PG&E says “reasonably possible” it faces $600m+ loss from Kincade wildfire

Pacific Gas and Electricity (PG&E), the wildfire stricken California focused electrical utility operator, has said that it could face more than $600 million of losses from the 2019 Kincade wildfire if its equipment is found liable for the fire’s ignition.

At the moment it’s unknown whether PG&E could face these additional wildfire losses, which would drive impacts to its insurance tower that was in force for 2019 and potentially the reinsurance carriers backing that.

But the language used in its latest filings and the facts about the Kincade fire do make it seem like the chance of liability being faced by PG&E does seem quite high in this case.

The Kincade fire ignited on October 23rd 2019 northeast of Geyserville in Sonoma County, California, located in area serviced by PG&E.

The Kincade wildfire went on to consumed some 77,758 acres, resulting in at least 374 structures being destroyed, consisting of 174 residential structures, 11 commercial structures and 189 other structures, as well as another 60 structures damaged, consisting of 35 residential structures, one commercial structure and 24 other structures.

The cause of the Kincade wildfire remains under investigation, but the facts associated with this do suggest there is an elevated chance of PG&E’s equipment being found liable for the blaze.

PG&E had shut down power to many of its customers in the region and de-energised a lot of infrastructure.

But a  transmission level outage occurred within the region and a fire had started near a specific transmission tower of PG&E’s, which led to officials from Cal Fire taping off the area around the base of the tower and other Cal Fire personnel reported a broken jumper on the same tower to a utility staff member.

The investigation of this remains preliminary, PG&E said, explaining, “There are a number of unknown facts surrounding the cause of the 2019 Kincade fire, and accordingly, the cause of the 2019 Kincade fire remains uncertain.”

But the utility also said that, “PG&E Corporation and the Utility believe it is reasonably possible that they will incur a loss in connection with the 2019 Kincade fire.”

Adding that, “If PG&E Corporation and the Utility were to incur a loss in respect of the 2019 Kincade fire, PG&E Corporation and the Utility estimate that the amount of such loss could exceed $600 million (before available insurance).”

The $600 million estimate is right at the lower-end of “reasonably possible losse” PG&E said, highlighting that it also doesn’t include any potential fines, punitive damages, compensation to state or federal agencies, evacuation costs or other amounts that it cannot estimate at this time.

Some of which could inflate any potential insurance claim that comes as a result of the Kincade wildfire, which could elevate the figure much higher than the $600 million it currently estimates as the bottom of the potential range.

PG&E’s insurance tower has been diminished considerably thanks to significant payouts over recent wildfire seasons, not least the Camp wildfire and an expected $1.38 billion insurance recovery associated with it, as well as $843 million related to the 2017 northern California wildfires.

For the period that the Kincade wildfire occurred in, PG&E had $430 million of liability insurance coverage for wildfire events, after an initial self-insured retention of $10 million per occurrence, for the period from August 1st 2019 through July 31st 2020. In addition, the utility has another $1 billion in liability insurance coverage for non-wildfire events that runs across the date of ignition of the Kincade fire.

If PG&E is eventually found liable it seems certain that the $430 million of wildfire liability insurance coverage will all be paid out and recovered by the utility, marking another year where the entire wildfire liability tower is wiped out and its the insurance and reinsurance companies backing it lose their total limits deployed to support PG&E.

It’s not clear at this time where the losses could fall, but certainly a few of the Bermudian reinsurance players are thought to have backed PG&E’s wildfire liability tower at its renewal in 2019 when the rates rose significantly.

Whether any of the potential loss would flow to any insurance-linked securities (ILS) fund is less certain, but some retrocessionaires could find their support called on which always has the potential to expose some third-party capital.

Of course, PG&E is also slated to join the new California Wildfire Fund sometime in the coming months, once its its bankruptcy reorganisation is completed. As we explained recently, the Fund is out in the market seeking a reinsurance renewal right now to cover some of the liabilities of the utilities that join it.

That’s unlikely to change the fact there is a potential loss hanging over the 2019 wildfire liability insurance tower.

But it could make the market reception to the Wildfire Fund’s reinsurance procurement a little less welcoming and with PG&E facing another investigation this could drive pricing expectations even higher for wildfire liability insurance and reinsurance coverage.

It may be a while before we know for sure whether PG&E will be calling on the insurance and reinsurance capital backing its liability tower again for the Kincade fire, but it seems there is a good chance this will be the case and so the market will certainly be watching the outcome of the investigation closely.