August 09, 2009 - 7:01pm EST by
2009 2010
Price: 8.05 EPS $0.95 $0.95
Shares Out. (in M): 6 P/E 8.5x 8.5x
Market Cap (in $M): 45 P/FCF 4.0x 4.0x
Net Debt (in $M): 0 EBIT 8 8
TEV ($): 32 TEV/EBIT 3.9x 3.9x

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The credit crisis has led to a lot of bargains, but it's still pretty hard to find anyone willing to sell US Treasury securities at 61 cents on the dollar - unless you count shares of Unico American, a small and profitable casualty insurance company that sells for nearly a 40% discount to a rock solid investment portfolio composed almost entirely of US Treasuries.

I first posted Unico several years ago at $9; it eventually rose to $14 on solid earnings but has fallen back sharply as investors indiscriminately sell small-cap financials without regard to the actual quality of their portfolios. Since that time, tangible book value has grown to $13.68 per share, composed of an extremely solid and conservative investment portfolio, as seen in the following from the May 5th 2009 10-Q:

The Company's investments in fixed maturity obligations of $130,451,606 (at amortized cost) includes $118,761,922 (91.0%) of U.S. treasury securities, $9,093,685 (7.0%) of industrial and miscellaneous securities, and $2,595,999 (2.0%) of long-term certificates of deposit.

In an environment where many insurers' balance sheets have been seriously impaired, UNAM has a straightforward portfolio of investment-grade assets yet sells at an surprising 0.61 multiple given the quality of its balance sheet. Unico holds mainly shorter-term maturities, positioning them to benefit from an eventual rise in rates. Underwriting performance has also been excellent, with the firm achieving a respectable combined ratio of 63% to 85% in each of the last three fiscal years despite a persistent "soft market" that has caused many comparable firms to write unprofitable policies to maintain top-line revenue volumes. As major shareholders themselves, management is clearly very focused on shareholder value and is conservative in selectively writing policies as well as in investment decisions. As demonstrated by other recent ideas such as SUAI, I think Mr Market has placed excessive emphasis on "top line growth", which in reality can partly reflect conservative underwriting to maintain profitability; as a result he can often become strangely blind to the obvious tangible book value of an investment-grade asset portfolio, plus the further added value of a dividend and earnings stream.

Given UNAM's conservatism re policy volume, earnings have been fairly consistent and robust, with Unico growing book value by 12.5% during fiscal 2008 in the face of competitive pricing and turmoil in the credit markets; and earnings in the latest quarter beating the TTM quarter at $0.18. Going forward, large investment losses at other firms should eventually lead to easing of the soft market, enhancing volumes and profitability at Unico. UNAM is also completing an IT overhaul that should further improve efficiency in quoting and underwriting more policies, and has recently added specialty programs covering bars, gas stations, and convenience stores. The company was also recently awarded a ratings upgrade to A- by AM Best, which should significantly bolster both policy volumes and pricing going forward.

Management personally owns nearly 60% of the common stock and have bought shares on the open market as high as $12; the company recently reactivated its stock repurchase plan and is again buying back shares at a deep discount to book. The company also initiated a cash dividend of $0.18 per share, with the resulting 2.2% cash yield making UNAM an even more attractive substitute for buying Treasuries at face value. Effectively buying back T-bills at 61 cents on the dollar is an excellent business to be in, and getting a highly profitable insurance company for less than free certainly doesn't hurt. For anyone looking for a straightforward microcap financial with an excellent margin of safety, UNAM provides a way to own extremely high-quality assets at a discount while earning a generous expected return.


Stock buyback

Resumption of revenue / earnings growth (firming insurance market, IT investments in web-based quoting)

Possible buyout a la SUAI

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