Two occurrence cat bonds believed affected by LA wildfires: Twelve Capital

Specialist insurance-linked securities (ILS) manager Twelve Capital has said that it believes two per-occurrence catastrophe bond structures are likely affected by the loss impact of the Los Angeles, California wildfires at this stage, while the impact of aggregate erosion for other cat bonds is still being assessed.

Twelve Capital bases its latest assessment on the current industry loss estimate range from the four leading catastrophe risk modelling firms, which spans from $20 billion to as high as $45 billion.

As we’ve said, the mid-point average across the cat modeller estimates sits at $31.125 billion.

In its latest update on the LA wildfires, Twelve Capital reports that still the majority of losses are likely to be absorbed by primary insurers and junior reinsurance layers.

Twelve Capital added, “We believe that there are currently two Cat Bonds with occurrence structures that are affected at this stage. However, we completely excluded one of them and are underweight with the other relative to its market weight, limiting the impact on our portfolio.”

Here, we assume Twelve Capital is referring to armers Insurance Group’s $100 million Class A notes from its Topanga Re Ltd. (Series 2021-1) catastrophe bond and the $45.5 million Randolph Re (Series 2024-1) private cat bond that provides indemnity per-occurrence reinsurance from the capital markets to Mercury Insurance.

On the Topanga Re cat bond, the $100 million of indemnity per-occurrence Class A notes have remain marked down. However, after Farmers issued its first loss estimate in a range running up to $2.15 billion, the notes recovered slightly to bids of 50 at the latest pricing.

We understand that the range began around $1.6 billion, which is approaching the attachment point for the notes, although at this stage it’s important to state this is an early estimate and so there is no certainty as to whether any principal losses will be suffered yet.

For the private Randolph Re cat bond, that provides wildfire reinsurance to insurer Mercury, we understand that at pricing on Friday these notes were marked further down to bids of around 25 cents on the dollar.

So, at this stage cat bond principal losses from these occurrence notes remain uncertain, although the two deals are certainly at-risk of attaching.

Twelve Capital also said, “As noted in our previous updates, the wildfires have contributed to an erosion of the attachment point in aggregate structures meaning it reduces the severity threshold for future events to trigger losses.

“While the full extent of the aggregate erosion is still being assessed, we are actively monitoring the situation and are awaiting further loss updates from cedants.”

The aggregate cat bonds that are exposed remain marked down in the latest pricing, with not much change from the prior week.

It’s worth highlighting our article from earlier here that suggests some re/insurers may be working off higher industry loss estimates for the fires, as this could have ramifications for where the industry feels ultimates may settle, with read-across implications for the catastrophe bond market.

Read all of our coverage related to the Los Angeles, California wildfires here.