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Auto insurance investing

August 24, 2009 – Comments (2) | RELATED TICKERS: MCY

Mercury insurance worked hard to undercut other insurance companies and get a large percentage of California’s insurance business. Like many publicly held companies their stocks did very well while they were growing. It seems the growth is over. Like most companies when the growth stops investors have little reason to invest. They have one teaser that may tempt investors and that is their dividend. Their dividend is higher then most companies and everyone likes dividends, it’s like free money. For a small investment of only $35,000 you can get a dividend of  $2,300 per year. If their stock price goes up then at least on paper you make money on the stock. Sounds good as long as the stock does not loose value. If the stock goes down 7% then you have lost more then the dividend gave you.

What would hurt worse is if their stocks were to go down and they reduce or eliminate the dividend. Currently their dividend is equal to their earnings. They are making as much as they are giving away, that is very generous for a company to do. That is also hard to sustain, if they make any less money then they would have to give away more then they make. Even a charity does not give out more then they bring in.

We assume stocks will recover but why did an insurance company stock drop in the onset of recession. The policies were already in place the claims can take months or years to come due. Their stock was already dropping from a lack of growth. Then they lost 500 million in bad investments. Now their stock is up some because they made money on their investments.  Although their operation is costing them more while sales are declining.

From this point it’s a matter of how lucky they get in their investments. As far as their business profit goes simple math tells you old policies in one of the highest unemployment areas of the country is not a good formula. The last report shows that their expenses went up even though their sales went down. This seems like they are servicing more claims. All those years of building a huge list of policy holders is now turning into a huge list of claims.