A small but ostensibly stable California insurer is suddenly facing liquidation after suffering extensive losses from a devastating wildfire.
In just seven weeks, Merced Property & Casualty Co.'s surplus as regards to policyholders went from $17.1 million to negative $40 million due to the Camp Fire, which virtually destroyed the town of Paradise as it burned through 150,000 acres of Northern California.
Merced had written policies in the area affected by the blaze with an estimated $141.3 million in insured value. The company has incurred $56.8 million in losses and loss adjustments expenses after Oct. 31, as compared to just $1.7 million for the year up to that date.
The insurer's total assets of $23.2 million were dwarfed by the sudden shock of wildfire claims.
California Insurance Commissioner Dave Jones became aware of Merced's distressed finances on Nov. 16, when company representatives provided him with information that showed the insured losses related to its homeowners policies affected by the Camp Fire would make the insurer insolvent. After reviewing the company's financial records, Jones filed a petition to liquidate on Nov. 30. The regulator had concluded that the struggling company was indeed insolvent and determined that "further efforts to rehabilitate Merced would not be feasible."
Due to the historic nature of the wildfires that have plagued the Golden State this year, Jones ordered additional actuarial reviews of all California-domiciled insurers. The regulator said there were no reports of any other insurers in a situation similar to Merced's.
Merced is a small insurer; on an affiliated basis it ranked 215th by direct premiums written among all property and casualty insurers in California in 2017, according to S&P Global Market Intelligence data. Its $4.4 million of homeowners multiperil DPW ranked it 44th in the state, and accounted for roughly 0.06% of all such premiums in 2017.
Although small, Merced was seemingly strong. Prior to a Dec. 3 downgrade, the company had an A.M. Best financial strength rating of A- (Excellent) that was affirmed in August; it was well-capitalized, with a risk-based capital ratio of 1,662% in 2017 and a surplus of nearly $17.1 million as of Sept. 30; and it had a reinsurance agreement with one of the world's largest reinsurers.
Under its reinsurance treaty with Swiss Re AG, the latter would cover losses in excess of $150,000 up to $3.85 million for each of the company's property risks and $1.85 million for each liability risk. Automobile liability and personal auto physical damage were reinsured in excess of $75,000. Yet the median property value in Paradise was $257,400, according to Zillow, suggesting that Merced would have recouped only about 40% of a total loss on such a property.
Merced also had a catastrophe reinsurance agreement, under which Swiss Re effectively assumed just under 95% of a $10 million loss event. That was enough, according to Merced's most recent annual filing, to cover its estimated probable maximum loss attributable to a single loss event or occurrence.
A balance sheet included in the petition to liquidate reflected estimated reinsurance recoveries of $10,465,000 for losses related to the Camp Fire, equivalent to the $9,465,000 maximum payout on the catastrophe agreement, plus an additional $1 million. But that amounted to barely 15% of its gross losses incurred of more than $67.2 million.
Historically, Merced primarily focused on homeowners insurance, with roughly two-thirds of its direct premiums written falling into that category as of the end of the third quarter. In 2014 it had almost no exposure to private auto insurance, but that segment had since grown to more than a quarter of total business as determined by direct premiums written.
Fire and allied lines made up the third-biggest portion of the company's direct premiums written, at 8% as of September 2018.
Although "atypical storm activity" in the winter months of 2017, coupled with an expected increase in auto losses, caused claim levels in 2017 to double from the year prior, Merced said in a regulatory filing that it had a "positive outlook for 2018." But this prediction was made long before anyone knew that the year would bring the deadliest wildfire in California's history.
The Camp Fire started in Butte County on Nov. 8 and ultimately destroyed 13,696 single residences, 528 commercial buildings and 4,293 other minor structures. Butte County officials pegged the official death toll at 85 as of Dec. 3, with a further 11 people still unaccounted for.
Latest estimates from CoreLogic placed losses from the Camp Fire between $11 billion and $13 billion. Risk modeler RMS projected insured losses of $9 billion to $13 billion from the blaze and the Woolsey Fire in Southern California, while Moody's has said combined insured losses from the two fires could reach $15 billion.