Got in on NPD today @3.41.. They have a "special" divy of 1.50 per share if you're on record as of Sept 23rd. Divy payable on or around 12-31.
Link to transcript:
Let me ask everybody on here a question. Would you rather bet on management's ability to generate $1.50 in earnings per share in one year, or would you take a guaranteed $8.50/sh within six months?
Let me first say that I don't think this management team will earn $1.50/sh at any time in the future, but I'm using the example that listed earlier on this board. $1.50 EPS would probably get this stock to $11.50, based on a 10x multiple. I don't think it would get a higher multiple than that based on management's historical performance. However, $8.50/sh is very doable based on selling/liquidating this company at 90% of book and it could be done within six months.
I'd also like to point out some interesting call/Q tidbits:
1) On the call, Michael Braun's inability to directly answer Robert Sterling's question to name a profitable part of the business, and his glossing over of Ray Dirk's question on expected return on book value. Both were valid questions/points.
2) Look at the proxy vote totals. I don't think I've ever seen that high of a Withhold Director vote % without a proxy fight going on. I also don't see how they will get a stock option plan through next year. I know I'll vote against it again.
3) Michael and Peter received new three-year employment contracts on June 22 with COC guarantees. Why?
4) What happened to the investment income that was discussed on the Q1 call? Q1 six weeks was supposedly $700K. The interest alone should have been approximately $1.4MM this quarter at a minimum. Also, the entire portfolio should have been invested by now.
One more thing before I go. Stop the dividend and buy back the stock! You get a minimum of 2-1 on your investment.
Ok, I just noticed that I was tired when I was typing last night. The illustrative multiple price should have been $15.00. My bad. I'd still take $8.50/sh.
Who was buying today? I was sort of surprised that the stock bounced back at the end.
I don't think a six month liquidation is realistic. The investment returns stink, the CFO lied, and whoever they hired to run their portfolio should be replaced (along with the CFO), but the mitigation credit issue is real (profiled in yesterday's WSJ) and there is pushback going on, so, sooner or later, something will have to give.
These guys are just wants to keep the company around so that they can draw their salaries. Bruce Simberg makes $50k in salary out of $1 million in investment. That's a 20% year return w/o dividends, stock appreciation.
I think we need a proxy fight here.
Book value $9.68 up $.17 from last quarter. Mitigation credits in last part 2008 will return to positive in Q4 2009. Mitigation credits are one time rate reductions for spending $$ to reinforce one's home. It amounts to approx. $6MM per quarter for TCHC. Big number. That is $.50/shr in earnings after tax. Think about that: if this credit goes away they would be earning an extra $2/shr. Also regulatory assessments will go away in the next few quarters. That is another $.40/shr in after tax earnings. mitigation credits are effective upon policy renewal. TCHC does not have to renew the policy. The State of Florida is reviewing these mitigation credits and TCHC has asked for 15% rate increase. TCHC has $360MM of reinsurance and only $5MM of exposure in total. So the profts are the spread between reinsurance and net premiums written less the potential $5MM of exposure if a hurricane happens. Assuming (or taking over) policies from Citizens will be profitable because of these spreads. When the book of business renews they weed out the less profitale policies. They are projecting a very good profit in Q1 2010 as book is rationalized. This is a building year as the book of business grows 100% or so. All the costs of assumption are in the first year. All Florida companies have weakest quarters in Q3 and Q4 so this is not new news. State farm is leaving Florida so that business gets spread around also.
If they can deal with mitigation credits, they can earn some serious money. a 15% ROE gets us $1.50 in earnings. The State of Florida has to grant this ROE or there will be no insurance companies in the State. There is a lot of upside to TCHC but it will take a few years to get to $1 of earnings as the book of business grows and the cycle starts going their way.
Impact of credits/rates was felt in Q2 and may not increase in Q3 IMO:
< The Florida Legislature required a rate decrease that resulted in an average 15.2% decrease statewide on homeowners' policies that was integrated into our rates on June 1, 2007. The effect of this rate decrease on existing policies and the corresponding premium decrease in direct written premium was fully recognized in policies by May 31, 2008. In addition, a rate decrease of 11.3% statewide for homeowners' policies was approved by the Florida OIR and implemented with an effective date of May 1, 2008 for new business and June 1, 2008 for renewal business for the homeowners' program. The effect of this rate decrease is flowing through the Company’s homeowners’ book of business such that a full impact of the premium decreases on direct written premium was realized by April 2009 for the homeowners' program. These rate decreases have had an adverse effect on gross and earned premium.
