Discrimination in Insurance

NEW YORK, March 20 (Reuters) - A leading U.S. consumer group on Monday accused Geico Corp. of using consumers' education backgrounds and occupations as criteria in setting auto insurance rates, resulting in discrimination against minorities and lower-income people...

Geico, a unit of Berkshire Hathaway... rejected the charges. It called them "an offensive attempt to link fundamentally fair and actuarially sound industry practices with invidious discrimination."

I can understand people feeling squeamish about an insurance company charging different rates to different people based on demographic traits not directly connected with risk (especially if the rates are based on traits over which the customer lacks control, such as sex or age). On the other hand, the discrimination in question isn't being done irrationally or maliciously. And I believe level of education is often assumed by employers to be an indicator of level of maturity — Geico hardly invented the idea. From a Wall Street Journal version of the story:

In an emailed statement yesterday, Geico defended what it called a "longstanding industry practice," saying the factors are just two of many used to price an insurance policy. "Every criterion, including occupation and education, used by Geico reflects its actual loss experience nationwide over many decades," the company wrote.

Representatives of State Farm Mutual Automobile Insurance Co. and Progressive Corp., the largest and third-largest auto insurers, respectively, said their companies don't use education or profession as a pricing factor.

For the record, I own shares of Berkshire Hathaway.
- posted by Steven @ 12:11 AM

 
Government debt and its statutory ceiling
The government debt ceiling needs to be raised again.

If the debt ceiling actually served to keep spending and borrowing in check, then it might be worth the hassle. But there's no indication that it does. The ceiling was first set in 1917 at $11.5 billion, and has been raised more than 70 times since. In the meantime, the United States has piled up an ever-larger (with some major ups and downs through the decades) nominal debt and yet somehow avoided financial ruin.

I agree pretty closely with what this guy says, in particular

So yes, the nation's fiscal position has worsened significantly during the Bush presidency, and for that the president and Congress deserve to catch flak. But those who yelp about "record" deficits and "record" debt and imminent bankruptcy are blowing smoke. "The fiscal debt of the U.S. is not at an alarming level," S&P's Chambers says.

What is alarming is the projected long-run funding shortfall in Social Security, Medicaid, and Medicare (especially Medicare) -- which doesn't show up in today's budgets and isn't subject to any kind of legal ceiling. Estimates of its size, expressed as the present value of future unfunded obligations, go as high as $98 trillion — many times the current GDP of $12.5 trillion.

- posted by dWj @ 8:29 PM

 
Refco

Refco Inc. held offshore accounts with as much as $525 million in fake bonds, indicating the futures broker's troubles may be more extensive than previously reported, according to four people with direct knowledge of evidence gathered by U.S. prosecutors investigating Refco's collapse.

Huh.

The bond accounts were at Refco's Bermuda-based unit, beyond the reach of U.S. regulators. Refco owed creditors $16.8 billion when it filed for bankruptcy protection on Oct. 17, a week after former Chief Executive Phillip Bennett allegedly used a loan from [Bawag P.S.K. Bank, Austria's fourth-largest bank] to pay uncollectible debts he had concealed from investors. Bennett denied wrongdoing.

- posted by dWj @ 8:25 PM

 
regulations make strange financial instruments

Techpacific Capital has sold a $75 million five-year convertible bond to Goldman Sachs in order to raise money partly for an investment into three gas fields in the United States.

...

Goldman Sachs will pay $72.75 million for the bonds after subtracting a $2.25 million discount, which Techpacific said was comparable to the fee it would have had to pay had the bonds been sold to a wider group of investors with the help of an independent investment bank.

The bonds can be converted into new Techpacific shares at a conversion price of HK$0.7665 per share, which represents a 2.2% premium to the March 3 closing price (the last trading day before the shares were suspended) or 5% premium to the average closing price in the previous five days. However, the CB holder has the option to exchange the bonds for shares in Crosby instead, at a price of £0.9975 per share, which equals a discount of 1.48% to the March 3 close and a 5.95% premium to the average close in the previous five days.

