On 7-8 January 2025, dangerous fires broke out in the Los Angeles area. The largest of these, dubbed the Palisades Fire, started in the Pacific Palisades district and covered an area of nearly 1182 hectares. Other outbreaks occurred in the San Fernando area to the north and near Pasadena to the northeast of the city. According to media reports, the fires have destroyed or severely damaged more than 12,000 buildings, forcing the evacuation of more than 150,000 residents. Currently, around 92,000 people are still under orders to leave their homes. Initial estimates predict that losses could be as high as $30 billion if the fires continue to spread. The tragic events have also affected financial markets. The main S&P 500 index lost 2 percent of its value last week. However, there is one sector on the US stock market that has been hit the hardest.
Table of contents
- Insurance
- Chubb Limited
- Allstate
- The Hartford
- Mercury General Corporation
- Reinsurance, or the thread to the puck
Insurance
The iShares U.S. Insurance ETF index lost more than 3 percent last week, but the companies in the index were unevenly affected by the fires, due to the different forms of business they operate. Let's take a look at those that may be most affected by the fires.
Source: Tradingview
Chubb Limited
Chubb is one of the largest insurance companies in the world specialising in the provision of property, liability and reinsurance insurance to individuals, companies and institutions. The company offers a wide range of insurance services, including health, life and accident insurance, as well as specialised products for various industries.
Source: Tradingview
Chubb manages the risk of natural catastrophes such as hurricanes, earthquakes, fires and floods by setting risk limits based on probable maximum loss (PML) and buying reinsurance to provide liquidity and capital. Based on risk models, the company estimated potential losses, including those associated with hurricanes in the US and earthquakes in California. In a 1-in-250-year scenario, losses could amount to more than $8.5 million, or just 13.1 percent of Chubb's equity, indicating the company's financial stability is safe.
Allstate
Allstate is a US-based insurance company offering a wide range of products, including auto, home, health, life and business insurance. The company specialises in insurance for individuals and small businesses, and also offers investment and retirement products. Insurance in the state of California accounts for 9.6 percent of the company's insurance portfolio.
Source: Tradingview
Allstate offers homeowners insurance policies through North Light Specialty Insurance Company, including earthquake insurance (EXCLUDING post-earthquake fires), which is ceded through quota share reinsurance, a transfer of liabilities to another company. As a result, Allstate appears to be safe despite its exposure to property insurance risks in California.
The Hartford
The Hartford is a US-based insurance company that offers a wide range of products, including property, life and liability insurance for both individuals and businesses. It specialises in insurance for small and medium-sized businesses and also provides employees the retirement and health insurance solutions. California accounts for 12 percent of The Hartford's insurance revenue share.
Source: Tradingview
As part of its extreme event risk management, the company reports that in the event of extreme natural catastrophes, which occur once every 250 years, the loss after reinsurance will be around $2 billion. This represents only 11.7 percent of equity, suggesting that the company should have no solvency problems, even in the event of large fires.
Mercury General Corporation
One of the companies most affected may be Mercury General Corporation, which has more than 80 percent of its insurance portfolio in California. Mercury General Corporation is an insurance company that specialises mainly in private auto insurance accounting for two-thirds of its insurance portfolio and home insurance (25 percent). The share price suffered the most of the large insurers, falling by as much as 28 percent.
Source: Tradingview
The company monitors and manages catastrophe risks, including those related to the California wildfires, by limiting risk concentrations in specific regions, using tools to accurately assess insurance risk and using reinsurance. The current reinsurance agreement covers 100 percent of losses up to $100 million and 95 percent of losses between $100 million and $140 million. The company does not anticipate significant changes to the reinsurance cover when the contract was renewed in July 2024, although the final decision will depend on pricing conditions in the market.
It is noteworthy, however, that the company's insurance coverage in California totals $3.6 billion, representing as much as 193 percent of its equity. Although it is currently difficult to estimate what amounts the company will have to pay out in claims, from the companies analysed, it is the most exposed to natural catastrophe risks in California.
Reinsurance, or the thread to the puck
These losses are to be treated as a single occurrence, which can help insurers to obtain reinsurance coverage. Reinsurance clauses often group fires occurring within a specific time frame and in close proximity to each other, which is applicable to the current fires. Some analysts estimate that losses could be as high as $30 billion if the fires continue to spread.
Reinsurance companies such as Chubb, Allstate and The Hartford are expected to benefit from recoveries under their reinsurance programmes. Loss estimates vary, but most insurance companies, even those with significant exposure to property and casualty insurance in California, appear to have adequate coverage and risk diversification through their reinsurance programmes.
Grzegorz Dróżdż, CIIA, Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
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