Wildfires may put aggregate cat bonds back in investor focus: Plenum

The ongoing wildfires across California, Oregon and other western parts of the United States may put investor focus back onto aggregate catastrophe bonds, according to specialist insurance-linked securities (ILS) fund manager Plenum Investments.

A number of aggregate catastrophe bonds were impacted after losses from the 2018 wildfires in California drove cedants accumulated qualifying losses above the trigger points for some of the capital market backed reinsurance coverage.

The prospect of another damaging and costly wildfire season for the insurance and reinsurance industry will likely bring aggregate cat bonds back into the focus on investors, Plenum Investments believes.

The wildfire season so far in 2020 has resulted in the destruction of more than 6,300 structures in California, while in Oregon a single wildfire, the Alameda fire, is said responsible for the destruction of more than 600 homes and another 100 commercial properties.

As a result the losses for insurers are rising, with some estimates suggesting these are already into the low single-digit billions of dollars.

Because of this, the expectation is that some reinsurance arrangements will also face some impact from the wildfires, if not at this stage of the season then later on, as there are some months to go and so far the burns have been unprecedented in 2020.

Catastrophe bonds make up some of these reinsurance arrangements, with aggregate structures the ones most exposed to losses from wildfires.

With losses rising across other covered perils, such as severe thunderstorms and named storms, there is every chance the wildfires could worsen the erosion of aggregate deductibles sitting beneath cat bond layers.

Plenum Investments said in an update, “According to initial estimates, the economic damage is expected to reach several billion dollars, a significant portion of which will be borne by the insurance industry. Especially loss-aggregating CAT bonds will therefore be in the focus of investors.

“However, no concrete loss estimates are yet available and we have so far seen little market reaction to the current fire events. We currently do not expect any negative impact on performance.”

Before cat bonds are hit though, it would be expected that some other collateralised reinsurance arrangements, such as aggregate excess-of-loss and quota share arrangements, would face some losses on the back of the wildfires, as these tend to attach lower-down.

Plenum also commented on current hurricane season activity, saying that based on the latest forecasts tropical storm Sally is not expected to pose a cat bond market threat if it only makes landfall as a Cat 1 storm, as the forecasts currently suggest.

Fellow ILS investment manager Twelve Capital also commented on the wildfires today, “Twelve Capital is not unduly concerned with the level of damage given, as most Cat Bonds either do not cover wildfire risk or require multiple substantial events to trigger losses.”

On the hurricane threat from Paulette and developing Sally, Twelve Capital added, “While these events are likely to cause dangerous storm surge and potential flooding, they are not forecast to develop into major hurricanes and neither are expected to have any significant impact on the ILS market.”

On the wildfires, red flag wind warnings are in place for some of the affected areas and with hot and dry conditions set to continue, there are fears over the continued spread of some of the wildfires in the next few days, which could exacerbate the situation even further.