💰 5 Fact Friday: California’s $100B Insurance Gap

ECONOMY
1. California’s $100B Insurance Gap 👀

Tragic wildfires in Los Angeles continue to rage, scorching 40,000 acres, claiming at least 24 lives, and destroying more than 12,300 structures. The toll on communities is heartbreaking, and the financial blow is just as staggering. Current estimates put insured losses at $40 billion, but the total bill could surge to $135-150 billion.

That leaves a $100 billion gap between insured damage and actual costs—a shortfall that either homeowners or taxpayers will inevitably bear.

The kicker? This crisis didn’t come out of nowhere. Insurers have been raising red flags for years, only to be hamstrung by restrictive legislation.

Why Insurers Left

Insurance companies don’t avoid risk—they price it. They forecast the likelihood and severity of losses using catastrophe (CAT) models. These models show a sharp increase in risks in wildfire—and hurricane-prone areas.

Here’s the problem:

• If a $1M home in California has a 3% chance of total loss each year (up from 1%), premiums need to triple from ~$10,000 to $30,000 to cover the increased risk.

• However, Proposition 103 requires state approval for large rate hikes, making such increases almost impossible.

• Without the ability to price risk appropriately, insurers either non-renew risky policies or leave the state entirely.

• As a result, nonrenewal rates are highest in so-called ‘Prior Approval States’ such as California, Florida, and North Carolina.

The FAIR Plan: A Flawed Safety Net

To fill the gap, California expanded the FAIR Plan, the state’s insurer of last resort.

• This plan must cover homes in vulnerable areas, so its customers are among the riskiest in the state.

• In 2021, the FAIR Plan requested a 70% rate increase to remain solvent but was only approved for 15.7%.

• Unsurprisingly, the Plan is now underfunded. It holds just $200M and $2.5B in reinsurance to cover claims that could exceed $6 billion.

While regulated insurers are required to bail out the FAIR Plan, this obligation could drive the few remaining insurers out of California—accelerating the state’s insurance crisis.

In fact, the FAIR Plan’s coverage surged 49% in the first nine months of 2024 alone. This rapid growth creates what the Department of Insurance calls a “negative feedback loop.” 

As more customers turn to the FAIR Plan, traditional insurers retreat further from high-risk areas, increasing reliance on an already underfunded system.

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STOCKS
2. Big Banks Post Record Q4 🚀

America’s banking giants kicked off 2025 with earnings that screamed, “We’re back!” From record profits to surging trading revenues, here’s how the key players stacked up:

J.P. Morgan

J.P. Morgan retained its #1 spot in global investment banking fees, thanks to a 49% boost in dealmaking revenue. Assets under management also climbed 18% year-over-year to $4 trillion, supported by strong client inflows and market appreciation.

Ultimately, the bank pulled in $58B in full-year profit (and $14B in Q4), setting a new U.S. banking record.

Bank of America

Bank of America more than doubled its Q4 profit to $6.7B, propelled by a 44% jump in investment banking fees. While net interest income ticked up 3%, the bank’s record-breaking sales and trading revenue of $4.1B stole the show.

Wells Fargo

Wells Fargo posted a 47% surge in Q4 net income, reaching $5.1B. Investment banking shined with fees up 59%. Plus, the bank returned $25B in capital to shareholders in 2024, fueling a 43% stock rally.

Goldman Sachs

Goldman smashed expectations with a 105% Q4 profit jump to $4.1B, its best in three years. Trading revenue soared 32%, equity underwriting jumped 98%, and debt underwriting popped 51%—sending shares more than 6% higher on Wednesday.

Morgan Stanley

Equities trading was Morgan Stanley’s MVP, surging 51% due to strong hedge fund activity. Investment banking revenue also grew 25%, pushing the bank’s Q4 profit up 145% to $3.7B.

Citigroup

Citi unveiled a $20B stock buyback plan, sending shares to a five-year high. Q4 net income hit $2.9B, with 35% growth in investment banking and gains across all business lines—a major rebound from its rough 2023.

Bottom Line

With CEO confidence surging, regulatory hurdles easing, and a hefty backlog of deals, deal-making is officially back on the table. Credit risks and rate dynamics could pose challenges ahead, but for now, it’s full steam ahead for Wall Street’s biggest players.

