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Mercury's Michigan exit 'very difficult' but necessary

plans to inform, by letter, the holders of its 2,820 Michigan private-passengerauto policies of the forthcoming exit of a state it had been unable topenetrate in a profitable way.

"MercuryNational Insurance Company … has made a difficult business decision to nolonger offer a Private Passenger Auto program in the state of Michigan,"the company said in a draft letter filed April 29 with the Michigan Departmentof Insurance and Financial Services as part of . "This decisionwas made solely for business reasons at Mercury, and not because of anyindividual consideration of your record."

Theletter, which warns of the company's plan to nonrenew policies at the naturalexpiration of the current policies terms, recommends that policyholders contacttheir independent agents for coverage options with other carriers.

MercuryNational parent Mercury GeneralCorp. announced its intent to withdraw from Michigan andPennsylvania on May 2, and company officials explained during a that theybelieve resources would be better spent in other markets.

Thewithdrawal filing indicates that Mercury National entered Michigan through afiling submitted in August 2004 and effective in September 2004. The companysaid that $9.2 million in direct premiums written had been associated with itsin-force business in Michigan as of March 2016.

"Thebusiness purpose behind the decision to withdraw from the State of Michigan isan inability to grow the business in a profitable fashion," MercuryNational said. "It was a very difficult decision to discontinue writinginsurance in Michigan, but since Mercury is a very small writer, with only oneline of business in Michigan, we do not feel the discontinuation of our PrivatePassenger Auto program will adversely affect the maintenance of a competitivemarket."

A reviewof disclosures on the Michigan state page of Mercury National's annualstatements finds that the company's business volume in the state peaked in 2014when it generated $11.8 million in direct premiums written. Its 2015 premiumvolume of $9.2 million, which ranked 32nd highest among the U.S. P&C groupsand top-tier entities active in the Michigan private-passenger auto market,represented a decline of 22.3% on a year-over-year basis. No-fault businessaccounted for 63% of the company's Michigan direct premiums written during theyear.

Thegroups led by State Farm MutualAutomobile Insurance Co. and Auto Club Insurance Association were the top twoMichigan private-passenger auto insurers in Michigan during 2015, with directpremiums written of $1.50 billion and $1.28 billion, respectively. ranked third,based on in-market direct premiums written of $885.2 million.

MercuryNational's ratio of direct losses and defense-and-cost-containment expenses, orDCCE, incurred to direct premiums earned on Michigan private-passenger autobusiness improved to 86.2% in 2015 from 98.6% in 2014. The median and averagedirect loss and DCCE ratios were 86.2% and 101.3% during the 11 full years inwhich the company has been active in Michigan. Among the 13 states from whichMercury General companies generated more than $1 million in private-passengerauto direct premiums written in 2015 at the group level, the Michigan directloss and DCCE ratio ranked third-highest behind 95.3% in Nevada and 89.9% inVirginia.

MercuryNational said in the management's discussion and analysis section of itsannual statementthat it cedes all of its business to Mercury Casualty Co. under a 100% quota-sharereinsurance agreement. But prior to the effect of that treaty, the companyreported that its combined ratio was 148.6% in 2015 and 149.4% in 2014. Thecompany attributed its lower written premium in 2015 to the combination of adeclining policy count and an increase in rates, including hikes of and that took effect for renewalbusiness in November 2014 and May 2015, respectively.

Thecompany plans to suspend accepting new business on May 10 by effectivelyturning off the front-end application through which agents write business. Itexpects to issue nonrenewal notices through February 2017, and it does not planto remarket the nonrenewed business through competing carriers.

S&PGlobal Market Intelligence does not currently have record of a Pennsylvaniawithdrawal plan. Mercury General writes private-passenger auto business in thatstate through Mercury InsuranceCo. of Florida, which reported less than $4.2 million in KeystoneState private-passenger auto direct premiums written in 2015, down from $6.4million in 2014. Its loss and DCCE ratio on Pennsylvania private-passenger autobusiness increased to 72.8% from 67.6%.

Combined,according to annual statutory statement data, Michigan and Pennsylvaniaaccounted for less than 0.58% of the 2015 private-passenger auto directpremiums written of Mercury General's P&C units and 0.45% of theirtotal-filed business volume.