S&P Rates Mercury General Corp

Standard & Poor’s today assigned its preliminary “A” issuer credit rating to Mercury General Corp. (Mercury). The outlook is stable.

At the same time, S&P assigned its preliminary “A” rating to up to $150 million of senior debt to be issued by Mercury, with a final maturity of up to 10 years, and its “A” and “A-” ratings to Mercury’s $300 million shelf registration for senior and subordinated debt, respectively.

Mercury, founded in 1961, is a property/casualty insurance holding company whose main operating assets are:

— Mercury Casualty Co., primarily a writer of personal automobile insurance, which also writes homeowners’ multi-peril and commercial automobile lines.

— Mercury Insurance Co., which is exclusively a writer of personal automobile insurance.

In 2000, Mercury companies wrote about 90 percent of its overall premium in California. The company operates several much smaller personal insurers that do business in Oklahoma, Texas, Georgia, Illinois, Florida, Virginia, and several other states.

Major Rating Factors:

— Profitability. Mercury has consistently posted extremely strong operating results for at least the past five years. Loss control has been the group’s strong suit. In this period, Mercury’s combined ratios have averaged more than 10 points below those realized by S&P’s peer group of interactively rated companies.

— Capital. Capital is extremely strong, both among the operating companies looked at as a group and at the holding company, the borrower. The capital score calculated under S&P’s risk-based capital model for property/casualty insurers is close to twice the model’s “AAA” threshold.

— Management, strategy, and business position: Management, led by Mercury’s founder, is deep and experienced. The company is the sixth largest writer of automobile insurance in California and competes with a number of companies that are much larger and have much greater resources. However, its relationship with its independent agents, long the only type of distribution it has used and one of the keys to its profitability, is as solid as that enjoyed by any insurer. Management has parlayed this relationship and the low price at which Mercury sells its insurance products into an extremely strong and stable book of business. The strategy of maintaining the effectiveness of its agent force while maintaining strong technology in underwriting and claims cements the strength of the organization.

— Geographical concentration. Partially offsetting these strengths is the concentration of business in California. Although California is very populous and diverse, the company is exposed primarily to one regulatory and legislative environment rather than to more than one in which a favorable climate in one important state can counteract an unfavorable one in another. However, the group has performed well over many years, and management has worked closely with the legislature to promote reasonable treatment for the personal lines industry.

S&P stated it expects Mercury to continue to use its agency force and operating systems to produce results that substantially exceed those of most of its competitors in California, although the gap could narrow over the intermediate term as rivals try to gain access to the company’s customer base. It also expects that Mercury will expand its operations in Georgia, Florida, Illinois, Oklahoma, Texas, and certain other states, and the share of total written premium accounted for outside of California could double within five years. Capitalization should remain extremely strong for at least the next two years at both the holding company and, in general, at the operating companies, S&P said.