Mercury General Corporation History

Company Perspectives:

Today, as many other insurers are exploring alternative means of distribution, becoming in part direct writers and, in some cases, placing themselves in direct competition with their own appointed agents, Mercury has reemphasized its commitment to the agency system by adopting strategies which involve the agent ever more closely in both the underwriting and claims management process. It is this integration, supported by continuous improvement in systems and communications, which is producing the savings and loss controls which make Mercury's competitive pricing possible. While other companies are attempting to reduce costs by cutting agents' commissions and by marginalizing the role of the agent, Mercury is holding the line on agents' compensation. We have to realize savings from the greater efficiencies achieved within our agents' offices as they build and improve their systems to handle tasks traditionally done at the home office. The professional insurance agent, our front-line underwriter, lies at the heart of the Mercury system, and the Company intends to continue to grow its business on the foundation of the independent agent.

Company History:

The largest agency writer of private passenger automobile insurance in California, Mercury General Corporation sells various types of insurance in selected regions stretching from Florida to California. From its inception in 1961 until 1990, Mercury operated exclusively in California, building a prodigious business from selling automobile insurance. During this formative period, the company stood out as an industry innovator, developing a complex system of rate levels for California customers that often offered considerable discounts to drivers. Known for shrewdly keeping overhead costs to a minimum and for its attention to detail in the screening process of potential customers, Mercury began expanding geographically in 1990, nearly doubling its revenue during a three-year period during the mid-1990s. During the late 1990s, the company sold insurance in Georgia, Illinois, Texas, Kansas, Oklahoma, and Florida, yet continued to depend heavily on its California business, which accounted for 90 percent of the direct premiums written in 1997. In addition to writing private passenger and commercial automobile insurance, Mercury sold homeowner, commercial and residential fire, and commercial property insurance. The company was founded by George Joseph, who continued to preside over operations during the late 1990s.

Origins

Like many other entrepreneurs before him, George Joseph started his own business because he believed he could do a better job than those who ran the company he worked for. He was born in 1921, the eldest son of a Lebanese-born storekeeper. Joseph spent his youth in Beckley, West Virginia, a small town in Appalachia where he stayed until World War II. During the war Joseph served as navigator aboard a B-17 airplane, and afterward he used his GI Bill tuition to attend Harvard. At Harvard, Joseph majored in mathematics and physics; upon graduating he settled in Los Angeles.

Joseph spent the 1950s working two jobs. During the day, he worked in the actuarial department of Trans-America's Occidental Life Insurance Co. At night, he sold insurance door-to-door. Working in insurance day and night, Joseph became intimately familiar with the way the business operated and the inadequacies in its execution, particularly in regard to automobile insurance. At that time, large insurance companies divided the driving population into two broadly defined categories: bad drivers and good drivers. The problem, as Joseph perceived it, was that the driving habits and histories of Los Angeles drivers did not neatly fall neatly into these two categories. Many drivers who fell somewhere between those with spotless driving records and those with a history of repeated accidents were categorized as high-risk drivers, and were forced to pay the resulting high premiums. It was this category of drivers that Joseph believed he could better serve, reasoning that he could offer lower premiums than his much larger competitors and gain legions of happy customers. In 1961 Joseph founded Mercury to test his theory.

What was needed, Joseph realized, was greater scrutiny of automobile insurance applicants. By delving deeper into the screening process than his larger counterparts, Joseph could more accurately define his customers, create more complex driver classifications, and grant discounts where appropriate. He took the time, for instance, to check a map to verify if an applicant's commuting distance really was five miles. He studied an applicant's credit history, took into account the type of car an applicant drove, and factored in these details into a premium formula that generated numerous rate levels--far more than his competitors relied on. Consequently, a driver looking to be insured could either be grouped into one of two large risk pools defined by one of the large insurance corporations, or the driver could approach Joseph and, for example, receive a "good student" discount. As he soon discovered, insurance applicants were often eager to opt for the latter.

Joseph was able to turn his insurance venture into a going enterprise by concentrating on what he determined were the "good," or lower, risks relegated to the high-risk pool, and he focused on these drivers exclusively for more than a decade. After building a foundation on such clientele, he began expanding his business to embrace other classifications of drivers.

