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Mercury General's (MCY) Steady Premium Growth is a Big Boost

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Mercury General Corporation (MCY - Free Report) , which engages in writing personal automobile insurance in the United States, has been witnessing premium growth over a considerable period of time. This sustained improvement can be attributable to higher average premiums per policy arising from rate increases pertaining to the California private passenger automobile and homeowners lines of insurance business as well as growth in the number of private passenger automobile and homeowners policies written in the same region.

Further, direct premiums written at the company’s line of insurance businesses on the basis of states, have been experiencing a growth trajectory and we expect this consistent increase to also contribute to total premium growth in the near term.

Riding on the strength of rising interest rates, the company has been witnessing better investment results over the last several quarters. We expect this momentum to remain on the back of higher short-term interest rates, better yields obtained from specific classes of investments along, increased invested assets and a lower tax incidence.

Sustained growth in premiums along with solid investment results should continue to aid, witnessing a five-year CAGR (2012-2017) of 4.2%. In fact, the Zacks Consensus Estimate for current-year revenues is pegged at $3.5 billion, reflecting an increase of 5.5% on a year-over-year basis while for 2019, the consensus mark stands at $3.7 billion, representing a rise of 5.6%.

Additionally, top-line growth coupled with expense management has been contributing to net margin expansion that has improved in the last few quarters.

Mercury General has been increasing rates in most states, which in turn, is driving improvement in the combined ratio. For a P&C insurer, this metric is important as it is a measure for underwriting profitability and we expect underwriting results to fare modestly in the near term. The insurer’s catastrophe reinsurance treaty provides for $205 million of coverage in excess of its $10 million retention.

However, the insurer expects combined ratio in the fourth quarter to be higher than other quarters of the year, given increased loss frequency and higher severities due weather-related events.

Mercury General boasts a strong liquidity position with its cash flow from operations ensuring to satisfy its liquidity requirements without the forced sale of investments. Moreover, the insurer’s debt to total capital ratio has been improving over the last couple of quarters.

Furthermore, return on equity, a measure of the profitability of a business in relation to the equity, has been improving over the last few quarters.

The company also has a strong capital management policy in place that enhances its shareholder value through dividend hikes. Currently, the insurer’s dividend yield stands at 4.61%, noticeably better than the industry’s yield of 3.34%.

The stock also carries a favorable VGM Score of A. Here V stands for Value, G for Growth and M for Momentum with the score being a weighted combination of all three factors. Back-tested results have shown that stocks with a VGM Score of A or B when combined with a top Zacks Rank #1 (Strong Buy) or 2 (Buy) offer best investment opportunities.

For this Zacks #1 Ranked P&C insurer, the Zacks Consensus Estimate for current-year earnings is pegged at $2.80, indicating a year-over-year surge of 70.7% and for 2019, the consensus estimate for the same stands at $3.88, depicting a 38.4% year-over-year rise.

Shares of the company have gained 4.8% year to date against the industry’s decline of 1.5%. We believe, the aforementioned positives will drive the stock higher in the near term.

Other Stocks That Warrant a Look

Investors interested in other top-ranked stocks from the same space can also consider Cincinnati Financial Corporation (CINF - Free Report) , Atlas Financial Holdings, Inc. and W.R. Berkley Corporation (WRB - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Cincinnati Financial provides property casualty insurance products in the United States. The company delivered positive surprises in three of the trailing four reported quarters with average beat of 14.49%.

Atlas Financial engages in underwriting commercial automobile insurance policies in the United States. The company pulled off earnings surprises in three of the previous four reported quarters, the average beat being 17.56%.

W.R. Berkley operates as a commercial lines writer in the United States and internationally. The company surpassed estimates in all the preceding four reported quarters, the average being 17.73%.

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