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Mercury General Expects $253M Loss From California Wildfires

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Mercury General Corporation MCY has announced estimated pre-tax gross catastrophe loss of $253 million stemming from Camp Fire and Woolsey Fire. The insurer’s fourth-quarter results will reflect these losses.

The Zacks Rank #1 (Strong Buy) insurer projects gross loss from Camp Fire in Northern California to be $207 million and from Woolsey Fire in Southern California to be about $46 million.

Mercury General anticipates pre-tax total loss, net of reinsurance benefits, to be about $37 million. This constitutes $20 million of initial reinsurance retention, $10.5 million of retention from the first layer of reinstated reinsurance limit and $6.5 million retention for Camp Fire.

Being a property and casualty insurer, Mercury General is vulnerable to natural disasters inducing volatility in underwriting results. In the last reported quarter, the company incurred net catastrophe losses of $13 million from California Carr fire, though combined ratio, a measure of underwriting profitability, improved 370 basis points. In fact, operating earnings per share in the third quarter surged 85% year over year largely on improvement in the combined ratio coupled with higher investment income and a lower corporate tax rate. The company has been increasing rates in most states, which, in turn, is driving improvement in combined ratio. Shares of Mercury General have gained 3.4% year to date, outperforming the industry’s increase of 3%.


Apart from California wildfire, Hurricane Michael is also expected to take a toll on insurers in the fourth quarter. Mercury General estimates losses from hurricane Michael in the range of $4 to $8 million. The company’s catastrophe reinsurance treaty provides for $205 million of coverage in excess of $10 million retention. The insurer expects combined ratio in the fourth quarter to be higher than other quarters of the year, given increased loss frequency and higher severities.

Insurer RLI Corp. RLI estimates cat loss between $22 million and $27 million, net of reinsurance. AXIS Capital Holdings Limited AXS expects preliminary cat loss between $100 million and $120 million, net of estimated recoveries from reinsurance and retrocessional covers and including the impact of estimated reinstatement premiums for fourth-quarter 2018.

Per preliminary estimates from Moody’s released in Insurance Journal, losses from the ongoing fires in Northern and Southern California could hover around $6.8 billion, lower than $12.5 billion in insured losses from last year’s wildfires. In its recent release, CoreLogic estimated total losses from Camp Fire in the $11-$13 billion range while loss from Woolsey Fire is projected in the $4-$6 billion range.

The Zacks Consensus Estimate for the fourth quarter is currently pegged at 74 cents, indicating an increase of 393% on 7.6% higher revenues. However, we expect the estimates to move south once analysts start incorporating loss estimates into their numbers.

A Stock to Consider

Investors interested in the property and casualty space can look at Berkshire Hathaway Inc. BRK.B. It engages primarily in insurance along with freight rail transportation and utility businesses.  The company delivered average positive surprise of 13.66% in the last three quarters and sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

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