Author Topic: NODK - NI Holding  (Read 756 times)

Spekulatius

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NODK - NI Holding
« on: May 17, 2018, 11:51:40 AM »
I came along this Little GEM a sleepy 2 step mutual insurance conversion, with the 2nd step still outstanding. NI holding is a small North Dakota insurance company that is in the process of demutualization using a 2 step process. The first step was completed with the IPO in 2017 at $10 and the second step will be comolet dein the future. Shares are trading at $16.4 and current book value is $11.3/ share, but so far only 45% of the shares have been issued, the remainder will get sold at the second step.

The way I see it, the adjusted book is going to be in between $20.5 assuming 2nd step completes at $16 or. $25 ($11.3/0.45 counting only the outstanding shares). This insurer actually has a pretty good underwriting performance with a profit from underwriting in 11/12 years.

So at current prices, you get a property insurance company with pretty good underwriting that is totally overcapitalized that will rerate  at some point in the future. Pretty good deal to put some funds into and just wait for the almost inevitable good thing to happen.

FWIW, I have never seen a 2 step demutualization with insurers before, but itis very common with thrift conversions. The process appears to follow exactly the same playbook as far as I can tell.
« Last Edit: May 17, 2018, 06:13:35 PM by Spekulatius »
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ScottHall

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Re: NODK NI Holding
« Reply #1 on: May 17, 2018, 05:49:29 PM »
Thanks Spekulatius I bought a few shares.
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writser

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Re: NODK - NI Holding
« Reply #2 on: May 18, 2018, 05:02:16 AM »
Thanks for bringing up this idea. Looks interesting. I have no experience at all with demutualizations . Here are some thoughts / questions that you or others can perhaps address to make me understand this situation better.

- How does NODK trade in comparison to other demutualizations that haven't completed step two yet? Assuming the second offering is around market prices this is trading at a discount of ~20% to pro forma book value. Is that better or worse than comparable thrift conversions? What would you peg as fair value? Have you looked at other ones? Does the fact that this is an insurer vs. a bank change your assessment?
- What's a 'usual price' for the second step conversion? Around the market price of the stock at the time of the offering? Around book value? Somewhere in between? Probably huge differences between different individual stocks, just trying to get a feeling for the baseline here.
- How long does it usually take for a thrift conversion to go from first to second step? A year? Five years? Do some of them never do it? Again, just trying to get a feeling here. My simple reasoning: the company already looks overcapitalized and policy holders probably spent all their savings to buy shares in the first step last year. So they might not have a big incentive to do a second step soon?
- Looking at this 424B5 it looks like all directors and officers together only purchased 60k shares in the first step. That seems like an extremely small amount, doesn't it? What do insiders do in other conversions? It doesn't look like they have a big incentive personally to go for the second step? The CEO and CFO alone earned ~$1m in 2016 and ~$3.3m in 2017.

This looks like a nice, defensive stock pick. Just trying to get a feel for if and when you expect a second step, at what price, and what stock price returns you expect going forward both in case of a quick second step and in case it takes a long time. I'm not sure returns will be spectacular in the latter case and what the chances are of that happening. Let's say it takes two more years to do a second step around $18 and it will trade at a slight discount to book afterwards. Sounds like one of the better outcomes to me but even in that case your IRR isn't super spectacular, unless I am missing something.

I like that they have been buying back $8m in shares last year. Seems like sensible thing to do with all the excess cash and the low valuation. They have an authorization for another $10m this year. Lets see next quarter if they'll use it.

Any further insights would be appreciated.
« Last Edit: May 18, 2018, 05:26:56 AM by writser »
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valuedontlie

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Re: NODK - NI Holding
« Reply #3 on: May 18, 2018, 05:56:45 AM »
A large thrift that has yet to make its second step conversion is TFS Financial Corp (TFSL). It has been in-between that 1st step and 2nd step for over 10 years and looks unlikely they'll make the 2nd step conversion anytime soon as they have no need for the additional capital.

They continue to pay dividends and buy back stock though shares have gone nowhere and it has underperformed over virtually every timeframe. It is cheap and has remained cheap. I have it trading at less than 0.45x BV and ~8.5x earnings.

It is nearly impossible to predict when these things will make the leap to the 2nd step conversion. These are sleepy little things... Sort of like watching paint dry...

I think there was a KBW report (many years ago) that looked at mutual conversions in-depth, timing, performance, valuation, etc...

Spekulatius

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Re: NODK - NI Holding
« Reply #4 on: May 18, 2018, 03:03:11 PM »
Thanks for bringing up this idea. Looks interesting. I have no experience at all with demutualizations . Here are some thoughts / questions that you or others can perhaps address to make me understand this situation better.

