Social Security's 2018 Raise May Not Reach Up to 70% of Its Beneficiaries

For tens of millions of Americans, Social Security provides a financial foundation that they simply couldn’t live without. Data from the Social Security Administration (SSA) in 2016 finds that 62% of retired workers — and there are more than 42 million of them receiving a monthly stipend from the SSA — relies on their monthly payment for at least half of their income.
Social Security’s 2018 raise is announced
Given how important Social Security income is for a majority of seniors, last week’s inflation data release from the Bureau of Labor Statistics (BLS) bore particular importance. The BLS’s September inflation announcement was the last piece of the puzzle needed to figure out what the cost-of-living adjustment (COLA) would be in the upcoming year. Think of COLA as nothing more than the “raise” that Social Security beneficiaries receive from one year to the next as a result of inflation.

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Social Security’s COLA is tethered to the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. The average reading of the CPI-W during the third quarter (July, August, and September) of the previous year acts as the baseline figure, while the average reading from the third quarter of the current year acts as the comparison. If the average price of the eight major spending categories tracked by the CPI-W rises, then Social Security recipients receive a raise that’s commensurate with the percentage increase from the previous year, rounded to the nearest 0.1%. If prices fall year over year, benefits remain the same. Thankfully, they can never fall because of deflation.
The Oct. 13 data release from the BLS allowed us to determine that Social Security beneficiaries are on track to receive a 2% raise in 2018. Considering that the August snapshot from the SSA shows the average retired worker receives $1,371.14 a month, it means a little more than $27 extra a month in the pockets of the average beneficiary. 
However, there’s quite the caveat to this year’s Social Security raise: Most beneficiaries may not get it.
A majority of Social Security recipients may not receive their raise
Most Social Security recipients fall into two groups. First there are those who are eligible to receive Medicare, are currently enrolled in the program, and have their monthly premiums deducted from their Social Security payout. The second category includes those who aren’t enrolled in Medicare and brand-new Medicare enrollees for 2018. This group also includes those who prefer to be billed directly by Medicare for their monthly premiums as opposed to having their premiums automatically deducted from their monthly Social Security check.

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Over the past couple of years, brand-new enrollees to Medicare, people who prefer to be directly billed for premiums, and those enrolled (age 65 and up) in Medicare who are waiting to sign up to receive Social Security benefits, have taken the brunt of Part B premium increases. Medicare Part B covers outpatient services and prescription medicines administered in an outpatient setting. With healthcare costs having risen rapidly in recent years, these folks have seen their monthly Part B premiums rise by a high-single-digit, or perhaps low-double-digit, annual percentage.
Meanwhile, the majority of folks, comprising about 70% of people who are receiving both Medicare and Social Security, have been protected from these rapid increases by the “hold harmless” clause. Put simply, the hold harmless clause ensures that existing Medicare members don’t see their Part B premiums rise at a faster pace than their Social Security COLA. Thus, Social Security’s 2017 raise of 0.3%, the smallest on record, kept Part B premiums from rising by more than 0.3% in 2017 for about 70% of people. The bulk of the increase was passed along to the aforementioned group.
In the upcoming year, we’re going to see a reversal. Part B premiums aren’t expected to move higher, meaning brand-new retirees, those who prefer to be directly billed, and those holding off on claiming Social Security until a later age, shouldn’t see their premiums increase relative to the 2017 levels. Comparatively, those who’ve been protected by hold harmless could see some, or all, of their raise gobbled up by Medicare Part B in order to “catch up” for the lower premiums they’ve paid in recent years.

