AM Best Affirms Credit Ratings of Mercury General Corporation and Its Subsidiaries
- AM Best affirms Mercury Casualty Group's Financial Strength Rating of A (Excellent) and Long-Term Issuer Credit Ratings of 'a' (Excellent).
- AM Best also affirms Mercury General Corporation's Long-Term Issuer Credit Rating of 'bbb' (Good) and the Long-Term Issue Credit Rating of 'bbb' (Good) for its $375 million senior unsecured notes due 2027.
- Mercury's balance sheet strength is very strong, with a risk-adjusted capitalization at the strongest level and a generally risk-balanced investment portfolio.
- Mercury's operating performance has deteriorated due to increased claim frequency and severity, mainly in California, leading to weakened underwriting performance.
- Mercury has received significant rate increases for California's private passenger auto line of business to restore underwriting profitability.
- AM Best expects Mercury's earnings to gradually improve in 2024 with implemented strategic initiatives.
- The Credit Ratings outlook for Mercury Casualty Group is stable, reflecting its adequate operating performance, neutral business profile, and appropriate enterprise risk management.
- Mercury's operating performance has deteriorated in the past two years due to weakened underwriting performance.
- Increased claim frequency and severity in California have negatively impacted Mercury's financial performance.
- Mercury's business concentration in California poses challenges due to the regulatory environment and difficulty in achieving rate increases.
Insights
The affirmation of Mercury Casualty Group's Financial Strength Rating (FSR) and Long-Term Issuer Credit Ratings (ICRs) by AM Best is a significant indicator of the company's stability and resilience in the market. The 'A' (Excellent) and 'a' (Excellent) ratings denote a strong capacity to meet ongoing insurance obligations, which is crucial for policyholder confidence and market competitiveness. The stable outlook suggests a low likelihood of rating changes in the near term, which can reassure investors about the company's risk profile and financial prospects.
Mercury's balance sheet strength, as indicated by the highest level of risk-adjusted capitalization per Best's Capital Adequacy Ratio (BCAR), provides a cushion against potential volatility in the market. The increased interest rates in 2023 have positively affected Mercury's investment portfolio, highlighting the importance of interest rate trends on investment income for insurers. However, the deteriorated underwriting performance due to increased claims in their primary market of California is a concern. It is essential to monitor how the significant rate increase of 20.7% for California's private passenger auto line, effective February 2024, will impact the company's profitability and market share.
The ratings' implications extend beyond Mercury Casualty Group, potentially influencing the broader insurance industry, particularly in California. The company's experience with regulatory challenges and rate increases could signal a trend for other insurers operating in similar regulatory environments. The strategic initiatives undertaken by Mercury to restore underwriting profitability, including both rate and non-rate actions, may serve as a model for other insurers facing comparable difficulties.
Investors should also consider the impact of Mercury's business concentration in California, which exposes the company to region-specific risks such as legislative changes and natural disasters. Diversification of geographic footprint could be a strategic consideration for Mercury and its peers to mitigate such concentrated risks. The gradual expected improvement in earnings for 2024 will be an important metric for evaluating the effectiveness of Mercury’s strategic initiatives and overall industry health.
The regulatory environment in California has posed challenges for insurers like Mercury, particularly in achieving rate increases for the private passenger auto line of business. This regulatory backdrop is a critical factor for insurers as it directly affects their pricing strategy and profitability. The legal landscape in which Mercury operates, therefore, is not only relevant for the company but also serves as a barometer for the insurance industry's ability to navigate regulatory hurdles.
Understanding the intricacies of insurance regulation and the potential for legal challenges is essential for stakeholders. The successful approval of Mercury's rate increase may pave the way for other insurers seeking similar approvals, but it also raises questions about consumer response and potential legislative pushback. Stakeholders should closely monitor these developments as they can significantly impact insurers' operational strategies and financial performance.
The ratings of Mercury reflect its balance sheet strength, which AM Best assesses as very strong, as well as its adequate operating performance, neutral business profile and appropriate enterprise risk management.
The very strong balance sheet strength assessment reflects Mercury’s strongest level of risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR) and generally risk-balanced investment portfolio, which benefited from the higher interest rate environment in 2023. Financial flexibility is provided through the group’s publicly traded parent MGC. Mercury’s operating performance in the past two years has deteriorated due to weakened underwriting performance; this resulted from increased claim frequency and severity caused largely by catastrophe losses incurred in its geographic footprint. These were exacerbated by Mercury’s business concentration in
AM Best notes that detailed strategic initiatives Mercury has implemented to restore underwriting profitability, which include rate and non-rate actions, should strengthen its prospective underwriting performance. AM Best expects that the group’s earnings to gradually improve in 2024.
The FSR of A (Excellent) and the Long-Term ICRs of “a” (Excellent) have been affirmed with stable outlooks for the following members of Mercury Casualty Group:
- Mercury Casualty Company
- Mercury Insurance Company
- California Automobile Insurance Company
- California General Underwriters Insurance Company, Inc.
-
Mercury Indemnity Company of
Georgia -
Mercury Insurance Company of
Georgia -
Mercury Insurance Company of
Illinois - Mercury Indemnity Company of America
- Orion Indemnity Company
- American Mercury Insurance Company
- American Mercury Lloyds Insurance Company
- Mercury County Mutual Insurance Company
This press release relates to Credit Ratings that have been published on AM Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see AM Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Guide to Best's Credit Ratings. For information on the proper use of Best’s Credit Ratings, Best’s Performance Assessments, Best’s Preliminary Credit Assessments and AM Best press releases, please view Guide to Proper Use of Best’s Ratings & Assessments.
AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in
Copyright © 2024 by A.M. Best Rating Services, Inc. and/or its affiliates. ALL RIGHTS RESERVED.
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Billiah Moturi
Financial Analyst
+1 908 882 2191
billiah.moturi@ambest.com
Alan Murray
Director
+1 908 882 2195
alan.murray@ambest.com
Christopher Sharkey
Associate Director, Public Relations
+1 908 882 2310
christopher.sharkey@ambest.com
Al Slavin
Senior Public Relations Specialist
+1 908 882 2318
al.slavin@ambest.com
Source: AM Best
FAQ
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