Mercury General Corp

Mercury General rebounded +21% in Q2 after a -15% drop in Q1, validating our thesis that the wildfire losses were a short-term earnings event rather than a capital impairment. Our research indicated that the California insurance market and Mercury's reinsurance coverage would support this view. With Southern California Edison likely responsible for the fires, Mercury's net exposure is projected at $320 million after tax, about 17% of pre-fire book value. In Q2, Mercury reported $148 million in after-tax operating earnings, with a forward earnings run-rate estimated at $380 million to $440 million annually. The stock trades at 9–10x earnings and generates ample free cash flow, positioning it well for potential capital returns to shareholders.

We began purchasing shares of Mercury General (MCY) in February 2024, believing the California personal lines market was entering a period of favorable pricing and regulatory support, setting the stage for a profitability inflection. We acquired shares around $50 and estimated normalized EPS in the range of $8.00–$10.00, supporting a fair value between $80–$120. Our thesis played out in 2024, with MCY securing significant rate increases and delivering strong earnings—EPS annualized above $10/share in the final two quarters of the year. Although the recent Los Angeles wildfires have led to short-term losses, we believe this will be an earnings event rather than a capital event, and the operating environment for insurers is improving, suggesting substantial upside.

Mercury General (MCY) is a midsized writer of personal auto and homeowners insurance, focused on the California market. We began purchasing shares in February 2024, believing the California personal lines market was entering a period of favorable pricing and regulatory support, setting the stage for a profitability inflection. Our thesis played out in 2024, with MCY securing significant rate increases and delivering strong earnings—EPS annualized above $10/share in the final two quarters of the year. Although the recent Los Angeles wildfires have led to short-term losses, we believe this will be an earnings event rather than a capital event, and the operating environment for insurers is improving, suggesting substantial upside.

Mercury General (MCY) is a midsized writer of personal auto and homeowners insurance, focused on the California market. We began purchasing shares in February 2024, believing the California personal lines market was entering a period of favorable pricing and regulatory support, setting the stage for a profitability inflection. Our thesis played out in 2024, with MCY securing significant rate increases and delivering strong earnings—EPS annualized above $10/share in the final two quarters of the year. Although the recent Los Angeles wildfires have led to short-term losses, we believe this will be an earnings event rather than a capital event, and the operating environment for insurers is improving, suggesting substantial upside.

We began purchasing shares of Mercury General in February 2024, believing the California personal lines market was entering a period of favorable pricing and regulatory support, setting the stage for a profitability inflection. We acquired shares around $50 and estimated normalized EPS in the range of $8.00–$10.00, supporting a fair value between $80–$120. Our thesis played out in 2024, with MCY securing significant rate increases and delivering strong earnings—EPS annualized above $10/share in the final two quarters of the year. Although the recent Los Angeles wildfires have led to short-term losses, we believe this will be an earnings event rather than a capital event, and the operating environment for insurers is improving.