T11 Capital Management has taken a long position in 1347 Property Insurance Holdings Inc (PIH) during the first quarter of 2016.

1347 Property Insurance Holdings Inc (PIH), through its subsidiary, Maison Insurance Company, provides property and casualty insurance products to individuals in Louisiana. The company offers homeowners insurance, manufactured home insurance, dwelling fire insurance, and wind/hail insurance products, as well as reinsurance products. It distributes its insurance policies through a network of independent agents. The company was formerly known as Maison Insurance Holdings, Inc. and changed its name to 1347 Property Insurance Holdings, Inc. in November 2013. 1347 Property Insurance Holdings, Inc. was founded in 2012 and is based in Tampa, Florida.

During 2015, 1347 Property Insurance through their wholly owned subsidiary Maison Insurance began operating in Texas, writing wind and hail policies in partnership with Brotherhood Mutual.

1347 Property Insurance Holdings Inc (PIH) Overview

1347 Property Insurance (PIH) is a relatively new property and casualty insurance company that was formerly 100% owned by Kingsway Financial (KFS). Kingsway Financial was profiled by T11 Capital Management in April of 2014. In 2014, 1347 participated in an IPO for 2,272,727 shares at a price range between $10-$12 per share. The primary purpose of the IPO was to provide further capital for the Maison Insurance subsidiary, as well as to provide capital for expansion opportunities in Florida, Texas and Hawaii. The 1347 business model is based on the belief that a group of highly-experienced managers with a history in niche, difficult to insure regions of the United States can grow profits at an above average rate while managing risk appropriately through historically low-priced reinsurance. The abandonment of hurricane and storm prone regions of Louisiana, Texas and Florida by large, nationally recognized insurers creates substantial opportunity for experienced operators such as 1347. Additionally, the recent movement towards depopulation of state run insurance agencies provides numerous opportunities for taking over policies, creating substantial growth both presently and over the long-term.

The management team is headed by CEO Doug Raucy. Prior to 1347 Mr. Raucy founded three separate homeowners’ insurance companies. He was also the head of Allstate’s national catastrophe team with over 20 years experience at the company.

CFO, John Hill, has over 15 years in the Florida homeowners’ market, formerly CFO of three other property & casualty insurers.

Dean Stroud is the VP of Underwriting. He brings with him 40 years of experience underwriting policies in Louisiana. He was formerly President of Audobon Insurance, an AIG subsidiary.

In April of 2015, 1347 Property Insurance appointed Scott Wollney to the Board of Directors for the company. Mr. Wollney is the current CEO of Atlas Financial Holdings (AFH), a Nasdaq listed commercial automobile company. Mr. Wollney has 25 years of experience in the insurance industry. He has managed to grow Atlas from nearly nothing when he started in 2010 to an operation with a $200 million market cap and a stock price that has increased by nearly 200% since its IPO in 2013.

The experience management possesses in relation to the specialty insurance markets they are targeting brings with it a number of benefits, the most obvious of which is adept and efficient management of risk across a variety of policies. It also brings with it the added benefit of a network of independent agents who are comfortable selling policies underwritten by Maison Insurance (1347). This allows for rapid expansion in targeted areas.

The areas 1347 Property Insurance is targeting have among the highest property insurance rates in the country. They are also predominantly areas where income levels fall into the low to middle income ranges. This combination of factors allows for significantly profitable underwriting of policies, but also provides a distinct competitive advantage to those companies that can provide value to consumers in a difficult to insure region of the country.

 1347 Property Insurance Holdings Inc (PIH)

The above is according to ValuePenguin http://www.valuepenguin.com/best-cheap-homeowners-insurance-louisiana

Consumers are strongly driven by price in property and casualty insurance market, positioning 1347 Property Insurance well to compete in its chosen markets.

 1347 Property Insurance Holdings Inc (PIH)

The original goal of 1347 Property Insurance was to capture 2%-3% of the Louisiana market. According to recent data Louisiana has $2.6 billion in premiums written. The mid-point of 1347’s goal would mean $65,000,000 in premiums written for Louisiana.

Growth & Valuation

 1347 Property Insurance Holdings Inc (PIH)

A majority of the growth inception to date has occurred purely as a result of the Louisiana market. The company has a substantial network of independent agents who effectively distribute the policies to homeowners. Mr. Raucy has reiterated that the independent agents become comfortable working with Maison as a result of previous established relationships and adept, efficient handling of new claims, making them more likely to promote Maison’s policies on an ongoing basis.

The primary question with respect to property & casualty insurers is the efficiency of their underwriting practices. For purposes of measuring the efficiency, the combined ratio of the company is an accurate measure.

The combined ratio essentially takes the sum of incurred loss and expenses for a company and divides them by earned premium. The ratio is typically expressed as a percentage, with a combined ratio below 100% indicating underwriting profitability, whereas a combined ratio above 100% indicates an underwriting loss. It is important to note, however, that even with a combined ratio over 100% an insurance company can still extract a profit from investment returns from their float.

1347 Property Insurance has been an effective underwriter with an average combined ratio of 79.64% since Q1 2014. In Q2 and Q3 of 2015 the company experienced severe weather conditions in their insured regions, leading to a combined ratio well in excess of normal expectations.

 1347 Property Insurance Holdings Inc (PIH)

The combined ratio should normalize in the quarters ahead as the residual effects of the recent storm incident lessen.

While 1347 Property Insurance has managed to grow premiums substantially since inception, while possessing efficient underwriting practices overall, the company has not been able to substantially expand book value since 2014, leading to a decline in share price that currently reflects a substantial discount to book. In fact, the company is also trading at a discount to net cash as 1347 participated in a 2.5 million share secondary offering in 2014 at $8 per share. The secondary offering has over-capitalized the company causing a lag in return on equity (ROE). Presently, including the float as a liability, the company has approximately $7.50 per share in cash. The company has a book value of $7.67 per share and is trading at a 0.81 (mrq) price/book.

1347 Property Insurance shares are trading at a substantial discount to peers given that the company is a recent startup in the industry without any institutional coverage or recognition.

 1347 Property Insurance Holdings Inc (PIH)

The lag in book value is set to reverse in quarters ahead due to a number of factors:

  1. The CEO Doug Raucy has explicitly stated that the company is searching
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