Corp Focus

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By SCOTT S. SMITH

Contributing Reporter

Mercury General Corp. went through some tough times in 1998 and this year could get even stormier, though analysts generally remain bullish about the company’s prospects.

The bargain-rate auto insurer, one of L.A.’s few remaining $1 billion-plus public companies, has seen its stock price cut almost in half since last summer, as out-of-state competitors flooded into California.

Drawing the out-of-towners were two changes to state law that dramatically fattened California auto insurers’ profit margins. One was passage of Proposition 213, which bars uninsured motorists and drunk drivers from suing for pain-and-suffering damages. The other was a new state law requiring all motorists to carry auto insurance.

Those changes sent Mercury General’s revenues and net income soaring in 1997, but also prompted out-of-state insurers to jump into the California market. The resultant competition has squeezed once-fat margins and hammered Mercury’s stock.

“It’s a very competitive environment because consumers are being deluged by ads at a time when they’re too complacent about low rates to shop around,” said Gabriel Tirador, Mercury’s chief financial officer.

Mercury expects to release its fourth-quarter and year-end 1998 results this week (Feb. 12).

Analysts’ consensus, according to First Call, is for 1998 earnings per share of $3.26, a 14.8 percent increase from $2.84 a year earlier. But growth is projected to fall to 2.8 percent this year, according to Michael Dion, an analyst with Hoefer & Arnett. The projected slowdown is one reason Mercury’s stock has fallen from its 52-week high of $70 last July to about $39 as of last week.

“We’ve squeezed out all the incremental benefits from the new laws,” said Tirador.

But the outlook appears to be improving, said Weston Hicks, an analyst for Sanford C. Bernstein & Co. Inc., who says Mercury has “a powerful business model.”

“It was the first insurance company to have a special investigative unit to make sure claims were legitimate, and it has maintained a database of perpetrators of insurance fraud from its start,” Hicks said.

That fraud-fighting unit is one edge Mercury has over new entrants, many of which are just now realizing the exorbitant level of auto insurance fraud in California. Those looking “to pull a fast one” know it won’t work with Mercury, Hicks said.

But not everyone is thrilled with Mercury’s hard-nosed efforts against fraud. “They are very tough to the point of almost being unfair in settling claims, low-balling or not paying at all,” said Arnold Schwartz of Mazursky, Schwartz & Angelo and immediate past president of the Consumer Attorneys of Los Angeles. “They have a scorched-earth policy as an M.O.”

One advantage Mercury enjoys over most other insurers is that it relies on independent insurance brokers to market its policies. With commissions tied to Mercury’s profitability, brokers have an incentive to keep risks low, so they’re performing some of the screening functions that are normally handled by the insurer.

Mercury also has longtime relationships with auto-repair shops throughout California. Through those relationships, it has negotiated rates even as repair shops have been raising their prices for most other customers.

And looking to compete against the newcomers, Mercury reduced its auto insurance rates by about 7 percent last April and has been spending aggressively on radio and billboard advertising.

As a result of all those factors, other insurers that recently entered the state will find it hard to compete in the long run on Mercury’s turf, said Dion.

Once those competitors pull out, perhaps in a year or so, Mercury should be able to reduce its marketing expenditures, somewhat restoring its fat margins, Dion said.

Meanwhile, Mercury has followed the new entrants’ example by itself undertaking expansions into other states, especially Florida, Georgia, Illinois, and Texas, where it believes its methods will prove profitable.

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