EGI is Canada's second largest (next to Westaim) non-standard auto and niche insurance company with direct written premiums of $185mm. Initially founded in 1997 as a insurance and reinsurance broker, EGI began focusing on underwriting opportunities not served by larger, standard insurers. In March 2010 EGI acquired American Colonial Insurance Company, a Florida based P&C insurer to expand in the US non-standard auto market. Presently EGI's revenue mix is 71% personal lines, with 72% of gross written premiums in the province of Ontario.
EGI's history shows a management team who has been successful at creating value for shareholders. According to a 2005 article in the National Post, "Douglas McIntyre is EGI's chief executive. In an earlier career, McIntyre was CEO of Pafco Insurance which, following a reverse takeover, became Pembridge Insurance Co. In 1998 that company was acquired by Allstate Insurance for about $400-million. Pafco was also a non-standard provider of automotive insurance. (Indeed, many of EGI's current management team worked with McIntyre at Pembridge.) That deal was a also a huge win for GTL, a Toronto-based merchant bank, which grossed $60-million from the sale. (LARR Capital, which originally stood for Little Abitibi River Resources, was the shell company used to take Pembridge public.) Paul Little, one of the three principals at GTL, is the chairman of EGI." It is also worth mentioning that management holds over 11% of the stock.
The first nine months of 2010 were rough for EGI, realizing combined ratios as high as 126% stemming from large claims in the Greater Toronto Area (GTA). Starting September 2010, Ontario's auto reforms were implemented to reduce claims costs on insurers. EGI also began reducing its exposure to the GTA by implementing a 10% rate increase, terminating selected broker relationships and decreasing commissions, tightening underwriting guidelines, and introducing a maximum 6-month policy term. The result was a significantly better 95% combined ratio. Niche lines had a 79.4% combined versus 142% in Q4/2009 as it exited unprofitable programs and tightened underwriting standards. For 2010 as a whole, Net Premiums Earned increased 13% to $162mm, showing strong market gains and a hardening price environment.
Although a strong Q4/2010 does not make a trend after 4 very disappointing quarters, EGI is poised to outperform. EGI is trading at only 67% of its current $12.14 book value per share. The two analysts on the stock have $0.65 of operating EPS based entirely on investment income. Should management's operating improvements carry through into 2011 we will see an underwriting profit and solid earnings leverage. Management is targeting a 95% combined ratio and 4% long term return on assets, equating to a 12% after-tax Return on Capital. If they can hit those metrics they can easily trade at book value. If they break even on underwriting they can still obtain an 8% ROE. I believe the current price is extrapolating the previous 4 quarters of horrendous underwriting losses into the future. The core business has improved, and with basically no debt or intangibles the balance sheet is free to take on leverage and expand. The shares are trading near the lowest P/B ever, close to levels seen in the 2008 crash. The shares are discounting a horrendous environment, best case scenario management hits their goals and we get a 50% pop over the next 12-24 months to trade in line with its book value.
No comments:
Post a Comment