Mercury General’s reinsurance to cover $216m of its wildfire losses

Multi-line U.S. primary home and auto insurer Mercury General Corporation is set to pass as much as $216 million of its losses from the recent Camp and Woolsey wildfires in California to its reinsurance partners, leaving the firm retaining a net loss of just $37 million.

Mercury General said that it expects pre-tax total gross losses of $207 million from the Camp Fire in Northern California and $46 million from the Woolsey Fire in Southern California.

Net of reinsurance the firm only expects to retain a pre-tax total loss of approximately $37 million.

It’s the first primary insurer estimate of losses from the recent Californian wildfires, which are thought to have caused up to $19 billion of property damages, with the insurance and reinsurance industry expecting up to $13 billion in losses as a result.

Mercury General’s net loss represents its $10 million retention for each of the wildfire events, plus $10.5 million of retention from the first layer of reinstated reinsurance limit previously used up (likely due to the Carr wildfire), and another $6.5 million retained after the Camp wildfire loss blew through the top of the insurers 100% reinsured coverage layer.

Having blown through the top of that 100% coverage layer of reinsurance, which stretched to $200 million for the Camp fire, the insurer shares its losses on a basis of 5% coverage by the reinsurers and 95% retained.

Additionally, Mercury General said that it has exhausted the reinstated limit on the first layer ($30 million limit in excess of $10 million retention) of its reinsurance treaty, and a second reinstatement is not available.

As a result, should the Woolsey fire loss creep higher than the currently estimated $46 million then the insurer will have 100% reinsurance coverage up to $200 million and 5% coverage above $200 million up to $500 million of gross losses, the company said.

For the Camp wildfire, having already blown through the $200 million layer where it is 100% reinsured, any creep in that estimate will only see the firm able to claim back 5% of its losses up to $500 million from its reinsurer.

Any further catastrophe events occurring up until the end of June 2019 will now see Mercury General with $54 million of reinsurance protection for losses above $40 million up to $100 million, 100% of reinsurance protection for losses from $100 million up to $200 million and then 5% reinsurance coverage for losses between $200 million up to $500 million.

Of course we can’t be certain where the losses from Mercury General will fall, but there is a chance the firm has some collateralised participation in its reinsurance program from ILS funds.

Being the first sign of losses that will flow to the reinsurance market, in this insurers case at least it seems the reinsurance counterparties are taking the larger share of its exposure to the recent wildfires.