Pioneering insurer gains share, capitalizes on competitor's Ills. (Corporate Focus).

SHARES of Mercury General Corp. have skidded since a late October earnings miss, but investors may be ignoring some longer-term strengths in the Los Angeles-based insurer's business.

Mercury, founded by industry pioneer George Joseph, is gaining market share in California, already a stronghold, and it's expanding opportunistically in other states as well.

Joseph, its 80-yearold chairman and chief executive, is using Mercury's strong capital ratios and relationships with insurance agents to pounce on new business when competitors run into trouble. In recent years, Mercury has launched operations in Virginia, Florida and New York, among other states.

"What he's doing now is planting seeds," said Dan Boyle, partner with Schwerin Boyle Capital Management in Springfield, Mass., which has a position in the company. "They're picking these larger states where they feel like at some point there's going to be a tightening in the market, and they'll take advantage."

Outside of California, Mercury has had its most success in Florida, where experiments with purchasing. policies on the Internet have soured relations between competitor Progressive Insurance Co. and its agents.

"In Florida in particular, (Mercury is) writing an appreciable amount of business," said Charles Titterton, a debt analyst with Standard & Poor's.

Mercury shares dove 9.4 percent from around $45 on Oct. 28, after the company reported third quarter earnings that fell far below Wall Street estimates due to an unexpected rise in medical claims. The stock has continued to weaken, to a recent price of $37.85.

During the third quarter, Mercury General discovered that medical claims on automobile insurance policies it wrote in 2000 and 2001 were coming in higher than estimated, Titterton said.

The company adjusted its formulas and applied them to policies written in those two years. It then applied the new assumptions to 2002 as well, increasing its reserves all at once in the third quarter. As a result, net income for the period fell to $18.5 million from $32.1 million in the like year earlier period.

Titterton called the shortfall a "hiccup." He and others say that the earnings mask Mercury's continuing market share gains in California, where premiums written rose 28.5 percent in the third quarter, to S418.4 million, and in newer markets, where business is much smaller but growing fast.

Company-wide premiums totaled $491.6 million in the third quarter, up 31.5 percent from a year earlier.

Joseph's formula is to keep Mercury's capital strength at very high levels, manage the company efficiently and wait for others in its markets to stumble.

Known as an innovator in the automobile insurance industry, Joseph was the first to have claims adjusters take photographs of automobile damage to limit fraud. His losses on automotive coverage typically run much lower than competitors'.

In writing homeowners' insurance policies -- a much smaller business for Mercury -- Joseph avoided large losses in the Northridge earthquake of 1994, because he limited the number of policies Mercury would sell in certain zip codes. He also refused to write policies on structures he viewed as susceptible.

Another hallmark of Mercury is its continued reliance on independent agents to sell its policies. Mercury gives these agents incentives to write policies that generate low claims. It pays out higher commissions, but generally avoids big surprises.

Increase requested

The third quarter adjustment in medical loss claims, an unusual development, is nonetheless due to medical cost inflation affecting insurers nationwide.

Mercury has applied for a rate increase to account for the higher medical losses estimated for future periods.

In California, where Mercury still generates more than 85 percent of its business, the company is taking advantage of others' stresses, as it has in previous down cycles.

State Farm, for example, which has taken large losses on its homeowners' policies and on its investment portfolio, has stopped writing new policies here and in a number of other states, Titterton said. Meanwhile, the rate environment for Mercury and other insurers has improved.

"The conditions are pretty good for companies that are staying the course and writing new business aggressively, and that's what Mercury's doing," Titterton said.

Mercury General Corp.
Stock Prices


Nov. 20, 2001  $41.34
Nov. 20, 2002  $37.85

Note: Table made from line graph

[GRAPH OMITTED]

YEAR (Dec. 31)                  2001     2000

Revenue (millions)            $1,507   $1,366
Total Expenses (millions)    1,382.1  1,237.5
Operating Income (millions)    124.8    128.6
Net Income (millions)          105.3    109.4
Earnings Per Share             $1.94    $2.02

SUMMARY

Business: Automobile and homeowner insurance

Headquarters: Los-Angeles

CEO: George Joseph

Market Cap: $2.1 billion Dividend Yield: 3.2%

Total Liabilities: $1.5 billion P/E Ratio: 29

Long-Term Debt: None

Financial Editor Anthony Palazzo can be reached at 323-549-5225, ext. 224, or at [e-mail].