Reinsurance treaties vulnerable to California wildfire losses: Fitch

Reinsurance treaties with aggregate loss triggers are expected to be vulnerable to the November fire losses in California, following previous qualifying catastrophe events in 2018 that would have utilized some or all of their aggregate deductibles, Fitch Ratings said.

At the same time, gross losses from the Camp and Woolsey/Hill fires have also been large enough for certain insurers to recover losses from occurrence-based catastrophe reinsurance layers, particularly those with lower attachment points, the agency noted.

The California Department of Insurance has received nearly 40,000 claims related to the Camp and Woolsey/Hill fires with a total of over $9.1 billion of incurred losses reported, as of Dec. 12. Approximately 92 percent of the claims relate to residential property policies as nearly 10,564 homes were completely destroyed in the fires with another 17,955 residential structures facing partial losses.

The timing of the losses in the fourth quarter is expected to impact ongoing January 1 reinsurance renewal discussions for primary companies that transferred fire losses to their risk transfer partners. For some companies, 2018 represents the second year in a row that wildfire losses have hit reinsurance layers, Fitch noted. When combined with the substantial third quarter catastrophe hits, the above average industry catastrophe losses in back to back years may provide momentum for rate increases and improved terms and conditions for reinsurers in 2019, the agency said.

The most recent loss estimates for the November fires from catastrophe loss modellers AIR Worldwide and RMS place insured losses in a range of approximately $9 billion-$13 billion, with CoreLogic's estimate even higher at $15 billion-$19 billion. Fitch estimates that losses will likely reach the higher end of these estimates, based on individual public announcements that several companies have released.

A number of the largest property insurance writers in California have already pre-announced fourth quarter 2018 wildfire loss estimates and provided details on the significant amount of losses that have already been paid to policyholders and the recoveries that are expected from their reinsurance partners. To date, primary carrier net losses reported have tended to be relatively limited as reinsurance programmes absorbed a considerable amount of the losses, Fitch said.

Three companies in the top 10 of homeowners insurers in California reported both gross and net losses from the November wildfires, demonstrating the significant amount of losses that were ceded to their respective reinsurance structures, Fitch noted.

Exposure to November wildfire events led to the regulatory seizure of Merced Insurance Company, a small regionally concentrated homeowners insurer that the California regulator declared insolvent on Nov. 30 as the company's net incurred losses far exceeded its ability to pay claims from the fires. The company's loss experience from the fires demonstrates the risk of product and geographic concentration, particularly small companies with catastrophe exposure, Fitch said.

The ILS market will also experience losses from the fires, the agency said. Collateralized reinsurers and ILS funds that participate on property reinsurance or retrocession agreements with cedants that were particularly exposed to the region represent the most likely source of losses to the market, it noted.

Cal Phoenix Re, the first ever wildfire specific catastrophe bond was sponsored by Pacific Gas and Electric Company (PG&E) in 2018, with a trigger based on third-party liability incurred losses for the utility. A number of lawsuits have been filed against PG&E in the aftermath of the fires and the catastrophe bond currently trades well below par on the potential for the company to be found liable for the fires, Fitch noted.

Of the top 15 homeowners insurance writers in California, USAA Group and Nationwide Mutual both sponsor outstanding aggregate structure catastrophe bonds that include wildfire property risk as a covered peril. Each of the companies has seen catastrophe bonds in riskier layers of their reinsurance structure marked down below their par values in the secondary market in recent weeks, signifying the market expectation of potential losses, the agency said.

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