Mw L.A. Wildfires To Cost Insurers More Than $20 Billion. Three Companies Are Likely To Foot Most Of The Bill

By Evie Liu

As wildfires burn through parts of Southern California causing devastating damage, many homeowners will rely on insurers to get back on their feet. In a state where the cost of homeownership is already high, they might find it even more difficult to get affordable coverage once the cleanup work has finished.

As of Wednesday afternoon, two people died and more than 1,000 structures burned, making the fire the most destructive in the history of Los Angeles, according to the Associated Press.

Many insurers paused coverage in parts of California or raised premiums sharply after the 2017 and 2018 wildfires led to huge losses for the industry. The companies have said they are concerned about outsize financial losses due to the growing risk of more frequent and severe wildfires. Rising costs of reinsurance, purchased by insurers to protect themselves, have made it worse.

Last spring, State Farm, one of the largest private insurers in California, said that it had canceled 72,000 policies in the state, about 40% of which covered homes. Many of those cancellations were in high-risk, upscale neighborhoods in Los Angeles, including Pacific Palisades, the area currently affected by wildfire.

Allstate stopped issuing new insurance policies for all business and personal property in California in 2023. The company said in April that it would insure California homes again if regulators adopt regulatory changes to make it easier for insurers to raise rates.

Standard homeowner insurance policies typically cover damage caused by wildfires, such as the cost of rebuilding the house, recovering personal belongings, and temporary relocations. However, in regions with frequent wildfires, insurers may limit their coverage or increase premiums to protect themselves from high risks.

While homeowners in California aren't required to have insurance, many mortgage lenders require an active policy before issuing a loan.

Homeowners in high-risk zones who can't find private insurance can turn to California's FAIR Plan, a state-run program that serves as a last-resort insurer. The number of policies in the program has more than doubled since 2020, even though it's often more expensive than the private market.

To address insurers fleeing the state, California issued a rule in December that requires insurance companies to write more policies to homeowners in wildfire-prone areas. In exchange, the state will allow insurers to raise rates based on their reinsurance costs and climate risks.

Consumer Watchdog, a nonprofit consumer protection group in California and opponent of the rule, said the new regulation could increase insurance premiums by up to 40%, even for neighborhoods and homes that have done wildfire prevention and fireproof work.

California is already one of the least affordable states in the country when it comes to housing costs. According to a recent Redfin report, the five most expensive metropolitan areas in the U.S. were all in the Golden State. Higher insurance costs would further add to homeowners' financial burden.

The median buyer in San Diego, San Jose, Anaheim, San Francisco, and Los Angeles spends as much as 77.6% of their income on monthly mortgage payments, much higher than the nationwide rate of 41.8% and the commonly recommended threshold of no more than 30%.

Write to Evie Liu at evie.liu@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

The S&P 500 Index Wednesday closed up +0.16%, the Dow Jones Industrials Index closed up +0.25%, and the Nasdaq 100 Index closed up +0.04%. March E-mini S&P futures (ESH25) are up +0.13%, and March E-mini Nasdaq futures (NQH25) are up +0.02%.

Stocks on Wednesday posted modest gains. Stocks recovered from early losses Wednesday as strong demand for the Treasury’s $22 billion 30-year T-bond auction knocked T-note yields down from early highs, sparking short covering in stocks. Stocks also garnered support on dovish comments from Fed Governor Waller, who said, “The extent of further easing will depend on what the data tell us about progress toward 2% inflation, but my bottom-line message is that I believe more cuts will be appropriate.”

Stocks initially moved lower on Wednesday due to rising global bond yields. The US 10-year T-note yield climbed to an 8-1/2 month high, the UK 10-year gilt yield soared to a 16-year high, and the Japanese 10-year JGB yield jumped to a 13-year high. Stocks are also being undercut by concern about President-elect Trump’s tariff plans. CNN reported Wednesday that Trump is considering declaring a national economic emergency to push through his tariff plans. US labor market news Wednesday was mixed as the Dec ADP employment change rose less than expected, but weekly initial unemployment claims unexpectedly fell to a 10-1/2 month low.

US equity markets will be closed Thursday for the funeral of President Carter.

US MBA mortgage applications fell -3.7% in the week ended January 3, with the purchase mortgage subindex down -6.6% and the refinancing sub-index up +1.5%. The average 30-year fixed rate mortgage rose +2 bp to a 6-month high of 6.99% from 6.97% in the prior week.

The US Dec ADP employment change rose +122,000, weaker than expectations of +140,000.

US weekly initial unemployment claims unexpectedly fell -10,000 to a 10-1/2 month low of 201,000, showing a stronger labor market than expectations of an increase to 215,000.

US Nov consumer credit unexpectedly fell -$7.489 billion, weaker than expectations of a +$10.500 billion increase and the biggest decline in 15 months.

The minutes of the Dec 17-18 FOMC meeting stated that “participants indicated that the FOMC was at or near the point at which it would be appropriate to slow the pace of policy easing.”

The markets are awaiting Friday’s monthly US payroll report to assess the strength of the US labor market (Dec nonfarm payrolls expected +163,000 and the Dec unemployment rate expected to remain steady at 4.2%).

