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2024 Hurricane Season, Latest on Boeing · Bloomberg Intelligence

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  Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live
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  Speaker 1: wherever you get your podcasts, or watch us live on YouTube.
• 0:16
  Speaker 2: And there may be a storm brewing in DC. There
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  Speaker 2: is definitely a storm brewing in the Caribbean. Apparently there's
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  Speaker 2: a record breaking hurricane barrel that is intensifying as it
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  Speaker 2: turns through the Caribbean south of Granada. It has regained
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  Speaker 2: category four strength after briefly weakening. We're talking top wins
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  Speaker 2: of one hundred and thirty miles per hour. Well, Matthew
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  Speaker 2: Palazoa is a senior analyst and P and C insurance
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  Speaker 2: over at Bloomberg Intelligence and he joins us now. Now, Matthew,
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  Speaker 2: I know you look at the stuff through the lens
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  Speaker 2: of insurers, but can you just give us some perspective
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  Speaker 2: of how you're looking at this storm.
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  Speaker 3: Yeah, so per perspective. As you had said, the earliest
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  Speaker 3: Category four in the Atlantic since two thousand and five.
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  Speaker 3: In two thousand and five was one of the worst
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  Speaker 3: hurricane seasons on was that Katrina. That was Katrina was
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  Speaker 3: one of those storms in that year. So right now
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  Speaker 3: it's early, we're looking at it. It seems to be
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  Speaker 3: I always look at it. Is it going to impact
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  Speaker 3: the United States? Right? The islands obviously matter, but generally
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  Speaker 3: for global insured losses, something on Florida or you know,
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  Speaker 3: in Texas, Louisiana, those are the kind of big money
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  Speaker 3: loss events. What it looks like is going to happen
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  Speaker 3: here is it will probably hit the Yucatan Peninsula, I
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  Speaker 3: will probably cross a lot of the islands in the
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  Speaker 3: Caribbean south of the Greater Antilles. But so we're looking
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  Speaker 3: at that, and we're looking at past events in Mexico.
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  Speaker 3: In two thousand and five there was also a Wilma
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  Speaker 3: hit Mexico and caused almost eight billion dollars in economic losses.
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  Speaker 3: The insured were a lot less. I do think Birtle's
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  Speaker 3: going to slow down though, so it probably wouldn't be
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  Speaker 3: that bad.
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  Speaker 4: What's it tell you or what is it the insurance
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  Speaker 4: company's telling you about kind of how they view hurricanes,
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  Speaker 4: other stream events, saying it's always in the news year,
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  Speaker 4: extreme heat, extreme storm, it's extreme. What are the insurance
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  Speaker 4: companies say, because they're the ones that actually have, you know,
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  Speaker 4: money at stake here.
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  Speaker 3: Get in the game, on in the game. So what
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  Speaker 3: they will say is climate change is having an impact.
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  Speaker 3: You wouldn't directly blame all these things on climb she
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  Speaker 3: It's very hard to exactly say. One of the good
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  Speaker 3: things about the global industry though, is that it realprices
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  Speaker 3: on an annual basis. Right, Generally, all these policies are
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  Speaker 3: written every year, so they can reprice things as they
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  Speaker 3: go along. They could leave regions as they go along.
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  Speaker 3: You are hearing these record breaking things. Even last year,
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  Speaker 3: which would turn out to be a mild hurricane season,
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  Speaker 3: there was a bunch of activity earlier in the season.
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  Speaker 2: So based on that, what the areas in the US,
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  Speaker 2: for example, that are exposed to these kind of intense
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  Speaker 2: changing storms. Are insurers still ensuring houses there?
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  Speaker 5: Like?
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  Speaker 2: Are they still doing the job? Or has all the
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  Speaker 2: stuff changed? That was a really intelligent question. Do the
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  Speaker 2: stuff or has the stuff changed?
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  Speaker 3: Some stuff has changed, some stuff hasn't. So the insurers
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  Speaker 3: are leaving certain areas, mostly California, honestly, Florida. The Florida
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  Speaker 3: market interesting is that wildfires peace, yes, wildfires, and the
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  Speaker 3: regulation is tough in some of these states too, So
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  Speaker 3: what you saw in Florida was a litigious environment that
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  Speaker 3: was driving up a lot of costs, and insures and
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  Speaker 3: reinsures pulled out of there. The state has done a
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  Speaker 3: lot of things to address that. So you see insurance
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  Speaker 3: companies actually tending to start to go back.