- How does NODK trade in comparison to other demutualizations that haven't completed step two yet? Assuming the second offering is around market prices this is trading at a discount of ~20% to pro forma book value. Is that better or worse than comparable thrift conversions? What would you peg as fair value? Have you looked at other ones? Does the fact that this is an insurer vs. a bank change your assessment?
- What's a 'usual price' for the second step conversion? Around the market price of the stock at the time of the offering? Around book value? Somewhere in between? Probably huge differences between different individual stocks, just trying to get a feeling for the baseline here.
- How long does it usually take for a thrift conversion to go from first to second step? A year? Five years? Do some of them never do it? Again, just trying to get a feeling here. My simple reasoning: the company already looks overcapitalized and policy holders probably spent all their savings to buy shares in the first step last year. So they might not have a big incentive to do a second step soon?
- Looking at this 424B5 it looks like all directors and officers together only purchased 60k shares in the first step. That seems like an extremely small amount, doesn't it? What do insiders do in other conversions? It doesn't look like they have a big incentive personally to go for the second step? The CEO and CFO alone earned ~$1m in 2016 and ~$3.3m in 2017.

This looks like a nice, defensive stock pick. Just trying to get a feel for if and when you expect a second step, at what price, and what stock price returns you expect going forward both in case of a quick second step and in case it takes a long time. I'm not sure returns will be spectacular in the latter case and what the chances are of that happening. Let's say it takes two more years to do a second step around $18 and it will trade at a slight discount to book afterwards. Sounds like one of the better outcomes to me but even in that case your IRR isn't super spectacular, unless I am missing something.

I like that they have been buying back $8m in shares last year. Seems like sensible thing to do with all the excess cash and the low valuation. They have an authorization for another $10m this year. Lets see next quarter if they'll use it.

Any further insights would be appreciated.

I am not aware of another 2 step insurance demutualizations, but there are anlotnof thrift demutualizations, so I donít think there are many direct comps. I vastly prefer insurance over banking currently, but if you compare with thrift conversions, it probably trades about inline.

The high CEO compensation is a concern, since it could incentivize him to keep the current structure, where interference from shareholders is less likely. I think some of the rise in his compensation may be a one off from going public. The CEO is 52 years old and strikes me as entrepreneurial, they have a stock portfolio of about 50M (half of it unrelialized gains) which is unusual, but possible due to overcapitalisationl soz itís a mini Berkshire in a way  :). That is why I think they will not linger around in their current state too long.

As for when the 2nd step occurs, it usually takes a couple of years. Management typically tries to make use of some of the extra capital raised in the first step and show higher profits,initiate a dividend and buy back stock to get thebshare price up. I would expect a dividend first, hopefully with a waiver from the mutual shares, as is customary.

FWIW, they have another 10M buyback authorized, but have not started the buyback yet.
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Spekulatius

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Re: NODK - NI Holding
« Reply #5 on: May 18, 2018, 03:15:44 PM »
A large thrift that has yet to make its second step conversion is TFS Financial Corp (TFSL). It has been in-between that 1st step and 2nd step for over 10 years and looks unlikely they'll make the 2nd step conversion anytime soon as they have no need for the additional capital.

They continue to pay dividends and buy back stock though shares have gone nowhere and it has underperformed over virtually every timeframe. It is cheap and has remained cheap. I have it trading at less than 0.45x BV and ~8.5x earnings.

It is nearly impossible to predict when these things will make the leap to the 2nd step conversion. These are sleepy little things... Sort of like watching paint dry...

I think there was a KBW report (many years ago) that looked at mutual conversions in-depth, timing, performance, valuation, etc...

TFSL is a real interesting case. Their outstanding shares are only 19% of total, so all the per Share numbers would need to be multiplied by 5. And they still seem quite a bit overcapitalized.  At this point, buying back shares seems counterproductive. What the really should do is increase their dividend by 3x, which they could easily do and still increase their equity, that would get the shareprice going. I kind of like it - they are sort of stuck in the muck, because if they ever do a 2nd step, this. Would essentially become a cash box and if they donít do anything, they would get taken out. Management is probably paralysed so they muddle along as they have.

FWIW and unrelated to the merits of TFSL as an investment, I was a customer with them once - I had a home equity line which I never tapped, initiated in 2004. Then during the financial crisis, they started to clamp down on me, asked for all sorts of documentation of threatened to close it down. I supplied the info and they kept it open, but then when I refinanced in 2009, without taking out equity, they would not extend and closed the still untapped equity line down.
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