Apple's Latest Event and the Fundamentals of Reinsurance

In this podcast, Motley Fool analysts Tim Beyers and Bill Mann, along with hosts Dylan Lewis and Ricky Mulvey, discuss:

• Apple's fall update and details on the iPhone 15 and 15 Plus.
• The promise of Vision Pro headsets.
• The fundamentals of reinsurance and one misconception about Florida's home insurance woes.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Sept. 13, 2023

Dylan Lewis: Another fall, another iPhone launch, Motley Fool Money starts now. I'm Dylan Lewis and I'm joined with the airwaves by Motley Fool Analyst, Tim Beyers. Tim, thanks for joining me.

Tim Beyers: Thanks, Dyl. Fully caffeinated, ready to go more iPhones as usual.

Dylan Lewis: It's just the steady march and the constant truth of tech. There will always be more iPhones Tim. We are talking today about the iPhone unveiling, which happened yesterday. Another tech event this week we have Salesforce's annual Dream Forest Conference going down in San Francisco, but we're going to start with a regularly scheduled hardware update. We got to look at the iPhone 15 and the iPhone 15 plus yesterday, that took a lot of the headlines Tim, with this Apple event, when you start digging into some of the details for these phones, what sticks out to you?

Tim Beyers: I'll go under the hood first here because I think a lot of things that we see in the iPhones, they are incremental awesomeness, if we want to be honest. The improved cameras, the better battery life, the increased processing power, but I'll say Apple should get more credit for how much work it does in silicon and building incredibly powerful chips. I think this is a heck of an advertisement, Dylan, for the Arm IPO, because whether you realize it or not, Apple builds its newest silicon. In this case, when we're talking about the newer iPhones, the bionic chips on top of the Arm platform that's highly power efficient, has a long history of being a platform of significance for mobile devices. Apple has taken full advantage of that and done a lot of their own engineering to make incredible chip sets. A lot of the things that we're seeing in the all of the iPhone 15 models, Dylan are going to be based on that A16 bionic chip. There's a lot of stuff in here. What they said was two high performance cores that use 20% less power four high efficiency cores. There's a six core CPU, that's a lot of compute power. There's a five core graphics processing unit that has 50% more memory. That's for streaming, that's for gaming. Then you have a 16 core neural engine, for computing up to, this is what Apple says. I'm quoting from the press release here, 17 trillion operations per second. That's a lot, Dylan.

Dylan Lewis: That sounds like a lot [laughs].

Tim Beyers: The silicon is very impressive here. I think Arm has to be very happy to see this announcement coming out.

Dylan Lewis: I love that we had an Arm discussion earlier this week on Motley Fool Money. If you want a little bit of a mini dive into that company, check out the episode from earlier this week we have that there. Tim looking at the details, you mentioned the incremental innovation, and I am someone who currently has an iPhone XR or 10R, however you want to say it, whatever your nomenclature is. I feel like every year the details feel incremental in what we get with these phones, but if you've been sitting on the sidelines using the same tech for a couple years, all of a sudden the new phone looks like a spaceship. I was looking at what we had here compared to what I have in my pocket and saying this looks like a much more powerful device. Looks like some heavy investments in cameras. You start to see that separate a little bit year to year over a three or five-year period.

Tim Beyers: There's no doubt, and this is not a contest. I'm not trying to one up you here, Dylan, but I have the original iPhone SE. I can't even upgrade to IOS 16, let alone IOS 17, which is what they rolled out here during the conference, but it's a very good phone, it does the work. It's very old, but if it looks like a spaceship to you with your iPhone 10 design it must look like an alien world to me if I get a chance to see this thing, but you're right. Incremental innovations do add up, and I think the basics. When you're talking about a mobile device, it is important to remember that the basics really do matter. There are some basics that are fundamental to a mobile device like an iPhone, a great camera, a highly efficient battery, so that you don't have to carry around a power brick, which I'll admit this, I have to do that. I have to run my iPhone on battery saving mode all the time, because the battery is essentially dead, but I'm not replacing it because it's still a really great phone, but these things are important, and every new iteration, Apple makes improvements to make that camera just a little bit better, to improve the software to increase things like error correction resolution, giving you more options as you use that camera. It is amazing what these little tweaks add up to over the course of generations. People will upgrade to them because they do like the way that it feels in the hand, the things that they can do with it. It doesn't take too many generations to feel like it's a seismic upgrade from let's just say like the iPhone 12 to the 15. The population of iPhones out there is big enough that these incremental upgrades do become meaningful to a subset of these populations. For Apple, I expect us to be driving revenue and earnings for quite some time.

