We own a medium-sized position in a Florida-domiciled Property & Casualty (P&C) insurance
company specializing in catastrophe risk. Think hurricanes. In 1992, Hurricane Andrew
devastated Florida and was, at that time, the costliest hurricane in U.S. history. Insurance
companies took heavy losses and stopped writing coverage in the state, deeming it too risky.
Florida’s government was forced to establish an insurer of last resort, called Citizens Property
Insurance, that wrote catastrophe coverage backed by tax payers because, well, people still want
to live in Florida.
Since Andrew, forecasting for hurricanes has dramatically improved, primarily via the leaps in
computing power that made crunching gigantic weather data sets more efficient and accurate.
By 1999, Citizens was under political pressure to reduce their risk. They formed a “take-out”
program that encouraged private insurers to take over their policies. To entice the private sector,
there had to be juicy economic incentives. And there were. It is under these favorable auspices
that many insurance companies were formed during this time to take advantage of the gold rush,
including the hero of our story.
Our company has parlayed the above macro tailwinds to become a publicly traded insurer, of
which we began investing in a little over a year ago. They have begun aggressively building out
an agency network with their newly raised capital and expanding their coverage to coastal states
from Texas to Maine. It has been an extremely successful campaign, more than doubling their
policies in-force and compounding their book value by 15+% per annum since 2011. In late July,
they reported blowout 2nd quarter results that had per-share earnings growing over 60% yearover-year
and sported a return on equity of over 25%. To top it off, almost all the growth was
“organic”, originating from their agents rather than from cherry-picking Citizens. 60% of the
growth was outside Florida. It was resounding evidence that their business strategy was working.
All of that could be had for a tantalizing bargain price of under 10x earnings.
How did Mr. Market reward such excellence the next morning? By selling the stock off by -17%.
It ended the trading session valued at 7x earnings, a level reserved for shrinking businesses
helmed by incompetent management, the diametric opposite of what this company has been
accomplishing. I searched high and low for a reason… and came up empty. A contact reached
out to the CFO of the company, who was as perplexed as anyone and even sought clarification
from the NASDAQ exchange. Nada.
Such is how irrational Mr. Market can be at times, and it is easy, even instinctive, to feel fear in
the face of a rapidly tumbling stock price. But for those who have done the homework and
possess the confidence gained through careful and thorough due diligence, fear becomes
opportunity. We upped our position in this company the next day, which, unfortunately, make
our monthly statements look bad, but has a very probable chance of being highly profitable over
time as the company continues its upward trajectory.
And don’t just take my word for it. Several insiders, people with detailed facts and figures of dayto-day
operations like management and members of the board, all did the same thing and
bought over $2 million worth of shares with their own money the same time I did. As the famed
investor Peter Lynch once said, there are many reasons why insiders sell, but only one
reason insiders buy: they think the price will rise.
