Safe Auto IPO: Impressive Data Analytics, But A Controlled Entity

Summary

  • Safe Auto Insurance Group sells automobile insurance products. The company specializes in offering insurance at states’ minimum financial responsibility limits.
  • Notice that the company’s algorithms allow Safe Auto to change policy conditions and pricing automatically. It is not only convenient for the company, but clients benefit as well.
  • Safe Auto Insurance reported a return of equity of 10.7% and 10.3% in 2018 and 2017 respectively. Peers have ROE of 2.6%-7.4% and trade at 0.4x-0.5x book value.
  • The company should sell at more than 0.5x book value. After the IPO, Safe Auto Insurance would be a buy at $2.5.
  • Safe Auto Insurance expects to use the proceeds to increase its advertising efforts and invest in technology among other purposes.

With growing return on equity and innovative technology, Safe Auto Insurance Group (SAIG) will most likely retain the attention of the market. The fact that the company’s ROE is better than that of other competitors is also quite beneficial. If Safe Auto Insurance can report the same performance in the future, the company should trade at more than 0.5x book value. With that, there are certain operating risks. The most relevant is that the company will be a controlled entity after the IPO.

Source: Prospectus

Source: Prospectus

Business And Key Performance Indicators

Founded in 1993, Safe Auto Insurance Group sells automobile insurance products. The company specializes in offering insurance at states’ minimum financial responsibility limits.

Through data analytics capabilities, Safe Auto has designed an online system that permits clients to purchase products at anytime and from anywhere. The company’s technology also helps the company adapt its services to evolving market conditions and consumer demands.

Notice that the company’s algorithms allow Safe Auto to change policy conditions and pricing automatically. It is not only convenient for the company, but clients benefit as well. Keep in mind that the company’s service is fast.

The company’s strategy appears to be working pretty well. The number of visitors increased by approximately 100% from 2013 to 2018. Besides, the number of downloads of the company’s mobile software increased by 250% from 2014 to 2018. Additionally, in 2018, the company offered 90% of its quotes online, and 60% of the new insurance products were delivered automatically.

The business results are impressive. The return on equity increased in the last two years. In 2018, it was equal to 10.7%. Besides, the loss ratio is also favorable. It decreased from 76.7% in 2015 to 66.6% in 2018. Read further information on the ratio below:

“Loss ratio is the ratio (expressed as a percentage) of losses and LAE incurred to premiums earned at period end. It measures the loss costs of a company’s insurance business.” Source: Prospectus

The table below provides additional information on key performance metrics:

Source: Prospectus

Assets

As of December 31, 2018, with total assets worth $494 million and total liabilities of $310 million, the company’s financial situation appears to be stable. Also, the amount of total liquidity is favorable. Like most insurance operators, Safe Auto Insurance invests the premiums in securities and debt. Total investments approximate to $284 million, 57% of the total amount of assets.

A list of assets is shown in the image below:

Source: Prospectus

Debt And Operating Risks

The number of total liabilities should not worry investors. Loss adjustment expense reserves represent 41% of the total amount of liabilities. Besides, the amount of debt is small. Debt and capital lease obligations approximate to $8.9 million.

A list of liabilities is shown below:

Source: Prospectus

Most likely, investors will not worry about the table of contractual obligations. The company needs to pay a total of $90 million, which is way below the total amount of liabilities. The image below offers further details on this matter:

Source: Prospectus

There are operating risks that shareholders should get to know. Firstly, the business of Safe Auto Insurance could decline if the economic conditions deteriorate. Besides, changes in the insurance policies or a decline in the demand for cars could damage the company’s revenue line. The lines below offer further information on this matter:

Source: Prospectus

Additionally, there are risks related to the method used to calculate insurance premiums. If the historical accident and loss data is not well assessed, the company may have to pay too much for accidents. As a result, the net income should decline. The lines below offer further information on the matter:

Source: Prospectus

8.9% Revenue Growth And 5.99% Net Income Growth

In 2018, the total amount of revenue increased by 8.9% amounting to 429 million. Premiums earned comprised of 89% of the total amount of sales and increased by 11% in 2018.

