LA wildfire losses unlikely to significantly affect cat bond market: Twelve Capital

Losses from the wildfires burning around Los Angeles in California are likely to predominantly fall to primary insurance carriers and more junior reinsurance layers, specialist insurance-linked securities (ILS) manager Twelve Capital has said.

Commenting on the devastating and damaging wildfire event that has unfolded this week and continues, Twelve Capital said it believes the catastrophe bond market will not be significantly affected.

Information on the extent of the damage remains limited, with the latest reports suggesting around 2,000 structures may have been destroyed, with the Palisades and Eaton wildfires the main drivers, making any estimates of losses preliminary in nature at this stage.

Twelve Capital cites our article from yesterday, in which we cited a number of reports that suggested the insurance and reinsurance market loss could be in the $6 billion to $13 billion range. However, later in the day, one of the analyst teams doubled its estimate for insured losses from the Los Angeles fires, saying it could be as much as $20 billion.

Twelve Capital noted that, “This escalating situation has, in addition to the danger for the people, led to widespread concerns regarding the potential economic and insurance impacts.”

The investment manager further explained, “Although it is too early to fully assess the extent of the impact, given it is actively ongoing, the majority of insured losses are expected to be absorbed by primary insurers and junior reinsurance layers, thus unlikely to significantly affect the Cat Bond market.”

But added that, “It is likely however, that the wildfire event will have the impact of attachment erosion in aggregate structures, meaning that events in the remaining risk period do not have to be as large to cause a loss.”

Those junior, or lower and riskier, reinsurance layers that Twelve Capital mentions may have some collateralized participation from ILS funds, of course, or other third-party capital providers. Meaning there is still a chance of some losses being borne in the ILS market, depending on how high the ultimate losses rise for affected insurers and reinsurers.

Also read:

– LA wildfires unlikely to cause meaningful catastrophe bond impact: Plenum Investments.

– JP Morgan analysts double LA wildfire insurance loss estimate to ~$20bn.

– LA wildfires: Analysts put insured losses in $6bn – $13bn range. Economic loss said $52bn+.

– LA wildfires bring aggregate cat bond attachment erosion into focus: Icosa Investments.