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Fitch Affirms Mercury General's Ratings; Outlook Stable
November 30, 2016 / 9:16 PM / in a year

Fitch Affirms Mercury General's Ratings; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, November 30 (Fitch) 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 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, historically stable underwriting results, low financial leverage and significant interest coverage, with a solid competitive position in California. The rating also considers recent deterioration in calendar-year underwriting performance to an underwriting loss in the first nine months of 2016, concentration risks arising from the company's product and geographic focuses, as well as execution risk associated with its efforts to diversify geographically. MCY's underwriting results have been affected by unfavorable claims frequency and severity trends that has led to adverse reserve development from recent 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 ratings. The company reported $69 million of adverse prior-year reserve development in the first nine months of 2016, adding 3.0 percentage points to the combined ratio, largely related to the re-estimation of losses for California and Florida automobile liability coverages. The company has implemented premium rate increases in response to less favorable experience that are the prime source of recent written premium growth. However, uncertainty remains regarding the 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 equal to year-end 2015 at over $1.4 billion. MCY's reported statutory net leverage has increased over the past five years but remains at a reasonable level for a personal lines writer, at 3.9x net written premium and liabilities-to-surplus at year-end 2015. MCY's capitalization is considered 'Strong' as measured by 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 premiums are generated in California, and 77% of premiums are derived from personal auto insurance. Fitch believes that MCY's extensive history in California and strong relationship with its independent agent network is a key factor supporting its competitive position. 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. MCY's debt-to-total capital ratio of 14.2% at Sept. 30, 2016 remains below the level of peer companies and 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 MCY's ratings. During 2016, MCY's operating subsidiaries are permitted to pay approximately $164 million in dividends to the parent without prior regulatory approval, which would cover MCY's 2016 interest expense by approximately 55x. RATING SENSITIVITIES The key rating triggers that could result in a downgrade include a sustained 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 measured by 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 Fitch expanding the notching between the IFS and debt ratings, resulting in a one-notch downgrade to the senior secured debt ratings. 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%; and further evolution of MCY's operating profile that includes broader premium scale and geographic diversification, coupled with consistent profitability and book value growth. 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. Contact: Primary Analyst Christopher A. Grimes, CFA Director +1-312-368-3263 Fitch Ratings, Inc. 70 West Madison Street Chicago, Illinois 60602 Secondary Analyst Douglas Pawlowski, CFA Senior Director +1-312-368-2054 Committee Chairperson Douglas L. Meyer, CFA, FLMI Managing Director +1-312-368-2061 Media Relations: Hannah James, New York, Tel: + 1 646 582 4947, Email: hannah.james@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Insurance Rating Methodology (pub. 15 Sep 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1015608 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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