Fitch Ratings has affirmed its ‘A’ long-term issuer rating on Mercury General Corporation (Mercury) and its ‘A’ rating on Mercury’s senior unsecured notes due 2011. Fitch has also affirmed its insurer financial strength (IFS) ratings on Mercury’s subsidiaries. The Rating Outlook is Stable. Ratings are listed below.
Mercury’s ratings reflect its consistently good underwriting results, very strong capitalization, and strong competitive position and significant market share 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.
Mercury has consistently outperformed the average personal line auto insurance writer from an underwriting perspective by employing conservative underwriting practices and maintaining tight expense control, offsetting increased advertising spending, especially in California. As a result, the company’s combined ratios are typically five-to-10 points lower than the auto insurance industry average.
Frequency and severity trends in the personal auto industry have been relatively flat year-over-year, due in part to safer cars, enhanced fraud control, and rising gas prices. However, Fitch expects a gradual upward trend with an improving economy and inflationary pressures. While the entire auto industry results will be impacted, Fitch expects Mercury’s performance to remain superior relative to the industry.
Primary subsidiaries, Mercury Casualty Co. and Mercury Insurance Co., use a moderate amount of operating leverage and their risk-adjusted capitalization as measured by NAIC risk-based capital (RBC) ratios have historically been very strong averaging 523% and 555% respectively between 2000 and 2004. Fitch believes that subsidiary, California Automobile Insurance Co., is managed to lower, albeit still adequate risk-based capital levels.
Mercury also employs a very modest amount of financial leverage and at June 30, 2005, the company’s ratio of debt-to-capital was 8.0%. Operating earnings-based fixed coverage has historically been very strong, well in excess of that required to support Mercury’s ratings.
Mercury has a leading market share in California where it is the third largest writer of personal automobile insurance in the state. Fitch believes that Mercury’s strong relationship with its independent agent network in California is a key factor supporting its strong competitive position. Mercury has carefully structured its compensation structure and technological service capabilities to attract high-quality independent agents that consistently produce profitable business.
Approximately 72% of Mercury’s premiums are generated in California, down from 78% in 2003, and approximately 90% of those premiums are derived from personal auto insurance. While Mercury has historically demonstrated solid results in the competitive and sometimes volatile California marketplace, Fitch believes that the company’s concentration in the California auto market carries potential risk exposures to political or legislative events that would not be present in a more diversified operation.
Mercury has increasingly expanded into new states to diversify its premium base. Fitch views this as an appropriate strategy but believes that it entails execution risk. To-date, Fitch believes the company has done a good job managing this risk.
Going forward, Fitch expects continued moderate growth in California and greater growth in other states. Fitch will continue to monitor growth outside of California and its effects on profitability which to-date have been positive.
Fitch has affirmed the following ratings with a Stable Outlook:
Mercury General Corp.
— Long-term issuer, ‘A’;
— Senior debt, ‘A’;
US$125 million 7.25% due Aug. 15, 2011.
Mercury Casualty Co.
— Insurer financial strength, ‘AA-‘.
Mercury Insurance Co.
— Insurer financial strength, ‘AA-‘.
California Automobile Insurance Co.
— Insurer financial strength, ‘A+’.