Mercury General Corporation (MCY) is a wonderful example of "making a stepping stone out of a stumbling block." Rather than view the independent agent as excess cost in the Internet age, MCY puts the independent agents to work as part of the underwriting team. The result: lower total cost ratios (MCY 58% vs. ALL 70%) with higher independent agent commissions (16% MCY vs. 8% PGR).
The founder and long term leader (since 1961) of the company is George Joseph. He and his former wife control 52% of the company's stock. During the same period it took for my parents to get me to age 45, George and his former wife built a net worth well over $1.5 billion. (I guess I should be mindful of how much I might have cost my parents!)
But, now, at age 85, Mr. Joseph is passing the CEO job to Gabriel Tirador. When he was asked about his retirement on the third quarter earnings call, he emphatically stated, "I am not retiring! I am only passing part of my responsibilities on to Gabriel." It is encouraging when I think about already being 45 to realize that my last two posts focus on businessmen who are active in their late eighties.
MCY continues to face the challenge of expanding its model successfully outside California. Premiums had accelerated outside of California as planned. However, expense and loss ratios were higher than expected. As a result, MCY has been more restrictive about its underwriting outside of California, leading to a drop off in premium growth. Clearly, these are appropriate steps to take - few mistakes are more painful than creating a book of mispriced insurance. Mr. Buffett compared its creation to Hell - easy to enter, hard to exit. It appears that Mr. Joseph's leadership continues to keep shareholders from going to Hell, so to speak.
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