PG&E says on track for wildfire fund and for subrogation payments

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Pacific Gas and Electricity (PG&E), the wildfire stricken California focused electrical utility operator, said today that its Chapter 11 bankruptcy plans remain on track and as a result it hopes to join the state’s newly formed wildfire fund and also make progress towards the subrogation payments it owes.

Wildfire industry lossesReporting its quarterly results today, the electrical utility said that “PG&E believes it remains on track to have its Chapter 11 Plan confirmed by June 30, 2020, the deadline for participating in the state’s new wildfire fund.”

Joining that fund will be a significant step for the utility, as the California Wildfire Fund is mandated to purchase reinsurance and risk transfer for the risks of those utilities that are covered by it.

The California Wildfire Fund was set up to provide a source of capital and capacity to pay or reimburse eligible claims arising from a covered wildfire event that was caused by a utility company which participates in the fund.

As a result, buying reinsurance and risk transfer is one of the mandated objectives of the wildfire fund, but to do this the fund needs to understand how much risk it is bearing before it can achieve this in the open market, we’re told.

So PG&E’s joining of the wildfire fund could be a key driver for its ability to purchase the reinsurance it needs to support the wildfire liability related risks of utilities in the state of California.

The company had submitted a new Chapter 11 bankruptcy plan at the end of January this year, which details paying over $25 billion to claimants after the wildfires from previous years.

A $13.5 billion settlement was agreed to resolve all claims with individuals arising from 2017 and 2018 wildfires, including the 2017 Tubbs Fire, as well as claims arising from the 2016 Ghost Ship Fire in Oakland and the 2015 Butte fire.

On top of that, PG&E had already agreed an $11 billion settlement with the holders of insurance subrogation rights, but that has remained on hold until the Chapter 11 was agreed and filed.

Now, PG&E is aiming to finalise all of the Chapter 11 plan and details by the end of June to emerge from bankruptcy, as legislation stipulates it must to join the wildfire fund, suggesting that subrogation payments may not be too far beyond that date.

PG&E agreed its subrogation settlement of $11 billion back in October, which as we explained at the time is expected to eventually 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 had been deemed liable for 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.

Of course, some subrogation payments have changed hands since, with a number of hedge funds and investors now holders of some of the rights.

But 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 may eventually benefit some ILS funds largely side-pocketed positions.

There remains a significant degree of caution in the ILS market over how beneficial the subrogation payments may be, or otherwise.

But there are other types of investors tracking these developments, seeing the potential for some return of value to certain ILS and reinsurance funds, especially via retrocession, once the subrogation payments finally are made.

That now appears closer, as approval of the Chapter 11 plan will enable PG&E to begin stepping through the list of those it owes settlement payments to.

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