A month and a half into hurricane season and a quiet one it has been for US coastal states. 1347 Property Insurance Holdings, Inc. (NASDAQ:PIH) has been patiently waiting for an uneventful stretch of weather to showcase their superior earnings power. Thus far, return on equity has not lived up to the hype. Executives stress the unique geographical opportunity and the premium quality will produce superior returns. Certainly, they are writing new business and appear to be retaining that business. Yet, the lingering question remains: do they really know how to price?
PIH is currently selling with a market cap in the ballpark of $40mil. In exchange, you receive liquid assets of around $75mil, nearly $50mil in cash - a valuable position when considering expansion and an inevitable rate hike. The company has nominal debt or roughly $5mil and a "float" liability of roughly $26mil. In other words, a liquidation event earns shareholders a 20% rate of return. However, we see this business as alive and well. There's another story unfolding here that could make what appears to be a gravely ill company, spring to life.
1347 PIH is suffering from the sophomore slump. After very promising results in its first full season, the company failed to write a profit in 2015. Or did they? Take a closer look and the income statement appears to be a bit deceptive. To get a feel for the true underwriting results, a one-time management services termination fee in Q2 2015 must be removed. Without it, PIH writes a small profit. No, it's not a profit that has made anyone rich. However, this small profit came in a season that saw catastrophic weather events cost the company just shy of $3mil (the amount when reinsurance kicks in). In a season with large scale damage, the company writes a profit - score one for current pricing.
Reinsurance rates are still declining, albeit at slower rates, and will continue to do so until another major catastrophe strikes - score one for current pricing.
In 2014, PIH initiated a share repurchase plan to buyback 500,000 shares and has used 250,000 through March 31, 2016. 250,000 shares represents over 4% of the remaining shares outstanding. In my view, they are buying shares back at undervalued prices. Most importantly, the gesture sends two important messages about the company's long-term management philosophy:
1. They are shareholder friendly.
2. They know how to allocate capital.
Though neither is directly related to pricing, a shareholder friendly management team should adjust prices accordingly if the current model is not producing shareholder value. And in insurance, if you can allocate capital, pricing mistakes will be muted - score one for current pricing
Finally, PIH recently began writing business and promised to ramp up in TX - almost three times the market size of LA, where the majority of policies were in-force as of March 31, 2016. PIH is organically gaining market share by utilizing close relationships with agents and superior service. Additionally, CEO Doug Raucy has been very vocal about entering the Mississippi and Florida markets. If, and this is a big if: IF they can succeed at entering these additional markets and grab 2% of each, the company will write $400m in business. Most importantly, the opportunity to spread out geographic risk across 4 states allows for the company to continue to competitively price their products to win market share - score another for current pricing.
In conclusion, PIH is selling for less than its liquid net asset value, with significant revenue and earnings growth ahead. The risk to this business right now is widespread wind/hail damage in areas of LA and/or TX. Competitive pricing is vital to continue to gain market share. As the geographical reach expands, loss ratios will decidedly fall. Give this company some time before concluding they don't know how to price. When PIH escapes the catastrophic events and expands their geographic reach, a hurricane of cash is brewing for shareholders.
Disclosure: I am/we are long PIH.
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.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.