On Friday, Raymond (NS:RYMD) James reiterated an Outperform rating on Mercury General (NYSE:NYSE:MCY) shares, with a steady price target of $80.00. The reaffirmation comes after the insurer's stock declined approximately 6% on Tuesday due to concerns surrounding its exposure to the recent catastrophic wildfires in the Los Angeles area. Mercury General's stock price continued to slide, reaching the mid $50s in after-hours trading.
The analyst from Raymond James acknowledged the "challenging optics" of potential losses due to the wildfires but expressed confidence in the company's recovery. The wildfires are estimated to result in insured losses between $11 billion and $17.5 billion, potentially marking it as the costliest wildfire event in U.S. history.
Despite the magnitude of the economic losses, which are expected to exceed insured losses, the analyst pointed out that insurance is typically based on replacement costs rather than market value. This factor, along with the tendency for more expensive properties to be insured in the Excess & Surplus (E&S) market, could mean that gross losses for some insurers might be lower than their market share of the total industry loss.
The analyst also noted Mercury General's strong underlying profitability, excluding catastrophe losses, coupled with robust top-line growth and elevated net investment income (NII), as reasons for a potential rebound in the stock price.
Although the anticipated losses from the wildfires led to a reduction in the first-quarter 2025 operating earnings per share (EPS) estimate to $0.00, down from the previous $1.60, the firm's pre-tax income, excluding catastrophes, is projected to be around $193 million for the quarter, a significant increase from the $89 million in the same quarter of the previous year.
Furthermore, the analyst adjusted the full-year operating EPS forecasts for 2025 and 2026 to $5.30 and $7.00, respectively, from the earlier estimates of $6.90 and $7.02. Despite the adjustment, Mercury General is expected to earn around $818 million in pre-tax income, excluding catastrophes, for the year 2025, compared to approximately $856 million in 2024.
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