Farmers QS accounts for almost $50 million of Zurich's LA wildfire loss estimate

By Rebecca Delaney

Feb 20 - (The Insurer) - The Farmers Exchanges quota share agreement with Farmers Re accounts for close to $50 million of Zurich’s expected $200 million pre-tax loss from the January 2025 California wildfires, with the remainder attributed to the firm’s commercial insurance segment.

Zurich disclosed the preliminary estimate on Thursday alongside its financial results for the 12 months ended December 31, 2024.

Farmers Exchanges had initially estimated a loss of $600 million from the Los Angeles wildfires, net of its per-occurrence reinsurance program and gross of tax and around $250mn of reinstatement premium.

Speaking on an analyst call following its results announcement, Zurich CFO Claudia Cordioli provided a breakdown of the group estimate.

“The way that the $200 million estimate is built, just shy of $50 million is coming from the quota share. It's 8% of the 30% cession of Farmers for 2025,” she explained.

“The rest is bottom up, but it’s obviously still a very preliminary estimate of the risk to the Zurich book. Most of it is coming through commercial activities and builders, which is the majority of our book in that area. We don't do retail business, private or high net worth in the U.S., so this is where the exposure comes from.”

Cordioli added that the Fair Plan assessment would have a "negligible" impact for Zurich as a group, while for Farmers the assessment was in line with its market share of 12%, although this does not impact the $600 million estimate net of the per-occurrence reinsurance program.

“The number is absolutely manageable, and for everything that we know now, it's fully absorbed by their reinsurance structure,” she added.

Also speaking on the analyst call, Zurich CEO Mario Greco said it remains too early to offer a precise indication as to whether the wildfires will prompt any pricing movements.

“It's way too early to do that. It's really not yet clear what's going to be the next filing for homeowners out of California,” he said.

“In the numbers that Farmers communicated, although this is a massive event and an incredible tragedy, the net impact for Farmers is manageable. The homeowner combined ratio of Farmers is still below 100%, even after this. So they will take price actions whenever the right moment will be, but they don't see (rightly so) reasons to discontinue anything.”

Cordioli continued that the insurance reforms introduced in California at the end of last year (after which Farmers Insurance resumed offering condominium, renters and umbrella lines in the state) have set the stage for more sustainable underwriting and pricing practices.

“It is important to remember that there has been a change in the regulatory approach at the end of last year that allows insurance companies in California to do underwriting and pricing on a technical basis, and reflect reinsurance costs in the pricing, which we believe are necessary steps to be sustainably operating pretty much in any state,” she said.

“This is something that is building the foundation of the underwriting for Farmers and on those conditions, obviously, pretty much any risk is insurable.”

Zurich’s U.S. catastrophe towers are set to renew on April 1, with the impact of the LA wildfires on reinsurance modelling yet to fully manifest.

“At 1.4, we're going to renew our U.S. cat, so we'll see if and what impact the wildfires will have,” said Cordioli.

“The interesting item in there is that the majority, potentially, of reinsurers have been modelling wildfires as a secondary peril. Now this event is getting the proportions of a hurricane or a major peril, it will be interesting to see if and how they consider that in the modelling going forward.”

She concluded: “We don't expect to make major changes to our reinsurance structure, but we've seen in the renewals at 1.1 that we were able to, in most instances, in large coverage keep the prices in a stable fashion.”