Investors might see recent extreme weather disasters — such as the Los Angeles wildfires and hurricanes Helene and Milton — and assume home insurance stocks will be crushed by huge losses. But for several reasons, pessimists could be in for a surprise.
According to the latest estimates from credit rating agency Morningstar DBRS, insured losses from the Los Angeles fires could reach more than $30 billion. Yet it concludes that the result will be "a negative but manageable impact on insurers' credit profiles."
Skeptical? "Manageable" is the key word, says Brett Horn, senior equity analyst for Morningstar. The fires "will definitely hit insurers this year, but the industry is strong, thanks to better pricing and higher interest rates."
How much insurers will have to manage is yet to be seen. State Farm, the biggest insurer in the state, has pleaded with regulators for hefty emergency rate increases, calling the fires "the costliest in the history of the company." And just a month after the fires, it's clear that California's insurer of last resort will collapse unless its member-insurance companies cover the excessive losses.
But, Horn said, when he looks at the industry as a whole, he keeps in mind 2005's Hurricane Katrina. Inflation-adjusted insured property losses from Katrina topped $100 billion.
"Insurers survived Katrina," he said.
An analysis from Redfin says the Palisades and Eaton fires destroyed 14% of homes within the fire perimeters. In total, more than 6,000 homes were damaged or destroyed.
And it's not just the wildfires. In the Southeast, estimates indicate that more than 100,000 homes were lost to Hurricane Helene alone in September.
Home Insurance Stocks: Early Signals From Insurers
The deadly Palisades Fire broke out the morning of Jan. 7 and quickly grew out of control. Investors retreated in varying degrees from insurance stocks with exposure to the area.
Among the hardest hit, Mercury General stock swooned 26% for the week, after the company said it would "exceed its reinsurance retention level of $150 million." However, the company's reinsurer is obligated to pay for $1.29 billion of losses for each natural disaster "after covered catastrophe losses exceed the Company's retention of $150 million," Mercury said.
As a group, the 65-stock property and casualty insurance industry group shed a bit more than 4% during the week ended Jan. 10. It then rebounded for four consecutive weeks, ending January effectively flat and moving up about 1.5% for February as of Thursday.
As fourth-quarter and full-year earnings come out, several companies say the fires will affect Q1 results, but overall they remain optimistic about 2025.
Chubb's 2024: Best Year In Company's History
Global property and casualty insurer Chubb Ltd. was among the first home-insurance stocks to report estimated losses from the Los Angeles fires. The company said on Jan. 25 it expects to pay out $1.5 billion.
In a report on Chubb's 2024 full-year results, Evan Greenberg, chairman and CEO, said, "Our full-year performance was the best in our company's history. Overall market conditions are quite favorable, and we see really good growth opportunity for over 80% of our global P&C business, commercial and consumer, as well as our life business."
Chubb reported a record net income of $9.27 billion for 2024, with a property and casualty combined ratio of 86.6%.
The combined ratio and loss ratio are two methods of gauging an insurer's profitability. The combined ratio takes the sum of incurred losses and expenses, and then divides them by the earned premium. The loss ratio is similar, but does not include expenses.
"We have very good momentum as we enter '25 and are optimistic about the year ahead, both top and bottom line, CAT (catastrophic) losses and foreign currency movement notwithstanding," Greenberg said.
"We are confident in our ability to continue growing operating earnings and EPS at a double-digit rate, driven by our three major sources: P&C underwriting, investment income, and life income."
Chubb is the 10th-largest property and casualty insurer in California, with a 3.45% market share in 2023, the most recent year for which data is available. According to the California Department of Insurance, State Farm Group and Farmers Insurance Group have the biggest market shares — 9.1% and 7.8%, respectively. Both companies are mutual insurance companies, meaning their policyholders are the sole owners and company shares don't trade on the stock market.
Other insurance stocks among the top 10 insurers in California include Berkshire Hathaway, with a 6.1% market share; Allstate Insurance, with 4.9%; Travelers, with 4.3%; and Mercury, with 3.7%.
