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Analysts at Fitch Ratings have said that any realised catastrophe bond losses from the Los Angeles wildfires are expected to be small, however these are not anticipated to impede cat bond market issuance.
According to a new report from Fitch, while roughly 12% of the $50 billion cat-bond market is currently exposed to wildfire risk, the rating agency said that it expects any realised cat bond losses to be small in aggregate.
“The broad-based Swiss Re Cat Bond Total Return Index has decreased 0.27% since the beginning of the wildfires. Secondary market trading on these 144A bonds show price decreases greater than 20% on only eight identified tranches. Bonds that are slightly below their attachment points may be triggered if more wildfires occur or by winter storms crossing the U.S.,” Fitch commented.
As we explained in a previous article, the reason for the incremental downward moves in secondary prices for these cat bonds is likely down to the emergence of greater clarity over the potential quantum of industry losses.
As we’ve been reporting, official reports state that over 17,000 structures have been damaged or destroyed by the wildfires, and the first estimates of insurance industry losses from catastrophe risk modellers, so far have a mid-point of $31.125 billion.
The highest estimate so far comes from CoreLogic at $35 billion to $45 billion. More recently, Verisk pegged insured losses from the wildfires at between $28 billion and $35 billion, while Karen Clark & Company (KCC) recently said that the hit to the industry will sit close to $28 billion.
We also recently reported that an analysis by catastrophe bond fund manager Plenum Investments suggests the cat bond market is implying a roughly $30 billion industry loss from the Los Angeles, California wildfires.
Moreover, Fitch’s preliminary principal loss estimate is less than 50 bps, or $250 million, for the cat bond market, absent any further catastrophes in 2025. The agency said it does not expect Fitch-rated cat bonds to experience principal losses.
This is relatively closely aligned with the roughly $200 million in write-downs, in mark-to-market terms, of the exposed cat bonds we reported on.
An interesting factor to highlight, is that unlike some catastrophe bonds that are exposed solely to Florida hurricane events, wildfire-only cat bonds are more rare.
Following both the Tubbs (2017) and Camp (2018) fires in California, a number of California utility companies sponsored wildfire cat bonds up to 2021 that have subsequently matured.
“Municipalities and corporations lacking affordable insurance coverage could potentially spur more rapid growth of the market by issuing cat bonds, as utilities have done,” Fitch added.
It’s important to note, that California lawmakers have recently advanced legislation to allow the California Infrastructure and Economic Development Bank to issue cat bonds to raise cash to offset liquidity shortfalls due to the FAIR Plan’s impending assessment.
“Cat bonds have a reset feature where accumulated losses are reset to zero following a stated 12-month risk period. Cat bonds that have a January 1 reset date may not be immediately affected by accumulated losses, but the California wildfires and recent winter storms will jumpstart the accumulated losses in 2025 prior to the upcoming hurricane season putting some cat bonds on alert later this year,” Fitch said.
“Cat bonds cover insured losses over a 12-month period, usually on a calendar-year basis. Thus, these bonds will most likely not be triggered due to the LA wildfires but may be triggered later in the year due to a hurricane event.”
Additionally, other cat bonds with different reset dates may see principal losses, as these wildfire losses are aggregated with 2024 insured losses (over $150 billion) such as Hurricane Helene and Milton which then exceed their attachment point triggers.
This is a similar situation to what happened six years ago, when insured losses from the Tubbs and Camp fires in California were aggregated with Hurricanes Harvey and Irma, which triggered a number of different cat bonds.
“Cat bonds that are close to the attachment point and near the maturity of the bond face the risk that the maturity date is extended three years pending the final determination of claims. Potentially ‘trapping’ capital,” Fitch said.
English (US) ·