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  Speaker 4: Didn't warn Buffet come go back.
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  Speaker 3: So Buffett Berkshire's reinsurance unit had a big bet on
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  Speaker 3: Florida last year. We don't actually know they didn't. They
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  Speaker 3: disclosed it at the annual meaning last year. They didn't
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  Speaker 3: talk about it this year necessarily, so we don't exactly
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  Speaker 3: know if they're there. I would suspect they probably are,
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  Speaker 3: but I can't confirm.
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  Speaker 4: Okay, So, but if I'm want to go out and
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  Speaker 4: buy a condo down in Florida on the coast, can
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  Speaker 4: I get that insured?
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  Speaker 3: You can? What is happening? You probably won't get it insured,
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  Speaker 3: by the way, in case you're wondering you can. It
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  Speaker 3: will probably be through a Florida company, like a smaller
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  Speaker 3: insurance company probably not going to get you know, and
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  Speaker 3: you might get an all state I don't know, but
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  Speaker 3: you're not going to get one of these probably national
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  Speaker 3: name brands. You'll probably get a smaller company, You're definitely
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  Speaker 3: going to pay a high price. You may even get
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  Speaker 3: it through the state fund. So Alex to your other
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  Speaker 3: question before. One of the things that is happening is
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  Speaker 3: that a lot there's an insurer of last resort in
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  Speaker 3: a lot of these states, so it's essentially the state
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  Speaker 3: insurance company. It's not it's an insurance company, so it's
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  Speaker 3: not like just backed by taxpayer money. It's supposed to
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  Speaker 3: be self sufficient, but it can always rely on the state.
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  Speaker 3: So a lot of people will end up getting insured
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  Speaker 3: through those mechanisms.
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  Speaker 2: So what about reinsurance.
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  Speaker 3: So the reinsurance market really, I think is returning to Florida.
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  Speaker 3: So these things that were hurting it, it's kind of
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  Speaker 3: a wait and see. The prices went up a lot,
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  Speaker 3: especially for catastrophe ponent regions stuff like Florida, So it
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  Speaker 3: became to pulse point earlier. It became attractive to some
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  Speaker 3: companies like Berkshire Hathaway to get back into these markets.
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  Speaker 4: How are these property and casually stocks trading or they did?
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  Speaker 4: Are they trading on the fundamentals of each company, Are
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  Speaker 4: they faitting on a trade or do they typically trade
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  Speaker 4: on interest rates?
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  Speaker 3: How do they trade? So the P and C companies
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  Speaker 3: trade less on interest rates than life insurance companies. The
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  Speaker 3: life insurance companies are way more levered assets to equity.
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  Speaker 3: They have bigger portfolios. Uh, you know these names, they'll
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  Speaker 3: tend to move on pricing in the cycle. Sometimes the weather,
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  Speaker 3: interest rates will will help. They were kind of in
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  Speaker 3: line with the market this year. Some have done better.
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  Speaker 3: So the auto insurance companies are doing a little bit better.
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  Speaker 3: We probably talked about that in the past, but they
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  Speaker 3: were having huge increase in the loss costs, so cars
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  Speaker 3: were more expensive to fix and that is kind of
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  Speaker 3: abating a bit. So those names have done better.
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  Speaker 2: What about rates, So FED cuts interest rates, how does
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  Speaker 2: that affect the insurance market? And does it matter as much?
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  Speaker 2: Considering that some of these places are gonna get hit
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  Speaker 2: no matter what because of all the changing.
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  Speaker 3: Weather, so it won't matter on the underwriting side much.
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  Speaker 3: Potentially it could in that interest rates could they help
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  Speaker 3: investment income, which could subsidize underwriting, But realistically lower interest
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  Speaker 3: rates will hurt investment income depending on how low they go,
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  Speaker 3: maybe not dramatically. It probably does not change underwriting decisions though,
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  Speaker 3: But net net lower rates are a bad thing for
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  Speaker 3: these companies.
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  Speaker 4: All right, i'mp buying property and casualty insurance stocks. What
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  Speaker 4: kind of dividend yields am I getting on these things?