We continue to afford premium discounts in response to wind mitigation efforts by policyholders. Such discounts, which were required by the Florida Legislature and became effective on December 15, 2007 for new business and renewal business, have also had a significant effect on both written and earned premium. As of June 30, 2009, 61.8 % of our homeowners’ policyholders were receiving wind mitigation credits totaling approximately $23.3 million, (a 38.6% reduction of in-force premium), while 40.1% of our homeowners’ policyholders were receiving wind mitigation credits totaling approximately $11.4 million, (a 16.4% reduction of in-force premium), as of June 30, 2008. >
$1.7 million of Q2 loss expense was the result of prior period adjustments, and is thus nonrecurring IMO:
< Management revises its estimates based on the results of its analysis. This process assumes that experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for estimating the ultimate settlement of all claims. There is no precise method for subsequently evaluating the impact of any specific factor on the adequacy of the reserves, because the eventual redundancy or deficiency is affected by multiple factors. Because of our process, reserves were increased by approximately $1.7 million during the three months ended June 30, 2009. >
Based on company disclosures, reinsurance rates are approx. 15% higher in the 09-10 hurricane season, which started June 1. Thus, a 10% increase in reinsurance rates may occur in Q3 versus Q2. Reinsurance cost is approx. 13.3 million per quarter in 09-10, so 9% of this is about $1.2 million.
All in all, I don’t foresee a loss for TCHC in Q3, unless there are major hurricanes, large prior period adjustments, or a jump in commercial losses. JMHO
Their investment income should be $1.5MM per quarter but these morons did not give all the money to the manager they have half of it in cash earning zero. Therefore the return is $586,000. Investment grade short 2 year bonds are yielding 4% with a YTM of 5%, the highest spread over Treasuries in 50 years and these guys do not even see it. If they just put the surplus in the Vanguard 2 year bond, they would have earned $5.6 million for the quarter. The board is just as dumb as the management. Did even one raise there hand and point this out. I guess they were to busy scooping up stock at $1.70 after the Q1 earnings release--and that is after a director interjected in the CC that he thought the money would earn a better return being invested in florida insurance policies--never mind that it was 14% rate of return from just saving the dividend and raised book value per share. If they simply got out of the insurance business, turned the $78MM portfolio into a bond fund and earned 4% on assets with $1.0MM for regulatory and management costs, they would earn $.30/shr and they could distribute all of that with no tax. The stock would sell for about a 15% discount to book value or $8. Somehow they think they are going to earn some return on the insurance book. No chance. The State of Florida will keep passing bills so no one earns more than 8% on equity, if that. The board is a club with outragous meeting pay and options. There should be a shareholder vote on either liquidating the company or selling it to HCII which seems able to make money in Florida. (although that may be coming to an end with mitigation credits.) The Florida legislature passed the credit after TCHC had bought the 15,000 policies from Citizens. They must renew them for three years. The credits are taking away all profitability and their reinsurance costs are going up. This is the all time profit squeeze. The policy premium of $1700 is going to $1000. If a windstorm comes along, they lose $.63/shr plus over head loss less investment income. Opps! book value drops by $1/shr and goodbye dividend. The man asked about a dividend increase--forget that try no dividend. The only thing saving it is the self serving BOD who bought some stock last quarter. It is too bad the BOD is not smart enough to even save themselves. If this things blows up because they are squeezed to death by the State after being asked several times to liquidate by shareholders, they could be sued for malfeasance. This stock has no upside for at least a year. The dividend will probably be eliminated and this dog will head back to $2 on the big loss in Q3. They said "IT IS GOING VERY DIFFICULT FOR FEDERATED IN Q3". In English that means we are going to have a big loss in Q3 and Q4. Florida insurance companies only make money in Q1 and Q2. I managed to get out of this dog after the earnings release and only hope someone bought my stock who can unseat these vile and really stupid people-- Maybe Morty Seinfeld is really running this from the Boca Vista. Good luck to you all because you will need it.
I caught the last half of it. Bottom line is that the State of Florida is imposing pretty stiff mitigation credits on the insurers, while at the same time raising (not reducing) reinsurance costs (amazing that Florida is getting away with such a double standard). These factors will impact TCHC's bottom line the next 2 quarters. They will be shifting policies to reduce the impact of these credits. I'm sure the industry is going to fight hard to get these credits more in line with what they should be.