Mercury General strives to keep up with growing expenses
Opinions about Mercury General Corp. often depend on whether they’re coming from investors or consumers.
The Los Angeles automobile and homeowner insurance company has been at the center of repeated attempts to amend California’s landmark Proposition 103, which made automobile insurance a more regulated industry.
For more than a decade, Mercury’s founder and chairman, George Joseph, has clashed repeatedly with consumer advocate Harvey Rosenfield, author of the landmark proposition, before the California Department of Insurance, the courts, the Legislature and on the ballot. Joseph’s efforts to amend the proposition have been unsuccessful so far.
Mercury sells auto and homeowner policies through 13 companies in more than a dozen states. California by far is its largest market, accounting for about 78% of its private auto business and 80% of its homeowner policies.
Joseph founded Mercury Casualty Co. in 1961 as a low-cost auto insurance alternative to bigger insurers. It focused on offering reduced premiums to drivers who had lower-than-average risks of getting into accidents and on tight underwriting and claims handling.
Because business is affected by many factors outside of the company’s control, it can be volatile. Mercury’s net income last year was $117 million, its worst performance since 2008, when it lost $242 million.
The latest
Mercury is attempting to raise premiums for homeowner and auto policies in California, but it needs state Department of Insurance approval. The increases are necessary, the company said, to help it keep up with growing expenses.
Mercury recently filed a lawsuit to overturn an administrative judge’s decision to force it to reduce its California homeowner rates by 5.4%, rejecting Mercury’s request for a 3.9% increase. The lawsuit is pending.
With that request unresolved, Mercury made a second request to raise homeowner rates, this time by 10.7%. The state approved an 8.3% increase, said Joel Laucher, deputy insurance commissioner for rate regulation.
Meanwhile, Laucher said, the agency also approved Mercury’s request for a 6% increase in premiums for auto customers.
Mercury is coming off a disappointing third quarter. The company posted earnings of 53 cents a share, far below the 64 cents that Wall Street analysts had expected.
Profits were affected by increased costs, primarily from automobile accidents, Vincent DeAugustino, an analyst with Keefe, Bruyette & Woods, said in a research note.
Analysts have been leery about Mercury’s future performance, noting that even if California regulators allowed it to increase rates, the increases would cover only its rising costs.
Accomplishments
In its more than five decades in business, Mercury has grown into one of the biggest names in auto insurance, at least in California.
Though it has added homeowner insurance to its offerings, the auto insurance business still accounts for about three-quarters of its revenue.
Mercury General is now the state’s fourth-largest private auto insurer, with about 8% of the private auto liability insurance market in the state.
Last year, the company reported revenue of $2.8 billion, its highest level since it recorded $3.1 billion in 2009.
Challenges
Mercury’s profits have been hit by rising expenses, primarily the costs of medical bills and automobile repairs related to traffic collisions involving its insured drivers. New regulations in California about the quality of replacement parts also could increase expenses.
It has had a difficult time increasing revenue to cover those expenses.
“Mercury’s ... 6% rate increase request would basically neutralize current loss cost inflation,” DeAugustino said.
DeAugustino had other concerns: “Its mostly California focus presents some profitability hurdles that detract from the valuation.”
In a recent conference call with analysts about its third-quarter performance, the company’s chief executive, Gabriel Tirador, hardly sounded upbeat.
“Our top line is expected to be under pressure going forward as new business, private passenger sales and retention levels outside of California have declined due to rate increases, and the California market remains competitive,” Tirador said.
The company sells auto and homeowner policies in several states. Its largest presence outside of California is in Florida, Texas and New Jersey. It recently stopped issuing homeowner policies in Florida.
Analyst opinions
One analyst recommends holding the stock, and three suggest selling it. On average, they estimate the stock will fetch $43 a share in a year. That would mark a 9% decrease from its Friday closing price of $47.47.
“We’re still not ecstatic about Mercury’s valuation in light of the risk that its auto and homeowners rate increase requests are unsuccessful,” DeAugustino said. “We’re also lowering our [earnings] estimates reflecting slower loss-ratio improvement, modestly higher expense ratio and lower net investment income.”
