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Mercury General Corporation Message Board

  • gacpcu gacpcu Dec 18, 1999 4:07 PM Flag

    Direct Action Statute

    It is my understanding that CA has enacted a
    "Direct Action Statute" that will take effect on
    01/01/00. This type of statute allows a third party
    claimant to file an action directly against the insurer of
    the policyholder. At common law, this type of action
    was not permitted due to the lack of "privity" to the
    contract held by the claimant. The contractual
    relationship is only between the insurer and the policyholder
    and the claimant has no real action against the
    insurer unless modified by statute as it has been
    recently in the CA legislature. Not with standing the
    constitutional challenge that will be mounted by the insurers (a
    freedom to contract related issue) I believe that this
    may raise loss costs for insurers like Mercury-
    especially since a majority of their business is in the
    State. Although, I personally believe that Merc is a
    fine company, I have always been curious about their
    lack of real geographic diversification. If you
    remember, Progressive learned that the "legal" hazards
    associated with any one market saturation can be problematic
    as was the case with Prop 103.
    Any thoughts?

    SortNewest  |  Oldest  |  Most Replied Expand all replies
    • Insguythen,
      I appreciate your very articulate
      post and perspective on the direction of the personal
      auto insurance industry as it relates to trends in the
      various distribution models. As I am not an investor (in
      the active trading sense)I seek the type of
      information that you and so many other fertile minds can
      offer as it can be applicable to my career in
      insurance.
      Whatever the outcome for Merc, they are a
      sweet company. Met has a nonstandard division known in
      the business as "Met Gen" and in order to grow this
      segment and infuse some true n/s auto talent they may
      attempt to make an acquisition or two. Since Merc is such
      a good organization and they are not well
      diversified geographically, they would be an excellent
      compliment to a larger National player such as Met-
      particularly given the capacity and consolidation issues that
      seem to roar ever so louder as time passes. If a
      national company wants to instantly gain a profile in the
      market where one in ten drivers resides, Merc would seem
      to fit the bill. Thanks again for you personal
      insight.

    • for keeping this such a good board.

      Since
      I've been long MCY oh, four-five weeks now I feel like
      an old timer.

      I think in reading the last
      several month's posts a person can get a pretty good
      response to most of the questions that have been asked
      here lately- many of which I asked...

      IMHO go
      long, buy it and hold it. I think this could be a
      forever stock, depending on what it becomes if it is
      taken over.

      Good luck.

      Mark

    • I've read with interest you're various postings.
      Most I agree with. However, your 12/27 post states
      several items that beg comment.

      <The
      independent agents have been losing market share to captive
      agents and direct writers for quite some
      time.>

      Actually independent agents started to take back market
      share from direct writers a few years ago and continue
      to do well in this battle.

      If anyone is in
      deep trouble today, I think it is those companies with
      only captive agents... It would seem ALL agrees with
      that premise, due to their purchase of CNA personal
      lines.

      <As far as "standard" personal lines is concerned,
      the direct channels, internet and captive agents will
      erode more market share. However, nonstandard and
      middle market personal auto business will still be
      written mainly through independent agents (this customer
      needs the service and professional advice that an
      independent can provide plus he may not have a checking
      account, credit card, etc.)>

      IMHO you have this
      reversed. The more the client views insurance as a
      commodity vs. a means to secure assets... the less likely
      they will be to purchase insurance from a
      nameless/faceles seller. Non-standard buyers are looking for a
      commodity to satisfy a loss payee or a statutory
      requirement. Standard buyers (with checking accounts, credit
      crds, etc.) would apparently have assets to protect and
      would want to have (and should have) the security of an
      agent/advisor.

      IMHO even though insurance can be sold over the
      internet, companies like MCY would do well to avoid this
      low margin trap.

      MCY is the perfect example of
      a company that has succeeded against huge odds.
      Conventional wisdom suggests it can't succeed operating
      primarily in CA/FL.

