Price-Cutting Fails to Attract New Business to Mercury
California’s auto insurance price wars have taken their toll on another major insurer: Los Angeles-based Mercury General Corp. said Monday that its price-cutting tactics failed to attract significant numbers of new customers.
Mercury’s shares fell 23% on the New York Stock Exchange, losing $13.88 to close at $45.63, their lowest level since November.
For the record:
12:00 a.m. July 29, 1998 For the Record
Los Angeles Times Wednesday July 29, 1998 Home Edition Business Part D Page 3 Financial Desk 2 inches; 62 words Type of Material: Correction
Mercury General Corp.--The company’s price-cutting tactics in auto insurance premiums failed to attract enough new customers to offset the lower prices during the second quarter. That fact was mischaracterized in a story Tuesday. In fact, as stated later in the article, Mercury’s policy count during the quarter grew by nearly 4%, to 705,000, compared with the previous quarter. However, premium price cuts more than offset the growth.
Profit at the company, California’s sixth-largest auto insurer, rose 33% in the second quarter but still failed to meet analysts’ expectations. Mercury said earnings, excluding gains from the sale of securities, rose to $47.4 million, or 86 cents a diluted share, from $35.7 million, or 65 cents, in the year-earlier period. That increase was below the average of 87 cents forecast by analysts surveyed by First Call Corp.
Premiums written in the quarter rose 3% to $274.8 million, well below the 12% growth of the first quarter, as the company lowered prices to attract customers. Analysts said the strategy didn’t draw enough new business to offset the drop in the growth rate.
“It’s harder to get people to switch companies, because everybody’s rates are lower,” said Ira Zuckerman, an analyst at Nutmeg Securities in Westport, Conn.
Mercury helped fuel a price war earlier this year by cutting its rates 7% in April and beginning a new advertising campaign. The company ended the quarter with 705,000 California policies in force, 28,000 more than three months earlier. The company said the advertising campaign didn’t meet expectations.
Mercury General, which has a market capitalization of $2.6 billion, has been one of the beneficiaries of the buoyant market for auto insurance, one of the few bright spots for property and casualty insurers.
“The margins have been very good in the business,” said Gabriel Tirador, Mercury’s chief financial officer. “When that occurs, you have new entrants, and the ones already in there are trying to gain market share.”
The intensifying competition has also hurt shares of California’s ninth-largest insurer, Mayfield Village, Ohio-based Progressive Corp., which last week reported that its second-quarter premium growth slowed. Progressive’s shares are down 13% since the July 21 earnings report. Progressive fell another $5.50 on Monday to close at $129.25 on the NYSE.
California’s insurers have cut premiums by nearly $400 million in the last two years as healthy profits attracted new competition.
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Bloomberg News was used in compiling this report.
