By Michael Loney

Feb 11 - (The Insurer) - Mercury General has revealed its gross loss from the Los Angeles wildfires could be as high as $2bn and estimated its net loss could reach $325mn, with the carrier also reporting an improved combined ratio of 91.4 percent for the fourth quarter of last year.

Mercury General on Tuesday said that it is currently estimating gross catastrophe losses from the Los Angeles wildfires before its share of California Fair Plan losses in the range of $1.6bn to $2.0bn and net catastrophe losses before taxes in the range of $155mn to $325mn.

“The range in net catastrophe losses from the wildfires is primarily based on the size of the gross loss, subrogation recoverability for the Eaton fire, and whether we choose to have the Wildfires be one or two events,” the company said.

Mercury General estimates that 55-60 percent of the losses are from Palisades and 40-45 percent are from Eaton. It expects underlying first-quarter 2025 results to partially offset the net catastrophe losses from the wildfires.

The Los Angeles-based company’s exposure to the wildfires has been the source of much speculation.

This included Raymond James analysts predicting in late January that Mercury General’s gross losses from the Los Angeles-area wildfires could range between $1.1bn and $1.7bn and be the fourth-largest among publicly traded firms.

The disclosure follows other major carriers estimating losses from the wildfires.

Travelers on Monday estimated its net losses at $1.7bn. Travelers’ corporate cat XoL reinsurance treaty for 2025 has a $4bn retention and is thus unlikely to have been triggered by the event. However, the carrier has a number of other cat reinsurance agreements in place.

Other significant loss estimates issued so far include Chubb estimating its net losses at $1.5bn and Allstate expecting a net loss of around $1.1bn after reinsurance recoveries of around $900mn.

New York-listed Mercury General’s share price has been trading down since the wildfires started. It closed at $50.09 on Tuesday, down 23.8 percent since the turn of the year.

However, the share price was trading up around 16 percent in after hours trading as of 5.30pm ET following the wildfires disclosure.

$1.29bn limits on a per occurrence basis after $150mn retention

Mercury General said that its catastrophe reinsurance program provides $1.29bn of limits on a per occurrence basis after covered catastrophe losses exceed the $150mn retention.

It also has up to $20mn of coverage on a property excess of loss reinsurance treaty available to offset losses exceeding $5mn per property that attaches prior to the catastrophe limits, and the company expects to use $10mn to $20mn of those limits for wildfire claims.

On the catastrophe reinsurance program, 1 percent of the reinsurance limit of the $650mn xs $650mn coverage layer was placed as parametric coverage that pays out based on industry insured values in pre-determined grids within the fire footprint and the company's participation percentage within that grid.

Mercury General has determined that this portion of the reinsurance will not be eligible for recovery, and as such, $6.5mn of the $1.29bn of total limits does not qualify for the Eaton or Palisades fires.

The company is engaged with legal counsel in the pursuit of subrogation, particularly on the Eaton fire. “In several previous wildfire events caused by utility company equipment, we sold our subrogation rights, but we have not determined whether we will do so with the Eaton event,” it said.

Mercury General’s reinsurance allows for its share of Fair Plan catastrophe losses to be included as reinsured losses. In addition, the California Department of Insurance allows for recoupment of a portion of the Fair Plan assessments via a surcharge to policyholders.

“Between the coverage afforded by reinsurance and the ability to recoup a portion of the assessment, the company does not expect the Fair plan assessment to materially add to the net wildfire losses from these events,” it said.

To the extent that wildfire losses are reinsured, the reinsurance program calls for reinstatements of limits to cover future events. If the full $1.29bn limits are used up, then the total reinstatement premium would be $101mn.

Reinstatement premiums will be charged evenly over the first and second quarters of 2025.

Mercury General yet to decide whether wildfires two separate events

The company's catastrophe reinsurance treaty allows for the combining of events that occur within a 150-mile radius as a single occurrence. Additionally, if each individual event is classified as its own catastrophic event by the Property Claims Service, each event can be considered a separate occurrence.

“In the case of the Palisades and Eaton wildfires, the PCS has designated each as a separate event. The company has not yet determined if it will consider the wildfires as two separate events,” it said.

Under a single-occurrence scenario, it will retain the first $150mn in losses and up to $6.5mn of losses for parametric coverage not eligible for reinsurance coverage. Gross losses in excess of $1.44bn ($150mn retention plus $1.29bn reinsurance limit), if any, will be retained by the company. In addition, the company is responsible for up to $101mn in reinstatement premiums.

Under a two-event scenario, the company may elect to use reinsurance limits of up to $1.29bn for the first event and reinstated limits up to $1.24bn for the second event.

In this scenario, the company would be responsible for the first and second event retentions of $150mn each, up to $6.5mn of losses for parametric coverage not eligible for reinsurance coverage for the first event and co-participation in losses for the second event equal to 8 percent of losses in excess of $650mn up to $1.30bn. In addition, the company would be responsible for up to $101mn in reinstatement premiums.

“The Company may seek to acquire additional reinsurance if reinstated limits are used by the second event, for the stub period ending on June 30, 2025, the expiration date of the current contract,” it said.

Mercury General as of 7 February had paid out $800mn related to the wildfires, primarily for contents, dwelling limits and living expenses. It has sent an initial billing to its reinsurers and has collected $500mn to date.

The company said it has over $1bn in cash and short-term investments on-hand, sufficient liquidity to handle the increased demand for cash. It does not expect the impact from this event to result in any defaults under its revolving credit debt covenants.

Mercury General noted that since the wildfires started Moody’s has downgraded its financial strength rating from A2 to A3 and senior debt rating from Baa2 to Baa3, while Fitch placed its financial strength rating of A- and senior debt rating at BBB- on negative outlook.

“The negative outlook from both agencies generally reflects the uncertainty around future reinsurance costs, potential for additional significant catastrophe events and the condition of the overall California homeowners insurance market,” Mercury General noted.

The company said that it “is currently reassessing its view of California wildfire risk”, which will factor in the recent wildfires and related updates to catastrophe models, availability and pricing of reinsurance, ability to obtain rates in a timely and sufficient manner to support writing homeowners business, risk acceptability for individual risks and risk tolerance for concentrations of risk.

Q4 combined ratio improves 7.2 pts to 91.4%

Mercury General announced the wildfire loss details along with its fourth quarter results, which included operating income of $153.9mn, which was up from $63.6mn in the fourth quarter of 2023.

The $2.78 operating income per diluted share beat the $1.12 consensus estimate of two analysts tracked by MarketWatch, and was up from $1.15 in the prior-year period.

The combined ratio improved to 91.4 percent from 98.6 percent.

Catastrophe losses net of reinsurance were $41.0mn in the quarter, up from $16.0mn in Q4 2023.

Net premiums written increased 16.1 percent to $1.31bn in the quarter, from $1.13bn in the prior-year period.

The combined ratio for the full year 2024 was 96.0 percent, an improvement from 105.4 percent in 2023.

Net premiums written increased 20.5 percent to $5.38bn, from $4.46bn in 2023.

The company recorded catastrophe losses net of reinsurance of approximately $277mn in 2024, up from $239mn in 2023. No reinsurance benefits were used for these losses.