Auto Insurance

 

I’ve written several times in the recent past about the involvement of life insurance companies in shopping center financing.  Whereas there has been great attention paid in the press to the difficulties of the automobile companies, of the banks, and of AIG, not much has been said about the exposure of many life insurance companies to the adverse conditions of the credit and commercial real estate markets.  That may be the case because, in the public’s mind, and in that of financial reporters, the connection between life insurance companies and the real estate industry is not immediately obvious.  Yet, the connection is real, it is direct, and it is very large.

In the old downtowns across the country, typically each building was individually owned, most often by the operator of the business therein – and often, the family lived upstairs.  It is generally understood that Don Casto, of Columbus, Ohio, built the first true “shopping center” in 1928 – several stores, in “strip” fashion, in single ownership, featuring their own parking.  In those days, financing was accomplished largely through local banks, which relied principally upon the personal signature of the borrower.

Later, as shopping centers grew in size and began to feature a conventional department store as the key tenant, a few life insurance companies began to see the potential of lending to this source of stable revenue.  The field grew when department stores which historically had been aggressive competitors agreed to enter the same shopping center.  Now, we have the apogee of the genre, the mega-mall, exemplified by the Mall of America near Minneapolis, which features several department stores, hundreds of smaller shops, and an entertainment complex covering many acres of ground.

Many life insurance companies and pension funds have invested aggressively in shopping center mortgages for many decades.  Some of these loans were, and are, self-amortizing over the term of the loan, but some have maturity dates of, say, ten years, leaving a substantial “balloon” amount still due.  The expectation has been that the unpaid amount would be refinanced (“rolled over”) into a new loan at that time.

The plan works just fine when credit is loose.  It doesn’t work so well when credit is tight.

That’s what befell General Growth Properties, which has just now filed in bankruptcy.  We understand that GG’s problem was particularly acute because it had relied heavily on short-term financing, probably more so than most shopping center development companies, when it purchased the Rouse Company and, in so doing, large tracts of undeveloped land.  GG found itself in a bind because short-term loans which it had historically rolled over without much problem became unavailable at all.

This is not to throw a pall over the properties themselves.  To a substantial extent, they are “marquee” shopping centers which are well-maintained and enjoy premier locations and competitiveness in their communities.  The problem is not the properties; we read that they generate sufficient cash to sustain themselves.  The problem is GG’s inability to refinance the principal of loans which are coming due.

So, the insurance companies and other lenders which had been unwilling or unable to roll over GG’s loans now find that “there may be a further delay,” like it or not.  Unquestionably, the centers will continue to operate.  The investment company which owns 25% of GG stock has agreed to supply substantial funds to GG as “debtor in possession” in the bankruptcy proceeding.

A worrisome part is that the “further delay” may adversely impact some of the same life insurance companies which have now made their appearance as supplicants on the bailout line.  This is not quite the same situation as a bank, with which a depositor or borrower has a financial relationship, and that’s all.  A life insurance policy is more in the nature of a fiduciary relationship.  There can hardly be a more trusting relationship than that between a policyholder and his life insurance company, where the outcome is certain and he trusts that, without fail, the policy will pay off upon his death and that his wife and children will be protected thereby.

Life insurance companies are regulated by the individual States, not by the Federal government.  Still, in light of the news that some life insurance companies (major ones included) have told Washington that they may be in need of bailout help, there is probably no way that the Federal government will be absent from the solution.  Many of the States, themselves, are in no position to help; and, after all, there is only one entity that has the power to create money out of thin air.

It is unthinkable that any life insurance company would be allowed to descend so far that it could not pay off on life policies upon the death of the insured party.  Still, the specter has arrived:  the bankruptcy of General Growth is the largest real estate bankruptcy filing, ever, and many life insurance companies and pension funds have really substantial amounts of money on the table.

I have generally good feelings about the eventual emergence of General Growth from the bankruptcy process.  The properties are good.  This is not a case of abandoned skeletons of half-built skyscrapers.  There had been too much short-term borrowing and not enough self-amortizing loans.  GG got caught in a credit squeeze not of its own making.

