NI Holdings, Inc. – Safe, cheap, and hopefully boring.

There exists a very fortunate error in equity databases, screens, and even SEC filings. There are businesses whose number of shares outstanding is far lower than the number shown in any of the above locations.

Let’s say there’s this business, we’ll call it HIV (hidden intrinsic value).  When I look at HIV’s data on Google Finance, or in its own SEC filings, I see there are 23 million shares outstanding and it’s currently trading at $16 per share.  That gives it a market cap of $368 million.  Further, this company has a book value of $243 Million (to get this, look at the balance sheet and subtract all liabilities from all assets – this is the same thing as equity).  Well, HIV looks like it’s trading at 1.5x book value – pretty typical for a financial company in this market.

BUT, this company is special.  Within it lies the very fortunate error described above.  The number of (economic) shares outstanding is far less than 23 million.  Fewer shares with the same amount of equity = more equity per share.  This error manifests itself due to HIV’s partial public conversion from a Mutual Holding Company (MHC) to a stock corporation.  Basically, HIV recently went public through a demutualization.

When an MHC decides to go public, it often goes through two steps to convert to a public company or “demutualize”.  Prior to the first step, the business has been technically owned by its depositors (in the case of a bank or credit union) or policyholders (in the case of an insurance company).  The first step usually involves selling a minority stake of all outstanding shares to the public.  In this case, HIV sold about 10.3 million or 45% of its shares to the public.  Now the MHC owns 55% of the shares and controls the voting rights, but here’s where the magic happens: the economics of those shares accrue to the remaining 45% shareholders.

Herein lies the conservative and attractive risk-adjusted return potential.  If the economics of HIV flow to the shareholders owning 45% of the stock, then the book value of $243 million economically belongs to 10.3 million shares, not all 23 million shares.  Well, HIV is trading at $16.  $16 multiplied by 10.3 million shares is $165 million – that’s the true “market cap”.  So if I buy HIV, then I’m buying $243 million dollars of book value for $165 million.  I.e. I’m buying book value at 67% of its face value.

The thing is, this isn’t hypothetical.  The MHC is called Nodak Mutual.  The stock corporation is called NI Holdings, Inc. and it trades under the NODK ticker.

 

P.s. and Notes:

In these offerings, new investors are basically buying their own capital and getting the existing institution’s assets and business free.  Although you don’t get the chance to buy NODK at the IPO price, here’s how it works in the abridged words of Seth Klarman:

A mutual with a net worth of $10 million might issue one million shares of stock at $10 per share.  Ignoring costs of the offering, the proceeds of $10 million are added to the institutions preexisting net worth, resulting in pro forma shareholders’ equity of $20 million.  Since the one million shares sold on the IPO are the only shares outstanding, pro forma net worth is $20 per share.  The preexisting net worth of the institution joins the investors’ own funds, resulting immediately in a net worth per share greater than the investors’ own contribution.  

 

Since most of us didn’t have the chance to buy at the offering and pay 50% of shareholders equity as described by Klarman, the stock has moved up (NODK actually opened its first day at $14/share.  The $10/share was reserved for insiders – discussion for another day).  Using the above example and applying it to the case of NODK, you’d be paying the equivalent of $13.40 for $20 of shareholders equity (or 67%).

In a second-step conversion (which NODK has not explicitly said will happen – as they have no use for the money at this point), an institution that is partially owned by the MHC typically completes a transition to a full public company by offering MHC owned shares to investors.  This is where additional capital is raised by the company and additional economic value is unlocked as the company raises another large slug of capital and sells the 55% it had held up to this point.  At this point, NODK would have 23 million shares outstanding.  We could assume they sell the remaining 55% of MHC-held shares at a price closer to the then current book value, but if we assume they sold those 12.7 million shares at today’s share price of $16, they’d raise another ~$200m after offering costs.  At that point, all 23 million shares would be entitled to the hypothetical book value of $443 million or $19.26 of book value per share.  Scenarios provided just for illustration.

