In a new update on the Los Angeles and Southern California wildfires, Evercore ISI analysts have said they believe that losses from the event are unlikely to change the trajectory of reinsurance pricing, which the firm anticipates will still be down 10% to 20% at the mid-year renewals.
Last week, Evercore ISI updated their estimate of the potential insurance and reinsurance market impact from the wildfires, saying that they believe the total could reach around $20 billion to $25 billion.A variety of catastrophe risk modelling firms and reinsurance brokers have put their industry loss estimates from the wildfires in a range of $20 billion to $45 billion. While risk modeller estimates currently have a mid-point average at $32.17 billion.
Earlier this week, Mercury General Corporation, one insurance company with meaningful exposure to claims from the LA, California wildfires, revealed that it has not yet determined whether it will consider the fires as two separate events under its reinsurance arrangements.
Decisions like that, related to terms of coverage, will have ramifications for how much of the loss could be passed on to the reinsurance sector and any exposed ILS capital.
“Reinsurers will be impacted at a $25-30b insured loss and we believe similar in magnitude to Hurricane Milton ($300-400m across the Bermudians; we estimate reinsurers will take ~10-15% of the industry loss).
“We do not think this will be enough to change the trajectory of reinsurance pricing which we still think will be down 10-20% at mid-year renewals,” Evercore ISI said in its latest report.
Adding: “In addition to direct exposure, the CA FAIR plan gave an update over the weekend that indicated 22% & 12% of the structures damaged in the Palisades & Eaton fires are covered by the plan, both below the 31% historical average in Fire impacted areas. We still think our ~$6b FAIR plan loss estimate feels right which implies an assessment for the industry.”
A crucial topic that Evercore ISI’s analysts mention is how this event could impact the competition on auto insurance across the state of California, with both Mercury General Corporation and Farmers Insurance expected to incur large losses from the wildfires.
“We think MCY is the most impacted and could pull back from growth in CA, while Farmers has reinsurance coverage in place that should limit the impact of the estimated $4.3b gross loss we expect it will incur from the fires. As a result, we think this is marginally positive for PGR and potentially ALL as both could see an increase in growth in auto in CA (although both could be hesitant to bundle with home on new apps),” analysts said.
Last week, several catastrophe bonds saw further negative secondary market price movements due to potential exposure to aggregate attachment erosion, or actual losses, from the wildfires.
According to our recent article on the cat bond price movements seen, the implied write-down, in mark-to-market terms from the wildfires, currently stands at around $200 million. Which shows that the cat bond market could only shoulder a small proportion of the losses that flow to reinsurance capital.
It’s also important to note, that private insurance-linked securities (ILS) strategies, such as collateralized reinsurance, quota shares, sidecars and retrocession may also each take shares, perhaps more than the amount that flows to the cat bond market.
Read all of our coverage related to the Los Angeles, California wildfires here.
