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TMCNet:  Fitch Affirms Mercury General's Ratings; Outlook Stable

[December 19, 2013]

Fitch Affirms Mercury General's Ratings; Outlook Stable

CHICAGO --(Business Wire)--

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 the '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.

KEY RATING DRIVERS

The affirmation reflects MCY's very strong capitalization, low financial leverage and significant interest coverage, modest improvement in underwriting results in the first nine months of 2013 and solid competitive position in California. Partially offsetting these positives are the 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 Sept. 30, 2013, MCY's shareholders' equity was $1.84 billion compared to $1.842 billion at year-end 2012. MCY uses a reasonable amount of statutory net leverage for a personal lines writer, averaging approximately 3.3 times (x) net written premium and liabilities to surplus.

MCY maintains favorable financial flexibility with positive cash flow from operations and ample insurance subsidiary dividend capacity for a modest amount of financial leverage and limited near-term liquidity needs. Mercury modestly increased its financial leverage in 2013 after borrowing $40 million under a new $200 million unsecured bank credit facility. This additional debt raised the company's debt-to-total capital ratio modestly to 8.9% at Sept. 30, 2013, which remains well below the level of peer companies.

Operating earnings-based interest coverage continues to be very strong at over 141x at Sept. 30, 2013, well in excess of that estimated to support MCY's ratings.

Fitch views recent underwriting results as sufficient to support the company's current rating levels. Favorably, MCY's results have improved at Sept. 30, 2013, reporting a 98.6% combined ratio versus 100.4% for the same period in 2012, despite the $10 million (0.2 points) planned restructuring charge related to the consolidation of its non-California operations, which is expected to result in annual savings of $12 million going forward. Fitch expects full-year 2013 results will show moderate growth and maintain a small underwriting profit.

Mercury reported favorable development of prior accident years' loss reserves of $2 million during the first nine months of 2013, primarily related to business from non-California states. The company reported $33 million of adverse development in 2012, which was primarily related to re-estimates of California bodily injury losses that experienced higher average severities and more claim count development than originally estimated as of Dec. 31, 2011.

Nine months 2013 results were impacted by $16 million of pre-tax catastrophe losses mostly from tornados in Oklahoma and severe storms in the Midwest and Southeast. Results during the first nine months of 2012 were less impacted with $9 million of pre-tax losses. The company's accident year combined ratio excluding catastrophe losses improved to 97.9 through the first nine months of 2013, from 98.2 in the prior year, demonstrating modest improvement in underlying results.

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 78% of MCY's premiums are generated in California, and 79% 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.

RATING SENSITIVITIES

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 statutory net leverage to over 4.0x.

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 on Fitch's web site at 'www.fitchratings.com'

Applicable Criteria & Related Research:

--'Insurance Rating Methodology' (Nov. 13, 2013).

Applicable Criteria and Related Research:

Insurance Rating Methodology -- Amended

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=723072

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=812583

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.


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