By Bill Alpert
Watching Pacific Palisades burn, it may be hard to imagine the insurance industry thriving. But the severe weather of climate change could actually help this industry grow.
So send relief to wildfire victims, but don't sell your insurance stocks.
Through the last five years of hurricanes and fires, insurance stocks have handily outpaced the S&P 500 index, with the iShares U.S. Insurance ETF rising 130% compared with an 85% rise for the S&P. That is because the industry has been able to raise premiums and have the discipline to avoid pursuing business where it can't operate profitably. Many publicly held property and casualty insurers reported record profits in 2024.
The top home insurers in California are State Farm Group and Farmers Insurance Group, with respective market shares of 21% and 16% in 2023, according to the state's latest figures. They are both mutual insurance companies, which means they are owned by their policyholders and not the investing public. They both stopped writing new policies in the state two years ago, after regulators refused their requests to raise premiums.
Among the publicly held property and casualty insurers doing business in the state, those deriving the largest portion of their California premium revenue from homeowners policies include Mercury General with 23%, Allstate with 15%, and the Travelers Companies with 13%.
Warren Buffett's Berkshire Hathaway is the state's third largest property and casualty insurer, but less than 1% of its premiums come from homeowner's insurance. Wildfire losses haven't been material enough to rate a mention in its insurance results since 2020.
"Climate change increases risk," Buffett told shareholders at Berkshire's May 2024 annual meeting, "In the end, it makes our business bigger over time."
Rising risk means a rising need for insurance coverage. "If there was no risk, there would have been no insurance business," said Buffett.
Most of the insurer's contracted liabilities, especially in reinsurance, are limited to a year, pointed out Berkshire's insurance chief Ajit Jain. Then it can reprice or get out of the business altogether.
"Climate change, much like inflation, done right can be a friend of the risk bearer," he said.
January is the start of a new era in California insurance regulation, under which the state agreed to allow insurers some price increases while requiring them to continue coverage in areas at risk of wildfire.
In anticipation of the regulatory change, Farmers said on Dec. 11 that it would start writing new California policies. The publicly held Mercury Group said it would become the first major insurer to write new homeowners insurance in Paradise, Calif., since 2018, when that town was engulfed by the "Camp Fire" conflagration.
Barron's asked Farmers if the latest wildfire is making it reevaluate its return to homeowners policy writing. The answer is no.
"We are currently focused on assisting customers who are impacted by the devastating fires and strong winds affecting Southern California," said a spokesman. "The information found in our Dec. 11, 2024 release about increasing coverage availability in California remains accurate."
To cope with more frequent losses from climate change, primary insurers have had to spend more money on reinsurance. That's been a boon for Berkshire, Arch Capital Group, and Everest Group, while lighting a fire under the overseas shares of Swiss Re and Munich Re.
"We remain committed to providing natural catastrophe capacity across all markets," said a Munich Re spokeswoman, "as long as we can achieve prices that adequately reflect the risk, which ultimately is what makes it possible for us to pay our clients in case of claims."
When insurers have withdrawn from states where regulators won't allow premiums to rise with rising climate losses, some have looked to provide excess and surplus lines -- which covers hard-to-insure commercial properties.
The demand for excess-and-surplus coverage in places like California and Florida made Morgan Stanley pick Ryan Specialty Holdings as a Buy recommendation as the broker launched research on specialty insurers in December. "States where insurers are reducing admitted market exposures tend to have large exposures to E&S market," wrote analyst Bob Jian Huang and his colleagues.
Climate change is changing the insurance business. For policyholders, buying insurance will be more expensive.
But for those with the capital and savvy, supplying insurance will become a bigger business.
Write to Bill Alpert at william.alpert@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.
(END) Dow Jones Newswires
January 09, 2025 19:12 ET (00:12 GMT)
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