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
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
The company reported
MCY is the fourth largest writer of personal automobile insurance in
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
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
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
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:
--IDR at 'A'.
--IDR at 'A';
--Senior secured bank debt (
Mercury National Insurance Co.
--IFS at 'A+'.
The Rating Outlook is Stable.
Additional information is available on www.fitchratings.com.
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Source: Fitch Ratings