LA fires: “Considerable attachment erosion” likely for some aggregate cat bonds – Steiger, Icosa

With loss estimates for the Los Angeles, California wildfires having risen, there’s now more likely to be “considerable attachment erosion” for some aggregate catastrophe bonds that hold exposure to the wildfire peril, Florian Steiger, CEO of Icosa Investments AG has said.

Earlier this week, catastrophe bond fund manager Icosa Investments was first to spotlight the still-developing wildfire catastrophe event brings into focus the topic of potential further erosion for aggregate catastrophe bond attachments.

Now, as clarity over the devastation that has occurred resulting from the fires in Los Angeles County improves, the possibilities of that occuring is seemingly rising.

As we reported early this morning, California officials at the moment are saying 10,000 structures have been destroyed or severely damaged across the 2 foremost wildfires that proceed to burn.

Estimates for the insurance and reinsurance market loss from this fireplace event are starting from $10 billion to $20 billion, with some analysts now warning that if the blazes proceed the industry loss could rise even higher than that.

At the identical time, estimates for the broad and consequential economic impacts of the fires now stand at as much as $150 billion.

Commenting on the potential impact of the California wildfires within the catastrophe bond market, Icosa Investments said today, “Final loss estimates remain highly uncertain and needs to be viewed with caution. Adding to the complexity, multiple wildfires burning concurrently may lead to differing impacts on occurrence cat bonds versus aggregate cat bonds.”

Adding, “A notable factor is that some aggregate cat bonds were already weakened through the hurricane season, with prior losses eroding their attachment points. This leaves them significantly more exposed for the rest of their risk period, which frequently extends until June and includes the upcoming tornado season.”

Florian Steiger, CEO of Icosa Investments, provided some additional color, saying, “What’s already evident is that these wildfires will lead to significant insured losses for the industry, although it’s unclear if cat bonds will likely be directly affected.

“On the very least, these fires are more likely to cause considerable attachment erosion for some aggregate cat bonds. Notably, certain cat bonds were priced quite high following the recent hurricanes- a priority we highlighted several times in recent weeks.

“Given the dimensions of the losses unfolding, it wouldn’t be surprising to see significant price adjustments for a couple of of of those instruments.”

As Steiger said, it does remain uncertain whether cat bonds could face any direct losses from the wildfires at the moment, but the topic of aggregate erosion is more more likely to be a feature of pricing discussions later today, as broker desks mark their pricing sheets.

We understand that a few of the USAA Residential Re catastrophe bond series that provide that insurer aggregate reinsurance protection are seen as probably the most exposed to erosion of their attachment deductibles at the moment.

It’s also value noting that there are, naturally, other non-securitised aggregate reinsurance and retrocession arrangements in each the normal and alternative markets that may likely feel similar attachment erosion effects from these wildfire losses.

But, erosion doesn’t necessarily equate to losses, although it will probably elevate the chance of impairment occurring across the remaining of the annual risk period for these instruments, depending on the quantum of future qualifying catastrophe events.

Also read:

– LA wildfires: Over 10k structures destroyed. Insured losses as much as ~$20bn, economic $150bn.

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

– 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.

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