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Risky business: Climate change turns up the heat on insurers, policyholders

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November 11, 2021

By Noor Zainab Hussain and Carolyn Cohn

(Reuters) – Tony and Jhan Dunn never thought they would leave California, where they grew up, built a life together and planned to retire.

But after a wildfire swept through their Northern California town of Paradise three years ago, burning their home to the ground, they could not get insurance to buy another.

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“We basically got priced out of California,” Dunn, a retired planning specialist, told Reuters from the couple’s new home in North Carolina.

There are thousands of homeowners and businesses from California to Australia in a similar position because the insurance industry, known for its readiness to cover anything from Bruce Springsteen’s vocal chords to alien abductions, has trouble factoring in climate change.

The tried and tested approach, where decades’ worth of historical data serve to estimate future claims, falls short when weather patterns change and hurricanes, floods, heat waves or snowstorms become more extreme and unpredictable, industry experts say. And the British hosts of the U.N. climate conference in Glasgow acknowledged on Wednesday that current pledges to cut greenhouse gases were not enough to avert climate catastrophe.

Insurance broker Aon said in a report last week that “highly anomalous” floods in Germany and China this year caused record insured losses in those regions.

“Insurers are pulling out because nobody wants to be in the business of losing money,” says Attila Toth, chief executive at specialist risk analytics firm Zesty.ai. “And if they don’t trust their traditional models, then they are concerned that they will be losing money.”

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Zesty.ai, whose customers include Farmers Insurance, reinsurer Berkshire Hathaway and Aon, uses artificial intelligence trained on more than 1,400 wildfire events to produce climate change risk scores for any individual property.

In the same vein, reinsurance broker Willis Re is using data from AI firm Cloud to Street to help clients price flood reinsurance.

Insurance statistics show an urgent need for such innovation.

For example, the average number of large U.S. wildfires has risen by 30% over the past 15 years and by nearly a fifth in just the last five, according to Lloyd’s of London insurer Chaucer.

In all, insured losses for so-called “secondary” perils such as floods and wildfires – rather than more closely modelled perils such as hurricanes – nearly doubled over the past decade, data compiled by Swiss Re shows.

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The reinsurer expects no let-up, forecasting a 30-63% rise in insured losses for all types of natural catastrophes in advanced markets by 2040. China, Britain, France and Germany, could even see those soaring between 90% and 120%.

Given the momentum, it is no surprise that traditional models cannot keep up, Bruce Carnegie-Brown, chairman of insurance market Lloyd’s of London told Reuters.

“If you’ve reached an exponential part of the curve where suddenly, something’s accelerating, it’s almost certain that we are underpricing the risk that we’re taking.”

FEELING THE HEAT

Policyholders are already feeling the heat, with coverage getting costlier or harder to come by.

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Broker Marsh estimates U.S. property insurance rates have risen by 10% in the third quarter.

In California, non-renewals of homeowners’ insurance policies rose 31% from a year earlier in 2019 to more than 235,000, the state’s Insurance Department’s most recent data showed. The data for 2020 could be similar, according to Carmen Balber, executive director of Consumer Watchdog LA.

Across the northern border, the Insurance Bureau of Canada warned on its website homeowners might not be able to buy a new insurance policy if they have suffered a fire.

Among those pulling back from home insurance in California are some household names such as Liberty Mutual, Nationwide and State Farm. Liberty Mutual said it was a “difficult but necessary step to reduce overall exposure to wildfires,” a sentiment echoed by other insurers.

Some insurers aim to reduce their exposure by helping clients become more resilient. Commercial insurer AXA, for example, offers a consulting service for clients such as manufacturers, identifying their vulnerabilities and suggesting remedies, such as erecting flood barriers, its chief risk officer Renaud Guidee told Reuters.

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“This is really an alignment of interest.”

U.S. insurer Chubb is also working with clients to help them make their infrastructure sturdier, said Paul J Krump, Vice Chairman, Chubb Group, Global Underwriting and Claims.

Reinsurers, with their global scope and long history of underwriting catastrophe risks, also have a role to play in helping the industry adapt to climate change, analysts say.

Ernst Rauch, chief climate and geo scientist at Munich Re, said the group had the expertise and willingness to take on climate risk.

The 141-year-old company set up a team to work on natural catastrophes and climate change in the 1970s after noticing loss patterns starting to change for weather related events, Rauch said.

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“We observed a continuation of years with losses significantly higher compared to the last 35 years or so. And that’s reflected in our models,” he said.

Yet there was a gap between what the reinsurer considered a fair premium and what insurers were prepared to pay.

“We can only transfer this risk on our balance sheet if we get the premium which we need to cover these risks, based on our own assessment,” Rauch said.

Ratings agency S&P Global warned even reinsurers could be underestimating their exposure to climate risk by as much as 50%, describing their efforts to account for climate change as “nascent” in a recent report.

Industry experts also say disasters such as hurricanes in Florida with a long history of causing severe damage, are more closely modelled than floods or wildfires, which have only in recent years begun to cause major losses.

