In Florida, if you are an insurance company, it is not legal to have 'two sets of prices' for the same home/wind insurance policies. So you can't have 'premier tier' pricing, and then 'lower tier pricing for a separate book of business that is somewhat higher risk and/or higher cost. Actually, I'm not sure its illegal,but FNHC management said its not allowable to them. Therefore, FNHC is starting this new jv, under a different umbrella (Monarch), which in essence will offer their agents more opportunities to accept policies, for these somewhat riskier, higher cost, higher priced business. This wont begin until 2015, and they may raise some capital to fund their startup costs.
according to the CC, there will be some cost savings, but much of that would be some lower supply costs due to more buying power. KTCC expects to keep all the new manufacturing facilities.
They expect to make money by grabbing additional sales. Obviously, the printed circuit boards go into a larger product. KTCC wants to now get the order to build the entire product......for instance, Ayreshire may make the printed circuit boards for, lets say a thermostat, or computer mouse, or toaster, or curling iron....KTCC want to get the biz to build the entire product. They said the 'additional business' to go from the pcb to final product could range from 20% to 400% (or more) of the amount the customer is paying currently to manufacture the pcb's.
hey commandor, I agree with your thoughts. This purchase allows them to get near that $100,000,000/qtr sales mark, while retaining their 'North American based' manufacturing niche. And and as management stated in the conf call, just as more biz continues to flow towards Mexico, now some of that biz is moving to the US. So the trends are with them.
And the now have an inside opportunity to lever all these North American Based new printed circuit board clients, by offering full EMS, engineering, plastic molding and metal fabrication, assembly services, etc. And its an accretive purchase even without any of this new universe of sales opportunities (if you believe them).
Of course it all depends on management, and their ability (along with their sales team) to pull of these new customer wins over the next three years. If you believe management is weak (like 'poet'), then this won't help.
As for smaycs question regarding their non answer to how accretive this will be; I agree with algo41 that would only be available after they've completed their dd. Unfortunately, knowing KTCC, I'm not sure if they'll ever give a set quantitative figure on that.....more likely it'll be a qualatative adjective.
Anyway, overall, I like the acquisition.
I agree that FNHC has strong management. I dont want to be as long winded as I was before, but I stand by my comments that while FNHC management is strong, their new reinsurance policy should pressure earnings, just a little bit in June, and harder in Sept and Dec. I think FNHC will continue to show strong growth, but their percent increase in policy count should drop strongly over the next year. And, imo, the entire sector will see competitive pressures since a bunch of new companies (including one or two newly public) have entered the Florida market after noticing the huge recent profits of the group. Of course, I could be wrong.
In the very short term I prefer UIHC at current levels. Although they are scheduled to an offering of shares by existing shareholders, which is a negative.
As I mentioned in an earlier post a couple weeks back, I really like KINS, an insurer in upstate NY. It has moved up, but on some good news. I would add on any pullback to the mid sixes or lower, and if I had no shares, I'd start a position near current levels. Its at $6.90, and I think it could move up over $10 by years end. Of course, I could be wrong.
ballen, I agree that FNHC has quality and honest management. I am not going against them. I have owned them since the mid $3 dollars, and AVERAGED DOWN as it headed into the two's (you can check my super old posts). I have listened to every conf call over the past four years, and participated in a bunch. I was positive about them from mid 2011 until now. You can check my posts.....when others were saying negative things about FNHC I was positive, saying any dip was buying opp.
But lets face it. Its not only great management that has helped FNHC these past three years, the entire Florida Prop and Casualty isurance sector has gone up....see, HCI, UIHC...even the poorly run UVE. Huge rate increases, coupled with large reinsurance expense reductions PLUS no hurricanes has both hugely increased their bottom lines.........and expanded their p/e's. But I also remember when FNHC (then TCHC) went up to over $30 in 2006 on huge earnings increases.... and five years later it $2.30. Rates are now beginning to decrease (with new competition)....and reinsurance will at some point start to increase. It seems to me that right now, with this huge increase in FNHC's expenses...we may be at or near a turning point. Of course if we never have another hurricane, Florida insurers will do well.
s12, yes, policy count was up 100%. The portion of their reinsurance expense that was renewed increased from $54.3 million (see their 8k in July of '13 to verify) to $117 million, thats an increase of 117%. FNHC stated that reinsurance expenses were decreasing, so if their policies went up 100% , reinsurance should have gone up something less than that, lets say 90%.
