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Fitch Affirms Mercury General's Ratings; Outlook Stable
June 20, 2013 / 7:59 PM / 4 years ago

Fitch Affirms Mercury General's Ratings; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, June 20 (Fitch) 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 the 'A' rating on Mercury Casualty's secured senior 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, and solid competitive position in California. Partially offsetting these positives are the deteriorated underwriting results in 2012, 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 March 31, 2013, MCY's shareholders' equity was $1.875 billion compared to $1.842 billion at year-end 2012. Policyholders' surplus increased to $1.51 billion from $1.44 billion during the same period. Equity has continued its steady growth trend due in part to net realized gains as well as positive earnings. MCY uses a reasonable amount of operating leverage for a personal lines writer, averaging under 2.0 times (x) net written premium to surplus. MCY maintains favorable financial flexibility with positive cash flow from operations and ample insurance subsidiary dividend capacity for a modest amount of financial leverage and limited near-term liquidity needs. The company's debt-to-total capital ratio was 6.9% at March 31, 2013. Operating earnings-based interest coverage continues to be very strong at over 45x at year-end 2012, well in excess of that estimated to support MCY's ratings. Fitch views recent underwriting results as sufficient to support the company's current rating levels despite deterioration in 2012 due primarily to increased catastrophe losses and unfavorable reserve development. Favorably, MCY's results have improved at March 31, 2013, reporting a 97.9% combined ratio versus 97.6% for the same period in 2012, despite the $10 million (1.5 points) planned restructuring charge related to the consolidation of its non-California operations which is expected to result in annual savings of $12 million going forward. Fitch expects a return to underwriting profitability for the full year 2013. At Dec. 31, 2012, MCY reported a 102.8% combined ratio versus 98.5% for 2011. Year-end 2012 results worsened primarily due to increased catastrophe losses and continued unfavorable reserve development. The company reported unfavorable development of roughly $42 million for 2012 versus $18 million in 2011 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, 2011. Additionally, 2012 results were impacted by $39 million of catastrophe pre-tax losses mostly from Superstorm Sandy as well as from wind and hail storms in the Midwest. Results in 2011 were less impacted with $18 million of pre-tax losses primarily from California storms and Hurricane Irene. Fitch recognizes that MCY has 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. Roughly 77% 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. 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%, 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 2.3x. 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. A material increase in MCY's consolidated debt-to-capital ratio or material decline in the company's interest coverage ratio could lead to Fitch expanding the notching, resulting in a one notch downgrade to the senior debt ratings. 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 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. Contact: Primary Analyst Gretchen Roetzer Director +1-312-606-2327 Fitch Ratings, Inc. 70 West Madison Street, Chicago, Illinois Secondary Analyst Douglas Pawlowski, CFA Senior Director +1-312-368-2054 Committee Chairperson Douglas L. Meyer, CFA, FLMI Managing Director +1-312-368-2061 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: Additional information is available on Fitch's web site at '' Applicable Criteria & Related Research: --'Insurance Rating Methodology' (Jan. 11, 2013). Applicable Criteria and Related Research: Insurance Rating Methodology — Amended here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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