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More insurers opting to unload PG&E subrogation rights

Add Mercury General Corp. and Hanover Insurance Group Inc. to the list of California insurers that have chosen to sell to third parties claims against PG&E Corp. and Pacific Gas and Electric Co. that they brought on behalf of policyholders who suffered wildfire losses.

The duo are among dozens of insurance companies and groups that had been pursuing so-called subrogation claims against the utility and its parent following 2017 and 2018 wildfires in California. Documents filed in connection with the PG&E entities' Chapter 11 bankruptcy cases show that an ad hoc group of claimants had approximately 80 members possessing alleged subrogation rights in excess of $10.40 billion in the aggregate related to "various" wildfires in the state.

The California Department of Insurance in January put insured losses from 2018 wildfires at approximately $12.36 billion on a direct basis across lines of business, the majority of which stemmed from the Camp Fire in the northern part of the state.

Bankruptcy court disclosures by the ad hoc group put the amounts of wildfire-related subrogation claims by Mercury companies and Hanover at $185.1 million and $19.2 million, respectively. The Mercury group ranked as the No. 9 writer of homeowners and farmowners multiple peril insurance in California during 2018, with a market share of 5.1%. Hanover, which avoids personal lines business in California, ranked as the state's No. 10 commercial multiperil writer in 2018 with a share of nearly 3%.

Mercury explained in its most recent quarterly report that it sold subrogation rights related to 2017's Thomas Fire and 2018's Woolsey and Camp fires and, in so doing, received a net benefit of $10 million. The primary beneficiaries of the transaction were Mercury's reinsurers, the company noted.

Mercury said its estimate of gross losses from those fires after a re-estimation to account for the transaction stood at $208 million, but it retained exposure for only $40 million of those losses on a net basis after taking reinsurance benefits into account. Mercury officials declined to discuss terms of the transaction when asked during a recent conference call. The company also did not disclose the identity of the entity to which it sold the subrogation rights.

Hanover, meanwhile, reported in its Form 10-Q that it sold a majority of its subrogration rights pertaining to various 2017 and 2018 California wildfires to an unnamed "large financial institution." It credited that transaction for contributing to $13.2 million in net favorable development of its losses and loss adjustment expenses in the first quarter.

"Considering the uncertainties associated with the recoveries, potential additional litigation cost and the timing of resolution, the ability to collect a meaningful portion of the subrogation claims now was very attractive," Executive Vice President and CFO Jeffrey Farber said during a conference call.

Farber later explained that Hanover's commercial lines claims "tended to be chunkier, clearer, [and] more straightforward" than personal lines claims, making them "very attractive to financial institutions that wanted to buy these things." To receive a "reasonably high percentage" on those claims, he added, "just felt like a good trade to us."

Mercury was one of 11 entities in the ad hoc group to which wildfire subrogation claims in excess of $100 million had been attached. Nine of the other 10 are insurance companies: Farmers Insurance Group of Cos., Allstate Corp., Nationwide Mutual Insurance Co., Travelers Cos. Inc., Liberty Mutual Holding Co. Inc., United Services Automobile Association, Chubb Ltd., American International Group Inc. and The Hartford Financial Services Group Inc. or their affiliates.

The largest, however, is Baupost Group LLC, a Boston-based hedge fund with a history of making distressed investments, including in PG&E shares. Court documents indicate that Baupost's subrogation claims approached $2.57 billion, an amount based on information the firm said it received from the original holders.

Among the claims purchased by Baupost are those originally held by CSAA Insurance Exchange. The company's statement of actuarial opinion reports that it sold subrogation rights pertaining to claims from certain 2017 wildfires to Baupost in September 2018 for compensation equal to 35% of its loss. Baupost then purchased subrogation rights to CSAA's Camp Fire claims in early 2019, for 30% of the loss. CSAA said the transactions were motivated by a desire to mitigate uncertainty associated with those claims.

CSAA and its affiliates estimated that its gross and net losses from the Camp fire were $1.3 billion and approximately $314 million, respectively. It previously reported an estimate of $1.13 billion in gross losses from the 2017 wildfires, and it put its gross favorable development from the sale of subrogation rights related to those catastrophes at $385 million.