Mercury General’s Reinsurance Strategy for 2025

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Strategic Reinsurance Expansion

Mercury General, a prominent insurer based in California, has outlined its strategy to bolster catastrophe reinsurance protection during its July 2025 renewal. This move follows the significant regulatory approval for a 12% increase in rates within its California Homeowners segment, aimed at counteracting the anticipated rise in reinsurance expenditure.

Reinsurance Adjustments and Financial Impact

For the policy period 2024-2025, Mercury General has enhanced its total reinsurance limit from $1.111 billion to $1.29 billion, incurring annual premiums on its catastrophe treaty to the tune of approximately $105 million. In light of the catastrophic wildfire event, the most costly in US history, Mercury forewarned of potential losses surpassing the $150 million threshold of its extensive $1.29 billion catastrophe reinsurance program.

Projected Losses from Wildfires

Mercury estimates gross losses stemming from the January 2025 wildfires to be between $1.6 billion and $2 billion, with net losses projected between $155 million and $325 million. These projections depend on the gross loss magnitude, subrogation recoverability, particularly for the Eaton fire, and whether the wildfires are classified as one or two events for reinsurance purposes.

Reinsurance and Risk Management Strategy

Mercury remains optimistic that the Los Angeles wildfires will affect earnings rather than capital, largely due to its comprehensive reinsurance coverage, flexibility in event classification, potential subrogation, and favorable underlying performance. The insurer plans to diligently monitor and manage its exposure to wildfires in California alongside other catastrophes, indicating a potential increase in reinsurance limits.

Future Reinsurance Considerations

As Mercury prepares for the July 2025 reinsurance treaty renewal, it anticipates an increase in both the limits and cost, as well as the current retention level of $150 million. The company’s future wildfire risk assessments will integrate lessons from these events, enhancements to catastrophe models, reinsurance market dynamics, and regulatory frameworks like the California Insurance Commissioner’s Sustainable Insurance Strategy.

Market Trends Influencing Reinsurance

The recent April 1st, 2025, renewals revealed a continuation of the January trend, showcasing a general softening in risk-adjusted rates across property and catastrophe lines, primarily focused on Asia. However, the California wildfires, despite being a discussion point, had minimal immediate impact. Looking ahead to the mid-year US-focused renewals, it’s expected that these wildfires will drive higher rates in California, potentially stabilizing any rate softening elsewhere in the property catastrophe market.