PG&E pays $11bn subrogation settlement, joins Wildfire Fund

Pacific Gas and Electricity (PG&E), the wildfire stricken California focused electrical utility operator, has finally made its payments to insurance, reinsurance and other entities holding subrogation claims rights, amounting to an $11 billion settlement.

Having now successfully emerged from Chapter 11 bankruptcy and secured financing for its future operations, PG&E has also formally joined the new California Wildfire Fund, which means the ongoing procurement of reinsurance for that fund will be aiming for the upper-end of its roughly $2 billion coverage target.

PG&E said this week that it has now funded its wildfire settlements, among which is the payment of an $11 billion settlement to insurance companies and other entities that hold subrogation rights related to claims paid to individuals and businesses related to wildfires in recent years.

The expectation is that some of this settlement will reduce the ultimate losses of insurance carriers that paid claims for the significant California wildfires of recent years, which in turn may result in a reduction of their reinsurance coverage from the events, in turn perhaps also reducing the liability for retrocessionaires.

While many subrogation rights had found their way out of the insurance and reinsurance industry and into the hands of investors and hedge funds over the last two years, enough are still held by major carriers to expect some return of value to reinsurers, retro providers and also some insurance-linked securities (ILS) funds.

Among those in the ILS market that had been expecting to benefit from the eventual payment of subrogation claims by PG&E are quota share focused ILS funds and investors, as private pro-rata arrangements and sidecars are likely to see any benefits from the settlement flow down the line to the ultimate source of capital backing these structures.

In addition, some retrocessionaires have been hoping to benefit from subrogation right repayments we understand.

PG&E had first agreed its subrogation settlement of $11 billion back in October 2019, which was expected to provide some benefit to reinsurance providers, also including some ILS funds, that were exposed to losses caused by the major California wildfire events of 2017 and 2018.

PG&E’s equipment and infrastructure was deemed to have caused a number of the major wildfire outbreaks in California in recent years, most notably the devastating Camp wildfire in late 2018.

Over $20 billion of losses were paid by insurance and reinsurance companies, ILS funds and retrocessionaires, for the wildfires and the subrogation agreement sees some of that value set to flow back out of the bankruptcy, in recognition of PG&E’s liability through its infrastructure that started the fires.

As a result, some of the subrogation rights are expected to reduce the ultimate losses for certain cedents of the ILS and collateralised reinsurance market, meaning some ILS funds are expected to be able to reduce the loss estimates on largely side-pocketed investment positions.

The exposed quota share and sidecar focused investors are expected to be some of the first to see any benefit from the PG&E settlement, as the loss position improves for the quota share structures investors or ILS funds have allocated to, which may allow them to free some ILS collateral that had been trapped.

There is still a significant degree of caution among ILS fund managers and investors, as to how beneficial these subrogation claims payments will actually be.

It’s also uncertain how fast they will flow along the market chain, as well as how much will actually reach retrocessionaires or ILS funds that provide capital further down that line.

But, loss positions related to the major wildfires will adjust for the better, it is expected, which ultimately has to cascade through the tiers of the insurance and reinsurance market and benefit those carrying exposed positions still.

PG&E also announced that it has elected to officially join the California Wildfire Fund and has deposited roughly $5 billion into it, representing the utilities initial and first annual contributions.

That’s also a milestone for the Fund itself, as it now sets the administrators of the Wildfire Fund, which are the California Earthquake Authority (CEA) a more definite target for the amount of exposure the Fund will carry and therefore a target for reinsurance and risk transfer needed to support it.

As we explained in our last article on PG&E, the California Wildfire Fund is is already out in the market looking for as much as $2 billion of reinsurance for a renewal of its initial, small program that was placed a year ago.

While that figure likely factored in the inclusion of PG&E, now the utility has joined it will make the Wildfire Fund’s future reinsurance needs much larger, it is assumed, bringing more California wildfire risk to the reinsurance and ILS market over-time.