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The salt in the wound
If this weren’t enough salt in the wound for most retired workers, there’s more. Despite receiving a 2% COLA, which is the highest raise in six years, there’s a decent chance that the purchasing power of your Social Security dollars will continue to decline.
Earlier this year, The Senior Citizens League released a study that showed seniors’ Social Security benefits have lost 30% of their buying power since the year 2000. What $100 would have bought in Social Security dollars in 2000 now buys just $70 worth of goods and services.  This is a result of rising medical care costs and higher rental or home expenditures. Even with medical care costs looking tamer in 2018 than in previous years, it doesn’t mean other costs, including housing expenses, won’t eat up seniors’ Social Security raise and some.
In other words, many seniors might be saying “Thanks for nothing, Social Security” once again in 2018.
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Better Buy: Exelixis, Inc. vs. Intra-Cellular Therapies Inc.

Biotech investors are always looking for the next big thing. That’s exactly what they found in Exelixis (NASDAQ: EXEL), which ranked as one of the top biotech stocks of 2016 (and 2015 also). But Exelixis isn’t the little biotech ready to hit the big time anymore. Intra-Cellular Therapies (NASDAQ: ITCI) could be, though.
Intra-Cellular Therapies stock has taken investors on a roller coaster ride so far in 2017. Exelixis has continued its winning ways of prior years. Which stock is now the better buy? 

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The case for Exelixis
Probably the strongest argument for buying Exelixis stock is that it claims one of the hottest cancer drugs in the biopharmaceutical industry with Cabometyx. The drug has already captured a nice chunk of market share in the second-line renal cell carcinoma (RCC) market. Now Exelixis is preparing for bigger and better things.
The FDA recently granted priority review for Cabometyx in the first-line RCC indication. Instead of having to wait 10 months for a decision, Exelixis will now find out by Feb. 15, 2018, if it can move ahead with selling the drug to a larger market. Although anything can happen with the regulatory process, the chances for approval appear to be good.
Exelixis could be looking at success in a different type of cancer, as well. The biotech announced earlier this week that Cabometyx met its primary endpoint of overall survival in a late-stage study evaluating the drug in treating advanced hepatocellular carcinoma (HCC). Exelixis expects to submit for approval in this additional indication in the first quarter of 2018.
Positive results in treating two tumor types could bode well for Cabometyx’s prospects in treating other cancers. Also, the drug has quickly become a go-to target for combinations with other pharma companies’ cancer drugs. Exelixis’ MEK inhibitor Cotellic is also an in-demand drug for inclusion in combo therapies.
Climbing sales for Cabometyx helped Exelixis become profitable earlier this year. In addition, the company paid off its debt. Exelixis is now in solid position to make deals to add to its pipeline — or potentially find itself an acquisition target.  
The case for Intra-Cellular Therapies
Intra-Cellular Therapies doesn’t have an approved product yet, but its likelihood for changing that improved significantly in recent months. Investors breathed a sigh of relief in August when the company announced that the FDA determined that additional data provided by Intra-Cellular showed that toxicity for its lead candidate lumateperone found in animals wasn’t relevant to humans.
The company followed up with more good news in September. Intra-Cellular reported positive results from an open-label safety switching study with lumateperone in patients with schizophrenia. The big news from this study was that lumateperone didn’t have some of the side effects experienced with other antipsychotic medications. Based on the results, Piper Jaffray analyst Charles Duncan upgraded the stock to “overweight” and hiked his price target from $14 to $33.
Intra-Cellular Therapies stock is only up a little so far in 2017. However, that’s primarily because a secondary stock offering to raise more cash offset the huge jump in its stock price following the good news in August and September. 
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What would it take for Intra-Cellular to become the hot biotech that Exelixis has been over the last few years? First, the company needs to win FDA approval for lumateperone. Intra-Cellular plans to submit lumateperone for approval by mid-2018. Second, the drug needs to obtain favor from insurers and pharmacy benefits managers. Third, lumateperone must snag a decent share of the market by beating out other schizophrenia drugs that are already approved. 
Better buy
I think Exelixis is the better choice between these two stocks. Intra-Cellular has too many hurdles to jump — and lumateperone didn’t prove to be more effective than a placebo in a late-stage study. Although the FDA allowed the company to move forward with testing and submission for approval, that’s not encouraging. Even if lumateperone does win approval, the schizophrenia market is pretty crowded already. 
Meanwhile, Exelixis has the wind at its back, with solid results for Cabometyx in first-line RCC and HCC indications. The only real knock against the stock is its valuation. However, my view is that Exelixis shares still have room to go higher because of the potential for Cabometyx in other indications, along with the company’s plans to beef up its pipeline. Exelixis is a former next big thing that could still be the next big thing.
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Keith Speights has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Exelixis. The Motley Fool has a disclosure policy.

