|[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
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.
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+'.