By Chris Munro

Feb 13 - (The Insurer) - Mercury General CFO Ted Stalick has said the insurer believes it could recover up to 70 percent of its California wildfire exposures from utility companies through subrogation, which would make it less likely to claim as two events under its reinsurance tower.

Shares in Mercury General closed 9.3 percent higher at $54.74 on Wednesday after it announced Q4 earnings and management commentary that included Stalick declaring that it “will aggressively pursue subrogation” from utility companies for their potential role in sparking the California wildfires.

Los Angeles, California-based Mercury General’s stock continued its rebound on Thursday and was trading 3 percent higher at $56.32 at 11.20am ET.

As this publication previously reported, the company’s combined ratio for the fourth quarter improved by 7.2 percentage points year on year to 91.4 percent, while its net premiums written grew by 16.1 percent to $1.31bn

Mercury General in its earnings release also provided an update on its exposure to the wildfires that tore through parts of Southern California last month.

The company’s current estimate for gross catastrophe losses from the fires before its share of California Fair Plan losses is in the range of $1.6bn to $2.0bn, while its net catastrophe losses before taxes stand at $155mn to $325mn.

On a call with analysts to discuss the results, Mercury General’s CEO Gabriel Tirador said the range of net catastrophe losses was determined based on various assumptions for gross losses, estimated potential subrogation and levels of reinsurance utilisation.

The company will also absorb a reinstatement premium of between $80mn to $101mn, which will be prorated between the first and second quarter of 2025.

Alongside the losses from its own operations, Mercury General will also be on the hook for its share of the recently announced $1bn Fair Plan assessment.

“The company's participation rate in the Fair Plan is approximately 5 percent,” said Tirador.

“Accordingly, we expect about a $50mn assessment from the Fair Plan. Fifty percent of this assessment is recoupable via a temporary supplemental fee to policyholders. Fair Plan losses can be added to reinsurance,” Tirador noted.

The insurer expects that its underlying first quarter 2025 results will partially offset the net catastrophe losses from the wildfires.

Mercury General estimates that 55 to 60 percent of the losses it has incurred are from the Palisades Fire and 40 to 45 percent are from the Eaton Fire.

Two events “less likely”

While Property Claim Services has designated the Palisades and Eaton fires as separate events, Stalick said Mercury General has not yet decided whether it will consider them as two.

“The company's catastrophic reinsurance treaty allows for the combining of events that occur within 150-mile radius as a single occurrence.

“Additionally, if each individual event is classified as its own catastrophic event by the Property Claim Services, PCS, a unit of the Insurance Services Office, each event can be considered a separate occurrence,” explained Stalick.

“The company has not yet determined if it will consider the wildfires as two separate events.

“As more information becomes available to the company, including any subrogation potential, the company will evaluate whether it will consider the wildfires as two separate events,” the CFO said.

Mercury General said it believes there is “strong video and other evidence” that shows utility company equipment caused the Eaton Fire.

“We estimate the range of recovery to be in the 40 percent to 70 percent range. Subrogation at these levels makes it less likely we will consider the Palisades and Eaton fire as two separate events,” he said.

As Stalick noted, following several previous wildfire events that were sparked by utility company equipment, Mercury General sold its subrogation rights.

“We have not yet determined whether to do with the Eaton Fire,” Stalick declared. “There is active interest in purchasing the company’s subrogation rights,” he added.

According to Stalick, since 2017 there have been 15 wildfires caused by utilities and where recoveries were made by insurance companies.

“The recoveries on those events range from around 55 percent to 70 percent,” he said.

“So there's a well-established track record of utilities paying out substantial recoveries on previous wildfires.

“We do have a very active interest in Mercury selling our subrogation rights. Obviously, if you sell them, the amount is something less than what the ultimate recovery would be, and we are evaluating that at this point in time.

“There's very strong evidence that the Eaton Fire was caused by utility company equipment. There's video of the lines arcing and the fire starting at the bottom of the transmission tower, and we're going to aggressively pursue subrogation, especially for the Eaton event.”