PG&E sued over Camp wildfire, putting Cal Phoenix Re cat bond in the frame

We reported yesterday in one of our articles on the ongoing California wildfire outbreak that electrical utility Pacific Gas & Electric Co. (PG&E) has been sued over the cause of the Camp wildfire, a move which could put investors in its $200m Cal Phoenix Re Ltd. (Series 2018-1) at risk of losses.

We felt this is worth an article in its own right, as it raises questions over the unpredictability of wildfires and also the difficulty these investors will now face in understanding whether they are likely to face a loss, or not.

The Cal Phoenix Re catastrophe bond, which was issued in August 2018, set a first for the ILS market. The first time a securitisation of what is essentially third-party property liability came to market.

Update: PG&E’s catastrophe bond was marked down to distressed levels in secondary broker pricing sheets, reflecting the market’s sentiment that a loss is likely.

The cat bond is exposed to third-party related property damages that result from a wildfire that is deemed to have been caused by or due to infrastructure owned by the insured PG&E, so the firms power lines, electricity sub stations etc.

Hence there is litigation risk attached to the catastrophe bond and this is explicitly called out under loss adjustment expenses in the deal documentation, we understand.

The coverage cascades down through a reinsurance firm, to a mutual insurance firm, that provides the coverage to PG&E.

Hence, to the investors this may seem a pure California wildfire property catastrophe risk cat bond, linked to the indemnity insurance claims that occur and are reported through the insurer and reinsurer.

But the fact that litigation and legal process may define whether a payout is due, or not, is not typical in the cat bond market and makes Cal Phoenix Re a very different transaction.

Now, Pacific Gas & Electric Co. and its parent have been sued this week by a group of more than twenty victims of the Camp wildfire, claiming that the fire was started by PG&E’s infrastructure and blaming the utility for not adequately inspecting its powerlines in the area.

PG&E itself had reportedly known about issues with powerlines in the area a day before the fire had started and media reports suggest PG&E had actually contacted a landowner about a potential issue.

PG&E itself disclosed in a filing on Tuesday of this week that, “The cause of the Camp Fire is under investigation. On November 8, 2018, the Utility submitted an electric incident report to the California Public Utilities Commission (the “CPUC”) indicating that “on November 8, 2018 at approximately 0615 hours, PG&E experienced an outage on the Caribou-Palermo 115 kV Transmission line in Butte County. In the afternoon of November 8, PG&E observed by aerial patrol damage to a transmission tower on the Caribou-Palermo 115 kV Transmission line, approximately one mile north-east of the town of Pulga, in the area of the Camp Fire. This information is preliminary.” Also on November 8, 2018, acting governor Gavin Newsom issued an emergency proclamation for Butte County, due to the effect of the Camp Fire.”

PG&E Corporation also cited the fact it has recently renewed its $1.4 billion of liability insurance coverage for wildfire events, which will include the addition of the Cal Phoenix Re catastrophe bond.

The firms share price currently sits almost 47% lower than prior to the wildfire outbreak.

Ominously, the electrical utility also warned that should its equipment be determined as the cause of the Camp Fire, then it could be subject to “significant liability in excess of insurance coverage” which suggests it would expect to blow through all of its liability protection, including the Cal Phoenix Re catastrophe bond.

So it could be the utilities Commission in California that determines whether PG&E is liable, or perhaps it could be the courts. Whichever it is, this is uncertainty that will affect the secondary market valuation of the Cal Phoenix Re cat bond and likely concern investors.

Of course other cat bond payouts can end up in litigation, but that’s more typically going to be related to the sponsor, an investor, or other party, not typically litigation brought by families that have seen their houses destroyed.

For the Cal Phoenix Re catastrophe bond the future is uncertain.

It can often take time to determine a payout for a catastrophe bond or other ILS structure, hence the ability for sponsors to extend the maturity and other features that allow for claims to flow in and losses to be counted.

But in this case it is not the level of losses it seems, rather the determination of liability. As if liability is apportioned to the utility, it seems the level of financial impact it would face could be extreme and result in an immediate triggering of the $200 million Cal Phoenix Re cat bond.

It’s also worth noting that none of the wildfire outbreaks from 2017 have yet had causes assigned to them. Wildfires from 2015 have, including some attributed to electrical infrastructure.

But that suggests it can take time for liability to be determined, meaning the investors in the Cal Phoenix Re catastrophe bond could have quite a wait before they know if any payouts are due.

Also read:

Wildfire loss expectations rise, as structures destroyed passes 10,800.

Wildfires could cost insurers $5bn to $10bn: Credit Suisse analysts.

Wildfires to drive up to $6bn industry insured loss – Moody’s.

Wildfire losses to hit record in 2018, pricing needs to change: A.M. Best.

Stone Ridge & CATCo fund prices dented by California wildfire threat.

California wildfires destroy more property, but industry losses uncertain.

Cat bond price volatility & discounts expected from wildfires: Plenum.

California wildfire most destructive ever, multi-billion losses expected.