USAA cat bond & private ILS also at risk of wildfire losses: Twelve Capital

by Artemis on November 15, 2018

According to specialist insurance-linked securities (ILS) and reinsurance investments manager Twelve Capital, one of the USAA sponsored catastrophe bond tranches and certain private ILS transactions are at risk of facing losses due to the ongoing California wildfire outbreak.

Wildfire industry lossesIn addition the $200m Cal Phoenix Re cat bond, which benefits electrical utility Pacific Gas & Electric Co. (PG&E) is also considered at high risk of losses, as we explained earlier today, due to the chances the utility is found liable for the largest fire outbreak.

With damage from the fires continuing and estimates of insurance and reinsurance industry losses from the ongoing California wildfire outbreak suggesting between $4 billion to as much as $10 billion, across all the current fires, it’s no surprise that ILS investments are exposed to the event.

ILS manager Twelve Capital has highlighted some of the potential impacts it envisages, based on the exposure its fund and private mandate portfolios have to the wildfire events.

The investment manager expects that single peril wildfire cat bonds, such as the Cal Phoenix Re deal, multi-peril cat bonds that include wildfires, such as the USAA aggregate cat bonds, and also private ILS transactions, or collateralised reinsurance arrangements, could all face some losses from the ongoing fires.

First, the Cal Phoenix Re cat bond which Twelve Capital says is at risk.

“If it were established that the Camp fire was caused by Pacific Gas & Electric (PG&E), then this would likely trigger a complete write-down of the Cal Phoenix 2018 Cat Bond,” Twelve Capital explained.

PG&E itself has confirmed that if found liable it expects to draw down on all its insurance protection, which would include the catastrophe bond.

But added that its own investments into that cat bond are “below market weight” and would help to mitigate any exposure there.

On the multi-peril catastrophe bonds, particularly those with aggregate indemnity triggers, Twelve Capital in particular highlights one USAA issuance, the $100 million Class 11 tranche of Residential Reinsurance 2018 Limited (Series 2018-1).

This is one of the riskiest tranches of notes ever issued by USAA, with an expected loss of 7.3% at issuance and Twelve Capital noted that this tranche has already faced some erosion of its aggregate deductible in 2018, from events including hurricanes Florence and Michael, the California wildfires in July, convective weather and tornadoes.

While the erosion of the buffer beneath this cat bonds trigger is ongoing and based on estimates still, given how recent Michael was, we understand this cat bond tranche has been offered in the market well marked-down, in terms of pricing, suggesting investors feel it’s a bond that should be considered at significant risk.

Add in any of USAA’s losses from the wildfires that eat away further into the aggregate deductible buffer and then considering the fact the reset for this cat bond is not due until June 1st 2019, and it’s clear that it should be considered at risk.

As a result, Twelve Capital said that it, “Assigns a high probability to this bond suffering a partial, or even a full, write-down from future thunderstorm, winter storm and hail or tornado events.”

Other USAA catastrophe bonds could also be considered at risk, given their inclusion of wildfire as a covered peril and the fact a number already have some aggregate deductible erosion. However, many of them are reset towards the end of the year, meaning they may escape without actual losses of principal.

Of course other USAA cat bonds are already facing losses from the 2017 hurricanes and wildfires, details of those considered at risk can be found on our dedicated Deal Directory page featuring at-risk transactions.

On the private ILS or collateralised reinsurance side of the market, further losses should be expected from the wildfires, Twelve Capital suggests.

While the manager’s own risk appetite for private ILS reinsurance and retrocession deals typically sits relatively high in program towers, the manager still said that its analysis of contracts and cedants shows that, “on a single event basis, the Camp fire could cause relatively limited losses within the private ILS positions held, assuming the same level of losses as 2017.”

However, the ILS manager also cautioned that with the fires ongoing and damage still being reported, increasing the numbers of properties destroyed, it’s still too early to know for sure how large an impact the ILS market will face.

Twelve Capital estimated that the portfolio impact from the California wildfires could be 03% to 0.8% for a diversified cat bond portfolio, 0.4% to 0.8% for an opportunistic cat bond portfolio, and 0.5% to as much as 1.8% for a portfolio that also allocated to private ILS or collateralised reinsurance and retrocession.

These are very preliminary assessments from Twelve Capital, based on where it sees the potential impacts should this ongoing California wildfire outbreak prove as costly for the industry as last year’s.

Twelve Capital also noted that there is likely to be some volatility in positions over the coming weeks, as losses become clearer and exposure for specific cat bond or ILS positions is confirmed.

It’s clear that these wildfires are going to drive a meaningful loss for insurance and reinsurance interests, with a share falling to the capital markets and ILS investors. It will be some weeks before the market understands just how meaningful the impacts may be.

Update: This USAA cat bond tranche was marked down in broker pricing sheets at the end of the week, reflecting the perception of an increasing likelihood of it facing losses.

Also read:

PG&E sued over Camp wildfire, putting Cal Phoenix Re cat bond in the frame.

Wildfire loss expectations rise, as structures destroyed passes 10,800.

Wildfires could cost insurers $5bn to $10bn: Credit Suisse analysts.

Wildfires to drive up to $6bn industry insured loss – Moody’s.

Wildfire losses to hit record in 2018, pricing needs to change: A.M. Best.

Stone Ridge & CATCo fund prices dented by California wildfire threat.

California wildfires destroy more property, but industry losses uncertain.

Cat bond price volatility & discounts expected from wildfires: Plenum.

California wildfire most destructive ever, multi-billion losses expected.

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