Fire & Finance: Lessons from the 2025 LA Wildfires for Cat Bond Investors

California’s wildfires have been a longtime symbol of climate risk, but in January 2025, the Palisades and Eaton fires set an alarmingly new precedent as these fires became the costliest wildfire disaster in U.S. history.

This blog post is intended to build on one of the case studies from our recent white paper, Risk Transfer & Resilience: How Catastrophe Bonds Support Disaster Recovery and Portfolio Stability. Our goal is to expand the short case study into a deeper analysis for cat bond investors looking for market insights and education. 

Estimates of the total economic damage from Los Angeles fires was estimated between $76 billion and $275 billion. Insured losses have reached nearly $40 billion¹²³⁴. Early financial headlines showcased widespread devastation: entire neighborhoods leveled, tens of thousands of claims filed, and California’s state insurance fund was stretched to capacity. 

Yet for catastrophe bond (cat bond) investors, the outcome was surprisingly stable. The 2025 LA wildfires are now a critical case study in how insurance-linked securities (ILS) behave under stress, and why they may play an increasingly important role in disaster recovery financing and, interestingly, why they might prove to be a useful tool for portfolio diversification.

The Scale of Losses

Loss estimates vary depending on calculation methodology:

• UCLA Anderson placed property damage at $76–131 billion with insured losses up to $45 billion³.
• Munich Re and Swiss Re converged around $40 billion insured and $53 billion total economic loss¹².
• Broader studies, including those by the Los Angeles County Economic Development Corporation (LAEDC), suggested $28–54 billion in direct property damage plus $5–9 billion in long-term business interruption⁴.
  
  

Regardless of the framing, the 2025 fires eclipsed prior wildfire benchmarks (for example, the 2018 Camp Fire with $12.5 billion insured losses), and placed wildfires alongside hurricanes as “peak perils” for the insurance sector.

Poise Under Pressure 

Despite the catastrophic human and economic toll, the catastrophe bond market showed resilience.

• Swiss Re Cat Bond Index dipped just 0.27% during the wildfire period⁵.
• Fitch Ratings noted temporary price drops of 20%+ on a handful of tranches, but projected no principal losses⁶.
• Total cat bond principal losses from the event are expected to stay below $250 million, which represented <0.5% of the total cat bond market during that period⁶.
  
  

How were the catastrophic bond market losses so minimal despite record-setting economic losses? Three key factors include:

1. Diversification. Only a small subset of outstanding cat bonds carried wildfire exposure. Most of the $56–57 billion market was spread across hurricanes, earthquakes, and floods globally⁵.
2. Trigger design. Indemnity and industry-loss triggers required extremely high thresholds (often >$500 million per sponsor) before investor capital was tapped¹².
3. Structural resilience. Layered coverage and multi-year terms protected both issuers and investors¹².
   
   

A Growing Market 

In the nine months since the LA wildfires, issuance hasn’t retreated. In fact, we’ve observed exactly the opposite: 2025 has become the most active year yet for wildfire-related cat bonds. An all-time high $3.375 billion of new cat bonds with wildfire exposure have been issued, and new dealers have remained oversubscribed with increasing use of parametric triggers, sidecars, and multi-peril aggregate towers.  Some particularly interesting new issues include:

• LADWP’s 123 Lights Re Ltd. (2025-1) secured $100 million (with potential up to $150M) in wildfire coverage at an 11% spread versus ~2% expected loss^8,9
• Mercury General (Luca Re) and Sutton National (Greengrove Re) brought additional wildfire-focused deals to market^10,11

Investors, far from fleeing, appear to have embraced the risk-adjusted return profile with  double-digit yields for carefully modeled wildfire exposures and attachment points designed to absorb only the most extreme events.

Key Lessons & Broader Implications 

We believe the 2025 LA wildfires should serve as reinforcement for investors as to why catastrophe bonds deserve a structural allocation in diversified portfolios.

They continue to provide meaningful risk diversification away from traditional equity and credit markets⁵, often delivering attractive yields (particularly relative to risk⁸), and they can fulfill a socially beneficial role by channeling capital into regions facing disaster recovery challenges.

Skeptics feared that wildfires would expose fatal flaws in cat bonds but we believe the LA 2025 fires validated the market’s design and that issuance after-the-fact proves that case. As climate risks intensify, catastrophe bonds are proving to be resilient for investors and indispensable for communities in need of rebuilding.

We recommend reading the full white paper for a complete perspective on how catastrophe bonds perform in extreme events and how they may enhance both client portfolios and societal resilience.

Footnotes

1. Swiss Re Institute, Wildfires and thunderstorms drive global insured losses to USD 80 billion in first half of 2025, Aug 6, 2025. https://www.swissre.com/media/press-release/pr-20250806-wildfires-thunderstorms-global-insured-losses-first-half-2025.html
2. Munich Re, Natural disaster figures for the first half of 2025, Jul 29, 2025. https://www.munichre.com/en/company/media-relations/media-information-and-corporate-news/media-information/2025/natural-disaster-figures-first-half-2025.html
3. UCLA Anderson Forecast, Economic Impact Analysis of the 2025 Los Angeles Wildfires, Feb 2025. https://www.anderson.ucla.edu/news-and-events/pr-economic-impact-los-angeles-wildfires#:~:text=Los%20Angeles%20(February%204%2C%202025,losses%20estimated%20at%20%2475%20billion.
4. LAEDC, Economic Impact Assessment of the 2025 Wildfires, Feb 2025. https://laedc.org/wpcms/wp-content/uploads/2025/02/LAEDC-2025-LA-Wildfires-Study.pdf
5. Swiss Re Cat Bond Index data, Swiss Re Cat Bond Indices https://www.swissre.com/institute/research/insurance-research/cat-bonds.html
6. Fitch Ratings, California Wildfires to Result in Minimal Principal Cat Bond Losses, Jan 24, 2025. https://www.fitchratings.com/research/insurance/california-wildfires-to-result-in-minimal-principal-cat-bond-losses-24-01-2025
7. Artemis.bm, Cat bond market assumes more wildfire risk in 2025 than any prior year, Aug 21, 2025. https://www.artemis.bm/news/cat-bond-market-assumes-more-wildfire-risk-in-2025-than-any-prior-year/
8. Artemis.bm, California utility LADWP seeks third wildfire cat bond, up to $150m (123 Lights Re), Jul 29, 2025. https://www.artemis.bm/news/california-utility-ladwp-seeks-third-wildfire-cat-bond-up-to-150m-123-lights-re/
9. Artemis.bm, LADWP secures $100m 123 Lights Re wildfire cat bond priced at low end of guidance, Aug 13, 2025. https://www.artemis.bm/news/ladwp-secures-100m-123-lights-re-wildfire-cat-bond-priced-at-low-end-of-guidance/
10. Insurance Business Magazine, Mercury General issues $100m wildfire catastrophe bond, Jul 2025. https://www.insurancebusinessmag.com/reinsurance/news/breaking-news/mercury-general-issues-100m-wildfire-cat-bond-538999.aspx
    
    

Artemis.bm, Greengrove Re Ltd. (Sutton National) wildfire cat bond, 2025. https://www.artemis.bm/deal-directory/greengrove-re-ltd-2025-1/