To The Moon

$Allstate(ALL)$ $Chubb(CB)$ $Travelers(TRV)$

On January 2nd, the National Interagency Fire Center issued a warning about significant fire potential across Southern California. This alert was due to warm weather, persistently dry conditions, and Santa Ana winds, which often blow during the region's wet season. These winds, also known as "devil winds," originate from the Great Basin and the upper Mojave Desert, moving toward the coast—opposite the usual moist Pacific breezes. This dry airflow dehydrates vegetation, making it highly flammable, and its strong gusts can rapidly escalate small fires into raging infernos.

The current fires, primarily the Palisades Fire and Eaton Fire, have become some of the most destructive in California's history. Together, they have claimed at least 27 lives, displaced over 200,000 residents, and destroyed or damaged more than 12,000 structures. Approximately 880,000 people remain under evacuation orders, many uncertain about the fate of their homes or possessions. The affected area spans a region three times the size of Manhattan, leaving communities devastated and resembling a war zone.

California has a long history of wildfires, with the earliest recorded being the Santiago Canyon Fire of 1889, which burned 300,000 acres. While some fires result from natural causes like lightning, others are human-caused, such as sparks from power lines or accidents. Urban sprawl into wooded areas has increased the risk of both ignitions and property damage.

Which Company Will Affected

Insurance companies are preparing for over $20 billion in insurance losses due to the wildfires currently sweeping through the Los Angeles area, according to analysts at J.P. Morgan, who have doubled their loss estimates from the previous day.

The fires, which remain out of control and have claimed at least five lives, are expected to result in more than $50 billion in total losses, the analysts added. Later on Thursday, AccuWeather revised its estimate of the economic damage from the fires, predicting losses between $135 billion and $150 billion, up from an earlier range of $52 billion to $57 billion.

Allstate Corp. (ALL), Chubb Ltd. (CB), and Travelers Cos. Inc. (TRV) are expected to be the most affected among publicly traded insurers, as they have significant exposure to California's homeowners' market. Chubb, in particular, is at risk due to its focus on high-net-worth policies, with the affected areas predominantly consisting of affluent neighborhoods.

This disaster is likely to be more severe than the 2018 Butte County Camp Fire, which was the costliest wildfire in California's history, with insured losses around $10 billion. Although the current fires in Los Angeles have not burned as much land or destroyed as many structures, they are concentrated in wealthy areas like Pacific Palisades, where the median home price exceeds $3 million.

Most of the insured losses are expected to come from homeowners' insurance, with primary insurers facing a heavier burden than reinsurers. A significant but smaller portion of the losses will stem from commercial fire insurance and auto insurance. As the fires spread to more nonresidential areas, those costs may continue to rise.

Negatively Impacted By the LA Wildfires

Allstate Corp. (ALL)

Allstate Corp. is expected to face significant losses due to the ongoing wildfires in Los Angeles. As one of the major insurers exposed to the California homeowners' market, the company could be hit hard by the damage caused by the fires. While exact figures are still being calculated, the loss from the fires is expected to contribute to a larger total economic impact, with some analysts estimating insurance losses in the range of billions. The fires are primarily affecting affluent residential areas like the Pacific Palisades, where property values are high, leading to more substantial claims.

The total cost of the wildfires in Los Angeles could reach more than $50 billion in overall losses, with the insurance industry expected to bear a significant portion of this, especially in homeowners' insurance claims.

Chubb Ltd. (CB)

Chubb Limited (NYSE:CB) is a global provider of insurance and reinsurance products and ranks as a leading publicly traded commercial property insurer, with strong performance in the past year. However, due to the ongoing wildfire crisis in Los Angeles, the stock has experienced a decline. Fortunately, share prices have rebounded in the past four days, recovering some of the losses.

The company’s projected EPS growth for 2025 and 2026 is 7.37% and 6.77%, respectively. However, given the current crisis and its impact on the company, these estimates could fluctuate. Wells Fargo has estimated that the Los Angeles wildfires could result in up to $30 billion in damage to the insurance sector.

A team led by analyst Elyse Greenspan noted that approximately 12,000 structures, each valued at around $3 million, have been destroyed. As an insurer and reinsurer, Chubb Limited will incur losses from this crisis. Despite the challenges, the stock has shown positive performance in the last two days, alleviating some concerns among investors.

Travelers Cos. Inc. (TRV)

The Travelers Companies, Inc. (NYSE: TRV) provides personal, commercial, and casualty insurance services both in the US and internationally. The company operates in personal insurance, business insurance, and bond and specialty insurance segments. It has a history of rewarding investors with consistent stock performance and reliable dividends. However, the ongoing Los Angeles wildfire crisis has raised concerns among investors.

