Mercury, an insurer with a meaningful exposure to claims from the Los Angeles, California wildfires, said it estimates gross losses of $1.6 billion to $2 billion, but while significant reinsurance recoveries will be made the company noted that a parametric reinsurance arrangement is not expected to pay out.Previously, Mercury had explained that .Its reinsurance program provides for $1.29 billion of coverage limits, on a per-occurrence basis, after covered catastrophe losses exceed that retention level.At that time, , which it believed it would be allowed to do and would affect recoveries made.

Now, Mercury has provided its first estimate for losses from the wildfires, saying that gross catastrophe losses before any share of FAIR plan losses, are expected to fall in a range of $1.6 billion to $2.0 billion, while net catastrophe losses before taxes from the wildfires are estimated at $155 million to $325 million.“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,” Mercury explained.Mercury reiterated that it has $1.29 billion of catastrophe reinsurance limits available per-occurrence, after the $150 million retention.

The insurer also said it has up to $20 million of property excess of loss reinsurance coverage available to offset losses exceeding $5 million per property and this attaches before the main catastrophe reinsurance program limits.Mercury said it expects to use roughly $10 million to $20 million of those additional limits for wildfire claims.However, while significant reinsurance recoveries will support Mercury’s losses from the LA wildfires, the insurer also said it has a parametric portion of its main catastrophe tower that is not expected to respond.

“On the catastrophe reinsurance program, one percent of the reinsurance limit of the $650 million xs $650 million 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.  The Company has determined that this portion of the reinsurance will not be eligible for recovery, and as such, $6.5 million of the $1,290 million of total limits does not qualify for the Eaton or Palisades fires,” Mercury explained.Which means the $6.5 million of parametric reinsurance limits will be retained, whether Mercury opts to classify the fires as single or multiple events, on which it said it has still not yet determined which way to make its recoveries.The insurer further explained how the single or separate events might affect its recoveries, retentions and reinstatements, “Under a single-occurrence scenario, the Company will retain the first $150 million in losses and up to $6.5 million of losses for parametric coverage not eligible for reinsurance coverage.

Gross losses in excess of $1,440 million ($150 million retention plus $1,290 million reinsurance limit), if any, will be retained by the Company.In addition, the Company is responsible for up to $101 million in reinstatement premiums.Under a two-event scenario, the Company may elect to use reinsurance limits of up to $1,290 million for the first event and reinstated limits up to $1,238 million for the second event.

In this scenario, the Company would be responsible for the first and second event retentions of $150 million each, up to $6.5 million 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% of losses in excess of $650 million up to $1,300 million.In addition, the Company would be responsible for up to $101 million 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.” Mercury said that it has now paid out $800 million for claims related to the wildfires, primarily for contents, dwelling limits and living expenses.

Mercury also said it has sent an initial billing to its reinsurers and has collected $500 million to date, providing support for the claims payments made.Mercury also said it is “currently reassessing its view of California wildfire risk”, factoring in catastrophe model updates, the availability and pricing of reinsurance, its ability to obtain rates in “a timely and sufficient manner to support writing homeowners business”, as well as the risk acceptability for individual risks and its risk tolerance for risk concentrations.Recall that, Mercury has been a beneficiary to a number of the of private catastrophe bonds.

that provides Mercury with collateralized catastrophe reinsurance protection against wildfire losses in California.That Randolph Re 2024-1 cat bond had been marked down roughly 11% at the mid of bid and offer, soon after the fires, but was marked further down in later pricing sheets.We’re told that at the end of January the Randolph Re notes were marked down for bids as low as 25 cents on the dollar.

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