- HECO burns the bank to save its neck (for now)
- Climate model Tower of Babel
- Let's make a model deal
HECO burns the bank to save its neck (for now)
The holiday week announcement that Hawaiian Electric Industries would spin off its lucrative bank subsidiary was no surprise, given the hole the 2023 Maui Fire blew into the conglomerate’s balance sheet.
But the deal is far from a guarantee of its financial future. Rather, it’s only the next step in a state-backed game plan to save the utility from bankruptcy and position it for a state-backed securitization plan that lawmakers rejected last month.
Hawaiian Electric announced on Dec. 30 that it would sell American Savings Bank, F.S.B. (ASB), its wholly owned subsidiary, for $450 million to a group of investors that includes existing management.
The bank sale, however, is really just a stepping stone to a real lifeline for the utility: a state-backed plan to securitize future rate increases. That plan was rejected by legislators last year because they argued shareholders did not have enough skin in the game.
But with the bank sale imminent, state lawmakers say that HECO is now serious about getting assistance.
“In general, one of the major questions being asked last year when HECO requested securitization authority was, ‘Has the company done everything it needs to do to shore up its position?’” State Sen. Jarrett Keohokalole told local news. “So I think this is a significant change.”
Seeing an opportunity for a bailout bounce, a handful of new investors and hedge funds took up positions in HECO in late 2024. Some of the biggest new holders of shares include Zimmer Partners, Newtyn Management, and Ghisallo Capital Management.
Zimmer, a New York-based energy hedge fund, took the biggest bet on HECO with a 9.13% stake worth $145 million, according to regulatory filings.
HECO is just the latest utility to be pushed toward the abyss as a result of a catastrophic wildfire. California's PG&E faced multiple catastrophic wildfires over several years, including the 2018 Camp Fire, which remains the most destructive wildfire in California’s history.
But there are key differences between how the two state utilities reacted and planned for survival.
PG&E declared bankruptcy in 2019 to manage its mounting liabilities, using the process to restructure debts and settle claims. PG&E operated under California’s strict liability laws, which hold utilities responsible for wildfire damages regardless of negligence—a factor that significantly shaped the company’s financial and operational fallout.
In addition, PG&E relied heavily on insurance payouts and contributions from California’s Wildfire Fund, established through state legislation to provide financial support to utilities facing wildfire-related liabilities.
Hawaiian Electric has avoided bankruptcy so far by focusing on disputing liability claims, emphasizing the potential role of other entities, such as Maui County, in contributing to the wildfire’s impact. Hawaii’s legal framework for liability is also more contingent on evidence of negligence. This distinction could influence the long-term financial burden faced by the company as the legal process unfolds and the precise causes of the Maui wildfire are determined.
But the absence of a statewide fund similar to California’s Wildfire Fund leaves Hawaiian Electric with fewer financial safety nets, pushing them to securitize future rate increases.
Climate model Tower of Babel
A report by J.P. Morgan Asset Management released last month highlights significant challenges in effectively using climate scenarios, particularly for investors.
One of the primary difficulties lies in the origins of these models, the analysts state. Initially designed for policymakers and researchers with long-term horizons, climate scenarios often require substantial adjustments to align with the short-term needs of businesses and investors. For instance, investment cycles are considerably shorter than the decades-long timelines typical of climate modeling.
Another challenge is the lack of granularity. "Off-the-shelf" climate scenarios frequently fail to provide the sector-specific or issuer-level detail necessary for investment decisions. This forces users to refine assumptions and tailor outputs, adding complexity to an already intricate process.
Inconsistencies among scenario vendors further exacerbate these issues. A study by the Institutional Investors Group on Climate Change (IIGCC) revealed significant variations in vendor assessments of portfolio alignment with climate goals. Such discrepancies can create confusion and undermine confidence in the results.
The report identifies several widely used climate scenario providers, including the International Energy Agency (IEA), the Network for Greening the Financial System (NGFS), and the Intergovernmental Panel on Climate Change (IPCC). Each provider offers distinct models, assumptions, and use cases.
The IEA’s Net Zero Emissions (NZE) scenario, for example, focuses on achieving carbon neutrality by 2050, providing qualitative storylines that simplify interpretation for investors. In contrast, NGFS scenarios present a broader range of options, encompassing emissions from multiple sources and allowing for customized inputs.
However, the choice of scenario and model can significantly influence outcomes, according to J.P. Morgan. Differences in assumptions—such as reliance on emerging technologies like carbon capture or projections for renewable energy adoption—can drive widely varied results. These uncertainties underscore the importance of thoroughly understanding the models being used.
Despite the challenges, the report emphasizes the opportunities available to those willing to engage with climate scenarios. With regulations like the EU’s Corporate Sustainability Reporting Directive (CSRD) mandating climate-related disclosures, organizations must increasingly rely on these tools to meet compliance requirements.
"By starting to use the existing tools, users can be best positioned to enhance their capabilities and incorporate new developments," the report concludes.
Let's make a model deal
California Insurance Commissioner Ricardo Lara revealed the regulations the regulations last week aimed at expanding insurance access for homeowners in wildfire-prone areas that hinges on the nascent wildfire modeling industry.
The new regulation requires major insurance providers to incrementally raise their coverage in wildfire-distressed areas by 5% every two years until they achieve at least 85% of their statewide market share in these regions. Smaller and regional insurers are also obligated to enhance their coverage, promoting a more equitable distribution of insurance availability across the state.
To mitigate potential financial risks for insurers, the regulation permits companies to incorporate the costs of reinsurance into their rate structures as well as using catastrophe models in setting prices.
The new regulation also includes provisions to prevent so-called “model-shopping”: when insurance companies choose one model that produces higher rates for consumers, and another that lowers their reinsurance costs. To prevent model shopping, the regulation requires insurance companies utilize the same model for both, according to the final regulation.
The debate over the use of catastrophe modeling in insurance rate-setting has been a focal point over the past year. Traditionally, California's regulations required insurers to base catastrophe factors on historical wildfire losses over a 20-year period. However, insurers argued the frequency and severity of recent wildfires have rendered historical data less predictive of future risks.
This policy shift comes in response to the increasing challenges Californians face in securing homeowners insurance, particularly in areas susceptible to wildfires. In recent years, major insurers such as State Farm and Allstate have limited new policies in California, citing heightened wildfire risks and financial losses. These actions have left many homeowners reliant on the California FAIR Plan, the state's insurer of last resort, which has seen a significant uptick in policies—from 140,000 in 2015 to over 270,000 in 2023.
The Elusive Goal of Nationwide Disease Prediction - Undark Magazine
The federal government has bet big on the concept with a new nationwide network called Insight Net, which links academic disease modelers with public health practitioners.
Insurance risks will be a proxy carbon tax - Reuters Breaking Views
With the world looking increasingly unlikely to restrict temperature rises to 1.5 degrees Celsius above preindustrial times, climate change is ceasing to be a hypothetical risk. Take the insurance sector.
More attention on catastrophe modeling - WTW
Looking ahead, organizations able to present favourably their own nuanced and sophisticated natural catastrophe management and provide good data may expect enhanced negotiations with insurers, and we encourage early engagement with underwriters where possible.
