The severity of the ongoing California wildfires is expected to drive insurance industry losses of more than $20 billion, with some estimates even hitting or exceeding the $40 billion mark, which analysts at investment bank Berenberg believe could cause pricing to firm.

In a recent note, Berenberg analysts focus on re/insurers Zurich, SCOR, and Conduit Re, three stocks the investment bank feels have been oversold since the outbreak of the Los Angeles wildfires, and that potentially stand to benefit from firming prices.

“Insurance is a business where pricing is often adjusted after the event, as the loss cost is not known until after the coverage period ends. This means that, after a severe event – like the California wildfires – insurance rates would be expected to rise to help cover for the unexpected rise in claims,” says Berenberg.

Currently, insurance industry loss estimates for the fires are wide, from as low as $15 billion to more than $40 billion, and the unexpected severity of the event could cause insurers and reinsurers to push for payback and look to increase prices to offset these first quarter losses.

Berenberg explains: “Our main assumption is that each of these three stocks has the solvency to renew coverage at the higher prices that are likely to be achieved following this event. We believe that the three insurers will likely achieve full recovery of the loss, whereas implicit in the current share prices is the assumption by the market that they will not, and that the wildfires will not repeat the historical loss recovery pattern.”

Analysts estimate Zurich’s California wildfire loss at around $200 million, split 50% Farmers Re and 50% for Zurich’s commercial lines exposure.

“Our $200m estimate accounts for c1.9% in terms of quarterly combined ratio and just 0.6% of shareholders’ equity. Zurich’s 224% last reported solvency (Q3 2024 Swiss Solvency Test ratio) is well above its 160% target minimum, and this means that Zurich can continue underwriting California risks and benefit from the likely rise in pricing after the wildfires,” says Berenberg.

For SCOR, analysts estimate a loss of roughly €50 million, which is just over half the re/insurer’s loss from the 2018 wildfires. Berenberg estimates that the French carrier’s exposure to US wildfires and US natural catastrophe events has fallen since 2018.

“Our EUR50m estimate is c2.7% in terms of quarterly combined ratio and just 0.9% of shareholders’ equity. SCOR’s 203% last reported solvency (Q3 2024 Solvency II ratio) is in the upper half of its 185-220% target range, and this means that SCOR can continue underwriting California risks and benefit from the likely rise in pricing after the wildfires,” explain analysts.

Berenberg pegs Conduit Re’s wildfire loss at roughly $30 million, which is benchmarked to the firm’s loss on Hurricane Helene, also estimated at around $30 million.

“Our $30m estimate is c13% in terms of quarterly combined ratio and just 2.9% of shareholders’ equity. Conduit Re’s 381% last reported solvency (FY 2023 Bermuda Solvency Capital Requirement Ratio) is well above the top end of its 200- 300% target range, and this means that Conduit Re can continue underwriting California risks and benefit from the likely rise in pricing after the wildfires,” Berenberg says.

Assuming that insured wildfire losses will likely be similar to Hurricane Helene, Berenberg emphasises that the recent share drops for the three firms are overdone, and that these stocks represent a significant buying opportunity.

While it’s likely that the losses will increase re/insurance pricing for California wildfire business, it remains to be seen if the magnitude of losses is sufficient to influence broader property cat pricing at future renewals, following some softening at the January 2025 renewals.