Value This Mystery Company

[rayfinkle]

I've owned this company for most of 2013 and it's been great for me. It fits into my category of a good+ business and it's growing fast, but the price has run up significantly. I'd love this group's view of "fair value" for a company with the characteristics I describe below. After a few responses I'll post the name & some more information. I wrote this up pretty quickly so it's not at all comprehensive...I'm happy to add more as necessary. Thanks in advance.

 

-Niche insurer—not an “all things to all people” P&C. Market is small ($1.5B annually) but very specialized (technology and process experience helps them service needs of their niche more effectively than competitors or larger insurers)

-Targeting 20% market share. 20% of $1.5B is $300M annual gross premium opportunity. Current ~$100M. Gross premiums written for most recent quarter were up 3x vs. 2Q 2012… It seems that management has a credible path to continue to grow, but time will tell. Importantly, they are taking share from competitors as prices increase.

-Growing rapidly—gross premiums written up 37% Y/Y

-High renewal rate, >80% w/ upward trend

-Profitable: operating ratio of 94% in recent quarter

-Conservative investments…yielding 1.7% annually on average; average S&P rating of AA, duration 3.9 years

-Market is hardening…premiums have upward pressure—3 to 5 % in past several quarters

-Management seems credible—have done what they’ve said they’d do. Insiders own roughly 5% of shares.

 

So, what would you pay? Any metric works, but for common language maybe we start with price to book. 0.5x? 1.0x? 1.5x? 2.0x? More?

 

 

[racemize]

What's the ROE?

[merkhet]

It's difficult to price an insurance company without some sense of whether their loss reserves are accurate.

[rayfinkle]

Roe approx 10%.

 

True on loss reserves. Indications are that mgmt is adequately reserving.

[racemize]

I guess it depends on what future ROE you expect.  I have trouble thinking a stock is worth much more than 1.0 of book unless book is going to grow at 12% or more, over the investment period.  I tend to try to figure out book value growth, assume I can buy at current multiple and sell at ~1 of book in the future and see if the returns are satisfactory.

 

Also, given the extremely low rate of bonds, insurers have quite a headwind, at least for longer tail lines.

[bz1516]

EPS growth rate for last few years would be very impoortant.  Portfolio offers chance for increased profitability in future.

[rayfinkle]

Thanks to everyone. racemize, I view this the same way. Hopefully this is new to some of you!

 

Atlas Financial Holdings, AFH. They have good shareholder presentations, and a decent VIC write up here: http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/105763

 

Next time I'll do a better job of describing the company :).

[bz1516]

At close to 2x BV its priced in a lot more growth than companies with a lot better records.  As is typical in the insurance sector there are delayed reactions to turnarounds which are quite visible.  Very little in top line growth in the last 4 years.  I see it as worth about half its current selling price.  If there is a new secret sauce its not visible on their website.  I'm a little baffled why its so high priced?

[GregS]

Taking everything you said at face value, I think fair price would be a bit above book, like 1.2x.  1.5x would be on the upper end.

 

I think it is very difficult for an insurance company to grow consistently because attractive returns even in a niche will attract competitors and put pressure on rates and underwriting.  Good insurance companies will retrench a bit during soft markets.  You mention the market is hardening, which is great, but at 2x book, I think much of that is already priced in.

 

If you really like the management team, I wouldn't necessarily call it a sell at 2x book if your time horizon is many years.  But probably not a buy, either.

 

One key question: how much of the recent growth is organic vs. acquisition?