Dylan Lewis: I think while you might be sitting on the sidelines very happy with an older phone, there are probably going to be some people that are tempted to upgrade based on what we've seen here and the pricing details here Tim. iPhone 15 starts at just under $800 goes up to $1,100 The iPhone 15 plus starts at $900 up to $1,200. There's going to be some money in it for Apple. We pay attention to this because it is the big portion of the top line, it's about half the revenue. It's nice to hear that you feel like there's a solid foundation for the company's meal ticket product.

Tim Beyers: There's no doubt in my mind. I recognize I'm the outlier here, Dylan. Honestly, but there are tens of millions of mobile device users. This is common now. Just try to take somebody's mobile device, whether you're talking Android or IOS, it doesn't matter, but just try to take somebody's mobile device for 24 hours. Just strip that away from them and see how they react. I guarantee you they will be more angry, more frustrated, more annoying to be around, because it's an extra appendage. It really is, and because it is a new habit that has resulted in many years ago, the coining of the term Paradigm shift. The introduction of a mobile device, a computer in our pocket that we use as a daily companion, like a co-pilot, that's a paradigm shift we are not moving away from. We can continue to service that market over a long period of time, Apple can continue to service that market. I do think this is something that we can look forward to. There's no pressure, let me put it this way, there is no pressure on Apple to introduce massive breakthroughs, but one thing they don't want to do is introduce something that would break the habit. They wanted to feel familiar, they wanted to feel comfortable, and they wanted to feel powerful and attractive. Those are the things that matter. A giant breakthrough isn't necessarily what you want. What you want is a better version of the familiar, if that makes sense.

Dylan Lewis: I think it does. I do want to move us from the iPhone discussion to some of the other things they unveiled because iPhone got a lot of headlines, but we also, I think, got a glimpse at how iPhone could play into some of the company's other product ambitions. One of the things that jumped out to me Tim was buried in the features for the new iPhone pro was the ability to record three 3D spatial video, which can be later viewed on the company's Vision Pro headsets which will be arriving in 2024. I feel like we've all been wondering what these vision pro headsets, it's like is the content ecosystem going to be there? It seems like Apple's may be saying we're going to put you in a spot where you can contribute to that content ecosystem.

Tim Beyers: Everybody is part of Ready Player One now.

Dylan Lewis: That's right.

Tim Beyers: That's where we are instead of one master creator. So for those who don't know, and I actually, I'd never seen Ready Player One, Dylan. But it's a popular science fiction book that was made into a movie in 2018. The idea was the creator of a metaverse has died and has introduced a contest and the contest is to take over that metaverse and be the new master of the metaverse domain. So it's a big, messy race to see who ultimately wins this and it's a good versus evil battle and all this thing. But it's a metaverse, and so in this particular case, you're right. Like we don't know what the world that the Vision Pro, which is still to come in 2024 will introduce us to. Apple has said, hey, why don't you tell us so you can map out the world that maybe you want to see inside of the Vision Pro when it does come out. I think that is brilliant. There are a lot of companies that have profited from user generated content. This is a way for Apple to get into the user generated content style. It's not specific. You may be recording things that are in the real world and maybe putting your own spin on it. I don't know exactly how this is going to work. But it does feel like a little bit of UGC. We all know the company that has profited from this more than any other and its Youtube. So this is Apple doing a little judo, taking a page out of the Youtube playbook and maybe create seeding a little ground, let's call it for the Vision Pro when it comes out. Already Beta testers are giving the Vision Pro some really good reviews. So it'll be interesting to see, it'll be very interesting to see what it comes out with now that we've got, tens of millions of potential devices out there. World building for the vision pro before it even becomes a product alive on the market.

Dylan Lewis: Tim, you mentioned, Ready Player One. I read it on recommendation from David Gardner and it was written several years ago before the metaverse really expanded and became what we know it to be today and part of the big ambitions for big tech companies. It is worth reading, I think if you want to get a sense of what this world could look like, extended out a little bit and imagined. It is not far off, it turns out, from where some of these companies are looking to go.

