Fitch Ratings has downgraded its ratings on Mercury General Corporation (NYSE: MCY), one notch as follows:
–Issuer Default Rating (IDR) to ‘A’ from ‘A+’;
–Senior unsecured notes to ‘A-‘ from ‘A’;
–Senior secured bank debt to ‘A’ from ‘A+’;
–Insurer Financial Strength (IFS) on insurance company subsidiaries to ‘A+’ from ‘AA-‘.
The Rating Outlook is Stable. At the former rating levels, the Outlook was Negative. See the full list of rating actions below.
The downgrade primarily reflects the deterioration of MCY’s recent underwriting profitability on an absolute basis and relative to the company’s peers to levels that Fitch views as below what is expected for a company with MCY’s profile to retain its prior ratings level. To a lesser extent, the downgrade also reflects Fitch’s heightened concerns about MCY’s concentration risks arising from its product and geographic focus as well as the execution risk associated with its efforts to diversify geographically.
Fitch views MCY’s recent underwriting profitability as insufficient to support the company’s prior rating levels. In 2009 the company generated a 96.9% combined ratio in 2009, which included 2.1 points of favorable reserve development, and a 101.8% combined ratio in 2008 due to poor results in its New Jersey and Florida operations, higher loss severity inflation in its California auto business, and losses from California wildfires.
Historically, Fitch has viewed MCY’s underwriting performance as being better than the industry average. The company has been able to outperform the average personal line auto insurance writer from an underwriting perspective by employing conservative underwriting practices and maintaining tight expense control, especially in California.
The ratings continue to reflect MCY’s very strong capitalization, low financial leverage and very strong interest coverage, and strong competitive position and significant market share in California.
Fitch continues to believe that MCY’s capitalization is strong. At year-end 2009, due in part to net realized investment gains of $225 million, MCY’s shareholders’ equity had recovered to $1.77 billion, which is slightly more than equity levels at year-end 2006. Fitch also believes that MCY uses a moderate amount of operating leverage, averaging under 2.0 times net written premium to surplus.
Fitch believes that MCY employs a moderate amount of financial leverage, has ample financial flexibility, and limited near-term liquidity needs. The company’s debt-to-total capital ratio, including the $120 million of bank debt issued to fund its Auto Insurance Specialists, Inc. (AIS) acquisition, was 13% at year-end 2009. Operating earnings-based fixed coverage continues to be very strong, well in excess of that required to support MCY’s ratings. Currently, Fitch maintains a ‘non-standard’ two-notch gap between MCY’s IFS ratings and senior debt ratings due to MCY’s historically low debt-to-total capital ratios and very strong operating earnings-based interest coverage.
MCY has a leading market share in California, where it is the third largest writer of personal automobile insurance in the state. Approximately 80% of MCY’s premiums are generated in California and approximately 85% 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.
Fitch has downgraded the following ratings and assigned a Stable Outlook:
Mercury General Corp.
–IDR to ‘A’ from ‘A+’;
–Senior debt ($125 million 7.25% due Aug. 15, 2011) to ‘A-‘ from ‘A’.
Mercury Casualty Co.
–IDR to ‘A’ from ‘A+’;
–Secured senior bank debt ($120 million due Jan. 2, 2012) to ‘A’ from ‘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.
–Insurer financial strength to ‘A+’ from ‘AA-‘.
Applicable Criteria available on Fitch’s web site at ‘www.fitchratings.com’ include:
–‘Insurance Rating Methodology’ (Dec. 29, 2009);
–‘Non-Life Insurance Rating Criteria’ (March 2, 2007).
Additional information is available at ‘www.fitchratings.com’.