Business & Finance
Business and Finance
Business and Finance
Tue, February 1, 2011
Mon, January 31, 2011 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 'A-' rating on MCY's senior unsecured notes due 2011. Fitch has also affirmed 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 senior bank debt. The Rating Outlook is Stable. See the full list of rating actions below.
The affirmation reflects MCY's very strong capitalization, low financial leverage and favorable interest coverage, satisfactory underwriting results, and strong 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, 2010, MCY's shareholders' equity was $1.85 billion. At year-end 2009, due in part to net realized gains of $225 million, MCY's shareholders' equity had recovered to $1.77 billion following the recession, which is slightly more than equity levels at year-end 2006. Fitch also believes that MCY uses a moderate amount of operating leverage, averaging under 2.0 times (x) net written premium to surplus.
Fitch 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 was 12.7% at Sept. 30, 2010. Operating earnings-based interest coverage continues to be very strong at over 30x, well in excess of that required to support MCY's ratings. Currently, Fitch maintains a 'non-standard' two-notch gap between MCY's IFS ratings and senior debt ratings due to MCY's historically low debt-to-total capital ratios and very strong operating earnings-based interest coverage.
Fitch views MCY's recent underwriting profitability as sufficient to support the company's current rating levels. At year-to-date Sept. 30, 2010, MCY reported a profitable 97.8% combined ratio versus 96.5% for the same period last year. The combined ratio was affected by favorable development of roughly $18 million in 2010 versus $40 million in 2009 on prior accident years' loss reserves, primarily the 2009 California bodily injury losses which experienced lower average severities and lower claim count development than originally estimated as of Dec. 31, 2009.
Fitch recognizes that MCY has concentration risk related to the company's leading market share in California, where it is the third largest writer of personal automobile insurance in the state; however, Fitch also believes this provides the company with a competitive advantage. Approximately 77% of MCY's premiums are generated in California and approximately 83% 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.
The key rating drivers 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 capital with all else being equal, and material profitable growth outside of California.
The key rating drivers that could result in a downgrade include a sustained deterioration in underwriting profitability with an average combined ratio over 105% and a significant increase in operating leverage to over 2.5x. The key drivers that could result in a downgrade of the company's debt ratings given the current 'nonstandard' two-notch gap between MCY's IFS ratings and the senior unsecured debt ratings include a material increase in MCY's consolidated debt-to-capital ratio, or a material decline in the company's interest coverage ratio.
Fitch has affirmed the following ratings:
Mercury General Corp.
--IDR at 'A';
--Senior debt ($125 million 7.25% due Aug. 15, 2011) at 'A-'.
Mercury Casualty Co.
--IDR at 'A';
--Secured senior bank debt ($120 million due Jan. 2, 2012) 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 'A+'.
The Rating Outlook is Stable.
Additional information is available on Fitch's web site at '[ www.fitchratings.com ]'
Applicable Criteria and Relevant Research:
--'Insurance Rating Methodology' (Aug. 13, 2010);
--'Non-Life Insurance Rating Methodology' (March 24, 2010);
--'Insurance Industry: Global Notching Methodology and Recovery Analysis' (Dec. 29, 2009).
Applicable Criteria and Related Research:
Insurance Industry: Global Notching Methodology and Recovery Analysis
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493114 ]
Insurance Rating Methodology
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547766 ]
Non-Life Insurance Rating Methodology
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=506369 ]
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