Yesterday, we talked about cybersecurity, artificial intelligence and Chinese dominance of the modern world, but today we’re going to get back to a kinder, gentler topic. I want to go back to the report on the insurance industry that we talked about on Monday.
That report was focused on the new “Dream Big” vision in which insurance companies need to get a lot bigger so that they can have the scale to develop new technology systems to spread costs across a larger asset base, to automate and to gain access to the very best investment talent.
Remember that we’re likely going to be in a no-growth or negative-growth world over the next 10 years, so it’s going to get much harder to make money. Therefore, companies need to get bigger so they can write bigger checks to get better investment talent.
Takeovers in the insurance space are going to be a lot like banks and will be mostly based on price to book value. The most attractive targets are going to be profitable companies that are earning decent returns and trading below tangible book value.
So, I looked around and found a couple of companies you might want to consider because they are very cheap and would make outstanding acquisition candidates for the right company.
Kingstone Companies, Inc.
For instance, a company that’s looking to move into the northeast into select property and casualty markets, particularly homeowners’ insurance, would probably want to consider Kingstone Companies, Inc. (KINS).
This is a small property and casualty insurance company focused on writing homeowners’ insurance, landlord insurance, condo insurance and even K-9 insurance, and they have an insurance division on the commercial side where they insure ride-sharing drivers. They also offer personal liability policies.
They’re a true northeastern regional insurance company. So, if I was a company writing homeowners’ policies in high-risk states for storm damage like Florida, Louisiana and Texas looking to increase my exposure in those markets, you could really offset some of the volatility of that business by buying exposure in the northeast where you don’t have hurricanes on a regular basis.
So there are a lot of reason to expand into the northeast, and this is a fantastic target. The stock is trading at about 77% of book value, and you figure that a deal for this company would come in 40%-50% higher than current prices, at a minimum.
They’re trying to do their best to grow earnings by expanding to different states and offering new products. They’re going to have wide market acceptance and can drive future earnings growth.
Insiders control over 8%, and the company is forming a new employee stock ownership plan that’s going to own an additional 7%, so everyone at the company is going to have some skin in the game and will be motivated to get the stock price a lot higher.
The company has been around for a while, but everyone on the board is getting pretty old, and they may be looking for the door and be willing to sell the company at a reasonable price. They’re all shareholders, and they want to get paid and paid well.
One analyst covers the company, and they’re looking for about a 100% gain in earnings this year. The stock has a $70 million market cap with $150 million of revenue, so it’s a small company that I think may fall into the too-small-to-survive category. They will eventually have to go looking for a seller if one doesn’t pop up on its own.
I don’t see a lot of downside to this stock at 77% of book value, and I think the probability of them getting taken over is quite high.
Conifer Holdings, Inc.
Now, next up is Conifer Holdings, Inc. (CNFR), which is a Michigan-based insurance company. They have several different companies, including Conifer insurance company, which is licensed in four states in the midwest, and White Pine insurance, which is licensed in all 50 states. They also have a restaurant and casual dining insurance company that specializes in that industry in all 50 states as well.
These guys write niche market insurance, like liquor liability, insurance for security guards and alarm contractors. They also do workers’ compensation, but the business I love is that they’re insuring cannabis companies, which not everybody is doing.
Because cannabis is still illegal on a federal level, this is a state-by-state, slug-it-out kind of deal. They’re one of the few companies writing insurance policies for various cannabis businesses, and this can be a very profitable business when properly managed. And because of the lack of availability, it’s going to be a very high premium business.
The stock is trading at just 60% of tangible book value. Insiders own a whopping 52% of the companies, and an investment firm that’s controlled by one of their board members owns another 22%. There’s massive skin in the game here.
The insiders look at this stock trading at 60% of the book value, and that’s got to irk them a bit because they know that they could sell the company for a lot more than that given that they’ve got these profitable niche markets, especially the cannabis market.
This is a very attractive company, and I’m frankly surprised we haven’t seen a bid for this company already. We’ve seen several deals for specialty insurance companies already this year, and I think Conifer Holdings is probably on the short list of logical candidates for a mainline insurance company to consider buying.
The underwriters that figure out the cannabis market now before it becomes legal on the federal level, and it’s going to, are going to dominate what’s going to be an explosive insurance market. Again, insider have a ton of skin in the game, and I just don’t see a lot of downside because of the current valuation.
I would not be shocked to see this company taken over at twice the current stock price or higher at some point in the not-so-distant future.
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