Inferno in LA: California’s Billion-Dollar Wildfire (Feat. Re-Insurance Market, Hollywood, US, UK)

Inferno in LA: California’s Billion-Dollar Wildfire

(Feat. Re-Insurance Market, Hollywood, Santa Ana Devil Wind, U.S. UK Treasury Bonds, State Farm General, FAIR Plan Coverage, Palisades, Eaton)

The City of Angels is under siege by one of the most devastating wildfires in history. Fueled by scorching winds and bone-dry conditions, flames are tearing through high-end neighborhoods, reducing luxury mansions to ashes and leaving a trail of destruction worth tens of billions of dollars.

This isn’t just a natural disaster—it’s an economic catastrophe, with ripple effects threatening to reshape California’s insurance market and beyond. Let’s dive into the chaos, uncover the root causes, and assess the shocking financial impact that’s already making headlines.

1. High-pressure systems often form inland over the Nevada Plateau and the Great Basin.

2. Air from these high-pressure systems flows toward the low-pressure areas along the California coast.

3. Between Nevada and California’s San Francisco area, there are high mountains and valleys.

4. When high-pressure air crosses the mountains and descends, the air gets compressed due to atmospheric pressure.

5. When air is compressed, the molecules get closer, their kinetic energy increases, and the temperature rises.

6. This phenomenon is called adiabatic compression.

7. Even without meeting hot air from the outside, the temperature rises as the air moves down the mountains.

8. The San Bernardino Mountains divide the inland desert and the coastal areas of California.

9. As dry air from Nevada’s Great Basin crosses the 5,000-foot (1,524-meter) San Bernardino Mountains, its temperature increases.

10. While descending the mountains, the air’s moisture condenses into rain and falls, leaving the air extremely dry.

11. This already dry air becomes even drier during the descent.

12. The extremely dry air then passes through narrow canyons that lead to California’s coastal regions.

13. As the air travels through the narrow canyons, the wind speed starts to increase.

14. Wind speeds can reach up to 100mph (around 160km/h).

15. This creates the hot, dry, and fast-moving winds known as the Santa Ana Winds, nicknamed the “Devil Winds.”

16. California’s weather conditions worsen the situation.

17. Since May 2024, California hasn’t received more than 0.1 inches (2.5 mm) of rain.

18. In this dry and hot environment, any spark can quickly grow into an uncontrollable fire.

19. California’s climate and geography make it prone to wildfires, so the Santa Ana Winds have caused massive fires here before.

20. In 2018, the Santa Ana Winds triggered the Camp Fire, killing 85 people and causing billions of dollars in damage.

21. That same year, the Santa Ana Winds caused the Woolsey Fire in LA, burning 96,949 acres (393 km²).

22. In 2019, the Getty Fire broke out, threatening LA’s luxury neighborhoods.

23. This current LA wildfire isn’t unusual.

24. What makes this wildfire notable is the severe damage to high-end residential areas.

25. Aerial photos before and after the fire show luxury homes in California completely destroyed.

26. So far, over 10,000 homes in California have been lost, and the fire is still spreading.

27. Due to the strong Santa Ana Winds, fires are breaking out simultaneously in five different areas of LA.

28. As of January 11, the burned area spans 56 square miles (145 km² ).

29. This is less than half the size of the 2018 Woolsey Fire (393 km²), but because luxury homes are involved, the damage is far greater.

30. The fires are not yet under control.

31. Of the five fire zones, 75% and 37% of the Lydia and Hearst fires have been contained. However, the largest fires—Palisades and Eaton—are only 8% and 3% contained.

32. In Palisades, home to Hollywood stars and wealthy individuals, over 5,300 houses have been destroyed, and the fire is still spreading.

33. An additional 57,830 homes are currently at risk of being destroyed.

34. JP Morgan estimates the economic damage could exceed $60 billion, with insurance losses expected to surpass $20 billion.

35. Initially, JP Morgan estimated $20 billion in losses, but as the fires grew, this figure was revised to $50 billion, then $60 billion.

36. The largest wildfire-related loss in U.S. history was the 2018 Camp Fire, which caused $12.5 billion in damages.

37. The current LA wildfires are already estimated at $60 billion and could surpass previous records several times over.

38. California-based insurance companies have been incurring heavy losses since the 2018 Camp Fire.

39. With wildfires continuing in California, some insurers not only raised premiums but started pulling out of the market entirely.

40. State Farm General, California’s largest insurer, announced in March 2024 that it would not renew insurance for 72,000 homes and apartments across the state.

41. Many luxury homes in Palisades, heavily impacted by the current fires, were denied insurance renewals at that time.

42. State Farm reported that 69% of insurance contracts in the Palisades area were canceled, with only 31% being renewed.

43. Due to the fires in 2017 and 2018, insurers paid out the equivalent of 25 years’ worth of premiums collected in those areas.

44. This is why, starting in 2020, insurers not only raised rates but began rejecting wildfire insurance altogether.

45. California authorities tried to prevent insurers from dropping coverage, but rejection rates have continued to rise since 2020.

46. Homeowners denied private insurance had no choice but to join the state-run FAIR Plan.

47. However, the FAIR Plan has higher premiums than private insurance and a $3 million coverage limit, which is insufficient for luxury homes.

48. The FAIR Plan only covers damage to the home itself and its contents, offering much narrower coverage than private insurance.

49. While the state government is paying massive amounts in claims, FAIR Plan members still face inadequate payouts.

50. It’s time to think about the broader implications.

51. Interestingly, the UK deserves attention in this situation.

52. When insurers take on large policies, they typically reinsure them as part of standard practice.

53. Insurers usually keep about 30% of the risk and transfer 70% to reinsurance companies.

54. Even California’s FAIR Plan has only $200 million in cash reserves but has reinsurance coverage worth $2.5 billion.

55. The reinsurance market is headquartered in London, with major players like Lloyd’s of London operating there.

56. It’s worth keeping an eye on global reinsurers, especially those based in London, along with U.S. regional insurers.

Alphazen Insights

Insurance companies may need to sell off their assets to cover wildfire claims. While U.S. Treasury bonds will likely account for most of these sales, a considerable amount of UK government bonds could also hit the market.

Here’s why this is significant: the U.S. and UK economies are vastly different in size and resilience. While the sale of U.S. bonds might create slight downward pressure on prices, it’s unlikely to cause major disruptions—for now. However, the UK bond market could feel a more noticeable impact.

In the end, the scale of these wildfires will determine the financial strain on both systems. Pray for the safety of everyone affected and for the swift containment of the fires.