Catastrophe Bond Funds Say They’ll Dodge Losses as LA Fires Rage

Catastrophe Bond Funds Say They’ll Dodge Losses as LA Fires Rage

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Catastrophe Bond Funds Claim They’ll Avoid Losses Amid LA Fires

Despite raging wildfires in Los Angeles, catastrophe bond funds expect minimal losses, as primary insurers will likely absorb most damages.

Business

Los Angeles, Wildfires, Catastrophe Bonds, Insurance, JPMorgan

Los Angeles: The wildfires tearing through the city are causing quite a stir, but it seems like catastrophe bonds are in a good spot. According to experts, these bonds are unlikely to take a big hit from the fires.

About 12% of the $50 billion cat-bond market is linked to wildfire risks. Even in a worst-case scenario, many of these bonds should remain mostly unaffected. A fund manager from Twelve Capital mentioned that most losses will likely be covered by primary insurers, so the cat-bond market should stay stable.

Analysts at JPMorgan Chase estimate that the fires could lead to around $20 billion in insured losses, which is double what they predicted just a day earlier. Cat bonds are a way for insurers to manage risks, and investors can make a good profit if disasters don’t happen.

Interestingly, these bonds usually don’t cover fire risks alone; they often bundle them with other disasters like hurricanes. Losses are calculated over a year, and payouts only happen if a certain loss threshold is met. So, while the LA fires are serious, there’s still a chance that future events could impact these bonds.

The CEO of Icosa Investments pointed out that the current situation makes some bonds riskier. With the upcoming tornado season, there’s less room for safety. But over the last five years, fund managers have been getting better at predicting risks, which has made these bonds safer for investors.

The fires in LA have been fueled by strong winds, forcing over 100,000 people to evacuate. JPMorgan analysts have raised their loss estimates to around $50 billion, with insured losses potentially exceeding $20 billion if the fires continue.

Wildfires are tricky to model compared to hurricanes, which is why investors are cautious. There’s a gap between what models predict and the actual losses on the ground, leading to skepticism among investors.

Overall, while the cat-bond market has had a solid year, it might face challenges in maintaining high returns as insurance spreads return to normal levels.

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