AM Best Downgrades Ratings of Mercury in California, Wildfires a Factor

December 12, 2018

AM Best has downgraded the Financial Strength Rating (FSR) to A (Excellent) from A+ (Superior) and the Long-Term Issuer Credit Ratings (Long-Term ICR) to “a+” from “aa-” for the members of Los Angeles, Calif.-based Mercury Casualty Group.

The record wildfires in California the past two years may have been partially to blame. California Insurance Commissioner Dave Jones on Wednesday gave an official loss estimate of $9.05 billion for this year’s California wildfires, which include the Camp Fire in Northern California, and the Woolsey and Hill fires in Southern California.

AM Best has also downgraded the Long-Term ICR to “bbb+” from “a-” of the organization’s publicly traded ultimate parent, Mercury General Corp. [NYSE: MCY].

Shares of Mercury were trading up .18 cents on the NYSE on Wednesday.

AM Best additionally has downgraded the Long-Term Issue Credit Rating to “bbb+” from “a-” on MGC’s $375 million 4.4 percent senior unsecured notes due 2027. The outlook for all of these Credit Ratings (ratings) has been revised to stable from negative.

AM Best has affirmed the FSR of A- (Excellent) and the Long-Term ICRs of “a-” of the insurance entities within the American Mercury Insurance Group headquartered in Oklahoma City, Okla. The outlook of these ratings is stable.

The ratings of Mercury reflect the group’s balance sheet strength, which AM Best categorizes as very strong, as well as its strong operating performance, neutral business profile and appropriate enterprise risk management.

“The downgrade reflects the assessment of Mercury’s business profile in the neutral category,” AM Best stated. “While the organization benefits from its significant market share in private passenger auto and homeowners markets in its domicile of California with strong independent agency relationships, its continued heavy concentration in California also exposes it to substantial market volatility, catastrophe losses, legislative changes and judicial decisions.”

According to AM Best, this geographic concentration risk factor has gradually become more pronounced over the past several years and was underscored by its record fire losses in 2017 and 2018 and adverse auto bodily injury loss cost trends in California.

The strong balance sheet assessment reflects Mercury’s solid risk-adjusted capitalization, strong liquidity measures, generally conservative investment portfolio and the financial flexibility afforded it via its publicly traded parent, MGC, according to AM Best.

The positive aspects are offset partially by recent adverse prior year reserve development and net leverage ratios that exceed the composite.

“While Mercury’s current reinsurance program has thus far demonstrated sufficient capacity to absorb the fire-related events, Mercury remains somewhat exposed to additional catastrophe events through the end of June 2019, given that the first layer of reinstated limit on its reinsurance treaty has been exhausted,” AM Best stated. “The strong operating performance reflects the long-term stability in Mercury’s underwriting and operating results, solid expense management and total returns that compare favorably with the composite.”

ERM is considered appropriate for an organization of Mercury’s profile and market position, according to AM Best.

The ratings of AMI reflect the group’s balance sheet strength, which AM Best categorizes as very strong, as well as its adequate operating performance, limited business profile and appropriate ERM.

The FSR has been downgraded to A (Excellent) from A+ (Superior) and the Long-Term ICRs downgraded to “a+” from “aa-” with all outlooks revised to stable from negative for the following members of Mercury Casualty Group:

  • Mercury Casualty Co.
  • Mercury Insurance Company
  • California Automobile Insurance Company
  • Mercury Indemnity Company of Georgia
  • Mercury Insurance Company of Georgia
  • Mercury Insurance Company of Illinois
  • Mercury National Insurance Company
  • Mercury Insurance Company of Florida
  • Mercury Indemnity Company of America

The FSR of A- (Excellent) and the Long-Term ICRs of “a-” have been affirmed with stable outlooks for the following members of American Mercury Insurance Group:

  • American Mercury Insurance Co.
  • American Mercury Lloyds Insurance Co.
  • Mercury County Mutual Insurance Co.

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