By James Thaler

Jan 24 - Raymond James analysts predict that Mercury General’s gross losses tied to the Los Angeles-area wildfires could range between $1.1bn and $1.7bn and be the fourth-largest among publicly-traded firms.

In a research note issued by analyst Greg Peters late Thursday evening, the investment banking firm highlighted the fact that Mercury shares have traded down by around 25 percent since the start of the year and that Fitch put the insurer’s financial strength ratings on negative outlook. Raymond James maintains an “outperform” rating on Mercury's stock.

“While there is still a lot of uncertainty, and potentially even more fire risk, we believe the combination of underlying profitability excluding catastrophe losses, coupled with a conservative risk profile and an emerging hard market for residential homeowners insurance in California, should help [Mercury’s] long-term market position,” the note said.

On Monday Mercury announced that it is exploring the potential for the California wildfires to be viewed as two separate reinsurance events considering the different Property Claims Service (PCS) designations of the Palisades and Eaton fires.

Mercury had previously disclosed that it expects to exhaust the $150mn retention on its property catastrophe excess of loss reinsurance program, which provides first-event cover up to $1.29bn in losses.

If the insurer were to treat multiple fires as separate occurrences, Mercury would take an additional $150mn retention and pay $101mn in reinstatement premium, assuming one of the events identified exhausts the $1.29bn of limit for its first-event cover.

Mercury’s reinsurance treaty also carries a $52mn co-participation for losses in excess of $650mn for the second event.

“Under this scenario, we would also expect the company to pursue third event coverage costing at least $100mn,” Raymond James analysts said.

They estimate Mercury could incur $1.1bn to 1.7bn in gross losses from the California wildfires, as well as a possible assessment for every billion dollar shortfall in the California FAIR Plan that could amount to around $37.9mn.

They also noted that in the event of a $4bn shortfall with the FAIR Plan, they estimate that Mercury could incur gross losses of $1.3bn with a potential policyholder assessment recoverable of $132mn.

Raymond James is maintaining its current one-event operating EPS estimates of $0.75 per share loss for the first quarter in 2025 and full-year operating EPS $3.45 in 2025.

In the event the wildfires are treated as two events, Raymond James is predicting Mercury’s first quarter 2025 loss will jump to $4.50 per share and $0.30 per share for the year.

The analysts are maintaining their 2026 operating EPS estimate at $6.50, while also maintaining $70 per share price target, which is based on around 1.8x their 2025 book value per share estimate for the company.

They also noted that Mercury’s stock is currently trading at 1.5x recent based on recent book value per share disclosures, which represents a discount compared from the 3.9x price-to-book value of Mercury’s peers.

“We believe a discount to the peer group is justified considering the uncertainty of the company’s exposure to the California wildfires,” the analysts concluded.

Mercury’s shares were essentially flat in midday trading on Friday at $49.97 per share, down from $65.75 where they were to start the year.