The markets are discounting the chances at 5% for a -25 bp rate cut at the January 28-29 FOMC meeting.

Overseas stock markets on Wednesday settled mixed. The Euro Stoxx 50 fell back from a 2-3/4 month high and closed down -0.31%. China’s Shanghai Composite Index recovered from a 2-1/2 month low and closed up +0.02%. Japan’s Nikkei Stock 225 closed down -0.26%.

Interest Rates

March 10-year T-notes (ZNH25) Wednesday closed down -1 ticks. The 10-year T-note yield rose +0.2 bp to 4.685%. Mar 10-year T-note futures Wednesday posted a 7-1/2 month low, and the 10-year T-note yield climbed to an 8-1/2 month high of 4.728%. T-notes were weighed down Wednesday by carryover pressure from a slide in 10-year UK gilt prices to a 16-year low. T-notes were also under pressure after CNN reported that President-elect Trump is considering declaring a national economic emergency to push through his tariff plans, which could boost inflationary pressures. In addition, rising inflation expectations are bearish for T-notes as Wednesday’s 10-year breakeven inflation rate rose to a 2-month high of 2.428%. Finally, the minutes of the Dec 17-18 FOMC meeting were hawkish as policymakers expressed their support to slow the pace of Fed interest rate cuts.

However, T-notes recovered most of their losses Wednesday on strong demand for the Treasury’s auction of $22 billion 30-year T-bonds with a bid-to-cover ratio of 2.52, above the 10-auction average of 2.43. Also, some short covering emerged in T-notes on dovish comments from Fed Governor Waller, who said he believes more Fed interest rate cuts will be appropriate.

European government bond yields Wednesday moved higher. The 10-year German bund yield climbed to a 6-month high of 2.559% and finished up +6.6 bp to 2.549%. The 10-year UK gilt yield soared to a 16-year high of 4.824% and finished up +11.2 bp to 4.796%.

Eurozone Dec economic confidence fell -1.9 to a 15-month low of 93.7, weaker than expectations of 95.6.

Eurozone Nov PPI rose +1.6% m/m and fell -1.2% y/y, stronger than expectations of +1.5% m/m and -1.4% y/y.

German Nov factory orders fell -5.4% m/m, weaker than expectations of -0.2% m/m.

German Nov retail sales unexpectedly fell -0.6% m/m, weaker than expectations of a +0.5% m/m increase.

Swaps are discounting the chances at 97% for a -25 bp rate cut by the ECB at its January 30 policy meeting.

US Stock Movers

eBay closed up more than +9% to lead gainers in the S&P 500 after Meta Platforms offered to publish listings from eBay on Facebook Marketplace to comply with a European Union antitrust order.

GE HealthCare Technologies closed up more than +3% to lead gainers in the Nasdaq 100 after Jeffries upgraded the stock to buy from hold with a price target of $103.

Maplebear Inc closed up more than +4% after S&P Dow Jones Indices said the stock will be added to the S&P Midcap 400 Index before the start of trading on Tuesday, January 14.

Allstate closed up more than +3% after Evercore ISI upgraded the stock to outperform from in line with a price target of $226.

AAR Corp closed up more than +8% after reporting Q2 fiscal sales of $686.1 million, stronger than the consensus of $654 million.

Autodesk closed up more than +2% after Piper Sandler upgraded the stock to overweight from neutral with a price target of $357.

Boston Scientific closed up more than +4% after agreeing to acquire Bolt Medical.

Workday closed up more than +2% after Deutsche Bank upgraded the stock to buy from hold with a price target of $300.

Chip stocks were under pressure Wednesday and weighed on the broader market as Advanced Micro Devices fell more than -4% after HSBC downgraded the stock to “reduce” from “buy” with a price target of $110. Also, ON Semiconductor closed down more than -7% to lead losers in the Nasdaq 100, and GlobalFoundries closed down more than -4%. In addition, Micron Technology closed down more than -2%, and ASML Holding NV , NXP Semiconductors NV , and Microchip Technology closed down more than -1%.

Edison International closed down more than -10% to lead losers in the S&P 500 as the Los Angeles area wildfires are expected to rage for at least two more days. Edison International’s Southern California utility is the largest in the region and has cut off the power to at least 115,000 homes and businesses because of the wildfires.

Moderna closed down more than -9% after UBS cut its price target on the stock to $96 from $108.

Johnson & Johnson closed down more than -2% to lead losers in the Dow Jones Industrials after Wells Fargo published a research report alleging some disruption to the supply of the company’s ablation device, Varipulse, due to side effects.

Fidelis Insurance Holdings Ltd closed down more than -2% after Goldman Sachs downgraded the stock to sell from neutral with a price target of $16.

WK Kellogg closed down more than -6% after TD Cowen downgraded the stock to sell from hold with a price target of $16.

American International Group closed down more than -1% after Goldman Sachs downgraded the stock to neutral from buy.

Palo Alto Networks closed down more than -1% after Deutsche Bank downgraded the stock to hold from buy, and BTIG cut the stock to neutral from buy.

Earnings Reports (1/10/2025)

Constellation Brands Inc (STZ), Delta Air Lines Inc (DAL), TD SYNNEX Corp (SNX), and Walgreens Boots Alliance Inc (WBA).

On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policyhere.

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