By Bill Alpert
Investors have dumped the shares of Los Angeles-based insurer Mercury General as wildfires surround that city. The company's stock has fallen 28% in the last three days to a Monday close of $47.18.
Raymond James analyst Greg Peters is sticking with his Buy recommendation on the stock. In a Monday note, he took down his target price from $80 to $70, and trimmed his earnings estimates. But as premiums rise for homeowners insurance in California, so will the company's battered stock, says Peters.
By Monday afternoon, the Palisades fire west of the city was only 14% contained and the Easton fire in the north was 33% contained. The National Weather Service has red flag warnings for Tuesday, when winds may again gust up to 70 miles an hour.
Peters estimates that Mercury's homeowners business in California accounted for about 18% of the premiums it wrote in 2024. Its exposure to the multimillion-dollar homes of Los Angeles seems limited, he says, based on filings that says most homes insured by the company are valued at $1 million or less.
Mercury must cover the first $150 million in losses, before its $1.3 billion in reinsurance coverage kicks in. And after making claims on its reinsurers, Peters says Mercury must pay a premium of $101 million to reinstate its reinsurance.
Property insurance losses are "short-tailed", meaning that claims will come in pretty quickly. So Peters estimates that the fire losses will trim Mercury's 2025 earnings by about a third, to $3.54 a share, but 2026 earnings will only be clipped some 7%, to $6.50 a share.
That leaves Mercury stock trading at less than seven times next year's earnings, and two times book value. Other insurers are trading at 3.7 times book.
Firmer premiums on future sales of homeowners policies should help Mercury's long-term market position, says the Raymond James analyst.
Write to Bill Alpert at william.alpert@barrons.com
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January 13, 2025 18:07 ET (23:07 GMT)
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