If Travelers (NYSE: TRV) faces an estimated $30 billion in losses, it could lose approximately 3.8% of its total value. This is just a rough estimate, and the actual losses could exceed this figure if the fire continues to spread. While the stock has recovered much of its recent losses over the last five days, it is still down more than 4% over the past month. Property and casualty stocks, in general, have been declining as they remain in the spotlight due to the wildfires in Los Angeles.

J.P. Morgan estimates that insurance losses from the wildfires could reach at least $20 billion, making Travelers one of the most exposed companies to the ongoing disaster. Despite the company’s strong financial performance and solid fundamentals, the current situation may pose risks. Although it may be a riskier option in the short term, Travelers remains a valuable investment for the long haul.

Impact On Stock And Economic

The economic toll of these fires is staggering. Estimates suggest damages could reach $275 billion, making them the most expensive wildfires in U.S. history. The insurance industry alone may face losses up to $40 billion. Los Angeles homes, particularly in areas like Pacific Palisades and Altadena, are among the most valuable, significantly inflating reconstruction costs. Limited labor and building materials further compound rebuilding challenges, with costs potentially doubling, leaving many underinsured despite having coverage.

The crisis highlights the broader challenges of wildfire management, urban planning, and climate resilience in an increasingly fire-prone state.

More Loss Jobs In labors Report In Jan

I'll explain shortly how California's price control regulations led to the non-renewal of thousands of home insurance policies. Beyond the cost of private property losses, government funding will be required to rebuild damaged infrastructure, including roads, power lines, water systems, schools, and police stations. The wildfires also have economic repercussions, reducing employment and productivity. Evacuated residents cannot work until their lives stabilize, and many service-sector jobs in affected areas are temporarily lost. Although major employment centers like factories and offices remain unaffected, Goldman Sachs estimates the fires could reduce January's labor report by 15,000 to 25,000 jobs.

California's housing market, already among the nation's most expensive, will face increased pressure as displaced residents seek temporary rentals, driving up rental costs. Many destroyed homes were built during California's postwar housing boom of the 1950s. Strict zoning rules have historically limited modifications or new construction, but this disaster presents an opportunity to address the housing shortage by rezoning for denser, mixed-use neighborhoods. Without such changes, the trend of rebuilding larger, more luxurious homes is likely to continue.

The cause of the fires remains under investigation, but lawsuits have already been filed against Southern California Edison, blaming its equipment for the Eaton Fire. Utility companies in California face significant liability risks due to the state's inverse condemnation law, which holds them financially responsible for fire damage caused by their equipment, regardless of negligence. This law forced PG&E into bankruptcy after the 2018 Camp Fire, which killed 85 people. While Edison International may also face liability, its participation in California's $21 billion Wildfire Fund, established in 2019, provides financial protection against massive claims. However, this fund only covers specific utilities and does not apply to municipally owned providers like the Los Angeles Department of Water and Power.

Challenges

California's homeowners' insurance market has faced challenges since Proposition 103 was passed in 1988. This initiative limited insurers' ability to raise premiums and required rate increases to be based on historical losses rather than future risk assessments. Insurers were also restricted from passing on the costs of reinsurance—a form of insurance for insurers—leading many companies to withdraw from high-risk areas. The crisis peaked in 2023 when major insurers like State Farm and Farmers stopped issuing new policies and canceled thousands of existing ones. As a result, an estimated 10% of California residences are uninsured.

For those unable to obtain private coverage, the state-backed FAIR Plan offers last-resort fire insurance. However, this plan has significant limitations, including a $3 million coverage cap, which leaves high-value properties underinsured. Demand for the FAIR Plan has surged by 164% since 2019 due to the strained insurance market.

Recognizing these issues, Governor Newsom issued an executive order in 2023 to stabilize the market. New regulations now allow insurers to use forward-looking wildfire risk models and pass reinsurance costs to customers, but only if they meet policy quotas in high-risk areas. While these measures aim to balance the market, they perpetuate distortions where low-risk homeowners subsidize high-risk properties.

California’s approach to price controls has inadvertently worsened the insurance crisis, leaving homeowners underinsured in the face of increasing wildfire risks. This mirrors similar challenges in Florida, where legal costs and climate risks have led insurers to exit the market. Rising reinsurance costs, fueled by disasters like the LA wildfires, will likely increase insurance premiums globally, meaning the economic burden of these events will extend far beyond California.

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