Mercury General Q2 oper income misses market estimates

By Supantha Mukherjee and Adheesha Sarkar

BANGALORE (Reuters) - Auto- and home insurer Mercury General Corp (MCY.N) posted second-quarter operating income that missed analysts' estimates, hurt by a fall in net premiums earned and lower rates in California.

The growth in the California market was weaker, which drove the overall decline, analyst Dean Evans of Keefe, Bruyette & Woods told Reuters. Net premiums earned from California operations fell 3 percent to $558.4 million.

Mercury General, which writes automobile insurance mainly in California, posted operating income of 86 cents a share in the quarter, down from $1.15 a share, a year ago.

Analysts expected earnings of 98 cents a share, excluding special items, according to Reuters Estimates.

The company's operations in California will continue to suffer as regulators there were suppressing the premium rate levels and minimizing underwriting profits, analyst Meyer Shields of Stifel Nicolaus told Reuters.

"Outside California the company seems to be struggling from reserve issues from prior years," said Shields, who has a "sell" rating on the stock.

Loss reserves from the prior periods rose to $9 million from $1 million in the year-ago quarter.

"Its going to be worse if more and more of the company's premium volume is earned on the basis of lower rates," Shields added.

However, Keefe, Bruyette & Woods' Evans said the rates were starting to get flat in the company's automobile insurance segment, which is a positive for the company.

If oil prices stay high, and people drive less, that may also prove to be good for the company, Evans added. He has a "market perform" rating on the stock.

Shares of the Los Angeles-based company were trading down $1.29 at $48.94 Monday morning on the New York Stock Exchange.

INVESTMENT GAINS PROP NET INCOME

The insurer posted a quarterly net income of $70.7 million, or $1.29 a share, compared with $69.5 million, or $1.27 a share, a year earlier.

Net realized investment gains stood at $23.7 million, or 43 cents a share for the quarter, compared with $6.5 million, or 12 cent a share, a year earlier.

Net premiums earned fell about 6 percent to $711.2 million. Net investment income fell 4 percent to $39 million.

The company also said it expects to record a tax benefit of about $15 million in the third quarter.

In July, the California Superior Court ruled in favor of a case filed by the company against the California Franchise Tax Board entitling it to a tax refund of about $22 million, it said in a statement.

Mercury General's combined ratio, which is the percentage of premiums an insurer has to pay out in claims and expenses, was 97 percent in the second quarter, compared with 94 percent a year ago. A lower combined ratio is better.

The company also raised its quarterly dividend by about 12 percent to 58 cents a share.

(Editing by Amitha Rajan)