Moody’s downgrades Mercury’s ratings on California nat cat exposure

Moody’s has downgraded the ratings of California-based Mercury General, citing the firm’s concentration in the state and significant exposure to natural catastrophes.

Moody’s said, “We view this as an environmental risk as part of our environmental, social, and governance considerations. As the frequency and severity of natural catastrophes increase over time, Mercury General and its peers could find mitigating this risk more challenging.”

Dilated, the rating agency has downgraded Mercury General’s senior unsecured debt rating to Baa3 from Baa2 and the insurance financial strength (IFS) ratings of its principal insurance subsidiaries—Mercury Casualty Company, Mercury Insurance Company, and California Automobile Insurance Company—to A3 from A2.

According to Moody’s, the rating outlook for these companies is negative. This reflects the uncertainty surrounding Mercury General’s ultimate losses from the Los Angeles wildfires and their impact on its profitability, capital, and prospective business strategy.

“Mercury General maintains a high-quality reinsurance panel and has total catastrophe reinsurance limits of $1.29 billion on a per-occurrence basis, subject to a retention of $150 million. The company expects that losses from the Los Angeles wildfires will exceed its retention and trigger its reinsurance cover. The reinsurance program includes a reinstatement premium of $101 million to address ongoing exposures,” the rating agency explained.

Moody’s continued, “In the medium term, we expect that Mercury General will reassess its overall catastrophe risk management, including its wildfire risk, in a shifting California insurance regulatory environment.

“The California Department of Insurance recently enacted new legislation allowing insurers to include catastrophe-modelled losses and reinsurance costs to inform primary rates, in exchange for writing a certain portion of business in high-risk areas.

“It will take time to determine how this legislation and the pending wildfire losses will affect the California homeowners insurance market, including potential assessments from the California FAIR Plan.”

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