FG Financial Group, Inc. (FGF): The Sky is The Limit. ReInsurance & SPACs
FG Financial Group, Inc. (FGF), is completely unrecognizable today compared to a few years ago. Before changing its name in 2020, FGF operated under the name 1347 Property Insurance Holdings. Since beginning operations in 2012, 1347 operated as an insurance holding company, writing property and casualty insurance in Louisiana, Florida, and Texas. Late in 2019, 1347 sold its insurance subsidiaries to fellow insurer, FedNat Holding Company, for $25.5m cash and $25.5m of FedNat stock. 1347/FGF was additionally repaid $18m of outstanding surplus note obligations.
Unfortunately, FGF’s sale hasn’t ended up being quite as lucrative as those numbers imply. FedNat’s stock has plummeted since the deal closed and due to a standstill agreement, FGF is restricted on when they can sell and the number of shares they can sell. As of writing, FGF has sold 765,231 shares, resulting in gross realized losses of $7.6 million. Gross unrealized losses were around $14m as of December 31. FedNat shares have continued to fall since then so the loss is likely a lot higher now.
On the bright side, FGF gained a lucrative five-year first-refusal arrangement for up to 7% of any layer of FedNat’s reinsurance program renewals. Most importantly though, FGF’s sale to FedNat allowed them to begin focusing on their new strategy - reinsurance, and asset management. In FGF’s 10-k they defined their current strategy:
“to focus on opportunistic collateralized and loss capped reinsurance, with capital allocation to special purpose acquisition companies (SPACs) and SPAC sponsor-related businesses.”
Before diving into specifics and numbers, here is a more detailed rundown of FGF’s Reinsurance and SPAC operations. FGF offers reinsurance through their wholly-owned subsidiary “Fundamental Global Reinsurance Ltd.” (FGRe). They are also in the process of gaining regulatory approvals for a Risk Retention Group, that will provide directors and officers insurance coverage to special purpose acquisition vehicles. In 2020, FGF formed “FG SPAC Solutions LLC” (FGSS), through which they have launched their SPAC Platform. The platform provides various support services to newly formed SPACs for a monthly fee. On the asset management side, FGF co-founded a partnership, “FG SPAC Partners, LP” (FGSP) to co-sponsor newly formed SPACs. FGF also makes investments into newly-formed SPACs through their “FG Special Situations Fund” (“The Fund”).
FGF’s reinsurance business is in its infancy but it’s growing quickly. In 2021 FGF wrote two contracts with a “leading insurtech company” and generated $4.86m in premiums. Unfortunately, the line isn’t profitable yet as it cost $4.3m in net losses and loss adjustment expenses, as well as $1.4 in deferred policy acquisition costs. However, for what is essentially a startup reinsurance operation, the results are quite impressive. Reinsurance is a fierce industry, and many companies are unprofitable, even in the collateralized space. However, I think FGRe is well positioned, and I expect net premiums to grow rapidly in the next few years. Additionally, FGRe’s underwriting will only improve as they collect more data for their pricing models.
Due to an agreement with FedNat, FGF earns about $100k per annum for “providing investment advisory”, expiring in 2024. The investment advisory fees are reported in the revenue section under other income. In 2021 FGF reported $186k in this category, the notes show that the $86k not from investment advisory was derived from fees for FGF’s SPAC Platform. This is an exciting development as - at the very least - revenue from the SPAC Platform will offset the loss of the investment advisory operation. I have no idea what the growth potential is for the SPAC Platform but it’s something to keep an eye on.
Now on to FGF’s biggest and thus far only profitable operation: Asset Management. Though a young company, FGF has already made some significant investments. In early 2020, they invested in FG New America Investors, a sponsor that used the funds to launch FG New America Acquisition Corp (FGNA) a SPAC, which IPO’d in October 2020. In July 2021, FGNA completed its definitive business combination with Opportunity Financial and began operating as OppFi, Inc. (NYSE: OPFI). OPFI is a fintech company that operates a platform for banks to offer lending products. FGF’s interests in the sponsor represent approximately 860k shares of OPFI and 360k warrants to purchase shares for $11.50. OPFI has tanked since IPO and shares trade at $3.28. Through FGSP, and “The Fund”, FGF was also an early investor in Aldel Financial. Like FGNA, Aldel soon after completed its own business combination. Aldel combined with a company called Hagerty, and now operates under the name Hagerty, Inc. (NYSE: HGTY). HGTY is an interesting company. They are the world’s largest provider of specialty insurance for classic vehicles. HGTY’s website states that this specialization allows them to offer low cheaper insurance. Specifically, HGTY claims their premiums are 34% cheaper than the average daily driver insurance. Through FGF’s interest in FGSP and “The Fund”, they own about 516k shares and 300k warrants to buy HGTY shares at $15. Like OPFI, HGTY shares haven’t fared well, currently trading at around $10. While these investments haven’t quite panned out yet, FGF has had some successes. For example, FGF made a quick 25% return from an initial $4m investment into “FGI Metrolina Property Income Fund”. In the fourth quarter, Metrolina completed liquidation and FGF received $5m.
At the end of the day, an investment in FGF is a bet on management. The results of management’s capital allocation moving forward will be the biggest determinant of FGF’s success. The market seems to believe management’s future investments will fair more like OPFI & HGTY than Metrolina. FGF has $31m in cash & investments compared to a market cap of only $25m ($3.89 per share). Even net of all liabilities, cash & investments ($24m) makes up practically all of FGF’s market cap.
FGF is cheap but there is some validity to the market’s pessimism. For starters, FGF’s investments may very well continue to decrease in value (it’s almost certain their FedNat holdings will). Second, for the foreseeable future, FGF will pay about $1.8m annually in dividends to the holders of their preferred shares. A significant impediment to future profitability. Lastly, FGF’s filings reveal a very bizarre & questionable G&A expense. According to the notes, FGF pays an affiliate of their largest shareholder almost $2m for
“certain services related to the day-to-day management of the Company, including assisting with regulatory compliance, evaluating the Company’s financial and operating performance, providing a management team to supplement the executive officers of the Company, and such other services consistent with those customarily performed by executive officers and employees of a public company”
In essence, it appears FG (the shareholding group) is charging FGF for the privilege of using their own managers. Obviously, $2m is a significant expense for a company of FGF’s size, making this seem like a textbook example of a conflict of interests. While I don’t truthfully know the reasons/intentions for this expense, I do have a theory. FGF has $14.3m of net operating loss carryforwards (NOLs) that it can use to offset future taxable income - $12.1m of these NOLs do not expire under current law, and the other $2.2m don’t expire until 2039 at the earliest. As FGF is still far from profitability, I theorize that perhaps the expense is just a part of a bigger overall strategy by management to increase NOLs as much as possible. It’s probably more likely that FG is just enriching themselves, but I thought I’d throw the idea out there. Regardless, FGF’s NOLs are very valuable and add to my value thesis. Also, FGF has $5.3m of capital loss carryforwards that can be used to offset future capital gains, though these expire in 2026.
With a growing reinsurance operation, an exciting SPAC platform, and intelligent allocators of capital at the helm, I believe FGF is significantly undervalued. As is the case for most companies without much operating history, calculating the intrinsic value for FGF is tough. It’s easy to get carried away, and I truly do see huge potential in FGF. But until FGRe & the SPAC Platform’s potential is supported by future financials, I am going to be extra conservative. Therefore I have decided to value FGF at the sum of its cash & investments ($31m, or $4.75 per share).
Thanks for reading! As always none of this is investment advice. You should always do your own DD. I currently have no position in FGF.