By Bill Alpert

The insurance stock hit hardest by California wildfires this year is Mercury General. On an earnings call Wednesday, the Los Angeles-based firm will discuss the wildfires and its own exposure to the catastrophe.

It will be a tough call. The stock has slumped 25%, to around $50, as investors made the small-cap company into a focused bet on California's insurance crisis. Traders will be bracing to learn Mercury's exposure to one of the top 10 loss events in U.S. insurance history.

Some insurers have already reported what they lost in the fires that engulfed the Los Angeles neighborhoods of Pacific Palisades and Altadena. Wednesday, the Travelers Companies estimated their losses will reach $1.7 billion before tax, or $1.3 billion after tax. Chubb expects $1.5 billion in pretax losses. Allstate predicted after-tax losses of $1.1 billion, mostly in its current March quarter.

With about 4.5% of California's home insurance market, the much-smaller Mercury faces a double whammy from the fires. There will be billions in claims from Mercury's own policyholders. And California is expected to hit Mercury with an assessment to help replenish the soon-to-be exhausted coffers of the FAIR Plan -- the state's last-resort insurance plan, whose formal name is the Fair Access to Insurance Requirements Plan.

About 8% of Mercury free-trading shares have been sold short by pessimists betting that the hole left by the wildfires in the FAIR Plan will prove enormous. If the FAIR Plan's capital shortfall runs to the billions, then Mercury's share of replenishment could reach hundreds of millions of dollars.

Even the Street's lone bull on the stock, Raymond James analyst C. Gregory Peters, has predicted that Mercury could face more than $1.1 billion in claims from its customers, plus about $40 million in state assessments for every billion dollars in the FAIR Plan's shortfall.

Although Mercury's report on Wednesday will present its result for the December quarter, which predated the Los Angeles wildfires, investors will be thinking about the March quarter. The Raymond James analyst currently predicts a cash-earnings loss of about $40 million for the March quarter, or 75 cents a share.

So Wednesday's earnings call surely touch upon Mercury's expectations for the FAIR Plan and California insurance regulation.

The wildfires punctuated a breakdown in the state's home insurance market, after years in which California's populist insurance Commissioner Ricardo Lara slow-walked the industry's requests for rate increases. Premiums in the state are about 40% lower than those in other climate-risky states like Florida, Louisiana, and Texas, according to the National Association of Insurance Commissioners.

As seven of the state's top dozen insurers stopped or restricted their sales of new policies, homeowners sought coverage under the FAIR Plan. Property insured by the plan swelled from $113 billion in value in 2019, to about $460 billion in September 2024.

The FAIR Plan says it is potentially exposed to claims of more than $4 billion in the area burned by the Pacific Palisades fire, and over $775 million in the Eaton area fire. While the plan notes that actual claims after a fire tend to average only a third of its potential loss exposure, the losses from January's fires will still exhaust FAIR's surplus cash.

The plan has reinsurance that covers up to $5.78 billion in losses. But there is a $900 million deductible before the FAIR Plan can tap that reinsurance. With only about $200 million of surplus cash on hand, according to its most recent disclosures, FAIR will need to come up with $700 million in capital before it can tap reinsurance. And even after that, FAIR's losses will have to be covered by the combined contributions of reinsurers, rate increases, and the industry.

"We think it's pretty likely that they're going to exceed their surplus levels and there will be an assessment," said Mario Rizzo, Allstate's president of property liability on that company's Feb. 6 earnings call.

Write to Bill Alpert at william.alpert@barrons.com

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February 11, 2025 12:02 ET (17:02 GMT)

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