While Pacific Gas and Electricity (PG&E), the wildfire stricken Californian electrical utility, made its $11 billion of subrogation payments in July, the benefits for insurance-linked securities (ILS) funds are expected to take as long as a year to be fully accounted for in the valuation of their exposed ILS and reinsurance assets.
Part of the bankruptcy settlement agreed between PG&E and authorities was he payment of an $11 billion settlement to insurance companies and other entities that held subrogation rights related to claims paid to individuals and businesses from the wildfires of recent years.
Insurance carriers have begun to report recoveries related to these subrogation payments, which are being made against losses suffered during the severe California wildfires of 2017 and 2018, where PG&E had seen its transmission infrastructure deemed liable for causing some of the largest fires.
In layman’s terms, PG&E has been returning capital to insurers and other entities that had purchased the rights to these claims from insurers, after it was deemed liable for massive blazes that drove billions of dollars of losses to the insurance and reinsurance sector.
Allstate became the third major insurance carrier to report a subrogation recovery payment just recently, recording a $450 million recovery against wildfire losses it had suffered.
The first large carrier to report such a recovery was Travelers, which reported a subrogation recovery, amounting to $400 million and the carrier also noted that this amount would inure to the benefit of its reinsurance panel.
As insurance carriers, such as these, recognise favourable prior year reserve development against their wildfire reserves and losses they’d made, adjustments are also set to be made to reinsurance recoverables as well, passing the benefits of the payments down the market chain.
As a result, some insurance-linked securities (ILS) funds and investors, as well as retrocessionaires, also stand to benefit from the subrogation and will in some cases get to positively adjust the loss positions they had for the 2017 and 2018 California wildfires.
But the flow of subrogation through the insurance and reinsurance market is not that fast and while some ILS funds are expecting to see benefits in the second-half of 2020, some positions may not realise the adjustments in value until well into 2021 it seems.
Insurers and then reinsurers or retrocessionaires, all need to establish precisely how subrogation payments and recoveries break down between wildfire events or years, after which they can book any benefits from subrogation against specific transactions and at that stage ILS funds or other collateralised reinsurance and retro players could work to adjust valuations of positions, we assume.
At that stage ILS funds will be able to adjust the net asset value (NAV) of the specific positions and of their fund portfolios, with benefits in some cases flowing to the end-investor, in terms of positive asset value movements, it’s also assumed.
Some ILS fund managers are expecting to see some benefits flowing this year, in particular through reinsurance sidecars and quota share vehicles for major reinsurers, we understand.
But for others it will be into 2021 and some positions may take some months into next year before they are finally adjusted to reflect any benefit of subrogation.
This was always likely to be the case, of course. The main thing is that the flow of recoveries and benefits from PG&E’s $11 billion subrogation payment have now begun, so some ILS players and their investors will stand to benefit from this in time.
There is now some evidence of subrogation recoveries benefiting ILS funds, as the payments begin to flow through the market, including to catastrophe bonds. But the full recovery and how it is distributed will take time, meaning some ILS positions, particularly collateralised retrocession, won’t see the benefits for some months to come.