Special Situation Investing

Wednesday, October 25, 2006

BancInsurance Corporation (BCIS) - Pure Value Play

For a value investor, now is a sad and depressing time. Most companies are at or near 52-week highs and you need to look at next years earnings to get a reasonable PE. Even companies which are in the dog-house still look ugly when viewed over multi-year levels. However, I believe I may have found something worthwhile in the insurance industry.

BancInsurance Corporation (BCIS) is a specialty insurance company, primarily in the property/casualty field. With a market cap of $30 mil it is not for the bigger fish out there. I like that though, I can't help thinking it is keeping the price down.

What is interesting about this company is that it is selling for just under tangible book value (~$32 million) while still earning substantial profit. The valuation is due to a messy expansion into immgration and bail bond reinsurance. It ended poorly in 2004 when the company discontinued the business. The combined ratio got nailed 129% (this means the cost of providing the insurance was 29% higher than the premiums paid), audtiors quit, financial reports were delayed and the company was delisted from the NASDAQ. Subequently investors fled. There is still some overhang from these events as legal proceedings continue. Essentially, 1 company is attempting to recover losses related to the reinsurance from BCIS, while BCIS is attempting to recover losses from 2 other companies. I am not a legal expert but the size & scale of the reinsuracne operations do not seem adequate for the current legal issues to warrant the large-scale selloff that has occurred in the stock.

In spite of these events, the company was profitable in 2005 and quite profitable in 2006. Insurance produces fairly lumpy results due to changes in investment gains but the company will probably come in with a P/E of 5-6 in 2006.

I have to give credit where it's due, this idea was sparked by another investing block, Rational Angle. I recommend if you are still interested in the stock that you check out Rational Angle's post here.


The key question is where can the company go and how far? Assuming no more disasters it will probably trend slowly higher. If management writes bad insurance, of course the stock will get hit but you are already buying at book value which will provide some support. Insurance companies don't command the huge book value premiums of other businesses so don't expect any miracles.

If the company can grow modestly (high single-digits), and appreciate to 1.5 times book (slightly below peers), you would be looking at 70-80% over the next 2-3 years. On top of that there is always the chance of relisting on a major exchange, completion of legal proceedings, acquisitions, buyout of the company by another firm, or just enhanced organic growth. Don't fool yourself, it is not a perfect play but I view the risk/reward at this price, as excellent.

Finally, as always, do your own research. This blog, all blogs, in fact all financial analysis, should be used to generate ideas not used as your final source of knowledge on a stock.


I own shares in BCIS.


  • Thanks for the excellent article. Just wondering what happens if you buy pinksheet stocks and after few months/years later if they listed on the NASDAQ . Do the stocks you own automatically converted to the common shares at the par or do they became wothless because of the newly issued commonshares..Any insights in to this is very helpful

    By Anonymous Anonymous, at 11:29 AM  

  • They certainly wouldn't become worthless! The company would generally convert them automatically for you, although the exact ratio may vary. All that is really happening when a company gets on the Nasdaq, from the valuation perspective, is nothing. You will still own the same proportion of the company, it's just a question of how many shares this translates to. The reason I like re-listing is it can lead to automatic share increases as more investors become willing to invest.

    By Blogger spinoff, at 3:55 PM  

  • On my last comment, I meant 'it can lead to automatic price increases' not 'share increases'.

    By Blogger spinoff, at 3:56 PM  

  • Are you not concerned by the year end report disclosures: (1) ongoing SEC investigation; (2) pending arbitration; (3) low rating on insurance; (4)the "creative" insurance products being sold; and (5) the fact that the company is 61% owned and controlled by the Sokol family which may be the cause of the management fees increasing from 33K (2004) to 713K (2005).

    By Blogger vinominer, at 7:32 AM  

  • I am not saying this is a great company. I would lump it under the "cigar butt" category. However, at present valuation I think it offers good upside with limited downside.

    By Blogger spinoff, at 4:04 PM  

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