By Bill Alpert

Mercury General told shareholders its losses from the California wildfires were manageable. The only ones unhappy with that news were short sellers.

The stock closed Wednesday at $54.74, up 9.3%.

The stock had slumped 25% after the fires to around $50 as investors made the small-cap company into a focused bet on California's insurance crisis. Ratings firms slapped its debt with a negative outlook.

Wednesday morning, Mercury's stock jumped as high as $62, as it told shareholders that its ultimate losses from the fires around Los Angeles would be much less than feared -- after contributions from reinsurance and the potential sale of its legal claims against Southern California Edison.

Other insurers have predicted large losses from the fires. The Travelers Companies estimated its losses will reach $1.3 billion after taxes. Allstate predicted after-tax losses of $1.1 billion. Mercury said Wednesday that its gross losses from the wildfire catastrophe will range from $1.6 billion to $2 billion. But after reinsurance, Mercury says, after-tax losses will be between $155 million to $325 million.

"We don't have any liquidity issues," CEO Gabe Tirador told the conference call listeners.

The stock bounced with relief and Raymond James bull Greg Peters raised his rating from Buy to Strong Buy.

Mercury's sanguine outlook didn't sit well with pessimists who have sold 10% of its shares short. Several were on the call and they challenged Mercury's loss estimate.

"Let's have an honest conversation here," demanded Dan David, from the oft-bearish Wolfpack Research. "Does the fire just burn around your properties and not Allstate, Travelers and Farmers. Are you underestimating?"

"I know you're upset because you shorted our stock," said CEO Tirador. "It is what it is."

Mercury said it has sufficient liquidity to handle the cash demands from the wildfire catastrophe. After paying out $800 million, so far, to wildfire victims, and billing $530 million to its reinsurers, Mercury has about $1 billion in cash and short-term investments.

CFO Ted Stalick concurred: "We are now past the largest part of the surge in demand for cash from this event."

Mercury faces a double whammy from the fires. There are the claims from its own policyholders. And then California will hit Mercury with an assessment to help replenish the soon-to-be exhausted coffers of the state's FAIR Plant, the last-resort insurance pool whose formal name is the Fair Access to Insurance Requirements Plan.

The FAIR Plan got state permission this week to assess $1 billion from the state's licensed insurers. With 5% of California's home insurance market, Mercury expects its FAIR Plan assessment will probably come to $50 million. But it is allowed to recoup half that amount, through add-on fees to policyholders, so the company says its FAIR Plan contribution won't materially add to the net wildfire losses from the LA fires.

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 have been 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 fires are forcing California insurance regulators to allow the industry to raise its rates.

"Do you believe that the California Department of Insurance now understands the need to allow insurers to take appropriate rate actions following the wildfires?" Raymond James analyst Peters asked on the Mercury call.

"I do," said CEO Tirador.

Meanwhile, 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. Hence, this week's plan to assess $1 billion from the state's licensed home insurers.

Wednesday's webcast by the company was actually to report on the December quarter's results. With two-thirds of revenue coming from car insurance, the results were solidly positive.

The quarter's operating profits of $2.78 a share blew past the $0.64 estimate of Greg Peters. Noting that the stock trades at 1.5-times book value, compared with 2.5-times for its insurance peers, the Raymond James analyst raised his price target on Mercury, from $70 to $80.

The conference call ended abruptly. As Wolfpack's Dan David barraged Mercury CEO Tirador with caustic questions, Tirador asked the operator to cut the line.

"Let's end this call," said the CEO. "That was interesting."

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

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February 12, 2025 16:54 ET (21:54 GMT)

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