The “outrageous” prediction by Saxo Bank of a major climate disaster impacting the insurance industry in 2025 became a reality last week. The effects of California’s wildfires are being felt within the insurance sector. However, the predicted crisis has not materialised, as investors remain confident in the industry’s resilience.
In December, John Hardy, global macro strategist at Saxo Bank, forecasted that a “catastrophic climate event” this year would shake up the insurance market. Less than two weeks later, his prediction came true. Yet, his scenario where insurers would require government bailouts to prevent bankruptcies now seems improbable.
“The likelihood of a systemic risk is low,” stated Robert-Jan van der Mark, head of Multi-Asset Strategy at Aegon Asset Management, in a conversation with Investment Officer. Portfolio manager Jordy Hermanns added, “The market is more focused on developments in Washington than the situation in Los Angeles.” He referred to uncertainties surrounding the upcoming Federal Reserve decision and Trump’s inauguration later this month.
No panic
While the wildfires have already caused an estimated tens of billions of dollars in damages, the stock prices of major insurers have remained remarkably stable. Minor declines for publicly traded companies such as Allstate and Travelers largely mirror broader market trends. The iShares U.S. Insurance ETF, a benchmark for American insurers, has roughly followed the S&P500’s trajectory since the fires began.
A significant portion of property insurance in California, however, is held by non-publicly traded companies. State Farm was the largest provider of homeowners’ insurance in California in 2023, collecting over 2.7 billion dollar in premiums. Farmers Insurance and Liberty Mutual followed, with 2 billion dollar and 908 million dollar, respectively.
Even here, the situation appears manageable, according to strategists who point to stable CDS spreads—an indicator of bankruptcy risk. “Stable spreads signal that investors do not expect major structural issues in the sector,” said Van der Mark.
Yaron Kinnar, an analyst at investment bank Jefferies, described the impact of the fires on insurers as “manageable.” Many insurers have already reduced their exposure to California, which Kinnar believes renders the initial stock price drops for firms like Allstate and Chubb unwarranted.
In March 2024, State Farm announced plans not to renew 69.4 percent of policies in the heavily affected Pacific Palisades area.
Long-term implications for insurers
For most Americans, insurance companies have been a growing burden in recent years. Households are feeling the strain of rising premiums, driven by increased risks due to extreme weather.
Some states prohibit excessive premiums, but this comes with the risk of insurers withdrawing from those markets—despite most customers being compelled to purchase their products. Most mortgage providers require homeowners to insure their properties.
This also ties into Saxo Bank’s prediction regarding Berkshire Hathaway. According to strategist John Hardy, Warren Buffett’s firm would benefit from a climate catastrophe. He predicted that Berkshire shares would rise due to the company’s ample capital reserves, enabling it to withstand panic and gain market share.
“Climate change increases risk, but it makes our business larger in the long term,” Buffett remarked in May at Berkshire’s annual shareholders’ meeting. Losses from wildfires since 2020 have not been significant enough to meaningfully impact the company’s financial results.
Hardy’s prediction has only partially come true. While Berkshire’s shares have not risen, they have declined less sharply than the broader market.
Wildfires and the US economy
Goldman Sachs estimates that US GDP growth will dip by 0.2 percentage points in the first quarter due to the destruction. However, the impact on other economic indicators, such as the labour market, remains limited.
Economists at the investment bank noted that weekly jobless claims are likely to remain stable. “Recent alternative data show no noticeable increase in online searches for unemployment benefits since the start of the year,” they wrote in a note to clients this week.
Inflation, a key concern for investors in recent months, also appears largely unaffected. While insurance costs are included in inflation reports, Goldman Sachs does not expect the higher premiums from wildfires to have a significant impact. “Our insurance equity analysts see limited price increases outside California. Moreover, homeowners’ insurance accounts for only 0.1 percent of the PCE price index,” the bank said.