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Boeing “Strikes” a Deal to Buy Revolutionary Heli-Plane Maker

It’s been about a year and a half since we first learned of the Defense Advanced Research Projects Agency’s “LightningStrike Project,” the scary-sounding name attached to an entirely benign story of a new class of aircraft that DARPA wants to build. With LightningStrike, DARPA — the “mad scientist” arm of the U.S. Department of Defense — aims to create an electrically powered airplane that can launch vertically (i.e., no runway required) but fly horizontally at ordinary-plane-like velocities.
And now Boeing (NYSE: BA) will own that plane.

XV-24A LightningStrike aircraft
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LightningStrike could become the future of Uber. Image source: Aurora Flight Sciences.
What is LightningStrike?
Let’s start off with a few details about the project itself. LightningStrike is the brainchild of privately held aerospace company Aurora Flight Sciences, a specialist in the field of unmanned aerial vehicles, and one with a special affinity for developing electrically powered aircraft (i.e., no jet fuel required). As DARPA’s partner on the project, Aurora was hired last year to design and build an aircraft equipped with 24 hybrid-electric fans, powered by one Rolls-Royce AE 1107C turboshaft engine driving three Honeywell electric generators.
The 24 fans will be mounted on two sets of wings — six fans up front on one pair of forward wings and 18 more aft on a set of larger wings. These wings can pivot from full vertical to allow the fans to lift the aircraft at launch (and lower it for landing) to full horizontal when the aircraft is in flight, and will generate enough thrust to move the plane through the air at speeds from 345 mph to 460 mph.
Aurora has already completed Phase I of the LightningStrike project and entered into Phase II. A small-scale prototype of the plane conducted successful test flights earlier this year, and flight tests of a full-scale model (dubbed the XV-24A) are scheduled to begin next year.
Will lightning strike twice? Thrice?
This is not the only thing Aurora Flight Sciences is up to. Already this year, the company has announced a partnership with Uber to develop electrically powered vertical takeoff-and-landing (VTOL) aircraft like LightningStrike for use in a future “drone” air-taxi service. Aurora hopes to have a small fleet of 50 such aircraft ready by 2020 for Uber to test-drive. (It’s not known for certain whether Rolls-Royce and Honeywell will be powering those planes, but it seems a safe guess.)
Additionally, Aurora announced in August that it has signed a $499 million contract with the U.S. Air Force to support the latter’s Aerospace Systems Air Platform Technology Research project, conducting research into “autonomy, electric propulsion, advanced manufacturing, multi-vehicle coordination, and advanced multidimensional optimization” for use in military drones. (To be crystal clear, not all of this money is going to Aurora. As the Pentagon made clear at the time, Aurora and Northrop Grumman will be splitting this award.)
Boeing swoops in
Given the string of successes Aurora has been racking up, it was no great surprise when Boeing announced earlier this month that it had decided to buy Aurora Flight Sciences — lock, stock, and barrel.
Calling Aurora a “world-class innovator, developer and manufacturer of advanced aerospace platforms” that has “designed, produced and flown more than 30 unmanned air vehicles since the company was founded in 1989,” Boeing confirmed on Oct. 5 that it will acquire Aurora. Boeing did not disclose how much it is paying, and the fact it didn’t feel compelled to do so suggests the purchase price was not high enough to be “material.”
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So how much will Boeing pay? According to data from S&P; Global Market Intelligence, Aurora Sciences has annual revenue of about $72 million. Now, in defense circles, the rule-of-thumb valuation for acquiring a company has historically been about one times annual sales (though in recent years, valuations have gotten somewhat out of whack). Still, we’re probably talking about a valuation of only $100 million or $200 million here.
Even if the purchase price ends up being toward the high end of that range, (a) it’s still going to be peanuts for a company of Boeing’s size; and (b) it’s probably an investment well worth making for Boeing. In acquiring Aurora Flight Sciences, Boeing will:
Make a huge leap forward in drones technology and significantly strengthen the capabilities it acquired with its purchase of Insitu back in 2008.
Nip in the bud a threat that (if Aurora and Uber succeed in their project) travel aboard big aircraft run by big airlines might become obsolete.
And secure Boeing’s future as a military VTOL provider, in the event that Aurora’s technology proves superior to the VTOL tech that Boeing and Textron build into their popular V-22 Osprey military aircraft.
Snapping up half of a half-billion-dollar defense contract along the way is just icing on the cake.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Cost Creep Remains American Airlines' Achilles Heel

