Fitch Affirms Rating for Mercury General’s Senior Debt, IFS Ratings of Key Subsidiaries

Fitch Ratings has affirmed the ‘A’ long-term and senior debt ratings on Mercury General Corp. (Mercury).

Fitch has also affirmed the ‘AA-‘ insurer financial strength (IFS) ratings on Mercury Casualty Company (MCC) and Mercury Insurance Company (MIC) and the ‘A+’ IFS rating on California Automobile Insurance Co. (CAI). The Rating Outlook for all of the ratings is Stable.

Mercury’s ratings continue to reflect its strong competitive position and significant market share in California, consistently better than industry average underwriting results, and very strong capitalization. Partially offsetting these positives is the impact of the company’s concentrated geographic and product focus and rapid growth outside of California.

Mercury’s market share in California is approximately 9%. Fitch believes that Mercury’s strong relationship with 1,000 independent agents in California is a key factor supporting its strong competitive position. Mercury has carefully structured its compensation structure and technological service capabilities to attract high-quality independent agents that consistently produce profitable business.

Mercury has consistently outperformed the average personal line auto insurance writer from an underwriting perspective by employing conservative underwriting practices and maintaining tight expense control. As a result, the company’s combined ratios are typically five-to-ten points lower than the industry average for auto insurance writers.

MCC and MIC use a moderate amount of operating leverage and their risk-adjusted capitalization as measured by NAIC risk-based capital (RBC) ratios have historically been very strong averaging 563% and 571% respectively between 1999 and 2003. Fitch believes that CAI is managed to lower, albeit still adequate risk-based capital levels. This is a key reason CAI’s insurer financial strength rating is one notch lower than MCC’s and MIC’s.

Mercury also employs a modest amount of financial leverage and at June 30, 2004, the company’s ratio of debt-to-capital was 8.6%. Operating earnings-based fixed coverage has historically been very strong and through the first six months of 2004 was 123.8 times (x) as a result of an interest rate swap of Mercury’s fixed rate obligation on the senior notes. Without the benefit of the swap, coverage would still be strong at approximately 22x.

Approximately 78% of Mercury’s premiums are generated in California and approximately 87% of those premiums are derived from personal auto insurance. While Mercury has historically demonstrated solid results in the competitive and sometimes volatile California marketplace, Fitch believes that the company’s concentration in the California auto market carries potential risk exposures to political or legislative events that would not be present in a more diversified operation.

However, this risk has diminished as Mercury has strategically expanded into other states in recent years, causing premiums from outside California to increase to 22% of total net premiums written at June 30, 2004 from 16% for same period in 2003.

Fitch will continue to monitor growth and effects on profitability which to-date have been positive.