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Cat bond funds take NAV hit on wildfire cat bond write-down


Catastrophe bond fund managers have been marking down their holdings in Pacific Gas & Electric Co’s (PG&E) $200m Cal Phoenix Re Ltd. (Series 2018-1) cat bond on the expectation that it could face a total loss of the utility is found liable for the Camp wildfire in California.

As a result a number of cat bond funds have taken a hit to their net asset values on Friday, as the fund managers factored in the marking down of the Cal Phoenix Re cat bond into their latest fund valuations.

The electrical utility already faces a lawsuit and has said that if found liable it expects to claim on its full $1.4 billion of liability insurance coverage for wildfire events, which would include the Cal Phoenix Re catastrophe bond.

As a result of this news, the secondary market cat bond brokers had marked down the Cal Phoenix Re cat bond in their pricing sheets on Friday, as we reported at the time.

It’s not that the cat bond has taken a loss yet, rather that market sentiment has converged on it being extremely likely that it will do in the future.

Hence, given the assessment that the Cal Phoenix Re cat bond is at severe risk of paying out, the price was marked down for a total loss on Friday and ILS fund managers marked it down in their end of week valuations.

Plenum Investments, the Zurich headquartered catastrophe bond investment specialist, said that its cat bond fund was set to take a 2% hit to its net asset value (NAV) because of the marking down of the Cal Phoenix Re cat bond.

“If PG&E is indeed deemed responsible, then the bond will suffer a full loss,” Plenum Investments said.

Adding, “We expect the CAT bond market to price this full loss scenario already in on Friday November 15th and consequently the Plenum CAT bond fund will likely experience a mark down of roughly 2% on its NAV.”

But as the cat bond has not taken a loss yet there is a slim chance that it could recover, should PG&E be found to not have been liable for the Camp fire outbreak.

Plenum explained, “We want to emphasize that this mark down reflects only the market’s estimation of the likelihood that PG&E is indeed going to be responsible. There are no official proofs so far.”

As we explained on Friday, the Cal Phoenix Re cat bond even traded at a distressed price last week, showing that some investors are so sure it will face a loss that they were willing to secure something for their holdings at almost any price.

The Cal Phoenix Re cat bond is not the only one put at-risk by these wildfires. Some aggregate cat bonds are also exposed and one USAA tranche in particular is considered particularly at-risk as its risk period runs to next June.

It’s also worth noting that catastrophe risk modelling specialist RMS has estimated that insurance and reinsurance industry losses from the Camp and Woolsey wildfires in California could reach as much as $13 billion.

At that level the ILS market impact is likely to become more significant, as retrocession, ILW’s and reinsurance quota shares or sidecars come into play and it could also bring heighten risk for other aggregate cat bonds, as cedent losses rise further.

This will drive further NAV adjustments to private ILS funds, as more difficult to value collateralised reinsurance structures increasingly become exposed to this latest wildfire outbreak.

It’s important to note though that the NAV hit from the Cal Phoenix Re cat bond is based on uncertainty, not an actual loss yet. As such, it could be recovered in months to come if PG&E was not found to have claimed on its coverage and drawn down on the cat bond, although the market clearly feels this is unlikely to be the end result.

Also read:

RMS puts Camp & Woolsey wildfire losses at up to $13 billion.

California wildfire losses rising, destruction nears 15,500 structures.

PG&E’s wildfire cat bond marked down for loss, traded at distressed price.

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

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

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.

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

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

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