Climate change has the potential to destroy insurance as we know it. For instance, Aspen Insurance Holdings Limited (NYSE: AHL) is selling itself to Apollo Global Management (NYSE: APO).
Significantly, observers blame underwriting losses caused by California wildfires and hurricanes for Aspen management’s sell out. They announced the sell after Aspen recorded a loss of $14.8 million during 2nd Quarter 2018.
Aspen’s financial numbers are terrible; it reported revenue shrinkage of 13.07% during 2nd Quarter. Tellingly, AHL has experienced seven straight quarters of revenue shrinkage. Stockrow reported that the last revenue growth at Aspen Insurance was in 2nd Quarter 2016.
Is Aspen Insurance Holdings Making Money?
Climate Change deniers should note that Aspen is struggling to make money. It reported an operating income of $68.5 million and operating expenses of $196.6 million for 2nd Quarter 2018.
Disturbingly, Aspen Insurance reported an operating “cash flow” of -$72.6 million, a “free cash flow” of -$72.6 million and a financing cash flow of -$171.3 million. In particular, items to pay attention to are the investing cash flow of $77 million and the financing cash flow.
That means Aspen Insurance borrowed money to cover losses from claims payments. Therefore, Aspen’s insurance and underwriting operations are no longer a profitable business.
Aspen reported liabilities of $10.467 billion on 30 June 2018, but receivables of $2.6 million. The company also reported assets of $12.874 billion, cash and equivalents of $1.07 billion and assets of $12.8747 billion on the same day.
Why Insurance Companies are Losing Money
The obvious conclusion here is that Aspen Insurance is no longer making money from its business. For this reason I must raise the possibility that insurance is no longer a license to print money.
Historically, investors like Warren Buffett; and Apollo Global’s Leon Black, have financed their operations with “float” from insurance premiums. Specifically, an insurer generates float when the amount of premiums exceeds the claims payouts.
The opposite is happening at Aspen Insurance Holdings, the company is paying out more in claims than it takes in through premiums. Therefore, Aspen is losing money.
An obvious conclusion we can make in light of Aspen’s troubles is that insurance premium float no longer works. The volume of claims payments is so great that insurers cannot make money.
Did Climate Change Kill Aspen Insurance
Climate change is the obvious cause of Aspen’s woes. For example, Artemis estimates Aspen lost $135 million from the 2017 California wildfires alone.
Notably, California wildfires may have destroyed over 1,000 homes and caused $12 billion in damage during the first half of 2018. The Sacramento Bee reports that 17 fires were burning in California on 6 August 2018.
Experts blame the wildfires on high temperatures and drought conditions created by climate change. In particular, heat apparently changed the course of the jet stream making California dryer, The San Francisco Chronicle reports.
Instead of the usual conveyor belt of storms moving west to east over California, dry weather stayed in place for months. Therefore, there was no rain to put out fires and no moisture to fuel plant growth. Obviously, the plants died creating lots of fuel for fires.
“The weather patterns are just stuck,” Rutgers University Professor Jennifer Francis notes. “They’re trapped.”
Frighteningly, California is just the tip of the iceberg. NASA images revealed fires burning across the globe on 24 August 2018. Fast Company reports that wildfires were burning in Sweden, Germany, and England.
The cost of wildfires is adding up fast for insurers. For example, insurance claims from one group of fires in 2017 topped $9.4 billion, The Sacramento Bee estimates. The “wine country fires” in October 2017 were the source of those claims.
Under those circumstances, insurers are likely to dump fire insurance.
Can Speculators Make money from Climate Change and Insurance
On the positive side speculators could make money from climate change and insurance.
An obvious way to cash in is to buy the stocks of companies exposed to fire insurance, like Aspen Holdings. Then wait for the insurers’ management to sell out to private equity operators.
Apollo Global Management (NYSE: APO) will reportedly pay $42.75 a share for Aspen Insurance Holdings (NYSE: AHL), The Insurance Journal reveals. AHL was trading at $41.50 a share on 21 September 2018.
Under these circumstances another strategy is to bet against companies with high exposure to insurance. Three obvious candidates are Allstate (NYSE: ALL), Berkshire Hathaway (NYSE: BRK.B) and Apollo Global Management.
Short sellers might make money off dramatic news about Climate Change or fires. Conversely, contrarians might make by buying stocks heavily exposed to insurance and holding them. Their hope will be that Climate Change is fake or not as bad as it appears.
Should Speculators bet for or Against Climate Change?
This strategy is a little smarter than you might think. For example, Aspen Insurance Holdings paid a dividend of 24¢ on 4 September 2018. That dividend increased from 22¢ to 24¢ in 2017 despite Aspen’s losses.
Interestingly, Aspen Insurance shareholders enjoyed a dividend yield of 2.32%, an annualized payout of 96¢, and a payout ratio of 35.6% on 18 September 2018. To add icing to the cake, Aspen has reported six years of dividend growth.
Shrewd speculators could look for companies run by Climate Change deniers and sell them short. In other words they will bet on human stupidity which is sometimes a good way to make money.
The moral of the story is that Climate Change is real and wreaking havoc upon the insurance industry. Therefore speculators could, make a lot of money from the damage and misery Climate Change causes.
For this reason, all investors and speculators need to study the news about Climate Change carefully. There are apparently many opportunities to make money from Climate Change’s effect on the insurance industry.
Climate change will kill insurance as we know it and many speculators will make money from that tragedy.