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12 December 2017

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PG&E wildfire losses threaten $850mn GL tower

Catrin Shi and Adam McNestrie 5 December 2017

Berkshire Hathaway has the largest exposure on Pacific Gas and Electric (PG&E)'s $850mn general liability (GL) programme, which could be significantly eroded by the Californian wildfires, The Insurance Insider can reveal.

Sources told this publication Berkshire Hathaway has around $200mn on the tower across a number of shared layers in excess of $60mn.

Aegis Mutual leads the placement with a $35mn layer above a retention estimated at a few million dollars. Energy Insurance Mutual writes the next $25mn layer.

The following excess casualty tower is a patchwork placement through which PG&E retains around $115mn of exposure, via a self-insured retention spread across a number of shared layers.

Allied World, Argo and Apollo are understood to be carriers on a shared layer which attaches at $110mn, with line sizes of $35mn, $40mn and $5mn respectively.

A further shared layer in excess of $310mn is also split by a number of insurers, including Oil Insurance Company Limited, which has a $10mn line, Liberty with a $5mn line and a $17.5mn line written in Lloyd's.

Swiss Re and Munich also share this excess $310mn layer with a $25mn line each. Munich Re is understood to write a further $25mn line much higher up the stack, at around the $700mn mark.

AIG, meanwhile, has about $140mn of exposure on the PG&E placement, although its layer is situated above the shared layers, somewhere in excess of $500mn, sources said.

Several other carriers then take the top layers of the placement, which is thought to amount to $850mn.

Legal costs

Although PG&E has not been found liable in any capacity for the Californian wildfires, carriers fear the company will use the entirety of its GL cover to pay for legal costs and compensation.

According to CNBC, the firm has already been sued in connection with last month's deadly wildfires in complaints that allege negligence and violations of various utility and safety codes.

In a 13 October 8K filing, PG&E said it was currently unknown whether it would have any liability associated with the wildfires, and that it had "approximately $800mn" in liability insurance for any potential losses.

"If the amount of insurance is insufficient to cover the utility's liability or if insurance is otherwise unavailable, PG&E Corporation's and the utility's financial condition or results of operations could be materially affected," the firm said.

It is also further understood that PG&E has paid to reinstate its GL cover, although details on the premium paid are not clear.

In November, the company downgraded its 2017 forecast for Gaap earnings per share to a range of of $3.36 to $3.56, from a prior range of $3.54 to $3.79. It said the change in guidance was "primarily due to the reinstatement of the company's liability insurance following the northern California wildfires, as well as an increase in the expected third-party claims associated with the [2015] Butte fire".

Sources said PG&E had claimed on its GL policy a number of times in the past decade in connection to wildfires.

The utility firm is different from its peers in that it does not buy a separate GL tower for wildfire. Separate GL towers for that peril allow carriers to be selective on the risk they are taking and quote a far higher premium.

The Aliso Canyon and Butte wildfires led to payouts on the Sempra and PG&E excess casualty towers that are each thought to have run to several hundreds of millions of dollars.

As this publication previously reported, US casualty underwriters are confident of achieving rate increases of up to 10 percent in the early part of next year.

Sources said the market had passed an inflection point, prompted by a build-up of liability claims and the knock-on effect of 2017 earnings being decimated by property cat losses.

Upwards pressure is also being exerted from the "back end", as reinsurers look for improved economics on the quota share deals that had helped subsidise shrinking underwriting margins for insurers in the soft market by providing over-riders.

Anecdotal evidence suggests that in Bermuda's excess casualty market, CEOs have told underwriters not to present business plans for 2018 unless they can point to rate increases that are at least close to 10 percent.

Requests for comment were made to all companies named in this report.

Swiss Re and Munich Re declined to comment.

This article was published as part of issue December 2017/1

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