Payday for Kingsway

I’ve been following 1347 Property Insurance Holdings since their spinoff (or better, “IPO“) from Kingsway Financial Services in the spring of last year.  After all, it appeared as veritable catnip to the enterprising value investor–a spinoff, insurance float, aspirations of growth…

Initial plans included expanding 1347’s Louisiana property and casualty insurance business (“Maison Insurance Co.”) to include “Texas, Hawaii, and/or Florida during 2014.” (49)

A secondary offering followed quickly on the heels of the initial offering and raised $23 million more in June (PR).

Unexpectedly, the Florida market proved resilient to entry, as “1347 Property Insurance Holdings, Inc. notified the Florida Office of Insurance Regulation (the “OIR”) of the Company’s intent to withdraw its initial application for a de novo, wholly-owned subsidiary to seek a certificate of authority to write insurance policies in the State of Florida…  The Company may choose to re-submit an application to the OIR in 2015.” (8-k)  No official word yet on progress in Texas and Hawaii.

Admittedly the story of 1347 would seem to be only in its first chapters, which is why I was surprised to see Kingsway recently terminate its management services agreement with 1347. (PR)

1347 though was kind enough to ease Kingsway’s departure, offering $2 million in cash, $3 million in 8% preferred stock, a performance share grant agreement worth 100,000 shares of PIH, and 1.5 million warrants to purchase PIH at $15 per share.  That is no small gift for company with less than $50 million in equity.

It does leave one to wonder though–what services will 1347 now be foregoing?  With some digging, one can find a brief description of the management services agreement: “On February 11, 2014, we entered into a Management Services Agreement, which provides for certain permanent services, unless terminated, that we will receive from 1347 Advisors, including forecasting, analysis of capital structure and reinsurance programs, consultation in future restructuring or capital raising transactions, and consultation in corporate development initiatives. For the services performed, 1347 Advisors will be paid a monthly fee equal to 1% of our gross written premiums, as defined in the Management Services Agreement.” (63)

Going forward though, that monthly fee to Kingsway would decline if Kingsway ever sold 50% of its common shares.  As they say: “After the seventh year of the term of the Management Services Agreement, should the ownership of our shares by KFSI or an affiliate or subsidiary thereof fall below fifty percent (50%) of KFSI’s (or an affiliate or subsidiary thereof) ownership of our shares at the close of our initial public offering, the monthly fee shall be calculated by (a) dividing the existing shares owned by KFSI (or an affiliate or subsidiary thereof) by the number of original shares owned by KFSI (or an affiliate or subsidiary thereof) at the close of our initial public offering, and (b) multiplying by 1% of our gross written premiums, as defined in the Management Services Agreement.” (63)

All told then, Kingsway has elected to forego 1% of gross written premiums in exchange for the cash/preferred/stock/warrant package.  I suppose it makes good economic sense for them, since 1% of $20 million premium would only amount to $200,000 per annum.

Disclosure: No position

BNCCORP’s 2014 Results

Some twelve months past we briefly profiled BNCCORP’s 2013 results. Casting aside the convention of geographic contiguity, BNCCORP, Inc. “operates community banking and wealth management businesses in North Dakota, Arizona and Minnesota, and has mortgage banking offices in Illinois, Kansas, Nebraska, Minnesota, Arizona and North Dakota.” (PR)

Initially it was the attractive price that drew my interest (uncovered frauds tend to provide such), but over the last few years, BNCCORP has also pleasantly surprised its investors with strong core banking results.  And 2014 offered more of the same.

As of 12/31/14, BNCCORP had a book value per common share of $18.28, and it produced a return on average assets and equity of  0.94% and 12.37%, respectively, through the year 2014.  Non-performing assets decreased to $317k at 12/31/14, compared to $6.7 million at 12/31/13.  For that performace, today’s buyer is willing to pay $15.75 per share, or roughly, .86x BV.

Last year I expressed some disappointment with BNCCORP’s modest loan book ($351 million in total loans at 12/31/13, vs. $436 million in securities), and the fact that they hadn’t yet redeemed their preferred stock and subordinated debt.  In 2014, progress was made on both fronts: the loan book increased to $408 million at 12/31/14 (vs. $449 million in securities), and the subordinated debt was redeemed in Q314.  Coupled together, these moves helped to prevent some of the net interest margin compression that peers have endured.

This year, one additional potential negative is the effect of lower oil prices on BNCCORP’s North Dakota loan book and demand deposits.  Though BNCCORP’s North Dakota loan book represents only $233 million of their $947 million total assets, it was the portion that many thought would offer the quickest and most profitable growth.

Disclosure: No position.

[P.S. On Seeking Alpha, Chris DeMuth has offered BNCCORP as his best long idea for 2015.]