The utilities sector is the most directly exposed to credit risk from the wildfires, with Pacific Gas and Electric's (PG&E:BBB-/RWN) and Southern California Edison (BBB+/Stable) experiencing downgrades earlier this year due to potential outsized liabilities from wildfires. The increased frequency of wildfires and sheer magnitude of potential exposure, coupled with an uncertain path to recovery, meaningfully expands business risk for electric utilities operating in California.
PG&E's financial exposure for the 2017 wildfires could be approximately $15 billion, with large incremental liability possible if PG&E equipment is found to have been involved in ignition of the 2017 Tubbs and 2018 Camp wildfires. PG&E common stock has lost more than half of its value and spreads have widened significantly.
Credit implications for other U.S. corporate sectors; including homebuilding, oil and gas, metals and mining, transportation, healthcare, retail, and agriculture, should be minimal. Insurance will partially cover losses with operational disruptions likely temporary and not prolonged enough to negatively affect individual credit profiles. Moreover, many issuers including those mentioned above along with lodging and leisure and media and entertainment are either diversified geographically or by type of business properties. Pure play REITS across the multifamily residential, industrial, and office segments have not reported any meaningful impacts from the fires.
The California wildfires of 2018 mark a second consecutive year of major wildfire losses for (re)insurers as the industry incurred $11.5 billion of insured losses in 2017. Prior to the current fires, California wildfires in July 2018 resulted in $845 million of direct-insured losses. Insured losses, while certainly significant, are expected to remain within the estimated ranges used by insurance industry when pricing catastrophe risk into premiums. Furthermore, insurance companies with exposure to the California wildfires are generally the larger, more capitalized national carriers that, as a group, have high insurer financial strength ratings.
The Fitch-rated U.S. public finance credits shouldn't be immediately impacted on a credit basis from the current California wildfires, the cost of which should be largely mitigated by support from federal and state governments and private insurance policies. Local governments affected by the fires will likely use a combination of federal relief funds, state support and insurance claims to pay for most fire-related damage.