Loss estimates from the fires in the Los Angeles area appear to be increasing. Morningstar DBRS previously estimated over $8 billion in insured losses, but we have seen larger estimates as the fires have remained largely uncontained.

Early loss estimates from natural disasters are often imprecise, but it seems clear that this will be a meaningful loss event for the industry. Still, it appears losses will be manageable and fall short of the losses the industry sees from large hurricanes. For context, Hurricane Katrina led to about $100 billion in insured losses in today's dollars, according to Aon.

The regulatory situation in California has been tense in recent years, and the aftermath of this event might provide another test here. A number of insurers started to exit the California homeowners market in recent years, based on their view that the state regulator wasn't allowing adequate pricing increases to match increased risk. More recently, regulators have appeared to bend somewhat on this front. However, if insurers ask for large pricing increases after this event and the California regulator balks, we could see insurers move away from the state. In our view, this is the best course for insurers to take if pricing is inadequate, and we have generally been encouraged by the discipline the industry has shown in this respect in recent years.

We generally see P&C insurance stocks as overvalued at the moment, as we think the market is overly focused on near-term tailwinds for the industry. While we don't believe losses from this event will be large enough to impact the fair value estimates or moat ratings for our domestic P&C insurance coverage, events such as this should act as a reminder of the risks the industry faces.