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Mercury General: Always No, Forever No


  • In 2020, Mercury benefited from COVID19 social restrictions, which impacted auto claims activity positively.
  • As a result, the company recorded the best-combined ratio over the last decade, with a FY2020 combined ratio of 93.6%.
  • In 2021, the insurer succeeded in maintaining strong underwriting margins for the first nine months, with a combined ratio of 95.8%.
  • Nonetheless, the dividend aristocrat remains in my "Always No, Forever No" category, as I do not believe that the business model will improve significantly on a long-term view.
  • Looking for more investing ideas like this one? Get them exclusively at Cash Flow Kingdom. Learn More »


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Executive Summary

As I wrote in prior articles, the insurance industry is one of those boring, stable sectors where leaders seem unshakeable. In short, it is a sector that could appeal to retirees in search of increasing dividends

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This article was written by

The CrickAnt profile picture

The CrickAnt is an actuary for an insurance company utilizing his work experience to do analysis on insurance and reinsurance companies. He is a contributing author to the investing group Cash Flow Club where along with Darren McCammon and Jonathan Weber, they focus on company cash flows and their access to capital.

Core features of the Cash Flow Club include: access to the leader’s personal income portfolio targeting 6%+ yield, community chat, the “Best Opportunities” List, performance transparency and coverage of energy midstream, commercial mREITs, BDCs, and shipping sectors. Learn more.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (21)

No Identity profile picture
Have done this twice already. Bought 200 in at $45 sold at $64. Bought 100 $34 sold $57. Will do this again. Wash and flush.
The CrickAnt profile picture
@No Identity congratulations on your winning trade
Never say never, ever. You sound bias regarding Mercury. Did you loose money trading? For someone who wants a reliable, close to 5%, dividend Mercury is a winner. Most dividend aristocrats raise their dividends carefully or would probably not be aristocrats. J&J, a dividend king, pays around 2.48%.
SleepyInSeattle profile picture
@Study1 I just initiate a minor position and agree with you on this.
Read the Barrons article, combine this with the low IV's (ie cheap) on the options and it's a compelling situation.
The CrickAnt profile picture
@Study1 I have never invested in Mercury (nor shorted the stock), and I do not intend to do so because I believe that there are more profitable, faster-growing insurance companies that are also interested in rewarding their shareholders.

I think that looking only at the current dividend rate and not the growth of the dividend may be a mistake, or at least may represent an opportunity cost.
Random Logic profile picture
I looked into MCY after it screened so well: high expected LT growth, strong returns, good FCF, big div. Something doesn't jive with this piece. I will have to do a more detailed analysis after reading this.
The CrickAnt profile picture
@Random Logic FCF is not the best metric to analyze an insurer.

Mercury's revenue growth is good, but you also have to consider claims inflation, which will affect your loss ratio.

In other words, if you increase your prices by 7% but your claims costs also increase by 7% (e.g., more expensive towing, more expensive insured cars, more expensive spare parts), the positive impact will potentially be zero.

Two counter-examples to what I just said:

If you manage to keep your costs stable or not increase them by 7%, your cost ratio should decrease, improving your overall profitability.

The surplus of earned premiums can be invested in the financial markets, and your financial income should grow.
The reasons you state are the ones that will feed a bid for the company. The stock hasn't moved in over a decade, founder/chairman is 100, just handed over the reins, overall valuation speak to a 50% premium by any number of suitors. Barrons articulated this better than I. State Auto, one of MCYs peers received a 200% premium last year.
As a bonus, call options are stupid cheap, stock has broke downtrend of late on good volume, we're long large for a catalyst, activist and an end to a decade long flatline performance.
The CrickAnt profile picture
@cboe77 Thank you for your comment.

As I wrote at the end of the article, the Mercury buyout is a viable option. It is even the best conclusion for the current Mercury shareholders, depending on the price offered.

For the buyer, it could even produce some synergies, but it would also require significant investments (or at least efforts) to improve the profitability of Mercury's portfolio.

However, we don't know if this scenario will occur while you can invest in other, more profitable, faster-growing insurance companies that are also keen to reward their shareholders.

All the best!
@The CrickAnt
well, your critics have become crickets !
interesting that Semper Augustus initiated a 2% position; they are among the most critical of insurance investing, with a famously large stake in bh.
With EV growth how will that affect auto insurers? Are EVs actually more safe than a conventual automobile? What about autonomous vehicles?
@labman106 Autonomous vehicles can only be safer than the homicidal drivers around here in Crazyfornia--Mercury's primary market.
@wdjax0n Quit the dope and that's no longer an issue.
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