A.M. Best Affirms Ratings of Mercury General Corporation and Its Insurance Entities Business Wire OLDWICK, N.J. -- December 21, 2012 A.M. Best Co. has affirmed the financial strength rating (FSR) of A+ (Superior) and issuer credit ratings (ICR) of “aa-” of insurance entities within the Mercury Casualty Group (Mercury) (Los Angeles, CA). Additionally, A.M. Best has affirmed the FSR of A- (Excellent) and ICRs of “a-” of the insurance companies within the American Mercury Insurance Group (AMI) (Oklahoma City, OK). Concurrently, A.M. Best has affirmed the ICR of “a-” of Mercury’s and AMI’s 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 affirmations reflect Mercury’s adequate capitalization and consistent and sustained earnings that have been achieved through strong independent agency relationships; historically strong investment income; financial flexibility of its parent, 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. Mercury's adequate capital position is derived from its historically profitable underwriting performance and conservative investment risk profile, which has always greatly supplemented underwriting profits or covered minor underwriting losses. These factors are aided by the group's low dependence on reinsurance. The group's capitalization was historically supported by solid operating earnings, somewhat offset by dividend payments to MGC. With the repayment of MGC’s $125,000,000 of outstanding debt, which came due in 2011 and was retired, MCC's capital base was impacted, reducing the company’s ability to withstand further capital stresses. Despite this, the group benefits from the financial flexibility of its parent due to its modest financial leverage and access to capital markets. The group maintains moderate catastrophe exposure, which is located in MCC. The group leverages technology to enhance operating efficiency, renewal persistency and customer satisfaction. Mercury maintains a sustainable competitive advantage within its core personal auto segment that includes pricing, risk classification expertise and aggressive claims management practices. The group's business concentration within the state of California exposes it to market volatility, earthquake losses, legislative changes and judicial decisions. This has evidenced itself in Mercury'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 for those accident years as well. 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, which is the largest independent agency automobile insurance writer in California. These positive factors are offset by the group's high underwriting leverage, unfavorable underwriting results in recent years and catastrophe exposure to potentially severe weather events. The outlook is supported by the group's recent stabilization of capitalization and adequate operating performance. While 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, such actions would ensue if the group were to incur further material losses in its capitalization; have a severe reduction in the profitability of its core book of business; be unable to contain the group's 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 ICR of “a-” has been affirmed for Mercury General Corporation. 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. Key criteria utilized include: “Risk Management and the Rating Process for Insurance Companies”; “Understanding BCAR for Property/Casualty Insurers”; “Catastrophe Analysis in A.M. Best Ratings”: “Insurance Holding Company and Debt Ratings”; “Equity Credit for Hybrid Securities”; and “Rating Members of Insurance Groups.” Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology. Founded in 1899, A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com. Copyright © 2012 by A.M. Best Company, Inc. ALL RIGHTS RESERVED. Contact: A.M. Best Co. 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A.M. Best Affirms Ratings of Mercury General Corporation and Its Insurance Entities
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