S&P Lowers Mercury’s Ratings

May 17, 2010

Standard & Poor’s Ratings Services has lowered its counterparty credit and senior unsecured debt ratings on Los Angeles-based Mercury General Corp. to ‘BBB+’ from ‘A-‘.

S&P also lowered its counterparty credit and financial strength ratings on Mercury Casualty Co. and Mercury Insurance Co. to ‘A+’ from ‘AA-‘ and its financial strength rating on Mercury Insurance Co. of Florida to ‘A+’ from ‘AA-‘. In addition S&P lowered its counterparty credit and financial strength ratings on California Automobile Insurance Co. to ‘A’ from ‘A+’.

S&P noted that all of the companies are units of Mercury General Corp, and that the outlook on the ratings is stable.

“The downgrades reflect our opinion that Mercury has made slow strategic and operational progress in achieving profitable expansion outside of its home state of California,” explained credit analyst Michael Gross. “The company began its multistate expansion outside of California in earnest more than a decade ago.

“However, its business concentration in California, as measured by net premiums written, increased to 77.7 percent in 2009 from 72.1 percent in 2005.” This results largely from some pullback in states where Mercury experienced challenges.

S&P also noted that “management has taken a number of corrective actions, including greater product development and segmentation as well as improvements in technology to enhance its competitive footing both inside and outside California.”

However, the rating agency added, “we believe that Mercury somewhat lags similarly rated peers in these efforts and that it will be some time before the company fully implements these efforts and before we can determine the level of success. Meanwhile, in its home state of California, Mercury faces keen competition and remains susceptible to the influences of the highly political and pro-consumer California insurance marketplace.

“Mercury General, through its operating subsidiaries, remains a competitive provider of auto and homeowners’ insurance, with particular brand recognition and franchise strength in California where it is the third-largest provider of personal automobile insurance. The outlook is stable.”

S&P also said it “expects Mercury’s 2010 net premiums written growth to be relatively flat with 2009 because of tough market conditions. Nevertheless, we expect the company to report an underwriting profit, with a combined loss and expense ratio of 96 percent to 98 percent. Mercury’s capital likely will remain very strong. We expect total consolidated financial leverage of approximately 15 percent.”

Source: Standard & Poor’s

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