State National Companies (SNC) is a specialty insurance business operating in two niche markets across the United States - Program Services ...

Weekly Superstock Scan 7 Mar 2016 - 11 Mar 2016

State National Companies (SNC) is a specialty insurance business operating in two niche markets across the United States - Program Services and Collateral Protection Insurance (CPI). In its Program Services segment, the Company leverages its “A” (Excellent) A.M. Best rating, expansive licenses and reputation to provide access to the U.S. property and casualty insurance market in exchange for ceding fees. In its Lender Services segment, the Company specializes in providing Collateral Protection Insurance (CPI), which insures personal autos and other vehicles held as collateral for loans made by credit unions, banks and specialty finance companies.


Program Services is the main driver of income, contributing 72% of 2014 adjusted pre-tax income. The two figures below summarize the business model of the two segments of SNC.

Lender Services
Program Services


First Strong Breakout Since Listing

SNC was listed on NASDAQ only in November, but it was founded long before that in 1973. It has a 26+ year track record of profitability. Since its listing, this was the first strong breakout with strong volume and high angle of attack.

With its short history, it is subjective whether SNC broke out from a base. In the past few months, SNC is trading within a $9-$10.5 box. Even if it is to be considered as a base, the range is on the wide side.

Important Confluence Area at $11

The $11 is an important price level. Not only because it is a round number, but it has served as support and resistance since its IPO.

The implication is if we are able to get an entry near $11, it will be a nice low risk entry as a stop can be set just below $11.


Strong Growth Since IPO, Riding on Favorable Industry Trends

SNC has experienced strong growth since its IPO. With the exception of  a very slight fall of EPS from 3Q 2014 to 4Q 2014, revenue and EPS has been growing at a healthy rate quarter-on-quarter.

The growth can be attributed to favorable industry trends. For the Program Services segment, growth drivers include emergence of insurance risk as an asset class and growth in the global reinsurance capital. For the Lender Services, growth drivers include increasing automobile sales and increasing credit availability.

Untapped Banks and Specialty Lenders Market

In SNC's lender services segment, currently 56% of the premium are from CUNA Mutual Alliance Credit Unions, 38% from other credit unions and only 6% are from banks and specialty lenders. SNC has identified banks and specialty lenders as a market that is bigger than the credit union market. SNC has added salesperson to target this market. If successful, we can expect to see sustainable high growth rates for SNC.

High Operating Leverage for Program Services

The Program Services segment of SNC enjoys very high operating leverage, i.e. an increase in a dollar of additional revenue lead to close to an increase in a dollar of net income. Looking at the revenue and expenses for three and nine months ending September 30, 2015, despite the significant increase in revenue, expenses increase disproportionately.

Though the same cannot be said for the Lender Services Segment, it is fortunate that SNC derives most of its income from the Program Services Segment.

Risk Factors/ Things I do not like

  • Meadowbrook Risk - Customers need SNC when they lack the A.M. Best "A" rating. One of SNC's main customer is Meadowbrook who accounted for 9.3% of SNC's total revenues in 2014. In July 2015, Meadowbrook was sold to Hong Kong's Fosun International Limited and the credit rating for its operating subsidiaries has been upgraded to "bbb+" from "bbb". If Meadowbrook subsequently get upgraded due to better financial positions or Fosun decided to terminate the partnership, SNC's income will be affected.
  • Less rosy outlook for 2016 - The guidance for the Lender Services Segment for FY2015 was revised downwards to $113 - $117 million from $120 - $130 million in November 2015. The outlook for 2016 is $115 - $125 million, implying that the segment is expected to remain stagnant for the next year. Even though the ceding fees for the Program Services Segment was revised upwards in November 2015, the outlook for 2016 was $55 - $65 million, showing that the segment is more likely to contract than expand in the next year. It is contradictory to the favorable industry conditions that the management highlighted, and the poor outlook may be conservative management. Or it may also be that the outlook may be genuinely bad with the current macroeconomics conditions.

Potential trade setup

Since $11 is an important confluence area, I will want to buy the stock as close to that level as possible. Another important point to note is that SNC is scheduled to report its fourth quarter and full year 2015 earnings this Thursday, 10th March, after market closes. Volatility is expected to be higher this week and it may just be possible to snap some shares near the $11 level.

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