LA Wildfires Could Consume 30 Percent of European Reinsurers' 2025 Budgets

The recent Los Angeles wildfires may deplete over 30 percent of the natural catastrophe budgets allocated by Europe's largest reinsurers for 2025, according to Fitch Ratings. Despite the significant financial hit, Fitch expects losses to remain within rating sensitivities due to the reinsurers' robust capital positions and diversified risk profiles.

Global insured losses from the wildfires are projected to surpass previous records, with industry estimates ranging from $25 billion to $45 billion. European reinsurers have reduced exposure to high-risk wildfire zones in California since 2017 and 2018, shifting from proportional reinsurance treaties to excess-of-loss agreements and raising attachment points. Nonetheless, the magnitude of the fires' insured losses will still significantly impact their portfolios. Most of the losses are expected to come from property and casualty reinsurance, with additional impacts from specialty reinsurance and, in some cases, direct insurance operations.

If insured losses total $35 billion—midway through current industry estimates—Fitch projects aggregate losses for Europe's largest reinsurers, including Swiss Re, Munich Re, Hannover Re, and SCOR, to equate to approximately 30 percent of their combined catastrophe budgets for 2025. At the higher end of estimates, with losses reaching $45 billion, this figure could rise to 38 percent.

While the fires will clearly strain catastrophe budgets, Fitch suggests the impact on earnings and capital is unlikely to be material. Global insured losses of $35 billion would correspond to estimated losses for these reinsurers equal to about 15 percent of their combined expected earnings or roughly 3 percent of their combined shareholders' equity. However, these figures are preliminary, and actual impacts will vary by company.

Munich Re, Hannover Re, and Swiss Re had all announced higher earnings targets for 2025 prior to the fires. Fitch does not anticipate changes to their financial guidance, citing the prudence built into these targets to accommodate large-scale losses. Munich Re reaffirmed its target, while SCOR has not publicly disclosed one.

It remains uncertain how these losses will influence reinsurance pricing. Fitch believes the fires may temper the recent decline in rates but are unlikely to trigger significant increases, except in particularly high-risk regions.