In recent years, United Continental’s (NYSE: UAL) perennial margin deficit relative to Delta Air Lines (NYSE: DAL) has become a frequent topic of conversation among airline investors and analysts. By contrast, the growing margin gap between American Airlines (NASDAQ: AAL) and Delta has mostly flown beneath the radar.
At an investor day event last month, American Airlines’ management laid out a blueprint for boosting earnings in the coming years. However, three years of big increases in non-fuel unit costs may have spoiled the company’s chances of matching Delta’s profit margin.
American’s shining moment ends quickly
Just a few years ago, American Airlines seemed to be firing on all cylinders. Management’s firm stance against fuel hedging paid off in a huge way as oil prices crashed beginning in 2014. The resulting fuel cost advantage allowed American Airlines to post a higher pre-tax margin than either Delta or United in 2015.

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American Airlines outpaced its peers in terms of profitability in 2015. Image source: American Airlines.
However, American Airlines’ adjusted pre-tax margin has quickly eroded since peaking at 15.3% in 2015. In 2016, a combination of declining unit revenue and rising non-fuel costs caused American’s adjusted pre-tax margin to sink to 12.6%.
Unit revenue has returned to growth at American Airlines this year, but that hasn’t been enough to offset the company’s cost increases. In the first half of 2017, American’s pre-tax margin fell by about 5 percentage points year over year, and the second half of the year isn’t shaping up to be much better. American Airlines seems to be on track to post a full-year pre-tax margin of about 8%: right in line with United Continental and more than 5 percentage points behind Delta.
Non-fuel unit costs have skyrocketed
Cost synergies were never the rationale for the 2013 American Airlines-US Airways merger. From the beginning, management expected that most of the cost savings from the merger would be offset by well-deserved wage increases for the two carriers’ employees. Instead, revenue synergies related to the combined carrier’s expanded route network were expected to drive profit growth after the merger.
Still, investors clearly weren’t prepared for the degree of cost inflation that American Airlines has experienced over the past three years. In 2015, non-fuel unit costs (excluding special items) rose 3.9% year over year, driven by wage increases for American’s pilots and flight attendants. The company had also increased staffing during the year in order to ensure a smooth merger integration process.
Back in mid-2015, I predicted that non-fuel unit cost growth would recede in 2016. After all, American seemed to have an opportunity to reverse its 2014-2015 headcount increases. Plus, the carrier has been rapidly upgrading its fleet with newer, more cost-efficient jets. Finally, American Airlines has been adding seats to some of its jets in order to further reduce unit costs.
Boy, was I wrong. Cost inflation accelerated in 2016, as non-fuel unit costs rose 4.8% (again excluding special items). Based on American Airlines’ first-half performance and projections for the rest of the year, unit costs will likely rise at an even faster clip in 2017.
Too little, too late
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At the investor day last month, American Airlines CFO Derek Kerr said that cost creep would finally slow beginning in 2018. The company now expects adjusted non-fuel unit costs to rise about 2% next year, and roughly 1%-2% annually in 2019 and 2020.
This really isn’t anything to get excited about. First, the guidance specifically excludes changes in labor costs. However, American Airlines’ pilot contract becomes amendable in 2019, and while American just raised pilot wages significantly this year, it still remains behind Delta Air Lines in total pilot compensation.
Second, American Airlines is squeezing more seats than ever onto its jets to hold costs down. Most notably, American’s 737 MAX planes will be configured with 172 seats, and the carrier will add 12 seats to each of its 737-800s to create the same configuration. The higher seating capacity and the reduction in legroom could hurt unit revenue growth for the next few years.
Third, even if long-term unit cost growth is 2% or less, American Airlines will need to post phenomenal unit revenue growth to reach its earnings targets (and catch up with Delta).
CEO Doug Parker seems to think that American Airlines can rely on unit revenue growth alone to fix its margin problems. You can count me as a skeptic. Unless American Airlines can find ways to become more efficient, it will probably join United Continental as a long-term laggard in the airline industry.
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Adam Levine-Weinberg owns shares of Delta Air Lines. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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3 Facts About High-Yield Dividend Stocks Every Investor Should Know

