The Insurance Disaster Trade: Going to Net Zero

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It’s incredibly rare to be on the emerging frontier of market development. Mainly because most markets have already been around for decades.

The last 12 months have represented a once-in-a-generation opportunity and I continue to believe we are very early for carbon. There are many ups and downs to come.

Many investors and historians might well point to November 2021 as the catalyst date that set world war zero on the move The 2021 United Nations Climate Change Conference, also known as COP26, has concluded. Held every year, this conference is where climate goals are set, countries are held accountable, and companies are forced to deliver.

In 2022 and beyond, the most renowned institutions, universities and media outlets will be in overdrive reporting on climate and net zero news.

Expect the entire media and news cycle to highlight reports that global oceans, on average, are 30% more acidic. And that global temperature is 1 degree Celsius warmer than it was before the Industrial Revolution. This has resulted in a 70% decline in the population of mammals, birds, fish, reptiles and amphibians. To add urgency, the media will highlight that the rate of change of ice loss in the Arctic is 300% higher than the past decade. It took mankind 250 years to produce and release 500 billion tons of COtwoeq to the atmosphere. At current emission rates, It will take less than 40 years. Now I’ll share the stat that made the wheels turn in my brain…

  • 1 in 50 years the occurrence of climatic events will increase 38.9 times.

This line in IPCC report It caught my attention. I had to reread the entire section many times to fully understand the meaning. Because the news is the marketing machine for this…

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The green renaissance of insurance

Before jumping to conclusions and opinions, you should know that the above statistic is very important.

Supported by sufficient evidence and mathematics, the results will directly affect the way the insurance sector does business.

The insurance industry (as a whole) is one of the largest capital groups (non-government) in the world. And the largest (non-governmental) provider of capital for infrastructure projects worldwide.

For example:

  • 2017 was a banner year of losses for insurance companies: $140 billion in climate-related infrastructure losses.

Dr. Stokes, testifying in front of Congress in September 2021, stated that the cost in the US alone in 2021 would be $500 billion due to climate and weather disasters. Another well-known insurance group, Lloyd’s of London (Over 300 years and operating in 200 countries, they are survivors!) published their calculations… They believe their numbers prove that the 20 cm rise in sea level at the tip of Manhattan, compared to the level of the water of 1950, increased insurance losses from Superstorm Sandy in 2012 by 30% in New York alone. Additionally, more than $500 billion of US coastal property could be below sea level by the year 2100. All of these statistics are a significant risk to insurance company operations.

You No I have to agree with climate change

According to the data published or not, it is presented by the main firms in the world. The world’s largest insurers have taken notice. But it is not only politicians who expressed their opinion at COP26. Let me explain…

The Bank of England (UK central bank) is the force behind the UK being a world power in insurance. This editorial is not about insurance or actuarial science. (That’s the math that can calculate with incredible precision when we each will die when insurance premiums are written.) So bear with me with a few minutiae to help you understand where the flow of capital is going to go over the next decade.

The Insurance Marketplace 101

The UK is the largest single market for non-life insurance in the world (7% of global insurance premiums). These premiums are written through the London Market and almost 85% are made in the UK by insurers that are part of groups based abroad (read: everyone is connected and not an island).

  • UK-domiciled insurers rank fourth globally in written premiums and manages nearly $2 billion in assets.
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The insurance business is so big that it will depend on open international insurance markets.

Therefore, sector reform and legislative reform will become a key factor in redirecting/investing/lending trillions of dollars of managed insurance assets to reduce climate impact. Meaning, have accessone must abide by the rules.

  • In addition, large infrastructure projects, real estate assets and other assets, etc. they will have to meet the criteria of the insurance companies.

Or risk the potential of not meeting the insurance company’s coverage criteria due to your carbon footprint and emissions. It would be the equivalent of an obese smoker who has had a heart attack who does not qualify for life insurance. Very bad very sad.

  • Without a plan to reduce the carbon footprint of corporations, your portfolio of assets may not qualify for insurance coverage.

Would you invest in such a company, say a REIT, if the building portfolio had no insurance coverage? Perhaps, but at a much lower valuation due to the risk of uninsured assets.

The Net Zero movement will spare no one

central banks, stock exchanges and the big insurance corporations are getting behind the net zero movement. It all comes down to the cost of capital.

  • More than $88 billion only the financial world (insurance, pensions, specific government plans, etc.) has already lined up to commit to allocating that capital to projects/companies/assets that meet the criteria for reducing their carbon footprint.

Think about the magnitude of this amount of capital. Total annual global energy expenditure is less than $2 trillion. This is more than 44 years of global annual energy in this decade. Furthermore, the IEA recently came out and stated that energy spending must at least double to meet the agreed targets of the 2015 Paris COP. In the last 6 years, decarbonization went from being a nice idea to what will become the most coveted investment theme since the tech boom of the late 1990s. Through a concerted effort, companies and governments around the world used the 2020 pandemic as a turning point to move from an unsustainable emissions trajectory to a sustainable path.

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The rewards and penalties for decarbonization success and failure have never been higher. And with rising carbon offset prices by multiples in the last 12 months, the cost to many companies’ balance sheets will be significant. Especially in the mining and energy sectors. You will see below that since January 2020, the number of companies with net zero commitments has tripled.

Companies with net zero commitments

Glasgow Finance Alliance for Net Zero (GFANZ)

These commitments are not backed by fluffy long-term guidance. Financial commitments to support net zero targets have increased 18-fold to $88 trillion in the last 18 months. Corporations have compromised with their balance sheets.

Net zero financial commitments

Glasgow Finance Alliance for Net Zero (GFANZ)

Some of you may not believe in this whole “climate change and decarbonization world” yet, and that’s okay. I’m not here to change your beliefs. I’m here to present a very strong investment proposition, backed by a strong narrative, that has the potential to make us a lot of money. The largest and most powerful investment institutions in the world are heading towards decarbonization. And I think the UK government will be very committed to this COP 26 and will even go so far as to initiate legislation towards a decarbonisation framework (making it law). this movement will be impact on all your investments.

Corporations that are unwilling to make changes simply will not attract new capital from investors. Worse yet, many current investors will be forced to sell.

This is just the beginning. Companies that do not want to follow the new rules will face much higher capital costs, which in turn will make them obsolete and uncompetitive.

Aggressive shareholder activism will continue for those companies that don’t want to play ball. Again, the cost of capital goes up for those who are unwilling to make changes. This is the new normal. Regards, Marin Katusa.