Mercury General Reports Implements Salary Freeze, 7% Workforce Reduction

Mercury General reported net income in the first quarter 2009 was $96.7 million compared with net loss of $4 million for the same period in 2008. Included in net income are net realized investment gains, net of tax, of $50.7 million in the first quarter of 2009 compared with net realized investment losses, net of tax, of $59.9 million for the same period in 2008. Operating income was $46 million for the first quarter of 2009, down 17.8% from the same period in 2008. The combined ratio was 96.9 percent, compared with a combined ratio of 95.4 in the same period the previous year.

The company said as a result of the adoption of SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS No. 159), changes in unrealized gains and losses on all investments that prior to Jan. 1, 2008 were recorded as changes to accumulated other comprehensive income on the balance sheet are now recorded as realized gains and losses on the statement of operations. During the first quarter of 2009, the company recorded approximately $101 million of pre-tax gains due to changes in the fair value of its fixed maturity portfolio and approximately $10 million of pre-tax losses due to changes in the fair value of its equity security portfolio. Net realized investment gains, net of tax of $50.7 million, in the first quarter of 2009 include the changes in the fair value of the investment portfolio and approximately $9 million, net of tax, in losses realized from the sale of equity securities.

Company-wide net premiums written were $670.9 million in the first quarter 2009, an 8 percent decrease over the first quarter 2008 net premiums written of $729.3 million. California net premiums written were $526.9 million in the first quarter of 2009, a decrease of 8.5 percent over the same period in 2008. Non-California net premiums written were $144 million in the first quarter of 2009, a 6.3 percent decrease over the same period in 2008.

On Jan. 1, 2009, the company acquired all of the membership interests of AIS Management LLC, a California limited liability company, which is the parent company of AIS and PoliSeek AIS Insurance Solutions, Inc. for $120 million. Prior to the acquisition, the company deferred the recognition of commissions paid to AIS to match the earnings of the related premiums. As AIS is now a wholly-owned subsidiary, commissions paid are no longer deferrable. During the first quarter of 2009, the amortization of deferred commissions offset by deferrable direct sales cost impacted the statement of operations by $12 million. The company said it expects an additional $3 million impact in the second quarter of 2009 and no material impact thereafter.

To improve profitability, Mercury General has implemented several cost reduction programs, including a salary freeze, a suspension of the employee 401(k) matching program, and a workforce reduction of approximately 360 employees (7 percent of workforce) primarily located in California. As a result of the workforce reduction, an $8 million expense was recorded in the first quarter of 2009. The annualized cost savings from these cost reduction programs are expected to be over $20 million, which will begin to be realized in the second quarter of 2009.

The Board of Directors declared a quarterly dividend of $0.58 per share. The dividend is to be paid on June 29, 2009 to shareholders of record on June 15, 2009.

Mercury General Corporation and its subsidiaries are a multiple line insurance organization offering predominantly personal automobile and homeowners insurance through a network of independent producers in many states. For more information, visit www.mercuryinsurance.com. The company will be hosting a conference call and webcast today at 10 a.m. Pacific time where management will discuss results and address questions. The teleconference and Webcast can be accessed by calling 877-807-1888 (USA) or 706-679-3827 (International). A replay of the call will be available beginning at 1:30 p.m. Pacific time and running through May 11, 2009. The replay telephone numbers are 800-642-1687 (USA) or 706-645-9291 (International). The conference ID# is 95278578. The replay will also be available on the company’s Web site shortly following the call.