TEXT-Fitch affirms Mercury General's ratings, outlook stable
(The following statement was released by the rating agency)
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 ratings.
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 2012.
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 '
'. 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 (New York Ratings Team)