Today I am going to cover an interesting little stock - 1347 Property Insurance Holdings Inc (PIH).
It is an illiquid microcap business that previously sold individual property insurance in Florida, Texas, and Louisiana. At the end of 2019, PIH sold off its insurance business to FedNat Holding Company (FNHC), a publicly trading insurance company.
In exchange for the sale of the business, PIH got $25.5 million in cash, and $25.5 million in FNHC stock. All of PIH's employees transferred to the new company except for two.
Currently PIH is somewhat of a clean slate. It has practically no liabilities and a relatively liquid book value of $46 million. That consists of 25.6 million in cash, 4 million in real estate investments, 1.8 million in income tax assets, and 14.5 million in FNHC stock.
And the market cap of PIH is only 25.5 million dollars. (Share price of about $4.20)
You may ask, why is this trading at 0.54 of book value when there is no debt and all assets are relatively liquid? Great question.
That is what I asked myself when I discovered this net net and I believe there are a few good explanations.
1. This stock is pretty illiquid. It is listed on Nasdaq but has a share turnover of only 0.19. This is because 87% of shares are owned by insiders and a few funds that hold the stock. The market cap is only 25 Million so very few people know about this stock, and no large players would ever touch this because of the scarce float available.
2. $14.5 million of the $46 million book is in FNHC stock. FNHC has taken a strong beating lately and is down 75% since it's high in 2014. PIH's shares are already down 43% since they got them in late 2019. If you look at the two stock charts on top of each other over the past year, they are moving in tandem. This makes sense to a degree, however PIH has 25.6 Million in cash and the FNHC stake only accounts for 31.5% of their book value.
Perhaps people have concerns about the FNHC holdings because of how poor the stock has been performing. They company is currently losing money, although appears quite cheap as it is trading at half of book.
Part of the problem is that PIH has a standstill agreement with FNHC, where it appears that they cannot sell their stake for five years.
The Standstill Agreement imposes limitations on the sale of voting securities of FedNat held by the Company and restricts the Company from taking certain actions as a holder of voting securities of FedNat. The term of the Standstill Agreement is five years.
I think shareholders are concerned that PIH will be holding FNHC for so long if it does poorly.
3. PIH currently does not really have a business. They have two or three employees and then their board of directors. They are starting a reinsurance business, and want to start an asset management business where they will sponsor investment managers starting funds. And they want to invest in real estate. They are moving in this direction and have taken some action but there is no evidence that any of this will work out. They have to hire employees and do a lot of work to start these, as well as invest capital. So while the book value is $46 million now, it could go down substantially as they build these businesses over the next few years.
4. The insiders and the company are all strangely intertwined. It actually gets really complicated when you look into all of the connections and related party transactions.
Fundamental Global Investors owns 45+% of PIH. (I actually think it is 50% because they bought more shares after the most recent proxy statement.)
This firm is run by Kyle Cerminara and Lewis Johnson. They are both Co-Chairman of the board of PIH. They also run a bunch of other businesses, and sit on the boards of many other publicly traded companies. All of which have performed horribly as stocks. (BTN, TSXV: ICL, BKTI)
Many of the people on the board and the current CEO is associated with KFSI which used to own PIH. As you would expect, many of the connections are network related, however when you dig into it, everything looks a little too intertwined.
Cerminara and Johnson own a bunch of PIH, but they also get paid a bunch by PIH and have it very interconnected with their own firms. They don't have a great track record with other companies. While I would expect that they would want the stock to do well, perhaps they are happy controlling it and slowly drawing money out of it.
It should be noted that PIH also wants to change its name to Fundamental Global Financial Corporation (FGFC) at the end of the year at the shareholder meeting. A move that would further intertwine it with Fundamental Global Investors - the firm run by Cerminara and Johnson.
It seems that the bear case is that "Yes this stock is ridiculously cheap, but management has plans to transform it and they could end up burning the capital in the process of doing that."
PIHPP
During my research process, I couldn't help but get intrigued by the preferred shares (PIHPP). In early 2018 PIH issued their Series A 8% preferred stock. The par value is $25. 700,000 shares are issued which amounts to $17.5 million raised. They pay a quarterly dividend of $0.50 each quarter, amounting to $2 per share or 8%. This costs them $1.4 million per year.
What is interesting is that there is no senior debt to the preferred shares. There are no weird catches with the preferred shares either. And on February 28, 2023, PIH can redeem the preferred shares if they want. That would mean that they would buy the shares back at $25 par value and would pay out any unpaid dividends. The company would only not pay dividends if they felt they didn't have the cash. However the company is currently only really cash and liquid securities. There is no debt so this seems like a pretty safe bet. This is because in the event the company goes down, PIHPP would have first dibs on assets.
PIH did have Series B preferred shares which they ended up buying back with the money raised by their Series A issue. Because they are paying 8% a year on this, I would expect that they will redeem the shares in 2023. The cost of borrowing is so low right now, they have ample liquidity, so it seems odd that they would not.
The risk is that management runs PIH into the ground and totally burns through all the capital as they go out on their new ventures. This is unlikely to me. Management owns a ton of equity, as well as a big percentage of the preferred stock. Johnson and Cerminara own the preferred for a bunch of their clients as well. So I feel it is unlikely to stop paying its dividend, as well as unlikely to blow up to the point that the $17.5 million in preferred would be lost. It has first preference in the event of bankruptcy.
Conclusion
PIH is indeed very cheap. But is it a buy? Historically net-nets have done very well. But at the moment, there is not an established business. Management does not have a great track record, and seems very scattered with obligations. There is a ton of upside if management executes, but at the moment there is no proof that they will. I would say that the downside is pretty limited but the upside is very uncertain.
However in PIHPP it seems that there is a pretty secure 8% return for the road forward. For some of you reading this that may seem too low to mess with. But the preferred shares intrigue me. The idea of putting some capital in there and not having to worry or think about it, and knowing that I will be getting a pretty safe 8% return is attractive. Plus I have never bought preferred shares before so it is a first. This stock doesn't seem to have any of the pitfalls that I have read about in other preferred shares.
So I have taken the plunge and bought some PIHPP. I feel that PIH is probably a bargain as well and probably has way more upside than PIHPP of course. In a year you could make 8% with PIHPP but you may make 45%+ with PIHPP. For some reason I am just having trouble getting comfortable with the equity.
Disclosure: Long PIHPP. I am an absolute Noob Whale Investor. Do your own due diligence and don't take anything I have written here at face value. Feel free to point out where I was wrong or right in the comments. I would love to hear from you. Cheers!
Calum