Nothing Ventured - Texas, Taxis, Homes, and Startups
Texas
America grants an unusual amount of autonomy to its state governments. Many issues that should be regulated at the federal level - like abortion - have been pawned off on the states by cynical judges and lawmakers. Even federal programs like Medicaid are administered at the state level, leading to inequity.
Texas is a case study in exceptionalism. It cut itself off from the national power grid, which has set it up to experience regular energy disasters during summer heat waves and hurricanes.
This summer, Hurricane Beryl knocked out power to Houston for weeks. People died due to lack of services, but recent estimates paint an even darker picture for a hotter future:
The Washington Post analyzed the risks of a prolonged, citywide blackout coinciding with a more severe heat wave. The results show that such a heat wave could kill between 600 and 1,500 people in the Houston metro area over five days. With the power grid working normally, the same heat wave would lead to around 50 deaths.
Heat waves are a common occurrence in Texas, a state that has long enriched its oil and gas barons as they contribute to the global warming. Natural gas is so plentiful in Texas due to its frenzied oil extraction that producers can’t pay people to take it away. And though it is the country’s highest carbon emitter, state officials plan on using federal climate funds to build more roads.
While it may have more gas than it knows what to do with, Texas is rapidly running out of a substance far more important to life - water. The state’s agriculture minister issued a dire report this month:
“We’re out of water, especially in the Rio Grande Valley,” Miller told WFAA “Our tomato production in the Valley is just about gone.”
“They usually grow five crops of vegetables in that area,” he added. Now “they have enough water to grow one. So, our production’s down 80 percent And it’s all about water.”
It’s not just agriculture sucking up water - the oil and gas industry uses it to frack, and homeowners use it on their desert lawns. Willful ignorance of a looming crisis is a running theme in Texas, extending to their water ‘plan’, which amounts to a literal drop in the bucket:
While the state passed $1 billion for the Texas Water Fund in 2023, the amount needed to overhaul the state’s water infrastructure sufficient to head off shortages is estimated to be more like $80 billion, per KAMR.
Even if the state were sufficiently funding its water plans, it would be running a 2.4 million acre-foot-per-year deficit, Sen. Charles Perry (R) said at the Texas Alliance of Groundwater Districts meeting last month.
That’s more than the entire 2 million acre-foot volume of the Highland Lakes system that the city of Austin depends on.
To recap, Texas has a failing power grid that it continues to use to subsidize Bitcoin miners while its citizens lose power during heatwaves and winter storms. It dishes out land and water to fossil fuel companies sucking the state’s groundwater dry, while spending conservation money to build more highways.
This prioritization of profit is why some of the country’s worst people use Texas as a means to their malicious ends. Elon Musk is attempting to move all his companies there, believing that the state’s courts will allow him to ignore his fiduciary duties. Even the state’s federal courts have become such a target for judge-shopping zealots seeking to undermine the country’s administrative state that the federal judicial conference attempted to end the practice - the Texas district refused to follow the guidance.
It is possible that some Texans do not like living in a place where every weather event could prove life-threatening, but thus far they have not voted along those lines - keeping right wing Republicans in charge of their state. Despite its population becoming more racially integrated, Texas has a mostly white, male legislature.
To that end, the state’s criminal attorney general has spent the last year filing spurious voter fraud charges and threatening minority voter registration and outreach groups with legal consequences, even raiding the homes of elderly volunteers.
Federalism has allowed a state like Texas to operate as it pleased for decades, and despite their increasing precarity, Texans vote for the status quo. Unfortunately for the rest of us, the wanton extraction and destruction does not respect state boundary lines. Texas may have tried to cut itself off from the rest of American society, but we must live with the consequences of its actions.
Taxis
Loosely speaking, the business model of an insurance company is:
1. Take in customer premiums as cash
2. Invest that cash in a mix of short- and long-term investments
3. Pay out some of the premiums as claims
4. The money you earn from investments exceeds the amount you pay in claims
5. Profit
It is not a very exciting business, because if you are doing it properly it involves a lot of complex actuarial math, answering questions like ‘what are the chances and potential costs of X thing happening’ and creating very complicated pricing spreadsheets and sitting in meetings while your analysts argue over them.
One thing that can happen is that after your long, torturous meetings you agree on the wrong pricing model. At some point you discover you are not bringing in enough money in premiums and investments to cover your claims, and you sheepishly both notify your regulators and request the right to raise your premiums because you screwed up. Then you lose customers to your competitors, which decreases your premiums, and it’s a mess. This is the honest version of being bad at running an insurance company.
There is a, let’s say, different approach you could take to issuing insurance, which looks something like this:
1. Charge low premiums to dominate market share
2. Deny claims to cover up the fact you do not have enough money to pay them
3. Post huge losses
4. ???
You might be saying ‘wait, that sounds either illegal’ and, well, yes? But what if I told you that the company insuring sixty percent of New York City’s taxis and rideshares was doing that?
