(The following statement was released by the rating agency)
CHICAGO, November 30 (Fitch) Fitch Ratings has affirmed the 'A'
Rating (IDR) on Mercury General Corporation (NYSE: MCY) and the
Financial Strength (IFS) ratings on MCY's subsidiaries.
Additionally, Fitch has
affirmed the 'A' IDR on MCY's subsidiary, Mercury Casualty Co.,
and 'A' rating
on Mercury Casualty's secured bank debt. The Rating Outlook is
Stable. A full
list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The affirmation reflects MCY's strong capitalization,
underwriting results, low financial leverage and significant
with a solid competitive position in California.
The rating also considers recent deterioration in calendar-year
performance to an underwriting loss in the first nine months of
concentration risks arising from the company's product and
as well as execution risk associated with its efforts to
MCY's underwriting results have been affected by unfavorable
and severity trends that has led to adverse reserve development
underwriting years. MCY's GAAP calendar-year combined ratio
increased to 101.2%
through Sept. 30, 2016 versus 98.9% for the same period in 2015.
A shift to
persistent underwriting losses could have unfavorable
implications for MCY's
The company reported $69 million of adverse prior-year reserve
the first nine months of 2016, adding 3.0 percentage points to
ratio, largely related to the re-estimation of losses for
California and Florida
automobile liability coverages. The company has implemented
increases in response to less favorable experience that are the
prime source of
recent written premium growth. However, uncertainty remains
future direction of loss cost trends and the pace at which
pricing actions lead
to underwriting performance improvement.
At Sept. 30, 2016, MCY's statutory surplus remained essentially
year-end 2015 at over $1.4 billion. MCY's reported statutory net
increased over the past five years but remains at a reasonable
level for a
personal lines writer, at 3.9x net written premium and
year-end 2015. MCY's capitalization is considered 'Strong' as
Fitch's Prism capital model based on year-end 2015 results.
MCY is the fourth largest writer of personal automobile
insurance in California
(direct written premium at year-end 2015). Roughly 82% of MCY's
generated in California, and 77% of premiums are derived from
insurance. Fitch believes that MCY's extensive history in
California and strong
relationship with its independent agent network is a key factor
Fitch maintains narrower than traditional notching between MCY's
IFS and holding
company senior debt ratings due to the company's consistently
capital ratios and very strong interest coverage. MCY's
ratio of 14.2% at Sept. 30, 2016 remains below the level of peer
within Fitch's guidelines for narrow notching.
Operating earnings-based interest coverage continues to be very
strong at 24x
through 9 months 2016, in excess of that estimated to support
During 2016, MCY's operating subsidiaries are permitted to pay
$164 million in dividends to the parent without prior regulatory
would cover MCY's 2016 interest expense by approximately 55x.
The key rating triggers that could result in a downgrade include
deterioration in underwriting profitability with a statutory
combined ratio over
102% and operating ratio over 95%; an increase in statutory net
leverage to over
4.0x; and deterioration in Mercury General's capitalization as
Fitch's Prism capital model below a score of 'Strong'.
An increase in MCY's consolidated debt-to-capital ratio above
16% or a decline
in the company's interest coverage ratio below 12x could lead to
the notching between the IFS and debt ratings, resulting in a
downgrade to the senior secured debt ratings.
The key rating triggers that could result in an upgrade include
improvement in underwriting profitability on an absolute basis
and relative to
peers, with an average combined ratio under 95%; and further
evolution of MCY's
operating profile that includes broader premium scale and
diversification, coupled with consistent profitability and book
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
Mercury General Corp.
--IDR at 'A'.
Mercury Casualty Co.
--IDR at 'A';
--Senior secured bank debt ($120 million due 2017) at 'A'.
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.
California Automobile Insurance Co.
--IFS at 'A+'.
The Rating Outlook is Stable.
Christopher A. Grimes, CFA
Fitch Ratings, Inc.
70 West Madison Street
Chicago, Illinois 60602
Douglas Pawlowski, CFA
Douglas L. Meyer, CFA, FLMI
Media Relations: Hannah James, New York, Tel: + 1 646 582 4947,
Additional information is available on www.fitchratings.com
Insurance Rating Methodology (pub. 15 Sep 2016)
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