A.M. Best has found that many re/insurers may face additional exposure to the volatility surrounding energy supplier Pacific Gas and Electric Company (PG&E) due to their investments in the company’s bonds.
Source: Michael Moriatis/AP
PG&E power lines have been under investigation as a potential cause for the devastating Camp Wildfire, which has destroyed more than 10,000 homes and killed at least 79 people in northern California’s Butte County.
If it is determined that PG&E equipment was the cause of the fire, under California law the company will assume full financial liability for all damages and may face potential bankruptcy.
While this outcome could alleviate recent wildfire losses for some re/insurers, which RMS has estimated to be in the range of $9 billion to $13 billion, many companies will continue to face exposure via PG&E’s approximately $1.4 billion re/insurance program, which includes its $200 million Cal Phoenix Re Ltd. (Series 2018-1) catastrophe bond.
However, A.M. Best noted that the re/insurers have additional avenues of exposure to PG&E’s volatility due to the fact that the industry holds between roughly one fifth to one quarter of the company’s debt, or about $4.1 billion.
PG&E has $18 billion of unsecured bonds, and A.M. Best suggested that, in the event of bankruptcy, bondholders and affected property owners may have to compete with one another, with the payment priority of these bonds equal to that of the $30 billion in potential liabilities from the 2017 and 2018 wildfires.
The rating agency found that around 10% of re/insurers have exposure to PG&E bonds, of which the life & annuity segment holds roughly 88% and the property & casualty segment around 10%.
By entity, the report found that exposure is fairly limited as two thirds of the companies in question have exposures totalling less than 1% of Capital & Surplus, and only 5% have exposure of more than 5% of C&S.
Nearly 90% of the industry’s exposure to PG&E bonds is held by companies that A.M. Best rates A- or higher.
PG&E has entered bankruptcy before, in 2001, after a drought reduced the amount of hydroelectric power available and caused a decrease in electrical power generation capacity, costing the company and the state up to $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.