If you are like me, you love a good dividend stock. There’s nothing better than sitting back and collecting a quarterly dividend, especially if the stock in question is offering a big yield. But there are a few things you need to know before you pull the trigger. Plains All American Pipeline, L.P. (NYSE: PAA), Hormel Foods Corp (NYSE: HRL), and Magellan Midstream Partners, L.P. (NYSE: MMP) will help explain three key facts every dividend investor should know.
1. Sometimes there’s a good reason for that high yield
Plains All American is a midstream oil and natural gas partnership. It has been increasingly shifting its business toward fee-based assets over the past decade via construction of new assets and acquisitions. In fact, at the company’s investor day, Plains All American projected that fees would account for 90% of its revenues in 2017. It would be reasonable to assume that this is a fairly stable business if you didn’t look any further. So when the yield spiked over 9%, you might have been tempted to jump aboard.   

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That high yield showed up after the partnership reported it had a tough first quarter in early May. At that time, however, management was calling for improving results through the rest of the year. Then during the second quarter call in early August, management noted that it was reviewing its distribution policy. The yield spiked to over 11%. On August 25, it announced plans for a distribution cut — the second in roughly a year. One of the big problems the partnership was dealing with was the heavy debt load left from its expansion and acquisition activity.
The takeaway here is that sometimes high yields show up for a good reason. In Plains All American’s case, investor concerns about a distribution cut that pushed the yield higher turned out to be true. Important fact No. 1: Don’t get suckered in by a high yield; do your homework.
2. Think in relative terms
As long as you understand that a high yield requires that you dig a little deeper and examine everything with a cautious eye, then dividend yields are a useful indicator. But you can’t just look at one data point. One day’s yield, even if it’s high on an absolute level, doesn’t tell you a whole lot.
Take Hormel Foods and its roughly 2.1% yield. That doesn’t sound like a high yield at all, but if you look at the company’s historical yield trends, it is. The yield has spiked higher on occasion, like during the 2007 to 2009 recession, but a yield of 2% or more has historically been a buying opportunity. The same could have been said for industrial giant Emerson Electric (NYSE: EMR) when its dividend yield spiked over 4% in late 2015 and early 2016. Emerson has since rallied, and the yield is now below 3% — closer to the middle of its historical range.

