Oct 1 - Fitch Ratings has affirmed the 'A' Issuer Default Rating (IDR) on
Mercury General Corporation (NYSE: MCY) and the 'A+' Insurer Financial
Strength (IFS) ratings on MCY's operating subsidiaries. Additionally, Fitch has
affirmed the 'A' IDR on MCY's subsidiary, Mercury Casualty Co., and 'A' rating
on Mercury Casualty's secured senior bank debt. The Rating Outlook is Stable. A
full list of rating actions follows at the end of this release.
The affirmation reflects MCY's very strong capitalization, low financial
leverage and significant interest coverage, and solid competitive position in
California. Partially offsetting these positives are the deteriorated
underwriting results in the first six months of 2012, concentration risks
arising from the company's product and geographic focuses as well as the
execution risk associated with its efforts to diversify geographically.
Fitch believes that MCY's capitalization is very strong. At June 30, 2012, MCY's
shareholders' equity was $1.861 billion compared to $1.857 billion at year-end
2011. Policyholders' surplus remained stable at $1.5 billion during the same
period. Equity has continued its steady growth trend due in part to net realized
gains as well as positive earnings. MCY uses a reasonable amount of operating
leverage for a personal lines writer, averaging under 2.0 times (x) net written
premium to surplus.
MCY maintains favorable financial flexibility with positive cash flow from
operations and ample insurance subsidiary dividend capacity relative to a modest
amount of financial leverage and limited near-term liquidity needs. The
company's debt-to-total capital ratio was 7% at June 30, 2012. The company paid
off its $125 million senior debt in 2011 with cash from an extraordinary
inter-company dividend. Operating earnings-based interest coverage continues to
be very strong at over 60x, well in excess of that estimated to support MCY's
Fitch views MCY's recent underwriting results as sufficient to support the
company's current rating levels despite recent modest deterioration. At June 30,
2012, MCY reported a 101.1% combined ratio versus 98.1% for the same period in
2011. At Dec. 31, 2011, MCY reported a 98.5% combined ratio versus 100.7% for
2010. Fitch expects a return to underwriting profitability for the full year
Six month results worsened primarily due to increased catastrophe losses and
modest unfavorable reserve development. The company reported unfavorable
development of roughly $29 million for year-to-date 2012 versus $10 million for
year-to-date 2011 on prior accident years' loss reserves, primarily related to
re-estimates of California bodily injury losses which experienced higher average
severities and more claim count development than originally estimated as of Dec.
31, 2011. Additionally, six months 2012 results were impacted by roughly $8
million of catastrophe pre-tax losses from wind and hail storms in the Midwest
while results in the first half of 2011 were less impacted with $4 million of
pre-tax losses from California storms.
Fitch recognizes that MCY has concentration risk in California where it is the
fifth largest writer of personal automobile insurance in the state (direct
written premium); however, Fitch also believes this provides the company with a
competitive advantage. Roughly 76% of MCY's premiums are generated in
California, and 81% of premiums are derived from personal auto insurance. Fitch
believes that MCY's strong relationship with its independent agent network in
California is a key factor supporting its solid competitive position.
The key rating triggers that could result in an upgrade include sustainable
improvement in underwriting profitability on an absolute basis and relative to
peers, with an average combined ratio under 95%, a significant increase in
risk-adjusted capital, and material profitable growth outside of California.
The key rating triggers that could result in a downgrade include a sustained
deterioration in underwriting profitability with an average combined ratio over
103% and a significant increase in operating leverage to over 2.3x.
Fitch maintains narrower than traditional notching between MCY's IFS and holding
company senior debt ratings due to the company's consistently low debt-to-total
capital ratios and very strong interest coverage. A material increase in MCY's
consolidated debt-to-capital ratio or material decline in the company's interest
coverage ratio could lead to Fitch expanding the notching, resulting in a one
notch downgrade to the senior debt ratings.
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 2015) 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.
Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
Applicable Criteria & Related Research:
--'Insurance Rating Methodology' (Sept. 19, 2012).
Applicable Criteria and Related Research:
Insurance Rating Methodology