American Independence Corp AMIC
December 30, 2008 - 2:11pm EST by
2008 2009
Price: 2.38 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 20 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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I wrote up AMIC a year ago and the stock is down 75% since. Mea culpa. It’s a micro-cap insurance company, what more can I say? But the fundamentals haven’t changed, it’s still a solid little insurance company, and while it was cheap a year ago, now I’d put it in the category of classic Graham-and-Dodd, trading at an estimated 0.36x tangible book and 2x P/E on previous peak earnings, with lots of NOLs. It’s profitable, and more importantly, it doesn’t have the insurance company baggage that should scare you off – it has zero debt, a conservative investment portfolio, and none of the annuity and DAC liabilities that have gotten life insurers in trouble recently. I know of at least one investment firm that has had to liquidate its position in the stock in the past several weeks, and I suspect there are others, which surely has put pressure on the stock. Perhaps the supply-demand situation for the shares will improve in the near future.

AMIC is an “A-“ rated medical stop-loss and health insurer with an estimated $115 million in 2008 revenues.  The stock price is $2.38 and there are 8.5 million shares outstanding, for a market cap of $20 million. It has no debt. About 55% of AMIC’s premiums are in medical stop-loss, 40% in fully-insured health, and the rest in short-term disability. About three-quarters of its business is from a pro rata reinsurance treaty with Independence Holding Company (IHC), which owns 49% of AMIC, and that figure is rapidly decreasing as AMIC is writing more business directly. IHC and AMIC essentially share a management team. The IHC/AMIC combination is one of the largest stop-loss writers in the country, along with HCC Insurance, Sun Life, and Symetra (a White Mountains company), so while it is a small firm, it is a significant player in its stop-loss niche. Within the fully-insured health market, it is but a minnow among the whales. It skirts the competition of the UnitedHealths and Aetnas by going after the rural markets where the big competition can’t give personalized service.

The insurance cycle is not in its favor, as the stop-loss business has been in a soft market for several years, and the health market started weakening last year. Eventually, the markets should harden, but I have no idea when. In the meantime, AMIC is a disciplined underwriter willing to shrink revenues in soft markets, and since it writes all short-tail insurance, it can always re-underwrite without the overhang of large catastrophic exposure, so the risk of devastating losses is quite miniscule. In this context of relatively stable business results, then, valuation becomes the overwhelming investment case.

Book value is the best metric in highlighting the value, but it first needs to be pointed out that this is not some unprofitable, cash burning company. It’s solidly profitable. In the first three quarters of the year it earned 9 cents, 9 cents, and 7 cents per share. It pays little in taxes because of NOLs, so its cash earnings were more like 15 cents, 14 cents, 11 cents per share. Annualizing the latest 11 cents per share, the stock is trading at 5.4x cash earnings. With the soft insurance markets continuing, it’s pulling back from business, so that 11 cent rate may not be sustainable in the near term, but that’s just part of the cycle. A few years ago, AMIC was earning well over $1 a share. There’s no reason why it can’t get back to that; in fact, AMIC has made some acquisitions in the past couple of years that increases the future earning potential, but at a multiple of 2x previous peak earnings, you don’t need to count on that.

The tangible book value as of September end was $7.21/share, which was flat from June and up 2% from December 2007. AMIC owns no common stocks in its investment portfolio. About 5% of the portfolio is in preferred stocks, and the rest is mostly high-grade corporates, MBS, agency, treasuries, and ABS/CMO. The investment portfolio took a 7% hit in the third quarter, and if you assume it took another 10% hit in the fourth quarter, the tangible book value today is $6.56/share. So the stock is trading for 0.36x tangible book value. Even if you assume a 20% hit to the investment portfolio this quarter, tangible book is still $5.90/share, for a P/TBV of 0.40x. Then there are the roughly $270 million of NOLs that AMIC has, mostly expiring after 2019. It’s such a big number relative to the current $4 million pretax profit run rate that it’s doubtful that it will all get used. But it’s got to be worth something. Assuming a 12% discount rate and very modest profit growth, the NOLs are worth about $1/share. It could be worth a lot more if profits rebound in the next few years or if an acquisition accelerates the NOL usage.

I don’t know exactly what the proper value for AMIC shares is, but given these four points – P/E of 5x current earnings, P/E of 2x peak earnings, P/TBV of <0.4x, and NOLs of >$1/share – I think it’s a lot higher than $2.38.

There have been several modest open market purchases by three insiders over the past couple of years. Two directors and an officer have bought about 40,000 shares combined at prices ranging from $11 on down. Clearly, they’ve been as wrong on the stock as anybody else, but I still take it as a good sign. The most recent purchase was by a director just last week, for 20,000 shares at $2.15-2.25/share.


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