AMERICAN SAFETY INS HLDG LTD ASI
December 08, 2010 - 2:04pm EST by
david101
2010 2011
Price: 21.85 EPS $2.26 $2.23
Shares Out. (in M): 11 P/E 0.0x 0.0x
Market Cap (in $M): 232 P/FCF 0.0x 0.0x
Net Debt (in $M): 39 EBIT 0 0
TEV ($): 0 TEV/EBIT 0.0x 0.0x

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  • Insurance
 

Description

After the recent spate of M&A activity in the P&C space, including the buyout of MIGP last week, I am presenting American Safety Insurance Holdings for consideration. It trades at 74% of TBV and about 9X 2011 earnings.

 

My initial interest in ASI stemmed from looking for potential M&A targets. I did a simple screen last Friday of P&C insurers trading for under 80% of book and with market caps under $1 billion, which gave me 21 names. Here are the results:

 

Symbol

Description

 MC

 P/B

 Notes

MAJC

Majestic Capital, Ltd.

       6

   0.12

 Being bought out

AFFM

Affirmative Insurance Holdings

     59

   0.35

 Flowers owns 51%; TBV<0

TCHC

21st Century Holding Co.

     27

   0.44

 Florida homeowners insurance

UIHC

United Insurance Holdings Corp

     21

   0.47

 Florida homeowners insurance

SBX

SeaBright Holdings, Inc.

   177

   0.47

 work comp, big in CA

FAC

First Acceptance Corp.

     85

   0.48

 insiders own 65%

KFS

Kingsway Financial Services In

     84

   0.55

 Ugly; Stilwell involved since 2008 & owns 15%

ASI

American Safety Insurance Hold

   170

   0.57

 E&S, specialty, reinsurance

GBLI

Global Indemnity plc

   510

   0.59

 51% owned by Fox, Paine

GAN

Gainsco Inc.

     39

   0.59

 PE firm owns 36%, chairman 23%; inv. Port. Poor

UNAM

Unico American Corp.

     49

   0.65

 Insiders control 53%; writes CMP in CA but no EQ

NSEC

National Security Group Inc.

     28

   0.66

 insiders own 43%

FSR

Flagstone Reinsurance Holdings

   812

   0.68

 Bermuda/Luxombourg reinsurer

PMIC

Penn Millers Holding Corporati

     75

   0.69

 recently demutualized, niche in ag business

EIHI

Eastern Insurance Holdings

   104

   0.69

 small work comp insurer

KINS

Kingstone Companies, Inc.

       9

   0.74

 Insiders own 51%

MHLD

Maiden Holdings, Ltd.

   535

   0.74

 Good write-up on SumZero; insiders own 30%

STFC

State Auto Financial Corp.

   618

   0.76

 Mutual owns 63.5%

FMMH

Fremont Michigan Insuracorp In

     36

   0.77

 Biglari seeking tender offer

HALL

Hallmark Financial Services In

   179

   0.78

 insider owns 43%

EMCI

EMC Insurance Group Inc.

   279

   0.78

 Mutual owns 63%

 

One of the first things that I did was eliminate 10 names with large insider holdings of >40%, as they are unlikely to be willing sellers in this market. MAJC and FMMH are being bought. KFS is a basket case and I would not touch TCHC and UIHC based on two words: Florida homeowners. I have written up and continue to own PMIC and SBX. That leaves four names: ASI, FSR, MHLD and EIHI. FSR is an offshore reinsurer and should be compared accordingly to its peers. There is already a write up on MHLD on Sum Zero. From the remaining two, the cheapest is ASI.

 

History: The Company began as a captive insurer for a risk retention group in 1985. The initial business was to provide liability coverage for companies involved in the abatement process for asbestos and pollution. They have expanded their products, including buying an excess & surplus ("E&S") company and an admitted company.

