On May 9, 2007, Mercury General held its annual shareholders’ meeting in Los Angeles. Mercury General writes auto and home policies and was started by George Joseph. Mr. Joseph is ranked as the 283 rd wealthiest American at a net worth of $1.2 billion. Owning over half of the company’s stock, at age 84, he retired last year as CEO and is now chairman of the board.
Mercury has shown phenomenal growth over the years. Its dividend has increased at an annual rate of 20% since 1986 and now yields about 3.7%. The stock has returned, with dividends, about 14.6% since 1986. That growth rate has decreased since the stock has not done much for the last few years.
Mercury is known to have some of the strictest underwriting in the business. Its combined ratio, which is its expenses and losses per dollar of premium, is one of the lowest in the insurance industry. It does thorough background checks on its insured to make sure it is rating its customers properly. As an example, they make sure teenagers are not driving their parents’ cars. Founded in California, Mercury is now in thirteen states and sells its insurance through independent agents. Management is now taking its great style of underwriting and spreading it across the country.
What is striking about Mercury General’s meeting is that it was empty. It appeared that there were only about five non-employees in attendance. When I walked in the door, I went straight up to George Joseph and CEO Gabriel Tirador and inquired as to how the company was doing. It’s hard to believe that one of the wealthiest men in America has a meeting and it’s empty. If someone in Los Angeles wanted to raise venture capital for a new type of cell phone case that had pink, sparkly sequens, there would be a line out the door.
Mr. Joseph told me about the early days of Mercury. It was a one-man show. He did everything from marketing to underwriting. His accountant only came in one day a week. Joseph first came to Los Angeles during World War II to a base on the outskirts of town. He grew up in West Virginia and still has a trace of an accent. He looks like a business man with his horned rimmed glasses and gold coin cuff links. My guess is that they don’t have casual Fridays in the executive offices at head quarters.
Mercury is rolling out two internal computer models named NextGen and Mercury First. According to management, these will allow better interface between agents, customers paying bills, and the insurance company. Though the roll out will not be until 2008 or 2009, management feels that income will significantly improve when this occurs.
I asked Mr. Joseph about the overall insurance industry. He said it is very competitive and there will likely be consolidation in the small cap insurance market.
Mercury’s investment portfolio is managed by managed by Chris Graves. The portfolio is mainly municipal bonds and other fixed income with a small equities portfolio. Mr. Joseph said that Mr. Graves has outperformed the S&P 500 with the equities portion since taking the reigns. I asked Mr. Graves what it is invested in and he said a high proportion of utilities. He said it is up about 17% year-to-date, if I understood him correctly. Insurance companies do not enjoy the same tax rate on investing as individual investors. Mercury pays 35% regardless of long-term or short-term gains.
I told someone in management that I had invested my niece’s entire $1000 college savings plan into MCY. We speculated as to how much of her college tuition it would pay for (she is only 6). His speculations were higher than mine, but we both feel that it will pay a substantial portion by the time she is ready for school. I won’t disclose who it was or how much he said because he did not know I would be writing this article.
* Holmes R. Osborne III, Inc., owns 5190 shares for clients and himself.
Mercury has shown phenomenal growth over the years. Its dividend has increased at an annual rate of 20% since 1986 and now yields about 3.7%. The stock has returned, with dividends, about 14.6% since 1986. That growth rate has decreased since the stock has not done much for the last few years.
Mercury is known to have some of the strictest underwriting in the business. Its combined ratio, which is its expenses and losses per dollar of premium, is one of the lowest in the insurance industry. It does thorough background checks on its insured to make sure it is rating its customers properly. As an example, they make sure teenagers are not driving their parents’ cars. Founded in California, Mercury is now in thirteen states and sells its insurance through independent agents. Management is now taking its great style of underwriting and spreading it across the country.
What is striking about Mercury General’s meeting is that it was empty. It appeared that there were only about five non-employees in attendance. When I walked in the door, I went straight up to George Joseph and CEO Gabriel Tirador and inquired as to how the company was doing. It’s hard to believe that one of the wealthiest men in America has a meeting and it’s empty. If someone in Los Angeles wanted to raise venture capital for a new type of cell phone case that had pink, sparkly sequens, there would be a line out the door.
Mr. Joseph told me about the early days of Mercury. It was a one-man show. He did everything from marketing to underwriting. His accountant only came in one day a week. Joseph first came to Los Angeles during World War II to a base on the outskirts of town. He grew up in West Virginia and still has a trace of an accent. He looks like a business man with his horned rimmed glasses and gold coin cuff links. My guess is that they don’t have casual Fridays in the executive offices at head quarters.
Mercury is rolling out two internal computer models named NextGen and Mercury First. According to management, these will allow better interface between agents, customers paying bills, and the insurance company. Though the roll out will not be until 2008 or 2009, management feels that income will significantly improve when this occurs.
I asked Mr. Joseph about the overall insurance industry. He said it is very competitive and there will likely be consolidation in the small cap insurance market.
Mercury’s investment portfolio is managed by managed by Chris Graves. The portfolio is mainly municipal bonds and other fixed income with a small equities portfolio. Mr. Joseph said that Mr. Graves has outperformed the S&P 500 with the equities portion since taking the reigns. I asked Mr. Graves what it is invested in and he said a high proportion of utilities. He said it is up about 17% year-to-date, if I understood him correctly. Insurance companies do not enjoy the same tax rate on investing as individual investors. Mercury pays 35% regardless of long-term or short-term gains.
I told someone in management that I had invested my niece’s entire $1000 college savings plan into MCY. We speculated as to how much of her college tuition it would pay for (she is only 6). His speculations were higher than mine, but we both feel that it will pay a substantial portion by the time she is ready for school. I won’t disclose who it was or how much he said because he did not know I would be writing this article.
* Holmes R. Osborne III, Inc., owns 5190 shares for clients and himself.
