Mercury General Corp. does not expect to have to lower its rates in response to an initiative by California's state insurance regulator aimed at pushing companies to pass on savings from the recent cut in the federal corporate tax rate to their customers.
California determines premium rates based on a formula that yields a rate range, which will shift downward due to recently enacted federal tax reform, Chief Product Officer Robert Houlihan noted. The company's requested and approved rates for recent state filings fall within those ranges after adjusting for the lower federal rate, Houlihan said during a conference call to discuss quarterly earnings.
Mercury General has sought premium hikes in several states to account for industrywide elevation in auto losses, as well as property losses the company has experienced. The insurer recorded prior accident years' loss and loss adjustment expense reserves of $36 million for the fourth quarter of 2017, up from $16 million in the prior-year quarter.
Management will adjust its reserve formula to weight the most recent years' payout expenses more heavily among historical data, an executive said on the earnings call.
Expenses related to a pair of destructive wildfires in California helped send the company's fourth-quarter 2017 operating earnings into a 73% year-over-year drop. Catastrophe losses net of insurance for the fourth quarter of 2017 were $20 million, 5x the figure it recorded in the prior-year quarter. For full year 2017, reserves nearly tripled year over year to $79 million.