The lower reinsurance increase last year....only 40% from..helped them dramaticaly in this March quarter, since their policy count went up 100%. This year their reinsurance expense (at least the portion I am referring to) increased 117% this year vs 40% last year. Since this year their growth will not be 100%, the increase in reinsurance will hurt them more going forward.
But all that matter is, under their current reinsurance, they are spending near $16 million more per quarter. Under this policy, the would have LOST money last quarter. LOST MONEY. Therefore, under the current policy, FNHC would have to MORE THAN DOUBLE their March '14 quarter earnings to make the same amount of money after taking into account the increased reins expense (and thats assuming all other costs stayed the same). This will dramatically effect their earnings in September '14 and forward.
FNHC is still a well run company. But imo the next twelve months will be difficult,
1. FNHC stated in their conference call that the state approved a very small rate decrease for FNHC, something less than 1/4 of one percent, in late 2013 for the '14 year. Management has also stated that they believe their could be further decreases in their rates (as reviewed by Florida) going forward due to current profit margins and reinsurance rates. They further stated in the last conference call that there has been an influx of new competition (brought in by the the huge profit margins of Florida insurers the past several years) which is pressuring pricing.
2. Sure, reinsurance is up b/c policies are up. Policy count is up 100% year over year. FNHC stated in conference calls that reinsurance rates will be coming down. Yet reinsurance is increasing from $54.3 million $117.4 million (policy starting on July 1, '14), or 117%, $63.1 million dollars per year or $15.8 each quarter. Reinsurance expense per quarter is increasing by more than what FNHC made in its last quarter...in total, before tax going forward. In comparison, UIHC, a fast growing publicaly traded Florida P&C competitor, just announced their reinsurance would be going up only around 20%.
3. It seems to me the only way reinsurance expense could be going up 117% is if we were underinsured at the end of June. Thats fine...it helped last years earnings a bit, and will hurt this year. And pretty obviously, the percent growth rate will slow down over the next 12 months (we will still have strong growth.).
4. My numbers were real simple, some posted in item two above. You say my reinsurance calculation is incorrect. Please tell me where you believe the numbers are wrong.
yes, but.. we know their growth rate, and the number of new policies expected, since in each conf call they tell how many polices they are currently writing. And that number has been around three to four thousand new per week. And that has been fairly consistent for the past year...albeit slightly higher growth rate now than a year ago.
So why did reinsurance go up 125% this year, compared to 40% last year, when their growth rates were similar? I think the answer is that they may have been dramatically under-reinsured last year...so they have to play a lot more catch up with expenses.
Again, unless I calculated something wrong, the increase in their reinsurance is more than they made pre tax in the March '14 quarter. At the current expense rate, they would have actually lost money last quarter.
FNHC will continue to be a fine company, just their share price is now extended. The positives are they have a great management team and have turned around this formerly underperforming company. The negatives are, as discussed in recent conf calls, there is more and more competition in the Florida prop and casualty market....several new companies have recently gone public, and some old line companies are returning to the market. State regulators have forced FNHC and some other carriers to actually lower rates going forward (just very marginaly for FNHC), but FNHC said they expect this trend to continue. So their rates will come in longer term. And of course we are entering Hurricane season. Reinsurance rates have decreased by huge amounts for what, at least three or four years now. That earnings bump cant continue forever.
I don't see why one would add to a position right now in FNHC. Its had its dramatic run from its lows around two bucks, to twenty-five. The sector has had everthying go positive for it during the run.....zero hurricanes, lower reins rates, accompanied by huge rate increases. IMO, 'the times they are a changin'.
I could be wrong. best.
s12. imo, its bad for q2 and horrible going forward. Reinsurance expense increases more than anyone could have imagined if my numbers are correct.
Their new 'policies' started on June 1, of 2014, so 1/3 of the increased expense will hit this quarter. So pre tax earnings will be decreased by $5.3 million off the top (or .46/share pre tax). But thats not the big point. Starting in the September quarter, pretax earnings will be negatively hit by $15.8 million, each quarter!
I want someone to confirm or refute my numbers...b/c they seem crazy. A $15.8 million increase in reinsurance expense each quarter, means earnings would be hit by $1.40 each quarter!!!
Sure, reinsurance expense went up last year vs the year before as well. But it only rose a total of about $14 million last year, or about $3.5 million/quarter. This year it rose $63.1 million, or nearly $16 million each quarter. That sixteen million each quarter is an expense FNHC did not have up till June 1, 2014.
So, earnings should decrease somewhat (excluding any investment gains they may have) next quarter, and then take a huge hit in the September quarter.