Tim Beyers: For sure. I mean, it's a fascinating idea and how much we might value things that are not real but are part of a world in which there are real stakes. Which is the message of Ready Player One. I definitely think it's worth diving into a little bit because we are entering a time when the stakes in the metaverse are getting more and more real and Apple is going to play a part of that for sure.

Dylan Lewis: How can they not, largest company in the world. They have to have a place in that. Tim, from Cupertino to San Francisco, there's another big tech event this week. Salesforce has their annual DreamForce conference and that kicked off on Monday. It is being billed on the event page and in materials as the AI event of the year. Do you feel like it is living up to that hype so far?

Tim Beyers: Come on. [laughs] No, of course not. But that is, that is Salesforce. If you don't hear that from Salesforce, that's when you get worried. The hyperbole is just, I mean, those are the table stakes. If you are invested in or following Salesforce, you know you're going to get the hyperbole. If you don't get it, that's when you start scratching your head. You know that's what's coming and then you decide, OK, I know what they've told me, but what's really going on here? So it's definitely not living up to the AI event of the year. No, that would be insane to say that, because there's so much AI hype that I don't think you can really distinguish. However, there are interesting things that Salesforce is doing. And the primary thing that I think is interesting is they have talked up the Einstein AI platform, which has been around for a while. The Einstein platform has been around. So that's not new. What is new is that they're talking up Einstein AI as a multi layered platform that has a data cloud attached to it. There are some interesting integrations that they're talking up with both snowflake and data bricks. In other words, your customers live across and your customer data lives across a huge number of applications. What if you could use AI to rationalize all that data and then be able to query it and get real insight and do real meaningful things with it.

So creating this highly integrated data cloud does make some sense and those partnerships might have some legs. So I thought that was interesting, Dylan. Then on the other part of it, on the front end of it they talked about a thing called the Einstein AI co pilot which this is something that you know, for those who follow this weekend text show that I do with Tim White. Tim and I have been talking about this for a long time. The idea that the ideal use case for AI is as a co pilot to you do a thing, and then the AI helps you do the thing better by spotting errors or giving you some hints. Something to automate and accelerate the work you're doing. Not replace it, but do it with you and alongside you. So this idea of an Einstein AI co pilot I think is completely fascinating to automate and accelerate the work that you do inside the Salesforce suite. That's great. But there is one thing that's missing from it, which is it doesn't seem in the press release where they talk about this, Dylan, they mentioned slack a grand total of twice. I really expected like once you got to this co pilot type of tool, I thought that's the thing that's going to make Slack infinitely more useful, and that still may come. But I was really expecting to see that in the announcements, the rollout of this. The fact that I didn't see it makes me go, where is it?

Dylan Lewis: I'm glad you brought up Slack, Tim, because this is the 21st time that Salesforce has hosted DreamForce. It is generally when they show both what is a priority for them as a business and the current state of the tech landscape and what is the most important there. Slack was an incredibly big splashy acquisition back in 2021 and I feel like we've all been kind of waiting for some updates there to understand how it fits into Salesforce's business, how they benefit from what Salesforce can bring down to it and how it plugs in. I don't know that we've really gotten that.

Tim Beyers: Not yet. Well, I'm going to say maybe we are starting to get it, but I haven't seen any big red flashing signs that says, OK, here it is. Slack is materially improved and here are the five ways it is materially improved and what it's going to do for Salesforce. That could be coming, it could be something that's in development, it could be something we don't yet see. But I think you're right to say, I'd love to see where we're going with this. But for right now, what we see is that this was a very big acquisition. We're waiting for it to add all of the value we thought it was going to add. The fact that we're still waiting is a slight concern. But it may very well be, Dylan, that the AI strategy that Salesforce is pursuing will ultimately get us there where Salesforce is using Slack as the gateway to all of its other suite of applications. The co pilot exists with Slack first, and Slack is your entry way. If that happens, I will eat my words and say, great job, Salesforce this acquisition was absolutely worth it. But we're not seeing that yet and I really thought we were going to see a little bit more of it at DreamForce. The fact that we aren't seeing it, it just leaves me with some questions that I wish I didn't have to ask.

Dylan Lewis: There's still another day or two or content. So we'll see. But I'm with you, Tim.

Tim Beyers: We'll see.

Dylan Lewis: I'm a little impatient. That's all it is. Tim Beyers, thank you so much for helping me keep tabs on all things tech and tech events related. Always great talking to you.