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  Speaker 3: They're not dramatically high. I mean they're you know, probably
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  Speaker 3: less than what you'd get on the SMP. I mean
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  Speaker 3: it's like it's two or three percent. I don't think
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  Speaker 3: they love to be locked into returning capital, so they'll
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  Speaker 3: favor share a purchase instead. And are they doing that, yeah,
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  Speaker 3: I mean they're buying back shares. They'll they'll tend to
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  Speaker 3: pause during hurricane season.
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  Speaker 5: This is.
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  Speaker 3: By some estimates. Quote the hurricane season from Hell coming
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  Speaker 3: up that that was a headline. Was clickbait or not,
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  Speaker 3: but it was a headline. So you may see, you know,
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  Speaker 3: the second third quarter repurchase slow down. But that's usually
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  Speaker 3: the main mechanism.
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  Speaker 2: What about consolidation in this industry. You mentioned some state
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  Speaker 2: smaller players, say in Florida. What does that wind up
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  Speaker 2: looking like?
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  Speaker 3: I don't think you're gonna see big consolidation in the industry.
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  Speaker 3: So there's a completely separate issue with liability loss reserves
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  Speaker 3: where they write these they write these policies and then
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  Speaker 3: many years later they may have claims on them. And
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  Speaker 3: that is starting to rear its head in terms of
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  Speaker 3: we didn't get maybe great pricing years ago, So I
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  Speaker 3: think it's going to be a headwind to large consolidation.
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  Speaker 3: You may see it on the smaller side. Companies that
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  Speaker 3: I don't necessarily even cover, like those maybe smaller Florida
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  Speaker 3: names might get scooped up. There are companies that are
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  Speaker 3: starting up and taking policies out of the state fund,
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  Speaker 3: which is not necessarily consolidation, but it's kind of helping
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  Speaker 3: and that's a business. But when when they get whacked
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  Speaker 3: by a hurricane, you know, we'll see how those companies do.
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  Speaker 4: What's the best idea in insurance these days? What people
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  Speaker 4: want to talk about the most.
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  Speaker 3: I mean, the reinsurance story seems to have played out
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  Speaker 3: a little bit. You know that the reserves are an issue,
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  Speaker 3: Climate change is an issue. Cyber insurance is a kind
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  Speaker 3: of big issue. You've seen this now with the auto dealers, right.
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  Speaker 3: Some estimates say it could be the biggest line of
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  Speaker 3: insurance eventually. What the insurance companies have done historically is
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  Speaker 3: kept limits very low on this, so even in a
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  Speaker 3: big event, they're only paying out a small amount. But
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  Speaker 3: someone say it's actually an uninsurable risk that it's completely correlated.
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  Speaker 3: So they want to stay away from things that could
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  Speaker 3: affect a huge group like a flood that could flood
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  Speaker 3: a state or something like that. This is something they
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  Speaker 3: could shut down, you know, swaths of the country, so
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  Speaker 3: they want to stay away from it.
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  Speaker 2: Well, we appreciate it, thank you very much, Matthew Palizoa.
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  Speaker 2: A Bloomberg intelligency covers everything insurance and reinsurance and then
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  Speaker 2: by de facto you're like a storm analyst and does
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  Speaker 2: the weather for us as well. So we do appreciate that.
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  Speaker 2: But that's kind of scary, right, like already a category
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  Speaker 2: four storm and it's.
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  Speaker 4: Only what is it because the map, Yeah, yeah, Matt's
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  Speaker 4: got a great the map from the one of those
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  Speaker 4: mapping people that go out there and coming cutting right
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  Speaker 4: across the Caribbean, right across the also hitting the Mexican peninsula,
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  Speaker 4: So that could be harsh for our good friends and
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  Speaker 4: like cancoon things.
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  Speaker 2: Like that bikes. Yeah, it doesn't look very good there.
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  Speaker 4: Wait Busy twenty four hours for Boeing. The US Justice
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  Speaker 4: Department plans to charge Boeing with criminal fraud after finding
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  Speaker 4: the company violated a twenty twenty one deferred prosecution agreement
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  Speaker 4: tied to two previous fatal crashes, and Bloomberg News was
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  Speaker 4: reporting that late yesterday, and then just hours later, Boeing
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  Speaker 4: announce a plant to buyback Spirit Aero Systems. As Charlie
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  Speaker 4: is just reporting a supplier that hit it spun off
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  Speaker 4: two decades ago. They're gonna pay four point seven billion
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  Speaker 4: dollars in a bid to improve manufacturing stock today up
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  Speaker 4: about two and a half percent of down about twenty
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  Speaker 4: eight percent year to date. So it's got the Lady's song.
