Long American Coastal Insurance Corporation (ACIC)
Hello OpTrackers,
Today I am back with a very simple investment thesis for you. The thesis is that Dan Peed is a winner. This is a man you want to bet on:
Early Background
Before we get into ACIC and the current investment case, it’s important to cover some history. The investment case after all, is simply that Dan Peed is a winner, so the majority of this post is going to summarize why/how I believe that to be true.
Dan Peed went to Texas A&M and graduated with a degree in engineering in 1985. He initially went to work in the construction industry where he got a hands-on education in how commercial structures are built. Fast forward to 2000, Dan Peed and two other fellows he knew from college founded a company named AmRisc and Dan served as the CEO.
AmRisc is a Managing General Agent (or “MGA”). An MGA is focused on pricing insurance contracts. A broker sells insurance, a carrier underwrites insurance, and MGAs exist to help carriers determine how to price the policies that are being underwritten and get paid a commission to do so. This is somewhat of an oversimplification, but we don’t need to get bogged down in the details here. The bottom line is three engineers who were very knowledgeable in commercial construction built a company to help insurance carriers determine how to price insurance contracts on commercial real estate (that makes sense!). And it worked… AmRisc is now the largest catastrophe-focused MGA in the US, per their own website. I don’t have a stock chart to drive the point home, but Dan Peed & Co likely took the company from zero to hundreds of millions of dollars of enterprise value over time.
AmRisc’s market leading position gave it access to a lot of data in insight into various niche markets for commercial insurance in the US. One of them was catastrophe insurance in Florida related to wind damage from hurricanes (and specifically the small end of that market). In the early 2000s a series of high severity hurricanes led most insurance companies to exit that particular niche. Large buildings could still get decent coverage, but smaller, low-rise apartment buildings were forced to use a government option with bad coverage and terrible service. So, the principals at MGA created American Coastal to serve this niche.
Again, everything Dan Peed does seems to be wildly successful and American Coastal went on to become the largest underwriter of catastrophe insurance in Florida for low-rise apartment buildings.
Sh*t Hits the Fan
As far as I can tell, Dan Peed ended up owning 100% of the equity of American Coastal. And in 2016 he sold the company to United Insurance Holding Corp (UIHC) for $330mm in stock, which made Dan a 49% shareholder in the pro forma company. Importantly, Dan does not become the CEO of the pro forma entity, UIHC’s prior CEO remains in that role.
I will spare you the details, but it turns out UIHC was a complete piece of crap and on the fast track to bankruptcy. This is admittedly the one blemish on Mr. Peed’s track record. UIHC pulled one over on him and get him to sell his very valuable insurance company to them for paper that was effectively worthless.
Eventually Dan (and everyone else if you look at the stock chart) figures this out and ousts the CEO of UIHC, taking over the combined company as CEO. Dan tried to save the combined company and American Coastal did assumed some of UIHC’s losses to bail out the legacy UIHC business, but it was all for naught. And in Q1 2023, the bad half of UIHC was put into receivership and is now the responsibility of the state of Florida. ACIC – the public company as it stands today – is just the American Coastal business that it originally acquired from Dan Peed.
So, what we have now is Dan Peed back in control of the same company that he founded and took from nothing to $330mm in 10 years. He is also trying to save his life’s work, so he is motivated both financially and reputationally.
The story in a single picture:
A Quick Word on Valuation
ACIC still screens terribly today, because the LTM figures include multiple quarters of results prior to the bad half of the company being put into receivership. I believe the medium-term normalized earnings power of the business to be $2-$2.50/share and while ACIC will likely always trade with a punitive multiple because of “knock out” risk (i.e., a once-in-three-hundred-years storm would wipe out the company inclusive of their reinsurance coverage), something like a 7-9x multiple seems reasonable, which would value the stock at $14-$22.50/share compared to the last close of $11.40/share.
Furthermore, that is just the earnings power of the existing core business. The company recently issued equity to 1) grow their existing core business as well as 2) fund the development of a new, internal MGA. Again, this is Dan Peed doing something he has already done before (at AmRisc) and I believe it will likely contribute a material amount of enterprise value in the future as well.
Summary
Dan Peed is the man. Every business he has ever run has been successful and he has created hundreds of millions of dollars of wealth for himself multiple times in the same industry. Dan is back at the helm of a newly transformed company and trying to rebuild his life’s work. We think this is a man you can bet on to do it.
Disclaimer: As always please remember nothing written in this blog should be considered investment advice. You should assume that even though we tried our best that this post is riddled with errors and do your own research/consult a licensed financial advisor before investing any of your own money into any financial security.