So, imo, if my math was correct, FNHC is worth a lot less now then before the new reinsurance program was announced on Thursday. Hard to say by how much, but is it really worth over $20 if earnings take this big a big a hit over the next four quarters? If my numbers are right..then imo, its certainly is a possibility that FNHC dips to 1.5 times tangible book value at some point over the next six months, to about $15 - $16/share.
..For the term 7/1/14 to 6/30/15, "The total estimated cost of $117.4 million to the Company is comprised of approximately $76.4 million for the herein referenced private reinsurance products including prepaid automatic premium reinstatement protection along with approximately $41.0 million payable to the Florida Hurricane Catastrophe Fund (''FHCF'')."(from todays 8-k)
So thats $117.4 in reinsurance expense starting 7/1/14 though 6/30/15.
The one year contract that just ended on 6/30/14, had a "total estimated cost of $54.3 million to the Company is comprised of approximately $36.1 million for the herein referenced private reinsurance products including the prepaid automatic premium reinstatement protection along with approximately $18.2 million payable to the Florida Hurricane Catastrophe Fund." (from their 8-k on 7-1-13)
So their reinsurance expense is increasing from $54.3 million/year to $117.4 million/year. Its more than doubling....its increasing by $63.1 million year over year. At least that's what I get, maybe someone could confirm my numbers.
That means each quarter, reinsurance expense is increasing by about $15.8 million.
This past quarter, which was a great one, FNHC made $8.43 million, (.74/share). And now our reinsurance is going up near $16 million per quarter???????????????????
I'm thinking I must have made a mistake with these numbers, because this seems crazy.
Can anyone check and let me know if its right. I'll try to review again over the weekend.
I knew reinsurance was going to go up due to the huge increase in business, but wasn't expecting this much.
automatic five minute trading pause due to (as traderx mentioned) volatility in trading, code LUDP. a greater than ten percent price deviation within five minutes....
"trading pauses", which are defined as, under NASDAQ, "if a security is subject to a Trading Pause, the Pause Threshold Price field will contain the reference threshold price that deviates 10% from a print on the Consolidated Tape that is last sale eligible as compared to every print in that security on a rolling five (5) minute basis".
mcaplan, Can you be more specific? What analyst, and is there a link to his report or article?
uptab, looks to me from Yahoo's earnings estimates that those estimates have fallen recently. Am I wrong?
In this space, I was a buyer of KINS, a small prop and casualty insurer based in upstate NY. I bought my shares in the upper five's, but the lower sixes are also attractive and I might add on a small pullback.
Last quarter was poor because of claims due to the very very very cold and snowy winter. I guess there could be some spillage of claims into the June qtr.
KINS has good growth, a good balance sheet, and recent insider buying.
its preliminary, but its basically guaranteed; the share price would have to drop a ton (40% or so in two weeks) for them not to make it. On Friday June 27 they will be officially in.
The many index funds that follow the Russell 2000 will be forced to buy UIHC in their one time per year reconstitution.
specifically, they were both added preliminarily to the Russell 2000 index. I mentioned earlier on both the FNHC and UIHC boards that they would be added. Its based purely on market cap....both are pretty secure to stay in (final is last week in June) unless their share price drops a ton.
...looks to me like UIHC will be added to the Russell 2000 index later this month, judging by its market cap. The first preliminary list comes out after the close today.
scott, re: " How many seasons have had little or no insurance claims in Florida? Maybe 5 or 6. The odds are now against us, in terms of this coming season."
This is not meant as a recommendation to buy or sell. But the National Hurricane Center has came out with their hurricane forecast for '14 last week, and they said they expect a lower than normal number of hurricanes forming in the Atlantic this year. Of course last year the forecast a higher than normal, and we got bubkas, so they aint right all the time.
Also, the probability that a hurricane will occur is basically a memoryless function. In other words, if there are ten straight seasons of no hurricanes, the probability of a hurricane in the following season remains unchanged. Just like if you flip a coin and get heads nine straight times, the tenth time you flip it, the odds are still 50% for heads, and 50% for tails.
.. FNHC will be added to the Russell 2000 index judging by their market cap (and thats the sole criteria of the index fo r US based stocks). Even if she were to head back down to $20, or a little less, I believe FNHC will be added. The preliminary list of additions will be made available this Friday.
Of course that will bring in lots of buying pressure, at least at the end of the month, as index funds that follow the very popular R2000 index are forced to buy FNHC. Could be lots of fun.