Catastrophe exposure on a single tract: insure the standing timber or spread the acreage?

Question

Working through what happens if the thing burns. On a pine tract, most of the value sits in the standing inventory, and a single fire or a hurricane track can take a large share of it in a day. Replanting resets you to year zero on a rotation you were fifteen years into.

Three ways I've seen people handle it, and I think it's a real split.

Standing timber insurance. You can buy it, premiums vary a lot by region and by whether you're insuring only fire or wind too, and coverage is often written on cost of replanting plus lost growth rather than market value of the timber. Cheap relative to the asset in some places, and the payout basis is where the arguments happen.

Geographic spread. Instead of premiums, own two smaller tracts a few hundred miles apart, or buy into partnerships across regions. You've paid for protection in per-acre efficiency and management attention instead of cash.

Self-insure and accept it. The argument is that expected annual loss on well-managed acreage is small, that firebreaks and thinning reduce it further, and that a long horizon absorbs one bad event.

What I can't decide is whether concentration risk on one tract is different in kind from the smoothness the asset class is sold on. Terms and availability differ by state and by carrier, so I'd want anything specific in writing before relying on it.

karen_whitfield · Answer

I've carried standing timber coverage on part of my acreage and dropped it on the rest, which sounds indecisive but wasn't. The block I insure is the mature sawtimber, because that's where twenty years of accumulated growth is sitting and where a loss is not recoverable inside my lifetime. The young stands I don't insure. A fire in an age-8 plantation costs me site prep and seedlings, and that's a number I can write a check for.

Read the payout basis carefully, wren. Some policies I looked at paid replanting cost plus a growth factor, which is nowhere near the market value of a merchantable stand. If that's the basis, you're buying protection against a replanting bill, and you should price the premium against that bill and nothing bigger.

tylerbrooks9 · Answer

orchard's split by stand age is the first version of this I've heard that I could actually execute without a spreadsheet.

ehernandez74 · Answer

I lean geographic spread, though I'll admit part of that is that I wanted two tracts anyway. The thing insurance doesn't cover is the slow correlated stuff, drought pushing growth rates down, a regional mill closing and taking your pulp market with it. Two tracts in different wood baskets handle that and a policy doesn't.

The cost is real though. Half the acreage means worse per-acre pricing going in, two sets of property tax filings, two foresters or one who travels, and you notice it at every thinning. I'd guess the efficiency loss on my two parcels versus one equivalent tract runs a few percent of gross over a rotation. Whether that beats a premium depends entirely on your region's fire and wind history, which your state forestry service can usually give you.

tashaford30 · Answer

anchor, the mill closure point is the one that moved me. I'd been treating catastrophe as fire and wind only, which is a physical loss you can insure, and ignoring the market side where your timber is fine and there's nobody within a profitable haul distance to buy it. That's not an insurable event and it happens more often than fires do.

Which makes me think the real answer to wren's poll isn't one of the three. Insure the mature inventory if the payout basis is decent, and let haul distance to at least two independent mills be a hard filter on any tract you buy in the first place. If a parcel only works with one buyer, the spread argument has already lost.

Catastrophe exposure on a single tract: insure the standing timber or spread the acreage?

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