(Bloomberg) – Hedge funds face discounts in California, as their bets related to insurance claims arising from wild fires in Los Angeles are attacked as unethical.
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Focus transactions are bound by the so -called subrogation claims that hedge funds, private capital companies and other alternative investment managers buy from insurers in the last few months. Sutrogation begins if it is suspected that a third party is responsible as a utility program, that it is responsible for the losses covered by insurers.
Hedge funds buying these claims from insurers have already been attacked by the California earthquake body, which is the administrator of the California Wild Fire Fund. He has described such transactions as “opportunistic, profit -oriented investment speculation” and says he plans to undertake Hedge Funds and other speculators, which are said to be “actively striving to profit from devastating catastrophes in California fire.”
In practice, this means that the authority will try to block the payment of what says it may be the “billions of dollars” to investors who have purchased the claims, according to materials prepared before a meeting, which took place last month with the California Response Council that runs the fund. To this end, he plans to engage California’s state legislative body, according to a copy of comments made during the meeting and seen by Bloomberg.
The organ spokesman declined to comment.
Bradley Max, director of Cherokee Acquision, a New York -based investment bank, which trades and invests in subrogation claims, says development is “cool from bidding”, which is already evident in pricing.
Subrogation rights, bound to Ethan’s fire, which torn through Southern California in January, were traded by 50 cents per dollar at one point, but now they have dropped out “at least a few points smaller,” Max said.
Yet, although political development has led to lower prices for subrogation claims, it has not retained transactions, he said.
Cherokee said he had concluded deals related to fires in Los Angeles in April for “bigger, more difficult hedge funds”. And until April 15, the investment bank OpenHeimer & Co. Inc. has carried out 10 transactions tied to the Eaton and Palisades fires for a total value of over $ 1 billion in recovery rights, said Ronald Ryder, co-owner of special assets in Oppenheimer, to the California earthquake body. This includes over $ 125 million in claims traded in just one day, Ryder writes.
A spokesman for Oppenheimer declined to comment. Cherokee did not specify the hedge funds for which he mediated transactions.
In an email to the California earthquake body, Ryder said that as catastrophic meteorological events become “more common”, insurers are increasingly resorting to “subrogation to restore the secondary market to strengthen the balance.”
There is increasing consensus that insurers cannot cover increasing costs only for time -related crashes, especially since climate change nourishes more extreme events. For this reason, the industry is looking for ways to transfer some of its financial risk to capital markets, with alternative asset managers often being the only class of investors wishing to enter.
Efforts to prevent profit from investors from subrogation claims they have purchased are a “politically motivated attempt not to pay legal obligations,” said Max of Cherokee. They “try to defeat the hedge funds with deep pockets, despite the ethical and legal consequences,” he said.
The restoration of subrogation claims is expensive and can take years to play, which is why insurers have started selling them in exchange for an initial cash payment. The hedge funds that buy them bet that the recovery amount at the end of the process will exceed the amount it paid to the insurer to buy the claim.
The investment market in subrogation claims is characterized by over -the -counter transactions with almost no transparency. Subrogation transactions had a seminar moment more than half a decade ago, when defective power lines and equipment damage at California Utility PG & E Corp. were charged with wild fires in the state. Then the Baupost Group LLC Hed Fund purchased claims against PG & E worth $ 6.8 billion. Earlier, Bloomberg reported that Baupost may have generated approximately $ 1 billion in profit.
The California Wild Fund, which is managed by the state earthquake body and is controlled by the California Catastrophe Council, was created in 2019 to help restore claims arising from wild fires caused by utility companies. If hedge funds are prevalent in their claims of subrogation, some of the money may be from the wild fire fund in California.
The fund, located at about $ 13 billion in liquid assets, partly benefits from three utilities – San Diego Gas & Electric Co., Edison International in Southern California Edison and PG & E. Although the reason for the January fires remains in the process of investigation, it is already clear that Ethan’s fire started inside the service territory of Edison and therefore leaves the fund potentially exposed, the authority said.
With current estimates of insured losses up to $ 45 billion, wild fires in Southern California are expected to be the most expensive in the history of the United States, according to the California earthquake body.
The Board for the Response to the Earthquake and Response of Catastrophes is now reviewing claims and administrative procedures as they take the issue of the state legislative body.
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