2017-12-14 - Av Henrik Sjöholm

Update on California 2017 wildfires

2017 is set to be the costliest year ever from wildfire damages. Adding to the extreme North Atlantic hurricane season, cat bonds can be affected, which is reflected in the fund’s NAV. By our present assessment, one bond in the portfolio is potentially facing a total loss of its principal and one would suffer a partial loss.

The total insured losses are now estimated to exceed $10 billion. As most losses are not covered by insurance, the total losses are expected to be vastly larger. Presently the largest threat is posed by the Thomas Fire in Santa Barbara and Ventura counties. The fire covers, as of today, more than 950 km2, making it the geographically largest wildfire in California this year, and has destroyed more than 1,000 structures, and is not yet contained.

This season’s costliest wildfire, Tubbs, raged in Napa and Sonoma counties in October, destroying more than 5,600 structures and causing several casualties. In total, wildfires have burned more than 4,400 km2 (state and federal land) to date in 2017, almost double the area burned in 2016. According to AIR Worldwide, this year accounts for five out of the 20 most destructive wildfires on record in California.

The large wildfires are largely attributed to meteorological conditions, with strong winds and extreme lack of precipitation. Most areas have recorded less than five per cent of the normal rainfall in the current quarter.

Cat bonds generally do not cover wildfire as a single peril, but can have wildfire losses included in bonds with aggregated losses, where the total losses from several perils determine whether the bond will face a loss or not. Neither a normal nor an extreme wildfire season will, by itself, cause a loss of any cat bonds. However, in addition to the extreme 2017 hurricane season losses, the wildfires may cause losses.

Entropics’ estimate of the erosion of the retention on December 13 indicates that one position  in the portfolio (Caelus Re V 2017-1 Class D) will face a total loss. Another position of the same bond (Class C), seems to face a partial loss (currently 8% of the principal).

The estimated erosion of retentions and principals on positions affected by California wildfires is summarized in the following charts according to present loss reports.

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