Andrew Bary

Berkshire Hathaway, the country's largest property and casualty insurer, likely won't suffer sizable losses from the Los Angeles-area wildfires because it isn't a major homeowners insurer in California.

There could be meaningful losses, however, at investor-owned insurers such as Allstate, Chubb, Travelers, and Mercury General.

J.P. Morgan analyst Jimmy Bhullar wrote Thursday that insured losses could exceed $20 billion from the L.A. fires, which would be the largest wildfire loss in state history, exceeding the previous record of $10 billion from the 2018 Butte County Camp fires in the state. Total economic losses for the L.A. fires could total $50 billion.

"We expect insured losses from the event to be confined mostly to our homeowners' coverage (ALL, TRV, and CB more exposed among public insurers) and, to a lesser extent, commercial property (TRV, AIG, CB, and KNSL most exposed," Bhullar wrote. ALL, TRV and CB refer to Allstate, Travelers and Chubb, while AIG is American International Group and KNSL, Kinsale Capital Group.

"Overall, we view this event as an incremental negative for exposed personal lines carriers and reinsurers, although not enough to alter our stock recommendations. Even though high losses bode well for future prices in CA (and for reinsurance rates), we view the near-term losses as a bigger negative for most affected carriers," he wrote.

Bhullar has Overweight ratings on Allstate and AIG, is Neutral on Chubb and Kinsale, and Underweight on Travelers.

Progressive, which is the No. 2 auto insurer nationally behind State Farm, has very little exposure to California homeowners insurance and could benefit from "greater pricing discipline" by mutual carriers, Bhullar wrote.

He added the mutuals "are likely to absorb a significant proportion of LA fire losses and are major competitors of the firm in personal auto insurance."

Mercury, whose business is concentrated in California with the state accounting for nearly 80% of its premiums of $4.6 billion last year, could have the most exposure relative to its size of any public property and casualty insurer.

It wrote more than $700 million of homeowners-insurance premiums in the state during the first nine months of 2024 -- and $2.3 billion of auto insurance in California.

Mercury stock fell 6.5% Wednesday to $60.70. Markets were closed Thursday to mark the recent death of former President Jimmy Carter.

Mercury shares had the biggest negative reaction among its peers with investors so far not concerned about the financial impact on most big property and casualty insurers. Chubb shares were down 0.8% Wednesday, while Allstate rose 3% to $191.80 and Travelers was up 0.5% to $242.77. Berkshire's Class A stock was virtually unchanged at $677,925.

The largest four homeowner insurers in the state in 2023 were State Farm (19.9% of written premiums), Farmer Insurance (14.9%), CSAA Insurance Exchange, and Liberty Mutual, according to S&P Financial and J.P. Morgan. These four companies aren't public. State Farm and Liberty are owned by policyholders.

State Farm has shed homeowner policies during the past year in the affected areas in Los Angeles, reducing its financial exposure to the fires.

Mercury General is No. 5 in the state, Allstate sixth, Travelers ninth, and Chubb 11th in the homeowners market. Berkshire isn't in the top 20.

Berkshire is a sizable auto insurer in the state through its Geico unit but auto insurers aren't expected to suffer substantial losses from the fires.

Berkshire also has a large reinsurance business. CEO Warren Buffett has said that Berkshire could absorb 3% of losses from a major catastrophe, such as a hurricane, earthquake, or fire.

If that's the case here -- and that 3% figure could be high given significant exposure at primary insurers -- Berkshire's losses could total about $600 million, which is a tiny fraction of the company's insurance capital of about $300 billion. Such a loss also would be trivial relative to Berkshire's quarterly after-tax operating earnings of more than $10 billion.

Berkshire and other insurers could benefit from the fires if catastrophe and other property and casualty insurance pricing rises due to losses. That sometimes occurs after major events.

Write to Andrew Bary at andrew.bary@barrons.com

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January 10, 2025 00:30 ET (05:30 GMT)

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