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Investing.com -- Shares of Mercury General (NYSE:MCY) declined 2.4% following a critical report from Wolfpack Research, which has taken a short position in the company. The report, released on Monday, alleges significant financial exposure for Mercury General’s California subsidiary due to claims from the recent LA wildfires, which it believes will exceed the company’s reinsurance coverage.
Wolfpack Research claims that Mercury General faces over $2 billion in losses from the Eaton (NYSE:ETN) and Palisades fires, based on an analysis of a detailed rate filing that outlines the number of homes and condominiums insured by the company in each California zip code. The report suggests that the insurer’s $1.3 billion reinsurance tower will be insufficient to cover these losses, potentially leaving the subsidiary with depleted capital.
The short seller also expressed skepticism regarding Mercury General’s management, criticizing their communication with investors and questioning the company’s assertion that the fires constitute separate occurrences for reinsurance purposes. According to Wolfpack, this is an unlikely scenario, as reinsurers are expected to treat the fires as a single event, which could lead to disputes over additional reinsurance coverage.
The report further speculates that without the anticipated reinsurance, Mercury General may face liquidity challenges in fulfilling its fire damage claims. Wolfpack Research anticipates possible outcomes such as the suspension of dividends, the need to raise additional capital, or other significant measures by the company in response to the crisis.
Mercury General has not yet publicly responded to the allegations made by Wolfpack Research. Investors appeared to react to the report with concern, as reflected in the stock’s downturn during Monday’s trading session. The implications of the report and the company’s financial position following the wildfires remain a point of focus for shareholders and market watchers alike.
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