Catastrophic bond price volatility and expected forest fire reductions: Plenum

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Catastrophe bonds exposed to wildfire risk in California, investor Plenum expected to face increased levels of volatility and price cuts in the secondary market due to ongoing wildfires in the state .

California wildfire camp, AP photo by Noah Berger

Zurich-based Insurance-Linked Securities Specialist (ILS) and catastrophe bond investment manager Plenum Investments said the California wildfires, which have now become the most destructive on record, will bring volatility through positions exposed in cat bonds held by the investment manager.

With forest fires still raging and strong winds, as well as dry conditions expected to persist, the impacts of this outbreak are expected to continue.

As we wrote this morning, wildfires are expected to result in billions of dollars in losses in the insurance and reinsurance market.

For the catastrophe bond market in particular, most of the exposure will come from reinsurance or retrocession cat bonds, in particular global cat bonds.

Although another angle of exposure is the forest fire liability disaster obligations sponsored by electric utilities, which, as we pointed out earlier today, would be threatened if PG&E was considered responsible for starting the campfire.

Plenum said the possible damage from the camp fire could be comparable to last year’s Tubbs wildfire, which caused insured losses of around $ 8 billion.

Other estimates now suggest that the campfire alone could cause $ 4 billion in insured losses.

It is too early to speculate, however, and property values ​​are significantly lower in the town of Paradise (as our sister post Reinsurance News explained today here), which the campfire devastated, compared to the area. where the Tubbs fire burned.

Regardless of the possible loss of insurance and reinsurance interest, the exposure of the $ 200 million catastrophe bond Cal Phoenix Re Ltd. (2018-1 series) sponsored by PG&E is clear. If the electric utility is found to be responsible in any way for the Camp wildfire outbreak, investors in this chat bond could suffer a loss.

Plenum said the uncertainty is likely to be reflected in the valuation of investments in the Cal Phoenix Re bond cat in investors’ portfolios.

Meanwhile, the Woolsey Fire continues to affect the Malibu area and surrounding areas as the number of destroyed properties has increased according to the latest estimates.

With multiple wildfires burning across California, Plenum highlights the exposure that some comprehensive and comprehensive catastrophic obligations will have to these events.

These wildfire events can erode the retention of catastrophe bonds covering forest fires and with a global trigger, Plenum explained, although with disaster losses currently below 2017, it is likely that most between them lasted longer than during the scorching fires in California in the fourth quarter of 2017.

Therefore, Plenum indicates that most of these global cat bonds can probably absorb more losses before reaching the point at which they are triggered and payments would be due.

However, the mere fact that they are exposed and the wildfire season may unfold means that there could be volatility ahead for valuations in the secondary market of the exposed catastrophe bonds.

“We expect increased volatility and price discounts on potentially exposed bonds in the coming weeks until the fires are brought under control and there is a high degree of uncertainty about the extent of the damage,” said declared Plenum.

The only two catastrophe bonds that are purely exposed to wildfire risk in California are those sponsored for electric utility companies PG&E and Sempra Energy.

The remainder of the wildfire risk exposure in the catastrophic bond market comes from property and casualty catastrophic bonds sponsored by insurers like USAA and Nationwide Mutual. These obligations would primarily require that the losses from those 2018 California wildfires eclipse the 2017 losses from the same peril, so that they are truly considered at risk of loss.

Read also :

California wildfire is the most destructive ever, with multi-billion dollar losses expected.

California wildfires destroy more property, but industry losses are uncertain.

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