Please ensure Javascript is enabled for purposes of website accessibility

Mercury General Is Homesick

By Ryan Fuhrmann, CFA – Updated Nov 14, 2016 at 11:28PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Auto insurer Mercury General is doing well at home -- it should stay there.

Auto insurer Mercury General (NYSE:MCY) continues to perform well in its home state of California. Perhaps it should consider staying close to home, because trends in other states are still not looking so hot.

Mercury General's stock jumped yesterday after reporting second-quarter earnings ahead of analyst projections, but it continues to spin its wheels in terms of overall growth. Net income did improve an impressive 84% as insurance losses fell significantly, and the expense ratio also improved, meaning Mercury was more efficient in writing new business.

However, other key insurance metrics, such as net premiums written and net premiums earned, continued to tread water, implying that Mercury continues to see challenges in growing the top line. And, as has been the trend, "non-California" business continues to be the culprit; it posted double-digit declines in both net premium categories. The combined ratio also remained higher than 100%, meaning an underwriting loss outside of Cali.

The Cali operations posted a favorable 90.2% combined ratio and showed positive, albeit modest, growth in net premiums earned and written. Fortunately, these represented close to 79% of Mercury's total personal auto policies in force as of the quarter's end. California homeowner policies also account for 95% of the total, with Florida making up the rest.

On a more positive note, management upped the quarterly dividend payment by 8.3% to a current $0.52, putting the annual payout at about 4%. After the recent stock jump, Mercury's price-to-book multiple has increased to 1.69, but it still stands at the low end of its five-year range.

Clearly, Mercury General will need to start posting better top-line trends for the multiple to expand further, but from a yield perspective, the stock still leads archrivals Allstate (NYSE:ALL) (2.9%), Progressive (NYSE:PGR) (0.2%), and Safety Insurance (NASDAQ:SAFT) (3.2%).

Mercury also has a reputation as a savvy insurance underwriter that pays high commissions to brokers who sell its products -- two key differentiators in a crowded and cutthroat industry. Combine that with the coupon payment, and the shares may be worth waiting around for. Premium growth could resume if non-California trends improve -- or if they continue to account for a smaller proportion of Mercury's overall business.

For related Foolishness:

Mercury General is an Income Investor  pick. Click here to learn about beating the market with quality dividend-paying companies. Safety Insurance is a Stock Advisor recommendation. 

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.

None

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Mercury General Corporation Stock Quote
Mercury General Corporation
MCY
$30.10 (1.14%) $0.34
The Allstate Corporation Stock Quote
The Allstate Corporation
ALL
$127.62 (-0.27%) $0.35
The Progressive Corporation Stock Quote
The Progressive Corporation
PGR
$121.53 (-0.73%) $0.89
Safety Insurance Group, Inc. Stock Quote
Safety Insurance Group, Inc.
SAFT
$82.46 (-0.36%) $0.30

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
339%
 
S&P 500 Returns
109%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.