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California Wildfire Settlements in ILS Fund Valuation

Accurate Reflection of California Wildfire Settlements in ILS Fund Valuation is Critical

PG&E have agreed in principle with entities representing approximately 85 percent of insurance subrogation claims to an $11 billion settlement to resolve $20 billion of such claims arising from the 2017 Northern California wildfires and 2018 Camp Fire.

This is PG&E's second major settlement of wildfire claims. In June, 2019, PG&E reached agreement to settle claims relating to the 2015, 2017, and 2018 wildfires for a total of $1 billion to be implemented as part of the Plan. 

In terms of the impact of this latest major settlement, this is a significant clarification for Property Insurers, Reinsurers, ILS Fund Managers and their investors of their ultimate loss resulting from the 2017 and 2018 California wildfires. Still, it’s more complicated than simply reducing all from-ground-up (FGU) losses by 55% and calling it a day.

For starters, some Insurers had previously sold their subrogation rights on claims from these wildfires to third party investors, and then reported net of the sold recovery rate FGUs to the reinsurance and ILS market. For those who didn’t sell, and are now included in this new settlement, the subrogation settlement will flow through to their reported FGUs as they recognize the gain.

Also keep in mind that Southern California fire losses, such as Woolsey, are not impacted, nor are the remaining 15% of subrogation demands not resolved by the settlement. Furthermore, there are still unknown details about exactly how and when the subrogation payments will be made, and how they will be allocated to claims across different years and insurers.

ILS Fund Managers need accurate fair value estimates for their month end NAVs, and they can’t afford to wait for the subrogation recovery to filter its way through into cedant reported FGUs. Fund managers are developing estimates of the impact, and this task is complicated by complex contractual structures. Retrocession contracts may lack the necessary visibility into the primary FGUs, and horizontal contracts are impacted by the interplay of multiple loss events on retentions, limits and co-participations.

Investors have grown impatient with loss creep and trapped collateral over the last two years. They are eager to ensure that their Fund Managers are accurately recognizing the value of the PG&E settlement to their contracts. As a trusted partner, we at KPMG in Bermuda are putting our expertise and industry intelligence to work for our clients in resolving this thorny valuation issue. We would welcome the opportunity to put those resources to work for you!