NEW YORK, NY (Dow Jones) — George Joseph, the founder, chairman and largest shareholder of insurer Mercury General Corp. (MCY), employs his nephew as an executive in the firm without disclosing the family tie to investors, a consumer group said Tuesday.

Joseph’s nephew, Charles Toney II, is the Los Angeles-based auto insurer’s chief actuary, according to a letter from Consumer Watchdog to the U.S. Securities and Exchange Commission.

"This relationship presents a significant potential conflict of interest," Consumer Watchdog President Jamie Court wrote in the letter. The advocacy group said it has "concerns regarding the accuracy and completeness of securities filings" by the company.

Mercury said in a statement Tuesday that "it is widely known that they are related," and said the company was "in full compliance with SEC rules."

SEC rules require publicly traded companies to report the employment of close family members of senior executives or board members. The rule doesn’t include nephews on its list of relatives that must be disclosed, and such rules don’t apply to family members earning less than $120,000.

Court, however, said in an interview that Toney’s employment is "clearly material to the company" since a chief actuary sets prices and helps determine how much money the company needs to hold in reserve to pay claims.

The letter is the latest salvo in a contentious fight over a insurance-reform initiative appearing on California ballots next month. Mercury is the primary sponsor of the proposal, which will allow companies to expand discounts they give to customers who have maintained continuous insurance coverage. Consumer Watchdog has said that the proposition would unfairly raise insurance prices for those with lower incomes.

Mercury’s statement said the advocacy group was "clearly wrong" and motivated by its desire to defeat the ballot measure. "Charles Toney is a pricing actuary and has no involvement in the setting of the company’s reserves," the company said. "CW is also wrong on a variety of other facts, but Mercury will not comment further on this matter.

The way Mercury evaluates its claims reserves has drawn scrutiny from Wall Street. Michael Phillips, an insurance analyst at Stifel Nicolaus, wrote in a note to clients in March that Mercury may have an undisclosed reserve shortfall of $25 million. The company, he wrote, has a track record of pulling money from the pool that’s set aside to pay claims too quickly, only to reverse itself later. Last year, it took $46.7 million from the 2008 reserve fund, and it took $20 million from the 2009 fund in the first quarter of 2010.

"It’s a little bit early to be doing that," Phillips said in an interview Tuesday. "The bigger companies like the Allstates and Geicos of the world aren’t as volatile. They aren’t going back and forth because, frankly, it’s not that hard to figure out."
 Mercury executives said on a conference call last week that claims costs didn’t rise as much as they’d anticipated and that there were fewer "late reported claims," which allowed them to pull funds from the reserve pool.

Toney’s employment may violate the company’s own policies. The employee handbook, according to an excerpt supplied by the advocacy group, says an employee can’t report "directly to" or be "supervised by his/her relative" unless the chairman or chief executive authorizes an exception. Nephews are considered a relative under the policy, it says. Consumer Watchdog said it found no record that the company had alerted shareholders to a waiver.

Mercury has disclosed some of the business ties Joseph had with relatives in the past. Until this year, the company said in annual filings that an insurance agency that operates from Mercury’s home office was owned by Joseph’s daughter and run by Joseph’s sister. Joseph’s daughter sold the agency to George Toney in 2008, according the a regulatory filing in 2009, which stated that George Toney was Joseph’s nephew. Consumer Watchdog said George Toney is Charles Toney’s brother.

George Joseph, who was listed as 88 years old in a company report in March, has served as Mercury General’s chairman since founding the company in 1961. He had been chief executive as well, until relinquishing the title in 2006.

Joseph owns 34% of outstanding Mercury shares. His ex-wife, Gloria Joseph, is the next largest shareholder with a 17% stake. BlackRock Inc. (BLK) is the largest institutional investor, with 6.4%.
 
Contact the author, Erik Holm, at: 212-416-2892 or [email protected]