A.M. Best Affirms Ratings of Mercury General Corporation and Its Subsidiaries
A.M. Best has affirmed the financial strength rating (FSR) of A+ (Superior) and the 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 the 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 of Mercury reflect its adequate capitalization, aided by consistent and sustained earnings, which have been achieved through strong independent agency relationships, historically strong investment income, the financial flexibility of MGC and improved underwriting results. These positive rating factors are partially offset by the group’s business concentration in California, moderate adverse loss reserve development and slowing investment portfolio performance. Mercury maintains moderate catastrophe exposure, particularly California earthquake, which is mostly located in Mercury Casualty Company. The group leverages technology to enhance operating efficiencies, 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.
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 group’s capitalization has been historically supported by solid operating earnings, which has been somewhat offset by elevated dividend payments to MGC in several recent years. Most recently, MGC took advantage of a spike in realized capital gains to increase the overall organization’s fungibility of capital by dividending $225 million from its insurance entities in 2014. While capital has been thinned somewhat at the operating entities as a result of the dividends, these entities continue to benefit from the financial flexibility of MGC. MGC continues to maintain modest financial leverage and has access to capital markets.
The ratings of AMI reflect its solid level of risk-adjusted capital, improved operating performance and the explicit financial support that has been demonstrated in the past by MGC. These positive rating factors are partially offset by AMI’s relatively high underwriting leverage and catastrophe exposure to potentially severe weather events.
A.M. Best does not expect negative pressure on the ratings of the members of either Mercury or AMI in the near to midterm. However, negative rating actions could 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. Furthermore, AMI’s future ratings could be impacted by changes in the implicit and explicit support it receives from MGC.
The FSR of A+ (Superior) and the 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 the 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.
Key insurance criteria reports utilized:
- Analyzing Insurance Holding Company Liquidity
- Catastrophe Analysis in A.M. Best Ratings
- Evaluating U.S. Surplus Notes
- Insurance Holding Company and Debt Ratings
- Rating Members of Insurance Groups
- Risk Management and the Rating Process for Insurance Companies
- Understanding BCAR for Property/Casualty Insurers
This press release relates to rating(s) that have been published on A.M. 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 visit A.M. Best’s Ratings & Criteria Center.
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 (c) 2015 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.
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