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Investors are closely monitoring insurance stocks as losses from the devastating California wildfires that erupted on Jan. 7 continue to rise. The fires have ravaged neighborhoods in Pacific Palisades, Altadena and Pasadena, destroying thousands of structures and displacing residents.Tragically, lives have also been lost. Wildfire risk is a major factor in the state's struggle to keep homeowner's insurance coverage affordable.
Fueled by strong, dry Santa Ana winds, the wildfires intensified in Southern California's already warm and dry conditions, which have seen minimal rainfall since early May. Private forecaster AccuWeather estimates that the total damage and economic impact of these wildfires, now among the worst in the state’s history, will range within $52-$57 billion.
Meanwhile, J.P. Morgan projects insured losses to approach $10 billion. This estimate, which remains preliminary, is intended to help investors gauge potential financial effects. The majority of these losses are expected to come from homeowners' insurance, with commercial property insurance playing a smaller role.
Primary Insurers Most Vulnerable to LA Fires
J.P. Morgan’s analysis highlighted that primary insurers, including The Allstate Corporation ALL, The Travelers Companies, Inc. TRV and Chubb Limited CB, are more vulnerable to the losses than reinsurers like Arch Capital Group Ltd. ACGL and RenaissanceRe. This is largely because reinsurance attachment points have risen since 2023, meaning primary insurers will bear a larger share of the costs.
Allstate, with approximately a 6% market share in California, faces significant exposure. Travelers and Chubb hold comparable market shares in the state. Currently, Allstate carries a Zacks Rank #3 (Hold). While its latest quarterly results showed strength, they were partially overshadowed by higher catastrophe losses, increased insurance claims and expenses, and weaker real estate investment performance. Similarly, rising catastrophe losses impacted the third-quarter profits of both Travelers and Chubb. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
In May 2024, Travelers increased its insurance rates in California by an average of 15%, attributing the hike to wildfire risks, inflation and escalating reinsurance costs. According to the Department of Forestry and Fire Protection, seven of California’s 20 most destructive wildfires have occurred in the last five years, underscoring the escalating risk in the region.