It’s been reported that Warren Buffett’s conglomerate, insurance and reinsurance giant Berkshire Hathaway is looking at a possible acquisition of distressed California electrical utility PG&E Corporation, but Warren Buffett was quick to deny the news.
Buffett already holds ownership stakes in a number of utilities within its investments made by Berkshire Hathaway, including having acquired Portland-based PacifiCorp in 2005 and Nevada utility NV Energy in 2013.
After the reports of the acquisition interest in PG&E emerged today via energy newswire SparkSpread, analysts quickly said that PG&E would be a natural fit into the Berkshire Hathaway Energy portfolio of companies, given its operations are in California.
Of course, PG&E Corporation (the Pacific Gas and Electric Company), is already said to be well on the way to bankruptcy, after the impacts of 2018 wildfires in California are assumed to have been caused by its electrical equipment.
That wildfire alone is estimated to have caused insurance and reinsurance market losses of as high as $12.5 billion, making it the most costly insured wildfire loss in history.
Numerous wildfire property liability insurance contracts, and related reinsurance arrangements, remain in the balance still, as liability has not yet been assigned for the 2018 wildfire loss events.
Meaning if Warren Buffett’s Berkshire Hathaway does come in and rescue PG&E from bankruptcy, likely buying the utility for a knock-down price, it could put the conglomerate as the beneficiary of any insurance recoveries due to the utility, including for the at-risk Cal Phoenix Re Ltd. (Series 2018-1) catastrophe bond transaction.
But Warren Buffett himself has been quick to deny the news, telling CNBC that his firm was not looking to acquire PG&E, while the utility declined to comment on the rumour.
The chance of PG&E being acquired does raise interesting questions though, regarding the in-force wildfire liability coverage, the cat bond and any chances of subrogation rights being earned or bought by hedge funds.
We understand a number of hedge funds have already bought some subrogation rights from insurers that provided coverage to PG&E, while others hover around the insurance layers and Cal Phoenix cat bond wondering whether there is a chance to profit by acquiring at distressed rates, or buying subrogation rights.
It would have been surprising to see Buffett’s firm buying PG&E at this time, not least given the potential liability the utility may face as well as the steep rises in wildfire insurance costs coming to the state that will increase operational costs significantly and reduce profits for Californian utility firms.
It would also have been surprising given Berkshire’s expertise in the insurance and reinsurance space, as well as the fact its leadership under Aji Jain are no doubt fully aware of the risks associated with running an electrical utility in California.
Interesting news for a Wednesday, a little off our normal beat. But it does again highlight the distressed nature of PG&E and the subject of the catastrophe bond and other property liability contracts still in-force.
PG&E’s share price spiked on the initial rumour by as much as 20% in pre-market trading, but that slipped away quickly after Buffett’s denial.
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