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 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, historically stable underwriting results, low financial leverage and significant interest coverage, with a solid competitive position in California.
The rating also considers recent deterioration in calendar-year underwriting performance to an underwriting loss in the first nine months of 2016, concentration risks arising from the company's product and geographic focuses, as well as execution risk associated with its efforts to diversify geographically.
MCY's underwriting results have been affected by unfavorable claims frequency and severity trends that has led to adverse reserve development from recent underwriting years. MCY's GAAP calendar-year combined ratio increased to 101.2% through Sept. 30, 2016 versus 98.9% for the same period in 2015. A shift to persistent underwriting losses could have unfavorable implications for MCY's ratings.
The company reported $69 million of adverse prior-year reserve development in the first nine months of 2016, adding 3.0 percentage points to the combined ratio, largely related to the re-estimation of losses for California and Florida automobile liability coverages. The company has implemented premium rate increases in response to less favorable experience that are the prime source of recent written premium growth. However, uncertainty remains regarding the future direction of loss cost trends and the pace at which pricing actions lead to underwriting performance improvement.
At Sept. 30, 2016, MCY's statutory surplus remained essentially equal to year-end 2015 at over $1.4 billion. MCY's reported statutory net leverage has increased over the past five years but remains at a reasonable level for a personal lines writer, at 3.9x net written premium and liabilities-to-surplus at year-end 2015. MCY's capitalization is considered 'Strong' as measured by Fitch's Prism capital model based on year-end 2015 results.
MCY is the fourth largest writer of personal automobile insurance in California (direct written premium at year-end 2015). Roughly 82% of MCY's premiums are generated in California, and 77% of premiums are derived from personal auto insurance. Fitch believes that MCY's extensive history in California and strong relationship with its independent agent network is a key factor supporting its competitive position.
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 Sept. 30, 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 24x through 9 months 2016, in excess of that estimated to support MCY's ratings. During 2016, MCY's operating subsidiaries are permitted to pay approximately $164 million in dividends to the parent without prior regulatory approval, which would cover MCY's 2016 interest expense by approximately 55x.
The key rating triggers that could result in a downgrade include a sustained deterioration in underwriting profitability with a statutory combined ratio over 102% and operating ratio over 95%; an 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'.
An increase in MCY's consolidated debt-to-capital ratio above 16% or a decline in the company's interest coverage ratio below 12x could lead to Fitch expanding the notching between the IFS and debt ratings, resulting in a one-notch downgrade to the senior secured debt ratings.
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.
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.
Insurance Rating Methodology (pub. 15 Sep 2016)
Dodd-Frank Rating Information Disclosure Form
Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third-party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.