State Farm to Acquire GAINSCO ($GANS)

From a press release today:

State Farm Mutual Automobile Insurance Company, America’s largest property and casualty insurance provider, and GAINSCO, Inc. announced today that they have entered into an agreement pursuant to which State Farm will acquire GAINSCO for approximately $400 million in cash.

The transaction is expected to close in early 2021, subject to approval by GAINSCO’s shareholders, the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, obtaining regulatory approvals, and satisfaction of other customary closing conditions.

GAINSCO concentrates on the non-standard personal automobile insurance market, specializing in minimum-limits personal auto insurance.

The transaction is the first acquisition of an insurance company by State Farm in its 98-year history. [...]

Under the definitive merger agreement, upon closing State Farm Mutual will acquire 100% of the stock in GAINSCO, Inc., the holding company of MGA Insurance Company, Inc., a Texas-domiciled insurance company, and GAINSCO shareholders will receive approximately $107.38 per share in cash. GAINSCO will continue to operate as a separate company and brand with continued focus on its current objectives. Over time, the parties expect to provide State Farm agents the opportunity to distribute GAINSCO products in addition to State Farm products and services.

Shares of GANS had been trading in the mid-$30 range. We mentioned Gainsco in Issue 25 of the Oddball Stock Newsletter back in June 2019. Here is what we said at the time:

GANS is a Texas-based holding company with an insurance company subsidiary (MGA Insurance Company, Inc.) that specializes in minimum-limits personal auto coverage. The company apparently also owns and operates a Hyundai dealership in Dallas! It had been a public company until 2011 when it terminated its SEC registration and went dark. The company had shareholders' equity of $102.7 million as of the end of 2018, on which they had comprehensive income of $14 million in 2018 compared to $15 million in 2017.

Of course, for an insurance company that's earning double-digit returns on equity, you are going to have to pay up... at the ask price of $38 a share the company market capitalization is $182 million, a price-to-book ratio of 1.77 times. Management seems to think that this is cheap because they repurchased 292,958 net shares of stock in 2018, which was 5.8% of the outstanding. The average price paid, though was $25 – the share price chart over the past five years has been parabolic. There is actually a pretty small public float on this – as of the last proxy statement filing (which was in 2010) the directors and officers as a group owned 74% of the stock.

Minimum-limits policies are obviously a different breed than GEICO. One of the many one-star Yelp reviews says, “Pray you never get hit by someone insured by this company.” It is crazy that anyone is allowed on the roads with the bare bones $25,000 of coverage that Texas allows.

Go figure - you would have almost tripled your money buying the minimum-limits car insurer (with its own Hyundai race car) at a P/B of 1.77x (and a ROE of 14%). Maybe the clue was the aggressive share repurchase?

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