Mercury General (MCY)

Auto insurance provider Mercury General (NYSE:MCY) announced better-than-expected revenue in Q3 CY2025, with sales up 4.9% year on year to $1.58 billion. Its GAAP profit of $5.06 per share was significantly above analysts’ consensus estimates.

Company Overview

Founded in 1961 and maintaining a network of over 6,300 independent agents across the country, Mercury General (NYSE:MCY) is an insurance company that primarily sells automobile insurance policies through independent agents in 11 states, with a strong focus on California.

Property & Casualty (P&C) insurers protect individuals and businesses against financial loss from damage to property or from legal liability. This is a cyclical industry, and the sector benefits when there is 'hard market', characterized by strong premium rate increases that outpace loss and cost inflation, resulting in robust underwriting margins. The opposite is true in a 'soft market'. Interest rates also matter, as they determine the yields earned on fixed-income portfolios. On the other hand, P&C insurers face a major secular headwind from the increasing frequency and severity of catastrophe losses due to climate change. Furthermore, the liability side of the business is pressured by 'social inflation'—the trend of rising litigation costs and larger jury awards.

Mercury General competes with large national insurers like State Farm, Allstate (NYSE:ALL), Progressive (NYSE:PGR), and GEICO (owned by Berkshire Hathaway, NYSE:BRK.A, BRK.B), as well as regional insurance providers in its operating states.

Insurers earn revenue three ways. The core insurance business itself, often called underwriting and represented in the income statement as premiums earned, is one way. Investment income from investing the “float” (premiums collected upfront not yet paid out as claims) in assets such as fixed-income assets and equities is the second way. Fees from various sources such as policy administration, annuities, or other value-added services is the third. Over the last five years, Mercury General grew its revenue at a solid 10.4% compounded annual growth rate. Its growth beat the average insurance company and shows its offerings resonate with customers.

We at StockStory place the most emphasis on long-term growth, but within financials, a half-decade historical view may miss recent interest rate changes, market returns, and industry trends. Mercury General’s annualized revenue growth of 15.1% over the last two years is above its five-year trend, suggesting its demand was strong and recently accelerated. Note: Quarters not shown were determined to be outliers, impacted by outsized investment gains/losses that are not indicative of the recurring fundamentals of the business.

This quarter, Mercury General reported modest year-on-year revenue growth of 4.9% but beat Wall Street’s estimates by 6.7%.

Net premiums earned made up 94.7% of the company’s total revenue during the last five years, meaning Mercury General lives and dies by its underwriting activities because non-insurance operations barely move the needle.

Our experience and research show the market cares primarily about an insurer’s net premiums earned growth as investment and fee income are considered more susceptible to market volatility and economic cycles.

Net premiums earned are net of what’s paid to reinsurers (insurance for insurance companies), which are used by insurers to protect themselves from large losses.

Mercury General’s net premiums earned has grown at a 9% annualized rate over the last five years, slightly better than the broader insurance industry but slower than its total revenue.

When analyzing Mercury General’s net premiums earned over the last two years, we can see that growth accelerated to 14.4% annually. This performance was similar to its total revenue.

Mercury General’s net premiums earned came in at $1.41 billion this quarter, up 6.8% year on year and in line with Wall Street Consensus estimates.

Revenue growth is one major determinant of business quality, and the efficiency of operations is another. For insurance companies, we look at the combined ratio rather than the operating expenses and margins that define sectors such as consumer, tech, and industrials.

Combined ratio = (costs of underwriting + what an insurer pays out in claims) / net premiums earned. If a company boasts a combined ratio under 100%, it is underwriting profitably. If above 100%, it is losing money on its core operations.

Given the calculation, a lower expense ratio is better. Over the last five years, Mercury General’s combined ratio has increased by 6.8 percentage points, going from 95.8% to 99.6%. Luckily, it seems the company has recently taken steps to address its expense base as its combined ratio improved by 8.6 percentage points on a two-year basis.

Mercury General’s combined ratio came in at 87% this quarter, beating analysts’ expectations by 350 basis points (100 basis points = 1 percentage point). This result was 6.6 percentage points better than the same quarter last year.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Mercury General’s EPS grew at a decent 12.9% compounded annual growth rate over the last five years, higher than its 10.4% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For Mercury General, its two-year annual EPS growth of 151% was higher than its five-year trend. This acceleration made it one of the faster-growing insurance companies in recent history.

In Q3, Mercury General reported EPS of $5.06, up from $4.17 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Mercury General’s full-year EPS of $7.93 to shrink by 5.2%.

Insurance companies are balance sheet businesses, collecting premiums upfront and paying out claims over time. The float–premiums collected but not yet paid out–are invested, creating an asset base supported by a liability structure. Book value per share (BVPS) captures this dynamic by measuring these assets (investment portfolio, cash, reinsurance recoverables) less liabilities (claim reserves, debt, future policy benefits). BVPS is essentially the residual value for shareholders.

We therefore consider BVPS very important to track for insurers and a metric that sheds light on business quality. While other (and more commonly known) per-share metrics like EPS can sometimes be lumpy due to reserve releases or one-time items and can be managed or skewed while still following accounting rules, BVPS reflects long-term capital growth and is harder to manipulate.

Mercury General’s BVPS grew at a sluggish 3.3% annual clip over the last five years. However, BVPS growth has accelerated recently, growing by 27.4% annually over the last two years from $24.82 to $40.30 per share.

The debt-to-equity ratio is a widely used measure to assess a company's balance sheet health. A higher ratio means that a business aggressively financed its growth with debt. This can result in higher earnings (if the borrowed funds are invested profitably) but also increases risk.

If debt levels are too high, there could be difficulties in meeting obligations, especially during economic downturns or periods of rising interest rates if the debt has variable-rate payments.

Mercury General currently has $588.1 million of debt and $2.23 billion of shareholder's equity on its balance sheet, and over the past four quarters, has averaged a debt-to-equity ratio of 0.3×. We think this is safe and raises no red flags. In general, we’re comfortable with any ratio below 1.0× for an insurance business. Anything below 0.5× is a bonus.

Return on Equity, or ROE, ties everything together and is a vital metric. It tells us how much profit the insurer generates for each dollar of shareholder equity entrusted to management. Over a long period, insurers with higher ROEs tend to compound shareholder wealth faster through retained earnings, buybacks, and dividends.

Over the last five years, Mercury General has averaged an ROE of 6%, uninspiring for a company operating in a sector where the average shakes out around 12.5%.

It was good to see Mercury General beat analysts’ EPS expectations this quarter. We were also excited its revenue outperformed Wall Street’s estimates by a wide margin. Zooming out, we think this was a solid print. Investors were likely hoping for more, and shares traded down 1.1% to $79 immediately following the results.

Updated: December 3, 2025 at 11:14 PM EST

When considering an investment in Mercury General, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

Mercury General isn’t a bad business, but we have other favorites. To kick things off, its revenue growth was solid over the last five years. And while Mercury General’s BVPS growth was weak over the last five years, its projected EPS for the next year implies the company’s fundamentals will improve.

Mercury General’s P/B ratio based on the next 12 months is 2.1x. Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're pretty confident there are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $100 on the company (compared to the current share price of $89.75).