Twelve Capital Event Update

Wildfires in Los Angeles

At the time of writing there are five active fires in and around Los Angeles, California. The two main fires of concern are “Pacific Palisades”, and “Eaton”, both of which have resulted in significant property damage and are continuing to spread amid dangerous conditions.

The latest reports suggest that over 2,000 structures have been destroyed, with the Pacific Palisades fire alone having consumed more than 17,000 acres and forcing over 40,000 people to evacuate. The fires are expected to cause further damage, especially with strong winds (Santa Ana) and dry weather conditions predicted to continue. This escalating situation has, in addition to the danger for the people, led to widespread concerns regarding the potential economic and insurance impacts.

In terms of the insurance industry, initial estimates suggest that insured losses could range from USD 6-13bn (Source: Artemis), with some analysts projecting a total economic loss between USD 52-57bn. The fires are active in high-value real estate areas, such as Santa Monica and Malibu, with individual homes and structures in the millions of dollar range, meaning losses could increase. Key players in the insurance industry are likely to experience significant losses, with specialised firms that cover high-net-worth properties being hit hardest. Additionally, the California FAIR plan (the insurer of last resort) has considerable exposure in the Pacific Palisades region alone, estimated at around USD 6bn. The FAIR plan has seen its policy count increase significantly in the past few years in response to a widening protection gap as major private insurance withdraw coverage in the region.

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. 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 a large to cause a loss.