Business: There is a decent presentation at KBW, under their insurance conference from September 7 & 8, 2010:

http://www.kbw.com/news/conferenceInsurance2010.html

Some quick highlights:

 

  • "A" rated by Best for past 15 years
  • Loss ratio has been stable as expense ratio up slightly due to diversifying into other lines and technology, taking more business on the books due to cost of reinsurance
  • Business Mix: 50% E&S, 32% ART, 18% Re; will do fronting business on a fee basis
  • 55% of capital base in Bermuda, remainder in US
  • Average duration of liabilities about 5 years, average duration of bond portfolio 4.2 years
  • $212.6 reinsurance recoverable, with 80% of balances from reinsurers rated less than "A-" collateralized
  • Traditionally long-tailed but growing short-tailed business

 

To access their last cc:

 

http://www.investorcalendar.com/IC/ClientPage.asp?ID=161774

 

Underwriting: The average combined ratio since 2001 is 100.4. They are actively expanding business through several new lines, so their expense ratio is high right now. The idea is to have a platform to build upon when the insurance market turns.

 

Reserves: They had some issues with accident years prior to 2003 but have done better in recent years. Towards the end of the 3rd Qtr 2010 cc, in the Q&A, there was some good discussion about this. Part of  the strategy to going to short-tail lines is to free up capital that is currently needed to support the long-tail reserves.

 

Peers: Here is a table of small commercial P&C insurers:

Symbol  Price  Shares Market Cap Equity Intangibles TBVPS P/TBV 2011 EPS Est. Forw. P/E '11 ROTE
PMIC           13.85          5.1            70.4            93.9                -        18.49 74.9%              0.50         27.7 2.7%
EIHI*           11.06          9.2          101.8          150.5            17.2      14.47 76.4%              0.52         21.3 3.6%
HALL             9.07        20.1          182.5          235.7            67.2        8.37 108.3%              0.73         12.4 8.7%
UVE             4.81        39.2          188.4          138.6                 -        3.54 135.9%              0.65           7.4 18.4%
SBX*             9.12        22.0          200.9          353.7              2.8      15.93 57.2%              0.49         18.6 3.1%
ASI           21.85        10.6          231.9          322.4            10.4      29.40 74.3%              2.23           9.8 7.6%
EMCI           22.33        12.9          288.4          234.0              0.9     18.04 123.7%              1.95         11.5 10.8%
AMSF*           18.59        18.4          342.7          318.2                 -       17.26 107.7%              1.76         10.6 10.2%
BWINB           23.30        14.8          345.2          372.7                 -       25.16 92.6%              1.50         15.5 6.0%
NATL           21.26        19.4          413.4          307.9              9.0      15.37 138.3%              1.98         10.7 12.9%
MIG             9.80        53.2          521.7          558.1          156.5        7.54 129.9%              1.06           9.2 14.1%
MHLD             7.80        72.1          562.4          758.4            99.5        9.14 85.4%              1.16           6.7 12.7%
UFCS           22.07        26.2          578.9          727.4                -        27.73 79.6%              0.80         27.6 2.9%
GBLI           19.81        30.7          607.6          911.2            24.0      28.93 68.5%              1.67         11.9 5.8%
EIG*           17.10        39.8          681.1          528.8           49.9      12.02 142.2%              1.18         14.5 9.8%
*primarily work comp 

The median P/TBV is 92.6% and median P/E is 11.9.

 

Symbol Market Cap Portfolio Ratio TTM NWP NWP/M.C. Und. Lev.
PMIC            70.4      177.4 252.1%            68.6 97.5% 73.0%
EIHI*          101.8      229.2 225.1%          125.0 122.7% 83.1%
HALL          182.5      404.3 221.5%          283.1 155.1% 120.1%
UVE          188.4      104.4 55.4%          189.6 100.6% 136.7%
SBX*          200.9      695.5 346.3%          250.9 124.9% 70.9%
ASI          231.9      805.9 347.5%          207.7 89.6% 64.4%
EMCI          288.4    1,089.6 377.8%          390.9 135.5% 167.0%
AMSF*          342.7      751.3 219.2%          203.1 59.3% 63.8%
BWINB          345.2      588.5 170.5%          213.0 61.7% 57.2%
NATL          413.4      927.1 224.3%          323.1 78.2% 86.7%
MIG          521.7    1,268.9 243.2%          672.7 128.9% 180.5%
MHLD          562.4    1,587.9 282.3%       1,141.9 203.0% 150.6%
UFCS          578.9    2,543.8 439.4%          418.6 72.3% 57.5%
GBLI          607.6    1,615.2 265.8%          298.2 49.1% 32.7%
EIG*          681.1    2,084.2 306.0%          304.9 44.8% 57.7%

Strategy: I think that M&A activity will continue in this space and feel that ASI fits into that category. The low valuation provides a decent margin of safety even if it is not bought. If you want a basket approach, you can buy also buy SBX and EIHI. PMIC is also interesting, but think it is less of an acquisition target given its recent demutualization.

