A.M. Best Revises Outlooks to Negative and Affirms Ratings of Members of Mercury Casualty Group

OLDWICK, N.J.--(BUSINESS WIRE)--

A.M. Best has revised the outlooks to negative from stable and 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). The outlook for each AMI rating is stable. (See below for a detailed listing of the companies and ratings.)

Concurrently, A.M. Best has revised the outlook to negative from stable and affirmed the ICR of "a-" of Mercury and AMI's ultimate parent, Mercury General Corporation (MGC) (Los Angeles, CA) MCY.

The revision to Mercury's outlooks reflect concerns surrounding the approximately $40 million of adverse reserve development that was recorded in the first quarter of 2016, which was primarily attributable to Florida and California personal auto liability losses for accident years 2012 through 2014. In addition, the group's risk-adjusted capital position recently has been reduced, primarily as a result of stockholder dividends and growth in the group's probable maximum loss (PML) from a 1-in-250-year earthquake event.

Positive rating factors supporting Mercury's affirmation include the group's adequate risk-adjusted capitalization, albeit reduced, which has been historically supported by solid operating earnings. Mercury also continues to maintain strong independent agency relationships, historically solid levels of investment income and has exhibited some improvement in underwriting trends over the last few years through year-end 2015.

Partially offsetting these positive rating attributes is Mercury's business concentration within California, which exposes it to market volatility, potential earthquake losses, legislative changes and judicial decisions. This concentration risk has also 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.

While Mercury's risk-adjusted capital has recently deteriorated, the ratings continue to benefit from the financial flexibility afforded to it by MGC. MGC has access to capital markets and also has over $150 million of liquid assets that could be utilized to buttress Mercury's capital position. MCG continues to maintain modest financial leverage and strong interest coverage.

Key drivers that could lead to a rating downgrade include further deterioration in Mercury's risk-adjusted capital position to a level that fails to meet A.M. Best's expectations at the current ratings, or if Mercury were to experience a reduction in overall profitability or continue to experience material adverse reserve development.

The ratings of AMI reflect its solid level of risk-adjusted capital, underwriting performance that is generally comparable to the private passenger standard auto composite over the most-recent five-year period and the explicit financial support that has been demonstrated in the past by the parent company, MGC. These positive rating factors are partially offset by the group's high underwriting leverage, volatile underwriting and operating performance and catastrophe exposure to potentially severe weather events.

Key drivers that could lead to negative rating pressure include a change in AMI's relationship to its parent or its support that affects the operational stance of the members of the group, or if the group were to incur have a severe reduction in the profitability of its book of business.

The outlook has been revised to negative from stable and 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 with a stable outlook:

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

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 see A.M. Best's Recent Rating Activity web page.

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

Copyright © 2016 by A.M. Best Rating Services, Inc. ALL RIGHTS RESERVED.

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