EMC Insurance Group Inc. EMCI
September 24, 2009 - 1:40pm EST by
2009 2010
Price: 23.50 EPS $1.85 $1.30
Shares Out. (in M): 13 P/E 12.7x 18.0x
Market Cap (in $M): 300 P/FCF nm nm
Net Debt (in $M): 34 EBIT 1 1
TEV ($): 334 TEV/EBIT nm nm

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  • Property and Casualty



This is a short and sweet trade that is similar to one of my previous ideas where I noticed that the market hadn't figured out a big performance fee that was due to hit U.S. Global in the upcoming quarter. In this situation, I have found a company that will book a meaningful gain from the upcoming Verisk Analytics IPO that should result in an absolute trading gain of 25% and an IRR in the 90% range once this shows up in EMC filings at year end and Mr. Market catches on.

EMC Insurance Group:

EMC is a $300mm market cap, Iowa based corporation that serves both the P&C and reinsurance segments of the insurance market.  Most importantly, EMC has the most meaningful relative to market cap exposure to the Verisk Analytics IPO of any selling shareholder I could find. According to the preliminary prospectus filed a few days ago, EMC owns a little over 4.8mm shares of Verisk. These shares are worth over $100mm at my expected 21 offering price (I think this IPO has "Mastercard like" qualities and will price at the top of the range). The shares are being held at less than $15mm on the books. The 10-K note I have pasted below refers to this holding value. Note that nowhere in the filing does it mention the name Verisk Analytics - they refer to it as its former name, Insurance Services Office, when it was a run as a non for profit.  

My math suggests around a $6 gain from the 4.8mm shares of Verisk that EMC owns assuming a 21 IPO price where they will be selling 42% of the 4.8mm shares while keeping the rest. EMCI is trading at 1x book right now so if you assume that it continues to trade at book, it should appreciate somewhere in the range that approximates this gain in book value.

EMCI 30-Jun-09
Book Value 23.22
Shares Out      13,235,000.00
Holding Value      14,996,000.00
Market Value    101,000,000.00
Gain      86,004,000.00
Per Share Gain 6.50
After Tax Gain  6.05
New Book Value 29.27
New Book Value 29.27
Current price 23.5
Return Potential 25%
IRR 91%


EMC 10-K:


A small number of the Company's securities are not priced by the independent pricing service.  These securities are reported as Level 3 fair value measurements, since no reliable observable inputs are used in their valuations.  The largest of these investments is the Class B shares of Insurance Services Office Inc. (ISO).  Prior to the fourth quarter of 2008, the Company reported this investment at the fair value obtained from the Securities Valuation Office (SVO) of the National Association of Insurance Commissioners (NAIC).  The SVO establishes a per share price for ISO Class B shares by averaging all Class B trades during the past year and reviewing the quarterly valuations of the Class A shares produced by a nationally recognized independent firm (the Class B shares were assigned a 40 percent marketability discount from the fair value of the Class A shares).  The SVO valuation is typically performed twice a year, and resulted in a fair value of $10,180,000 for the Class B shares held by the Company at December 31, 2007.  During the fourth quarter of 2008, the Company modified the valuation process for this investment by implementing a 20 percent marketability discount from the fair value of the Class A shares.  This reduction in the marketability discount was implemented in recognition of a Form S-1 filing made by ISO with the Securities and Exchange Commission during 2008 in preparation for a planned initial public offering.  At the completion of the initial public offering, ISO will continue to have two classes of stock; however, there will be a defined conversion plan that will result in all Class B shares being converted into Class A shares within 30 months.  As a result, the marketability discount associated with the Class B shares will be well below the 20 percent discount utilized by the Company at year-end.  In addition, the Company has a commitment from ISO that the offering price for the initial public offering will not be less than the fair value of the shares as determined by the nationally recognized independent firm.  Applying a 20 percent marketability discount to the third quarter valuation of the Class A shares performed by the nationally recognized independent firm resulted in a fair value of $14,966,000 for the Class B shares.  The other equity security included in the Level 3 fair value measurement category continues to be reported at the fair value obtained from the SVO.  The SVO establishes a per share price for this security based on an annual review of that company's financial statements.  This review is typically performed during the second quarter, and resulted in a fair value for the shares held by the Company of $4,000 at December 31, 2008 and $7,000 at December 31, 2007.



 Verisk IPO on Oct 6th

Subsequent filings by EMC incorporating the gain

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