Comfortable with Mercury General

Dear Mr. Berko:

We have an insurance agent who sold us a Mercury General automobile insurance policy and told us if we also purchased our homeowners policy from Mercury that we could get a big reduction in our rates. He was right and we saved nearly $980 compared to the premiums we were paying with a larger and better-known company. The agent, who also sells IRAs and investments, suggested that we invest $5,000 in 125 shares of Mercury General stock in our IRA because he thinks it is a very good long-term investment. He even said that you would agree. So please tell us what you think about Mercury General stock.

HG: Cincinnati, Ohio

Dear HG:

I like your insurance agent because he sells a very fine insurance product that pays him a little less in commissions than most competitors' products. I like your agent because he didn't recommended a variable annuity like the vast majority of agents do. And lastly I like your agent because he recommended Mercury General Insurance.

Mercury General (MCY-$41.25) is a $2.5 billion revenue insurance holding company that writes private auto and commercial auto passenger insurance (84 percent of revenues) and homeowners insurance (16 percent of revenues) through 6,800 independent agents. Approximately 82 percent of MCY's business derives from the Left Coast (California) where MCY's retention rate exceeds 95 percent. Auto insurance is basically a commodity product with fiercely competitive pricing and California folks can switch auto policies as easily as they can change their socks. However, MCY's more affordable rates and its "we're there when you need us" attitude have endeared the company to its policyholders.

But MCY homeowners insurance division is having some problems. Near-record property losses, a result of catastrophic storms across the Midwest (MCY has blocks of homeowner policies in Illinois, Florida, Pennsylvania, Oklahoma, Michigan, Texas and Virginia) have devastated its reserve ratio and resulted in an underwriting deficit. And adding salt to these wounds is its subpar portfolio results. Large pieces of MCY's high coupon bond portfolio continue to come due, and reinvesting the redemption proceeds at today's rates of 2 percent to 4 percent is a killer. But this is a problem faced by every insurance company -- low bond rates are forcing all insurers to raise their premiums. Thanks to the FED for this bit of inflation.

The last few years have been tough, and earnings for 2012 are expected to decline to $2.05. But rate increases in 2013, better cost controls, improved underwriting, slightly higher revenues and hopefully lower property losses may modestly improve earnings. The consensus expects MCY to earn $2.70 a share next year and suggests the dividend will rise to $2.49 from $2.45. This would be the company's 20th consecutive dividend increase since 1992 when MCY paid shareholders 29-cents a share. That's a fine 20-year record. Meanwhile, George Joseph, MCY's founder and Chairman, owns 51 percent of the shares, which seems like a good reason to assume annual dividend growth in the future.

MCY is really boring company that sells a necessary and colorless product to unenthusiastic consumers. I don't believe the share prices have attractive short-term growth potential. But I do believe MCY is an excellent choice for a conservative, above average, long-term growth- income IRA. And comments from Bank of America, Standard & Poor's, Zacks, Reuters, Value Line and Morningstar agree. I'm comfortable buying 125 of MCY, with a 6 percent yield plus regular dividend increases each year, while waiting for the shares to appreciate. And if you buy the stock remember to reinvest the dividends. The consensus suggests that by 2017-2018 the dividend could grow to $2.80 and MCY's stock could trade in the low $50s. Yes, unexciting results but perhaps a fine performance. The 20 quarters of reinvested dividends would grow your 125 MCY shares to 172 shares worth about $9,100. And your 2012 annual dividend income of $306 could increase to $481, which is a 9.6 percent return on your original investment.

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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.

© 2012 Creators Syndicate Inc.

Published: Fri, Dec 7, 2012

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