When Los Angeles fires destroyed thousands of buildings, including high-end homes, it created massive liabilities for insurance firms. Investors should beware of holding stocks in that sector.
Chubb (CB), Prudential (PRU), Allstate (ALL), the Travellers Companies (TRV), and Mercury (MCY) tumbled in the last week. TRV stock previously peaked at $270, forming a bearish “double top” between Oct. and Dec. 2024.
The insurance firms earn hefty premiums from homeowners. Mercury earns around 20% of the homeowners’ insurance premiums from California. JPMorgan estimates that the insurance losses will cost $20 billion. It raised its estimate from $10 billion.
Investors dumped shares of Edison International (EIX) and Pacific Gas and Electric (PCG). Markets are worried that those two firms are responsible for the fire. However, Edison’s subsidiary, Southern California Edison, said that it was not responsible for starting the devastating fires.
Buying Opportunity
Once the insurance firms know how much they must pay out, the stocks are a buy. More importantly, the media may have overestimated the size of insurance underwriting in California. After the last wildfire in the State, firms stopped writing home policies.
Both Chubb and Allstate are attractive investments at lower prices. They currently trade at a P/E of over 10 times but could fall as the stock falls further.