      As I posted on HIG yesterday,
      Met is looking for rapid growth and certainly has the
      backing of Mother Met to purchase anyone they want. Is
      MCY a candidate, after Met's demutualization?

    • Credit scoring is viewed by many auto writers as
      the "Holy Grail" of insurance pricing. It is
      accomplished in various forms but generally follows three
      degrees 1) The numerical score is a rating factor and, in
      part, determines the final premium for the risk. 2)
      Only what are called "derogatories" are used to
      determine rate or underwriting program eligibility-
      nonnumerical i.e. liens, bankruptcy, repossessions,
      foreclosure, etc. and 3) the numerical score is used to
      determine the availability of a pay plan for auto
      insurance. Carriers know that an applicant will accept a
      down pay + installments over a lower total premium if
      he has to pay that premium in full due to being
      disqualified for a pay plan because of credit.
      It really
      goes like this: poets say that the eyes are the window
      to the soul (actually it is the credit score)The
      logic is that those individuals that are less
      responsible with their personal finances are more likely to
      exhibit that same behavior set when it comes to
      operating, maintaining, and even loaning out a vehicle.
      Actuaries believe that this is "strongly correlated" and it
      may well be. However, it does overlook people that
      pay cash for everthing (yes there are still some of
      us around), health problems and domestic situations
      (ie dirtbag husband leaves his loving wife and
      children.)Agent is also taken out of the picture when it comes to
      the use of common underwriting sense. By the way, I
      am still with my loving wife of 18 years and I do
      pay cash for everything. Oh well, there are the
      exceptions...

    • The use of credit scoring seems to negate the
      field underwriting expertise of the IA; I'm not aware
      of any tangible or clearly outward signs of good
      credit -- although it may be synonymous with affluence,
      it clearly is not highly correlated. With the
      expanding use of credit scoring, how do you see the role of
      the Independent?

    • The independent agents have been losing market
      share to captive agents and direct writers for quite
      some time. In the future the independent agents that
      survive and grow will be larger, more efficient, and have
      a more multi-line approach with increased
      commercial business and other financial services. As far as
      "standard" personal lines is concerned, the direct channels,
      internet and captive agents will erode more market share.
      However, nonstandard and middle market personal auto
      business will still be written mainly through independent
      agents (this customer needs the service and professional
      advice that an independent can provide plus he may not
      have a checking account, credit card, etc.) Merc
      writes a good blend of lower/mid market and standard
      business and will continue to do well with independent
      agents, but may seek direct channels in the future. The
      Company will most likely say that it is "committed to the
      independent agent" and I believe that they are as much as
      possible- but they can not fight a shift in strategic
      distribution. In the aggregate, Merc is in a far better
      position than most auto writers and will adapt. This is an
      excellent Company and despite the P&C woes of late, they
      will grow or become an excellent acquisition suit.

    • >>The pace of change is unprecedented in
      the industry and there will be continued
      consolidation and the explotitation of
      alternative
      distribution channels- much to the dismay of the independent
      agent.<<

      Do you think that will be a problem for
      MCY considering they use all independent agents?