Tim Beyers: Thanks, Dylan.

Dylan Lewis: Tim mentioned this week in Tech On The Show, that's his weekly program on our premium members-only livestream. If you're a Motley Fool US premium member you can access the show and the daily stream at live.fool.com. If you want to become a premium member you can learn more about our flagship products, Stock Advisor, and get a free report, five stocks under $49 for free at fool.com/report. That's right, five stocks totally free at fool.com/report. Coming up, we go from talking about Apple, one of Warren Buffett's favorite companies to another, reinsurance. Motley Fool analyst Bill Mann joins Ricky Mulvey to break down the fundamentals and one misconception about Florida's home insurance woes. 

Ricky Mulvey: Bill, you were having a conversation on the morning show which is on the Motley Fool livestream which is available to members any Motley Fool service, just a quick plug there. About property and casualty insurance and I thought it was interesting so I want to talk about our Motley Fool money.

Bill Mann: You're the one who thought it was interesting.

Ricky Mulvey: I'm serious, because though it's timely you got the storms and hurricanes in Florida, you have insurers leaving the state. It's going to be a big deal even if it seems a little boring on the surface. We're going to make it interesting, hopefully. I guess I can't promise that but we'll try.

Bill Mann: Send emails too.

Ricky Mulvey: [email protected]. Podcasts with an S at fool.com. I guess now I can just lead on you. Can you explain how property and casualty insurance generally works before getting to the Florida stuff?

Bill Mann: Yeah, so we can talk about the structure a little bit. A lot of people tend to think of property and casualty insurance companies as being really worried about claims. Obviously, in the continuum of pay money out and not pay money out, they'd rather not pay money out. But the way that the insurance companies work is a type of balance where they're trying to find risks across geographies, across types of claims, across types of properties, and they have a very broad set of risks that they are facing. That's the front line of the property and casualty insurance. Are we holding up, are you still interested?

Ricky Mulvey: I'm still interested, yeah. You're explaining the first part and then you're checking in I thought there is a second part.

Bill Mann: There is a second and a third part, which is this. When big claims come in, and they usually come in the form of natural disasters, you have hurricanes, earthquakes, tornadoes, will sometimes get to be large enough. These are things that are called super catastrophes. When you have a super catastrophe, and the super catastrophe is not determined by the weather. It's determined by the size of the overall loss from an event. When you have a catastrophe that's large enough, that's going to become a problem for the front line insurers. The front line insurers, they also have insurance, and very fancily enough that's called reinsurance.

Ricky Mulvey: One of the surprising things to me is Berkshire Hathaway, which owns GEICO. Even though they do car insurance, which may be your experience with that organization this is the bigger business for Berkshire Hathaway, the reinsurance stuff.

Bill Mann: You can think of reinsurance as being something where they don't pay it out often, but when they do pay out they pay out huge. It would work like this, a front line insurer, and let's call it Travelers just as an example. Has exposure in an area that has suffered a catastrophe of above a billion dollars. Beyond the billion dollars the reinsurance company will pay their claims for them. It's a really high hurdle but it doesn't happen very often.

Ricky Mulvey: I go to the image of picking up nickels in front of a steam roller for this?

Bill Mann: Yes, exactly right.

Ricky Mulvey: But if you can do the math right you might be able to pick up enough nickels. Then there's the other side of this which I think is now the third side, which is the reinsurance for reinsurers, which I didn't know existed until you're talking about it on the morning show.

Bill Mann: You can imagine if you have like Hurricane Ian when it hit the west coast of Florida last year caused somewhere in the range of $60 billion in damages. If you can think about a reinsurance company even one as big as Berkshire Hathaway, every dollar above that billion dollar threshold, that's money going out very quickly. They in turn want a balance and that balance comes from a reinsurance for the reinsurers, which are called retrocessionaires. Most of them that operate in the US are based in Bermuda. They will be something like anything above $20 billion in damage for a reinsurer, we've got you beyond that. It could be on a one to one basis, like you pay some, we pay some, it depends on the coverage. But for the mega super catastrophes there are the retrocessionaires. You can imagine for them they pay out almost never but when they do pay out, they pay out in huge dollar amounts.

Ricky Mulvey: See, that's weird to me. If I were to just say, "Hey, we have an organization that pays out $20 billion on an unlikely event, where do you think it's located? We're going to give you three options, Chicago, New York City, or Bermuda?" I wouldn't pick the third option.

