Mercury General Corp.’s stock took a beating last week and a weak third quarter earnings report was only part of the problem.

Shares of the L.A. insurer slid nearly 7 percent to close $46.95 on Oct. 30 after the company reported its net income fell 41 percent in the third quarter to $39.5 million, or 72 cents a share. The company was one of the biggest losers on the LABJ Stock Index. (See page 38.)

Mercury executives blamed nonrecurring tax expenses. Also mentioned was lower investment income, which hit the company when higher-yielding investments matured and were replaced with lower-yielding ones.

But concern over Mercury goes beyond those factors. That’s because much of its prospects are contingent on state approval for pending rate hikes in both its auto and homeowner policy lines. And, as recent history shows, such approval is no sure thing.

Earlier this year, a state regulatory judge rejected Mercury’s 2011 request for a 7 percent increase in homeowner policies; instead, the judge ordered Mercury to drop rates 8 percent. The company filed suit seeking to overturn the rate reduction; that suit is still pending. Meanwhile, Mercury has made requests for rate hikes and must run them through the same regulatory judge.

“We’re still not ecstatic about Mercury’s valuation in light of the risk that its auto and homeowner rate increase requests are unsuccessful,” Vincent DeAugustino, property and casualty insurance analyst with the Baltimore office of financial services firm Keefe Bruyette & Woods, said in a report last week.

DeAugustino has a “market perform” rating on Mercury stock. He told the Business Journal last week that he believes the company will ultimately get approvals for rate increases, though possibly not as much as it was seeking. Earlier this year, Mercury proposed an 8.3 percent rate hike for its homeowners insurance line because costs continue to outstrip premiums after the previous request was blocked. The company also requested a 6 percent hike for its auto line.

But in both cases, DeAugustino said the rate hikes would barely cover rising claims costs.

“Lower-than-expected increases could pressure estimates,” he said in his report.

As if that weren’t enough cause for concern, a new California law mandating that auto insurers use original manufacturer parts for many repairs instead of often cheaper

afterrmarket parts could hike Mercury’s operating costs.

In the company’s earnings teleconference call with analysts last week, Chief Executive Gabriel Tirador said that because the law only took effect March 30, it’s too early for any increases in auto parts costs to have worked their way through the system.

“It does have the potential to increase our cost, so we are watching it closely,” he acknowledged.