HRL Dividend Yield (TTM) Chart
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HRL Dividend Yield (TTM) data by YCharts
But are these signals or warning signs? That’s where homework comes in. Hormel is dealing with industrywide headwinds today, as was Emerson in late 2015. There’s really nothing to suggest that Hormel’s dividend is at risk today or that Emerson’s was at risk when it spiked to the high end of its historical range. Important fact No. 2: Look for high yields relative to historical yield trends — even if that means lowering your yield targets.
3. Don’t forget dividend growth
When looking at high-yield stocks, you can’t forget about the future. A high yield backed by a dividend that doesn’t grow will slowly get eaten away by inflation. That’s a big problem if you hope to live off of your dividend income and still have 20 or more years of retirement ahead of you.
But there’s more to this issue. If you are willing to sacrifice some yield today to invest in a company that has a higher dividend growth rate, then you could actually end up with more income down the road. For example, Magellan Midstream Partners offers investors a yield of around 5% today. Larger and more diversified Enterprise Products Partners L.P. (NYSE: EPD) has a yield of nearly 6.5%. You might be tempted to go with the higher yield since the two are very similar. However, take a look at the graph below and you might change your mind.

EPD Dividend Per Share (Quarterly) Chart
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EPD Dividend Per Share (Quarterly) data by YCharts
Over the past decade, Magellan has grown its distribution at around 11% a year on an annualized basis. Enterprise’s distribution growth was around half that. You can see what a difference that makes over time. Over the next few years, Enterprise is expecting distribution growth in the low single digits; Magellan is targeting 8%. Unless you need to maximize income today, Magellan, despite a lower yield, is probably the better option right now. Important fact No. 3: Dividend growth matters as much, if not more, than a high yield.    
Think before you leap
The really big picture here is that a big, fat, juicy dividend yield is great, but not enough to make an investment decision. The yield could be high because a dividend cut looks increasingly likely, like what transpired at Plains All American. And you can’t look at yield in a vacuum — sometimes a low absolute yield can be a high yield for a specific company, like Emerson in 2016 and Hormel today. You might find some diamonds in the rough if you look at high yields a slightly different way. And then there’s the issue of dividend growth, which can make a lower yield today more attractive over the long run, as the comparison between Magellan and Enterprise makes clear.
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Reuben Gregg Brewer owns shares of Hormel Foods. The Motley Fool recommends Emerson Electric, Enterprise Products Partners, and Magellan Midstream Partners. The Motley Fool has a disclosure policy.

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Tesla strikes another deal that shows it’s about to turn the car insurance world upside down

A Tesla Model S/ Tesla
Tesla has created a customized insurance package, InsureMyTesla, that is cheaper than traditional plans because it factors in the vehicles’ Autopilot safety features and maintenance costs.
InsureMyTesla has been available in 20 countries, but Tesla just recently partnered with Liberty Mutual to make the plan available in the US.
InsureMyTesla shows how the insurance industry is bound for disruption as cars get safer with self-driving tech.
Tesla struck a deal with Liberty Mutual to create a customized insurance package — and the move shows how the electric automaker is intent on disrupting the insurance industry.
The new plan is called InsureMyTesla and was designed specifically for Tesla vehicles. Its benefits include replacing Teslas damaged beyond repair within one year. Tesla launched the package on October 13 in the US in all 50 states, but it already exists in 20 other countries, a company representative confirmed.
Electrek first reported on the news.
Tesla started quietly rolling out the InsureMyTesla program in February in Hong Kong and Australia. The electric car maker partners with different insurance companies across the globe to offer InsureMyTesla, which lowers overall insurance costs by factoring in the vehicles’ Autopilot safety features and maintenance costs.
Tesla CEO Elon Musk has said that insurance agencies should adjust their prices for Tesla vehicles because the cars come with Autopilot, the company’s advanced driver-assistance feature. 

