Description

Since Covid, we have made a sizeable thematic investment allocation to insurance companies, mostly niche, non-admitted providers.  This has worked well with the KIE (S&P Insurance ETF) outperforming the SPY by 25% over the past 3 years but we believe the share prices of many insurance companies are underperforming their growth in intrinsic value.  Much of the strong share price performance can be attributed to the excellent underwriting environment, as most insurers are demonstrating huge growth in premiums combined with record profitability, but we believe an obvious tailwind to future profitability is being ignored based on current share prices: higher interest rates.

Higher interest rates are a bit more nuanced variable than a hard insurance market because there is substantial variability to how insurance companies manage their float/investment portfolios.  Like some banks, certain insurance companies extended too far in duration on their fixed-income portfolios and have thus suffered mark-to-market losses on these positions.  Other companies, however, managed their portfolios prudently in short duration government securities and not only did not suffer mark-to-market losses but are also now in the enviable position of earning large profits on higher interest rates.

One such company is International General Insurance Holdings, Ltd. (“IGIC”).  We think IGIC is significantly undervalued but we often like to start with why the stock might be undervalued.  IGIC was taken public via a SPAC which certainly gives it a “taint” as most SPACs, especially the 2021 and 2022 vintages, likely have a negative selection bias.  The IGIC deal was announced in October 2019 and closed in March 2020 (just as the lockdowns were being rolled out) so it occurred prior to the true “SPAC mania” but we feel it must be getting lumped into all the 2021 and 2022 SPAC garbage to justify such a discount.  It also currently trades above the SPAC IPO price of $10 so even the daring investors that may be interested in dumpster diving in SPACs likely gloss over this one as it is not down 70-95% like most other SPACs.  The stock is also performing very well this year, up almost 40%, which we think may be deterring new buyers that fear they have “missed it.”

It is headquartered in Amman, Jordan with its business truly global (~15% of the business in the U.S.).  So it is not only mostly non-U.S. but it is also headquartered in a country neighboring some of the more hostile geographical climates in the world.  Lastly, it has less than a $500mm market cap with the founding family owning 37% of the shares and an Oman investment fund owning 22% so it is not only small but also has a low float so it’s not liquid enough for larger funds.

These, in our view, help justify the cheapness but none of them, other than possibly the “SPAC taint,” will change any time soon so we are not recommending this stock for a quick re-valuation.  Fortunately, the company is highly profitable, repurchases its own shares, and has a long runway for profitable reinvestment.  As is the case for most of our investments, we are not counting on a re-rating but rather for the stock to compound alongside its ROE – the cheap multiple is attractive for downside protection and faster intrinsic value per share growth via share repurchases.

Company Background

IGIC is a family run and controlled global niche insurer.  It was founded in 2001 by Wasef Jabsheh in Jordan.  As part of the transition plan announced during the SPAC acquisition, Wasef recently stepped down from CEO with his son Waleed Jabsheh succeeding him.  Prior to becoming CEO, Waleed was the president of IGI since 2011.  Waleed is based in London which is the underwriting hub of the business while Wasef remains in Jordan.  Wasef’s other son, Hatem Jabsheh is the COO and head of investments. Below is a graphic of IGI’s key events:

Business Operations

IGI reports their GWPs in three segments: long tail, short tail, and reinsurance.  Two thirds of their GWPs are individually underwritten, which illustrates how specialized each offering of theirs is. The remainder is originated through MGAs or Reinsurance.   Since they went public, they have been growing their shorter tail lines much quicker than longer tail lines. They say on their calls that they see much greater competition and pricing pressure in their long-tail lines. 10-year average ROE has been 13.1% which is very strong considering how depressed NII has been during that span (>30% ROEs so far in 1H23).  Combined ratios have been extremely strong YTD and they state on every call that their longer-term average target is mid to high 80’s.  As shown below, they manage the insurance market cycle very well by pulling back in softer times (2014-2017) and growing into the harder markets (2019-Current).  They also have a demonstrated track record of over-reserving with reserve releases every year going back to 2015 (many years greater than 10%). 

Recent Developments

Management believes this is the best environment for underwriting that they have seen in their lifetime.  Book value per share is up more than 20% just through the first half of the year.  Q2 combined ratio was 73.5%, the lowest in company history, with the first half coming in at 75.7%.  They just repurchased all their SPAC warrants (17.25mm warrants with $11.50 strike) for $0.95 to avoid future dilution and started a $5mm share buyback in 1Q23.  We expect this to be completed this year with another buyback program re-authorized thereafter. 

Valuation

As mentioned at the start, we came across this company when searching for insurance businesses with large floats/investment portfolios relative to their market cap with low or conservative debt.  IGI has a $1B fixed-income investment portfolio, a $480mm market cap, and no debt.  The current portfolio has a yield of 3.9% but they said they are getting new money yields in the 5-6% range.  IGI generated $16mm of net investment income in 2022 which should be greater than $50mm in 2024.  At the current price, it trades at less than 10x just its pre-tax interest income on government bonds.

We expect about $2.90 of EPS this year so it is currently trading at 3.8x PE.  It is definitely earning outsized underwriting profits currently which will normalize over time, but we think it remains under 5x PE at normalized underwriting profitability and current interest rates.  It currently trades at just under its 9/30 expected book value which will compound at its earnings yield (20-30%) in the current environment. We believe they can underwrite at better than a 95% CR through the cycle while growing premiums by mid-single digits.

Catalyst

• Strong earnings on 11/14
• Non-deal roadshow in the U.S. in early December
• Increased sell side coverage
• Increased share buyback
• Long-term book value per share compounding