Fitch Ratings said in an outlook revision that it expects Mercury General Corp.’s credit profile will withstand the impact of the Eaton and Palisades fires near Los Angeles, but the agency also gave a negative outlook that reflects “the potential for credit deterioration and financial pressure from a third large catastrophe event or an aggregation of smaller weather-related claims.”
Fitch affirmed Mercury’s Long-Term Issuer Default Rating (IDR) at ‘BBB’ and senior debt at ‘BBB-‘. Fitch has also affirmed Mercury’s property/casualty operating subsidiaries’ Insurer Financial Strength (IFS) ratings at ‘A-‘(Strong). The rating outlook is revised to Negative from Stable.
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The negative outlook also reflects some uncertainty on the reinsurance program capacity that would be available should another event occur, according to Fitch.
The L.A. could consume more than 30% of the aggregate natural catastrophe budgets set for 2025 by Europe’s four largest reinsurers – Swiss Re, Munich Re, Hannover Re and SCOR, according to an earlier Fitch Ratings commentary.
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Fitch noted that the California insurance market is experiencing significant fire catastrophes.
“Combined, these fires will result in the largest wildfire loss in a season by a factor of 3-4 times,” Fitch said. “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.”
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Fitch said it anticipates that net wildfire losses for the first quarter of the year will add 6 to 10 percentage points on the combined ratio, resulting in a projected full-year 2025 GAAP combined ratio.
“Even with the higher projected combined ratio, it is within previously established rating sensitivities; however, it leaves little room for adverse deviations from other potential weather events in the near term,” Fitch said. “Favorably, the company has been able to obtain rate increases, which have helped stabilized results and added a cushion to absorb these wildfire losses.”
Fitch also anticipates that after-tax losses from the wildfires will adversely affect capital in the first quarter. However, with earnings and investment income, full-year 2025 GAAP capital will be relatively flat compared to the prior year, resulting in minimal changes to financial leverage, which projects at roughly 23% at YE24.
“While the company has not fully exhausted its reinsurance tower capacity, the three wildfires have placed it in a higher risk position in the near term regarding potential catastrophe events,” Fitch stated.
Mercury renews its reinsurance program effective July 1. The wildfire losses to date will likely cause reinsurance costs to tighten, making mitigation efforts for catastrophe risk more expensive and reducing profitability. While the company writes in other states, including in weather-prone Texas and Florida, the combined market share of other geographies leaves Mercury “over-exposed to changes in the California market.”