WSJ What’s News - What’s News in Earnings: Insurers Confront a Riskier Future

Episode Date: February 7, 2025

Bonus Episode for Feb. 7. California’s wildfires caused an estimated $30 billion or more in losses to insurers. The state’s insurance landscape is in a state of chaos , but the broader industry is faring better. Telis Demos, co-host of WSJ’s Take On the Week and a writer for Heard on the Street, breaks down what’s happening across the industry and explains why the impact of the catastrophe on insurance companies such as Allstate, Travelers and Chubb could depend on reinsurers like the Everest Group.  Chip Cutter hosts this special bonus episode of What's News in Earnings, where we dig into companies’ earnings reports and analyst calls to find out what’s going on under the hood of the American economy. Sign up for the WSJ's free Markets A.M. newsletter. Learn more about your ad choices. Visit megaphone.fm/adchoices

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Chances of winning based on code entry time. Rules in app. Hey listeners, it's Friday, February 7th. I'm Chip Cutter for The Wall Street Journal, and this is What's News in Earnings, our look at the broad themes that stood out in the latest earnings season. Today we're focusing on insurers,

a group of companies that has been in the headlines a lot recently, especially since the catastrophic fires in California that are likely to cost the insurance industry billions of dollars. Big home and auto insurers have now reported their earnings giving us a sense for how companies are handling the costly California crisis and more. for how companies are handling the costly California crisis and more. Telus Deimos, co-host of the Wall Street Journal's Take on the Week podcast, has been analyzing the results of the big insurers and joins us now. Hey, Telus. Hi, how are you? Doing well. Thanks for being here. So among the home and auto insurers, how do the companies perform?

Which companies are faring the best? Right now is actually a pretty good time to be a home and auto insurer, despite what is going on in California and obviously The wildfires home and auto insurers were having a tough couple of years leading up to this right particularly in auto insurance after the pandemic the severity of losses Soared however, we're now kind of on the other side of that auto insurance home insurance rates have gone up pretty substantially And so the fourth quarter results for home insurance rates have gone up pretty substantially. And so the fourth quarter results for insurers have been largely pretty positive. I'll just give you one

example of one who just reported their 2024 results. And you'll see it's pretty stark, right? So Allstate, last year, they printed over the course of 2023, a net loss of around $300 million. In 2024, after adjustments in pricing adjustments and what they're covering, their net income for 2024 was over $4 billion. That's an enormous turnaround in one year. And I would say that, you know, maybe not that magnitude, but that type of pattern has been repeated across a number of insurers. Well, and our colleague, Greg Gippp made the point recently that insurance is showing some signs of breaking down. I mean, he made the point that Americans are getting older and sicker,

risks from natural and financial disasters are growing, but people seem to be resistant to paying enough to insure against these issues. Is that a dynamic that shows up in these earnings, or how are insurers just dealing with this issue? Insurers deal with that issue by very carefully deciding what policies they write and what they don't. And so for an insurance company, they are often able to navigate these challenges. And again, it takes time for them to adjust. So in California, many insurers have just said, we're not writing new policies. So insurers navigate this in part by just sort of saying, we're not getting what we want to take on this risk.

Well, what does that mean? That means that the cost of insurance falls on the consumer. Or more often, it falls on a state, because states have their own sort of state-backed plans to cover wildfire risk in California or hurricane risk in Florida. That said, there have been some insurer reports that do show the strains that they face, particularly in the reinsurance category. So I mentioned that there were some tough years for those primary insurers in the past.

