Fitch Ratings has noted that the Los Angeles wildfires will cause certain catastrophe bonds to experience partial principal losses, though these are not anticipated to impede issuance.
According to a new report from the rating agency, while roughly 12% of the $50 billion cat-bond market is currently exposed to wildfire risk, it does not expect any realised cat bond losses to be small in aggregate.
Fitch continued, “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.”
As explained by our insurance-linked securities sister publication, Artemis, 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.
The highest estimate so far comes from CoreLogic at $35 to $45 billion. More recently, Verisk pegged insured losses from the wildfires at between $28 and $35 billion, and Karen Clark & Company said today that the hit to the industry will be close to $28 billion.
While cat bonds with a January 1 reset date may not be immediately affected by accumulated losses, Fitch’s new report suggested that 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.
The rating agency continued, “Other cat bonds with different reset dates may see principal losses, as these wildfire losses are aggregated with 2024 insured losses such as Hurricane Helene and Milton which then exceed their attachment point triggers.
“This situation is similar to six years ago, when insured losses from the Tubbs (2017) and Camp (2018) fires in California were aggregated with Hurricanes Harvey and Irma, which triggered several 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’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 rating agency said it does not expect Fitch-rated cat bonds to experience principal losses.
The post LA wildfires to cause minimal principal cat bond losses, issuance unaffected appeared first on ReinsuranceNe.ws.
