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 'A' rating on Mercury Casualty's secured senior bank debt. The Rating Outlook is Stable. A complete list of ratings is provided at the end of this release.
The affirmation reflects MCY's very strong capitalization, low financial leverage and very strong interest coverage, improved 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 Dec. 31, 2011, MCY's shareholders' equity was $1.86 billion compared to $1.79 billion at year-end 2010. Policyholders' surplus grew by roughly $200 million to $1.5 billion during the same period. MCY's shareholders' equity surpassed pre-recession levels due in part to net realized gains reported over the past two years as well as from positive earnings. Fitch also believes that MCY uses a reasonable amount of operating leverage for a personal lines writer, averaging under 2.0 times (x) net written premium to surplus.
Fitch believes that MCY employs a modest amount of financial leverage, has ample financial flexibility, and limited near-term liquidity needs. The company's debt-to-total capital ratio was 7% at Dec. 31, 2011. 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 30x, well in excess of that estimated to support MCY's ratings. Historically, Fitch maintained a 'non-standard' two-notch gap between MCY's IFS and senior debt ratings due to the company's consistently low debt-to-total capital ratios and very strong interest coverage.
Fitch views MCY's recent underwriting profitability as sufficient to support the company's current rating levels. At Dec. 31, 2011, MCY reported a profitable 98.5% combined ratio versus 100.7% for 2010. Results improved partially as a result of reduced catastrophe losses, offset by modest unfavorable reserve development. The company reported unfavorable development of roughly $18 million in 2011 versus favorable $13 million in 2010 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, 2010. Additionally, 2011 results were impacted by roughly $10 million of California windstorm pre-tax losses while results in 2010 were more adversely impacted by roughly $25 million of pre-tax losses from California rainstorms and a $19 million pre-tax underwriting loss in Florida from homeowners' sinkhole claims.
Fitch recognizes that MCY has business 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. Approximately 76% of MCY's premiums are generated in California and approximately 82% 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 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 2.5x.
Fitch has affirmed the following ratings:
Mercury General Corp.
--IDR at 'A'.
Mercury Casualty Co.
--IDR at 'A';
--Secured senior bank debt ($120 million due January 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 on Fitch's web site at 'www.fitchratings.com'. 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 and Relevant Research:
--'Insurance Rating Methodology' (Sept. 22, 2011).
Applicable Criteria and Related Research:
Insurance Rating Methodology