Tuesday, September 19, 2006

Bancinsurance Corp (BCIS): undervalued and off the radar

Bancinsurance is a microcap insurance company whose main business involves providing insurance against collateral for lending institutions. Basically, if someone defaults on a loan, bancinsurance makes sure that the collateral is still worth as much as it was originally. Bancinsurance provides its services to approximately 400 lending institutions, and it operates in a small and highly profitable niche. So why the great opportunity?

5 years ago, Bancinsurance entered into a new line on reinsurance covering for immigration and bail bonds. The results were disastrous; the company was forced to take a big hit to reserves, their auditors left, and they were delisted from the Nasdaq. Bancinsurances responsed quickly, hiring a new auditor, discontinuing the business, and hiring a legal firm to dispute the charges.

This was 2 years ago. Bancinsurance has now returned to filing, its legal disputes are coming to a close, and its core business is still highly profitable. Adverse loss reserves from the discontinud bond program are pretty much not a problem as the company has already assumed close to worst case scenarios for its legal disputes and the policies were also short-tail. We are left with a company that is severely cheap and with a catalyst to improving earnings.

How Cheap?

BCIS currently has a market cap of 30 million, and total debt of 15 million, minus 4.2 million recieved from the sale of its publishing division, giving an Enterprise value of 40 million. It has a 95 million investment portfolio; assuming a 4% yield, this gives you approximately 4 million in earnings. If discounted at 10%, this gives you 40 million. With simply the investment portfolio, the current price is already justified.


05 04 03 02 01 00 99 98 97 96
Loss Ratio 45.8 95.1 66.1 69.3 56.6 60.7 57.8 63.9 54.4 53.3
Expense Ratio 47.8 34.6 26.0 21.0 35.4 27.4 26.6 16.5 22.1 30.5
Combined Ratio 93.6 129.7 92.1 90.3 92.0 88.1 84.4 80.4 76.5 83.8

BCIS currently writes over 50 million in premiums annually. Historically, the company has averaged combined ratios in the mid 80's. What has changed recently? A comparision of the loss and expense ratios makes this clear. BCIS's expense ratio has increased significantly in the past few years as a result of increased legal and audit fees. The company has been able to increase pricing to compensate for this, resulting in the lowest loss ratio in the company's history. This shows to me the pricing power the company possesses in this niche. Regardless, management has stated by the end of the year they should be mostly finished with their legal fees and the expense ratio should fall to a more normal level.

Assuming the 93% CR the company achieved in 2005, this would be an additional 3.5 million in pre-tax income, or 2.25 million after tax. If the company improves the expense ratio to 37%, that changes it to 5.5 million after tax. If it improves the expense ratio back to the historic average of 25%, it will earn 9.25 million after tax. Combine any of these figures with the 4 million earned from the investment portfolio and you get a net income range of 6.25 million to 13.25 million.

As for manamgent, the Sokol family owns 62% of the stock, does not take excessive pay, and has done a good job steering the company.
At an EV of 40 million, BCIS has a significant margin of safety and a huge potential for upside.

Disclosure: I own shares in BCIS.

1 comment:

Anonymous said...

Hi Nick
Thanks for the eccelent article. Just wondering what happens if you buy pinksheet stocks and after few months/years later if they listed on the NASDAQ . Do the stocks you own automatically converted to the common shares at the par or do they became wothless because of the newly issued commonshares..Any insights in to this is very helpful