Hedge funds buying these claims from insurers are now under attack from the California Earthquake Authority, which is the administrator of the California Wildfire Fund. — Bloomberg
LOS ANGELES: Hedge funds are facing pushback in California as their bets tied to insurance claims stemming from the Los Angeles wildfires are attacked as unethical.
The transactions in focus are tied to so-called subrogation claims, which hedge funds, private equity firms and other alternative investment managers have been buying from insurers over the past few months.
Subrogation kicks in if a third party such as a utility is suspected of being responsible for losses covered by insurers.
Hedge funds buying these claims from insurers are now under attack from the California Earthquake Authority, which is the administrator of the California Wildfire Fund.
It has described such transactions as “opportunistic, profit-driven investment speculation” and said it’s planning to take on “hedge funds and other speculators” that it claims “are actively seeking to profit from California’s devastating wildfire catastrophes”.
In practice, that means the authority will try to block the payout of what it said could end up being “billions of dollars” to the investors that bought the claims, according to materials prepared ahead of a meeting that took place last month with the California Catastrophe Response Council, which oversees the fund.
To that end, it plans to engage California’s state legislature, according to a transcript of comments made during the meeting and seen by Bloomberg. A spokesperson for the authority declined to comment.
Bradley Max, a director at Cherokee Acquisition, a New York-based investment bank that trades and invests in subrogation claims, said the development has “put a chill on bidding”, which is already visible in pricing.
Subrogation rights tied to the Eaton Fire that ripped through Southern California in January were trading as high as 50 US cents on the dollar at one point, but have now dropped “at least a few points lower”, Max said.
Even though the political development has led to lower prices on the subrogation claims, it hasn’t held back transactions.
Cherokee said in April it had brokered deals linked to the Los Angeles fires for “larger, more sophisticated distressed debt hedge funds”.
And by April 15, there had “been at least 10 transactions, to date, totalling more than US$1bil worth of recovery rights between Eaton and Palisades” fires, investment bank Oppenheimer & Co Inc’s co-head of special assets, Ronald Ryder, told the California Earthquake Authority.
On April 17, Oppenheimer “successfully traded” over US$125mil in claims in just one day, Ryder added.
A spokesperson for Oppenheimer declined to comment. Cherokee didn’t name the hedge funds for which it brokered deals.
In an email to the California Earthquake Authority, Ryder said that as catastrophic weather events become “more prevalent”, insurers are increasingly resorting to “recovery subrogation in the secondary market to fortify the balance sheet”.
There’s a growing consensus that insurers can’t cover the rising costs of weather-related catastrophes alone, especially as climate change fuels more extreme events. — Bloomberg
