The first company from my first share screener that I will be looking at is ‘The Co-Operators General Insurance Co’, a Canadian insurance company with a market cap of CAD $94 million, a debt to capital ratio of less than 2%, a dividend yield of 5.32%, and a price to cashflow ratio (PCF) of less than 0.66 (selling for less than 1x cashflow!), according to the Financial Times share screener.
It provides Home, Auto, Farm and Commercial insurance through an agent network, and also distributes Life insurance and Wealth Management products for Co-Operators Life Insurance Company. Both are subsidiaries of ‘The Co-Operators Group Limited (organisational chart below), the holding company for The Co-Operators group of companies.Source: www.cooperators.ca
Annual reports for both the group holding company and ‘The Co-operators General Insurance Co’ (CGIC) are available on the above website, but since the quote CCS.PR.C refers only to preference shares of CGIC (which are traded in the Toronto Stock Exchange and have been selling between CAD $21.50 and CAD $24 for the last three years), I will only read the annual report for the latter. CGIC itself has three subsidiaries: Sovereign, Equitable, and COSECO.
2016 Annual Report
- Assets over CAD $5.8 billion (page 4);
- CGIC protects 766,000 homes, 1.2 million vehicles, 38,000 farms and 218,000 businesses (page 4);
- National market share of 4.9%, being one of the largest providers of property and casualty insurance in Canada (page 6);
- Shareholders’ equity of $1,578.9 million, a year-on-year (yoy) rise of 8.25% (page 8);
- Premium growth of 5.6% yoy (page 8);
- Net investment income and gains of $200.7 million, up from $144.8 million in 2015, due to stronger equity markets and a stronger Canadian dollar. This is a 5% return on total invested assets of $3,963.8 million (page 10);
- Operating cash flow of $238.36 million, up from $160.36 million in 2015 (page 41);
- The company offers a defined contribution pension plan, which is much better for the company than a defined benefit plan, since the company is not obligated to pay any further amounts (page 76).
- Annual report with 94 pages for a company with a market capitalisation of CAD $94 million (Berkshire has 124 pages and a market cap of USD $423.28 billion);
- Co-operative legal structure, which implies control of the company by its members, and a greater concern for them, instead of being shareholder oriented (page 7);
- Net income of $145.3 million in 2016, compared to $162.3 million in 2015 (page 8);
- All the common shares of CGIC are owned by ‘Co-operators Financial Services Limited’ (CFSL) and are not publicly traded (page 8);
- Earnings per share (EPS) of $6.33, compared to $7.17 in 2015, 12% decrease (page 8);
- Return on equity of 10.5%, down from 12.3% in 2015, and below the average North American company (page 8);
- Combined ratio of 101%, meaning an underwriting loss of $22.9 million (due to a devastating wildfire in Fort McMurray), compared to an underwriting gain of $60.9 million in 2015 (page 8);
- 58.1% of invested assets in bonds, 26.7% in stocks and 12% in mortgages (page 13);
- Equity structure has preference shares: $100 million in a public issue, and $74.6 million in private issues. Common shares have a face value of $48.1 million, contributed capital $10.1 million, retained earnings $1,218.5 million, and accumulated other comprehensive income $127.6 million. So the PCF ratio in the first paragraph is incorrect, since the FT screener is only taking into account these publicly available preference shares to make its calculations, when it is a very small part of the equity structure. It says that the market capitalization of the entire company is $94 million, when this only refers to the market value of the preference shares, which are selling at a 6% discount to face value (page 14);
- Preference dividends declared were $9.8 million in 2016, and $9.5 million in 2015. The increase is due to the issuance of additional privately placed preference shares. No common stock dividends were paid in 2016, but in 2015 the company paid out $169.5 million to CFSL. Preference shareholders only received their specified preference dividend rate (page 14);
- The publicly listed preference shares are Class E, Series C shares and there are 4 million shares issued trading under the symbol CCS.PR.C. Common share quantity is 21,458,185. There are several other privately placed preference share classes (page 15);
- Class E preference dividends have been $1.25 per share per year (5% on nominal value of $25) and did not grow in the last three years (page 15);
- The earnings per share are calculated correctly by dividing net income after preference dividends over the number of common shares. The PE ratio I get in the FT’s company profile is also incorrect since it’s being calculated with only the price of the public preference shares over EPS ($23.51/$6.33=3.71) (page 15);
- Decrease in cash to $26.6 million, down from $86.9 million in 2015, mainly due to an increase in cash used in investing activities (page 41);
- Class A, B and E preference shares rank equally, and in priority to all other classes of preference and common shares (meaning that any dividends must be paid first to these classes before any others). Class E, Series C (the publicly traded ones) have a non-cumulative dividend payable quarterly, if declared, for the amount of $0.3125 per share, to yield 5% per year. Right now the company can redeem these shares at any time for $25 per share. Unlike normal preferred stock, where the dividend is usually cumulative if not paid, and the shareholder can choose whether to redeem the shares or not, these preference shares do not possess these advantages. Might as well be common shares (page 79).
I was intrigued about the possibility of buying a company making CAD $145 million in profit and with $1,578.9 million in equity for only $94 million, since this was the market capitalisation showing in the FT’s website, but now know that this is just the market value of their Class E, Series C preference shares, the only publicly traded shares that CGIC has, which is a very small part of its equity structure ($100m / $1,578.9m = 6.33%). 6.33% of $145 million is $9.18 million. I would be paying $94 million to own $9.18 million in profit, a PE ratio of 10.24. Not so much of a bargain after all.
Besides the above, it’s safe to say the company is not shareholder oriented at all, since it has a co-operative legal structure, being owned by its members who nominate the board of directors. Its equity structure also shows this, with preference shares that are not much better than common shares, with limited non-cumulative dividends and no capital gains possible above the redemption value (not very nice to outside shareholders). With 22 directors for a $1.6 billion company, it also has some dead wood. The earnings are volatile (as with most insurance companies) and the return on equity is below average. I do not want to buy this company.
With 15 cons and only 8 pros, the ‘Co-operators General Insurance Co’ goes solidly into the ‘No’ tray.