The California Earthquake Authority (CEA), which administers the California Wildfire Fund, is challenging recent deals in which hedge funds and other alternative investors bought subrogation claims tied to January’s devastating Southern California wildfires. Subrogation lets insurers seek repayment from third parties—such as utilities—if they believe the utility’s negligence caused an insured loss.
“Opportunistic” Speculation, Says CEA
The CEA has labeled these transactions “opportunistic, profit-driven investment speculation.” It plans to urge the state legislature to block potentially “billions of dollars” in payments to investors. Materials from a recent meeting with the California Disaster Response Commission outline the authority’s intent to prevent funds it oversees from financing investor recoveries.
Background on Subrogation Trades
In recent months, insurers have sold subrogation rights to raise immediate cash. Buyers then pursue legal claims, hoping recoveries exceed their purchase price. After the Eaton Fire in January, such claims traded at as much as 50 cents on the dollar. Following the CEA’s public criticism, prices have dipped by a few points, though trading has continued.
Market Reaction and Deal Flow
Bradley Max of Cherokee Acquisition, an investment bank that brokers these trades, said the controversy “put a chill on the bidding,” reducing prices but not halting deals altogether. Cherokee helped arrange bond deals for fires in Los Angeles earlier this year. Oppenheimer’s special assets team reported executing more than $1 billion in subrogation trades by mid-April, including over $125 million in a single day.
Industry Seeks Risk Transfer
As climate-driven disasters grow more frequent, insurers are turning to secondary markets to transfer risk. Ronald Ryder of Oppenheimer noted that “subrogation bolsters balance sheets” when catastrophic losses spike. With few investors willing to take on complex, long-dated legal claims, hedge funds have become the primary buyers of these rights.
Legal and Political Pushback
CEA officials argue that allowing speculative investors to tap wildfire relief funds undermines the program’s purpose. The Wildfire Fund, set up in 2019, holds about $13 billion in reserves, partly supplied by California’s major utilities. Because the Eaton Fire occurred in Southern California Edison’s service area, the fund could be on the hook for any successful claims.
Cherokee’s Marks called the CEA’s stance “a politically motivated attempt to deny legal obligations,” warning of “ethical and legal consequences” if investors are blocked from pursuing valid claims.
High Stakes for Utilities and Taxpayers
California regulators estimate the January wildfires caused up to $45 billion in insured losses—potentially the costliest in US history. The Eaton and Palisades Fires burned more than 37,400 acres and claimed 30 lives. With investigations still under way, the final determination of utility fault will shape both insurer recoveries and the financial outlook for the Wildfire Fund.
Next Steps: Legislative Review
The CEA and the Disaster Response Commission are reviewing their claims-management procedures. They plan to present proposed safeguards to the California legislature in the coming weeks. Until then, the subrogation market remains in limbo as investors and insurers monitor the political and legal fallout.
