California push for coal divestment raises concerns

SACRAMENTO – Unlike the sellers of most other products or services, insurance companies receive payments from their customers in exchange for future promises. If you wreck your car, they will pay for the damage. If you die, they will pay out a benefit to your heirs. Because of that reality, insurance commissioners have a role in assuring companies that write policies have the wherewithal to pay those claims. No one disputes that notion, including the insurance industry itself.

This “solvency” issue gives state commissioners broad authority. In the dozen or so states where insurance commissioners are elected, these officials often have their eyes on higher office. For instance, insurance officials and some Sacramento observers argue California’s ambitious commissioner – Dave Jones, a former Democratic assemblyman who is mulling a race for attorney general – is imposing a politically motivated diktat on companies and dressing it up as a campaign for solvency.

Coal miningThe issue: Jones is calling for insurance companies to divest “voluntarily” from their investments in thermal-coal companies and in utility companies that make heavy use of coal. He has vowed to publicize – some say “shame” – insurance companies that don’t comply with the request. Given that 1988’s Proposition 103 grants the California commissioner vast powers to prescribe which factors companies use to adjust rates and to approve or deny proposed rate increases, insurance officials wonder about the voluntary nature of the policy.

The “Climate Risk Carbon Initiative” divestment request applies to direct investments in companies that gain more than 30 percent of their revenues from thermal coal. In practice, these are some of the most conservative investments around, including monopoly utilities whose returns are set by regulation. It also requires insurance companies that do business in the state to answer a variety of questions about such investments, even if they are headquartered outside California. The goal is to pressure companies to divest from these holdings.

“The commissioner decided to request voluntary divestment from thermal coal enterprises this year following consideration of recent studies that show coal investments represent significantly higher financial risk than other investments over time,” the California Department of Insurance explains. “Moreover, since 2011, coal prices, cash flows, and company valuations have fallen sharply, thus adversely affecting and bankrupting numerous coal companies.”

“Politics,” the department says, “has nothing to do with the decision to ask insurers to divest from thermal coal.”

That sounds reasonable, but insurers typically make conservative investment decisions. Jones and other advocates for divestment make it seem as if these companies are heavily invested in high-risk stocks. They suggest these companies will be stuck with enormous “stranded assets” as the nation moves away from coal-based energy and toward alternative-energy sources. But insurance companies hold few coal-related stocks and bonds as a percentage of their overall investments. Even if the “stranded asset” argument were correct, it would barely cause a blip in their portfolios.

In a letter to the insurance commissioner last year, leaders of major insurance-company trade associations reminded him: “For regulated utilities, the risk of loss due to stranded assets is remote. Utility companies operate on a cost-plus system. Precedent is in place that supports the recovery of all costs deemed to have been prudently incurred.”

By contrast, some of the investments the insurance commissioner prefers – in “green” energy, for instance – are risky. As my R Street Institute colleague R.J. Lehmann noted in an article last year, “Greentech Media publishes an annual list of solar company failures and has noted that ‘(k)eeping track of failing solar companies in 2011 and 2012 bordered on full-time work.’”

Why hasn’t the insurance commissioner called for divestment from these companies?

The answer seems obvious. California’s government has embraced climate change in a big way. Gov. Jerry Brown has addressed the United Nations and a conference at the Vatican, where he has depicted the issue in stark terms. In his view, the future of human existence is at stake. California has passed a first-in-the-nation cap-and-trade system to roll back industrial emissions to 1990 levels, along with other legislation designed to decrease public use of petroleum products dramatically. It’s a popular cause here, and isn’t lost on any up-and-coming politician.

Whatever one’s view of man-made climate change, it remains an iffy proposition to suggest it is threatening the long-term solvency of major insurance companies. These investments already reflect the risks involved in the energy sector. Every knowledgeable investor knows about the changing regulatory climate. Private investors are better able than government planners to evaluate such matters and make decisions accordingly.

Indeed, as I pointed out in my recent R Street study, one of the nation’s most widely respected investors, Warren Buffett, recently rejected calls by an activist group and investor in his Berkshire Hathaway Corp. to report on climate-change risks. For instance, many activists argue that insurance companies aren’t properly pricing these risks and aren’t being aggressive enough in tackling the potential long-term problems. Buffett believes in climate change but doesn’t see a risk in his company’s insurance holdings.

“As a citizen, you may understandably find climate change keeping you up nights,” Buffett said in his company report. “As a homeowner in a low-lying area, you may wish to consider moving. But when you are thinking only as a shareholder of a major insurer, climate change should not be on your list of worries.” Buffett suggested even an uptick in the frequency or severity of climate-related catastrophes wasn’t much of a problem for the insurance industry, given that rates are set annually. Moreover, as a major provider of reinsurance – that is, insurance for insurance companies – Berkshire might actually benefit from more demand driven by climate change, given that reinsurance prices have been falling for years.

These companies’ futures depend on their ability to evaluate risks and benefits. They all have teams of actuaries and risk-management professionals who have a vested interest in making the most sophisticated guesses about future events. Elected officials, by contrast, are more apt to be swayed by political winds. A previous Republican insurance commissioner and gubernatorial candidate, Steve Poizner, in 2010 tried to force insurers to divest from investments in multinational companies that did business in Iran. This type of thing is nothing new.

“Divestment comes at the expense of meaningful action,” wrote Frank A. Wolak, director of the Stanford University Program on Energy and Sustainable Development. “It will do nothing to reduce global greenhouse emissions. It will not prevent these companies from raising capital.” And indeed, the state government’s push for divestment in non-insurance areas – i.e., forcing the California Public Employees’ Retirement System to take a similar approach – has been met with a similar backlash.