The 52-year-old, family-owned firm is hardly a household name, but it’s vital to how New Yorkers zip around the city. American Transit, also known as ATIC, insures roughly 60% of New York City’s more than 117,000 commercial taxis, livery cabs, black cars and rideshare vehicles.
It’s also insolvent.
Run by Ralph Bisceglia, ATIC has for decades been the dominant player in New York City’s commercial car insurance market, the largest in the country, offering cabbies premiums far lower than other insurers. In the second quarter, it posted more than $700 million in net losses, according to a filing with the National Association of Insurance Commissioners.
We’ve seen this business model before - a company creates a product or service (rideshares, food delivery) that is priced so cheaply everyone starts using it, and then once it has a large enough market share it raises rates to become profitable. The problem with applying this model to insurance is you are not lighting VC dollars on fire - the money you’re using is coming from the people you insure, who expect to be paid out if something happens. Oops.
Also, they didn’t really put much effort into the ‘cover up your cash problems’ step?
The losses follow years of warnings from industry analysts, and disagreements between ATIC and its third party actuary. The company’s reserves have been considered deficient for decades, said [Tim] Zawacki…
[…]
While ATIC is required by the state’s DFS to submit to an examination every five years, there are no publicly available exam reports for the company. A 1986 DFS evaluation obtained by Bloomberg described ATIC as insolvent by $6 million.
They had been undercapitalized for decades and hadn’t submitted a report to the state regulator since the Reagan administration. Not great! So, now what happens?
The insurer’s losses grew so large that they have crossed a threshold known as a “mandatory control level event,” according to a Dec. 31 report by Huggins Actuarial Services, a consultant hired by ATIC. New York’s Department of Financial Services — which regulates insurers — could now be forced to step in to place the company into receivership or liquidate it.
Ah, yeah, the state will sort things out. The problem is, more than ten thousand NYC cab and rideshare drivers may soon find themselves without insurance (not that they really had insurance in any meaningful sense with ATIC) and may not be able to afford the premiums of their appropriately-priced competitors.
When the Ubers and Doors Dash were offering us cheap stuff, we all sort of knew it was less expensive than it should be. I doubt anyone realized the extent to which cab rides in NYC were being subsidized by a weird little insurance company on Long Island. They might be about to.
Homes
Yet another approach to running an insurance company is:
1. Take in customer premiums as cash
2. Invest some of that cash
3. Wait until claims exceed the amount of cash you have
4. Go out of business
This model is currently being employed at scale in Florida, a state whose home market we’ve previously discussed. Again, if you are thinking ‘how is this possible/legal’ that is a valid question, and one of the answers is that there is a second business model at play here, which is:
1. Create an insurance rating firm
2. Rate all of your homeowners insurance clients ‘A’ or above
3. If some of your clients become insolvent, blame market forces
4. ???
Some researchers decided to look into why homeowners insurers in Florida seem to be going out of business at a rate of a few per year, and, well:
When we last talked about Florida’s insurance crisis, it seemed like the obvious answer to why it was so difficult to insure homes was that expected claims on the properties were simply too high now, due to climate change. But, because it’s Florida, there’s also a bunch of fraud baked into the cake.
Nor does the fraud stop there, here is a fun stat for you:
Florida politicians have long blamed high insurance rates on excessive litigation: The state in recent years accounted for almost 80% of all US lawsuits related to property claims, due in part to a rule that let homeowners transfer insurance benefits to contractors.
Let’s pause to consider the fact that nearly eighty percent of all US lawsuits for property claims occur within the state of Florida. What the fuck?
The ‘Florida politicians have long blamed’ does a lot of work in that paragraph, and in fact the same excuse was provided by the Demotech CEO, claiming that lawsuits place an undue burden on insurers in Florida. What are they talking about? This crazy ass law:
It generally looks like this: Contractors will knock on doors and say they can get the homeowner a new roof. The cost of a new roof is maybe $20,000-$30,000. So, the contractor inspects the roof. Often, there isn’t really that much damage. The contractor promises to take care of everything if the homeowner assigns over their insurance benefit. The contractors can then claim whatever they want from the insurance company without needing the homeowner’s consent.
If the insurance company determines the damage wasn’t actually covered, the contractor sues.
So insurance companies are stuck either fighting the lawsuit or settling. Either way, it’s costly.
The law Florida politicians are complaining about - but, critically, not fixing - allows contractors to fabricate huge claims and sue insurance companies without the consent of the homeowner. It is the roofing scam stuff we’ve alluded to before, but I confess I was not aware the scale to which Florida has become captive to and complicit in contractor scamming on a truly remarkable level.