Quite apart from the question of return of capital, there may be “haircuts” and even some “shaves” administered to lenders in coming days.  It is yet to be seen to what extent those will materially adversely affect certain life insurance companies and pension funds.  It bears watching.

William Kurtz      April 17, 2009       http://www.candlesticksonsteroids.com

 

 

 

Developments in procurement are reshaping the traditional contractual relationships that exist within construction.  In this environment, the challenge for consultants is to develop working practices consistent with the scope and nature of the obligations (and therefore liabilities) they face – particularly when operating for contractor clients.

There is a common perception that consultants thrive best when briefed and retained by an informed end-user whose prime objective is to see a quality project delivered at a reasonable cost.  Working for a contractor who has accepted a brief to deliver an end product at a particular cost, by a particular time is a different prospect.  In the former relationship, quality and value for money are in most cases paramount whereas for the contractor client, profit is the prime factor.

Professional Indemnity claims are notoriously long tail and it is therefore difficult to draw finite conclusions from the data currently available. What we do know is that there are firms who notify more claims when appointed under design & build contracts than when they are appointed under traditional contract forms. Equally, however, there are consultants who focus on design & build and have an exceptionally good claims experience.

These recent developments pose some far-reaching questions for engineers: Is liability under design & build relationships really that different? What are the major issues facing consultants as a result of procurement changes – particularly contractor client relationships? Do today’s contracts represent consultants’ areas of influence and the actual performance of the project?

Our experience suggests that there is a distinct change in the nature of risk posed under design and build contracts.

The questions that consultants need to ask themselves in this key area are simple:

a) Do I have absolute control over a particular aspect?

b) Do I have any influence over it?; or,

c) Is it achievable as a result of the exercise of ‘reasonable skill and care’?

An increasingly common source of claims involves contractors seeking to recover costs when a project’s finances overrun. In these instances the extent of services and contractual obligations that the consultant has assumed have a significant influence on how claims are defended and resolved. It is therefore more important than ever for consultants to carefully consider the contractual risks arising from contractor appointments – and to document their responsibilities carefully.

With the scale and contractual complexity of many projects increasing, informed advice on the basis of the risks faced and the extent of cover required to fund those risks, is increasingly a critical element in any consultant’s robust business plan. In turn, this enhanced understanding is leading to a more appropriate allocation and funding of risk.

Add to the mix ‘the spectre of novation’, where firms can be caught between the differing interests of client and contractor and it is easy to conclude that the risks faced by today’s consultants are not for the faint-hearted. However, with a combination of good internal management, controlled innovation and the right risk and insurance advice, it is possible to establish and maintain a positive position.

Our clear message is that consultants should increase their knowledge and understanding of the risks associated with differing procurement routes. The current combination of buoyancy in the construction sector and “soft” insurance market conditions should not lessen the need for effective risk management.

Time and again the stories are told. People who payed good money for a medical insurance policy, who are denied complete treatment when they finally are injured or become ill. Whats the deal? How could they have not known that there was some clause in their contract that precluded them in their desperate time of need?

Its All About Profits My Friend

Its actually quite simple. The terms and particulars in medical insurance contracts and agreements were all written by medical professionals and lawyers. The idea of the insurance business is to receive money, not pay it out. Its just business.

Your No Fool!

So when medical insurance carriers are crafting their contracts they are doing so with an eye toward generating profits and profits aren’t boosted by paying out on huge medical bills. OK. So you are going to read the contract carefully to make sure that they don’t bamboozle you like they do everyone else.

Amputate What?! – But I Need that to Go to the Bathroom!!

What the heck do you know about medical conditions treatments and technology?!!! It’s tough enough trying to decipher the double-speak in a car finance contract, let alone a contract that covers medical treatments!

Hey! Whats that Word Mean?

This is what is at the core of most peoples issues that the have with their medical insurance carriers when there is a dispute. The contract may have as well been written in Chinese and it wouldn’t have made any difference.

Now Your Getting Smarter

However the Internet is offering some assistance in the way of online medical insurance information websites. These websites are able to explain the particulars of medical insurance contracts in layman’s terms, which is what is really needed to fully understand them. Once you are able to better navigate a medical insurance contract your odds of getting screwed can be greatly diminished.