One can never know the motives of insurance commissioners, past or present. But it’s a safe bet that private investors making their own decisions with their own money are almost certainly more trustworthy than politicians making investment decisions based on the latest political winds. By all means, commissioners should work to assure that insurers can fulfill whatever claims are made in the future – but they shouldn’t bootstrap that legitimate authority into a politically motivated crusade.

Steven Greenhut is the founding editor of CalWatchdog. He is Western region director of the R Street Institute and a Sacramento-based columnist. Write to him at [email protected].

9 comments

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  1. Dork
    Dork 2 August, 2016, 06:44

    He has vowed to publicize – some say “shame” – insurance companies that don’t comply with the request

    We used to Call this FELONY EXTORTION

    Reply this comment
    • Mr. Pickle
      Mr. Pickle 2 August, 2016, 11:28

      Can you say AB 32? As in 32 ways to screw the people of Ca.
      Yep, the Democrats are controlling everything in this state, and look what we have. DEBT so far up our patooties, we may never be able to climb out. They learned how to TAX the air we breathe……
      Grrrrrrrrrrrrrr……………

      Reply this comment
  2. Queeg
    Queeg 2 August, 2016, 08:40

    Comrades

    Your public servants become Commissars……expanding the ruling class. So familiar this this command decision making…..

    Reply this comment
  3. JPR11
    JPR11 2 August, 2016, 10:03

    Only in Socialist CA

    Reply this comment
  4. Mr. Pickle
    Mr. Pickle 2 August, 2016, 11:24

    Like one Presidential candidate has said, shut down all coal operations and terminate the employees, as all things green must crush those that don’t believe in Global Cooling, or is it Global Warming, or is it Climate Change??? It is called weather………….
    These so called leaders and do-gooders are playing politics with American. Just ask anybody who recently saw their PG&E bill!
    IT SUCKS, and it is all POLITICS from one side called DEMS.
    VOTE ALL OF THEM OUT!

    Reply this comment
  5. Queeg
    Queeg 2 August, 2016, 16:57

    Comrades

    Spent two weeks in Spain early this year. The country is a run down disaster due to unemployment, high green energy costs, socialist tilt in housing and small business. Their tourist PR is a FRAUD…….most notable most residents do not use much home electricity due to cost. They live in gulag seedy apartment houses that look like California tear downs. Beware of Tapas bars…they put tapas out in morning and they sit in unrefrigerated counter cases or in the open for mucho hours. Many places have hygiene problems, and, frankly, the food quality is marginal…..hours of operation random and highly inconvenient, gas stations scarce, most hotels look like from works projects in the 1970’s.

    Reply this comment
  6. milton
    milton 2 August, 2016, 19:38

    Dave Jones can lick my ass after a big crap on May 6th. Beans, hot sauce, carnitas, tequila, lots of modelo….blow dry his hair with my steamy sulfiric gas.

    Reply this comment
  7. Spurwing Plover
    Spurwing Plover 3 August, 2016, 15:54

    All those idiots who oppose fracking,drilling coal mining the Keep it in the ground jerks all need to go live in a dank,drafty bug and bat infested cave all winter long lets see how they like living a real primative and not the hollywood ones their so used to while watching crap like AVATAR

    Reply this comment
  8. Ron
    Ron 8 August, 2016, 07:03

    Seems that Dave Jones has boarded the Tom Steyer emissions crusade. Tom Steyer made his fortune with Farallon Capital Management with successful investments in overseas coal mines and coal fired power plants and now that he has reaped the financial rewards from the fossil fuels industry, he now seeks to make another fortune on “green energy”. His fossil fuels fortune is now being parlayed to heavy solar investments, thus his crusade to stall the fossil fuel sector. He was a major investor in a Kinder Morgan pipeline that was competing against the Keystone Pipeline, thus he opposes the Keystone for his financial benefits. He may be a wise investor, but many deem his message today as hypocritical.

    The HYPOCRITIC Tom Steyer is part of the 1% that pays 50% of all California state income taxes. The 1% that can afford most anything. His “off oil” crusade against the one industry that provides all the products and chemicals to EVERY infrastructure and EVERY industry that supports our lifestyle, will impact the financially challenged more than the 1%. Shifting the California energy needs for our 38 million citizens, out of California to other States or Countries, will net an increase in costs to the financially challenged to maintain the elements of our basic lifestyle, and increase the world’s greenhouse gasses from afar from locations with significantly less environmental controls.

    The other 99% of our 38 million citizens may be the ones that have registered the 97% of the 32 million registered vehicles that are fossil fuel driven and generally more affordable than the alternative energy driven vehicles that the 1% can afford. The financially challenged includes: 1) nearly 25% of Californians 38 million live below the poverty line. 2) California has more than 33% of the nation’s welfare recipients, 3) California is home to 12% of the nation’s population, but startlingly 21% of the nation’s homeless population, 4) The majority of California renters: Nearly 3 million households – pay more than 30% of their income toward rent, 5) Roughly – 1.5 million households pay more than 50% of their income toward rent.

    Steyers’s crusade is financially good for Steyer, but bad for 99% of California.

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Steven Greenhut

Steven Greenhut

Steven Greenhut is CalWatchdog’s contributing editor. Greenhut was deputy editor and columnist for The Orange County Register for 11 years. He is author of the new book, “Plunder! How Public Employee Unions are Raiding Treasuries, Controlling Our Lives and Bankrupting the Nation.”

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