The wildfires in LA County have reached unprecedented levels, as the city grapples with a series of rapidly spreading blazes fueled by dry conditions and powerful Santa Ana wind gusts. With the event ongoing, potential economic and insured losses remain fluid and much will depend on the duration and intensity of the uncontrolled spread.

California has long been synonymous with wildfires, exacerbated by climate change, urban expansion, and prolonged drought conditions. Preliminary estimates from third parties suggest the LA wildfires could result in $10 billion-$15 billion in industry insured losses. This compares with the North California wildfires in 2017 (Tubbs Fire) and 2018 (Camp Fire), which caused nearly $16 billion and $14 billion in insured losses, respectively.

Although expected losses are steep, we believe many of our rated insurers have the capital resilience to absorb them, after strong results in the first nine months of 2024 (and likely for the year). Moreover, many major primary insurers in the admitted market, such as State Farm Mutual Automobile Insurance Co., Allstate Corp., and Hartford Financial Services Group Inc., have either reduced exposure to or exited the California homeowners insurance market over the past two years. On a nonadmitted basis, the $3.6 billion written (based on year-end 2023 statutory filings) in the excess and surplus (E&S) property market in California is relatively small. These E&S specialty insurers are generally highly diversified and can quickly raise premiums to recuperate losses.

According to S&P Global Market Intelligence, a division of S&P Global, the U.S. property/casualty (P/C) industry statutory surplus grew 8.7% to $1.1 trillion through the first nine months of 2024, from $1.0 trillion at year-end 2023. This was largely due to record earnings and investment value recovery. However, insurers with less robust capital and more concentrated exposure, particularly in Southern California, could face earnings and potential capital pressure, especially if natural catastrophe losses exceed 2024.

Modest Depletion of U.S. P/C Insurers 2025 Catastrophe Budgets But Limited Ratings Effect

We do not expect the LA wildfires to trigger rating changes, although we could see modest depletion in 2025 catastrophe budgets for insurers exposed to the incident. Embedded in our forecast 2025 combined ratio (loss and expense) of 98% is $90.0 billion of catastrophe load (or 9 percentage points on the combined ratio) for U.S primary insurers. A preliminary industry insured loss from the LA wildfires of $10 billion-$15 billion would affect our forecast of catastrophe losses for 2025 by 1.3 percentage points.

Within the California property lines (largely homeowners, commercial muti-peril nonliability, allied lines, and fire), for our top-20 rated (re)insurers by market share, this represents about 3.4% of U.S. P/C premiums written in 2023. Our estimate of the top-20 rated (re)insurers' exposure to property business in California is about 16% of their total insurance business in the state and, on average, their exposure is slightly biased toward personal over commercial property. The state-sponsored FAIR Plan's written premiums of nearly $1.4 billion as of Sept. 30, 2024, are up significantly from 2019, with policies-in-force growing 22% annually, making it the fifth largest property insurance writer in California. We anticipate insurance rates will sharply rise on property lines in California in response to mounting losses.

Most rated U.S P/C primary insurers are entering 2025 with substantial capital buffers at the 99.95% confidence level under our risk-based capital adequacy model. In the first nine months of 2024, U.S primary insurers reported $133.0 billion in statutory net income, up from $65.0 billion in the same period the prior year. The LA wildfire losses will affect underwriting margins but not capital.

Global Reinsurers' Losses Are Expected To Be Low And Manageable At This Time of Year

For now, we believe the impact of the wildfires is manageable for global reinsurers, with no major impact on earnings. This is because we estimate losses will stay within their natural catastrophe budgets for first-quarter 2025. The wildfire represents the first major natural catastrophe loss in the year for the sector. However, it is still unclear how aggregate reinsurance coverage could be affected, given this will depend on developments over the remainder of the year.

Moreover, reinsurers are entering 2025 with robust capitalization, supported by strong earnings in 2023-2024, which helped the industry's returns to exceed its cost of capital. The reinsurance sector remains disciplined regarding its appetite for frequency losses, maintaining high attachment points for coverage. While property catastrophe reinsurance pricing has passed its peak, with selective moderate price declines in recent renewals, the sector remained committed to defending its terms and conditions and higher attachment points.

The wildfires mark an early start to the 2025 natural catastrophe season, following a heavy burden in 2024 for the global insurance sector. Munich Re recently reported global insured natural catastrophe losses of $140 billion for 2024, making it the third costliest year on record and significantly above the 10-year average of $94 billion. We continue to monitor reinsurers' appetite for natural catastrophe risk as climate change, urbanization, inflation, and increased property exposures--specifically in catastrophe-prone regions--continue to evolve.

Related Research

• U.S. Property/Casualty Insurance Sector View Improves On Stronger Earnings And Capitalization, Nov. 21, 2024.
• Hurricane Milton: The Implications For Rated U.S. Insurers And Global Reinsurers, Oct. 9, 2024
• Global Reinsurers Must Maintain Discipline To Cement Strong Performance Amid Casualty Risks, Sept. 3, 2024
• Record Weather-Related Losses Hit U.S. Homeowners Insurers And Pose Challenges In Estimating Catastrophe Risk Charges, Sept. 3, 2024