Why Mercury General Stock Soared 26% This Week

What happened

Insurer Mercury General Corp. (MCY 13.59%) had a bumper week as its stock price jumped 26% (as of 3:00 p.m. ET) from last Friday’s close, according to S&P Global Market Intelligence. The stock price had risen 28.3% during the week. Mercury General is trading at $36.22 per share, down about 31.7% since the start of the year at 3:00 p.m. ET.

It outperformed the major indices, as the Dow Jones Industrial Average was down 2%, the S&P500 was down 4%, and the Nasdaq fell 6.4% this week as of 3:00 p.m. ET Friday.

So what

Mercury General is a California-based insurance company that serves approximately 11 states, primarily with auto and home insurance. It jumped higher this week on a strong third-quarter earnings report on Tuesday that comfortably beat analysts’ estimates.

Mercury posted operating earnings per share of $0.28, down from $0.64 per share in the third quarter of 2021, but much better than the $0.55 per share loss analysts expected. The company also generated $900.3 million in revenue, up from $932 million a year ago, and missed estimates.

Additionally, the combined ratio climbed to 102.8% from 99 a year ago, meaning the company is paying more in losses and expenses than in premium gains. Anything less than 100% means he earns more in bonuses than in expenses and losses.

In the third quarter, net earned premiums increased 6% to $997 million, but losses increased approximately 12% to $787 million, and overall expenses increased 10% to $1.029 billion. of dollars. In addition to the pace of earnings, Mercury got a huge boost from an upgrade to Raymond James Friday, analyst C. Gregory Peters.

Now what

Peters took Mercury General from an underperformer to a solid buy, sending the stock up 12.3% Friday at 3:00 p.m. ET.

The upgrade is based on the expectation that the California Department of Insurance (DOI), which oversees Mercury’s core market, will approve Mercury’s automotive rate filings within about six months.

The DOI has not approved any rate filings from any state insurer since the start of the pandemic. He is currently reviewing state insurers to see if their pandemic-related premium refunds were accurate, as well as requests for rate increases. In its 10-Q filing, Mercury said, “It is not reasonably possible to predict if, or when, the California DOI will approve the company’s pending rate filing.”

Based on this expectation, Mercury’s success with rate initiatives in other states it serves, and expected investment income growth through higher interest rates, Raymond James sets a target of price of $45 for the stock. Mercury also maintained its quarterly dividend of $0.3175, but it’s down from $0.6325 a year ago. The company was forced to cut its dividend in half after the second quarter of this year, but still has a high yield of 3.92%.

I don’t know if that’s enough to warrant a purchase, but it will be interesting to watch this California rate case.

Dave Kovaleski has no position in the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.

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