Federated National (FNHC) provides homeowners insurance in Florida. It is a very small company:
- Market capitalization of less than $60 million.
- No analyst coverage.
- Average volume of less than 14,000 shares traded daily.
It just reported good fourth quarter earnings over a week ago and since then the stock has surged almost 20% from $6.17 to $7.30 yesterday. However, further gains could be in store for this company as revenues should get a huge boost in 2013.
The state owned Citizens is the largest insurer in Florida. Due to concerns about whether Citizens would be able to pay out claims if major hurricanes hit the state, it has been state approved raising rates over the last couple years with the hopes of writing profitable policies and pushing customers to the private sector. This has had a positive impact on Federated:
- Over 20%+ growth in gross premiums written in 2012 to almost $120 million.
- State approved rates rises and disciplined underwriting have decreased loss ratio and increased net income to .53/share in 2012.
Based on management’s comments in the earnings call, 2013 should be even a better year:
- Significant growth in new business in 2013. Last quarter the company was doing $1 million in new business and this quarter it is doing $2 million business and the CEO feels they could reach $2.5 to $3 million in business. Based on normal retention rates of 90% of existing customers, gross premiums will increase anywhere from 50% to 100%.
- A signed deal which would allow 700 Allstate agents to write business for Federated has not gone into effect yet. This should help grow new business.
- Earnings should increase at a higher rate. Even though most of expenses such as reinsurance are variable, some of the smaller costs are fixed which should significantly help the bottom line with the revenue growth.
- It is possible that earnings could be over $1/share and book value could increase from $8.26 to over $9+ share.
I bought some shares at $6.59, $7.10, and $7.15. I will most likely buy more at the right price.
There is a good seeking alpha article on the stock.
Disclosure: I own FNHC.