State National Companies: Specialty Insurance Compounder

Peter Rabover presented his in-depth investment thesis on State National Companies (Nasdaq: SNC) at Best Ideas 2017.

State National Companies is a specialty insurance company with two unique, high moat, businesses compounding at at 15-17% ROEs and trading at 11.5x forward earnings. 70% of the business is essentially “rent an AM Best A-rated balance sheet” that allows alternative capital to participate in the US domestic P&C market. SNC cedes a 100% of the risk to the reinsurers/foreign capital and collecting a “rental fee” from a market that is expected to double in the next five years and should be viewed more like a broker trading at 16-18x earnings than a P&C company. The other 30% Lender Services segment is a collateral protection business that mostly insures autos under loan for credit unions whose insurance coverage has lapsed. With an exclusive relationship with the Credit Union National Association (CUNA) SNC has 95% of the credit union market and is a leader in an oligopoly that allows it to earn a consistent eye popping 84 Combined Ratio (relative to mid to high 90s for most auto insurers). A clean balance sheet that can drop down an additional 15% of EV down to the company level and a founder run and owned company should allow SNC to continue to grow earnings in high teens and to adjust to 15-16x earnings for a 20% IRR over the next 4-5 years.

About the instructor:

Peter Rabover is the principal and portfolio manager of Artko Capital LP. His focus and expertise lies in value investing, small caps, special situations and M&A. Prior to founding Artko Capital, he was a Senior Analyst for a large San Francisco mid cap value fund and a Santa Cruz large cap value fund, as well as stints in the Peace Corps as an Economic Development Volunteer and various private equity/M&A consulting roles. Peter holds a B.S. in Finance from Duquesne University and an MBA from University of Virginia’s Darden Graduate School of Business. He has also attained the Chartered Financial Analyst designation. He splits his time between San Diego and San Francisco, California.

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