Description

ICCH is only suited for personal accounts and small funds.

The Twitter pitch is "ACAP Junior."

The elevator pitch is a microcap insurance company that demutualized last year and trades at 76% of TBV.

The porn star come-on line is the largest shareholder is R. Kevin Clinton, who owns 17.1% of the stock and sits on the board of directors.

You might be asking who is R. Kevin Clinton and the Twitter pitch is a clue. Here is what the proxy statement discloses:

"Mr. Clinton has been a professor and Director of the Actuarial Science Program of Michigan State University since August 2015. From November 2013 to April 2015, he served as the State Treasurer of the State of Michigan and a member of the Governor’s cabinet. Mr. Clinton was part of the team that brought the City of Detroit out of bankruptcy. From April 2011 to November 2013, he served as the Commissioner of Insurance of the State of Michigan and Director of the Michigan Department of Insurance and Financial Services (MDIFS), which regulates state insurance companies, banks, credit unions and other financial institutions. Mr. Clinton was President and Chief Executive Officer of American Physicians Capital, Inc., a publicly traded insurance company, from 2004 until its sale to The Doctors Company in October 2010. He was Vice President and Chief Operating Officer of that company from 2001 to 2003. From 1997 to 2001, Mr. Clinton was President and Chief Executive Officer of MEEMIC Insurance Company, a personal lines insurer which converted from a mutual to stock company and became a publicly traded company in 1999. From 1990 to 1997, he worked at ProNational Insurance Company, holding the positions of Chief Financial Officer from 1996 to 1997 and Vice President of Underwriting from 1990 to 1995. Mr. Clinton was a consulting actuary from 1986 to 1990. He was the Chief Actuary of the State of Michigan Insurance Bureau, which is now part of the MDIFS, from 1982 to 1986. Mr. Clinton graduated from the University of Michigan (B.S. Business Administration; Masters of Actuarial Science), and was inducted as a Fellow of the Casualty Actuarial Society in 1982. Mr. Clinton is required to be nominated as a director pursuant to a purchase agreement, dated as of September 6, 2017, between the Company, Illinois Casualty Company, and certain investors, including Mr. Clinton. Mr. Clinton’s experience in all aspects of the insurance industry, including as an insurance regulator, were important in the decision of the Board of Directors to appoint him as a member of the Board of Directors." [Bold highlight is mine.]

Long-time VIC members might remember American Physicians Capital (ACAP). It was written up three times, including by yours truly. The original CEO of ACAP was William Cheeseman, who retired in 2003, and was succeeded by Clinton. ACAP was losing money and had combined ratios well over 100% during Cheeseman's tenure. Under Clinton, ACAP cut bad business, reduced net written premiums in half, got the combined ratio under 80%, made money, instituted a dividend and bought back shares. Then he sold the company in 2010 for the happy ending.

Background: ICCH is the holding company for Illinois Casualty Company which left the virginal state of mutuality and sold itself into sin by going public in March 2017. The S-1 contained this basic history:

Illinois Casualty was founded as an inter-insurance exchange in 1950 based upon the recognition that establishments serving alcohol require unique insurance protection. Beginning in 1998, we expanded the scope of our product offerings beyond liquor liability to include property, general liability, umbrella, and workers compensation coverage. Our goal was to meet the full range of business insurance needs of our clients in the food and beverage industry.

In 1999, Illinois Casualty recognized the significant need to automate. Upon determining available commercial software was inadequate to meet our long-term vision, we contracted the development of an integrated platform to handle agency, policy, and vendor management. Introduced in 2001, the first module successfully improved productivity and reporting capabilities. We built on that success by adding document imaging, claims, billing, and risk management modules. As it has grown, our information management system has provided us with a unique and comprehensive ability to automate processes, track and examine risk traits, and monitor claims development. As a result, Illinois Casualty has constructed and leveraged a multi-variant pricing algorithm that allows us to better segment our business in order to more effectively price to actual exposure.

Illinois Casualty mutualized in 2004 and began to expand its territory geographically within the Midwest. We are an admitted carrier in eight states: Illinois, Iowa, Indiana, Minnesota, Michigan, Missouri, Ohio and Wisconsin. We currently issue policies in seven states, including Ohio where we began writing policies in the third quarter of 2016, and expect to begin writing premiums in Michigan as early as 2017. As we expanded our territory and product lines over the last 66 years, we have maintained our focus and commitment to the food and beverage industry. As a result, we have developed unsurpassed expertise in our niche, particularly within the areas of underwriting, loss control, and claims management. Illinois Casualty continues to leverage that experience into the ongoing development of innovative insurance products and services uniquely tailored to the food and beverage industry.

