Bankruptcy threatened California focused electrical utility PG&E Corporation (the Pacific Gas and Electric Company) spent almost $27 million in annual premium for the $200 million of coverage it received from the at-risk Cal Phoenix Re Ltd. (Series 2018-1) catastrophe bond.
This catastrophe bond was considered ground-breaking in a number of ways.
It was the first to offer indemnity coverage to a corporate sponsor thanks to the way the coverage cascaded down to PG&E via a reinsurance firm and a mutual insurer.
It was also the first catastrophe bond to exclusively provide insurance and reinsurance coverage for wildfire risks. The wildfire peril had only ever been part of a multi-peril cat bond and even then only a small contributor to expected losses, compared to the main perils of U.S. wind and earthquakes.
Finally, the insurance and reinsurance protection offered by the Cal Phoenix Re cat bond is on a third-party property liability basis for PG&E, something unprecedented in cat bonds and still unusual in ILS and collateralized reinsurance markets.
But of course after the severe wildfires losses of late 2018 (Camp and Woolsey fires) this catastrophe bond is now considered at risk of paying out, should PG&E be found liable for any of the blazes. This is almost expected, given the firm has filed for bankruptcy due to the threat of it having significant liabilities from last year’s fires.
When the cat bond was launched it saw its coupon pricing settle at 7.5%, as investors demanded more than the original offer of a 6% to 6.5% coupon range.
But the overall cost of issuing the catastrophe bond, when calculated as an annual premium was much higher, with PG&E reporting in bankruptcy related documents that the annual premium for the Cal Phoenix Re cat bond was set to be just over $26.8 million.
A rudimentary calculation shows that this equates to almost a 13.5% rate-on-line for the coverage, as the costs associated with the catastrophe bond appear almost to be as high as the coupon payments PG&E would have made for it.
That serves as a reminder that the coupon is not the total cost the sponsor has to bear, particularly when the coverage has to cascade through multiple service providers and given the numerous service providers that also have to be paid. It is not just the investors who need to be compensated for a cat bond issuance.
But the cost of the Cal Phoenix Re cat bond for PG&E pales by comparison to the cost of some of its traditional excess liability insurance.
In particular the slice of PG&E’s excess liability insurance program taken by Berkshire Hathaway owned National Fire and Marine Insurance Company was significant, with the annual premium cited at a huge $136.5 million.
Back in November the PG&E wildfire cat bond was marked down for loss and traded at distressed prices in the secondary market, as investors saw little hope of it surviving the legal action against PG&E for the wildfires.
Then, by January it became clear that PG&E’s liability insurance tower was likely to pay out, which would include its cat bond Cal Phoenix Re as well.
Recently, PG&E and other utilities were found not liable for starting the 2017 Tubbs wildfire, but with a number of other wildfires still needing to see liability assigned including the huge 2018 fires, it seems PG&E is a long way from clearing its name and the bankruptcy filing suggests it expects some liability to fall on its shoulders, hence the cat bond remains viewed as expected to be a loss for the market.