Deadly Floods In California Put 38 Million Under Emergency Alert While State Faces Massive Insurance Crisis

At least three people are reported to have died on Tuesday, Feb. 6 as a result of the floods and mudslides that swept across Southern California.

Unprecedented levels of rainfall caused low-elevation sections of the Los Angeles area to flood, leaving destruction along its path of water and mud.

The region is becoming increasingly problematic for residents, as insurers flee the state — which is also highly prone to wildfires — causing the price of home and auto insurance to shoot up.

38 million people have been placed under flood alert, as heavy rains are expected to continue through Tuesday and the soil is oversaturated from the storm that began Sunday.

By Monday afternoon nearly 440,000 homes were left without electricity with some areas around LA reaching up to 11 inches of water.

The fire department responded to at least 130 flood incidents between Sunday and Monday, according to the LA Times, with Governor Gavin Newsom declaring a state of emergency.

Daniel Swain, a climate scientist with UCLA, called the storm "remarkable and in some ways historic," as unseen levels of rainfall hit specific areas consistently.

With homes and vehicles around the area sustaining damage to diverse degrees, insurers covering the area will likely be hit with massive bills to cover.

The weather event, however, didn't cause a major disturbance to insurance stock prices as of Tuesday. Progressive Corp PGR was down 0.7% on Tuesday. Erie Indemnity Co ERIE was up 0.8%. Fidelity National Financial Inc FNF is up 0.1%.

The Causes And Consequences Of The California Insurance Exodus

The increasingly alarming rate of disastrous events in the Golden State has already become an exit alarm for some players in the California insurance market.

Allstate Corp ALL, one of the largest insurance companies in the country, decided last June to stop offering new policies in the state, which has also been battered by wildfires during recent years.

"The cost to insure new home customers in California is far higher than the price they would pay for policies due to wildfires, higher costs for repairing homes and higher reinsurance premiums," said Allstar in a statement at the time.

The move followed that of competitor State Farm General Insurance Company, which stopped accepting new insurance applications in the Golden State in May.

In August last year Kemper Corp KMPR also decided to swiftly reduce its presence in the California market. The company, owning subsidiaries Merastar Insurance, Unitrin Auto and Home Insurance, Unitrin Direct Property and Casualty, as well as Kemper Independence Insurance decided to not renew existing preferred policies in home and auto insurance across the country.

The decision was expressed by CEO and Chairman Joseph P. Lacher, Jr as "the most effective and efficient way to support our stakeholders" and a way to "release capital and increase the resources available to support our core specialty auto and life businesses," in a move that was allegedly not motivated by climate reasons.

A similar trend has existed in disaster-prone Florida, where the Farmers Insurance Group, a wholly owned subsidiary of Zurich Insurance Group AG ZURVY, announced its exit from the state in August 2023. Close after, the company also decided to withdraw from all insurance programs offered in California, including home, auto and renters policies.

The rising risk for California real estate is causing the cost of home insurance to rise at higher rates than inflation. According to Money.com, State Farm was recently approved a 20% increase for renewals, which will be effective in March of this year. Allstate requested a 39.6% rate increase, which is currently under review by the California Department of Insurance.

Some residents of high-risk areas have been forced to last-resort options, including more expensive plans designed for customers who've been rejected by other insurers, reported to PolicyGenius.

Insurance ETFs were generally unaffected by news of the floods.

• SPDR S&P Insurance ETF KIE is up 0.2% on Tuesday at the time of this writing.
• iShares US Insurance ETF IAK remained flat on Tuesday.
• Invesco KBW Property & Casualty Insurance ETF KBWP is up 0.1%.

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