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PG&E bankruptcy confirmed, Wildfire Fund & subrogation to follow


Pacific Gas and Electricity (PG&E), the wildfire stricken California focused electrical utility operator, has achieved another important milestone in its history, as its bankruptcy plan has now been confirmed putting it on track to join the California Wildfire Fund and also to make its subrogation settlement payments.

Wildfire industry lossesWith the United States Bankruptcy Court for the Northern District of California now having confirmed PG&E’s Chapter 11 Plan of Reorganization, the electrical utility can head towards exiting Chapter 11 in July, then join the Wildfire Fund and make all settlement payments in good time.

“Today’s ruling in the Chapter 11 proceeding concludes the process of approving PG&E’s Plan of Reorganization and is a critical milestone that brings us one step closer to compensating wildfire victims fairly and quickly and sets the course for PG&E’s future. We appreciate the extensive collaboration among a broad range of stakeholders that brought us to this point as we work to reimagine the company,” explained CEO and President of PG&E Corporation Bill Johnson.

As well as settlements to compensate wildfire victims, PG&E is also destined to pay an $11 billion settlement to insurance and reinsurance companies, as well as to other entities that paid claims by individuals and businesses related to the wildfires.

This is the much discussed $11 billion settlement with the holders of insurance subrogation rights, which has remained on hold until the Chapter 11 was finalised.

PG&E agreed its subrogation settlement of $11 billion back in October 2019, which is expected to provide some benefit to reinsurance providers, also including some insurance-linked securities (ILS) funds that were exposed to the losses from major 2017 and 2018 California wildfire events.

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

Those wildfires left insurance and reinsurance companies, ILS funds and retrocessionaires, on the hook for over $20 billion of losses between them and the subrogation agreement sees some of that value set to flow back out of the bankruptcy.

Some of these subrogation payment rights have changed hands since, with a number of hedge funds and investors now holders.

But still, there are still subrogation rights that are expected to result in a reduction of ultimate losses for certain cedents of the ILS and collateralised reinsurance market, which is expected to eventually benefit some ILS funds in reducing the estimates on largely side-pocketed investment positions.

Quota share investors are expected to be some of the first to benefit, given that as subrogation rights flow down to insurance and then reinsurance companies, the ILS investors and funds backing quota shares or sidecars may benefit as the loss position improves for the vehicles they have allocated to, allowing them to free some trapped ILS collateral.

There remains a significant degree of caution in the ILS market over how beneficial these subrogation payments will actually be. It’s also uncertain how fast they will flow through the market and how quickly they will reach retrocessionaires or ILS funds.

But some benefits are expected and loss positions will adjust for the better, which has to cascade through the tiers of the insurance and reinsurance market.

As well as the subrogation, PG&E’s joining of the California Wildfire Fund will also be a significant event, as it lifts the exposure that Fund will carry significantly and means it will likely require much more reinsurance than it would have if PG&E had not joined it.

We’re told that the Wildfire Fund, which is being administered by the California Earthquake Authority (CEA), is already out in the market looking for as much as $2 billion of reinsurance for a renewal.

It seems likely that figure was reached with the understanding that PG&E was likely to be joining, so we wouldn’t expect it to grow significantly this year.

For ILS funds and investors that stand to benefit from the subrogation payments, PG&E’s confirmation of bankruptcy has been long awaited.

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