Description

***This is an extremely illiquid stock only suitable for patient accumulation in PAs***

 ICCH is a specialty insurance carrier focused on the food and beverage industry. David101 posted a nice write up on ICCH in 2018, shortly after it was demutualized. His write up is well worth reading for additional context. David101 identified 3 key risks at the end of his write up including “the growth does not materialize or worse, the growth occurs but its bad”. Growth did occur, but it has not been profitable growth (yet). The end result is that ICCH has underperformed over the past 5 years, and its share price remains where it was at the time of David101’s writeup (~$15.50/share).

What went wrong?

Prior to demutualization in 2017, ICCH had posted underwriting profits for three consecutive years (2014-2016). Since demutualizing, ICCH has yet to achieve an underwriting profit again. That is six straight years with a combined ratio >100%. The best that can be said is that the CR is trending in the right direction, down from 105% in 2018 to 101% in 2022

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I believe that part of the problem is ICCH embarked upon its growth journey during the middle of a soft market in 2017. From 2017 to 2022 ICCH’s market share increased dramatically across its markets (see below); however, clearly not all of this market share was won profitably.

The path to profitable underwriting:

It was not until 2019/2020 that there was a consensus view of a hard market for insurance carriers generally, and even then that hard market did not seem to apply in ICCH’s case (presumably due to the significant turmoil in the food and beverage industry in 2020). Looking at the chart below, ICCH’s pricing barely budged from 2019 to 2020; however, in 2021, ICCH was able to increase its average Property policy pricing by almost 14% while its average exposure only increase by 2%. Property is the exposure that has been the problem child over the past several years so this is a huge step in the right direction. Although we do not have this updated chart yet for 2022, we do know from the 2022 10-K that premiums increased by 16% y/y “primarily due to increased rates”. It seems that ICCH is finally taking price.

Critically, ICCH was upgraded by A.M. Best in June 2021 from B++ to A-. This upgrade was extremely important to ICCH’s ability to attract more discerning customers that are more focused on coverage quality than rock bottom pricing. 

I believe that ICCH will return to a CR ratio <100% in 2023 due to the hard insurance market dynamics, rating upgrade by A.M. Best, as well as the tangible evidence of pricing increases seen in 2021 and 2022. That said, if current management is unable to continue to capitalize on the aforementioned tailwinds, there is a backup plan.

The backup plan:

The backup plan is Joseph Stilwell. Over the past 20 years, Stilwell has been one of the most prolific and successful activist investors focused on financials / insurance companies. ICCH is Stilwell’s 4th largest position, and he has been acquiring more shares as recently as December 2022. His overall cost basis looks to be around $15/share and he has been a buyer as high as $16.80/share.

Since the demutualization, ~32% of shares have been subject to standstill agreements. In addition 11% of the stock is held by the ICC ESOP. This has restricted investors’ ability to agitate effectively for change.

The standstill seems to have originally applied to Kevin Clinton, Rock Island, and Tuscarora Wayne; however, the standstill language in the 2022 10-K dropped the reference to Rock Island and inserted Joseph Stilwell’s name. I am not sure what happened – perhaps Rock Island was able to transfer its standstill provisions to Stilwell. Either way, the standstill expires in March 2024. If management is unable to continue to improve underwriting profitability in 2023, Stilwell will be able to do what he has done successfully so many times before (check out any of his recent 13D’s for a list of his campaigns).

The involvement of Kevin Clinton and Tuscarora should help our case as well. Kevin is an insurance industry veteran, with a track record of success for his investors. Tuscarora Wayne is a strategic that has been rolling up insurance companies for decades (see David101’s writeup for more info on Kevin and Tuscarora Wayne). I do not know the extent of the personal relationships between current management and Clinton / Tuscarora Wayne, but Clinton and Tuscarora each made multi million $ investments six years ago that have not panned out as expected. I believe that both will be amenable to supporting plans to increase shareholder value.

Acquisition Candidate:

After the standstill rolls off in March 2024, I believe that ICCH would be an attractive takeout candidate whether current management is able to improve its underwriting profitability going forward or not. ICCH is small in absolute size (~$50mm market cap), but has a strong market share and competitive position in its food and beverage niche. I believe that a strategic acquirer (or financial sponsor) would look favorably on ICCH’s distribution channels and name recognition among its target customer base. Furthermore, despite its recent poor underwriting results (driven by Property exposure), ICCH undoubtedly has valuable expertise with respect to underwriting risk in the food and beverage industry.

Upside:

ICCH trades at 0.8x year end 2022 book value of ~$60mm ($19.19/share). Note that 2022 YE book value marks their entire investment portfolio to market and includes a $12mm duration driven hit to their bond portfolio (avg duration of 5.4 yrs) and a $3mm hit to their equity portfolio in 2022. Because their bond portfolio has been marked down, the effective yield will take a step up going forward.

At a 100% CR, I model ICCH earning almost $5mm in 2023 (7% ROE), which puts them at 0.75x book YE 2023 book value. At 96% CR, they earn $7mm (11% ROE) in 2023. High single digit to low double digit ROE should drive ~30% upside in the share price to match YE 2023 book value per share of ~$21/share (low double digit PE ratio).

In a blue sky scenario where either current management (or an acquirer’s management) is able to increase earned premiums to 130% of surplus (~30% increase from 2022) while hitting a 94% CR (achieved by ICCH in 2016), ICCH could earn $10mm, which at a 10x P/E multiple would be 100% upside to the current share price.

Risks:

Liquidity is probably the biggest consideration. To piece together a position takes weeks/months of patient accumulation. If things turn south and you lose faith in the outcome, getting out will be difficult and painful. I believe this risk is mitigated by the low probability of a permanent loss of capital. Given the nature of the business, the overcapitalized balance sheet, the major shareholders involved, meaningful downside at the current valuation is a low probability event. Now that the standstill is on the cusp of running out, failure to achieve decent operating results will likely result in the sale of the company within the next 2 to 3 years.

APPENDIX:

Historical Financials:

Financial Model:

Catalyst

1. 2023 combined ratio <100%

2. Standstill agreement rolling off in March 2024