The company demutualized in order to raise capital, i.e. they needed the money. It has a "B++" rating from A.M. Best and prior to the offering, a net written premium to surplus ratio around 150%. That ratio meant that ICCH effectively could not write more premium on its existing capital base. The offering also should help with getting a rating increase from A.M. Best. Moving up to "A-" would make a significant impact on the business, as it would expand its potential client base to include more upscale clients. Better run companies are more discriminating and will only do business with insurers having A.M. Best ratings of "A-" or higher. However, I should caution that A.M. Best tends to be slow with upgrades. The offering also allowed the company to redeem its surplus notes.

In terms of premiums, below is a distribution of premiums by state and by line of business:

The company began writing business in Colorado and Kansas in 2017, and in Michigan in 2018. I am not sure about Colorado or Kansas, but I am hoping that Clinton's background, experience and contacts in Michigan will be a benefit in that state as opposed to the failure of a different Clinton in Michigan in 2016.

Investments: The investment portfolio is about as sexy as Elizabeth Warren. It is longer dated due to the concentration on liability lines with an average duration of 4.48 years. The financials do not mention the average yield on the fixed income portfolio but it is anemic, at under 3%. Corporate bonds make up 32% of the portfolio, asset-backed securities 31%, municipal bonds about 25%, and the equity portfolio is about 8% of the portfolio. The remainder is in Treasuries.

Reserves: This is a mixed bag. The earlier years are good but it deteriorated when the company started expanding the business. However, reserves have been trending better since 2013. With Clinton joining the board in 2017, I believe that the underwriting and reserving will be better.

Stock Repurchase: In September 2017, the board of directors authorized a $3 million stock repurchase plan. As of 12/31/2017, the company had not bought any shares.

Shareholders: Despite the small size, a lot of the shares are locked up.

• R. Kevin Clinton - 17.1%

• Rock Island Investors - 11.4%

• ICCH ESOP - 10.0%

• Tuscarora Wayne Insurance Company 5.7% (A Pennsylvania stock insurer that is majority owned by Tuscarora Wayne Mutual Group, a mutual holding company.)

• M3F - 3.9%

• John Klockau - 3.3% (He held the surplus notes, along with his brother.)

• Arron Sutherland (CEO) - 1.4%

• Teton Advisors - 1.1%

• Michael F. Price - 1.0%

• Minerva Advisors - 1.0%

• Stilwell Value - 0.8%

• Howard Beck (CUO) - 0.8%

• Mark Schwab (Director) - 0.8%

Clinton, Rock Island Investors and Tuscarora Wayne have all agreed to lock-up restrictions on their respective shares for between three to seven years. One of the directors of ICCH, Scott Burgess, is also a director of Tuscarora Wayne and is also the managing director of Griffin Financial Group, the company that handled ICCH's offering. Tuscarora Wayne is based in Pennsylvania, which is also where ICCH has its corporate domicile; the insurance subsidiary is still domiciled in Illinois. This piqued my interest in Tuscarora Wayne. The paragraph that follows is a tangent, so feel free to skip it.

Tuscarora Wayne has been rolling up other mutual insurers since 1963. In 2009, it did a partial conversion, whereby it created the Tuscarora Wayne Mutual Group, a mutual holding company, and converted the mutual insurance companies to stock companies that are held by an intermediate a stock holding company. The interesting thing is that there are no outside investors. The MHC controls everything, although all the insurance subsidiaries are stock companies. In 2010, Tuscarora Wayne acquired a mutual, Lebanon Mutual Insurance Company. TW had gained control of LMIC via a surplus note and replacing the LMIC of board of directors with its own nominees. This allowed TW to control the demutualization and hand the keys over, so to speak, to TW without compensating the policyholders or having to do an offering. That's the thing about Pennsylvania and insurance - screw policyholders and shareholders, let the companies do what they want. However, LMIC policyholders got a special consolation prize by having their LMIC membership transferred to the TW MHC.

Financials: Here are the financial highlights from the latest 10-K:

Earnings: Due to the lock-up and other factors, this will not be a three years +  a day and out conversion story. The question is what can the company earn in the coming years, so let's do some mental masturbation. Suppose that the company doubles net earned premiums to $90 million in five years. On a 97% combined ratio, that would be $2.7 million in underwriting income. The investment portfolio would be about 1.7X premiums or $152 million. A 3% yield on that would be $4.6 million. That translates to $7.3 million pre-tax, assume 25% haircut for taxes and divide by the current shares outstanding and you get $1.72/sh in earnings. That equates to a 8.5% ROE, which is about what the company has earned before. At a 14 multiple, that is $24.14. Over 5 years, that is a 9.3% CAGR. However, at a 24% discount to book and the possibility that the investment portfolio does better and the combined ratio gets down to the 93-95% range that the company has done in the past, it could be interesting.

Risks: This is where the ACAP Junior part really comes in. ACAP was a stormy investment that happened to work out in the end. Obvious risks here are:

• The growth does not materialize, or worse, the growth occurs but it's bad.

• R. Kevin Clinton turns out to be the Hillary Clinton of insurance.

• Company makes a stupid acquisition.

Catalyst

None. This is my typical paint-drying, "value as a catalyst" investment.