Press Release

Mercury Finance Insurance Subsidiaries Downgraded to "B"

CONTACT: Jeffrey Dunsavage
(908) 439-2200, ext. 5618

OLDWICK, N.J., Feb. 3, 1997 -- Effective immediately, A. M. Best Co. has lowered the ratings of Mercury Finance Co.'s insurance operations to "B" (Adequate). The downgrades into the Vulnerable category reflect Mercury's default on $17 million of commercial paper, which came due on Jan. 31, and concerns over Mercury's ability to refinance its other short-term debt in the near term. Mercury faces approximately $100 million of commercial paper obligations that will come due this week.

The ratings affected are those of Lyndon Property Insurance Co., which was downgraded from "A-" (Excellent), as well as Lyndon Life Insurance Co. and Gulfco Life Insurance Co., which were downgraded from "B++" (Very Good).

The default was triggered by a Jan. 29 announcement of recently discovered accounting irregularities at Mercury that resulted in the overstatement of previously released earnings. These irregularities and subsequent overstatements resulted from accounting entries that were made by Mercury's principal accounting officer. Based on the company's findings, it has restated net income for fiscal years 1993-1996, which has resulted in a $90 million charge to shareholder equity.

As a result of this development, Mercury is in violation of certain covenants of its debt agreements. Management has indicated that the insurance companies are not held as collateral by Mercury's senior lenders. However, A.M. Best will closely monitor the situation, including any possible involvement on the part of the Missouri Insurance Department with respect to the insurance subsidiaries. Mercury also faces several lawsuits filed recently.

A. M. Best will keep the ratings under review with negative implications, pending further developments given the significant uncertainty surrounding Mercury's ongoing operations. The review will focus on Mercury's ability to meet its short-term obligations to avoid bankruptcy, as well as the longer-term implications for both Mercury and the insurance operations. Approximately 40% of the insurance companies' earnings are associated with the captive distribution system of Mercury. Mercury's co-founder, John Brincat, recently resigned as chairman and chief executive officer and has been replaced by William Brandt Jr.

Mercury is a diversified specialty finance company that engages in the purchasing of individual installment sales finance contracts from automobile dealers and retail vendors, extending short-term installment loans and offering credit cards to customers. Mercury is the largest independent financier of previously owned automobiles. Mercury operates in 31 states through 285 branch offices that provide direct loans and credit insurance.

A.M. Best Co., established in 1899, is the oldest and most widely recognized insurance rating and information source.

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Copyright © 1997 by A.M. Best Company, Inc.