1970s Expansion

Joseph formed a subsidiary in 1973 to undertake the underwriting of preferred-risk policies. Emphasis was placed on examining applications thoroughly, a responsibility that fell to a network of independent insurance agents. From its outset the company had relied on independent insurance agents paying its representatives a commission based on losses in relation to premiums rather than standard commissions derived from premiums alone. For Joseph's strategy to work, everything hinged on the assiduous work of the agents, the individuals those at company headquarters referred to as Mercury's "front-line underwriters." It was at this level that Joseph's underwriting strategy was won or lost, and he spent considerable effort instructing the company's front-line officers about the importance of thoroughly vetting potential customers. Eventually, Mercury's independent insurance agents were governed by an underwriting manual stretching to 34 pages, made up of rules written by Joseph himself. The independent insurance agents were told to meet personally with applicants, to fill out detailed policy applications, complete with photographs taken at different angles of the applicant's vehicle, and to verify that the applicant did indeed live where he or she claimed to reside. Through their dedication to the philosophy espoused by Joseph and his senior executives, Mercury eclipsed much of its competition, steadily increasing its share of the nation's largest automobile insurance market.

Rapid Financial Growth in the 1990s

In 1985 Mercury converted to public ownership in an initial public offering on the NASDAQ exchange. Five years later the company took its first steps outside its home state of California, opening operations in Georgia and Illinois.

Mercury continued to prosper. In 1993 the company's underwriting losses were 61 percent of premiums earned, a figure that compared favorably to the higher (and less profitable) average of 73 percent registered by Mercury's eight largest California competitors. Furthermore, Mercury's underwriting expenses, tabulated before commissions and taxes, were 5.8 percent of premiums, which bettered the industry average of 12.1 percent. All told, the company enjoyed a premium volume that stood at $467 million, a total achieved after 32 years of hard work--but the 73-year-old Joseph was not content to rest on his laurels. At Mercury's annual shareholder meeting in May 1994, he made a startling announcement. He maintained that he intended to lift Mercury's premium volume past the $1 billion mark by the end of 1997, a feat that would more than double the size of the company in the space of three years.

Mercury executives began trying to meet this formidable challenge. A print media advertising program was introduced, featuring a toll-free number supported by the company's independent agents, that provided specific rate comparisons against Mercury's major competitors. In December 1996, the company purchased American Fidelity Insurance Group for $35 million. Based in Oklahoma City, American Fidelity operated as a writer of automobile insurance (which made up 57 percent of its total business) and other casualty lines of insurance, underwriting more than $90 million of direct premiums in the year leading up to its acquisition by Mercury. The acquisition was reorganized as American Mercury Insurance Group, giving Mercury operations in Oklahoma, Texas, and Kansas. Despite the geographic expansion of the 1990s, 90 percent of the company's direct premiums in 1997 were written in California.

When the financial totals were tallied at the end of 1997, the ambitious goal set out by Joseph in 1994 was fully achieved. For the year, written premiums increased 28 percent, swelling to $1.08 billion. In addition to meeting Joseph's goal, Mercury's executives and vast cast of independent insurance agents could take pride in several other heartening achievements. Operating as one of the fastest-growing automobile insurers in the nation, Mercury ranked as the largest independent agency writer of automobile insurance in California and the sixth-largest of all automobile insurers in California, up from the seventh position it had occupied in 1996. With an estimated 7.2 percent market share of the California market, Mercury was the insurer of more than one million vehicles in California. Additionally, the company's net income amounted to $156.3 million in 1997, more than three times the total recorded in 1994, when the concerted effort to dramatically increase revenues began. After establishing operations in Florida in January 1998, Mercury, with Joseph in charge, prepared for the new century ahead, its business thriving under the operating strategy created by its septuagenarian founder.

Principal Subsidiaries: Mercury Casualty Company; Mercury Insurance Company; Mercury Insurance Company of Illinois; Mercury Indemnity Company of Illinois; Mercury Insurance Company of Georgia; Mercury Indemnity Company of Georgia; California Automobile Insurance Company; California General Underwriters Insurance Company, Inc.; American Mercury Insurance Company; Cimarron Insurance Company; AFI Management Company, Inc.

Further Reading:

• Fondiller, David S., "Secret's Out," Forbes, March 25, 1996, p. 14.
• Munk, Nina, "'George Knows Whom to Call,"' Forbes, November 7, 1994, p. 113.

Source: International Directory of Company Histories, Vol. 25. St. James Press, 1999.

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