A.M. Best Affirms Ratings of Mercury General Corporation and Its Subsidiaries

A.M. Best Co. has affirmed the financial strength rating (FSR) of A+ (Superior) and issuer credit ratings (ICR) of “aa-” of the insurance entities within the Mercury Casualty Group (Mercury). Additionally, A.M. Best has affirmed the FSR of A- (Excellent) and ICRs of “a-” of the insurance entities within the American Mercury Insurance Group (AMI). Concurrently, A.M. Best has affirmed the ICR of “a-” of Mercury and AMI’s ultimate parent, Mercury General Corporation (MGC) (Los Angeles, CA) (NYSE:MCY). The outlook for all ratings is stable. (See below for a detailed listing of the companies and ratings.)

The rating affirmations reflect Mercury’s supportive capitalization and consistent and sustained earnings, which have been achieved through strong independent agency relationships; historically strong investment income; the financial flexibility of MGC; and favorable underwriting results. These positive rating factors are partially offset by the group’s business concentration in California, moderate adverse loss reserve development, weakened capital position within its lead insurer, Mercury Casualty Company (MCC), slowing investment portfolio performance as well as its dividending patterns to its shareholders that dampen surplus growth.

The group’s capitalization was historically supported by solid operating earnings, which were somewhat offset by dividend payments to MGC. With the repayment of MGC’s $125,000,000 of outstanding debt in 2011, MCC’s capital base was markedly impacted, leaving it vulnerable to any further capital stresses. The group responded by using the surpluses at its various companies to more efficiently, effectively and evenly utilize its overall capital. This was accomplished by MCC rolling its private passenger auto book onto California Auto Insurance Company’s paper in 2012 and 2013. Simultaneously, the group took on catastrophe reinsurance, which provided immediate benefits in terms of protecting surpluses at the various companies.

Mercury maintains moderate catastrophe exposure, which is mostly located in MCC. The group leverages technology to enhance operating efficiency, renewal persistency and customer satisfaction. Mercury also maintains a sustainable competitive advantage within its core personal auto segment, which includes pricing, risk classification expertise and aggressive claims management practices. Additionally, the group benefits from the financial flexibility of MGC due to its modest financial leverage and access to capital markets.

Mercury’s business concentration within California exposes it to market volatility, earthquake losses, legislative changes and judicial decisions. This has evidenced itself in the group’s historical performance as significant price competition, rising loss costs and inflationary trends on bodily injury coverage in the California private passenger auto insurance market have impacted underwriting income and led to adverse loss reserve development in some accident years.

The ratings of AMI reflect its adequate level of risk-adjusted capital and the explicit financial support that has been demonstrated in the past by MGC. These positive rating factors are offset by AMI’s high underwriting leverage, unfavorable underwriting results in recent years and catastrophe exposure to potentially severe weather events. The outlook for the ratings is supported by the recent stabilization of AMI’s capitalization and adequate operating performance.

A.M. Best does not expect to downgrade or place a negative outlook on the ratings of the members of either Mercury or AMI in the near to mid-term. However, such actions would ensue if either company were to incur further material losses in capitalization; have a severe reduction in the profitability of its core book of business; be unable to contain exposure to catastrophic events within its underwriting footprint (with the current set of preventative measures that have been recently put in place); or have substantial adverse reserve development relative to its peers, as well as the industry’s averages.

The FSR of A+ (Superior) and ICRs of “aa-” have been affirmed for the following members of Mercury Casualty Group:

• Mercury Casualty Company
• Mercury Insurance Company
• California Automobile Insurance Company
• Mercury Indemnity Company of Georgia
• Mercury Insurance Company of Georgia
• Mercury Insurance Company of Illinois
• Mercury National Insurance Company
• Mercury Insurance Company of Florida
• Mercury Indemnity Company of America

The FSR of A- (Excellent) and ICRs of “a-” have been affirmed for the following members of American Mercury Insurance Group:

• American Mercury Insurance Company
• American Mercury Lloyds Insurance Company
• Mercury County Mutual Insurance Company

The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.

A.M. Best Company is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

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