 

Note: I am writing this a bit on the fly, in part to address questions posed on the PMIC and SBX threads. Will try to fill in more details, and questions are welcome.

Catalyst

Cheap M&A target
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    Description

    After the recent spate of M&A activity in the P&C space, including the buyout of MIGP last week, I am presenting American Safety Insurance Holdings for consideration. It trades at 74% of TBV and about 9X 2011 earnings.

     

    My initial interest in ASI stemmed from looking for potential M&A targets. I did a simple screen last Friday of P&C insurers trading for under 80% of book and with market caps under $1 billion, which gave me 21 names. Here are the results:

     

    Symbol

    Description

     MC

     P/B

     Notes

    MAJC

    Majestic Capital, Ltd.

           6

       0.12

     Being bought out

    AFFM

    Affirmative Insurance Holdings

         59

       0.35

     Flowers owns 51%; TBV<0

    TCHC

    21st Century Holding Co.

         27

       0.44

     Florida homeowners insurance

    UIHC

    United Insurance Holdings Corp

         21

       0.47

     Florida homeowners insurance

    SBX

    SeaBright Holdings, Inc.

       177

       0.47

     work comp, big in CA

    FAC

    First Acceptance Corp.

         85

       0.48

     insiders own 65%

    KFS

    Kingsway Financial Services In

         84

       0.55

     Ugly; Stilwell involved since 2008 & owns 15%

    ASI

    American Safety Insurance Hold

       170

       0.57

     E&S, specialty, reinsurance

    GBLI

    Global Indemnity plc

       510

       0.59

     51% owned by Fox, Paine

    GAN

    Gainsco Inc.

         39

       0.59

     PE firm owns 36%, chairman 23%; inv. Port. Poor

    UNAM

    Unico American Corp.

         49

       0.65

     Insiders control 53%; writes CMP in CA but no EQ

    NSEC

    National Security Group Inc.

         28

       0.66

     insiders own 43%

    FSR

    Flagstone Reinsurance Holdings

       812

       0.68

     Bermuda/Luxombourg reinsurer

    PMIC

    Penn Millers Holding Corporati

         75

       0.69

     recently demutualized, niche in ag business

    EIHI

    Eastern Insurance Holdings

       104

       0.69

     small work comp insurer

    KINS

    Kingstone Companies, Inc.

           9

       0.74

     Insiders own 51%

    MHLD

    Maiden Holdings, Ltd.

       535

       0.74

     Good write-up on SumZero; insiders own 30%

    STFC

    State Auto Financial Corp.

       618

       0.76

     Mutual owns 63.5%

    FMMH

    Fremont Michigan Insuracorp In

         36

       0.77

     Biglari seeking tender offer

    HALL

    Hallmark Financial Services In

       179

       0.78

     insider owns 43%

    EMCI

    EMC Insurance Group Inc.

       279

       0.78

     Mutual owns 63%

     

    One of the first things that I did was eliminate 10 names with large insider holdings of >40%, as they are unlikely to be willing sellers in this market. MAJC and FMMH are being bought. KFS is a basket case and I would not touch TCHC and UIHC based on two words: Florida homeowners. I have written up and continue to own PMIC and SBX. That leaves four names: ASI, FSR, MHLD and EIHI. FSR is an offshore reinsurer and should be compared accordingly to its peers. There is already a write up on MHLD on Sum Zero. From the remaining two, the cheapest is ASI.

     

    History: The Company began as a captive insurer for a risk retention group in 1985. The initial business was to provide liability coverage for companies involved in the abatement process for asbestos and pollution. They have expanded their products, including buying an excess & surplus ("E&S") company and an admitted company.

    Business: There is a decent presentation at KBW, under their insurance conference from September 7 & 8, 2010:

    http://www.kbw.com/news/conferenceInsurance2010.html

    Some quick highlights:

     

     

    To access their last cc:

     

    http://www.investorcalendar.com/IC/ClientPage.asp?ID=161774

     

    Underwriting: The average combined ratio since 2001 is 100.4. They are actively expanding business through several new lines, so their expense ratio is high right now. The idea is to have a platform to build upon when the insurance market turns.

