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Recently, Fitch Ratings affirmed the issuer default rating (IDR) of Mercury General Corporation (MCY - Snapshot Report) at “A.” The rating agency also affirmed the IDR of Mercury General’s subsidiary – Mercury Casualty Co. – as well as the debt rating on its senior secured bank debt at “A.”

Further, Fitch affirmed the insurer financial strength rating (IFS) of Mercury General’s subsidiaries – Mercury Casualty Co., Mercury Insurance Co., Mercury Insurance Co. of Georgia, Mercury Insurance Co. of Illinois, Mercury Insurance Co. of Florida, Mercury Indemnity Co. of Georgia, Mercury Indemnity Co. of America, Mercury National Insurance Co. and California Automobile Insurance Co. – at “A+.” The outlook for all the above-mentioned ratings is stable.

The rating affirmation was based on Mercury General’s sturdy capitalization level, low financial leverage, ample interest coverage and strong market position in California, partially offset by a decline in operating profitability in 2013, product and geographic concentration and risks related to the implementation of geographic expansion plans.

Fitch may revise the ratings upward if the underwriting results improve significantly and stay at that level over the long term, the average combined ratio stays below 95%, the risk-adjusted capitalization improves significantly and the company witnesses growth outside California.

Alternatively, a downward revision is possible if the underwriting results decline significantly, average combined ratio rises above 103% and operating leverage surges beyond 2.3x. Further, a significant decline in the interest coverage ratio or surge in the consolidated debt-to-capital ratio can lead to a downgrade in the debt rating.

Rating affirmations or upgrades from credit rating agencies play an important part in retaining investor confidence on the stock as well as maintaining credit worthiness in the market. Rating downgrades, therefore, adversely affect the business, apart from increasing the costs of future debt issuances.  

We believe that the affirmed ratings will help Mercury General retain investor confidence and help it write more businesses going forward, thereby boosting its results.

Mercury General currently carries a Zack Rank #2 (Buy). Other property and casualty insurers with the same Zacks Rank are Montpelier Re Holdings Ltd. (MRH - Analyst Report), Alleghany Corp. (Y - Snapshot Report) and United Fire Group Inc. (UFCS - Snapshot Report).

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