Bill Mann: [laughs] That's right. Bermuda is the Hartford of the reinsurance world. That is, there are laws, there are reasons why so many of the reinsurance companies are based there but a lot of the retrocessionaires are based there as well.

Ricky Mulvey: Bill, what's going on in Florida?

Bill Mann: A lot of people point to the severity of damage that's happening in Florida due to climate change as being the issue, and that's probably a longer tail issue. There are two very specific issues in Florida. The first of which is that Florida has 9% of the nation's insurance policies, and 79% of the insurance lawsuits in the country. It has to do with basically a loophole that was set up that allows contractors to sue on the behalf of homeowners. It turns out when you allow them to do that, and you have a law on the books that requires the defendant to pay plaintiffs fees that becomes a pretty attractive line of business.

Ricky Mulvey: You get Pareto's principle as well.

Bill Mann: Exactly, right. It turns out if lawsuits are free then somebody's going to figure out how to sue all the time. That's a huge problem. They did pass a law this last year that should make that a little bit better but that doesn't change the structure of the industry in Florida, and they had $1.7 billion in underwriting losses last year across the insurance companies that are still there. These aren't insurance losses that can be pushed onto a reinsurer, each lawsuit is its own loss. That's one issue. The other issue in Florida is simply one of the structure of the state. Remember earlier I was talking about the balance that insurance companies have to try and hit to lay off risks from one to another. Almost all of the value of the real estate in the state of Florida is within five miles of a coast. Obviously, there's Orlando and there is Disney. But most of Florida is susceptible to storm surge which is hugely impactful and it is very high value coastline property. I frankly don't know how you solve that. There's not a mountain range in Florida where you could lay off for a different kind of risk. That's a structural issue that people have known about for a long time. But it is now really raising its head.

Ricky Mulvey: Well, the solution they've presented is basically bringing in a state backed insurer.

Bill Mann: That's right, but that's what insurer of last resort, so citizens doesn't want to be in the insurance business. I think that they are insuring about 2.7 million households now. They still require you to go out and get flood insurance on your own and I don't know if you might believe this about Florida but a lot of their damage is coming from flood instead of wind. It is not a solution that brings pricing down that much for a lot of its more vulnerable citizens of the state.

Ricky Mulvey: Just so I can have a headline for this episode it's not the fundamentals of reinsurance? Why is this one of Warren Buffett's favorite businesses?

Bill Mann: Well, because if you, and I started by saying that insurance companies and reinsurance companies are not really worried about risk payouts. I think that is something that is generally misunderstood about insurance companies. If they never paid anything out the argument would be why do we have insurance? What they are interested in is pricing risks correctly and then making sure that those risks are as uncorrelated as possible. It's all like a giant science fair experiment involving super catastrophes. They are not particularly focused on whether they have to pay. What they're focused on is when they have to pay do they have the risks priced properly so that it doesn't take the company out. It's one of those things, how they describe being an airline pilot is 99% boredom and 1% terror. That's exactly this business.

Dylan Lewis: I think I need to get you on the phone the next time I have a car insurance claim because it be good to remind them that they're not really worried about this small payout so they can just take care of it. You're worried about the big stuff. [laughs]

Bill Mann: These are not the droids you're looking for. Actually, these are the droids we're looking for.

Ricky Mulvey: This is exactly the droid and this is the check you're supposed to write so let's stop screwing around. I think that goes into your test though of basically how you determine a good versus bad insurance company.

Bill Mann: That's exactly right. Unfortunately, especially with the reinsurance companies, sometimes you find out after the fact. After Hurricane Katrina which on a inflation-adjusted basis is still the largest single event of loss ever, that actually got into the retrocessionaries. There's a very famous case of one called the PXRE Group which didn't have enough money to pay off its claims because the claims just absolutely overwhelmed it. You could say, because they poorly balanced out the risk but I think Katrina was one of those catastrophes that defined the next generation of them. But in general, for reinsurance companies, you're looking for a rather low cost to provide the insurance itself.

Dylan Lewis: As always, people in the program may own stocks mentioned, and the Motley Fool may have formal recommendations for or against so don't buy or sell anything based solely on what you hear. I'm Dylan Lewis. Thanks for listening. We'll be back tomorrow.