Hedge funds targeting California wildfire insurance claims are facing new obstacles after the state passed legislation restricting trades in subrogation claims, according a report by Bloomberg citing unnamed sources.
The law, signed last month by Governor Gavin Newsom, requires utilities to have the right to settle on the same terms before insurers can sell claims to third-party investors.
The move is expected to make it significantly harder for hedge funds and alternative investment managers to acquire these claims profitably, legal experts said.
Subrogation claims allow hedge funds to buy insurance claims tied to wildfire damages at a discount, assuming the legal risk of pursuing utilities such as PG&E and Southern California Edison. Profits can be substantial, with prior transactions generating estimated gains in the billions, but the market is opaque and illiquid.
The new legislation also introduces non-disclosure requirements that complicate pricing for hedge funds, potentially shrinking the market for such trades. Analysts and legal advisors note that while the law aims to curb perceived profiteering, trading subrogation claims has historically provided vital liquidity for insurers.
Transactions tied to California’s January wildfires reportedly exceeded $1bn by mid-April, involving hedge funds and investment banks including Cherokee Acquisition and Oppenheimer & Co. With the new rules, market participants may delay deals and face lower profitability, forcing reassessment of risk strategies.
The law forms part of a broader package to strengthen California’s wildfire fund, which now has $39bn in claims-paying capacity, funded partly through utilities and customer contributions.
