By Brian Swint

The wildfires in Los Angeles are a tragedy for the people and property involved, and it will be extraordinarily expensive to build back when it's over. But surprisingly, history suggests that insurance stocks can bounce back rather quickly.

Insurers certainly have to bear much of the cost of reconstruction, and the devastation could be great enough to affect statistics for the overall economy. The damages are likely to exceed $250 billion, the most expensive blaze in L.A. history, according to AccuWeather, the private forecaster. That's less than 1% of the U.S. economy, which is expected to have grown to about $29 trillion in 2024. But when the economy can only grow a couple of percentage points a year, it accounts for quite a lot.

Insurance companies will have to cover tens of billions of dollars in claims, though putting an exact figure on those expenses could take months. Looking at the four recent U.S. natural disasters in which losses exceeded $100 billion, insurance shares tend to rise in the months following the events.

Take Allstate Corp. as an example. It the week following a number of natural disasters the stock fell. It was down after Hurricane Helene in 2024, the Texas winter storm of 2021, Hurricane Harvey in 2017, and Hurricane Katrina in 2004. But it was up three months after the events in all but one of those cases -- the exception being Katrina, when it was 0.2% lower, according to Dow Jones Market Data.

Similarly, Chubb and Progressive, two other big insurers, were also clearly higher three months after three of those natural disasters. The only time they weren't was after Hurricane Helene last year, when they were both down about 5% three months after it hit. Allstate, by contrast, was up 2% a quarter after Helene struck.

The biggest publicly traded insurers in California fell as the L.A. fires got bigger, but this history suggests they have every chance of a recovery. Insurance stocks have outpaced the S&P 500's gains for the past five years because the companies have been able to raise premiums and avoid unprofitable businesses.

Economic theory holds that the rush to spend after a disaster won't boost growth. The classic illustration is the broken window fallacy, named after a parable in which a shopkeeper wonders if a shattered pane of glass might have a bright side if it encourages money to be spent that otherwise might not be. The problem is that spending on things that have been damaged diverts spending that could be more productive.

The New Orleans economy took years to recover after Katrina, partly because many people were forced to move away afterward, draining the local region of resources.

Having said that, natural disasters can create winners as well as losers. Shares of home improvement retailer Home Depot are up more than 4% in the past month. They also rose in the three months following three of the other four recent big natural disasters going back to Katrina.

Write to Brian Swint at brian.swint@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.

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January 20, 2025 07:39 ET (12:39 GMT)

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