See the image below for further details on the top of the P&L:

Source: Prospectus

In 2018, the company paid losses and loss adjustment expenses of $251 million. The company makes estimates of the losses using data obtained during the current period and changes in estimated costs in prior periods. The calculations are based on the following parameters:

Source: Prospectus

In 2018, underwriting, acquisition and other expenses approximated to $151 million, and the net income was equal to $20 million. It is beneficial that net income did not change a lot as compared to that in 2017 when it was $19 million. Financial analysts will most likely appreciate that the company’s financial figures appear predictable.

See below for more on the bottom of the income statement:

Source: Prospectus

Use Of Proceeds

The company expects to use the proceeds to increase its advertising efforts and invest in technology among other purposes. Read the lines below for more on the matter:

“We currently anticipate using our net proceeds from this offering to support our growth initiatives, increase our advertising spending and invest in our technology, as well as for general corporate purposes, including potential acquisitions.” Source: Prospectus

Besides, the company expects to use the proceeds for “phantom equity compensation” payments to the CEO. Investors will most likely not appreciate the payments to the CEO. With that, market participants should note that CEO compensations don’t seem that high. The compensation table below may not impress those market participants, who usually check compensation of top executives:

Source: Prospectus

Controlled Company With Non Independent Board Of Directors - It Is A Risk

Safe Auto Insurance Group is expected to be a controlled entity, which is very worrying. On top of it, the company noted that it does not expect to have an independent Board of Directors. As a result, minority shareholders are less protected than those in other non-controlled entities. Bear in mind that directors may make decisions to benefit the largest shareholder, which may damage minority shareholders. The lines below offer further details on the matter. Notice that the company accepts that the composition of the Board of Directors will make the stock less attractive.

“We will not have a majority of independent directors, and we will not have a compensation committee or nominating and corporate governance committee. Consequently, you will not have the same protections afforded to shareholders of companies that are subject to all applicable stock exchange corporate governance rules and requirements. Our status as a controlled company could make our common shares less attractive to some investors or otherwise harm our share price.” Source: Prospectus

Valuation

The company competes with insurers selling personal automobile insurance policies. There are many companies in the United States providing insurance. However, there are not that many public competitors offering only car insurance. The list of competitors given below is from Owler:

Source: Owler

Among the competitors given by Owler, the only public company is American National Insurance Company (ANAT). ANAT also competes with National Western Life Group, Inc. (NWLI) and Kansas City Life Insurance (OTC:KCLI). They have a TTM ROE of 2.6%-7.4% and trade at 0.4x-0.5x book value. The charts below offer further information on this matter:

Source: Ycharts

Source: Ycharts

As shown in the table below, Safe Auto Insurance reported a return of equity of 10.7% and 10.3% in 2018 and 2017 respectively. Peers have an ROE of 2.6%-7.4% and trade at 0.4x-0.5x book value. Thus, Safe Auto Insurance should have a similar price/book value ratio.

In 2018, with an equity of $184 million and a weighted average number of common shares outstanding of 31 million, the book value per share approximated to $5.9. With this figure and a ratio of 0.5x, the share price of Safe Auto Insurance should be close to $2.95. With this in mind, after the IPO, Safe Auto Insurance would be a buy at $2.5.

The tables below offer further information on the equity, the ROE, and the book value per share. Notice that there is a small mistake in the prospectus. The book value per share should read “$5.9” and not “$5,9.”

Source: Prospectus

Source: Prospectus

Conclusion

With favorable key performance indicators, including growing ROE, Safe Auto Insurance will most likely interest institutional investors. Competitors report ROE between 2.6% to 7.4% and sell at 0.4x-0.5x book value. With these numbers in mind, the company should sell at more than 0.5x. If, after the IPO, it trades below this mark, the company will be a buying opportunity.

This article was written by

I am hedge fund analyst having over 20 years of investment experience in individual stocks. I have expertise of working with small to mid-size companies. I focus on value, growth at reasonable price, and M&A investing. My clients are based in the US and Europe. Email: mcafe88@protonmail.comhttps://www.tipranks.com/bloggers/bilbao-asset-management+20% Stock ReturnsDisclaimer: The Author is not a CPA, CFA and explicitly denies that his opinions are expert in any way. The reader is encouraged to review publicly available information and perform other research before determining whether they agree with the opinions of the Author.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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