Regional auto insurer Mercury General (NYSE:MCY) just posted a third-quarter drop in year-over-year earnings, but the stock is still up almost 7%, since the number came in ahead of analyst projections. Don't expect the stock to speed along to further gains from here on out, but it does pay a solid dividend.
For the quarter, overall net premiums written, or insurance policies sold, grew slightly, up 1.7% from the third quarter last year. Mercury does the majority of its business in its home state of California, where it saw net premiums written advance a more impressive 5.1%. Premiums written outside Cali fell 6.7%; luckily, they only represented 26.2% of the total for the quarter. It's also worth noting that auto insurance represents more than 90% of Mercury's total business.
The combined ratio is another important industry ratio that measures whether an insurance firm is making an underwriting profit. A ratio under 100 is a good thing, as it implies an underwriting profit, while a number higher than 100 means a company is either paying too many claims or spending too much to write new premiums. Mercury's combined ratio moved in the wrong direction for the quarter, increasing to 93% from 90.8% last year. It will be important to track this number going forward; the company cited the need to make additional reserves in Florida and New Jersey for larger potential individual, bodily, and personal injury losses in the states.
Another important piece of news is related to the announced retirement of founder George Joseph as CEO. Joseph will retire his CEO post on Jan. 1, 2007, but will remain chairman. Many investors, including former Income Investor analyst Matthew Emmert, have seen the move as inevitable, since Joseph is now in his mid-80s, but he will remain involved at Mercury. In any case, transition concerns are minimal, since the overall management team is well-respected; Gabriel Tirador, the incoming CEO, has been the chief operating officer since 2001.
Premium growth at Mercury has been decelerating over the past several years, and more bearish investors fret that the company won't be able to post the robust expansion to which the market has become accustomed. Nevertheless, Mercury pays a decent dividend with a yield of 3.7%, and it is well-respected in the insurance industry as a savvy underwriter with a reputation of paying among the highest commissions to insurance brokers that sell its products.
Although it is much smaller, I would place Mercury up there with highly regarded industry titans such as Progressive (NYSE:PGR), Allstate (NYSE:ALL), and BerkshireHathaway's (NYSE:BRK-A) (NYSE:BRK-B) Geico insurance. For other regional players, also check out Ohio Casualty (NASDAQ:OCAS) and Merchants Group (NYSE:MGP).
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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.