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  Speaker 4: What's happening at Boeing? Very busy over there with George Ferguson,
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  Speaker 4: he covers the airlines, he comes to aerospace companies for
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  Speaker 4: Bloomberg Intelligence. Joe, I mean, George, how do you put
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  Speaker 4: into context what's happened to Boeing over these last several years?
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  Speaker 4: Where does the company go from here, So.
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  Speaker 5: I guess the way I put it in context would
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  Speaker 5: be a lot of air outsourcing at Boeing, including Spirit
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  Speaker 5: Aerosystem A couple of decades ago. Seven eight seven was
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  Speaker 5: one of these watershed events where they were trying to
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  Speaker 5: outsource large portions of the manufacturer and even does I
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  Speaker 5: say engineering is probably the better term than design engineering
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  Speaker 5: on that airplane. And now I think, you know, the
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  Speaker 5: company in the midst of pulling some of that supplier
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  Speaker 5: base back in so they can control quality and uh
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  Speaker 5: and improve production output. So I think I think that's
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  Speaker 5: where they are, and the and the weekends events are
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  Speaker 5: I think all, uh, you know, steps on the path
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  Speaker 5: to improving production, eliminating distractions, improving quality. There's there's more
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  Speaker 5: to come, more to do, and they need a strong
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  Speaker 5: recovery in the second half. They can't burn cash like
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  Speaker 5: they've been burning. But that, you know, That's what I
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  Speaker 5: would say kind of where we are right now as
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  Speaker 5: we're in the process of cleaning that whole whole outsourcing
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  Speaker 5: mess up.
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  Speaker 2: So as it relates to the to the to the
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  Speaker 2: fraud charges, et cetera. Do they have to pay a
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  Speaker 2: boatload of money to people on this or can they
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  Speaker 2: spend a boatload of money instead on making sure that
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  Speaker 2: their programs are good and their quality control is good.
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  Speaker 5: So I'm going to first, you know, caveat this whole
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  Speaker 5: thing with I'm not an attorney, so that you know
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  Speaker 5: that we're in some realms there that I don't totally understand,
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  Speaker 5: but I believe it's something for five hundred million dollars
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  Speaker 5: worth of fines they'd have to pay if they agreed
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  Speaker 5: to the current Justice Department proposal, and they'd have to
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  Speaker 5: bring in and outside I guess, you know, sort of
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  Speaker 5: quality manager overseer. I think that they have some rights
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  Speaker 5: to you know, sort of negotiate over who that would be.
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  Speaker 5: So to me, that doesn't sound like in extremely onerous provisions.
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  Speaker 5: I think it's something that again they've got to get
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  Speaker 5: out of their way to start to build more aircraft
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  Speaker 5: and focus on improving their processes, their production processes. So
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  Speaker 5: to me, it doesn't sound bad. I don't know what
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  Speaker 5: the other sort of legal ramifications are here on that.
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  Speaker 4: How many planes are they building per month now Georgia
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  Speaker 4: and where do they need to get to?
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  Speaker 5: So I don't know that we know it looks like
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  Speaker 5: the second quarter is going to have less deliveries than
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  Speaker 5: the first quarter. We still have to see what the
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  Speaker 5: June deliveries were, but through May it was they were
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  Speaker 5: a lower trajectory than they were in one queue. I
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  Speaker 5: suspect again, you know, things like uh, managing quality down
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  Speaker 5: at Spirit or slowing things down. The negotiations with Spirit
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  Speaker 5: have been throwing slowing things down. The discussion with the
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  Speaker 5: FAA about the way forward and the processes to make
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  Speaker 5: sure the quality is higher has been slowing things down.
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  Speaker 5: And we don't know how many of whatever they delivered
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  Speaker 5: in two Q was delivered out of the inventory that
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  Speaker 5: they already built, right they want to get rid of
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  Speaker 5: that inventory, which is you know, I think really onerous
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  Speaker 5: on h on efficiency because they need folks to maintain
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  Speaker 5: airplanes that are already built and sitting in the desert.
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  Speaker 5: But so either way, we kind of think two Q
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  Speaker 5: is going to be below one Q a rough rough quarter,
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  Speaker 5: probably a four billion and plus cash use after you know,
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  Speaker 5: any sort of maintenance capex. So I think the full
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  Speaker 5: story here really is three Q and four Q this year.
