S&P: Mercury Casualty Co., Affiliates Ratings Affirmed

July 13, 2004

Standard & Poor’s has affirmed its ‘AA’ counterparty credit and financial strength ratings on Mercury Casualty Co. and Mercury Insurance Co. as well as its ‘AA’ financial strength rating on Mercury Insurance Co. of Florida.

At the same time, Standard & Poor’s affirmed its ‘BBB’ counterparty credit and financial strength rating on California Automobile Insurance Co., a sister company of Mercury Casualty Co. that is considered nonstrategic based on Standard & Poor’s rating guidelines. In addition, Standard & Poor’s affirmed its ‘A’ counterparty credit rating on Mercury General Corp. The outlook on all these companies, collectively referred to as Mercury, remains stable.

The ratings on Mercury are based on its extremely strong operating history and capital, strong business strategy, and solid business position in a high-quality market segment. Partially offsetting these positive factors are the group’s geographic and product concentrations.


Standard & Poor’s does not see Mercury’s business position being threatened in the intermediate term. Mercury has been successful as a low-price producer while using independent agents. This is a considerable accomplishment and insulates it from direct writers competing on price. Good service, efficient operations, and the personal client relationships established by the agents shield Mercury from companies trying to compete on service.

However, Standard & Poor’s is concerned about management succession and the infrastructure in the expansion states, as Standard & Poor’s believes Mercury will write more business outside California, though other nonrated units of the organization will do most of that. Homeowners insurance will constitute more than the 6% of premium it produces now.

Major rating factors

— Extremely strong operating history. Since it was founded in 1961, Mercury has never experienced an unprofitable year. Its combined ratio has been at or near the top of Standard & Poor’s interactively rated peer group for at least the past five years and has consistently outperformed broader market results. Control of losses has been the group’s forte. The expense ratio has been middling to marginally above industry averages, which is attributable to higher agent commissions.

— Capital. Combined capitalization is well in excess of Standard & Poor’s ‘AAA’ floor. Some dividends from Mercury have been used for a modest holding-company stock-buyback program. However, Standard & Poor’s expects capital ratios to remain broadly at current levels as long as the current CEO (George Joseph) and his former wife own 51% of the stock of the organization. Investors might pressure future management to reduce capital levels, particularly if the Josephs’ holdings are sold to the public, but Standard & Poor’s expects capitalization to be strength of the rating for the foreseeable future.

— Strategy. Mercury’s strategy is strong and is founded on an extremely strong commitment to independent agents, including variable compensation that encourages them to produce their best business for the company and compensation levels that are high for the industry. Other important strategic elements include low pricing, which allows selectivity; sound underwriting practices, which allow arbitraging of risk quality against price; a claims department that uses people trained to spot fraud and abuse and runs day-to-day operations effectively; and a current aggressive advertising campaign to promote name recognition.

— Business position. Mercury probably insures the best drivers in California. In 2003, it moved up from the sixth-largest personal automobile insurance group in the state to become the third-largest; the larger ones are household names with greater name recognition. This high-quality market segment depends on maintenance of the group’s extremely strong position with its agents and exposes it to actions of competitors in competing for these agents and the group’s clearly superior clientele.

— Geographic and product concentration. The three rated operating companies write almost all their business in California private passenger automobile insurance, though more homeowners’ insurance is being written than before. California is a problematical state to be concentrated in because of a history of referenda, legislation, and regulation that has not always been friendly to personal lines insurers. However, Mercury has benefited from the market disruptions produced by these circumstances by remaining a constant market and taking market share from companies that were damaged. Management also has a long history of working with the state legislature to promote a reasonable legal climate for personal lines.

Ratings List Mercury General Corp. Counterparty credit rating A/Stable/–Senior unsecured debt rating AMercury Casualty Co.Mercury Insurance Co.Counterparty credit rating AA/Stable/–Financial strength rating AA/StableMercury Insurance Co. of FloridaFinancial strength rating AA/StableCalifornia Automobile Insurance Co.Counterparty credit rating BBB/Stable/–Financial strength rating BBB/Stable.

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