MARKETS
3. The Bear Who Cried Fraud 🐾

Nate Anderson, the man who turned short selling into a high-stakes art form, is hanging up his boots—or rather, his bear suit.

For seven years, Anderson and his firm, Hindenburg Research, rattled markets, exposed frauds, and sent billionaire egos crashing faster than a meme stock after earnings. Now, Anderson is stepping away, but not without making waves one last time.

Before we get to his parting gift, let’s talk about the concept of shorting. It’s a divisive topic:

The Case Against Shorts

Critics claim short sellers often harm companies by stifling innovation, discouraging investment, and creating volatility.

The infamous "short & distort" tactic involves betting against a (presumably innocent) stock, launching a negative publicity blitz, and profiting as the price tanks. It’s no wonder the strategy has some serious haters, like Elon Musk.

Why Short Kings Matter

Anderson’s defenders counter that markets are already flooded with hype machines pushing stocks up. Without short sellers putting their reputations on the line, fraudsters could run wild.

Hindenburg unearthed shady accounting, Ponzi-like schemes, and outright lies—results that regulators should have caught first.

Hindenburg’s Legacy

Hindenburg’s track record speaks for itself: of the 63 companies the firm targeted, 51 are now worth less than when their reports dropped. That’s an impressive 81% success rate.

Sure, short sellers profit, but Anderson’s work also provided a valuable public service—protecting investors from further losses.

In his final act, Anderson is open-sourcing Hindenburg’s playbook, paving the way for a new generation of watchdogs to investigate corporate misdeeds.

BONDS
4. Are Bonds Worth A Second Look? 🏦

The 10-year Treasury yield surged from 3.60% in September to a peak of 4.80% earlier this week—a dramatic 33% move in just four months.

After relentless selling, Wednesday’s inflation report finally offered a glimmer of relief to bond markets. With core CPI slowing to 3.2%, yields eased to 4.62% as investors stopped fretting about a 2025 rate hike.

Still, much of the market’s attention has shifted to the yield curve and a rare phenomenon known as bear steepening.

Bear Steepening 101

Bear steepening occurs when interest rates rise across the board (the “bear” part), but long-term rates climb faster than short-term rates (the “steepening” part). This shift often signals rising uncertainty about long-term risks.

At its core, bear steepening reflects an increase in the term premium—investors are simply demanding higher returns to hold longer-term bonds.

Despite the recent steepening, the term premium (0.6 percentage points) remains well below its historical average (~1.5%), suggesting yields may still have room to rise.

The Buy-or-Wait Debate

For fixed-income seekers—or anyone reconsidering the classic 60/40 portfolio—bonds are becoming harder to ignore.

Starting Yield → Future Returns: For one, the single best predictor of bond returns is the yield at purchase. At today’s levels, prospective returns are far better than during the near-zero days of 2020. Why? When rates fall, higher-yield bonds gain value—so more room to fall = more upside potential.

Good Bond Scenario: Inflation cools, the Fed cuts rates, and yields drop. Bond prices rise, rewarding investors with locked-in coupons and potential capital gains.

Bad Bond Scenario: Inflation persists or deficits swell, driving yields even higher. Bond prices fall further, but you’d still collect interest payments—just at below-market rates.

The big question is… Have yields peaked, or is there more pain ahead? Either way, bonds might finally be worth a second look.

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STOCKS
5. Guess That Stock 🕵️‍♂️

This week’s mystery stock is at the center of the AI revolution and recently reported blowout quarterly results. Think you can crack the case? Here are five clues:

1. From Nvidia’s GPUs to Apple’s iPhones, the company’s products power the world’s leading AI and tech platforms.

2. Fourth quarter revenue rose 39% year-over-year to $26 billion, while net income surged 57%, thanks to insatiable demand for 3nm and 5nm semiconductors.

3. With a near-monopoly in advanced semiconductors, 74% of the business’ wafer revenue comes from cutting-edge technologies under 7nm.

4. Despite its critical role in the AI supply chain, this stock trades at an attractive 23.5x forward earnings and boasts a PEG ratio of 0.75, signaling strong growth at a discount.

5. With rising U.S.-China tensions, the business is diversifying its production base—building out fabrication plants across Arizona, Japan, and Europe.

Got a guess? Tap here to reveal the answer → 

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