Mercury expects reinsurance rates to increase as it seeks more limits at July ’25 renewal

California-based insurer Mercury General expects to purchase more catastrophe reinsurance protection at its July 2025 renewal and anticipates the recent approval for a 12% rate increase in its California Homeowners business to help offset an expected rise in reinsurance expenditure.

For 2024-2025, Mercury increased its total reinsurance limit from $1.111 billion to $1.29 billion, with total annual premiums on the catastrophe treaty of approximately $105 million.

Soon after the outbreak of the most expensive wildfire event in US history, Mercury warned that it expected its losses to exceed the $150 million retention of its $1.29 billion cat reinsurance programme.

As we’ve discussed previously, the insurer expects gross losses from the January 2025 wildfires of between $1.6 billion to $2 billion, and net losses of between $155 million and $325 million, which is based on the size of the gross loss, subrogation recoverability for the Eaton fire, and whether the company decides to have the wildfires be one or two events for reinsurance purposes.

Ultimately, Mercury believes that the Los Angeles wildfires will be an earnings event rather than a capital event, primarily due to its reinsurance coverage, option to classify the fires as one or two events, the potential for subrogation – which the firm has said it will aggressively pursue – and also its favourable underlying results.

Nevertheless, as Mercury continues to monitor and manage its catastrophe exposure from wildfires in California and other catastrophes, the carrier expects to again lift its level of reinsurance limit.

“When we renew our reinsurance treaty in July 2025, we expect to increase the limits we purchase, but also anticipate our reinsurance rates and current retention of $150 million to increase,” said the insurer in its 2024 annual report.

“Our future view of wildfire risk will factor in the Wildfires and related updates to catastrophe models, availability and pricing of reinsurance, ability to obtain rates in a timely and sufficient manner to support writing homeowners business, risk acceptability for individual risks, risk tolerance for concentrations of risk and our exposure to the FAIR PLAN. We will learn from these Wildfires and make the necessary adjustments. The California Insurance Commissioner’s Sustainable Insurance Strategy, which among other things, allows the use of catastrophe models and the cost of reinsurance in pricing is a good step towards improving the California homeowners market,” continued the firm.

Importantly, Mercury was recently approved for a 12% rate increase in its California Homeowners business line, which the firm said “will help offset an expected increase in reinsurance costs.”

Re/insurance broker reports discussing the April 1st, 2025, renewals, reveal a continuation of the 1.1 trend, for the most part, characterised by overall, risk-adjusted rate softening across property and property cat lines. However, these renewals were heavily focused on Asia, notably Japan, and the wildfires in California had little impact although were part of discussions.

But at the US-focused mid-year reinsurance renewals, there’s an expectation that the wildfires will lead to higher rates for the risk in California, and potentially limit any softening in other parts of the property cat market.

So, it’s not too surprising that Mercury expects both the cost of reinsurance and its retention to rise at its July renewal, given the size of the wildfires and current industry loss estimate of up to $50 billion.

It’s also worth highlighting that in its annual letter Mercury reiterated that it may also need to buy more reinsurance to cover the stub period to its next renewal.

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