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  Speaker 5: They just can't keep burning four billion dollars of cash
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  Speaker 5: per quarter. And so again I think you see this
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  Speaker 5: fury of activity as we enter the beginning of summer
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  Speaker 5: at Boeing, and I think it's all about tidying up
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  Speaker 5: these issues. They need a tidy so they can get
• 14:29
  Speaker 5: at building and delivering a lot more airplanes in the
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  Speaker 5: second half and lowering cash burn significantly.
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  Speaker 2: I'm just going to the Spirit thing for a moment.
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  Speaker 2: So air Bus is going to be taking over parts
• 14:40
  Speaker 2: of Spirit that make components for its own aircraft. How
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  Speaker 2: does that work? Does that make it like a super
• 14:46
  Speaker 2: company within Airbus or is it totally going to be
• 14:49
  Speaker 2: absorbed by Airbus? What does that look like?
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  Speaker 5: So, I mean the press release I saw today made
• 14:54
  Speaker 5: me believe that it's going to be fully taken out
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  Speaker 5: of Spirit Aerosit at least large portions of it, and
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  Speaker 5: pulled into air Bus. I thought much more interesting too
• 15:07
  Speaker 5: in that whole disclosure was Airbus is getting paid like
• 15:10
  Speaker 5: I think it was five hundred and fifty nine million something,
• 15:12
  Speaker 5: just over half a billion dollars to take those businesses,
• 15:16
  Speaker 5: to take the businesses and take the assets. So we
• 15:20
  Speaker 5: knew that that was a drag on Spirit, and it
• 15:23
  Speaker 5: seems like maybe a pretty significant drag again, I think
• 15:25
  Speaker 5: something that really helps potentially improve Boeing Quality and throughput
• 15:31
  Speaker 5: is a management team not focused on trying to economize,
• 15:34
  Speaker 5: especially on a big loss making contracts like the airbus contracts.
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  Speaker 4: Hey, Georgia, if Bowmen doesn't have enough balls in the air.
• 15:43
  Speaker 4: They also now need to find a new CEO because
• 15:45
  Speaker 4: chief executive officer David Calhoun, he said he's going to
• 15:47
  Speaker 4: step down by year in at the latest.
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  Speaker 3: Who's going to take this job?
• 15:51
  Speaker 2: Oh, that's George's favorite question.
• 15:53
  Speaker 5: This is a this is a hard job to take,
• 15:56
  Speaker 5: and they would love to have someone in place, I
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  Speaker 5: think to manage these problems and the upcoming ones. I
• 16:03
  Speaker 5: don't know, and there's a lot of speculation in the marketplace.
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  Speaker 5: I'd be throwing darts at a dartboard. I just know
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  Speaker 5: it needs to be a good manufacturing person, you know,
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  Speaker 5: someone someone focused on you know, manufacturing shop floor kind
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  Speaker 5: of quality. I will tell you, you know, we're going
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  Speaker 5: to step from these two problems. That are they're going
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  Speaker 5: to go on to simmer right. You know, Spirit doesn't
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  Speaker 5: get purchased until sometime next year. There's a lot of
• 16:32
  Speaker 5: details to get worked out between now and then. Do
• 16:35
  Speaker 5: OJ's you know, they may agree, there's could be they're
• 16:38
  Speaker 5: trying to negotiate with them, they could decide not to
• 16:40
  Speaker 5: agree end up in a lawsuit. And I'll tell you
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  Speaker 5: that as we get in September, one of Boeing's the
• 16:46
  Speaker 5: most important unions will come to the table. That's when
• 16:49
  Speaker 5: their contract expires. And so I so, so the hits
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  Speaker 5: just keep on coming here, I think, and that will
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  Speaker 5: be another very interesting challenge because I think those workers
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  Speaker 5: probably get some very nice increases. If you get into
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  Speaker 5: a strike, that second half recovery at Boeing is really
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  Speaker 5: put into question because you can't make airplanes with your
• 17:11
  Speaker 5: most important union striking. And again they're going to want
• 17:13
  Speaker 5: some good pay raises.
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  Speaker 4: All right, George, good stuff, But it's like a full
• 17:17
  Speaker 4: time job just figuring out what's going on with Boeing.
• 17:20
  Speaker 4: But boy, that's one of those companies you feel like
• 17:22
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• 17:25
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• 17:27
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