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UPDATE: Compass Point Initiates Coverage On Mercury General On Increased Risk

Dwight Einhorn

In a report published Thursday, Compass Point analyst Ken Billingsley initiated coverage on Mercury General (NYSE: MCY) with a Neutral rating and $47.00 price target.

In the report, Compass Point noted, “Mercury General is the fourth largest writer of personal auto in the state of California and the fifteenth largest writer in the U.S.

"The company continues to focus on enhancing its footprint outside of California, but we believe that will remain difficult as their advertising budget pales in comparison to those on the list above them. They have generally outperformed their peer group on an underwriting basis, but in the state of California that spread has narrowed within the loss ratio. And while the demographic trends within the state of California remain positive for market growth, the company's venture outside of the state has not been as successful and they are paying higher commissions to attract business.

"Reserves appear muddled as the company has a habit of releasing reserves in early years, only to later increase reserves in excess of what was initially released. The company has the majority of their investments in municipal securities, which could come under pressure. We will continue to track the Federal Reserve's Liquidity Coverage Ratio (LCR) rulemaking as it could negatively impact the value of MCY's municipal bond book over the medium-term. Insiders own over 51% of the company which likely explains the company's high dividend yield. But with a dividend payout ratio of over 100% for the past two years, there is increased risk about the sustainability of the dividend without the company generating realized gains.

"We rate MCY a Neutral with a $47 price target.”

Mercury General closed on Wednesday at $52.09.

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