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Fitch Affirms Mercury General's Ratings; Outlook to Negative

^{Published on 2009-02-20 14:59:08, Last Modified on 2009-02-20 15:00:34 - Market Wire}
 

CHICAGO--([ BUSINESS WIRE ])--Fitch Ratings has affirmed the 'A+' Issuer Default Rating (IDR) on Mercury General Corporation (NYSE: MCY) and 'A' rating on MCY's senior unsecured notes due 2011. Fitch has also affirmed the 'AA-' insurer financial strength (IFS) ratings on MCY's subsidiaries listed below. The Rating Outlook is Negative.

Additionally, Fitch has assigned an 'A+' IDR to Mercury Casualty Co. (Mercury Casualty) and 'A+' rating to Mercury Casualty's $120 million senior secured bank term loan due 2012. The bank debt is guaranteed by the parent company, MCY, and is secured by fixed income securities. Proceeds from the bank loan were used to finance MCY's January 2009 cash acquisition of Auto Insurance Specialists, Inc. (AIS) from Aon Corporation.

The affirmation of MCY's ratings reflects the company's very strong capitalization, low financial leverage, and strong competitive position and significant market share in California. Partially offsetting these positives are the concentration risks arising from the company's product and geographic focus as well as the execution risk associated with its efforts to diversify geographically.

The Outlook revision to Negative from Stable primarily reflects deterioration of MCY's recent underwriting performance on an absolute basis and relative to the company's peers. To a lesser extent, the Negative Outlook also reflects Fitch's heightened concerns about MCY's concentrated focus in the California insurance market, a recent increase in the company's financial leverage, or further material declines in capital tied to investment losses.

Factors that would likely lead to a downgrade include below-peer underwriting performance relative to auto insurance industry peers, a deterioration in the stability or health of the California auto insurance market, or an inability to generate earnings sufficient to reduce financial leverage.

Additionally, potential exists for a widening of the notching between MCY's IFS ratings and senior debt ratings. Currently, Fitch maintains a 'non-standard' two-notch gap between these ratings due to MCY's historically low debt-to-total capital ratios and very strong operating earnings-based interest coverage.

Historically, Fitch has viewed MCY's underwriting performance as being better than the industry average. The company has historically outperformed the average personal line auto insurance writer from an underwriting perspective by employing conservative underwriting practices and maintaining tight expense control, especially in California. However, in 2008, MCY underperformed from an underwriting profitability perspective relative to its peers, generating a 101.8% combined ratio due to poor results in its New Jersey and Florida operations, higher loss severity inflation in its California auto business, and losses from California wildfires.

Fitch continues to believe that MCY's capitalization is strong despite incurring a large reduction in equity and statutory surplus in 2008 due primarily to investment losses. Fitch's Prism Score for Mercury Casualty Group, which includes MCY's primary subsidiaries, Mercury Casualty and Mercury Insurance Co., is 'AAA'. This very strong score supports Fitch's belief that MCY maintains strong capital and uses a moderate amount of operating leverage.

Fitch also believes that MCY employs a moderate amount of financial leverage, has ample financial flexibility, and limited near-term liquidity needs. The company's debt-to-total capital ratio, including the $120 million of bank debt issued to fund the AIS acquisition on a pro-forma basis, was 16% at year-end 2008. Operating earnings-based fixed coverage has historically been very strong, well in excess of that required to support MCY's ratings.

MCY has a leading market share in California, where it is the third largest writer of personal automobile insurance in the state. Approximately 80% of MCY's premiums are generated in California and approximately 85% 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 strong competitive position. MCY has carefully structured its compensation structure and technological service capabilities to attract high-quality independent agents that consistently produce profitable business.

Fitch has assigned the following ratings with a Negative Outlook:

Mercury Casualty Co.

--IDR 'A+';

--Secured senior bank debt ($120 million due Jan. 2, 2012) 'A+'.

Fitch has affirmed the following ratings with a Negative Outlook:

Mercury General Corp.

--IDR at 'A+';

--Senior debt ($125 million 7.25% due Aug. 15, 2011) 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.

--Insurer financial strength at 'AA-'.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, [ 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.