The National Highway Traffic Safety Administration found that  crash rates for Tesla vehicles have plummeted  40% since Autopilot was first installed.  Electric vehicles also generally require less maintenance then traditional, gas-powered vehicles.
“If we find that the insurance providers are not matching the insurance proportionate to the risk of the car then if we need to we will in-source it,” Tesla CEO Elon Musk said in February.
Tesla’s partnership with Liberty Mutual marks the first time the InsureMyTesla package has been available in the US. The US launch comes a few months after AAA said it would raise rates for Tesla owners after seeing a high frequency of claims among Model S and Model X owners.
AAA based its decision based on data provided by the Highway Loss Data Institute, an analysis that a Tesla spokesperson said was “severely flawed” at the time.
The deal with Liberty Mutual shows how US agencies are starting to realize that they must adjust their prices as cars get safer with advents in self-driving tech. 
Insurers like Cincinnati Financial, Mercury General, and Travelers have noted in SEC filings that driverless cars could threaten their business models, according to a 2015 Bank of America and Merrill Lynch report.
The personal auto insurance sector could shrink to 40% of its current size within 25 years as cars become safer with autonomous tech, according to a report by the global accounting firm KPMG.
Tesla hopes to one day bundle the price of insurance and maintenance into the price of future vehicles.
“It takes into account not only the Autopilot safety features but also the maintenance cost of the car,” Jon McNeill, Tesla’s vice president of sales and services, has said of InsureMyTesla. “It’s our vision in the future we could offer a single price for the car, maintenance, and insurance.”
Get the latest Tesla stock price here.

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IRS will decline tax returns without proof of health insurance

Bill O’Reilly’s contract with 21st Century Fox was renewed — with an approximate $7 million pay raise — after O’Reilly made a $32 million agreement to settle sexual harassment allegations, the New York Times reports.
What happened: Lis Wiehl, an analyst at Fox News, notified O’Reilly of her sexual harassment lawsuit in early January. Five days later, the two reached a settlement, per the Times, and Wiehl agreed “not to sue Mr. O’Reilly, Fox News, or 21st Century Fox,” as well as destroying texts, photos, and other communications between them. The four-year contract extension with the network was granted in February, the Times reports.
Why it matters: This was the largest settlement made by O’Reilly and 21st Century Fox; it was also the sixth one of its kind.

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Theft lands former insurance salesman 50 days in jail

EVERETT — A former insurance salesman is expected to report to jail Nov. 1 after an investigation revealed that he siphoned away his customers’ premiums.
More than $50,000 was missing. Nearly 80 people were affected and many were unaware their policies weren’t current. The man sold the policies for American Family Mutual Insurance Company.

Levi Watson pleaded guilty to first-degree theft and admitted the crime was particularly egregious because there were multiple victims and the defendant misused his position of trust and fiduciary responsibility.
Snohomish County Superior Court Judge David Kurtz sentenced Watson on Tuesday to 50 days in jail. Watson, who didn’t have any criminal history, faced up to three months.
The judge agreed that Watson can serve 40 days of his sentence in work release if he qualifies and can find a facility outside of Snohomish County that will accept him.
The county shut down its work release program earlier this year due to a budget shortfall. Work release was offered to some criminal defendants who had jobs but faced a jail sentence. Defendants were housed in the secure facility near the jail when they weren’t working.
Watson, 45, also was ordered to pay back nearly $40,000.
He wrote the judge a letter, maintaining that the missing payments were a bookkeeping error, not theft. He listed his many volunteer efforts. He also explained the financial and personal pressures he was facing at the time.
“Regardless of what the evidence shows I have never in my life intentionally taken money or tried to hurt anyone,” Watson wrote.
“The reasons this ended up this way was my lack in care and custody of my financial duties in my business. My staff contributed to the issues but that’s due in large part to my poor training and direction,” he added.
Washington State Patrol detective Joshua Merritt investigated the case. He’s assigned to the criminal investigations unit with the state insurance commissioner. He interviewed Watson in June 2016.
An insurance investigator repeatedly tried to contact Watson in 2015. He failed to return calls or email messages. American Family Insurance also repeatedly tried to reach the defendant about the missing payments.
“He admitted he did not open his mail and avoided phone calls about the missing money because he could not handle it,” Merritt wrote in his report. “He said he intentionally did not contact the insurance company or anyone to identify how much was owed or try to establish any kind of payment plan.”
Watson was an insurance producer who sold policies to homeowners and business owners. He resigned in December 2014 from American Family Insurance and closed his business. His insurance license was revoked in the summer of 2015.
The missing payments came to the attention of authorities in early 2015 when American Family Insurance started transferring Watson’s clients to other producers. At that time, it was discovered that nine of his clients had made payments that hadn’t been forwarded to American Family.
An investigation was launched and records showed Watson had received the payments from the customers but the insurance company had no record of the premiums being forwarded, according to court records.
Some of the customers had written personal checks, and other payments were made as part of mortgages through lending companies.
American Family turned up more victims as the investigation continued, Merritt wrote.
Detectives obtained search warrants for Watson’s personal and business bank accounts. The records showed 554 checks deposited in his accounts between April 2013 and December 2014. Of those, 483 were verified as being valid payments forwarded to American Family accounts.
Watson told investigators he made mistakes on how the accounts were paid and how the money was
moved around.
“Watson stated he knew he was behind in the accounts and had not created all of the policies that had been paid for,” Merritt wrote.
The detective showed Watson emails where the defendant provided proof of policies for coverage that didn’t exist, according to court papers. “Watson admitted in those cases he was hiding the fact that the money was gone.”
Diana Hefley: 425-339-3463; hefley@heraldnet.com.

