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MCY - Mercury General Corporation


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Reading the last Semper Augustus letter triggered to see what was in Mr. Bloomstran's portfolio. i think he has liked MCY (to variable degrees) for a very long time and seems to like it more these days.

My story with MCY:
-liked it in 1999 (found the following reference yesterday):
https://static.fmgsuite.com/media/documents/ba647734-4ac3-4fc3-941b-856e902370a2.pdf
-didn't like it enough anymore in 2005
-looked at it in 2008-9
-forgot about it after until a few weeks ago

i come to a different conclusion vs Mr. Bloomstran now so i thought the following could be shared.

Summary: the company is focused (since 1961) in private auto insurance, mostly in California. The company grew ++ introducing a price segmentation strategy that offered profitable growth over a long period. The founder is still Chairman of the Board (at age 99!).

                                                    1999    2005    2019
combined ratio GAAP(%)                93.2    92.4      99.4
premiums to surplus                        1.4      2.0        2.4
NPW (base year 1999=1)                1.0      2.4        3.1
pre-tx yield on portfolio (FI)            6.2      4.0        3.5
operating EPS (approximate)          2.50    4.65      2.60
dividend per share                          0.70    1.72      2.5125
BVPS                                            16.73    29.44    32.51

Since 1999, diluted shares outstanding has grown by a total of 2 to 3%.
The thesis in 1999 was for operating earnings to go back to its normalized 3.00 per share, to have a combined ratio going back to 90% and to enjoy relative profitable growth after the softening phase. Things worked out at least up to 2004-6 despite a lower portfolio yield (more than compensated by premium growth (and float)).

Since that period, the company tried to grow and to diversify (commercial auto, homeowner and out of state) with limited success.

For the 2010-2019 period:
avg CR: 100.2%
avg ROE: 6.4%
avg operating earnings per share: 2.13
cumulative operating earnings per share: 21.29
cumulative dividend paid: 24.60

2019 earnings (EPS) also include an unusual 3.18 per share gain from realized gains which are unusual. 2020 earnings (EPS) are not representative (private passenger auto CR 98.2 to 88.3 specific to 2020) and 2020 also included unusual realized gains (1.22 per share).

Contrary to the 1999 picture and contrary to what Mr. Bloomstran seems to suggest by trends in ownership, i don't see underwriting and investment results (to come) justifying present market valuations. For the underwriting part, the moat has decreased and this is combined with high operating leverage (premium to capital). For the investment part, the company has reached up in the risk-reward ladder; the portfolio remains quite conservative but downside risk (which is largely unseen at this point) has increased considerably. i expect 0 to 3% CAGR for the next 3 to 5 years if market value coincides with intrinsic value over this longer time horizon. An argument could be made that absolute results may not match relative results but MCY's market valuations may be highly correlated on the way down, if applicable.

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I have owned this about the same time than Cigarbutt did- late nineties. It was a Graham stock back theN, profitable, paying a dividend and trading around book.

I also was their customer for about a decade when living in CA. I had the trifecta of homeowners, car and umbrella with the. Our agent (independent) was awesome and nobody could beat their prices for the entire package,  it even close.

 

I sold this stock for a decent gain back then and despite having it on my watchlist for almost 20 years, never really looked closely until recently in summer 2020. It’s operation results have deteriorated  since the late nineties if I remember correctly and other insurance stocks more appealing. It is probably a decent buy at the right price, but I don’t think it will be a compounder - they just don’t really have an edge and their results are consistently below average as far as I can tell.

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