The ongoing wildfires in Southern California have brought renewed attention to the property and casualty (P&C) insurance sector, with significant implications for insurers exposed to the region. Analysts estimate that insured losses could exceed $20 billion, making these fires the costliest in California’s history and surpassing the $10 billion in losses from the 2018 Camp Fire. Total economic losses are projected to reach between $50 billion and $150 billion, according to sources like J.P. Morgan and AccuWeather. The fires have destroyed more than 10,000 structures, caused multiple fatalities, and displaced hundreds of thousands of residents. Insurers with substantial exposure in California, such as Mercury General, Allstate, and Travelers, are under pressure as the market evaluates their ability to absorb these extraordinary losses.

Mercury General (MCY) is among the most exposed insurers, with 80% of its $4.6 billion in premiums last year coming from California. The company reported that wildfire losses are expected to exceed its reinsurance retention level of $150 million, triggering its reinsurance program, which provides $1.29 billion in coverage per occurrence. However, reinstatement premiums could add further financial strain if losses deplete those limits. Mercury’s stock has plummeted nearly 40% since the wildfires began, reflecting investor concerns about its concentrated exposure to the state. Allstate (ALL) and Travelers (TRV), which derive 15% and 13% of their premium revenue from California homeowners policies, also face significant exposure. Allstate’s stock has dropped 5% and Travelers is down 4%, as market participants brace for higher claims volumes.

Despite these challenges, the broader insurance industry has demonstrated resilience in recent years, bolstered by disciplined underwriting and premium hikes to address escalating risks from climate change. Over the past five years, the iShares U.S. Insurance ETF has outperformed the S&P 500, rising 130% compared to the index’s 85% gain. This outperformance underscores the industry’s ability to adapt to a riskier environment by repricing policies and withdrawing from unprofitable markets. For example, mutual insurers like State Farm and Farmers stopped writing new policies in California after regulators denied their requests for rate increases. However, new regulatory frameworks introduced in January 2025 may allow insurers to resume coverage in high-risk areas while adjusting premiums to better reflect wildfire risks.

Warren Buffett’s Berkshire Hathaway, the third-largest property and casualty insurer in California, illustrates a strategic approach to managing exposure. Less than 1% of its premiums come from California homeowners insurance, limiting its vulnerability to wildfires. Berkshire’s significant reinsurance business and short-term contracts provide additional flexibility, enabling the company to reprice policies or exit unprofitable lines as risks evolve. While Berkshire could face up to $600 million in wildfire-related losses, this amount is negligible relative to its $300 billion insurance capital base and quarterly after-tax earnings exceeding $10 billion.

The California wildfires highlight both the challenges and opportunities for the P&C insurance sector. Rising risks from climate change necessitate higher premiums and more sophisticated risk assessments, which could ultimately strengthen the industry’s financial position. However, the near-term impact on insurers with significant exposure to California cannot be overlooked. J.P. Morgan analysts note that while high losses could lead to future price increases, they are an immediate negative for personal lines carriers like Mercury, Allstate, and Travelers. Furthermore, mutual insurers such as State Farm are likely to absorb a significant portion of the losses, potentially shifting competitive dynamics in the market.

Regulatory changes may help stabilize the California insurance market. For instance, Farmers has resumed writing new policies in the state, and Mercury General recently announced plans to offer homeowners insurance in Paradise, California, a town devastated by the 2018 Camp Fire. These developments suggest a cautious but optimistic outlook for insurers operating in high-risk regions. Additionally, the federal government’s commitment to disaster relief, including funds for hazard removal and rebuilding efforts, may mitigate some of the long-term economic impacts on affected communities.

The wildfires have broader implications for the insurance sector beyond California. They serve as a stark reminder of the growing risks associated with climate change and the need for innovative solutions to manage those risks. As the industry navigates this evolving landscape, companies that demonstrate adaptability, financial strength, and effective risk management are likely to emerge as leaders. While the current crisis underscores the vulnerabilities of insurers with concentrated exposure, it also highlights the resilience and potential growth opportunities within the sector. For investors, the wildfires may present a buying opportunity in well-capitalized insurers poised to benefit from higher premiums and improved underwriting discipline in the years ahead.