To The Moon

$Lemonade, Inc.(LMND)$ 

$Mercury General(MCY)$  

$Kemper(KMPR)$  

Understand LMND's Exposure to LA's wildfires

This article is written by Shernice, if you like my article please hit the like button or do a repost. 

The time required to put out major wildfires in California has historically varied from 17 days up to over 6 months. Given that the current wildfire only began 4 days ago on January 7, 2025, it's premature to consider this as a "buying the dip" opportunity. Please see the incident data at the end of page. 

Buying insurance company shares just because of a wildfire-driven price dip? 

Careful—you’re playing with fire! Remember, what’s “cheap” can always get cheaper. Don’t get burned!

Shares of insurance companies, like Mercury General, Lemonade, and Kemper, took a tumble as investors worried about the impact of the wildfires burning through Southern California. Mercury general stock dropped 19.87% to $48.63, and it's down about 25% since the fires started on January 7. More than 57, 000 building structures have been damaged by the wildfires. The contents inside these buildings may contribute to the spread of the fires.

Lemonade saw a 6.18% dip to $32.31, and Kemper slid 1.97% to $62.81.  Lemonade has dropped approximately 17% since the fires began on January 7.

Lemonade has been extra cautious since 2022, halting new policies in California and scaling back its homeowners business there—from 30% to just 6%—by adjusting its marketing and product strategies.

Still, about 25% of Lemonade's premiums are still exposed to California wildfires, meaning it faces similar risks as other insurers like Mercury and Kemper. I believe it will negatively impact lemonade's profitability in the upcoming quarters. It’s unclear what portion of this 25% may result in significant insurance payouts. 

Reported in the news that 300,000 people were evacuated in Southern California, with an average household size of 3 people and an average home value of $760,000. Assuming an insurance payout of $1 million per home, as the affected areas predominantly consist of higher-income neighbourhoods. Lemonade's 6% market share, and a 25% probability of home damage, the calculation results in a figure of $1.5 billion. However, since Lemonade likely has reinsurance to cover part of the losses, the final amount would probably be less than $1.5 billion. The payout could potentially range between 30% and 50% of Lemonade's market capitalization! 

We’ll have to wait for Lemonade’s Q4 financial results, due by February 25, to hear the CEO’s outlook for the first quarter and how the wildfires might affect them.

Insurance companies like Lemonade are expected to book exceptional losses in advance due to the ongoing wildfires in Los Angeles, with estimates exceeding $59 billion in insured losses. Insurers are adjusting their financial strategies, and many are likely to set aside reserves to cover these anticipated losses, particularly as they face rising premiums and a shrinking market presence in high-risk areas. 

For now, predicting the financial impact of the fires remains tricky!

The duration to extinguish some of the largest wildfires in California's history varies, ranging from 17 days to over 6 months.

2018 Camp Fire: This fire, which was the deadliest and most destructive in California's history, took 17 days to be fully contained. It burned for 17 days straight from November 8 to November 25, 2018.

2018 Mendocino Complex Fire: This was the largest wildfire complex in California's history at the time, burning over 459,000 acres. It took more than 2 months, from July 27 to October 4, 2018, to achieve full containment.

2020 August Complex Fire: The August Complex, which became the largest wildfire in California history, burning over 1 million acres, took nearly 3 months to be fully contained, with containment declared on November 15, 2020.

2017 Thomas Fire: Previously one of the largest fires in California's modern history, it was finally declared out after more than 6 months, having started on December 4, 2017, and being fully extinguished by June 2, 2018.

2021 Dixie Fire: The second-largest fire in California's history, it burned for over 70 days, with 94% containment reported on September 22, 2021, after starting on July 13.

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