AM Best goes negative on Mercury General but expects capital position to withstand wildfire hit

By David Bull

Feb 20 - (The Insurer) AM Best has revised the outlooks on Mercury General’s A financial strength and "a” long-term issuer credit ratings from stable to negative, but said that the carrier’s capital position is expected to withstand the impact of the California wildfires after its ultimate losses are determined.

The rating agency said it had revised the outlooks to negative because of uncertainty over the carrier’s net ultimate losses and its future reinsurance structure and costs following the California wildfires that started last month.

It noted that Mercury General has exposure to the Palisades and Eaton fires, with gross cat losses currently estimated at $1.6bn to $2.0bn before reinsurance, potential subrogation recoveries, Fair Plan assessments and recoupment of Fair Plan estimates.

AM Best highlighted the insurer’s in-force reinsurance program, which provides for cat limits of $1.29 billion on a per-occurrence basis with a retention of $150 million and reinstatement premiums of $101 million.

“The rating affirmations reflect AM Best’s expectation that Mercury’s capital position will withstand the impact of the wildfires after the company makes the full determination of its ultimate losses.

“The outlooks are expected to remain negative until such time that AM Best can with certainty establish the impact of the ultimate net losses from the California wildfires on Mercury’s capital, profitability, and future reinsurance costs,” said the rating agency in a statement.

As previously reported, Mercury General’s net and gross loss positions relating to the devastating wildfires that hit the Los Angeles area last month are subject to uncertainty as it assesses incoming claims and whether it will seek to claim as one event or two under its reinsurance tower.

On its earnings call last week the carrier’s CFO Ted Stalick said it believes it could recover up to 70 percent of its wildfire exposure from utility companies through subrogation, which would make it less likely to claim as two events under its cat treaty.

The company’s current estimate for gross catastrophe losses from the fires before its share of California Fair Plan losses is in the range of $1.6 billion to $2.0 billion, while its net catastrophe losses before taxes stand at $155 million to $325 million.

Mercury General’s CEO Gabriel Tirador told analysts on the call that the range of net catastrophe losses was determined based on various assumptions for gross losses, estimated potential subrogation and levels of reinsurance utilisation.

The company will also absorb a reinstatement premium of between $80 million and $101 million, which will be prorated between the first and second quarter of 2025.

Alongside the losses from its own operations, Mercury General will also be on the hook for its share of the recently announced $1 billion Fair Plan assessment.

“The company's participation rate in the Fair Plan is approximately 5 percent,” said Tirador.

“Accordingly, we expect about a $50 million assessment from the Fair Plan. Fifty percent of this assessment is recoupable via a temporary supplemental fee to policyholders. Fair Plan losses can be added to reinsurance,” Tirador noted.

The insurer expects that its underlying first quarter 2025 results will partially offset the net catastrophe losses from the wildfires.

Mercury General estimates that 55% to 60% of the losses it has incurred are from the Palisades Fire and 40% to 45% are from the Eaton Fire.

TWO EVENTS 'LESS LIKELY'

While Property Claim Services has designated the Palisades and Eaton fires as separate events, Stalick said Mercury General has not yet decided whether it will consider them as two.

“The company's catastrophic reinsurance treaty allows for the combining of events that occur within 150-mile radius as a single occurrence.

“Additionally, if each individual event is classified as its own catastrophic event by the Property Claim Services … each event can be considered a separate occurrence,” explained Stalick.

“The company has not yet determined if it will consider the wildfires as two separate events.

“As more information becomes available to the company, including any subrogation potential, the company will evaluate whether it will consider the wildfires as two separate events,” the CFO said.

Mercury General said it believes there is “strong video and other evidence” that shows utility company equipment caused the Eaton Fire.

“We estimate the range of recovery to be in the 40% to 70% range. Subrogation at these levels makes it less likely we will consider the Palisades and Eaton fire as two separate events,” he said.