I wanted to do an updated write-up on Bancinsurance now that I have a greater understanding of the company and hence the investing situation. You can find a link to the original write-up at the bottom.
The Company
Bancinsurance is a small insurance company(market cap of 30 million) that focuses mostly on two small niche lines of business. 53% of their premiums are from Ultimate Loss Insurance(ULI). ULI covers physical damage to collateral in cases where it has been repossessed and is not insured, up to the lesser of fair market value or the remaining loan balance. The 2nd biggest line is GAP insurance, which makes up 23% of premiums. When a car is damaged beyond repair or stolen, GAP insurance pays the difference between the amount left owed on the lease and the insurance on the car. (Generally, the fair market value falls much faster than the amortization of the loan or lease.)
The Situation
In 2001, Bancinsurance expanded into a new line of insurance in a bid to grow their business. This ended up being a huge disaster- In 2004, huge losses came up, the auditors left, an investigation began, and the company took the company who managed the new line of business to court for missrepresentation.
Bancinsurance Today
The investigation concluded with no wrongdoing, the company hired a new auditor and became up to date with their filings, and most the claims have been handled and the rest have been reserved for on a practically worst-case basis. The last court arbitration should finish by this year and with it, take away a huge legal expense which cost Bancinsurance approximately 4 million in '06.
Valuation - Safety
Bancinsurance's losses in their lines of business are fairly predictable and stable. GAP relies on a car being either stolen or damaged beyond repair, while ULI covers physical damage on car's that are being repossessed. A recession would lead to more repossessions, but the combination of recession and physical damage is needed for bancinsurance to pay anything. Hence, I think book value is the safety net, especially considering that the company is still making healthy profits. The book value as of last quarter was $7.54, compared to a current price of $6.05. (24.6% return)
Upside Potential
Bancinsurance is in small niche lines of insurance and has been able to earn nice returns on capital throughout its history. And although growth has stagnated recently, over a longer time horizon they have done an excellent job running the business.
The following numbers are the results from 2006 to 2000. (numbers in millions)
Premiums: 49.1, 51.7, 50, 50, 42.6, 33, 25
Net Inc: 5.5, 6.3, -8.5, 3.9, .9, 3 , 3.9
One time
expenses: -1.8, -.4, -20.2, 0, -1.5, 0 , 0
(included in
net inc)
From 2004 to 2006, these one-time expenses consisted of reserves for the discontinued bond program, while in 2002 it was from the affect of an accounting change. Also, keep in mind that expenses were inflated in 2005 and 2006 due to approximately 4 million in yearly legal expenses. Put it all together and there is considerable upside potential for the company.
Moat
The company operates in niche lines of insurance, keeping many competitors away due to the small size. Also, the company sells its products mostly to lending institutions and car dealers, and there is some efficiency gained by having Bancinsurance operate a centralized claims management.
Risks
The main risks revolve around the discontinued bond program and the SEC investigation, but I believe these are accounted for because they are reserved for it and the SEC investigation has been open for a long time without any prosecution. (Usually, it takes a long time for the SEC to formally close an investigation, but if nothing happens within the first two years it diminishes the risk of the situation greatly) There is also a risk that premiums and business will continue to decline.
Given the price, I believe these risks are more than accounted for.
Original Write-Up on Bancinsurance on 9/19/06
Disclosure: I own shares in BCIS. This is neither a recommendation to buy or sell any of these securities. All information provided believed to be reliable and presented for information purposes only.
3 comments:
I bought some BCIS recently. It's a good buy even when you don't include the very competent investment team.
However, I see two additional lines of risk. The Highlands arbitration is still ongoing and may result in greater than expected losses, in addition to onagoing legal fees. I am also a little concerned about the lack of transparency behind their reinsurance arrangements, particularly the PORC agreements.
As BCIS acknowledges, one goal of the PORCs is to unify lender/dealer and BCIS interests. Can we then be sure that BCIS selects their reinsurers because of strong collateral and high probability of meeting claims? Or is the PORC reinsurance premium part of the cost of doing business with these entities?
I think the Highlands arbitration is a non-problem for two reasons. For one, the discontinued bail bond insurance was short tail, where losses are known and settled relatively quickly. So, by now all the claims are probably known. Second, in the 4th quarter of 06, they actually took a reserve redundancy of .1 million, and the wording makes it sound like that is essentially worst case scenario.
The PORC agreements were shaky to me at first, so let me explain how I've come to understand it. The PORC's are only for the lender/dealer products. If you look closely at these products, ULI and GAP, there is not much that should drastically change the reserves. Read the description of these products in this write-up. For ULI, you need to have an increase in defaults, and the cars must be uninsured and physically damaged. For GAP, there probably is no cyclicality behind increases in totaled or stolen cars, so your main concern is the prices in the used car market. To me, these both sound relatively stable to me, and I think the security of a 102% letter of credit seems okay.
So, I hope that helps. As i was thinking about it more, I did come up with some other concerns, and I want to get a better understanding of the unemployment products. So, keep tabs on this write-up and I will post a comment updating the new information as soon as I get it. (I made this the new direct link for bancinsurance under current holdings)
As a quick update, this is what I read which helped me become comfortable with the remaining Highlands arbitration.
We believe there is potential for the Company to mitigate its ultimate
liability to Highlands through the arbitration proceeding with
Highlands; however, because of the subjective nature inherent in
assessing the final outcome of this arbitration, management cannot
estimate the probability of an adverse or favorable outcome as of
December 31, 2006. In addition, while outside counsel believes we have
legal defenses under the reinsurance agreement, they are unable to
assess whether an adverse outcome is probable or remote in the
arbitration as of December 31, 2006. In accordance with SFAS No. 5
"Accounting for Contingencies," the Company is reserving to its best
estimate of the ultimate liability on the program at December 31, 2006
without any adjustment for positive arbitration outcome or a potential
settlement amount with Highlands. If the Company obtains information
to determine an estimate of a final arbitration value or estimate a
settlement value, the Company will record changes in its reserves, if
any, in the period that an estimate is made in accordance with SFAS
No. 60. The Company does not intend to pay for any of the Highlands
losses unless and until the arbitration is settled on a mutually
agreeable basis and/or a final binding judgment is made as to the
Company's ultimate liability.
I'm still trying to learn more about the unemployment products, so stay tuned.
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