Author Topic: BOMN - Boston Omaha Corporation  (Read 39479 times)

CorpRaider

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Re: BOMN - Boston Omaha Corporation
« Reply #130 on: January 24, 2020, 05:53:14 PM »
@Corpraider: One of Flagler's quips as quoted from a great book Last Train to Paradise - "I would have been a rich man if it hadn't been for Florida". 

I researched further on Akre/BOMN.  Last filing in 2017 for entity named Spencer Capital Holdings LTD (private fund with interests in insurance and car financing/dealer services) has the following Board Members - Charles Akre and Alex Rozek.  So the two sat (or still sit) on a BOD together.  Wonder if there was a conflict and that's why Akre had to sell BOMN.  Interesting side note, none other than famous value investor Michael Burry MD was (is) on same BOD.  Mr. Rozek finds himself rubbing elbows with some super value investors Akre & Burry. 

One of the subsidiaries of Spencer Capital is SouthWest Dealer Services is a full-service finance and insurance (F&I) company.  So Rozek is seeing lots of things related to auto lending, auto dealers, and auto insurance sitting on the BOD of Spencer Capital.  I'm almost positive that SWDS is selling United Casualty & Surety products (wholly owned by BOMN). 

Lastly, Adam Peterson is on the BOD and major shareholder of Nicholas Financial (NICK) which is a thrift lending to sub-prime auto customers. 

Above furthers the thought of BOMN's deep knowledge of sub-prime auto loan industry with passive equity purchase of bank doing sub-prime auto loans AND insurance distribution.  All of this may mean nothing, or may mean something.  Deep value comes from deep understanding.

I will have to check that book out.  Thanks!  Yeah I remember coming across that NICK position when they made the investment in the LA subprime auto bank.  I saw financials on a couple of sub-prime auto dealers back when I was a commercial banker and they were...killing it.  I'm not a fan tho.  Much more interested in the billboards (have CCO, LAMR, and OUT in a watchlist and look at JDDecaux every once in a while) surety bonds, even the uber-levered home builder with the land options.


longterminvestor

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Re: BOMN - Boston Omaha Corporation
« Reply #131 on: February 21, 2020, 10:45:49 AM »
Additional commentary on Insurance Business of BOMN.  They have 2 line items for Insurance - Premium Earned and Insurance Commission.  Below are FY 2017, 2018 and Estimated FY 2019.

FY 2017
Premium Earned: $2,031,597
Insurance Commission: $1,586,200

FY 2018
Premium Earned: $3,184,312 (57% Increase YOY)
Insurance Commission: $2,606,031 (64% Increase YOY)

ESTIMATED FY 2019 (Q4 est. is increase of Q3 by 10% - very conservative)
Premium Earned: ~$10,807,428 (239% Increase YOY)
Insurance Commission: ~$1,688,033 ( -35% Decrease YOY)

The mechanics of their vertically integrated system from what I see is taking as much of the existing book of business from the agency brokerage and funnel through wholly owned insurance risk bearing business.  That is probably where the jump in premium earned came from and there for a drop in insurance commissions as a broker.  Whatever commission being paid is probably from 3rd party surety companies not owned by BOMN where the risks do not fit the underwriting box and have to be brokered to other surety companies.  My expectation is this commission line item will level off and hopefully see small organic growth over time.  Question I would have for management is exactly that what happened to books of business purchased?  Were they re-written with UCS as much as possible?  How much surety business is written with other risk bearing sureties?

The large increase in premium earned has to have come from the fact the carrier UCS being licensed in all 50 states and DC and book being transferred.  Now this growth has large expense attached with relation to % of premium due to underwriting expense EE Cost and G&A.  The Startup nature and large learning curve going from $2MM premium to ~$10.8MM premium in 3 years will blow expense for any manager.  Management has discussed the integration of systems being difficult however technology will solve this problem over time.  Other important note is the lag of premium earned reported under GAAP.  I see this as a POSITIVE FOR GOOD CAPITAL ALLOCATORS.   For example, $1200 bond written and paid for in full on 1/1/2020.  UCS will pay agent $420 (35%) and have $780 of premium to recognize BOMN will only report $195 of earned premium at quarter end however they have the use of the full $780 premium for allocation.  Different for the Insurance Commission revenue recognition, example above revenue for $420 will be recognized immediately.  My questions for management would be How much UCS premium is written by 3rd party agents not wholly owned by BOMN?  How many new agents are you appointing to write business with UCS?  How much of the business is written direct vs through an agent?  How do you compensate internally for direct premium written?

Keep in mind the US Market for Surety is roughly $5Billion in premium.  Lets understand what that represents.  That means $3.25Billion in premium to risk bearing surety companies and $1.75Billion in insurance commissions to agent/brokers (35% Commission).  This IS NOT a large market.  But its the perfect market for disruption and learning with low loss ratios (UCS reported 12% loss ratio in 2018).  Lets assume that 80% of that $3.25Billion will stay where it is with the big boy carriers and 20% is up for grabs with regional players.  Thats $650MM premium available UCS is at ~$10.8MM Premium.  That is opportunity for sure.  And I discount the distribution insurance commission because the mechanics of permanent capital there are not as good as risk bearing surety.  I consider it "icing on the cake" revenue. 

So in conclusion, BOMN purchased UCS for $13MM in cash and infused like $2MM in capital for total consideration of $15MM (rough#).  They are already at $11MM Premium and yes the net income has not materialized to earn back the $15MM they paid however they have use of funds for float allocation and in the capable hands of an allocator they conceivably have all capital back and then some in 2-5 years for what they paid.  That is no lallapaloosa Private Equity IRR however it is good enough for me.

Im sure they are hunting for surety agents to acquire and pump their books of business through UCS and hopefully that will materialize over time.  The TRUE TRICK is can they take this same business model to other lines of business in the insurance business.  If they can figure that out, BOMN has possibility of being a monster.  Time will tell.