And! On top of all this, the fucking mortgage companies are involved as well, because guess who is taking on all these ‘A’ rated mortgages on underinsured homes:
US government-sponsored enterprises (GSEs) that secure mortgages — better known as Fannie Mae and Freddie Mac — demand that insurance meets a certain minimum quality standard. That’s especially important in places experiencing more severe catastrophes due to climate change, like Florida. When poor-quality insurance is graded as high-quality, it allows lenders in Florida to move mortgages for homes in vulnerable areas onto the books of Fannie and Freddie, who then bear the liability if they go south. Both GSEs will accept a rating from Demotech that is A or higher.
That’s right, the taxpayers in all fifty states are on the hook for this ouroboros of bullshit.
I joked about how an insurance company is nothing like a VC-backed consumer business, but in Florida you can open an insurance company, pay some guy in Ohio to give you an A rating, and take in claims money for a few years until you inevitably go insolvent, and when the state steps in to bail you out, you can, I guess, just do it again?
Mortgage issuers don’t care, because by the time you go insolvent they have resold the mortgages to Fannie and Freddie, and they can continue lending to people buying houses that will be blown to bits by a hurricane or flooded by storm surge. Florida insurance regulators don’t care, because the other option is to price half the state out of their homes, which would slow the influx of new residents the state depends on.
As more reputable insurers flee, and the pool of scrappy insurance scam startup founders diminishes, it’s unclear what happens to Florida, but it’s going to be a mess, and the rest of us are inevitably going to shoulder some of the financial responsibility.
Startups
With all this in mind, let’s imagine a parallel universe, where business founders couldn’t simply walk away from messes they created with no personal or professional liability. What if there were some risk that if you screwed up and your business failed, and you might actually suffer some form of consequence?
“Five years ago, the venture capital and private equity guys were masters of the universe. They were the most optimistic people in China,” says one industry insider.
“Now they’re depressed. You don’t see them any more.”
As the FT explains, the number of Chinese startups founded each year has fallen off a cliff. People in fleece vests are ‘depressed’. What happened?
In China, investment agreements often included a ‘redemption clause’ which held companies liable to reimburse their investors if they did not go public or get acquired by a certain date. In the past, such clauses were not enforced because - in VC fashion - firms depended on a few huge successes to subsidize a large number of failed bets.
But, with the Chinese economy slowing, that has changed:
Chinese business publication Caixin reported in August that the country’s leading state-owned VC, Shenzhen Capital Group, has filed 41 lawsuits since 2023, of which 35 were against companies that had largely failed to go public by a set date and had not repurchased shares.
[…]
New start-ups face even more onerous terms. Two executives at renminbi-denominated funds, whose LPs are primarily local governments, say that it is no longer enough that the company is on the hook for repurchasing shares; founders must take personal liability for the debt.
“We require our founders to put their house and car on the line. In this market it is mandatory,” says one.
We have long accepted the VC model - investing in a hundred ideas with the hopes that one succeeds, and ignoring the ninety-nine that lost heaps of money - as the best way to ‘innovate’ (whatever that means). It got us where we are today - a wildly unequal country run by a handful of tech conglomerates and their obscenely wealthy founders.
What’s happening in China now is a potential counterpoint to the American way of doing things. Here is a quote:
“The state is taking over the industry in an age of anti-corruption,” says one Chinese expert on innovation, who declined to be named. “It is contradictory to the VC spirit of engaging in high-risk and high-potential ventures.”
“In a portfolio of 10 companies, you would expect one or two to be a mega success and the rest to die. But now VC firms have to explain to the state why their companies failed and why they have lost the country’s money,” the expert adds.
If things like ‘regulating against corruption’ or ‘asking where the money has gone’ are ‘contradictory to the VC spirit’, as this unnamed expert on innovation claims, I would argue the VC spirit is the problem here, not the Chinese government.
Short Cons
NYT - ““Crypto is one of those things we have to do,” Mr. Trump said on X. “Whether we like it or not, I have to do it.””
ProPublica - “During President Donald Trump’s administration, they said, their managers at the Environmental Protection Agency began pressuring them to make new chemicals they were vetting seem safer than they really were.”
The Atlantic - “Six days into terrorizing the city of Springfield, Ohio, with baseless nonsense about Haitian immigrants kidnapping and eating people’s pets, the Republican vice-presidential nominee, J. D. Vance, admitted that the tales were intended to push a certain narrative.”
HuffPost - “Key allies and advisers aren’t mincing their words: In order to carry out Trump’s mass deportation agenda, the United States will need enormous prison camps for immigrant families, part of an effort to deport millions of people at a record pace.”
Rolling Stone - “An “election crime” group helmed by MyPillow founder Mike Lindell sent out emails requesting personal information from local election officials as well as information about security programs designed to detect threats in those counties…”
WaPo - “The U.S. presidential election system — with winner-take-all states and the electoral college — warps the political process and even the way people see their own country.”
The Verge - “As a classic 19th-century theory known as a Jevons paradox explains, even if autonomous vehicles eventually work perfectly — an enormous “if” — they are likely to increase total emissions and crash deaths, simply because people will use them so much.”
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