The outbreak of dangerous and damaging wildfires in the Los Angeles area of California in the last day brings into focus the subject of potential further erosion for aggregate catastrophe bond attachments, according to cat bond fund manager Icosa Investments.The company explained that many aggregate cat bonds see their annual risk periods aligning with the hurricane season, meaning that there are some months to run and should the Pacific Palisades fire that is burning out of control in the suburbs of Los Angeles create meaningful insured losses, it could have the potential to further erode aggregate attachment levels for exposed positions., a state of emergency has been raised in the Los Angeles aware as a fast developing wildfire situation emerged with the Pacific Palisades fire having expanded to over 3,000 acres on the back of a Santa Ana wind event, with many properties said burned and 13,000 buildings believed to be threatened.In recent hours concerns have begun to mount for areas such as Santa Monica, as this wildfire burns out of control and the Santa Ana winds remain strengthened.

With a number of smaller burns having also started in the region, it has turned the insurance and reinsurance industries focus back onto the California wildfire peril.Commenting on the wildfires, Icosa Investments said, “The recently sparked wildfires near the densely populated Los Angeles metropolitan area bring renewed attention to the issue of attachment erosion in aggregate cat bonds.While it’s too early to determine whether the “Palisades” wildfire will lead to significant insured losses, this event serves as an early-year reminder for investors holding aggregate indemnity bonds.” The investment manager further explained, “For many aggregate indemnity bonds, risk periods align with the hurricane season with resets occurring around June and are thus still six months away.

This means that the two major hurricanes of last year, Helene and Milton, may have already reduced the buffer (“attachment”) that protects investors from losses.With wildfires ongoing and tornado season approaching, questions remain about whether the remaining attachment levels are sufficient.Despite these evolving risks, valuations for most of these bonds remain largely unaffected.” CEO of Icosa Investments Florian Steiger further commented on LinkedIn, “Although the hurricane season has concluded, the impact of two major hurricanes – causing some attachment erosion in aggregate structures – will carry forward well into the new year.

Meanwhile, the “Palisades” fire near Los Angeles, currently threatening thousands of homes, poses a significant risk to the insurance industry.” Steiger added, “At this stage, however, the majority of potential losses (if any) are expected to be absorbed by primary insurers and private reinsurance/ILS layers, with only limited exposure for cat bonds to this peril.” It’s often challenging to know how impactful a wildfire event such as this could be, not least as it is night time still in California and no official reports for the numbers of structures burned so far are available at this time.But the fire situation in the Pacific Palisades and surrounding neighbourhoods remains critical and dangerous and forecasters suggest the wind event could even intensify through the early morning there.Understanding the aggregate erosion that has occurred so far for aggregate catastrophe bonds that may cover wildfires in California is also challenging to understand, but as Icosa Investments said there have been a number of US catastrophe loss events over many outstanding bond risk periods so far.

In order for aggregate erosion to become meaningful from a single event such as this, the wildfire would certainly need to become a billion dollar plus event for the insurance industry.But with cat bond terms and attachments still at relatively robust levels, it does seem that before any cat bonds were troubled significantly, there would likely be reinsurance and perhaps private ILS layers at-risk.Icosa Investments concluded, “In our view, the current risk-return profile given the high valuations of some of these bonds is less compelling, irrespective of the eventual outcomes.

Investors may find better opportunities elsewhere within the cat bond market, where risk-adjusted returns are more favorable.”.All of our Artemis Live insurance-linked securities (ILS), catastrophe bonds and reinsurance can be accessed online.Our can be subscribed to using the typical podcast services providers, including Apple, Google, Spotify and more.