Mercury General (MCY) Up to Strong Buy On Robust Q2 Earnings

On Aug 5, Zacks Investment Research upgraded Mercury General Corp. MCY by a notch to a Zacks Rank #1 (Strong Buy).

Why the Upgrade?

Mercury General has been witnessing rising earnings estimates on the back of strong second quarter earnings, which benefited from improved core business and lower-than-expected catastrophe losses. The company's solid growth outlook and healthy capital position have been supported by bullish market trends.

Additionally, this multi-line property-casualty insurer delivered positive earnings surprises in the last two quarters, marking an average beat of 23.1% in 2014.

On Jul 28, Mercury General reported second-quarter 2014 operating earnings per share EPS of 83 cents, beating the Zacks Consensus Estimate of 67 cents by 23.9%. EPS was also significantly higher than year-ago figure of 63 cents.  

The upside was driven by 25.6% year-over-year growth in revenues, reflecting improved premiums for the 14^th consecutive quarter. Higher premiums along with lower loss and loss adjusted expenses as well as reduced catastrophe losses (down 84.6%) bolstered the underwriting results. This was reflected in combined ratio that improved to 96.0% from 98.7% in the year-ago quarter.

Higher net realized gains against losses in the year-ago quarter also supported results. Despite the prevalent low interest environment, Mercury General's investment portfolio remains stable. Subsequently, the book value per share improved 5.6% in the quarter.

The various initiatives taken in California are also bearing fruit. Going ahead, a healthy balance sheet, fair liquidity and sturdy fundamentals are expected to mitigate market risks and drive operating leverage in the upcoming quarters, while modest shareholder return instill positive sentiment among investors.

Following Mercury General's second-quarter earnings, the company witnessed upward estimate revisions, reflecting optimism. The Zacks Consensus Estimate for 2014 and 2015 rose 6.7% and 3.2% to $2.72 and $2.61 per share respectively in the last 7 days. Notably, there was no downward estimate revision for both the years.

Moreover, the Most Accurate estimate for Mercury General's 2015 earnings currently stands at $2.67 a share, which translates into an Earnings ESP of +2.3%. This indicates the possibility of an earnings beat next year.

Other Stocks to Consider

Investors interested in the insurance industry could also consider stocks like AmTrust Financial Services, Inc. AFSI, Greenlight Capital Re Ltd. GLRE and Endurance Specialty Holdings Ltd. ENH. All of these have the same Zacks Rank as Mercury General.