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Fitch Affirms Mercury General's Ratings; Outlook StableFitch 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, low financial leverage and significant interest coverage, improvement in accident-year underwriting results in 2015 and the first quarter of 2016 (1Q16) along with a solid competitive position in California. Partially offsetting these positives is adverse development reported by MCY in 1Q16, concentration risks arising from the company's product and geographic focuses as well as the execution risk associated with its efforts to diversify geographically. MCY is the fourth largest writer of personal automobile insurance in California (direct written premium at year-end 2015); however, this provides the company with a competitive advantage. Roughly 81% 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 competitive position. The company reported $40 million of adverse prior-year reserve development in the 1Q16 adding 5.2 points to the combined ratio. The unfavorable development was largely related to the re-estimation of losses for California and Florida automobile liability coverages. Fitch believes that MCY's reserves are within the range of adequacy in the aggregate. The earnings impact of reserve development is expected to be manageable going forward. MCY's accident year combined ratio excluding catastrophe losses improved to 97.6% through three months 2016, from 99.2% in the prior year, as underlying results remained strong year over year. However, MCY's calendar-year combined ratio was negatively impacted by the reserve charge and increased to 103.9% combined ratio at March 31, 2016 versus 99.1% for the same period in 2015. At March 31, 2016, MCY's shareholders' equity declined by 0.7% to approximately $1.8 billion. MCY uses a reasonable amount of statutory net leverage for a personal lines writer, with 3.9 times (x) net written premium and liabilities to surplus at year-end 2015. The capitalization of MCY is considered 'Strong' as measured by Fitch's Prism capital model based on year-end 2014 results. Prism results for 2015 will be available in summer 2016. 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 March 31, 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 50x for full-year 2015, well n excess of that estimated to support MCY's ratings. 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%; and further evolution of MCY's operating profile that includes broader premium scale and geographic diversification, coupled with consistent profitability and book value growth. The key rating triggers that could result in a downgrade include a sustained deterioration in underwriting profitability with an average combined ratio over 103%; a significant 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'. Further material increases in MCY's consolidated debt-to-capital ratio or a material decline in the company's interest coverage ratio could lead to Fitch expanding the notching between the IFS and debt ratings, resulting in a one-notch downgrade to the senior debt ratings. 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. Additional information is available on www.fitchratings.com Applicable Criteria Insurance Rating Methodology (pub. 17 May 2016) https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=881564 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1005190 Solicitation Status https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005190 Endorsement Policy https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31 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. View source version on businesswire.com: http://www.businesswire.com/news/home/20160526006314/en/ |