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2023 California Property And Casualty Insurance Market
| Group | Written premium | Market share | Incurred losses | Loss ratio* |
|---|---|---|---|---|
| State Farm | $8.7 trillion | 9.11% | $7.5 trillion | 89.61% |
| Farmers Insurance | $7.5 trillion | 7.82% | $4.9 trillion | 68.61% |
| Berkshire Hathaway | $5.9 trillion | 6.15% | $4.5 trillion | 77.24% |
| Allstate | $4.7 trillion | 4.92% | $4.1 trillion | 86.61% |
| Auto Club Enterprises | $4.3 trillion | 4.52% | $3 trillion | 76.16% |
| Travelers | $4.2 trillion | 4.32% | $2.2 trillion | 54.83% |
| Liberty Mutual | $3.9 trillion | 4.12% | $2.6 trillion | 68.10% |
| CSAA | $3.9 trillion | 4.08% | $2.5 trillion | 72.52% |
| Mercury | $3.6 trillion | 3.70% | $2.4 trillion | 68.93% |
| Chubb | $3.3 trillion | 3.44% | $1.8 trillion | 57.11% |
* A loss ratio of less than 100% means the company is making a profit on its underwriting activities. A ratio above 100% indicates a loss.
Source: California Department of Insurance
Insurance Stocks: A Good Year For Travelers
Travelers said in its most recent earnings report that claims from the Los Angeles fires will affect its Q1 earnings, but that it was too early to estimate losses.
Travelers reported full-year net income of $5 billion and a combined ratio of 92.5% for 2024. Net income for 2024 was up $2 billion, driven by higher core income and lower net realized investment losses. Core income (the profit from core business operations) of $5.025 billion increased $1.953 billion, "primarily due to a higher underlying underwriting gain, higher net investment income and higher net favorable prior year reserve development, partially offset by higher catastrophe losses."
CEO Alan Schnitzer also shared Travelers' insights on the Los Angeles fires. The company had "assessed impacted areas through aerial imagery and made live contact with a substantial majority of our customers with claims, enabling us to expedite claim payments." Travelers seeks "a resilient insurance market going forward" and will work with California lawmakers to achieve that, he added.
Overall, insurance stocks have done well for several years. As of Feb. 11, the total return, annualized, in the past three years for the iShares U.S. Insurance ETF is 16.67%, compared to 11.81% for the SPDR S&P 500 Trust ETF in the same period.
Insurers Report Record Results For 2024
Travelers and Chubb are in good company. Before storms slammed the south in September and October, the U.S. property and casualty industry recorded a $4.1 billion net underwriting gain in the first nine months of 2024, compared with a loss of $32.1 billion for the same period in 2023. So said a December report from AM Best.
That translated into record profits during the period for some insurers.
According to the report, the underwriting gain, coupled with a 22.1% increase in earned net investment income, drove pretax operating income up 261.7% to $65.9 billion. A combined $21.2 billion change in net realized capital gains at three Berkshire Hathaway Insurance Group companies helped the industry's net income double from the first nine months of 2023 to $130 billion.
However good that underwriting gain, the nine-month period didn't include the impact of hurricanes Helena and Milton. Those storms rampaged through the Southeast in late September and early October, respectively. Swiss Re said in December that the hurricanes severely impacted the U.S. and resulted in estimated insured losses approaching $50 billion.
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Berkshire Hathaway may be the third-largest property and casualty insurer in California, but less than 1% of its premiums come from homeowners insurance.
Warren Buffett told shareholders in May that as climate change risks increase, the need for insurance also increases. The result, he said, is better for business.
This may sound like a rosy view of losses, both human and financial, from extreme weather and natural disasters. But Buffett is simply pointing out that bigger disasters demand deeper pockets, and that a changing climate could lead to the consolidation of overall insurance coverage, over time, into fewer and larger companies.
A Tale of Two Coasts: Florida Insurance
Many national carriers have pulled out of states in the Southeast, especially Florida, Morningstar's Horn said. "We're well past a migration out of there."
Several insurance companies have left Florida, gone out of business or are not renewing policies in high-risk areas. Progressive, Farmers and AAA are among the insurers that have left or cut coverage in the Sunshine State.
The state-run not-for-profit Citizens Property Insurance Corp., founded by the Florida legislature in 2002, was meant to be the insurer of last resort. Instead, it became one of the biggest insurers in Florida.
Florida Gov. Ron DeSantis said early last year that Citizens was "not solvent" and could be in trouble if a storm hits the state. "And we can't have millions of people on that, because if a storm hits, it's going to cause problems for the state."
And that was before hurricanes Helene and Milton.
However, a massive offloading of Citizens policies to commercial insurers helped begin to turn the situation around. Citizens said in early February that it will reduce rates by an average of 5.6% statewide in 2025. It has transferred more than 400,000 policies to other insurers, cutting its policy count to below 1 million.
Florida made regulatory changes that allow surplus lines insurance companies that meet certain financial requirements to take over policies from Citizens. Those policies typically cover nonprimary residences and vacation homes. The state's insurance commissioner says 11 new insurers are entering the state and private insurers are filing for rate decreases or only minor adjustments.
