AM Best: US insurers have limited exposure to alleged PG&E wildfire link

21-11-2018

According to AM Best the US insurance industry has only limited exposure to PG&E Corporation, the California utility whose equipment is being investigated as having a potential role in the deadly Camp Fire, which has ravaged northern California.

Around 12,637 residences, 483 commercial and 3,718 other buildings have been destroyed as of Nov. 20, according to Cal Fire. Overall, 152,250 acres have burned. The fire is 75 percent contained and has resulted in 81 civilian fatalities. The Camp Fire is already the most destructive fire in the history of California.

It was recently determined that a second power line of the utility company failed the morning the Camp fire began. At issue is whether utilities should continue to be held liable for damages caused by wildfires linked to their power lines, even if the companies did nothing wrong. AM Best claimed that lobbying continues to support the Governor’s call to loosen the liability standard, formally known as inverse condemnation, to allow a “more equitable apportionment of costs between utilities and insurers,” meaning that the liability should not fall solely on the utilities unless they’ve been found negligent or guilty of criminal violation. PG&E has filed two incident reports since the fire began and has seen about half its market value, roughly $12 billion, vanish in little more than a week.

According to AM Best US insurers hold approximately 23 percent of the debt, totalling $4.1 billion, issued by PG&E. The life/annuity segment holds 88 percent of the entire industry’s holdings, while the property/casualty segment holds 10 percent.

Overall, single-company exposure is limited, as just 5 percent of the total number of entities, or 23 companies, have exposure of more than 5 percent of capital and surplus (C&S).

Two-thirds of the total amount of entities have exposures totalling less than 1 percent of capital and surplus, according to the agency. By entity, exposure is fairly limited as two thirds have exposures totalling less than 1 percent of Capital & Surplus; only 5 percent have exposure of more than 5 percent of C&S.

The utility’s common stock shares have been volatile but have been on the rebound, as concerns that the utility’s wildfire liability could push the company into bankruptcy eased, the agency noted. California’s Public Utilities Commission president, Michael Picker, was quoted as saying late last week that it was not “good policy” to allow the company to go broke. In any event, a PG&E bankruptcy could come down to a fight between bondholders and property owners whose homes were destroyed by wildfires, AM Best said.

The utility company has $18 billion of unsecured bonds; in the event of a bankruptcy, the payment priority of these bonds would be equal to that of the roughly $30 billion in potential liabilities that analysts have estimated from the 2017 and 2018 wildfires. What’s more, rules governing the existing bond issues state that the unsecured notes would also become secured if PG&E were to take on at least $5 billion of new debt secured by its assets—which could result in current bondholders wanting the company to issue more secured debt if doing so could put them ahead of wildfire claims, AM Best said.

The utility company entered bankruptcy in 2001, albeit under a different set of circumstances, when a drought reduced the amount of hydroelectric power available and other factors led to a decrease in available electric power generation capacity, the agency noted. Hot weather then led to higher usage and rolling blackouts, costing PG&E and the state between $40 billion and $45 billion. The utility emerged from bankruptcy in 2004, after paying $10.2 billion to hundreds of its creditors, and as part of a reorganisation, PG&E’s 5.1 million electricity customers had to pay above-market prices for several years to cancel the debt.

California, wildfire, damage, losses, AM Best

Bermuda Re