It was the opposite for reinsurers. So reinsurers, the last couple of years, had really good years. However, in insurance, there's always something unforeseen, right? It's all about risk. One reinsurer, for example, Everest Group, their profits actually went down in 2024 versus 2023. And that was in part attributable to the fact that they had to make a big reserve adjustment for that casualty and liability business. So they had to adjust their numbers by in the billions to account for that. I would say that there is an unusual amount of uncertainty and volatility in a lot of these businesses right now because of the evolving nature of catastrophe risk and also

because of things like just the value of homes are so high. So the big issue, of course, that's been on our minds lately is the California fires. What's the projection for how insurers are going to be affected by them going forward? Do insurers even know sort of what the full cost of these will be? Insurers have definitely started to grapple with what their exposures will be. And sometimes insurers do, they estimate what the losses will be based on their market share and what they think the industry loss will be. That can be tricky though, because the industry loss number is a bit of a moving target.

Even now that the wildfires have been contained, it's still hard to say because it depends on like what kinds of policies, right? And what's interesting about this catastrophe is that, you know, the Pacific Palisades are a wealthy area. These are not necessarily just standard homeowners policies that are being impacted. There are people that might have art collections, classic cars and things like that. Those things are baked into their insurance policies and so you have to know a lot about the specific impact. And then there's the question of course of how much of the losses are being

borne by the California Fair Plan, which is the state backed plan for people who can't get a standard insurance policy, how much of the loss is being baked there. And then on top of that, how much of the loss from the Fair Plan will then be sent back to insurers in the form of an assessment. So you have to kind of know all of those things before you really start to say what's going to be the overall industry impact. And actually the executive vice president and CFO of Travelers, Daniel Fry, told investors in their earnings call in January just that. The California wildfires will have an impact even if it's too early to put a number on

it. As you know, the California wildfires that began earlier this month are going to be a material event for the industry. It will have a material impact on our first quarter earnings. Because the event is so recent and to some degree still ongoing, we'd like to take more time to refine our analysis before providing an estimate. But some insurers have started to give what they call kind of a bottom up estimate. They look at their exact policies and what they think the losses will be. So Chubb, for example, said that they expect a $1.5 billion loss from the wildfires. Allstate

has also given an estimate. They said that they expect a gross $2 billion cost to them from the wildfires. That includes what they think will be their fair plan assessment. However, that won't be their actual loss because they get money back from reinsurance for that. I do want to call out an article I wrote which was that insurers and reinsurers in the same way that you kind of maybe argue with your insurance company over how much they should cover, insurers argue with their insurance company about what should be covered. And so whether an insurer considers the wildfires to be like one catastrophe event, the Los Angeles area wildfires, or whether each fire, the Eaton fire, the Palisades fire, whether those are separate catastrophes,

that might mean that they can actually get more reinsurance than they could from one catastrophe. However, I will say that we are beginning to see at least some convergence of estimates. There's still some dispersion, but the numbers are going to be pretty substantial. I mean, a 30, 40, $50 billion catastrophe is a big one. That is a big loss. That would put it in some of the largest in the US ever.

Well, and then when we think of the consumer side of all of this, obviously homeowners in many areas face increasing risk of non-renewals, reduced coverage, expensive policy conditions, like forcing property owners to cut down trees if they want to have coverage. So there's these eye-watering premiums and coverage cancellations that maybe were once confined to markets like Florida, Louisiana, and California. It seems like those are spreading. So is this sort of the reality for insurance

for the foreseeable future? Is this here to stay? Is this what consumers should expect going forward? What a lot of insurers are doing is they're really preparing more for this, what I've been calling sort of bespoke market, right? We're not writing any more homeowners policies in California. But what they're talking about are those standard policies. But they might be able to come in and say, look, it's not going to be cheap, but we'll write you a policy and we're going to ask you to do this, that and the other thing in order to get that policy. And so what that tells me is that homeowners will get coverage, but it's not going to be cheap. Tell us. So interesting. Thanks so much. Thank you. Thanks for having me.

And that was What's News and Earnings. Today's show was produced by Zoe Culkin and Anthony Bansi with supervising producer Michael Cosmines. Additional sound courtesy of S&P Global Market Intelligence. Later today we'll have the PM edition of What's News out for you as usual. And we'll be back later this earnings season diving into another industry. Until then, I'm Chip Cutter. Have a great day.