Insight: Coal miners forced to save for a rainy day by insurance snub

PICC Property And Casualty

31/08/2023 04:00

By Clara Denina and Sarah McFarlane
       LONDON, Aug 31 (Reuters) - Some coal producers are
having to set aside tens of millions of dollars to cover their
own risks as they are cut adrift by insurers, making it more
difficult and costly to do business amid a surge in demand for
the fossil fuel. 
    Dozens of insurers have announced restrictions on their
cover for the coal industry, particularly for new projects, in
response to pressure from shareholders, governments and
environmental groups who want to limit coal's contribution to
global warming. This follows similar moves by banks to restrict
their coal financing activities. 
    Coal miners need extensive insurance including for
operations, property, equipment, and environmental liability.
Three insurance brokers said it can now take months and dozens
of enquiries to find such coverage for a coal client.     
    Reuters spoke to five coal mining executives who said that
the industry is increasingly moving towards self-insurance and
self-finance, as the difficulty of securing coverage from
insurers makes loans more expensive or unavailable. 
    Some miners, including South Africa's Seriti Resources and
Thungela Resources  TGAJ.J , are already setting aside capital
to self-insure and only buying insurance to protect against
larger and less frequent losses.     
    While Seriti has said it is not struggling to get funding
from banks, securing insurance cover has become more
challenging, according to its chief financial officer Doug Gain.
    "In recognition of ESG and related factors shrinking the
availability of thermal coal insurance capacity globally, Seriti
has embarked on a journey toward increased self-insurance," Gain
told Reuters via email. 
    He did not elaborate on the cost for Seriti, which supplies
many of South Africa's coal power stations. 
    Many coal producers are finding workarounds and production
continues to rise. The International Energy Agency (IEA)
forecasts 2023 global supplies will surpass last year's record
of 8.6 billion tons, after the energy crisis triggered by
Russia's invasion of Ukraine forced many countries to use coal
to keep the lights on.
    But the need to earmark funds for self-insurance ties up
money on the balance sheets of coal companies and could leave
them vulnerable to large costs when something goes wrong,
industry analysts say. 
    Three analysts told Reuters that coal companies have been
able to absorb any increase in costs due to record profits last
year, but may find it harder in leaner times, as the issues with
insurance ultimately push up the cost of production.
    "Financing becomes impossible without insurance," said
Liberum equity analyst Ben Davis.
    "For existing producers at the moment, this is not a massive
issue because they can still set funds aside, given sustained
coal prices. But there are going to be tougher times ahead for
the ones that don't set the money aside," he added.  
    The dwindling supply of insurance for coal producers has led
to premiums rising nearly three times as much as an industry
benchmark, data from brokerage Willis Towers Watson shows.
    Thermal coal insurance rates rose more than 20% last year,
it said, above the 7.3% rise in the benchmark Marsh Global
Insurance Market Index. 
    Whitehaven Coal  WHC.AX , Australia's top independent coal
miner, has seen its insurance costs roughly double over the last
two years, a person familiar with the company who asked not to
be identified because the information is financially sensitive,
told Reuters. 
    Whitehaven declined to comment.  
    
    TAKE COVER
    Seriti has a combination of self-insurance to cover damage
to some assets, while retaining some cover from the insurance
industry such as flood damage or underground fire damage, a
spokesperson said. 
    To reduce the cost of insurance cover, Seriti is increasing
the retention of capital in its own insurance unit so that only
excess layers of risk need to be insured by third parties. 
    "We expect the availability of insurance capacity for
thermal coal assets to continue to shrink over time and the
capacity will likely be extremely limited by circa 2030," Gain
said.
    In the case of Thungela - a company spun off from Anglo
American - it set aside R1.2 billion ($67 million) to
self-insure some of its risk last year, while still sourcing its
catastrophic risk cover, including events like mine collapses or
natural disasters, from the insurance market. 
    Thungela told Reuters it intends to become fully
self-insured in future, without specifying the timeframe. 
    Forty-five insurance companies have introduced restrictions
now on cover for the coal industry, including Allianz, Swiss Re
and Munich Re, according to the Insure Our Future environmental
pressure group.
    Some insurers still have relatively large fossil fuel
businesses, with Bermuda's AEGIS, China's PICC, Russia's SOGAZ,
Switzerland's Chubb and Germany's Allianz the top five by gross
premiums in 2022, according to data exclusively provided to
Reuters by Insuramore, which produces insurance rankings and
analysis. 
    AEGIS said in an email that its coal business represents a
small portion of its total and was decreasing, while Allianz
said it will phase out coal-based business by 2040. 
    Chubb, which says it does not insure new risks for miners
generating more than 30% of their revenue from coal, declined to
comment. China's PICC and Russia's SOGAZ did not respond to a
request for comment.
    Some coal producers have set up their own separate company
to deal with their insurance - called a captive - which can be
covered by a combination of their own funds, individual
insurance companies, and a group of insurance companies working
together to share the risk with so-called reinsurance. 
    Insurance companies can be active in both primary insurance
and reinsurance and have differing commitments on ESG for
different parts of their business.
    "The majority of the reinsurance market remains open to the
ongoing operations of coal companies but not their new
projects," said Insure Our Future coordinator Peter Bosshard.
    
    MUTUAL INSURANCE FUND 
    In Australia, coal companies have explored setting up a
mutual insurance fund that they would all pay into as a form of
self-insurance, but talks have stalled with a lack of government
support, people familiar with the matter said.
    "Establishing a mutual fund for the coal industry is a
matter for the coal industry," a spokesperson for the Australian
Department of Treasury said. "Any financial support or guarantee
for a mutual fund would involve a decision of government."
    The spokesperson did not say whether the government had been
approached by companies about the fund.
    Nombasa Tsengwa, Chief Executive Officer at South African
coal miner Exxaro Resources  EXXJ.J , said that insurers in some
countries and regions, including in Asia, were more willing to
do business than elsewhere.
    "What we have also noticed is that there are other
jurisdictions that are interested in absorbing the risk of coal
businesses," Tsengwa said, referring to more stringent
regulations in Europe. 
    "I'm talking about going beyond your normal UK-based markets
and looking into Asia for funders and insurance cover," she
added.
    Coal prices hit record highs in September last year as
European countries scrambled to replace Russian gas, sending
coal miners' profits soaring. 
    But prices have since fallen and analysts say the need by
producers to meet more of their own financing and insurance
requirements could exacerbate the impact of weaker prices on
profits.
    Thungela and Exxaro saw their profits fall by 75% and 29%
respectively in the first half on weaker prices. Major
diversified miner Glencore  GLEN.L  said its industrial assets'
profit fell by 51% in the first half due to lower prices,
particularly in coal, and inflationary costs.

 (Reporting by Clara Denina and Sarah McFarlane
Additional reporting by Nelson Banya; Editing by Elaine
Hardcastle and Daniel Flynn)
 ((sarah.mcfarlane@thomsonreuters.com;))