Where Will Mr. Biglari Focus Next? Identifying Potential Acquisition Targets

by: Alex B. Gray

Last week Fremont Michigan Insuracorp Inc. (OTC:FMMH) announced that it has agreed to be acquired by the Auto Club Insurance Association for $36.15 per share. Biglari Holdings Inc. (NYSE:BH) built a 9.7% stake in Fremont and had made three offers to acquire the company with the last offer coming in at $31 per share. Based on comments made by Biglari chief Sardar Biglari, he seems content with the price being offered by the Auto Club Insurance Association.

If Mr. Biglari is willing to vote his company's shares in favor and not issue a competing bid, then the question becomes-- where will Mr. Biglari turn his focus next? It would seem an insurance company is part of the overall strategy for Biglari Holdings, which would give the company access to investment assets to fuel further acquisitions.

Below I have summarized a few property and casualty companies with market capitalizations near what Biglari was willing to pay for Fremont. This is not considered to be based on any in depth analysis and I would not consider buying any company based on solely on its takeover potential. However, careful analysis could uncover an undervalued investment that may be a potential acquisition candidate allowing the true value to be realized similar to the case of Fremont Michigan Insuracorp.

National Security Group Inc. (NASDAQ:NSEC) is an Alabama based insurance company offering property and casualty, life, accident and health insurance marketed through independent insurance agents primarily in the Southeastern United States. The company's earnings for 2010 were $1.32 per share, which was down from the $1.71 earned in 2009. However, book value per share increased to $17.72 from $16.69 at the end of 2009. While the company lowered its dividend after a difficult 2008, it still pays a hefty $0.60 per share which yields the shareholder 4.4%. Insider ownership is high at 42% which might serve to deter any takeover attempts.

Homeowners Choice, Inc. (HCII) is a property and casualty company primarily serving the insurance needs of Florida homeowners. The company reported net income of $0.81 per share in 2010-- a sharp decline from the $1.52 per share earned in 2009. Book value increased 6.8% in 2010 to $7.51 per share. The company paid its first dividend on December 20, 2010 in the amount of $0.30 per share. So far in 2011, the company appears to have settled on paying a $0.10 per share dividend each quarter for a yield of 5%. Management, including directors, currently control 26.58% of the stock. In October 2010, the company entered into a purchase agreement to buy 16.67% of United Insurance Holdings Corp. (NASDAQ:UIHC) with the intention of possibly combining the two companies. However, the agreement expired and the deal was not consummated. Another investment option for Homeowners Choice is the recently issued Series A convertible preferred shares trading under the symbol (HCIIP).

Unico American Corp. (NASDAQ:UNAM) offers property and casualty insurance to commercial clients through its wholly owned subsidiary, Crusader Insurance Company. The company provides coverage in the states of Arizona, California, Nevada, Oregon and Washington. The company reported net income for 2010 of $0.44 per share down from $0.53 in 2009. Book value also slipped in 2010 to $13.75 per share from $13.82 per share at the end of 2009. The company paid an annual dividend in December of 2010 in the amount of $0.36 per share which represents a yield of 3.7%. Insiders hold 53.6% of the stock so it would have to be a case where there was a will to sell, and long-time holder Erwin Cheldin in particular would have to be motivated to vote his 44.3% stake in favor. The stock does have two major institutional holders. Schwartz Investment Counsel and Dimensional Fund Advisors LP each own just over 9%.

Penn Millers Holding Corporation (NASDAQ:PMIC) provides property and casualty insurance to certain areas in the agricultural industry as well as middle market commercial clients in various businesses. The company's agribusiness products are sold in 33 states while its commercial lines products are limited to Pennsylvania, New Jersey, Connecticut, Massachusetts, Tennessee, Virginia, New York and Maryland. The company reported a net loss of $0.76 per share in 2010 compared to net income of $0.19 per share in 2009. Book value per share slipped $0.46 in 2010 to finish the year at $20.85 per share. The company currently is not paying dividends to shareholders. Insiders, including directors, control 4.5% of the shares and the company's ESOP plan controls 10.63%. A small portion of the insiders holdings are included in the ESOP plan. Other notable stakes in the company are Castine Capital Management with 9.98%, Aegis Financial Corp with 6.19% and Wellington Management Company with 5.76%.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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