    • I have been in the Georgia market in the P&C
      business for 17 years. I have a back ground in insurance
      regulation, claims and I have spent the past ten years in
      substandard personal/commercial auto company marketing
      through the independent agent distribution channel. My
      interest in the various message boards is purely insurance
      related as I am not a stock trader. I personally do not
      like the P&C industry equities at this time as I
      believe that there is a re-engineering of the industry
      underway. I like to buy quality individual stocks and
      dollar cost average purchases over time and hold for the
      long run (retirement). The only P&C stock that I own
      is Citigroup (Travelers) I believe that with the
      passage of financial modernization that the Company is
      well-positioned to take advantage. I can only assume that most of
      you guys trade actively.
      Concerning Mercury, I
      believe that they would be a good acquisition for someone
      that wanted to penetrate or expand market share in the
      CA market place. I believe that PGR would be a
      logical purchaser. I believe Merc writes around 1 Billion
      in premiun verses PGR at about 6 Billion. The only
      thing is that I have heard Peter Lewis (PGR CEO) state
      in the past that they would not be caught in the
      same situation they were in when Prop 103 passed. At
      that time, I seem to recall him saying that about 25%
      of the Company's business was in CA and they would
      not return to that level of written in any one
      market. However, things have changed and I do not expect
      someone with the vision and courage of a Peter Lewis to
      resist a good opportunity. I do believe that these
      companies are compatible. In addition, I believe that they
      are clearly the two best companies that write in this
      sector of the industry.
      The pace of change is
      unprecedented in the industry and there will be continued
      consolidation and the explotitation of alternative distribution
      channels- much to the dismay of the independent agent.
      Also, PGR will move more toward a standard auto
      direction and most likely acquire a homeowner company in
      the future in a effort to account sell and sell on a
      direct basis. The standard business is more conducive to
      direct writing due to the nature and sophistication of
      the customer (credit card holder, current checking
      account and good credit).
      Happy Holidays to all!
      I
      have to go now. My son has whipped himself into a
      Poke'mon frenzy and I have to rescue my wife.

    • Thanks so much for the informed feedback;
      you,
      like others on this board, share
      insider's
      perspective that a non-industry investor like
      me really
      benefits from. Have a good holiday,
      Pilgrim

    • Pilgrim,
      Progressive has been a competitor of
      mine for nearly ten years, and I believe that they
      have a bright future whether they elect to grow
      organically or by acquisition. They have sustained a pace of
      terrific organic growth in recent years with only one
      acquisition to memory. They purchased Midland Financial Group
      (aka Midland Risk) a few years ago. Midland had been
      for sale and during negotiations with a few
      prospective buyers Mr. Hank Gray (President of Midland) was
      killed in the 747 plane crash off of New York.
      Immediately after the Company was bought by Progressive.
      Midland was a small Company that wrote only about 20M
      direct premiums in 1998. Whatever interested Progressive
      about this Company has apparently been realized and now
      it will be sold off or perhaps left to evaporate.
      Progressive has always marched to a different drummer and
      seen itself as a cut above the unwashed masses in this
      business. For this reason organic growth has always ruled
      the day. However, I believe that the P&C market is at
      critical mass with new "real" organic growth only coming
      at the expense of lower premiums (perhaps this point
      is being currently played out by Geico). After all,
      most people see insurance as a "fungible" or commodity
      type product with no real advantage from one company
      to another with the exception of price. As far as
      Merc is concerned, it may be a fit for PGR, and Merc
      is a clean organization with soild mgt. and
      financials despite no real geographic diversification.
      However, this may be an advantage when it comes to
      integrating business into a larger co. due to fewer markets
      to absorb with less in terms of logistical issues to
      address.
      There are differences in culture between
      these two: Progressive sees responsive claim service as
      the key to keeping expenes down (in 1998 they
      invested 13.2% of earned premium in loss adjustment-well
      above average- but realized lower than average loss
      costs through savings on indemnity dollars. Progressive
      also sees independent agents "differently" than does
      Merc. I.A. s have been critical of Progressive for
      reducing commission and soliciting agency business direct.
      Merc is an independent agency company with more
      loyalty from Independents- especially in CA. However, we
      are on the threshold of a new paradigm in this
      business and it is rapidly consolidating and shrinking in
      many ways. We will have fewer, larger and more
      efficient insurance organizations in the future. One of
      these will be PGR. In addition, more uniformity in
      state licensing standards and market conduct with the
      adoption of "model" as opposed to "state specific"
      regulation will promote greater competition on a national
      and perhaps eventually international basis. In the
      final analysis, PGR will get to where it wants to go
      despite any temporary set backs.

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MCY
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