Potential wildfire cat bond losses may bolster investors’ desire for greater returns: AM Best

A number of catastrophe bonds have seen negative price movements due to potential exposure to the Los Angeles wildfires. As insured loss estimates from the event fluctuated, bond prices dropped by an average of 10% to 20%. But the potential for cat bond capacity to be utilised may strengthen bondholders’ demand for higher returns, says rating agency AM Best.

We previously reported that the mark to market impact to catastrophe bonds from the Los Angeles wildfires had risen, as a number of cat bond names saw further markdowns on pricing sheets, while some aggregate cat bonds saw negative movements that had not done so before.

But, it’s important to qualify that the extent of mark-downs of cat bond secondary prices after the wildfires depends on the pricing sheet looked at, as they are far from evenly marked across banks and brokers at this time.

In addition, price adjustments to cat bonds exposed to the California wildfires drove the overall yield of the catastrophe bond market higher in January 2025, to end the month back in double-digit territory, at 10.34% in USD, according to data from Plenum Investments.

It’s important to note, that as the scale of the wildfire losses becomes clearer, the industry is realising that a larger proportion of the loss is expected to flow to reinsurance and retrocessional capital, with evident ramifications for the insurance linked securities (ILS) market.

In a new report, AM Best explained that the ultimate reinsurance exposure to the California wildfires “will be significant,”, with the agency noting that it appears to be manageable at this point.

Moreover, the agency also noted that large losses from the wildfires are likely to lead to pricing increases in reinsurance for the California FAIR Plan.

The FAIR Plan significantly expanded its reinsurance protection, increasing ceded premiums from $8 million in 2018 to $169 million in 2023. This growth was driven by both additional coverage and rising costs associated with greater property exposure, which has tripled since 2020.

“Any impact on the broader property catastrophe reinsurance market remains to be seen. Pricing and terms of reinsurance for the California FAIR Plan will be critical to ensure the plan is adequately funded and able to properly support the policy holders,” AM Best explained.