     

    Reserves: They had some issues with accident years prior to 2003 but have done better in recent years. Towards the end of the 3rd Qtr 2010 cc, in the Q&A, there was some good discussion about this. Part of  the strategy to going to short-tail lines is to free up capital that is currently needed to support the long-tail reserves.

     

    Peers: Here is a table of small commercial P&C insurers:

    Symbol  Price  Shares Market Cap Equity Intangibles TBVPS P/TBV 2011 EPS Est. Forw. P/E '11 ROTE
    PMIC           13.85          5.1            70.4            93.9                -        18.49 74.9%              0.50         27.7 2.7%
    EIHI*           11.06          9.2          101.8          150.5            17.2      14.47 76.4%              0.52         21.3 3.6%
    HALL             9.07        20.1          182.5          235.7            67.2        8.37 108.3%              0.73         12.4 8.7%
    UVE             4.81        39.2          188.4          138.6                 -        3.54 135.9%              0.65           7.4 18.4%
    SBX*             9.12        22.0          200.9          353.7              2.8      15.93 57.2%              0.49         18.6 3.1%
    ASI           21.85        10.6          231.9          322.4            10.4      29.40 74.3%              2.23           9.8 7.6%
    EMCI           22.33        12.9          288.4          234.0              0.9     18.04 123.7%              1.95         11.5 10.8%
    AMSF*           18.59        18.4          342.7          318.2                 -       17.26 107.7%              1.76         10.6 10.2%
    BWINB           23.30        14.8          345.2          372.7                 -       25.16 92.6%              1.50         15.5 6.0%
    NATL           21.26        19.4          413.4          307.9              9.0      15.37 138.3%              1.98         10.7 12.9%
    MIG             9.80        53.2          521.7          558.1          156.5        7.54 129.9%              1.06           9.2 14.1%
    MHLD             7.80        72.1          562.4          758.4            99.5        9.14 85.4%              1.16           6.7 12.7%
    UFCS           22.07        26.2          578.9          727.4                -        27.73 79.6%              0.80         27.6 2.9%
    GBLI           19.81        30.7          607.6          911.2            24.0      28.93 68.5%              1.67         11.9 5.8%
    EIG*           17.10        39.8          681.1          528.8           49.9      12.02 142.2%              1.18         14.5 9.8%
    *primarily work comp 

    The median P/TBV is 92.6% and median P/E is 11.9.

     

    Symbol Market Cap Portfolio Ratio TTM NWP NWP/M.C. Und. Lev.
    PMIC            70.4      177.4 252.1%            68.6 97.5% 73.0%
    EIHI*          101.8      229.2 225.1%          125.0 122.7% 83.1%
    HALL          182.5      404.3 221.5%          283.1 155.1% 120.1%
    UVE          188.4      104.4 55.4%          189.6 100.6% 136.7%
    SBX*          200.9      695.5 346.3%          250.9 124.9% 70.9%
    ASI          231.9      805.9 347.5%          207.7 89.6% 64.4%
    EMCI          288.4    1,089.6 377.8%          390.9 135.5% 167.0%
    AMSF*          342.7      751.3 219.2%          203.1 59.3% 63.8%
    BWINB          345.2      588.5 170.5%          213.0 61.7% 57.2%
    NATL          413.4      927.1 224.3%          323.1 78.2% 86.7%
    MIG          521.7    1,268.9 243.2%          672.7 128.9% 180.5%
    MHLD          562.4    1,587.9 282.3%       1,141.9 203.0% 150.6%
    UFCS          578.9    2,543.8 439.4%          418.6 72.3% 57.5%
    GBLI          607.6    1,615.2 265.8%          298.2 49.1% 32.7%
    EIG*          681.1    2,084.2 306.0%          304.9 44.8% 57.7%

    Strategy: I think that M&A activity will continue in this space and feel that ASI fits into that category. The low valuation provides a decent margin of safety even if it is not bought. If you want a basket approach, you can buy also buy SBX and EIHI. PMIC is also interesting, but think it is less of an acquisition target given its recent demutualization.

     

    Note: I am writing this a bit on the fly, in part to address questions posed on the PMIC and SBX threads. Will try to fill in more details, and questions are welcome.

    Catalyst

    Cheap M&A target

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