By Michael Loney

Jan 24 - Fitch Ratings revised its outlook to negative from stable on the A (strong) insurer financial strength ratings of Mercury General's property casualty operating subsidiaries, in response to the potential for further catastrophes to follow the Los Angeles wildfires.

The rating agency also revised the outlook to negative on Los Angeles-based Mercury’s long-term issuer default rating at 'BBB' and senior debt of 'BBB-'.

Fitch affirmed all the ratings reflecting its expectation that Mercury's credit profile will withstand the impact of the Eaton and Palisades fires.

“The negative outlook reflects the potential for credit deterioration and financial pressure from a third large catastrophe event or an aggregation of smaller weather-related claims,” Fitch said. “Additionally, there is some uncertainty on the reinsurance program capacity that would be available should another event occur.”

Fitch said that the Los Angeles wildfires will result in the largest wildfire loss in a season by a factor of 3 to 4.

“While Fitch believes Mercury's financial position can withstand the losses from the Palisades and Eaton fires, the potential for other catastrophes provides near-term uncertainty and is driving the negative outlook,” it said.

Fitch anticipates that net wildfire losses for Q1 2025 will add 6-10 percentage points on Mercury’s combined ratio, which even at the high end is within previously established rating sensitivities.

But Fitch warned “it leaves little room for adverse deviations from other potential weather events in the near term”.

“Favorably, the company has been able to obtain rate increases, which have helped [to stabilise] results and added a cushion to absorb these wildfire losses,” it added.

Fitch also highlighted that Mercury has not fully exhausted its reinsurance tower capacity, but said the three wildfires have placed it in a higher risk position in the near term regarding potential catastrophe events.

Mercury renews its reinsurance program effective 1 July 2025, with Fifth expecting the unprecedented wildfire losses to date to likely cause reinsurance costs to tighten, making mitigation efforts for catastrophe risk more expensive and reducing profitability.

“While the company does write in other states, notably Texas and Florida, the combined market share of other geographies leaves it over-exposed to changes in the California market,” it said.

California is the largest market for Mercury, accounting for approximately 79 percent of net written premiums in 2024.

In addition, Fitch believes the California Fair Access to Insurance Requirements $(FAIR.UK)$ plan – of which Mercury is a member – has inadequate capital levels and will impose some level of assessment on its members to help fund current losses and rebuild capital levels.

“Favourably, the company's assessment is included under its reinsurance program and additional assessments can be passed along to consumers pending regulatory approval,” it said.

Fitch will evaluate whether Mercury’s actual results vary considerably from current forecasts, particularly additional costs in reinsurance for both the remaining 2025 calendar year along with future reinsurance costs, as well as losses above reinsurance limits and any structural changes to the California insurance market given the company's concentration to the state.

Factors that could lead to a downgrade include a full-year 2025 combined ratio above 110 percent, financial leverage sustained above 32 percent, and inability to purchase reinsurance at levels consistent with prior year,

Moody's downgrades Mercury to A3

On 17 January Moody’s downgraded the insurance financial strength ratings of Mercury’s principal insurance subsidiaries on – Mercury Casualty Company, Mercury Insurance Company, and California Automobile Insurance Company – to A3 from A2.

Moody’s also downgraded the senior unsecured debt rating of Mercury General Corporation to Baa3 from Baa2.

“The ratings downgrade reflects Mercury General’s geographic concentration in California and its meaningful exposure to natural catastrophes. 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,” Moody’s said.

The Moody’s ratings have negative outlooks, reflecting uncertainty around Mercury’s ultimate losses from the Los Angeles wildfires and the impact on its profitability, capital and prospective business strategy.

Moody’s noted that Mercury General maintains a high-quality reinsurance panel and has total catastrophe reinsurance limits of $1.29bn on a per-occurrence basis, subject to a retention of $150mn.

“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 said.

Mercury General’s credit profile reflects the company's strong market presence as the eighth-largest personal auto insurer in California along with its steadily improving auto profitability, relatively low expense ratio and high-quality fixed income investment portfolio.

The company distributes its insurance policies primarily through independent agents.

“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,” Moody's said.

Mercury also holds an A (Excellent) AM Best rating.