Pure Value Play in BancInsurance Corporation

For a value investor, now is a sad and depressing time. Most companies are at or near 52-week highs and you need to look at next years earnings to get a reasonable P/E. Even companies which are in the dog house still look ugly when viewed over multi-year levels. However, I believe I may have found something worthwhile in the insurance industry.

BancInsurance Corporation (BCIS) is a specialty insurance company, primarily in the property/casualty field. With a market cap of $30 million it is not for the bigger fish out there. I like that though -- I can't help thinking it is keeping the price down.

What is interesting about this company is that it is selling for just under tangible book value (~$32 million) while still earning substantial profit. The valuation is due to a messy expansion into immigration and bail bond reinsurance. It ended poorly in 2004 when the company discontinued the business.

The combined ratio got nailed 129% (this means the cost of providing the insurance was 29% higher than the premiums paid), auditors quit, financial reports were delayed and the company was delisted from the NASDAQ. Subsequently investors fled. There is still some overhang from these events as legal proceedings continue. Essentially, 1 company is attempting to recover losses related to the reinsurance from BCIS, while BCIS is attempting to recover losses from 2 other companies. I am not a legal expert but the size & scale of the reinsurance operations do not seem adequate for the current legal issues to warrant the large-scale sell off that has occurred in the stock.

In spite of these events, the company was profitable in 2005 and quite profitable in 2006. Insurance produces fairly lumpy results due to changes in investment gains but the company will probably come in with a P/E of 5-6 in 2006.

I have to give credit where it's due: this idea was sparked by another investing block, Rational Angle. I recommend if you are still interested in the stock that you check out Rational Angle's post.

Expectations

The key question is where can the company go, and how far? Assuming no more disasters it will probably trend slowly higher. If management writes bad insurance, of course the stock will get hit, but you are already buying at book value which will provide some support. Insurance companies don't command the huge book value premiums of other businesses so don't expect any miracles.

If the company can grow modestly (high single-digits), and appreciate to 1.5 times book (slightly below peers), you would be looking at 70-80% over the next 2-3 years. On top of that there is always the chance of relisting on a major exchange, completion of legal proceedings, acquisitions, buyout of the company by another firm, or just enhanced organic growth. Don't fool yourself, it is not a perfect play but I view the risk/reward at this price, as excellent.

Finally, as always, do your own research.

Disclosure: Author is long BCIS