For a better and more thorough discussion on how this works, I highly recommend Seth Klarman’s Margin of Safety.  Also, the economics and logistics are concisely explained by John Mihaljevic in his book The Manual of Ideas.

What’s NODK reasonably worth anyway?  Let’s postulate or forecast that they deploy this new capital raised to purchase an insurance company (as is their stated goal) and get returns on equity (net income/equity) back to roughly 10% – where it was prior to the capital raise.  At that point, it’s probably worth book value?  Meaning, the discount to book value that exists today would probably close rather quickly.  As of today, it’s just a big discount without a KNOWN concrete catalyst to close the discount (management may create one for us as they are actively looking to buy an insurance outfit – with a preference for heavy commercial exposure).

Per the IPO prospectus, peers are trading at 101-110% of book value:

NODK peers

Balance Sheet Data as of Q2 2017:

NI balance sheet

 

I might know just the company for NODK to buy…

 

As is forever and always the disclaimer, this is not investment advice.  Do your own work and verify your own numbers.  I might buy, sell, or ignore anything at any time and have no obligation to update anything on this site.

2 thoughts on “NI Holdings, Inc. – Safe, cheap, and hopefully boring.”

  1. Another similar opportunity with a smaller company: First Federal Bank of Wisconsin just sold 2,950,625 shares of common stock at $10/share in a demutualization. That’s 45% of shares outstanding. Again, these are the only economic shares outstanding. They raised $29.5 million in the deal. Their balance sheet prior to the raise (June 30, 2017) showed a book value of $34.3M. Of the $29.5 raised, they contributed a bit to a charity and some to the ESOP. Around $25 million went to the company. So using the book of $34.3M and adding the $25 net to the company we get a book of just over $59M. That’s about $20/share in book value.

    Another rational way to look at this is “what’s this worth on a full and immediate second step conversion?”

    Step 1) current tangible book value + (current share price * number of shares owned by MHC) – $3M for offering expenses (gives TBV after second step conversion)
    Step 2) Divide the answer from above by the current total shares outstanding (gives you TBV per share after second step conversion)
    Calc 3) Multiply answer from step 2 by peer average P/TBV (1.2 for this bank)

    with FFBW:
    1)58,493,000 + (11.7 * 3,661,875) – 3,000,000 = 98,336,937
    2 98336937/6,612,500 = $14.87
    3) $14.87 * 1.2 = $17.84

    I got a decent chunk filled this morning at $11.xx

    https://www.biztimes.com/2017/industries/banking-finance/first-federal-bank-of-wisconsin-completes-29-5-million-stock-offering/

    http://www.jsonline.com/story/money/2017/10/11/first-federal-bank-wisconsin-raises-29-5-million/753777001/

    https://www.bamsec.com/filing/157104917007640?cik=1709017 -Pg. 54 showing pro-forma TBV’s and shares outstanding

    Like

  2. As of today, I’ve mostly scaled out of NODK. It came to about a 15% return in about 1.5 years of holding. NODK made an acquisition that I’m not a huge fan of in the current environment (non-standard auto) and through my conversations with management, they seem unworried about closing the discount to book and seem happy price-takers and salary collectors. I don’t see any imminent danger in NODK and probably would have held indefinitely, though I think a better use for the money was staring me in the face. Over the last few weeks, I’ve preemptively redeployed these funds to Westaim (also written up on this site) buying as much as I could right around $3.10 CAD. Liquidity in NODK is slim, so it took me some time to scale out of it and chose not to wait before redeploying to Westaim. Westaim is showing some proactivity (like HIIG retaining Credit Suisse…) and I like the specialty lines nature of HIIG based on how the (mostly large) insurers have been diversifying (AIG with Valdius, Hartford with Navigators) while showing a willingness to fork out the money at hefty P/BV multiples. HIIG might deserve a similar 1.5-1.7x multiple on a sale. Arena has significantly de-risked as well and continues to scale up with a steady inflow of AUM.

    My Westaim position is quite large.

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s