The California Earthquake Authority recently criticized hedge funds and private equity firms for “speculative profits” by purchasing insurance subromination rights related to the Los Angeles wildfire, calling such transactions “opportunistic and unethical”. And it is planned to prevent investors from obtaining “billions of dollars” in claims through legislative means.
The right of subrogation refers to the situation where an insurance company transfers its claim right to a third party (such as a hedge fund), and the latter recovers from the responsible party (such as a public utility company). In recent years, as climate change has intensified the risk of wildfires, insurance companies have sold such claims to hedge funds at low prices in order to recover funds quickly. Investors then bet that the final amount of recovery is higher than the acquisition cost, thereby making a profit.
The California Wildfire Fund (managed by the Seismological Bureau) believes that such transactions could put the fund under huge compensation pressure as it needs to partially assume the wildfire compensation liability of the utility company. The fund has begun lobbying state legislures to restrict hedge funds from profiting through subrogation.
Bradley Max, a director of investment bank Cherokee Acquisition, said that political pressure has led to a decline in the price of subrotal claims. For example, the price of claims related to the January Eaton fire has dropped from 50 cents per dollar to “a few points lower”, but the transaction is still ongoing. Oppenheimer Bank disclosed that it has recently completed 10 subrogation rights transactions with a total value exceeding one billion US dollars.
Supporters believe that hedge funds provide liquidity to insurance companies and bear the risk of lengthy legal recourse. Opponents accused it of profiting from the disaster. Max criticized the California authorities for “refusing to fulfill legal debts for political motives”, which might lead to legal consequences.
The California Wildfire Fund, established in 2019, aims to share the wildfire compensation liability of utility companies. Currently, the fund pool is approximately 13 billion US dollars. If the hedge fund wins the lawsuit, part of the compensation may come from the fund. The January wildfires in Southern California are expected to cause insurance losses of 45 billion US dollars, potentially becoming one of the most expensive disasters in US history.
The California Earthquake Administration is jointly reviewing the claim process with the Disaster Response Committee and intends to promote legislative adjustments to address this emerging market controversy.
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