What happened
Insurer Mercury General Corp. (MCY 0.72%) had a stellar week as its stock price jumped 26% (as of 3:00 p.m. ET) from last Friday's close, according to S&P Global Market Intelligence. The stock price had been up as much as 28.3% during the week. Mercury General is trading at $36.22 per share, down about 31.7% year to date as of 3:00 p.m. ET.
It outperformed the major indexes, as the Dow Jones Industrial Average was down 2%, the S&P 500 was off 4%, and the Nasdaq dropped 6.4% this week as of 3:00 p.m. ET on Friday.
So what
Mercury General is a California-based insurance company serving roughly 11 states, primarily with automobile and home insurance. It jumped higher this week on a solid third-quarter earnings report released Tuesday that soundly beat analysts' estimates.
Mercury posted operating income per share of $0.28, down from $0.64 per share in the third quarter of 2021 but much better than the $0.55-per-share loss analysts expected. The company also generated $900.3 million in revenue, down from $932 million a year ago, and missed estimates.
In addition, the combined ratio jumped up to 102.8%, up from 99 a year ago, meaning the company is paying out more in losses and expenses than earnings in premiums. Anything under 100% means it is earning more in premiums than expenses and losses.
NYSE: MCY
Key Data Points
In the third quarter, net earned premiums were up 6% to $997 million, but losses were up about 12% to $787 million, and overall expenses were up 10% to $1.029 billion. In addition to the earnings beat, Mercury got a sizable boost from an upgrade by Raymond James analyst C. Gregory Peters on Friday.
Now what
Peters upgraded Mercury General from underperform to strong buy, which shot the stock up some 12.3% higher on Friday as of 3:00 p.m. ET.
The upgrade is based on the expectation that the California Department of Insurance (DOI), which oversees Mercuryʻs primary market, will approve Mercury's auto rate filings within the next six months or so.
The DOI has not approved a rate filing from any insurer in the state since the pandemic started. It is currently reviewing state insurers to see whether their pandemic-related premium refunds were accurate, along with rate increase requests. In its 10-Q filing, Mercury said, "It is not reasonably possible to predict if, or when, the California DOI will approve the Company's pending rate filing."
Based on that expectation, Mercuryʻs success with rate initiatives in other states it serves, and the expected growth in investment income from higher interest rates, Raymond James sets a $45 price target for the stock. Mercury also maintained its $0.3175 quarterly dividend, but it is down from $0.6325 a year ago. The company was forced to cut its dividend in half after the second quarter of this year but still has a high yield of 3.92%.
Iʻm not sure whether that is enough to warrant a buy, but that California rate case will be interesting to keep an eye on.
