Mercury General MCY released a generally strong firstquarter report in the absence of large catastrophe or other claims losses. Operating income–which excludes realized investment gains and losses–was down 3.3% to $37.8 million, or $0.69 per share. The drop was primarily caused by a restructuring charge the firm took in order to streamline operations. While the results were stronger than is typical of the firm in the current quarter, we will keep our fair value estimate and moat rating in place as our valuation is derived more from long-term operating assumptions rather than a quarter of good performance.

Mostly because of a calm storm period but also because of a slight favorable reserve development (related to reestimation of prior periods’ loss estimates), Mercury generated a 97.9% combined ratio. Due to its expansion efforts and weakened competitive position, Mercury’s profitability has slipped. While this quarter’s result was solid, the fact the company only generated a 2.1% underwriting margin in a benign environment speaks to the lower level of normalized profitability.

Additionally, Mercury took a $10 million restructuring charge in the quarter as it consolidates its claims and underwriting operations outside of California. The charge is just the latest in a series of negative events for the firm regarding its expansion efforts. Mercury’s growth outside its home state led to lower profitability and volatile results as well as a dilution of the company’s competitive advantages. While the charge hurt Mercury in the quarter, it expects to benefit from lower expenses going forward.