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That calls for reinsurers and independent risk modelling firms such as RMS and KCC to try new ways of approaching natural catastrophes.

One such approach is scenario modelling, where insurers are provided with a number of possible climate impacts on their portfolios over years, to take account of “the whole range of uncertainty,” said Laurent Marescot, senior director, EMEA and CIS, at RMS, which sells its risk models to insurers.

Another involves machine learning, which can be used to take existing models of floods in a particular region, for example, and map them to other parts of the world, Marescot said.

But any developments in making insurance more available and affordable will come too late for the Dunns.

“It was sad because we both spent our whole lives in California, we both grew up in San Diego,” Tony Dunn said. “I never had any intentions ever of leaving California.”

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(Reporting by Noor Zainab Hussain in Bengaluru and Carolyn Cohn in London; Editing by Tomasz Janowski and Elaine Hardcastle)

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Volkswagen exploring IPO of luxury carmaker Porsche -sources

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December 7, 2021

BERLIN/HAMBURG (Reuters) -Volkswagen is still exploring a possible initial public offering of its luxury brand Porsche AG as a way to fund its costly shift towards software and electric vehicles, two people familiar with the matter told Reuters on Tuesday.

Speculation about a Porsche listing, which could be a record-breaking IPO, has surfaced over the year, but no decision has been made due to a complex stakeholder set-up, the sources said, adding it was unclear whether a listing would happen.

Reports about a possible listing of the unit have included estimates of a standalone Porsche AG valuation of between 45 billion and 90 billion euros ($101 billion).

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Earlier, Handelsblatt reported that the Porsche and Piech families, who control Volkswagen’s largest shareholder Porsche SE, are considering selling part of their VW stake to fund a substantial stake purchase in a possible Porsche IPO.

The families, who own 31.4% of Volkswagen shares and have 53.3% of voting rights via Porsche SE, could sell enough shares to raise roughly 15 billion euros, the German newspaper said.

They would remain the largest shareholder in Volkswagen, Handelsblatt added, ahead of the state of Lower Saxony, which holds a 11.8% equity stake and 20% of voting rights.

Porsche SE called the report “pure speculation”, without giving further comment. Volkswagen declined to comment.

Volkswagen preference shares, which have fallen significantly in recent weeks due to a leadership tussle, closed up 8.6% at the top of Germany’s benchmark DAX index.

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Porsche SE shares closed 8.5% higher.

People familiar with the matter told Reuters in May that the families were prepared to take a direct stake in Porsche https://www.reuters.com/business/finance/porsche-piech-families-weigh-direct-stake-possible-porsche-ipo-sources-2021-05-31 AG should the luxury carmaker be separately listed.

Such a move would loosen the grip of the families on Europe’s largest carmaker Volkswagen, in favour of direct ownership of the sports car brand founded by their ancestor Ferdinand Porsche, which dates back to 1931.

Asked about a potential listing of Porsche in October, Chief Executive Herbert Diess said that Volkswagen was constantly reviewing its portfolio, but gave no further comment.

Diess will probably stay on as VW CEO although he will cede some responsibilities after a clash with labour leaders, two sources familiar with the matter told Reuters.

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($1 = 0.8894 euros)

(Reporting by Victoria Waldersee, Ilona Wissenbach, Jan Schwartz, Pamela Barbaglia and Christoph Steitz; Editing by Madeline Chambers and Alexander Smith)

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American Airlines taps president Isom as next CEO

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December 7, 2021

By Rajesh Kumar Singh and Abhijith Ganapavaram

(Reuters) – American Airlines Group Inc CEO Doug Parker will hand over the reins of the No. 1 U.S. airline to president Robert Isom on March 31, the company said on Tuesday, sending its shares up 2% in morning trade.

Parker will continue as chairman, while Isom will join the carrier’s board after he takes over as CEO.

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Isom, a longtime airline industry executive, took over as president in 2016 and has overseen operations, planning, marketing and pricing.

The leadership change comes as the industry recovers from the lows hit during the pandemic but faces operational challenges due to the threat posed by the Omicron coronavirus variant.

Isom faces the challenge of repairing American’s balance sheet as the pandemic has left it with the largest debt stock in the U.S. airline industry. He will also have to work on improving relations with the company’s labor unions.

In an interview, Isom said American would focus on returning to profitability as soon as possible and delivering a reliable service. He also aims to pay down a lot of debt.

“We’re going to be really focused on making sure that we have an appropriate level of leverage,” Isom told Reuters.

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Returning to profitability, however, is contingent upon a full recovery in travel demand. Isom said while the airline’s domestic business remained strong, new travel restrictions following the Omicron variant’s discovery had dampened demand in some international markets.

“If there’s anything, it just delays recovery,” he said.

Isom, 58, has been playing a key role in developing American’s strategy before and through the pandemic.

Analysts at Jefferies said he would bring broad experience to the job and the leadership change was unlikely to result in a deviation from the strategy, focused on fleet renewal and alliances, under Parker.

