Description

21st Century Holding Group is a small Florida insurer that has been buffeted by hurricanes of late because it writes homeowners and mobile home insurance. Last Wednesday, its shares where whacked in anticipation of Hurricane Ivan storming ashore. Today, Ivan looks to be heading west of TCHC’s territory. Trading around 4X lowered 2005 EPS, this company is cheap.

First, let me provide a brief business description history. 21st Century Holding Group, not to be confused with California work comp writer 21st Century Insurance Group (symbol = “TW”), primarily writes homeowners, personal auto, and mobile home insurance. Most of their business is in Florida, although they have started expanding into Georgia and Louisiana. The company was started in the 80’s by Edward Lawson and his wife Michele as an insurance agency. In the 90’s, they expanded into a more vertically integrated operation by buying two insurance companies, starting a managing general agency (MGA), a premium financing company, a claims adjusting company and a tax preparation service. They were primarily known as a non-standard, basic-limits writer of personal auto, but decided to expand their homeowners book this year (dohhhh!).

I’m recommending this as a short-term trade because it has been oversold. After Hurricane Frances, the company lowered its 2005 EPS guidance to $2.67 ($4.00 pre-split). They expect to earn $0.33 - $1.00/share in 2004, factoring in the effects of Frances. Considering that they earned $0.63/share last quarter, $2.67 is doable. Their guidance was originally higher because of their growth in the homeowners line. Net premiums written more than doubled during the first half of 2004 as compared to 2003 and this will be earned, i.e. recorded as revenue, over the coming twelve months.

The company has some warts, besides insuring Florida homes and that the hurricane season is not over yet. TCHC’s two insurance companies, American Vehicle Insurance Company and Federated National Insurance Company, have A.M. Best ratings of “B+” and “B,” respectively. These ratings reflect the concentration of risks, and adequate (but not great) capital levels. There is also a dilution factor due to warrants and options.

Dilution is important because there are 1.2 million warrants and options outstanding at an average strike price of $9 (as adjusted for the 9/7/04 3-for-2 stock split). There are 1.5 million options available for future issuance. This is significant because there are only 5.9 million shares outstanding. Book value is currently $6.80/share. That is not cheap; however, it will grow dramatically if they meet next year’s EPS numbers and retained earnings grow accordingly.

TCHC’s investment portfolio is conservative, with the bulk consisting of government long bonds. Unfortunately, this came about from taking a course at the school of hard-knocks from the 2001 equity market and Worldcom bonds. Their equity investments now only consist of affiliated investments.

They do rely on reinsurance to mitigate catastrophe losses on their property book of business, and they do have a quota share reinsurance agreement on the auto business. For small insurers, reinsurance is critical, so it is a risk factor that one should note.

The Lawsons own 28% of the shares. There are no 5%+ holders, although First Wilshire had 200,000 shares as of 6/30/04.

One final note, if anyone here at VIC does buy this, please use a limit order or some restraint. There is above average liquidity today, but it does not take much to move TCHC. I was somewhat dismayed by the pop of my last submission, FCCG, and the subsequent tail-off. While I could have sold Fog Cutter on the “VIC effect," I did not and still hold all my shares. Being able to buy with a margin of safety in these roach motels is important.

Catalyst

- Oversold and should rebound
- cheap at a P/E of 4.1