By James Thaler, David Bull

Jan 30 - (The Insurer) - Investment firm Wolfpack Research is predicting Mercury General is facing gross losses in excess of $2bn from the ongoing Los Angeles wildfires based on an analysis of rate filings and that the California insurer “will be severely affected” by a loss of capital at that level.

In a note issued on Wednesday, Wolfpack disclosed that it has shorted shares in Mercury and cast doubt on the insurer’s ability to define the wildfires as multiple occurrences and receive recoveries on reinstated limits from its property catastrophe treaty.

Shares in the Los Angeles-based carrier have plunged since it initially revealed on 10 January that it expects a full $150mn retention loss on its property catastrophe reinsurance program, which carries $1.29bn in limit in excess of the retention.

It then stated in a follow-up disclosure that it on 20 January that it had at that point not yet decided whether to consider the Palisades and Eaton wildfires as one or two events under its reinsurance coverage, after Property Claim Services (PCS) designated the fires as separate events.

Wolfpack called the wildfire events a “gamechanger” for Mercury, as it detailed its analysis using zip code data.

“Our analysis shows [Mercury’s] California subsidiary is deep underwater as we expect more than $2bn in claims will blow the top off its $1.3bn reinsurance tower and eat up its subsidiary’s existing capital,” Wolfpack said Wednesday.

“We believe [Mercury] will be severely affected by the loss capital,” it added, with the losses largely driven by the Palisades and Eaton fires.

Wolfpack said it has “discovered” an obscure, roughly 4,000-page rate filing that reveals the number of homes and condominiums [Mercury] insures in each California zip code.

It said that the document, filed in June 2024 by a Mercury subsidiary, allows us it see how many policies in force the insurer has per zip code.

“For example, we can see…that [Mercury] insures 929 homeowner (HO-3) policies in Altadena (91001). Per LA County, ~63 percent of single-family homes in this zip code have been destroyed,” Wolfpack wrote.

“We have used this data to estimate [Mercury’s] losses from the fires and arrived at ~$2bn in gross losses (for homeowner and landlord policies), more than enough to eat through the company’s $1.3bn in reinsurance,” it commented.

Wolfpack said it believes Mercury will face further losses from insured automobiles, condominiums, commercial property, displacement costs for those in evacuation zones, and rehabilitation costs for non-destroyed homes for smoke damage and mold.

“We think these costs will add significantly to our $2bn loss estimate,” the firm noted.

“Management seems slow to share the true extent of its exposure with investors, instead opting to tell investors on a market holiday that the fires ‘can be considered a separate occurrence’ for reinsurance purposes,” Wolfpack commented.

The investment firm said it is “skeptical” losses can be recovered under two occurrences, expressing doubt that reinsurers would be willing to provide $1.2bn in reinsurance limit for an additional $250mn in fees – by its estimate – to cover losses from an event that has already occurred”.

“We consider this to be [Mercury’s] Hail Mary as [Mercury’s] own press release indicates these fires would be defined as a single event in its reinsurance treaty,” Wolfpack’s analysts concluded.

Wolfpack didn’t define what it meant by “fees”, but Mercury General has a $150mn retention on its cat program for first and second events and had also previously disclosed it would have to pay $101mn in reinstatement premium.

Two-event scenario

In its 20 January statement, Mercury General revealed that its cat reinsurance treaty allows for events that occur within a 150-mile radius to be combined as a single occurrence. Events can also be classified as a separate occurrence when deemed as a separate catastrophic event by PCS.

The carrier said it will determine whether to classify the fires as one or two events as more information becomes available, including regarding any subrogation potential.

Under a two-event scenario, Mercury General had previously stated that it may elect to use reinsurance limits of up to $1.29bn for the first event with reinstated limits of up to $1.24bn for the second event.

In this scenario, the carrier would be responsible for first and second event retentions which together with reinstatement premium costs would be a hit of $401mn.

Mercury General would also have co-participation on up to $52mn for losses in excess of $650mn on the second event.

Should reinstated limits be used by the second event, Mercury General said it may seek to acquire additional reinsurance for the stub period ending 30 June 2025, which is the date its current contract expires.

News of Wolfpack’s loss estimate comes as industry loss estimates for the Los Angeles wildfires have steadily climbed, with Karen Clark & Company putting out a $28bn loss estimate last week, after modelling firm Verisk said the wildfires could cost the industry between $28bn and $35bn.

On Tuesday, wildfire insurtech MGA Kettle updated its projection to between $27bn and $36bn.

The estimate of Mercury’s gross wildfire losses comes after last week equity research analysts at investment banking firm Raymond James predicted that Mercury could be facing gross losses from the event of between $1.1bn and $1.7bn.

Mercury General’s share price is down by more than 20 percent in the year-to-date but the stock closed up 2.5 percent on Wall Street Thursday.

A spokesperson for Mercury General has been contacted for comment.