Paraphrasing one of the most quotable movies of the last century (Animal House), some might say that Specialty Underwriters’ Alliance (SUAI) “is a P-I-G, pig!” Maybe true, maybe not, but in the mind of no less an investment genius than Homer Simpson, the pig is “a wonderful, magical animal.” Regardless, this is the third time that SUAI has been posted on VIC. So, a year from now, we’ll know – is the third time a charm, or is this a case of three strikes and you’re out? We firmly believe in the charm scenario.
Here is the quick business description from Capital IQ:
Specialty Underwriters' Alliance, Inc., through its wholly owned subsidiary, SUA Insurance Company, offers commercial property and casualty insurance products in the United States. The company offers commercial automobile, workers’ compensation programs, physical damage, property, inland marine, and general liability coverage. It offers its products through partner agents or independent general agents. The company also offers insurance and risk management services for general contractors, artisan, and specialty trade contractors engaged in residential and/or commercial construction; commercial insurance for truckers; and insurance and risk management services for small to medium sized roofing contractors engaged in commercial and residential work. It also serves schools, other educational institutions, and municipalities; and towing operators, and garage operations with towing and recovery, as well as towing operations for auto auctions.
We also encourage you the read the prior two VIC postings and the Q&A from the first posting in particular.
So, what has changed with SUAI since the June 30, 2005 VIC posting when the stock was at $8.50, the December 22, 207 posting when the stock was at $5.27, and today when the stock is at $2.40? The simple answer is this – not much has changed other than the stock price. June 30, 2005 book value and tangible book value were $7.51 and $6.42, respectively. At December 31, 2007, these numbers were $8.42 and $6.41. And, in SUAI’s most recent 10Q (September 30, 2008) book value and tangible book value were posted at $8.52 and $6.71.
What else has transpired over the last several years? On the positive side of the ledger, SUAI received a stock-for-stock takeover bid earlier this year which valued the company at $6.50 per share. The board rejected that offer. On the negative side of the ledger, the business has never scaled up to original aspirations. As a result, it has been difficult for the company to generate meaningful economic value given its cost structure. With headwinds in many of its business lines (e.g., temporary staffing, trucking, contractors), we expect top-line pressure to continue. That being noted, we actually commend management for maintaining underwriting restraint and not chasing after unprofitable business. While the public market has been frustrated by the lack of growth, management’s discipline would make Warren Buffett proud and gives us comfort that this management team will not destroy book value.
So, where are we today? We have a company that is: (1) sub-scale; (2) will likely continue to have difficulty in reaching economic scale; (3) run by a disciplined and conservative management team; (4) trading at 28% of book value and 36% of tangible book value; (5) trading 63% below the July 2008 take-over offer (and approximately 54% below today’s value of that offer); (6) run by a management team that has more or less acknowledged that SUAI needs to be part a larger entity to achieve true success. We should also point out that SUAI’s book value, while not totally immune from markdowns, is very conservatively invested – e.g., no equities, average duration of 3.5 years, average credit rating of AA or better. For what it is worth, from 2Q-2008 to 3Q-2008, book value took just a 2% hit. Finally, for those focused on EPS and P/Es, consensus estimates are $0.60 for 2008 and $0.45 for 2009, producing P/Es of 4.0x and 5.3x for 2008 and 2009, respectively.
We find it difficult to imagine a scenario in which SUAI is worth less than its current share price of $2.40 and can easily envision a 100-200% gain from here over the next twelve months, very possibly as a result of a strategic transaction.
(2) Abatement of fund redemption selling.
(3) Subsiding of tax loss selling.