“Given Mr. Isom’s lengthy history with Mr. Parker, this transition was likely in place for a significant period of time,” they wrote in a note.

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A ‘THOUGHTFUL AND WELL-PLANNED’ SUCCESSION

In a letter to employees, Parker said the transition was the result of a “thoughtful and well-planned multi-year process”, dating back to Isom’s elevation to president in 2016.

Parker, 60, said the transition would have happened sooner if it was not for the pandemic, which brought the airline industry to its knees.

“While we still have work to do, the recovery from the pandemic is underway and now is the right time to make the transition,” he said.

Parker, one of the longest-serving chief executives in the airline industry, is known for overseeing consolidation in the industry as well as leading it through crises.

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He took the reins at America West Airlines just 10 days before the 9/11 attacks. When America West merged with US Airways in 2005, Parker continued as CEO of the combined company.

He was named chairman and CEO of American Airlines in 2013 after its merger with US Airways.

He was also instrumental in negotiating a COVID-19 relief package for the industry, which carriers say has saved thousands of jobs, prevented bankruptcy and put it in a position to support the economy’s recovery from the pandemic.

Under Parker, American expanded overseas and took on low-cost carriers at home, sparking a fare war. He formed strategic partnerships with Alaska Airlines and JetBlue Airways Corp to compete in markets where other carriers had an advantage.

The alliance with JetBlue, however, has invited lawsuits from the U.S. Justice Department and six states.

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In June, Southwest Airlines Co named company veteran Robert Jordan as CEO in place of Gary Kelly, who will step down next year.

(Reporting by Rajesh Kumar Singh in Chicago and Abhijith Ganapavaram in Bengaluru Editing by Arun Koyyur, Jason Neely and Mark Potter)

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U.S. bank executives worried about sustained high inflation

Published

on

December 7, 2021

By Matt Scuffham

NEW YORK (Reuters) -U.S. bank executives on Tuesday raised concerns about the impact of a sustained period of higher inflation, adding to pressure on the Federal Reserve to accelerate plans to wind down the pace of its asset purchases.

Senior bankers are increasingly concerned that higher inflation could impact borrowers’ ability to pay back loans, slow U.S. economic growth and destabilize stock markets.

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Wells Fargo Chief Executive Charlie Scharf said at a conference that the U.S. central bank may need to move quicker to address inflation concerns. Goldman Sachs CEO David Solomon said he anticipated a period of higher inflation.

Bank of America CEO Brian Moynihan said his bank was running internal health checks to ensure its portfolios could withstand a return to 1970s-style inflation.

“We’ve been doing that for three or four quarters now figuring that we’d be at this place where inflation is real and out there,” Moynihan said at the Goldman Sachs Financial Services Conference.

Annual U.S. inflation increased from 1.4% to 13.3% from 1960 to 1979, while the country’s economic growth stagnated.

That had a marked impact on people’s lives, with the value of savings and the purchasing power of fixed incomes like pensions being undermined.

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U.S. inflation is running at more than twice the Fed’s flexible 2% annual target.

The International Monetary Fund last week warned of intensifying inflationary pressures, especially in the United States, and said U.S. central bankers should focus more on inflation risks.

“There’s a case to be made that they (the Federal Reserve) should be moving faster than they’ve been moving,” Scharf said.

“Inflation is very, very real,” he said. “Prices are significantly higher for inputs across most industries. Labor shortages and wage increases are extremely real. Whether that continues for several years is not all that relevant, but it certainly will have an impact over the next year or so.”

PANDEMIC’S SHADOW

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The U.S. central bank needs to be ready to respond to the possibility that inflation may not recede in the second half of next year as most forecasters currently expect, Fed Chair Jerome Powell said last week.

“My guess is now that there will be a quicker path to appropriate actions,” Scharf said.

Goldman Sachs’ Solomon anticipates inflation will be higher for a period but doesn’t expect a repeat of the cost rises of the 1970s, he said in an interview with CNBC.

“There’s a reasonable chance that we’re going to have inflation above trend for a period of time, but that doesn’t mean it has to be like the 1970s,” he said. “You’ve got to be cautious and manage your risk appropriately.”

Solomon acknowledged “uncertainty” in global financial markets due to factors including the emergence of the Omicron COVID-19 variant and question marks over the pace at which the Fed and other central banks will reduce asset purchases.

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The Fed has begun reducing its $120 billion in monthly purchases of Treasuries and mortgage-backed securities on a pace that would put it on track to complete the wind-down in mid-2022. There is growing pressure on the central bank to accelerate the end of the bond-buying program, which was unveiled in 2020 to stem the economic fallout from the pandemic.

“We’re still not completely out of the pandemic. There’s uncertainty that comes from that and that uncertainty is going to affect economic activity,” Solomon said.

“On top of that, we have shifts going on in fiscal and monetary policy to try to balance that. There’s no question that this has been an unprecedented period, so it’s very hard to predict how we’re going to come out of this.”

(Reporting by Matt Scuffham, Editing by Louise Heavens, Emelia Sithole-Matarise and Paul Simao)

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