California focused electrical utility PG&E Corporation (the Pacific Gas and Electric Company) has said that it is “probable” that its equipment will be determined to be an ignition point of the 2018 Camp wildfire.
The Camp wildfire is currently estimated to have caused an insurance and reinsurance market loss of as high as $12.5 billion, making it the most costly insured wildfire loss in history.
With analysts suggesting that PG&E faces as much as $30 billion of liability for wildfires that its equipment could be deemed to have ignited in the last two years, the assumption is that if liability is attributed to the firm then its liability insurance tower, as well as the at-risk Cal Phoenix Re Ltd. (Series 2018-1) catastrophe bond could be drawn down in full.
PG&E filed for Chapter 11 bankruptcy protection this year, saying it is the only viable route for the firm.
In a press release yesterday the firm said that its equipment was probably a cause of ignition for the devastating Camp wildfire, which if proven and liability is put on PG&E it seems the exposed catastrophe bond is likely a total loss.
PG&E said its belief that the equipment could be an ignition source for the burn is based on Electric Incident Reports (EIRs) and a supplemental letter that states CAL FIRE has identified coordinates for the 2018 Camp wildfire near a tower on PG&E’s Caribou-Palermo 115 kV Transmission Line.
It seems there is documentation saying that malfunctioning equipment was seen to be on fire near the location and that investigation has identified its equipment as a probable ignition point.
“Based on these facts, the company is including a $10.5 billion pre-tax charge related to third-party claims in connection with the 2018 Camp Fire in its full-year and fourth-quarter 2018 financial results,” PG&E said.
In addition the utility said that is has taken a further $1 billion charge related to the 2017 Atlas and Cascade fires, meaning so far it has taken $14 billion in pre-tax charges related to the 2018 Camp wildfire and the 2017 Northern California wildfires to date, which is still at the lower end of its estimated range of losses from these events.
PG&E cites “probable insurance recoveries of $2.2 billion” for these events.
With a roughly $800 million liability insurance tower for 2017 and another roughly $1.4 billion for 2018, provided by a mix of traditional insurance and reinsurance firms and including the at-risk $200m Cal Phoenix Re Ltd. (Series 2018-1) catastrophe bond, it seems PG&E is assuming an ability to claim in full on these coverages.
PG&E said that it “may not be able to recover the full amount of their insurance” so there is no guarantee at this stage of a payout in full of the insurance tower along with the Cal Phoenix Re cat bond.
But the firm has recorded $1.38 billion of probable insurance recoveries for the 2018 Camp wildfire and $842 million for probable insurance recoveries for the 2017 Northern California wildfires, so it seems the firm is accounting for a full recovery (including from the cat bond).
These amounts have been set based on an assumption each fire was a separate occurrence, but with the Camp fire already expected to be deemed a single wildfire it is seeming increasingly likely the 2018 insurance tower and cat bond will pay out in full for PG&E.
“PG&E Corporation and the Utility intend to seek full recovery for all insured losses and believe it is reasonably possible that they will record a receivable for the full amount of the insurance limits in the future,” the company said.
However, the utility did say that “it could take a number of years before the Utility’s final liability in connection with the 2018 Camp fire and 2017 Northern California wildfires is known.”
That’s potentially significant, as while the Cal Phoenix Re cat bond has been marked down for a total loss already by most cat bond brokers, there has been some trading at very low pricing (sub 10 cents on the dollar) largely by buyers assumed to be hoping to collect the coupon over the period it takes for liability to be determined.
That could prove a reasonable investment if the decision on liability and the official insurance claim does not come for some months or years ahead.
So, the expectation of a full loss for the PG&E sponsored wildfire cat bond is increasing, but still not guaranteed. Leaving holders uncertain but set to receive some coupon over the months until such a determination is made.