Mercury General: Signs of Life but Not Yet a Buy

Mercury General's Q1 2025 results were weak due to underwriting losses. Despite this, the insurance carrier has shown signs of life, but it is not a buy. The stock still rates a hold.

Mercury General (NYSE:MCY) has shown signs of recovery in its second-quarter (Q2) 2025 results, posting an underwriting income of $102.8 million, or a combined ratio of 92.5% for a total earned premium of $1.37 billion. This marks a significant improvement from the previous quarter, where the company reported underwriting losses due to underwriting challenges and California wildfires [1].

Despite the positive Q2 performance, Mercury General remains a hold from an investment perspective. The company's stock is currently valued at $3.84 billion, representing a 5-10% potential upside, according to the latest market analysis. The valuation is based on the expected earnings of around $300 to $314 million for the fiscal year 2025 (FY2025), with a 10% buffer for potential downside risks [1].

Key drivers of the underwriting income recovery include improved underwriting discipline and better pricing strategies. Additionally, the company's decision to sell its subrogation rights for the Palisades fire has boosted its underwriting income by $47 million. The company is also considering selling a portion of its subrogation rights for the Eaton fire to recover a portion of the expected subrogation already booked [1].

Investment revenues and realized investment gains have also played a significant role in Mercury General's performance. The company's investment portfolio, valued at $5.9 billion as of 06M2025, has generated substantial income, offsetting the underwriting losses. The total investment portfolio includes a larger portion invested in municipal securities, driving the investment income growth [1].

Looking ahead, Mercury General's FY2025 earnings are expected to oscillate between $303.8 and $317.6 million, driven by investment income, underwriting income, and interest expenses. The company's net realized gains are expected to remain unchanged compared to the first half of the year, with a corporate tax rate of 21.5% [1].

In conclusion, while Mercury General has shown signs of life in its Q2 2025 results, the stock still rates a hold due to the potential risks and challenges in the insurance sector. The company's performance in the second half of the year will be crucial in determining its future prospects.

References:
[1] Wipada Wipawin. (2025). Mercury General Signs Life, But Not Buy: Why Stock Still Rates Hold. Seeking Alpha. Retrieved from https://seekingalpha.com/article/4808198-mercury-general-signs-life-but-not-buy-why-stock-still-rates-hold