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Wells Fargo Likely Has No Idea How Much Its Auto Insurance Scandal Will Cost Them

Photo: AP
Wells Fargo has said it set aside $80 million to reimburse more than 570,000 customers who were forced by the bank to purchase auto insurance they didn’t need. But a confidential report from the Office of the Comptroller of the Currency suggests Wells has likely underestimated how much it would cost to reimburse consumers harmed by the scam, according to the New York Times.

How Wells Fargo Screwed $80 Million Out Of Customers Using Unnecessary Car Insurance
A week after New York resident Juan Thomas bought a 2004 BMW 745i, in December 2012, the bank that…
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Wells has been reeling in recent months from a litany of scandals, including one that entailed requiring an estimated 800,000 people to purchase auto insurance they never needed. The bank required auto loan customers to maintain “comprehensive and collision physical damage insurance, and if they couldn’t provide evidence of any, Wells was contractually allowed to purchase coverage for them.

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When customers bought a car through Wells, their information would be sent along to the company that provided the lender-placed insurance, National General. The insurer was supposed to confirm if an owner already had coverage—and if they didn’t, the collateral insurance would be immediately added to their account.
That was the main issue, Wells has said. The company told Jalopnik in September that “internal controls” failed to make sure the process worked seamlessly. As a result, an internal report commissioned by Wells found, an estimated 274,000 customers became delinquent on their account, while around 25,000 vehicles were wrongfully possessed.
And now, the confidential report obtained by the Times states that Wells Fargo management ignored signs of notable problems with the business.
From the Times:

In the comptroller’s report, regulators said management at the bank’s auto loan unit, Wells Fargo Dealer Services, had ignored signs of problems in the business such as consumer complaints, focusing instead on sales volume and performance. The report described its management of compliance risk — essentially the ability to abide by regulations and best practices — as “weak.” It noted that Wells Fargo in 2015 had characterized the risks associated with this business as “low.”

The $80 million is likely not enough, as well, the report said:

Wells Fargo has set aside $80 million to compensate the 570,000 customers it said were harmed by receiving auto insurance they didn’t want. The comptroller’s office said that the amount was inadequate and that the bank might have to pay out substantially more as additional victims were identified — partly because Wells Fargo’s analysis of how much money it needed to set aside excluded many years when the insurance was being imposed.

The report is preliminary, the Times said, and it could lead to possible financial penalties by the comptroller office.

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Know anything about Wells Fargo or the bank’s auto insurance dealings? Send an email to ryan.felton@jalopnik.com, use our SecureDrop system, or find my contact for Signal here.

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