Horn notes that Florida and other parts of the Southeast have seen policies move from national carriers to state and local carriers, which may be less well-capitalized. "It's a much more fragile system," he said. And though that hasn't led to major distress yet, Horn said, "Florida is a cautionary tale for the rest of these states."
Insurance Climate In California
Meanwhile, in fire-prone Western states, a migration may just be beginning — depending on state regulators.
In a more recent commentary on the state of insurers in the state of California, AM Best says the percentage of homeowners insurance premiums written by surplus lines insurers has increased almost 10-fold over the past 10 years. But it calls the situation "still comparatively modest."
Surplus lines insurers generally charge higher premiums to cover circumstances standard insurers will not, or to cover over and above the limits of standard policies. Damaging wildfires in recent years have affected voluntary market insurers' "appetite" for providing coverage in high-risk areas, AM Best said.
State Farm, the largest insurer for California homeowners, asked state regulators in early February for an average 22% increase for homeowners and 15% for renters. That's on top of the premium hike requests it made in 2024 — as yet unapproved — of 30% for homeowners, 52% for renters and 36% for condominium owners.
The state's insurance department has said it's looking into State Farm's request and its financials. California's personal lines insurance is among the most highly regulated markets in the country. Also, the state's insurance commissioner must approve rates before the insurer can implement them.
Just weeks before the L.A. fires, the state's insurance regulator announced new regulations that would let insurers use future risk modeling when setting premiums. The move was designed to help prevent insurers from fleeing the state. The new rate tables provide discounts for homeowners who mitigate risk on their property and surcharges for properties without mitigation.
Fire Losses Could Squeeze State-Backed Insurer
California's Fair Access to Insurance Requirements, or FAIR, plan, is the state's insurer of last resort. It said Feb. 7 that it has a total potential exposure of over $4 billion for the Palisades Fire and $775 million for the Eaton Fire. That's multiples more than FAIR's estimated $200 million in cash and $2.5 billion in reinsurance.
On Tuesday, state insurance regulators approved a request by FAIR to impose a special charge, or assessment, of $1 billion on member companies. They, in turn, can pass 50% of that assessment on to policyholders in California via special fees on their bills. The companies, including their shareholders, will pick up the rest.
FAIR was set up in 1968. It is not a public entity or a state agency and there is no state or taxpayer funding. Instead, it's a syndicated fire insurance pool: Every property insurance company licensed in California automatically becomes a FAIR plan member as a condition of doing business in the state.
The American Property Casualty Insurance Association contends that FAIR's long-term viability depends on a varied number of sources for rebuilding its cash reserves. Catastrophic bonds and lines of credit are two options, according to a Feb. 11 statement from APCIA Vice President Mark Sektnan. Sektnan did not say whether insurers or taxpayers would ultimately be responsible for repaying those debts.
"In the short term, insurance regulators need to allow for risk-based pricing as the departure of insurers from the market will be counterproductive," said Patrick Douville, vice president of global insurance and pension ratings for Morningstar. "This means that premiums are likely to increase, and affordability issues will continue, potentially affecting property values and leaving some homeowners without insurance."
Home Insurance Stocks: What Investors Need To Watch Out For
The data-driven insurance industry has long been crystal clear on the increased intensity of storms, fires and floods affecting their markets.
"There are no climate deniers in the insurance world. They all understand what's happening," Horn said. But he noted that the solution is in the hands of actuaries.
"As an investor, you want to see underwriting discipline. As long as pricing matches risk — hypothetically, that's OK."
From an oversight perspective, what investors need to worry about is "the absence of discourse with regulators," he said. "If you don't hear insurance companies battling with regulators," that's a problem. California's situation is a positive sign, he said. "Major insurers are willing to walk away if the prices aren't right."
To assess risk among home insurance stocks, Horn says, investors need to focus on pricing trends among insurers, as well as interest rates. Insurers tend to benefit in rising interest rate environments, although inflation and volatile markets can erode insurers' substantial investment portfolios.
Horn says he's currently watching several insurance stocks. They include Allstate, American International Group, Travelers and Chubb.
The general rebound among property and casualty insurers over the past month offers some sense of industry winners and losers. Reinsurers RenaissanceRE and Everest Group have dropped almost 10% since Jan. 10, as of Thursday's close. Mercury has recovered to a 7% decline and Chubb is effectively flat. Allstate has added 3% and Berkshire Hathaway gained 6%.
Meanwhile, a handful of smaller insurers continued to pound out even larger gains: Hippo Holdings and Kinsale Capital each rallied 15% from Jan. 10 through Thursday's close. Markel Group jumped 11%. Columbus, Ohio-based Root rallied 79% and scored a breakout to new highs.
