel that I understand these concepts well. However, I still have a good portion of my nest egg with a financial advisor who charges me for assets under management. They’ll do that. I have IRAs, a 529, and a brokerage account with them. I do feel that I’m capable of managing my own investments along with an occasional consultation with a fee-only financial planner. How do you find a financial advisor who does not want to just manage your assets? Also, do you have any other suggestions for managing my own accounts?

Robert Brokamp: Well, Drew, how very Foolish of you, and that is Foolish with the F because Motley Fool was founded 31 years ago on the belief that the more you can learn and take control of your finances, the better off you’ll be. I will say there are good financial advisors out there, right, and they’re worth whatever fees you’re paying, especially if they’re providing some financial planning service like helping you determine how much you should be saving for retirement or for college, how much insurance you should have, giving you tax saving tips, and things like that. The first step is to determine whether the service and returns you’re getting from your advisor is better than what you can do on your own given the fees you’re paying. It sounds like you’re comfortable doing it mostly on your own. You can just transfer the money to another firm. The Motley Fool has a site called the Assent that rates discount brokers according to various criteria.

One criteria may be to look at is whether the firm provides any investment or financial planning advice, if and when you want it, and how much it costs. With some firms, it’s an additional assets under management fee, but I bet it’s going to be much lower than what you’re paying now. For others, once you have a certain level of assets, you get complimentary access to a financial professional. The other option is to find a fly financial planner who just charges by the hour, and you can find those folks at the Garrett Planning Network. That’s G-A-R-R-E-T-T, the National Association of Personal Financial Advisors, otherwise known as NAPFA, and the XY Planning Network. Now with the 529, you could just transfer it to your states or another state’s self-directed 529, and savingforcollege.com does a great job of rating 529 for residents and non-residents. You may also be able to just keep the 529 plan and take it over yourself and stop paying fees to the advisor, but that just depends on the plan. Then finally, if you decide to move accounts, it should be a tax-free event with your retirement accounts and the 529. Tough with the latter, you may have to give back some tax breaks if you move from your states plan to another plan. With a taxable brokerage account, you should be able to transfer most of the investments in kind. But if your advisor has you in some special or unique investment that your new broker can’t hold, then you’d have to sell that, and there could be some tax consequences.

Alison Southwick: Our next question comes from Chavan. I am a longtime listener and fan of the podcast from the other side of the world in Singapore. Hey. Fun fact, bro. Did you know that Singapore is our fifth most popular region for listeners?

Robert Brokamp: Wow. I did not know that.

Alison Southwick: It’s US, Canada, UK, Australia, and then Singapore. I don’t know. Sounds like Chavan needs to schedule a meet-up or something I think. [laughs]

Robert Brokamp: That looks great.

Alison Southwick: Dare to dream. I have a question related to unit-linked investment plans, or would I say this U-L-I-Ps or ULIPs, bro?

Robert Brokamp: I’m going to say ULIPs. It sounds more fun.

Alison Southwick: As it does. As they are sometimes referred to in Asia. Getting punchy at the end of the episode here. In every meeting with a bank wealth advisor, it is very likely that she or he is going to sell such a plan that will include investing in a basket of mutual funds with a minimum commitment time period and some insurance linked to it. Usually term protection. Do the Fools have any thoughts on such products and the common areas to pay attention to?

Robert Brokamp: Well, I have to say, I am not an expert on investments or taxes, or insurance in Singapore, and I’m not necessarily an expert on ULIPs. However, I did do some research. It looks like they have a lot in common with things we have here in the US that also mix investing with insurance. Here are some things I think anyone should look at when considering these type of investment/insurance policies. The first thing I would say is to look at cost. Here in the US, there are lots of these hybrid policies investments that sound great, but then when you look at the costs, they cost anywhere between two and 4% a year, and they basically overwhelm any of the benefits. I would look at that. You also want to look at how the returns are calculated. It sounds like these are just invested in straight mutual funds, so it would just be the performance of the mutual funds, but you would also want to see if costs are taken out of those as well. In some of the types of policies we have here in the US, the returns are calculated based on some complicated formula where they say, you get the index’s return, but with less downside. But you actually don’t get the index’s return, if it’s based on the S&P 500, it’s capped at just 8% and you don’t get dividends so you want to understand how the returns are calculated in these policies.

As you suggested, there are some liquidity issues. Often, you have to commit to a certain amount of payments for a certain amount of time, or you can’t take money out within five or seven, or 10 years so you definitely want to know how much your money is locked up and for how long. Taxation. I know nothing about taxes in Singapore, but here in the US, one of the benefits of cash-value life insurance policies is that you can borrow against the policies, and all loans, that’s tax-free. That is also, as I mentioned, earlier, life insurance policies are tax-free, so you just want to understand the taxes. Then finally, you want to understand what happens if you stop paying premiums. You’re committing to a series of premiums, or what if you stop? In some cases, that will basically mean the policy lapses or you lose some of the benefits that you were hoping to get so you want to understand what happens if you can’t pay the premiums, and then you have to look at your budget and be very comfortable with your ability to continue paying those premiums through thickens.

Ricky Mulvey: If you’ve got a question for the show, email us at [email protected]. That is podcasts with S @fool.com. As always, people on the program may have interests in the stocks they talk about, and the Motley Fool may have formal recommendations for or against so don’t buy or sell anything based solely on what you hear. I’m Ricky Mulvey. Thanks for listening. We’ll be back tomorrow.