The recent California wildfires have raised concerns about the financial health of insurance companies and the potential impact on insurance stocks and ETFs. As the fires continue to ravage neighborhoods in Los Angeles and other parts of the state, investors are closely monitoring the situation and its potential effects on the insurance industry.

The wildfires, which started on January 7, have already caused significant damage and economic impact, with AccuWeather estimating total losses between $52-$57 billion. J.P. Morgan projects insured losses to approach $10 billion, with primary insurers like Allstate (ALL), Travelers (TRV), and Chubb (CB) being more vulnerable due to higher reinsurance attachment points.

These primary insurers have significant market shares in California and are likely to bear a larger share of the costs associated with the wildfires. Allstate, with approximately a 6% market share in California, faces significant exposure, as do Travelers and Chubb, which hold comparable market shares in the state.

The recent quarterly results for these companies showed strength, but they were partially overshadowed by higher catastrophe losses, increased insurance claims and expenses, and weaker real estate investment performance. Rising catastrophe losses have also impacted the third-quarter profits of Travelers and Chubb.

Investors should be aware of the potential impact of these wildfires on insurance stocks and ETFs. The following ETFs have significant exposure to California's wildfire-prone areas and may be affected by the recent events:

1. SPDR S&P Insurance ETF (KIE): KIE has a significant allocation to companies with exposure to California's wildfire-prone areas. As of 2024, KIE's top holdings include Allstate (ALL), Travelers Companies (TRV), and Chubb Limited (CB), which have substantial market shares in California and are vulnerable to losses from wildfires.
2. iShares Global Insurance ETF (IXP): IXP also has exposure to California's wildfire-prone areas through its holdings in Allstate, Travelers, and Chubb. As of 2024, the top holdings with exposure to California's wildfire-prone areas are Allstate (ALL), Travelers Companies (TRV), and Chubb Limited (CB).

These ETFs have significant exposure to California's wildfire-prone areas through their holdings in primary insurers like Allstate, Travelers, and Chubb, which are more vulnerable to losses from wildfires due to higher attachment points for reinsurance.

Historically, insurance stocks and ETFs have experienced negative performance during wildfire seasons. The impact on ETF performance can be attributed to the broader market impact and investor risk aversion during wildfire seasons. For example, the iShares Global Clean Energy ETF (ICLN) experienced a decline of approximately 1.5% during the month of November 2018, which coincided with the peak of the wildfire season in California.

Increased wildfire risk is likely to have a significant impact on the premiums and underwriting practices of insurers within these ETFs. Insurers are likely to raise premiums to cover the higher potential losses, reduce their market share in higher-risk areas, and offer policies with higher deductibles and lower coverage limits. This could lead to a decrease in the availability of insurance coverage in high-risk areas and create coverage adequacy issues for homeowners.

Insurers may also rely more heavily on reinsurance to manage their risk exposure, which could lead to increased reinsurance costs being passed on to policyholders in the form of higher premiums. Additionally, insurers may adjust their underwriting practices to better manage wildfire risk, which could include more stringent building codes, improved fire prevention measures, and increased use of wildfire-resistant materials. These changes could lead to higher construction costs, which would be passed on to homeowners in the form of higher premiums.

In conclusion, the recent California wildfires have raised concerns about the financial health of insurance companies and the potential impact on insurance stocks and ETFs. Investors should be aware of the potential impact of these wildfires on insurance stocks and ETFs, particularly those with significant exposure to California's wildfire-prone areas. The increased wildfire risk is likely to lead to higher premiums, reduced market share in high-risk areas, and changes in underwriting practices, which could make insurance coverage more expensive and less accessible for homeowners in wildfire-prone areas.