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Coal underwriting changes not expected to hurt insurer, reinsurer ratings

Coal underwriting changes not expected to hurt insurer, reinsurer ratings

Ratings for European insurance sector players pledging to change their coal underwriting and investment positions are unlikely to be affected by such policies, according to officials from ratings agencies.

The plans to reduce coal underwriting and divest from coal investments will likely not have a material impact on the ratings of these insurers and reinsurers because they are not a major part of their investments or major source of premiums, said Miroslav Petkov, London-based head of financial services environmental and climate risk research for S&P Global Ratings. In addition, there are usually timelines for such policies to be implemented, sometimes long timelines, and there are exclusions, meaning not every coal investment needs to be divested under these policies, he said.

Munich Reinsurance Co. became the latest European insurance sector entity to announce it would restrict its underwriting of coal projects, following in the footsteps of Allianz SE, AXA SA, Scor SE, Swiss Re Ltd. and Zurich Insurance Group Ltd., after Munich Re’s CEO announced the new policy in an Op-Ed in a German newspaper in August. But observers note that some of these pledges are stronger than others. For example, Munich Re’s pledge does not extend to existing power plants or mines or to new plants in emerging and developing countries.

“But if you think about it, that’s where a lot of the new greenhouse gas emissions are coming from,” said James Eck, New York-based vice president and senior credit officer with Moody’s Investors Service Inc. “In the U.S. and Europe, coal-fired power plants are being closed every year and trending towards cleaner fuels. It seems like a good step for them based on how they view the world, but I’m not sure it has a huge impact in terms of the reduction in the amount of premiums.”

Munich Re’s Aa3 insurance financial strength rating by Moody’s reflects its “excellent business franchise and very strong market position in global reinsurance, its broad diversification across geographies and business lines, strong capital adequacy and relatively conservative investment portfolio, together with conservative management practices,” the company said in a January update.

Munich Reinsurance had its AA- ratings affirmed by S&P in May with a stable outlook because it maintains an “extremely strong franchise.”

The reinsurer must clarify how far the policy applies beyond industrialized countries, which account for less than 8% of new coal capacity planned or under construction, according to an analysis published on Tuesday by Unfriend Coal.

Swiss Re is the only reinsurer to take significant action on coal, according to the analysis. It announced in July 2018 that it will no longer provide cover to companies and projects which rely on coal for more than 30% of their revenues or more than 30% of the power they generate.

No reinsurer currently restricts cover based on the absolute scale and development plans of companies’ coal activities, according to the analysis. Even Swiss Re’s 30% exclusion threshold still allows big diversified companies and new coal developers to slip through the net, according to Unfriend Coal.

“My sense is it’s not going to have a huge impact on the financial performance” of these insurers and reinsurers if they restrain their coal underwriting and investments, Mr. Eck said.

Unfriend Coal plans to bring its lobbying pressure to divest from coal investments and underwriting to the United States.

“U.S. insurers are not even close to where European insurers are,” Lucie Pinson, the Paris-based European coordinator of the Unfriend Coal campaign, said of the divestment movement.

In the United States, California Insurance Commissioner Dave Jones launched the Climate Risk Carbon Initiative in January 2016 to require insurers with $100 million in annual premiums doing business in California to disclose investments in fossil fuels and asked all insurers operating in the state to divest investments in thermal coal.

“Regulators are worried about stranded assets and the value of some of these investments hurting the amount of capital of the companies,” Mr. Eck said. “That may be the case, but I think there’s good feedback from market pricing on a daily basis. Most of these companies have very high fixed income portfolios. I’m not aware of companies that have huge equity exposure to carbon-related impacts.”

In recent years, there has been a shift in investor expectations, with shareholders judging companies on a broader spectrum of criteria rather than solely on financial metrics while consumers are also demanding that businesses take positions on issues ranging from climate change to gender equality, A.M. Best Cos Inc. said in an August briefing. The elevated public interest, coupled with pressure from non-government organizations and regulatory authorities, particularly in Europe, is compelling companies and investors to adapt and consider environmental, social and governance risks and opportunities in their operations, the briefing stated.

“Insurers and reinsurers, with their unique societal role as risk managers, risk carriers and investors, have not been immune from this trend,” the company stated.

Currently, Best’s Credit Rating Methodology does not explicitly cite ESG in its building blocks, but some ESG factors are incorporated in the analysis such as climate-related risks considered through stress testing.

“I think the biggest thing is how long it’s going to take to come across the pond and start to gain more traction, at least on the underwriting side,” Mr. Eck said of the divestment movement. “I think on the investing side, companies are thinking about it. They’re not just ignoring it. But you haven’t really seen the same level of saying ‘ok, this is part of our investment policy’ as you’ve seen with some of the companies in Europe. But companies over here, they’re thinking about it, they’re studying it and it will be interesting to see how long it takes for some of the companies to really decide that they want ESG investing or certain exclusions on the underwriting side to become part of their corporate policy.”














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