This unusual conversion structure is due to the fact that a full conversion of the bonds into Techpacific shares would have exceeded 20% of the company’s existing share capita. Under Hong Kong regulations this is the maximum it is allowed to issue. At the current conversion price, about 80% of the bond issue can be converted into Techpacific shares.

Meanwhile, Techpacific only has the right to deliver 33.5 million Crosby shares to CB holders who wish to exchange the bonds into the London-listed subsidiary, but will ask its shareholders for approval to hand over a further 9.44 million shares to cover a full exchange into Crosby shares. If this request is not granted, CB holders will have to convert into a combination of Techpacific and Crosby shares.

Of course, most exotic characteristics of odd financial instruments are designed to suit the risk desires of the counterparties:

There is an issuer call after two years, subject to a 130% trigger, that could help force an early conversion.

...

The conversion price on the bonds will be reset if Techpacific’s shares close below HK$0.73, or Crosby’s shares finish below GBP0.95 the day after Crosby’s 2005 results (scheduled for March 16) and Crosby’s revenues failed to reach $120 million. The same would apply if the pre-tax profit is less than $95.32 million or the earnings per share fall below $0.385. The new conversion/exchange price will then be reset at 105% of the volume weighted average price in the first three days after the results announcement.

I obviously know nothing about this except through the media.
- posted by dWj @ 8:18 PM

 
Japanese Interest rates
The Bank of Japan will get less profligate with the quantitative easing, though interest rate targets will remain at 0 for the time being. Japanese bond yields took off, with the ten-year approaching the ten-basis-point mark. But, you know, not quite making it there.

Yet quantitative easing was accompanied by some even more unorthodox policies, which may indeed have helped to reflate the economy.

First, the bank massively increased its purchase of government bonds, from Y400bn a month to Y1,200bn. Even though it bought these from the market, rather than directly from the government, its purchase of roughly one-third of all new debt made it hard to avoid the impression that it was printing money to underwrite public spending.

Then in September 2002, when the Nikkei average of leading shares had plunged below 9,000 – compared with a high 12 years before of 40,000 – the BoJ took an even more drastic step. It started spending up to Y2,000bn on buying shares in unnamed companies. That helped prop up the stock market.

Many economists claim that another effect of the tide of money spewed out by the central bank was to help depreciate the yen and stimulate exports.

It seems to me that buying foreign currency (e.g. dollar-denominated paper) for yen — or much of anything else for yen, for that matter — could have accomplished this, too. The point is simply to get yen out there; if giving the banks arbitrary quantities isn't doing it, the public markets will.
- posted by dWj @ 8:14 PM

 
The Oracle Speaks
Warren Buffett's letter to shareholders is up (in PDF format). If you want his thoughts on investing and the economy in general, and don't care about Berkshire Hathaway, skip to the 15th page (the page with the number 16 on the bottom).

I wish he'd said more about the problems at NetJets, but I share his optimism that things will turn around. After all, when has an investment in an airline ever gone wrong?
- posted by Steven @ 2:39 PM

 
Returns to labor
Personal Income from Compensation of Employees — basically, returns to labor, minus certain benefits — were up 0.8% from December to January, for an annualized rate of 9.9% (or, logarithmically, 9.4%). I'm a bit skeptical of the inflationist/Phillip's Curve/NAIRU model of inflation, but I've recently seen some graphs that suggest a pretty close relationship between wage inflation and unemployment, and changes in the unemployment rate and GDP growth, which more or less imply accelerating inflation for growth rates above 3% and decelerating inflation below that. If you assume inflation will largely come in from labor costs, the one-month change would seem to pull the inflation rate toward the 6-7% range, but if you include more than the last two months in an average, you're looking at compensation growth in the 6% range, and possible a bit less, suggesting more like 3% inflation.

There are probably better indicators for this sort of thing.
- posted by dWj @ 9:01 PM