Mercury General (MCY, Financial) is a mid-cap insurer that is predominantly in California and mainly writes auto insurance. The stock yields 4.6%, but premiums and revenues have been stagnant for many years.
The company has 55.25 million shares outstanding and trades at a market cap of $3 billion. Trailing twelve month earnings per share are $2.01 and the price to earnings ratio is 27.1. The dividend is $2.48 and the dividend yield is 4.6%.
Sales have trended up slightly over the last few years. Sales were $2.776 billion in 2010 and were $3 billion in 2015. Trailing twelve month sales were $3.221 billion. That is actually a nice little bump. In 2008, sales crashed from $3.179 billion in the previous year to $2.414. Current revenues are about where they were ten years ago. Not a growth company and subject to economic conditions as evidenced by the big drop in 2007/2008.
Free cash flow has been around $200 million for the past few years. Net margins and return on equity are usually in the mid-single digits, which is not great. A big chunk of that free cash flow goes towards the dividend. Fortunately, insurance companies do not need big capital expenditures.
In the most recent quarter, Mercury had a combined ratio of 101.7%. This is the amount of expenses and claims. The goal is to be less than 100%. In the same quarter last year, the combined ratio was 98.5%. Some of this was due to storms in Texas. Mercury is implementing rate increases for its auto in California. That should help premiums and combined ratio. The company’s goal is to have a 95% combined ratio.
Mercury used to put up outstanding growth. In the 90s, the stock exploded but plateaued in 1998. Since then, you would have only made your dividend.
As of the latest Annual Report, the company had $3.38 billion in investments. Unpaid Losses was $1.1 billion, $1 billion in Unearned Premiums, and $290 million in Notes Payable. Mercury is financially sound.
California is 81.5% of the company’s business; 77.9% of premiums are auto, 13.3% home, 5.1% commercial and 3.7% “other”. Policies are sold through 9,700 independent agents.
A recent court ruling reversed the California Insurance Commissioner’s ruling against the company in the amount of $27.6 million. The commissioner claimed Mercury was allowing its agent to charge broker fees and that it was unlawfully raising premiums. An insurance company must get permission from the state before raising premiums.
The company was founded by George Joseph. At the age of 94, Mr. Joseph is chairman of the board. He holds 18.8 million shares worth over $1 billion. Not a bad dividend check that he gets every quarter. Warren Buffett once said that Mr. Joseph should be in the insurance hall of fame. I do not see that any interesting mutual funds own shares.
What I like about the stock is the 4.6% dividend yield. I also like that the company has been raising premiums every year. What I do not like is that Mercury reached its crescendo in the California auto market a long time ago. If revenues were growing at a slight amount every year, I would probably buy the stock and pocket that dividend. Another disconcerting issue is that premiums tanked in 2007/2008. So the company gets whacked when the economy does poorly and then puts up a milquetoast performance when the economy is stronger. I would also like to know more about their competition. If a big competitor pulled out of California, it would make the stock more enticing.
Disclosure: We do not own shares.
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