Standard & Poor’s Downgrades Mercury Insurance from Stable to Negative

June 1, 2006

Standard & Poor’s Ratings Services has revised its outlook on Mercury Casualty Co. (Mercury Casualty), Mercury Insurance Co. (Mercury Insurance), and Mercury Insurance Co. of Florida (collectively referred to as Mercury) to negative from stable. Standard & Poor’s also said that it affirmed its ‘AA’ counterparty credit and financial strength ratings on those companies.

In addition, Standard & Poor’s raised its counterparty credit and financial strength ratings on California Automobile Insurance Co. (California Auto) to ‘A’ from ‘BBB’ based on the recognition of California Auto as a strategically important entity to Mercury General and because of its substantially improved level of capitalization. The outlook on California Auto is also negative.

“The revised outlook on Mercury reflects the increasingly difficult regulatory, legal, and competitive environment in the group’s core California market,” explained Standard & Poor’s Credit Analyst Polina Chernyak. “We believe that the tougher environment will force changes in Mercury’s business practice and eliminate some of its competitive structural advantage.”

Although the company does not anticipate a material financial impact from the current regulatory and legal changes, they could affect the company’s ability to attract and retain business as well as the profitability of that business, S&P said. Standard & Poor’s intends to monitor the change closely, particularly its impact on Mercury’s financial strength.

The ratings are based on the group’s extremely strong capitalization, superior operating performance, and local market presence as California’s largest independent agency auto. Partially offsetting those positive factors are the group’s business concentration in California and increased underwriting leverage in recent years. However, management is promoting diversification in other states that produce profitable results. For example, it entered the New Jersey personal auto market in the third quarter of 2004, and this market generated a combined ratio in mid 90 percent range at year-end 2005, S&P said.

If Mercury General’s efforts to overcome increasing difficulties in its operating environment and enhance its risk-management capabilities are unsuccessful and the company does not maintain its current level of profitability and growth performance, Standard & Poor’s Ratings Services will consider lowering the rating within 18 to 24 months. Alternatively, if Mercury General — in addition to meeting capital and earnings expectations — is able to enhance its risk-management capabilities, Standard & Poor’s will consider revising the outlook back to stable.

All ratings affected by this rating action can be found on Standard & Poor’s public Web site at under Credit Ratings in the left navigation bar, select “Find a Rating,” then “Credit Ratings Search.”

Source: S&P

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