Fitch Affirms Mercury General's Ratings; Outlook Stable

CHICAGO--()--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 very strong capitalization, low financial leverage and significant interest coverage, improvement in underwriting results in the first nine months of 2014 and solid 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.

MCY's market position and size/scale are characterized as 'Medium' by Fitch. MCY is the fourth-largest writer of personal automobile insurance in California (direct written premium at year-end 2014); however, this provides the company with a competitive advantage. Roughly 78% 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.

At June 30, 2015, MCY's shareholders' equity declined by 1.5% to approximately $1.85 billion. MCY uses a reasonable amount of statutory net leverage for a personal lines writer, averaging approximately 3.4x net written premium and liabilities-to-surplus from 2010-2014. The capitalization of MCY is considered 'Strong' as measured by Fitch's Prism capital model.

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 13.9% at June 30, 2015 remains below the level of peer companies and within Fitch's guidelines for narrow notching.

Narrow notching is further supported by the significant levels of interest coverage that MCY continues to maintain. Annualized operating earnings-based interest coverage continues to be very strong at 56x at June 30, 2015, well in excess of that estimated to support MCY's ratings. MCY maintains financial flexibility with positive cash flow from operations and ample insurance subsidiary dividend capacity for a relatively modest amount of financial leverage and limited near-term liquidity needs.

MCY's underwriting results have improved, reporting a 98.8% combined ratio at June 30, 2015 versus 96.3% for the same period in 2014. Six-month 2015 results were affected by $10 million of pre-tax catastrophe losses, up from $6 million in the prior year. The company's accident year combined ratio excluding catastrophe losses deteriorated to 98.1% through six months 2015, from 96.4% in the prior year, demonstrating modest weakening in underlying results relative to the prior year.

RATING SENSITIVITIES

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.

The key rating triggers that could result in a downgrade include a sustained deterioration in underwriting profitability with an average combined ratio over 103%; a significant 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'.

Further material increases in MCY's consolidated debt-to-capital ratio or a material decline in the company's interest coverage ratio could lead to Fitch expanding the notching between the IFS and debt ratings, resulting in a one-notch downgrade to the senior debt ratings.

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

Applicable Criteria

Insurance Rating Methodology (pub. 16 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=871172

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=992962

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=992962

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Christopher A. Grimes, CFA
Director
+1-312-368-3263
Fitch, Inc.
70 West Madison Street, Chicago, IL
or
Secondary Analyst
Douglas Pawlowski, CFA
Senior Director
+1-312-368-2054
or
Committee Chairperson
Douglas L. Meyer, CFA, FLMI
Managing Director
+1-312-368-2061
or
Media Relations
Hannah James, New York, +1-646-582-4947
hannah.james@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Christopher A. Grimes, CFA
Director
+1-312-368-3263
Fitch, Inc.
70 West Madison Street, Chicago, IL
or
Secondary Analyst
Douglas Pawlowski, CFA
Senior Director
+1-312-368-2054
or
Committee Chairperson
Douglas L. Meyer, CFA, FLMI
Managing Director
+1-312-368-2061
or
Media Relations
Hannah James, New York, +1-646-582-4947
hannah.james@fitchratings.com