American Independence Corp. - Cash At A Discount And Earnings For Free

| About: American Independence (AMIC)


AMIC has agreed to sell its medical stop-loss business to a division of Swiss Re. AMIC’s stock price does not fully reflect the deal’s value.

Post-transaction pro forma financials filed with SEC on 1/21/16 indicate cash, investments, receivables, and accrued income (CIRAI) totaling $253.15 million, which exceeds liabilities (plus non-controlling interest) by $169.7 million.

AMIC closed at $16.60 on 1/21, indicating a market cap of only $134.3 million.

AMIC shareholders are, in effect, buying CIRAI at a discount of 21%, while getting a business for free that generated income of $.07/share in the most recently reported three quarters.

Aside from effects of psychological phenomena such as anchoring, the stock price has probably been held back by the pro forma financials being “buried” in a lengthy, detailed filing.

The Sale Looks Like a Go - But There Are Risks

Shareholders owning 92% of American Independence Corp. (NASDAQ: AMIC) have given written approval for the sale of its medical stop-loss business (IHC Risk Solutions) to a division of Swiss Re (OTC: OTCPK:SSREY). The customary conditions for closing apply - see pages 1 and 2 of the SEC filing for details. These are the major risks currently faced by AMIC shareholders.

In the unlikely event that the deal did fall through, AMIC would probably be worth at least the $8.77 per share it closed at on 1/5/16 (just before the Swiss Re transaction was announced) plus an increment reflective of an increase in market awareness regarding the stop-loss business's value.

At the $8.77 share price, AMIC had a market cap of $71 million, a 28% discount from its book value. The quality of AMIC's assets was strong as of 9/30/15, with CIRAI accounting for over 75% of them.

Moreover, the business has also been performing well, achieving net income from continuing operations of $3.25 million ($.40 per share) for the nine months ended 9/30/15.

The sale of IHC Risk Solutions would add $114.7 million to AMIC's shareholder equity. Given Swiss Re's willingness to pay this price, investors would most likely take note and, if the sale doesn't happen, provide ongoing support for much of AMIC's price gain since 1/5.

Assuming the Sale Happens

According to the pro forma financials, if all goes as planned, each share of AMIC will represent $26.02 in book value, including CIRAI of $31.28. And what remains of AMIC would have earned $.07 in net operating income during the most recent three quarters reported.

Independence Holding Company (NYSE: IHC), which currently owns roughly 1/3 of AMIC, has indicated its intention to take AMIC private during 2016. The law of supply and demand being what it is, this can't help but be beneficial to the stock price.

Why AMIC Stock Is Still So Cheap

AMIC doesn't get much attention from Wall Street, trading fewer than 4000 shares a day on average. Despite the excitement caused by its SEC filing, which publicly laid out pro forma figures for the first time, less than $500,000 worth of AMIC stock exchanged hands on 1/21.

When the filing was announced, not a lot of people were paying attention. And most of those who actually did see the press release probably took a while to find the relevant pro forma financial statements, assuming they took the trouble to do so.

The pro forma 9/30/15 AMIC balance sheet was the key piece of information needed to assess the post-sale value of AMIC. It was on page 87, buried in the midst of dozens of pages of financial statements and footnotes for AMIC and IHC Risk Solutions. This wouldn't have been a problem, except that the first index on which the 9/30/15 AMIC pro forma balance sheet was listed didn't show up until page 85!

I'd imagine quite a few people who might otherwise have bought some AMIC decided that life was too short to rummage through the filing looking for what they needed to know. Which no doubt kept the stock's price lower than it would otherwise have been.

In addition, the psychological phenomenon of anchoring probably came into play. Investors tend to be irrationally influenced by where a stock's price has been, rather than being 100% objective in assessing the value justified by its fundamentals.

When breaking news causes a $10 stock to double, for example, it generally takes at least a few days to reach $20. AMIC sat at or below $10 a share for months, which led some investors to mentally pigeonhole it as a $10 stock.

It has been known since 1/5 that a very big deal with Swiss Re was likely to happen. Without benefit of pro forma financial statements it could have been easily surmised that such a deal would add more than $100 million in cash to AMIC's book value. $100 million divided by 8.1 million shares outstanding is more than $12 a share. If the stock was at $8.77 when the deal was announced, it should have gone to $20 right away.

But instead it went to the mid-12's the next day - and to 14 or so the day after that. Which is where it stayed until today when we (those of us who found page 87, anyway) saw that the sale would add over $14 a share to book value. And we drove the price up to the $16.50 area.

My best guess is that AMIC would be worth $12 a share if the Swiss Re deal collapsed. Otherwise, adding $14 to the pre-deal announcement $8.77 price would result in an eminently reasonable valuation of roughly $23. If there's now $4.50 of downside and $6.50 of upside, this implies about a 60% chance that the deal won't happen.

I don't pretend to know for sure whether it will or won't happen. My gut tells me, though, that there's a much better than 50/50 chance it will. And yes, I own some.

Disclosure: I am/we are long AMIC.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.