Insurance for your insurance

QUOTE OF THE DAY

There may yet be a Florida insurance market on Tuesday.”

Yep, Charles Watson, it’s still standing. Even as Hurricane Irma wreaked havoc, insurers bounced back.

Market Snapshot

  • U.S. indexes surged—financials and technology led the way.
  • The Dow finished above 22,000 for the first time in a month.
  • Oil rose 1.2% as refineries continued to reopen.
  • Gold prices fell 1% from a one-year high; the dollar climbed.


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Insurance for Your Insurance

Shares of the reinsurance companies largely responsible for funding the Irma cleanup spiked yesterday. We know, it’s not supposed to work that way…we’ll get to that.

Hurricane Irma barrelled into Florida over the weekend after devastating several islands in the Caribbean. As of this writing, 6.4 million residents are without power, millions more evacuated to other states, and the damages could tally up to $49 billion.

So why are shares of reinsurance companies surging?

Reinsurance, not Insurance

Even insurance companies need insurance. Just like any homeowner would take out a policy to pool her risk, insurers turn to cash-rich reinsurers in order to provide extra security for major events (like a hurricane). Think of these reinsurers as the lenders of last resort.

And those lenders play a critical role in our economy. The global pool of reinsurance capital has doubled from $300 billion in 2006 to $605 billion in the absence of major natural disasters. That may feel like a lot, but initial estimates of Irma damage climbed up to $200 billion. Almost a decade’s worth of global efforts to prepare could have been washed away in a weekend (and this doesn’t even include the combined effect from Harvey).

So as Irma came bearing down on Florida this weekend…

…investors ran for cover, sending some insurance stocks down 15%.

This dealt a heavy blow to Florida’s unique insurance market. The state’s location in the crosshairs of major storms already makes it a difficult place for home insurers to do business. Which is why national firms said “see ya,” leaving 80% of the market to smaller, local insurers with far less capital.

To make matters worse, the Florida Hurricane Catastrophe Fund (Florida’s state-backed reinsurer) only had $17 billion stored in its “rainy day fund.” Expecting to pick up the slack, major global reinsurers like Everest Re Group (+4.26%), Munich Re (+4.07%), and XL Group (+5.02) braced for a bad couple days.

But as the rains and winds cleared, initial doomsday damage estimates (though still significant) fell across the board, and insurers and reinsurers had one of their best days of the year.

Bitcoin: Closed for Business

China is officially hanging the “Closed” sign on Bitcoin exchanges across the country.

You might’ve thought your purchase of .067 bitcoin was the reason for the recent market surge (it wasn’t), but China was. At one point, China contributed up to 90% of all Bitcoin trading volume.

So why are regulators closing up shop? A few reasons:

  • Chinese investors were actively buying up Bitcoin and selling off the yuan, effectively hurting the domestic currency.
  • Bitcoin transactions don’t need to be regulated by governments and institutions, so many transactions were taking place “off the books.”
  • Governments like financial security, and the Bitcoin trading frenzy has led to financial uncertainty.

For better or worse, Chinese regulators are putting their cards on the table—just last week outlawing Initial Coin Offerings. And while closing exchanges won’t ban investors from all forms of trading, it’ll certainly be less frequent.

BP + IPO = BPO

BP (+0.65%) is spinning off a portion of its massive network of U.S. pipelines into a publicly traded company. But this $100 million IPO will take shape differently than you’re used to seeing…

Introducing the Master Limited Partnership (MLP): A clever way for low-growth, yet highly-stable companies to issue publicly traded units of stock without investors suffering the agony of double taxation.

This type of structure is not uncommon for oil companies like BP—Royal Dutch Shell raised nearly $1 billion for its MLP in 2014. But BP’s not doing this just to fit in with the cool kids.

With oil prices remaining low and the costs from the 2010 oil spill still seeping into its operations, BP is reassessing its portfolio and seeking growth in other areas. Altogether it’s hoping to raise $5.5 billion, meaning this MLP is just scratching the surface.

So, if increased liquidity and the tax benefits of a limited partnership get your heart pumping, grab a slice of the action later this quarter.

Teva: CEO-less no Longer

Teva (+19.35%) finally found a new leader, tapping former Lundbeck chief Kåre Schultz to plug a leaking ship. And it’s about time…the pharmaceutical company has been without a permanent CEO since February.

Schultz will need to get his hands dirty with the new gig. The Israeli drugmaker’s shares fell 64% YoY, and after a large acquisition of Allergan’s generic business, Teva’s accumulated over $30 billion in debt…twice its market value.

This is why Teva hopes Schultz, an accomplished industry veteran, will right the ship. He’ll face tough choices like whether to remain focused on generics or take the leap into specialty drugs.

That, and hosting a Saturday yard sale to offload some of Teva’s assets.

What Else Is Happening…

  • Following Intel’s big win in EU court, Google filed an appeal to challenge its antitrust fine.
  • Citigroup expects a 15% drop in Q3 trading revenues YoY.
  • Tesla expanded its Supercharger station network into the urban centers of Chicago and Boston.
  • Volkswagen will spend $24 billion to develop electric versions of all 300 models by 2030.
Economic Calendar

  • Monday     Earnings: No Events
  •                     Economic Events: No Events

  • Tuesday    Earnings: No Events
  •                   Economic Events: Small Business Optimism Index

  • Wednesday    Earnings: No Events
  •                         Economic Events: MBA Mortgage Application, PPI,
    Treasury Budget

  • Thursday   Earnings: Oracle
  •                    Economic Events: CPI, Jobless Claims

  • Friday       Earnings: No Events
  •                  Economic Events: Retail Sale, Industrial Production, Business Inventories, Consumer Sentiment, Baker-Hughes Rig Count

(Tungsten) By the Numbers

You may have forgotten about the element tungsten since High School chemistry class, but it’s time to get reacquainted: the commodity’s price has jumped more than 50% over the past two months. Why? Tungsten’s unique properties (toughness and durability) have made it a valuable input for the defense industry. But fears about supply cuts in China have sent prices soaring. Here’s a bit more about this heavy-duty metal:

3-4%—Expected annual growth of global tungsten consumption between 2016 and 2020.

6,191.6° F—Tungsten’s melting point. Steel melts at about 2,750°. We told you it was durable.

22—Number of major materials in the Bloomberg Commodities Index. Tungsten has outperformed all of them since early July.

80%—How much of the global tungsten supply is controlled by China.

71,000 metric tons—Amount of tungsten produced by China.

25%—proportion of global tungsten consumption that is used in the auto industry, primarily in cutting and machining tools.

Question of the Day

Can you arrange 9 numerals—1, 2, 3, 4, 5, 6, 7, 8, and 9—(using each numeral just once) above and below a division line, to create a fraction equaling to 1/3 (one third)?

(Give up?)

Who Am I?

I own the Miami Dolphins—My company owns Hudson Yards, the largest private real estate development in U.S. history—You can find my name on the side of a top five business school.

(Any guesses?)

Stat of the Day

25%–The jump in customers at Whole Foods since the grocer cut prices.

Righting a Wrong

In our article on the Equifax data breach in yesterday’s edition of the Brew, we wrote, “If you choose to check on Equifax’s website, you are ineligible to take part in the class-action lawsuit.” This is incorrect. To clarify this important issue, Equifax has issued a statement that enrollees in the free TrustedID Premier credit protection service are not prohibited from taking legal action. You can read more on Equifax’s FAQ page.

Thank you to those readers who pointed this out.

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